Rule: Securities: Broker and Dealer Definitions Order Extending Temporary Exemption of Banks

Wednesday,
October 3, 2007
Part III
Federal Reserve
System
Securities and
Exchange
Commission
12 CFR Part 218 and 17 CFR Parts 240
and 247
Definitions of Terms and Exemptions
Relating to the ‘‘Broker’’ Exceptions for
Banks and Exemptions for Banks Under
Section 3(a)(5) of the Securities Exchange
Act of 1934 and Related Rules; Final
Rules
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56514 Federal Register / Vol. 72, No. 191 / Wednesday, October 3, 2007 / Rules and Regulations
FEDERAL RESERVE SYSTEM Andrea Tokheim, Counsel, (202) 452– B. Exemption Regarding Money Market
2300, or Brian Knestout, Attorney, (202) Fund Transactions
12 CFR Part 218 452–2249, Legal Division, Board of V. Safekeeping and Custody
Governors of the Federal Reserve A. Background
[Regulation R; Docket No. R–1274] B. Rule 760: Custody Exemption
System, 20th Street and Constitution
1. Order-Taking for Employee Benefit Plan
SECURITIES AND EXCHANGE Avenue, NW., Washington, DC 20551. Accounts and Individual Retirement or
COMMISSION Users of Telecommunication Device for Similar Accounts
Deaf (TDD) only, call (202) 263–4869. a. Employee Compensation Restrictions
17 CFR Parts 240 and 247 SEC: Catherine McGuire, Chief b. Advertisements and Sales Literature
Counsel, Linda Stamp Sundberg, Senior c. Other Conditions
[Release No. 34–56501; File No. S7–22–06] Special Counsel, Joshua Kans, Senior 2. Order-Taking as an Accommodation for
Special Counsel, John J. Fahey, Branch Other Types of Accounts
RIN 3235–AJ74 a. Accommodation Basis
Chief, or Elizabeth MacDonald, Special
Counsel, at (202) 551–5550, Office of the b. Employee Compensation Restrictions
Definitions of Terms and Exemptions c. Limitations on Bank Fees
Relating to the ‘‘Broker’’ Exceptions Chief Counsel, Division of Market
d. Advertising and Sales Literature
for Banks Regulation, Securities and Exchange Restrictions
Commission, 100 F Street, NE., e. Investment Advice or Recommendations
AGENCIES: Board of Governors of the Washington, DC 20549. 3. Other Conditions Applicable to Order-
Federal Reserve System (‘‘Board’’) and SUPPLEMENTARY INFORMATION: Taking for All Custody Accounts
Securities and Exchange Commission a. Directed Trustees
Table of Contents
(‘‘SEC’’ or ‘‘Commission’’) (collectively, b. Broker Execution Requirement
the Agencies). I. Introduction c. Carrying Broker Provisions
A. Background 4. Custodians, Subcustodians, and
ACTION: Final rule. B. Overview of Comments Administrators/Recordkeepers
C. Final Rules and Related Matters a. ‘‘Account for Which a Bank Acts as a
SUMMARY: The Board and the II. Networking Arrangements Custodian’’
Commission jointly are adopting a A. Overview of Proposed Rules and b. Administrators/Recordkeepers and
single set of final rules that implement Comments Subcustodians
certain of the exceptions for banks from B. Rule 700: Definition of Terms Used in 5. Evasions
the definition of the term ‘‘broker’’ Networking Exception VI. Other Exemptions
under Section 3(a)(4) of the Securities 1. Definition of ‘‘Nominal One-Time Cash A. Exemption for Regulation S
Fee of a Fixed Dollar Amount’’ Transactions With Non-U.S. Persons and
Exchange Act of 1934 (‘‘Exchange Act’’), 2. Definition of ‘‘Referral’’
as amended by the Gramm-Leach-Bliley Broker-Dealers
3. Definition of ‘‘Contingent on Whether B. Exemption for Non-Custodial Securities
Act (‘‘GLBA’’). The rules define terms the Referral Results in a Transaction’’ Lending Transactions
used in these statutory exceptions and 4. Definition of ‘‘Incentive Compensation’’
C. Exemption for Banks Effecting Certain
include certain related exemptions. In a. Exception for Discretionary, Multi-Factor
Excepted or Exempted Transactions in
developing these rules, the Agencies Bonus Plans
Investment Company Securities and
have consulted with, and sought the b. Safe Harbor for Plans Based on Overall
Variable Insurance Products
concurrence of, the Office of the Profitability or Revenue
C. Rule 701: Exemption for Referrals D. Exemption for Certain Transactions
Comptroller of the Currency (‘‘OCC’’), Involving Institutional Customers and involving a Company’s Securities for Its
the Federal Deposit Insurance High Net Worth Customers Employee Benefit Plans and Participants
Corporation (‘‘FDIC’’) and the Office of 1. Definitions of ‘‘Institutional Customer’’ E. Temporary and Permanent Exemption
Thrift Supervision (‘‘OTS’’), and have and ‘‘High Net Worth Customer’’ for Contracts Entered Into by Banks From
2. Determining that a Customer Meets the Being Considered Void or Voidable
taken into consideration all comments
Relevant Thresholds F. Extension of Time and Transition Period
received on the proposed rules issued in VII. Finding That the Exemptions Are
December 2006. The rules are intended, 3. Conditions Relating to Disclosures
4. Suitability or Sophistication Analysis by Appropriate and in the Public Interest
among other things, to facilitate banks’ Broker-Dealer and Consistent With the Protection of
compliance with the Exchange Act and 5. Conditions Relating to Bank Employees Investors
the GLBA. 6. Good Faith Compliance and Corrections VIII. Withdrawal of Proposed Regulation B
DATES: Effective dates: The addition of by Banks and Removal of Exchange Act Rules 3a4–
7. Referral Fees Permitted Under the 2–3a4–6, and 3b–17
parts 12 CFR 218 and 17 CFR 247 is
Exemption IX. Administrative Law Matters
effective September 28, 2007. A. Paperwork Reduction Act Analysis
8. Permissible Bonus Compensation Not
Regulations at 12 CFR 218.781 and 17 Restricted B. Consideration of Benefits and Costs
CFR 247.781 (collectively ‘‘Rule 781’’) III. Trust and Fiduciary Activities C. Consideration of Burden on
are effective on September 28, 2007. A. Trust and Fiduciary Exception and Competition, and on Promotion of
Regulations at 12 CFR 218.100 through Proposed Rules Efficiency, Competition, and Capital
218.780 and 17 CFR 247.100 through B. Joint Final Rules Formation
247.780 are effective December 3, 2007. 1. ‘‘Chiefly Compensated’’ Test and Bank- D. Consideration of Impact on the
Amendments affecting Part 240 of Title Wide Exemption Based on Two-Year Economy
Rolling Averages E. Regulatory Flexibility Analysis
17 are effective December 3, 2007. 2. ‘‘Relationship Compensation’’ F. Plain Language
Compliance date: Banks are exempt 3. Excluded Compensation X. Statutory Authority
from complying with the rules and the 4. Trust or Fiduciary Accounts XI. Text of Rules and Rule Amendment
‘‘broker’’ exceptions in Section 5. Exemptions for Special Accounts,
3(a)(4)(B) of the Exchange Act until the Foreign Branches, Transferred Accounts, I. Introduction
first day of their first fiscal year that and a De Minimis Number of Accounts
6. Advertising Restrictions A. Background
commences after September 30, 2008.
IV. Sweep Accounts and Transactions in
FOR FURTHER INFORMATION CONTACT: Money Market Funds
The GLBA amended several federal
BOARD: Kieran J. Fallon, Assistant A. Rule 740: Definition of Terms Used in statutes governing the activities and
General Counsel, (202) 452–5270, Sweep Exception supervision of banks, bank holding
Federal Register / Vol. 72, No. 191 / Wednesday, October 3, 2007 / Rules and Regulations 56515
companies, and their affiliates.1 Among activities; 11 identified banking ‘‘broker’’ exceptions in Section
other things, it lowered barriers between products; 12 municipal securities; 13 and 3(a)(4)(B) of the Exchange Act that were
the banking and securities industries a de minimis number of other securities not addressed in the proposal.
erected by the Banking Act of 1933 transactions.14
In October 2006, the Financial B. Overview of Comments
(‘‘Glass-Steagall Act’’).2 It also altered
the way in which the supervisory Services Regulatory Relief Act of 2006 The Agencies received comments
responsibilities over the banking, (‘‘Regulatory Relief Act’’) became from 58 organizations and individuals
securities, and insurance industries are effective.15 Among other things, the on the proposed rules. Commenters
allocated among financial regulators. Regulatory Relief Act requires that the included 22 trade associations, 20
Among other things, the GLBA repealed SEC and the Board jointly adopt a single banking organizations, 7 other
most of the separation of investment set of rules to implement the bank organizations in the financial services
and commercial banking imposed by the broker exceptions in Section 3(a)(4) of industry, 3 community and nonprofit
Glass-Steagall Act. The GLBA also the Exchange Act.16 In addition, it groups, two credit unions, one state
revised the provisions of the Exchange required that the Agencies issue a single government, one self-regulatory
Act that had completely excluded banks set of proposed rules to implement these organization, one association of state
from broker-dealer registration exceptions not later than 180 days after securities administrators, and one
requirements. enactment of the Regulatory Relief Act individual. Many commenters
In enacting the GLBA, Congress (April 11, 2007). supported the proposed rules as a
adopted functional regulation for bank In December 2006, the Agencies general matter. For example,
securities activities, with certain jointly issued, and requested public commenters asserted that the proposed
exceptions from Commission oversight comment on, a single set of proposed rules would provide banks considerable
for specified securities activities. With rules to implement the broker flexibility in providing securities
exceptions for banks relating to third- services to their customers, would avoid
respect to the definition of ‘‘broker,’’ the
party networking arrangements, trust disrupting bank activities and customer
GLBA amended the Exchange Act to
and fiduciary activities, sweep relationships, or were a significant
provide eleven specific exceptions for
activities, and safekeeping and custody improvement over earlier proposals.18
banks.3 Each of these exceptions
activities.17 The proposed rules In addition, many commenters
permits a bank to act as a broker or
included certain exemptions related to supported the general approaches
agent in securities transactions that
these activities, as well as exemptions (including related exemptions) taken by
meet specific statutory conditions.
related to foreign securities transactions, the proposed rules to implement the
In particular, Section 3(a)(4)(B) of the securities lending transactions
Exchange Act as amended by the GLBA networking, trust and fiduciary, sweep,
conducted in an agency capacity, the and safekeeping and custody
provides conditional exceptions from execution of transactions involving
the definition of broker for banks that exceptions. Several commenters,
mutual fund shares, and the potential however, contended that the proposed
engage in certain securities activities in liability of banks under Section 29 of
connection with third-party brokerage rules did not adequately protect
the Exchange Act. In developing the investors, and particularly retail
arrangements; 4 trust and fiduciary proposed rules, the Agencies
activities; 5 permissible securities investors.19 Some of these commenters
considered, among other things, the argued that that the Agencies should
transactions; 6 certain stock purchase language and legislative history of the
plans; 7 sweep accounts; 8 affiliate withdraw the proposed rules and issue
‘‘broker’’ exceptions for banks adopted new rules based on those issued in
transactions; 9 private securities in the GLBA, the rules previously issued
offerings; 10 safekeeping and custody 200120 or 2004.21
or proposed by the Commission relating Most commenters also recommended
to these exceptions, and the comments that the Agencies modify specific
1 Pub. L. No. 106–102, 113 Stat. 1338 (1999). received in connection with those prior provisions of the proposed rules to,
2 Pub. L. No. 73–66, ch. 89, 48 Stat. 162 (1933) rulemakings. among other things, reduce
(as codified in various Sections of 12 U.S.C.).
3 15 U.S.C. 78c(a)(4).
The Agencies requested comment on administrative burden, better protect
4 Exchange Act Section 3(a)(4)(B)(i). This all aspects of the proposed rules. In bank customers or investors, or clarify
exception permits banks to enter into third-party addition, the Agencies requested the scope or effect of the rules. The
brokerage, or ‘‘networking’’ arrangements with comment on whether it would be useful comments received on the proposed
brokers under specific conditions. or appropriate for the Agencies to adopt
5 Exchange Act Section 3(a)(4)(B)(ii). This rules are discussed in greater detail in
exception permits banks to effect transactions as
rules implementing the other bank the following sections of this
trustees or fiduciaries for securities customers SUPPLEMENTARY INFORMATION.
11 Exchange Act Section 3(a)(4)(B)(viii). This
under specific conditions.
6 Exchange Act Section 3(a)(4)(B)(iii). This exception permits banks to engage in certain C. Final Rules and Related Matters
exception permits banks to buy and sell commercial enumerated safekeeping or custody activities,
paper, bankers’ acceptances, commercial bills, including stock lending as custodian. After carefully considering the
exempted securities, certain Canadian government 12 Exchange Act Section 3(a)(4)(B)(ix). This comments, the Agencies have adopted
obligations, and Brady bonds. exception permits banks to buy and sell certain
7 Exchange Act Section 3(a)(4)(B)(iv). This ‘‘identified banking products,’’ as defined in 18 See, e.g., Citigroup Letter, Independent
exception permits banks, as part of their transfer Section 206 of the GLBA. Community Bankers Ass’n (‘‘ICBA’’) Letter,
13 Exchange Act Section 3(a)(4)(B)(x). This
agency activities, to effect transactions for certain American Bankers Ass’n (‘‘ABA’’) Letter, JPMorgan
issuer plans. exception permits banks to effect transactions in Chase & Co. (‘‘JP Morgan’’) Letter, Financial
8 Exchange Act Section 3(a)(4)(B)(v). This municipal securities. Services Roundtable (‘‘Roundtable’’) Letter.
14 Exchange Act Section 3(a)(4)(B)(xi). This
exception permits banks to sweep funds into no- 19 See, e.g., Massachusetts Securities Division
load money market funds. exception permits banks to effect up to 500 Letter, Pace Investors Rights Project (‘‘Pace Project’’)
9 Exchange Act Section 3(a)(4)(B)(vi). This transactions in securities in any calendar year in Letter, Boyd Financial Letter.
exception permits banks to effect transactions for addition to transactions referred to in the other 20 Exchange Act Release No. 44291 (May 11,
affiliates, other than broker-dealers. exceptions. 2001), 66 FR 27760 (May 18, 2001).
10 Exchange Act Section 3(a)(4)(B)(vii). This 15 Public Law No. 109–351, 120 Stat. 1966 (2006). 21 Exchange Act Release No. 49879 (June 17,
16 See Exchange Act Section 3(a)(4)(F), as added
exception permits certain banks to effect 2004), 69 FR 39682 (June 30, 2004). See, e.g., North
transactions in certain privately placed securities, by Section 101 of the Regulatory Relief Act. American Securities Administrators Association
under certain conditions. 17 See 71 FR 77522, December 26, 2006. (‘‘NASAA’’) Letter.
final rules to implement the broker to rely on and comply with in effecting under Section 3(a)(4) of the Exchange
exceptions for banks relating to third- the transaction. Similarly, if a bank Act.28
party networking arrangements, trust effects no more than 500 securities Any additions or changes to these
and fiduciary activities, sweep transactions as agent for its customers in rules that may be appropriate to
activities, and custody and safekeeping a calendar year, the bank may rely on implement Section 3(a)(4)(B) of the
activities.22 The Board and SEC have the de minimis exception in Section Exchange Act will be adopted jointly by
consulted extensively with, and sought 3(a)(4)(B)(xi) of the Exchange Act in lieu the SEC and Board in accordance with
the concurrence of, the OCC, FDIC and of any other available exception or the consultation provisions in Section
OTS in developing these final rules. 101(b) of the Regulatory Relief Act. In
exemption for such transactions. The
Like the proposal, the final rules addition, if any rules (including
bank, of course, must comply with all of
include certain exemptions related to exemptions) are proposed or adopted in
these activities, as well as exemptions the requirements contained in the the future related to the other bank
related to foreign securities transactions, exception or exemption on which it ‘‘broker’’ exceptions in Section
securities lending transactions relies.25 3(a)(4)(B) of the Exchange Act that are
conducted in an agency capacity, the Section 401 of the Regulatory Relief not addressed in the final rules now
execution of transactions other than Act amended the definition of ‘‘bank’’ in being adopted by the SEC and the
through a broker-dealer, the potential Section 3(a)(6) of the Exchange Act to Board, they would be proposed and
liability of banks under Section 29 of include any Federal savings association adopted jointly by the SEC and Board.29
the Exchange Act, and the date on or other savings association the deposits As required by the GLBA, the Board,
which the GLB Act’s ‘‘broker’’ of which are insured by the FDIC. OCC, FDIC, and OTS (collectively, the
exceptions for banks will go into effect. Accordingly, as used in the final rules, Banking Agencies) will develop, and
As discussed in the following the term ‘‘bank’’ includes any savings request public comment on,
sections, the Agencies have modified recordkeeping rules for banks that
association that qualifies as a ‘‘bank’’
the rules in numerous respects in light operate under the ‘‘broker’’ exceptions
under Section 3(a)(6) of the Exchange
of the comments received. These in Section 3(a)(4) of the Exchange Act.30
changes include, among other things, Act, as amended.26 These rules, which will be developed in
modifications to the examples of Identical sets of the final rules are consultation with the SEC, will
‘‘relationship compensation’’ in Rule being adopted by the Board and SEC establish recordkeeping requirements to
721 to clarify the scope of the term for and will be published by the Board in enable banks to demonstrate compliance
purposes of the rules relating to trust Title 12 of the Code of Federal with the terms of the statutory
and fiduciary activities; the custody Regulations and by the SEC in Title 17 exceptions and the final rules and will
exemption in Rule 760 to permit banks of the Code of Federal Regulations.27 be designed to facilitate compliance
acting as a directed trustee to accept Pursuant to the Regulatory Relief Act, with the statutory exceptions and the
orders under the exemption; and Rule this single set of final rules supersedes rules.
781 to extend the compliance date for a any and all other proposed or final rules Several commenters urged the
bank until the first day of its first fiscal issued by the Commission on or after Agencies also to cooperate in providing
year commencing after September 30, the date of enactment of the GLBA with interpretations or guidance (such as staff
2008. The Agencies also have adopted regard to the definition of ‘‘broker’’ no-action letters) concerning the final
new exemptions relating to trust or rules or the broker exceptions for banks
fiduciary accounts held in a foreign 25 An employee of a bank that operates in
in Section 3(a)(4)(B) of the Exchange Act
branch of a bank,23 and to permit a bank accordance with the exceptions in Section 3(a)(4)(B) or in taking enforcement action to
to effect, under certain conditions and of the Exchange Act and, where applicable, the enforce compliance with these rules or
without using a broker-dealer, rules is not required to register as a ‘‘broker’’ to the exceptions.31 In addition, a number of
transactions in a fiduciary or custodial extent that the employee’s activities are covered by
the relevant exception or rule.
commenters urged the Agencies to work
capacity for an employee benefit plan in 26 Several commenters asked the Agencies, or the
the stock of the plan’s sponsor.24 Commission independently, to adopt rules that
28 Pub. L. No. 109–351, § 101(a)(3), 120 Stat. 1966,
The final rules are designed to would extend to federal or state-chartered credit 1968 (2006).
accommodate the business practices of unions some or all of the ‘‘broker’’ exceptions or 29 A few commenters requested that the
banks and protect investors. If more exemptions provided banks under Section 3(a)(4)(B) Commission delegate authority to act on future
of the Exchange Act or the final rules. See, e.g., exemptive requests from banks to the Director of its
than one broker exception or exemption Credit Union Nat’l Ass’n Letter, Nat’l Ass’n of Division of Market Regulation. See America
is available to a bank under the statute Credit Union Service Organizations Letter, Nat’l Community Bankers Ass’n (‘‘ACB’’) Letter, Roma
or rules for a securities transaction, the Ass’n of Fed. Credit Unions Letter, Navy Fed. Credit Bank Letter. Because particular banks may have
bank may choose the exception or Union Letter, and XCU Corp. Letter. While the individual situations that may be appropriate for
GLBA’s ‘‘bank’’ exceptions do not by their terms additional relief, the Commission delegated
exemption on which it relies to effect apply to credit unions, these requests are under authority to the Director of the Division of Market
the transaction without registering as a consideration by the Commission, which is the Regulation to consider, on a case-by-case basis,
broker-dealer. For example, if the bank agency with authority to address these matters. The individual requests for exemptive relief from banks.
effects a transaction in a security sold in Commission notes the existence of SEC staff To facilitate the processing of these requests, the
positions with regard to networking relationships Commission delegated this exemptive authority
an offshore transaction for a custody between a credit union and a broker-dealer and is within its Rules of Organization and Program
account that is permissible under either not addressing this issue at this time. See, e.g., Management in Rule 30–3(a)(70) (17 CFR 200.30–
the Regulation S exemption in Rule 771 Chubb Securities Corp., 1993 SEC No-Act. LEXIS 3(a)(70)). The Commission continues to expect the
or the custody exemption in Rule 760, 1204 (Nov. 24, 1993). staff to submit novel and complex requests for
27 The final rules adopted by the Board and the exemptions to the Commission.
the bank may choose which exemption 30 See 12 U.S.C. 1828(t)(1).
SEC within their respective titles of the Code of
Federal Regulation (12 CFR part 218 for the Board 31 See, e.g., ABA Letter, Clearing House Ass’n
22 Commenters generally did not request that the

and 17 CFR part 247 for the SEC) are identically Letter, Citigroup Letter, The PNC Financial Services
Agencies adopt rules to implement the other broker numbered from § ___.100 to § ___.781. For ease of Group, Inc. (‘‘PNC’’) Letter. One commenter,
exceptions for banks at this time or stated that no reference, the single set of final rules adopted by however, expressed concern that coordination
additional guidance was needed at this time with each Agency are referred to in this release as Rule among the Agencies might result in slower
respect to these exceptions. See ABA Letter. ___, excluding title and part designations. A similar responses to requests for guidance. See American
23 See Rule 723(c).
format is used to refer to the single set of proposed Bar Ass’n Section of Business Law Letter (‘‘Business
24 See Rule 776. rules issued by the Agencies. Law Section Letter’’).
with the Financial Industry Regulatory enters into a contractual or other written customers.38 Some commenters,
Authority (‘‘FINRA’’) 32 to modify arrangement with a registered broker- however. suggested that the proposed
promptly its Rule 3040 as it applies to dealer under which the broker-dealer rules would harm investors by giving
persons that are employees of both a offers brokerage services to bank bank employees undue incentives to
bank and a broker-dealer (so-called customers.35 The networking exception direct unsophisticated customers into
‘‘dual employees’’).33 does not address the type or amount of potentially unsuitable investment
In light of the joint nature of the final compensation that a bank may receive products.39
rules and the Agencies’ joint rule- from its broker-dealer partner under a B. Rule 700: Definition of Terms Used in
writing authority for the bank broker networking arrangement. However, the Networking Exception
exceptions in Section 3(a)(4)(B),34 the networking exception provides that a
Agencies will jointly issue any bank may not pay its unregistered 1. Definition of ‘‘Nominal One-Time
interpretations and responses to employees 36 incentive compensation Cash Fee of a Fixed Dollar Amount’’
requests for no-action letters or other for brokerage transactions. Nevertheless, Proposed Rule 700 defined the term
interpretive guidance concerning the the statutory exception does permit a ‘‘nominal one-time cash fee of a fixed
scope or terms of the exceptions and bank employee to receive a ‘‘nominal dollar amount’’ to mean a cash payment
rules, and will consult and, to the extent one-time cash fee of a fixed dollar for a referral in an amount that meets
appropriate, coordinate with each other any one of four alternative standards:
amount’’ for referring bank customers to
and the appropriate federal banking the first based on twice the average
the broker-dealer if payment of the
agency for a bank concerning any formal hourly base wage established by the
referral fee is not ‘‘contingent on
enforcement actions proposed to be bank for the employee’s job family; the
taken against a bank for violations of the whether the referral results in a
transaction.’’ 37 Congress included this second based on 1/1000th of the average
exceptions or rules. annual base salary established by the
The Agencies already consult with general prohibition on, and limited
exception to, incentive compensation to bank for the employee’s job family; the
and coordinate with each other and the third based on twice the employee’s
other federal banking agencies in a reduce concerns regarding the securities
sales practice of unregistered bank actual base hourly wage; and the fourth
variety of areas, and the Agencies and based on a specified dollar amount
the other federal banking agencies are in employees.
($25), indexed for inflation.40
the process of supplementing their A. Overview of Proposed Rules and Many commenters generally
existing policies and procedures to Comments supported the flexibility that this range
facilitate coordination with respect to of alternatives would afford in
the broker exceptions and rules. Banks Proposed Rule 700 defined certain determining whether a referral fee is
or others that seek an interpretation of, key terms related to referral fees and ‘‘nominal.’’ 41 Some commenters
or a no-action letter or other staff incentive compensation used in the expressed concern that the proposed
guidance concerning, the rules or the networking exception. For example, the rule placed greater limits on permissible
exceptions should submit their request proposed rule provided that a referral payments under networking
to both Agencies. The Agencies also fee would be considered ‘‘nominal’’ if it arrangements than exist currently under
expect to continue their dialogue with met any of four standards included in applicable federal banking agency
FINRA concerning potential the rule. The proposed rule also defined guidance or questioned the need for a
modifications to that authority’s Rule when a referral fee would be definition of ‘‘nominal’’ to be
3040. ‘‘contingent on whether a referral results established by rule at all.42 A few
II. Networking Arrangements in a transaction,’’ what constitutes commenters contended that the specific
‘‘incentive compensation,’’ and what dollar amount in the proposed rule
The third-party brokerage exception ($25) was too low.43 A number of
types of bank bonus plans would not be
(‘‘networking exception’’) in Section commenters, however, believed that the
3(a)(4)(B)(i) of the Exchange Act permits considered incentive compensation
under the networking exception. alternatives would result in the payment
a bank to avoid being considered a of fees that are higher than nominal and
broker if, under certain conditions, it Proposed Rule 701 included an
exemption that permitted bank would create incentives for bank
32 On July 26, 2007, the Commission approved a employees, subject to certain employees to make securities referrals
proposed rule change filed by NASD to amend conditions, to receive higher-than- even when not appropriate for the
NASD’s Certificate of Incorporation to reflect its nominal, contingent referral fees for customer. These commenters
name change to Financial Industry Regulatory
referring institutional customers and questioned, for example, whether twice
Authority Inc., or FINRA, in connection with the an employee’s hourly wage was truly
consolidation of member firm regulatory functions high net worth customers to a broker-
of NASD and NYSE Regulation, Inc. See Securities dealer. nominal and whether the Agencies had
Exchange Act Release No. 56146 (July 26, 2007). sufficient basis for selecting that
FINRA’s Rules currently consist of the rules Many commenters supported the measure of ‘‘nominal.’’ 44
adopted by the NASD and effective on the date of general approach of Proposed Rules 700
the consolidation (which include NASD Rule 3040), and 701, including the range of 38 See, e.g. ABA Letter, Roundtable Letter,
as well as certain rules of the NYSE that FINRA has
incorporated into its own rules.
alternatives provided for determining if Citigroup Letter, Union Bank of California (‘‘Union
33 See, e.g., ABA Letter, Clearing House Ass’n a referral fee is nominal and the Bank’’) Letter.
39 See, e.g., Pace Project Letter.
Letter, Harris Bank Letter, HSBC Bank, N.A. adoption of an exemption for referrals 40 Proposed Rule 700(c).
(‘‘HSBC Bank’’) Letter, HSBC Securities (USA) Inc. involving high net worth or institutional 41 See, e.g., Roundtable Letter, ACB Letter.
(‘‘HSBC Securities’’) Letter, Roundtable Letter.
42 See, e.g., Bank Insurance & Securities Ass’n
These commenters asserted that it was important
35 15 U.S.C. 78c(a)(4)(B)(i). (‘‘BISA’’) Letter, Wisconsin Bankers Ass’n (‘‘WBA’’)

for the requested modifications to FINRA’s Rule
3040 to be made prior to the date on which banks 36 An unregistered bank employee is an employee Letter.
would first have to comply with the new ‘‘broker’’ that is not registered or approved, or otherwise 43 See, e.g., Clearing House Ass’n Letter and ICBA
exceptions in the GLBA. required to be registered or approved, in accordance Letter.

34 Rapaport v. U.S. Department of Treasury, 59 F. with the qualification standards established by the 44 See, e.g., Boyd Financial Letter, NASAA Letter,
3d 212, 216–217 (D.C. Cir. 1995), cert. denied 116 rules of any self-regulatory organization. Pace Project Letter, and University of Cincinnati
S.Ct. 775 (1996). 37 15 U.S.C. 78c(a)(4)(B)(i)(VI). Corp. Law Ctr. Letter.
After carefully reviewing the employees engaged in making referrals the compensation established for the
comments, the Agencies have of retail customers under existing employee’s job family, the Agencies
determined to adopt the ‘‘nominal’’ Banking Agency guidance, which also have modified the final rule to provide
definition substantially as proposed. includes a ‘‘nominal’’ standard.48 that a referral fee also will be considered
Including a definition of ‘‘nominal’’ in As under the proposal, a referral fee nominal if it does not exceed 1/1000th
the rule will provide banks with also will be considered ‘‘nominal’’ of the employee’s actual base annual
certainty as to the Agencies’’ under Rule 700(c) if the payment does salary.52 Under the final rules, a bank
interpretation of that standard and not exceed (1) twice the employee’s may use a different ‘‘nominal’’
should facilitate compliance. The actual base hourly wage; (2) twice the methodology in its different business
Agencies believe that each of the average of the minimum and maximum lines or operating units and may alter
alternatives for defining ‘‘nominal’’ is hourly wage established by the bank for the methodology it uses within a given
consistent with the statutory networking the current or prior year for the job year.
exception, which provides that a bank family that includes the employee; or (3) One commenter suggested that the
employee may receive compensation for 1/1000th of the average of the minimum term ‘‘job family’’ was ambiguous and
each referral if the compensation for and maximum annual base salary could allow banks to include all
that referral is ‘‘nominal’’ and meets the established by the bank for the current employees in a single job family, which
other requirements of the statute. Under or prior year for the job family that would result in payments to employees
each of the alternatives established, the includes the employee.49 with salaries at the lower end of the job
amount of compensation a bank In developing these alternatives to the family that may be well in excess of
employee may receive for each referral fixed $25 fee, the Agencies considered twice their hourly wage.53 Rule 700
will be small in relation to the data on the average hourly wages of defines a ‘‘job family’’ as a group of jobs
employee’s overall compensation and bank tellers, which are the class of bank or positions involving similar
therefore unlikely to create undue employees most typically engaged in responsibilities, or requiring similar
incentives for the bank employee to making referrals of retail customers. skills, education or training, that a bank,
engage in activities, such as ‘‘pre- These data indicate that the national or a separate unit, branch or department
selling’’ specific securities to the mean hourly wage in 2005 for tellers of a bank, has established and uses in
customer involved in violation of the was $10.59.50 Accordingly, the $25 the ordinary course of its business to
networking exception,45 which would amount is slightly more than twice the distinguish among its employees for
raise sales practice concerns. As national mean hourly wage for tellers in purposes of hiring, promotion, and
discussed below, the multiple 2005, and slightly more than 1/1000th compensation.54 The requirements that
alternatives are designed to provide of the annualized salary of an employee a job family include jobs or positions
flexibility for banks of all sizes and that makes $12.50 per hour (or $25 with similar responsibilities, or that
locations to use different business every two hours) based on a 40 hour require similar skills, education and
models and to take into account work week.51 Thus, the alternatives training, and be used by the bank in the
economic differences around the based on twice the employee’s hourly ordinary course of its business for
country and among their employees in base wage or 1/1000th of the employee’s hiring, promotion and compensation
assessing how best to structure their base annual salary, at current pay rates, purposes are designed to prevent a bank
program(s) for paying ‘‘nominal’’ cash are designed to allow bank employees to from establishing special job family
referral fees under the networking receive referral fees that are roughly classifications to evade the ‘‘nominal’’
exception. The alternatives also were equivalent to those that may be received standard. A bank may not deviate from
designed to allow for roughly equivalent by bank tellers under the flat dollar its ordinary classification of jobs for
treatment of bank employees at different option. purposes of determining whether a
base or hourly compensation levels The options based on the employee’s referral fee is nominal under this
within a bank. job family use these same measurements standard, and the Banking Agencies will
Rule 700(c) provides that a referral fee but allow comparisons to the average of monitor the job family classifications
paid to any bank employee will be the minimum and maximum hourly used by banks for ‘‘nominal’’
considered ‘‘nominal’’ if it does not base wage or base salary of the determination as part of the risk-focused
exceed $25.46 This dollar amount will employee’s job family. These options examination process. Depending on a
be adjusted for inflation on April 1, are designed to reduce administrative bank’s internal employee classification
2012, and every five years thereafter, to burden while also ensuring that referral system, examples of a job family may
reflect any changes in the value of the fees remain nominal in amount. To include tellers, loan officers, or branch
Employment Cost Index For Wages and provide comparability between the managers. The Agencies note, moreover,
Salaries, Private Industry Workers (or alternative based on an employee’s that other provisions of the networking
any successor index thereto), as actual compensation and those based on exception also provide significant
published by the Bureau of Labor protection to customers. For example,
Statistics, from December 31, 2006.47 48 See ABA Securities Ass’n., 2003/2004 National the networking exception provides that
The Agencies selected this index Survey of Bank Retail Investment Services, Vol. I, unregistered bank employees may
because it is a widely used and broad at 60 (survey data demonstrate that 20 percent of perform only clerical or ministerial
banks pay retail referral fees of $20 or more); functions in connection with brokerage
indicator of increases in the wages of Banking Agencies’ Interagency Statement on Retail
private industry workers, which Sales of Nondeposit Investment Products (Feb. 15, transactions.55 Accordingly, bank
includes bank employees. Available 1994). employees referring a customer to a
data indicate that the $25 amount is 49 Rule 700(c)(1) and (2). broker-dealer under the exception may
consistent with the level of referral fees 50 Occupational Employment and Wages, May
not provide investment advice
2005, (Tellers), U.S. Department of Labor, Bureau of concerning securities or make specific
generally paid to tellers and other bank Statistics.
51 Specifically, twice the hourly wage for an
45 See 52 Rule 700(c)(2).
Exchange Act Section 3(a)(4)(B)(i)(V). employee who earns an annual base salary of
53 See Pace Project Letter.
46 Rule 700(c)(3). $25,000 (1,000 × $25) would be $24.04, based on
47 Each adjustment would be rounded to the 54 Proposed Rule 700(d).
a 40 hour per week (or 1080 hours per year) work
nearest multiple of $1. Rule 700(f). schedule. 55 See 15 U.S.C. 78c(a)(4)(B)(i)(V).
securities recommendations to the however, receive a referral fee merely 2. Definition of ‘‘Referral’’
customer.56 for supervising the employee making The statutory networking exception
A few commenters suggested that, by the referral or administering the referral permits bank employees to receive a
defining ‘‘nominal’’ by reference to process. An officer or director of a bank nominal one-time cash fee of a fixed
hourly wages and annual base salary, who makes or personally participates in dollar amount for the ‘‘referral’’ of a
the rule treats unfairly employees who making a referral may receive a nominal customer to a broker-dealer. Rule 700(e)
receive a considerable portion of their fee for the referral as a bank employee. defines a referral as an action taken by
compensation through bonuses tied to
The proposed rule permitted a one or more bank employees to direct a
sales of non-securities products.57
nominal referral fee to be paid only in customer of the bank to a broker-dealer
Because the five alternatives included in
cash. Many commenters requested that for the purchase or sale of securities for
the final rule are based on a set dollar
banks be given the flexibility to pay the customer’s account.63 For purposes
amount or the hourly wage or annual
referral fees in non-cash forms.60 The of the networking exception and Rules
base salary established by a bank for the
employee or the employee’s job family, terms of the networking exception, 700 and 701, the term ‘‘customer’’
the alternatives help ensure that a however, provide for a ‘‘nominal, one- includes both existing and potential
referral fee will be nominal in relation time cash fee of a fixed dollar customers of the bank.
amount’’ 61 and, accordingly, the final As proposed, a bank employee may
to the employee’s compensation in the
year it is paid. Bonuses, however, rule continues to require that referral receive a referral fee under the
typically are discretionary, vary fees paid under the exception be paid in networking exception and Rule 700 for
significantly from year-to-year and, as cash. A bank, therefore, may not pay each referral made to a broker-dealer,
noted by commenters, may constitute a referral fees in non-cash forms, such as including separate referrals of the same
significant portion of the compensation vacation packages, stock grants, annual individual or entity. In addition,
of certain types of bank employees in leave, or consumer goods. The final nothing in the statutory networking
particular years. Permitting referral fees rules do not, however, prevent a bank exception or the final rules limits or
to be based in part on the size of a bonus from paying an employee on a quarterly restricts the ability of a bank employee
paid in a previous year (or projected to or more frequent periodic basis the total to refer customers to other departments
be paid in the current year) could allow amount of nominal, fixed cash fees the or divisions of the bank itself, including,
bank employees to receive a referral fee employee earned during the period. For for example, the bank’s trust, fiduciary
that is not nominal in relation to the example, if a bank employee is entitled or custodial department. Likewise, the
employee’s compensation, or the to receive a $25 referral fee for each networking exception and the rules do
average compensation paid to securities referral and the employee not apply to referrals of retail,
employees within the relevant job makes three qualifying referrals in a institutional or high net worth
family, in the year in which the fee is given quarter, the bank may pay the customers to a broker-dealer or other
paid and, thus, could increase the employee $75 at the end of the quarter third party solely for transactions not
potential for sales practice concerns. instead of three individual payments of involving securities, such as loans,
Commenters also asserted that more $25. A bank also may use a ‘‘points’’ futures contracts (other than a security
than one employee should be able to system to keep track of the number of future), foreign currency, or over-the-
receive a fee for a single referral and qualifying securities referrals made by counter commodities, or solely for
also requested clarification as to the employee during a quarterly or more transactions in securities (such as U.S.
whether officers and directors of a bank frequent period and the total amount of Government obligations) that would not
may receive referral fees under the nominal, fixed cash fees that the require the other party to register under
exception.58 The Agencies believe that section 15 of the Exchange Act.64
employee is entitled to receive at the
the networking exception permits a end of the period. In all cases, however, 3. Definition of ‘‘Contingent on Whether
bank employee who personally points must translate into cash the Referral Results in a Transaction’’
participated in a referral to receive a payments on a uniform basis and the
referral fee for the referral.59 Under the statutory networking
cash amount that an employee will exception, a nominal fee paid to an
Accordingly, the Agencies have receive for a qualifying securities
modified Rule 700(c) to clarify this unregistered bank employee for
referral (e.g., twice the employee’s referring a customer to a broker-dealer
position. Thus, for example, a actual base hourly wage) must be fixed
supervisory employee may receive a may not be contingent on whether the
before the referral is made and may not referral results in a transaction. This
separate, nominal one-time cash fee for be contingent or vary based on whether
a referral made by another individual limitation is designed to allow banks to
an employee makes a specified number reward bank employees for introducing
supervised by the employee only if the or type of securities referrals during a
supervisory employee personally customers to a broker-dealer without
quarterly or more frequent period.62 giving unregistered bank employees a
participated in the referral. A
supervisory employee may not, direct financial interest in any resulting
60 See, e.g., ABA Letter, BISA Letter, Clearing
securities transaction at the broker-
House Ass’n Letter, and JP Morgan Letter.
56 A bank employee, however, may describe in 61 See Exchange Act Section 3(a)(4)(B)(i)(VI).
dealer.
general terms the types of investment vehicles 62 The exception and the final rules also do not
The final rule, like the proposed rule,
available from the bank and the broker-dealer under prohibit a bank from providing its employees non- provides that a referral fee will be
the arrangement. See id. cash items, such as pizza or coffee mugs, in considered ‘‘contingent on whether the
57 See, e.g., ABA Letter, BISA Letter, Clearing
connection with programs to familiarize bank referral results in a transaction’’ if
House Ass’n Letter, Harris Bank Letter, Roundtable employees with new types of investment vehicles
Letter, PNC Letter, U.S. Trust Company, N.A. (‘‘U.S. offered by the bank or the broker-dealer through the
payment of the fee is dependent on
Trust’’) Letter, and WBA Letter. arrangement, provided that the programs or items
58 See, e.g., Consumer Bankers Ass’n (‘‘CBA’’) 63 Rule 700(e).
given to employees do not reward or compensate
Letter, BISA Letter. an employee for making a referral to a broker- 64 A bank that acts as a government securities
59 See Section 3(a)(4)(B)(i)(VI) of the Exchange dealer. Thus, for example, a ‘‘pizza party’’ that is broker (as defined in Section 3(a)(43) of the
Act (permitting ‘‘the bank employee [to] receive made available only to those employees that have Exchange Act) is not exempt from and must comply
compensation for the referral of any customer’’ in made one or more referrals to a broker-dealer would with the notification and other applicable
accordance with the exception). not be permissible. requirements of section 15C of the Exchange Act.
whether the referral results in a securities transaction at the broker- the officer, director, or employee and
purchase or sale of a security; whether dealer. those factors or variables include
an account is opened with a broker- In addition, the ‘‘broker’’ exceptions significant factors or variables that are
dealer; whether the referral results in a in Sections 3(a)(4)(B) of the Exchange not related to the profitability of the
transaction involving a particular type Act are available only to banks. broker-dealer. The Agencies specifically
of security; or whether the referral Accordingly, a referral to a broker-dealer requested comment on whether existing
results in multiple securities for a securities transaction within the bank bonus programs would fit, or
transactions.65 The final rule expressly scope of section 15 of the Exchange Act could easily be adjusted to fit, within
provides that a referral fee may be still involves a ‘‘broker’’ transaction at these proposed exclusions.
contingent on whether a customer (1) the broker-dealer even if a bank could Many commenters indicated that the
contacts or keeps an appointment with conduct the transaction itself without proposed bonus provisions worked well
a broker-dealer as a result of the referral; registering as a broker, and a referral fee and would not interfere with bank
or (2) meets any objective, base-line may not be contingent on the bonus plans generally. One commenter,
qualification criteria established by the occurrence of such a transaction (or the however, opposed the proposed bonus
bank or broker-dealer for customer opening of an account to engage in such provisions arguing that permitting
referrals, including such criteria as transactions).68 bonuses to be based even in part on
minimum assets, net worth, income, or revenues generated by activity
4. Definition of ‘‘Incentive
marginal federal or state income tax conducted at a broker-dealer would
Compensation’’
rate, or any requirement for citizenship encourage bank employees to make
or residency that the broker-dealer, or The networking exception prohibits referrals regardless of the
the bank, may have established an unregistered employee of a bank that appropriateness of the referral in order
generally for referrals for securities refers a customer to a broker-dealer to increase their compensation under
brokerage accounts.66 A bank or broker- under the exception from receiving the bonus plan.69 In addition, a number
dealer may establish and use different ‘‘incentive compensation’’ for the of commenters requested that the
objective, base-line qualification criteria referral or any securities transaction Agencies either confirm that bonus
(including citizenship or residency conducted by the customer at the programs structured in particular ways
requirements) for different classes of broker-dealer other than a nominal, non- identified by the commenter would not
customers or for different business lines, contingent referral fee. To provide banks fall within the definition of ‘‘incentive
divisions or units of the bank or broker- and their employees additional compensation’’ or modify the terms of
dealer. guidance in this area, Proposed Rule the exclusions to encompass plans with
700(b) defined ‘‘incentive these features. For example, several
Commenters generally supported compensation’’ as compensation that is commenters asked the Agencies to
these permissible contingencies. Some intended to encourage a bank employee confirm that the rules would not
commenters contended that the rule to refer potential customers to a broker- prohibit a bank from basing an
also should allow payment of a nominal dealer or give a bank employee an employee’s bonus on the assets,
referral fee to be contingent on other interest in the success of a securities revenues or profits brought to the bank
events, such as the opening of an transaction at a broker-dealer. and its partner broker-dealer by that
account at the broker-dealer or on the The proposed rule also excluded employee. Other commenters asked that
opening of an account that may be used certain types of bonus compensation the Agencies provide that all
to conduct only securities transactions from the definition of ‘‘incentive ‘‘traditional’’ bank bonus programs are
that the bank itself could effect without compensation.’’ Proposed Rule 700(b)(1) protected under the rule.
registering as a broker under the excluded compensation paid by a bank A number of commenters also raised
exceptions for banks in Sections under a bonus or similar plan if such specific issues with one or more aspects
3(a)(4)(B) of the Exchange Act.67 compensation is paid on a discretionary of the exception in Rule 700(b)(1) for
Opening a securities account at the basis; based on multiple factors or discretionary, multi-factor bonus plans
broker-dealer, however, is a necessary variables; such factors or variables or the safe harbor in Rule 700(b)(2) for
first step to executing securities include significant factors or variables plans based on overall profitability. For
transactions and one that a customer is that are not related to securities example, some commenters requested
unlikely to take unless the customer transactions at the broker-dealer; and a clarification of the ‘‘discretionary’’
anticipates engaging in securities referral made by the employee or any requirement in paragraph (b)(1) and
transactions with the broker-dealer. In other person is not a factor or variable asserted that a bonus plan should be
light of this close link between opening in determining the employee’s considered ‘‘discretionary’’ if employees
an account and executing securities compensation under the plan. do not have an enforceable right to
transactions, the Agencies have not In addition, Proposed Rule 700(b)(2) compensation under the plan until it is
modified the rule as requested and the provided that the definition of incentive paid.70 One commenter also argued that
final rule continues to provide that compensation did not prevent a bank Proposed Rule 700(b)(1) should not
payment of a referral fee may not be from compensating its employees on the prohibit the number of referrals made by
contingent on whether the customer basis of any measure of the overall an employee from playing a role in the
opens an account (other than the types profitability of (1) the bank, either on a employee’s compensation under a
of accounts described in Part B.2 supra.) stand-alone or consolidated basis; (2) bonus plan.71
at the broker-dealer. Other any of the bank’s affiliates (other than a Several commenters also asserted that
contingencies not specified in the rule broker-dealer) or operating units; or (3) the safe harbor in paragraph (b)(2)
may be permissible if they are not based a broker-dealer if such profitability is should be clarified or expanded to cover
on whether the referral results in a only one of multiple factors or variables

used to determine the compensation of 69 See NASAA Letter.
65 Rule 700(a). 70 See, e.g., U.S. Trust Letter and Union Bank
66 Rule 700(a). 68 For similar reasons, a referral to a broker-dealer Letter.
67 See, e.g., BISA Letter, Clearing House Ass’n for such a transaction is a ‘‘referral’’ for purposes 71 See TD Banknorth, N.A. (‘‘TD Banknorth’’)
Letter, and U.S. Trust Letter. of the networking exception and Rule 700. Letter.
bonus programs based on any measure that (1) those factors or variables unit of the bank, that are not based on
of the financial performance, and not include multiple, significant factors or referrals made by one or more bank
just the ‘‘overall profitability,’’ of a variables that are not related to employees and that include some inputs
bank, affiliate, operating unit or broker- securities transactions at the broker- based on securities transactions at a
dealer.72 Commenters indicated that dealer; (2) a referral made by the broker-dealer as well as multiple
bank bonus programs may be based on employee is not a factor or variable in significant factors or variables that are
a wide variety of measures or metrics determining the employee’s unrelated to securities transactions at
related to the operations or performance compensation under the plan; and (3) the broker-dealer.
of the bank, an affiliate or operating the employee’s compensation under the A bank may not establish or maintain
unit.73 Some commenters also requested plan is not determined by reference to one or more ‘‘sham’’ non-securities
that the safe harbor be revised to clarify referrals made by any other person.75 factors or variables in its bonus or
that a bonus program may be based on The Agencies have modified the rule to similar plan for the purpose of evading
the overall profitability of an operating make clear that, to be excluded under the restrictions in Rule 700(b) and the
unit of an affiliate of a bank (other than Rule 700(b)(1), a multi-factor plan must Banking Agencies will continue to
a broker-dealer), or be expanded to include multiple, significant factors or review the bonus and similar plans of
allow bonus programs to be based on variables that are not related to banks participating in networking
the financial performance of a branch, securities transactions at the broker- arrangements as part of the risk-focused
division, or geographical or operational dealer.76 The proposed rule already supervisory process. In considering if a
unit of a broker-dealer.74 required that there be ‘‘significant bonus program at a bank contains
The purpose of the exception and factors or variables’’ and the addition of sufficient banking or other factors
exclusion in paragraph (b) is to ‘‘multiple’’ highlights the plural nature unrelated to securities transactions at a
recognize that certain types of bonus of these terms. broker-dealer, the agencies will
plans are not likely to give unregistered Each factor or variable unrelated to consider, among other things, whether
bank employees a promotional interest securities transactions at the broker- such factors or variables relate to
in the brokerage services offered by the dealer will be considered ‘‘significant’’ banking or other non-broker-dealer
broker-dealers with which the bank for purpose of Rule 700(b) if it plays a business(es) actually being conducted
networks and to avoid affecting bonus material role in determining an by the bank or its employees, the
plans of banks generally. As described employee’s compensation under the resources devoted by the bank to such
below, the Agencies have made several bonus or similar plan, i.e., the amount business(es), and whether such
revisions to the exception and exclusion of the employee’s bonus could be business(es) materially contributes to
to help clarify the types of bonus plans reduced or increased by a material the payments made under the plan over
that fall outside of the scope of amount based on the non-securities time. It is not expected that the actual
‘‘incentive compensation’’ and to ensure factor or variable. This clarification will payments made under a bank’s bonus or
that excepted or excluded plans are not give banks greater certainty and will similar plan would, over time, be based
likely to give bank employees an allow them to more readily identify the predominantly on securities
impermissible promotional interest in types of factors or variables not related transactions conducted at a broker-
the broker-dealer’s activities. These to securities transactions that must be dealer. If such a situation were to occur,
exceptions and exclusions are crafted to included within a discretionary, multi- the bank would be expected to make
accommodate existing types of bank factor bonus plan under paragraph (b)(1) appropriate modifications to its bonus
bonus programs in general. of the Rule. Thus, under paragraph or similar plan going forward.
Nevertheless, a plan’s longevity or the (b)(1), a bank’s bonus program may take A bonus or similar plan will be
number of banks that utilize similar account of the full range of banking, considered ‘‘discretionary’’ under the
plans are not factors in determining securities or other business of one or final rule if the amount an employee
whether a plan constitutes ‘‘incentive more customers brought to the bank and may receive under the plan is not fixed
compensation’’ under this definition. its partner broker-dealer by an employee in advance and the employee does not
Accordingly, banks that have so long as the bonus is paid on a have an enforceable right to payments
networking arrangements with a broker- discretionary basis, the banking and under the plan until the amount of any
dealer should review their existing other factors or variables not related to payments are established and declared
bonus programs in light of the standards securities transactions at the broker- by the bank. A plan may, however,
set forth in the rule to evaluate whether dealer are significant factors or variables include targets or metrics that must be
they may constitute impermissible under the bonus program, and a referral met in order for any bonus to be paid,
incentive compensation. or number of referrals made by the provided the plan is otherwise a
employee or others is not a factor or ‘‘discretionary’’ plan.
a. Exception for Discretionary, Multi-
variable under the program. In this way, The Agencies have not modified the
Factor Bonus Plans
the rule is designed to accommodate rule to allow a bonus plan to be based
Under Rule 700(b)(1) of the final discretionary bank bonus programs that on the fact of a referral or the number
rules, compensation paid by a bank are based on general measures of the of referrals made by one or more bank
under a bonus or similar plan is business or performance of a bank or a employees. The Agencies believe that
specifically excepted from ‘‘incentive particular customer, branch or other doing so would allow a direct linkage
compensation’’ if it is paid on a between a referral and an employee’s
discretionary basis and based on 75 Rule 700(b)(1). The requirement that an
bonus compensation and be contrary to
multiple factors or variables, provided employee’s compensation not be based on a the purposes of the exception.
‘‘referral’’ made by the employee or another person
means that the employee’s compensation under the b. Safe Harbor for Plans Based on
72 See, e.g., ABA Letter, Clearing House Ass’n

bonus or similar plan may not vary based on the
Letter. fact that the employee or other person made a Overall Profitability or Revenue
73 See, e.g., Clearing House Ass’n Letter, Harris
referral to a broker-dealer or the number of The safe harbor provisions of Rule
Bank Letter, U.S. Trust Letter. securities referrals made by the employee or other
74 See, e.g., ABA Letter, Clearing House Ass’n person to a broker-dealer. 700(b)(2) are designed to allow banks to
Letter, HSBC Bank Letter, PNC Letter, and Union 76 A similar change has been made to the avoid having to analyze whether a
Bank Letter. corresponding language in Rule 700(b)(2). particular bonus program meets the
requirements of the exception in broker-dealer as a result of a referral. A branch, division or operating unit of the
paragraph (b)(1) in circumstances where bonus plan based on the overall revenue partner broker-dealer.
the general structure of the program of a bank or qualifying affiliate or In addition, the Agencies have
clearly reduces the potential for sales operating unit would be similarly modified paragraph (b)(2)(ii) of the rule
practice concerns in connection with a attenuated and, for this reason, the to exclude bonus plans based on the
referral to a broker-dealer. The Agencies Agencies have modified the safe harbor profitability or revenue of an operating
have made several changes to the safe to cover plans based on either the unit of a bank or non-broker-dealer
harbor to address the issues raised by ‘‘overall profitability or revenue’’ of a affiliate that over time predominantly
commenters and to ensure that the safe bank or a qualifying affiliate or engages in the business of making
harbor achieves its purpose. In operating unit. This would include referrals to a broker-dealer. This
particular, the Agencies have modified plans based on an entity’s earnings per exclusion is intended to prevent a bank
paragraph (b)(2) of the rule to cover any share or stock price, both of which are from basing a bonus plan on the overall
bonus or similar plan that is based on directly related to the entity’s overall profitability or revenue of a bank unit
the overall profitability or revenue of: profitability or revenue. Because other, that is focused solely or predominately
(i) The bank, either on a stand-alone more granular measures of the financial on making referrals to a broker-dealer.
or consolidated basis; performance of a bank, affiliate or This restriction, however, is not
(ii) Any affiliate of the bank (other operating unit could create an unduly intended to prevent a bonus plan from
than a broker-dealer), or any operating close connection between the being based on the overall profitability
unit of the bank or an affiliate (other employee’s expected payment under the or revenue of a bank unit, such as a call
than a broker-dealer), if the affiliate or bonus plan and referrals made to the center, that in fact markets, sells or
operating unit does not over time broker-dealer or the securities supports a range of bank products in
predominately engage in the business of transactions that result from those addition to making referrals to a broker-
making referrals to a broker-dealer; or referrals, the rules provide for plans dealer and which is not, over time,
(iii) A broker-dealer if: structured in more granular ways to be predominantly engaged in the business
(A) Such measure of overall analyzed under the multi-factor, of making referrals to a broker-dealer.
profitability or revenue is only one of discretionary criteria in Rule 700(b)(1).
multiple factors or variables used to The potential connection between a C. Rule 701: Exemption for Referrals
determine the compensation of the referral made by a bank employee and Involving Institutional Customers and
officer, director or employee; the payments made to the employee High Net Worth Customers
(B) The factors or variables used to under a bonus plan may be particularly The proposed rules included an
determine the compensation of the strong if payments under the plan are exemption that would permit a bank,
officer, director or employee include based on the profitability or revenue of subject to certain conditions, to pay an
multiple significant factors or variables (i) the partner broker-dealer itself or a employee a contingent referral fee of
that are not related to the profitability or specific branch or operating unit of the more than a nominal amount for
revenue of the broker-dealer; broker-dealer (such as the branch or referring an ‘‘institutional customer’’ or
(C) A referral made by the employee operating unit responsible for handling ‘‘high net worth customer’’ to a broker-
is not a factor or variable in determining customers referred by the bank), or (ii) dealer with which the bank has a
the employee’s compensation under the an operating unit of the bank or a non- contractual or other written networking
plan; and broker-dealer affiliate that is arrangement.78 Among the conditions
(D) The employee’s compensation predominantly engaged over time in included in the proposed rule were
under the plan is not determined by referring customers to the broker-dealer. conditions that—
reference to referrals made by any other To address the potential for improper • Established the financial thresholds
person. incentives in these situations, the
When a bonus program is based on at which a customer would be
Agencies have modified Rule considered an ‘‘institutional customer’’
the overall profitability of a bank, an 700(b)(2)(iii) to allow a bonus program
affiliate of a bank (other than a broker- or ‘‘high net worth customer’’;
to be based on the overall profitability • Limited the types of bank
dealer), or an operating unit of the bank or revenue of a broker-dealer only if the employees that may receive a higher-
or an affiliate (other than a broker- program meets the conditions specified than-nominal referral fee under the
dealer), any relationship between a in (A)–(D) above. These conditions are exemption and the manner in which
referral made by an employee and the similar to those that would apply to a these fees may be structured; 79
amount of payments that the employee discretionary bonus or similar plan • Required the bank to provide
may receive under the plan are likely to under paragraph (b)(1) and are designed certain disclosures to the customer
be attenuated. In these circumstances, to ensure that the profitability or regarding the referral arrangement; 80
for example, any potential connection revenue of the broker-dealer is only one and
between the revenue received by a bank of multiple significant factors or • Required that the agreement
from its partner broker-dealer as a result variables in determining the employee’s between the bank and the broker-dealer
of a referral and the payments made to compensation and that a referral or include certain provisions, including a
the referring bank employee under the number of referrals made by the provision obligating the broker-dealer to
plan likely would be tenuous and employee is not a factor or variable perform a suitability analysis of certain
largely speculative given the number of under the program.77 Like the proposal, securities transactions that may result
other employees, business and actions the safe harbor in paragraph (b)(2) is not from the referral or a sophistication
that contribute to the overall available to bonus plans based on the analysis of the customer referred.81
profitability of the bank, affiliate or most profitability or revenue of a particular Many commenters supported
operating units. The Agencies believe providing an exemption for referrals

this attenuation effectively addresses 77 As with a multi-factor bonus plan under
any potential that payments under the paragraph (b)(1) of the Rule, a non-securities factor 78 Proposed
or variable will be considered ‘‘significant’’ under Rule 701.
plan would give an employee an undue paragraph (b)(2)(iii) if it plays a material role in
79 See Proposed Rule 701(a)(1) and (d)(4).
promotional interest in any securities determining an employee’s compensation under the 80 See id. at 701(a)(2)(i).
transactions that may occur at the bonus or similar plan. 81 See id. at 701(a)(3)(ii).
involving sophisticated individuals and conditions in the final exemption are 1. Definitions of ‘‘Institutional
entities.82 These commenters, for designed to help ensure that, among Customer’’ and ‘‘High Net Worth
example, asserted that the exemption other things, institutional and high net Customer’’
was appropriate in light of the required worth customers, as defined in the rule,
sophistication of the customer receive appropriate investor protections Proposed Rule 701(d)(2) defined an
involved.83 Other commenters, and information that enables the ‘‘institutional customer’’ to mean any
however, argued that providing an corporation, partnership, limited
customer to understand the financial
exemption to the ‘‘nominal’’ liability company, trust, or other non-
interest of the bank employee so the
requirement would not be in the interest natural person that has at least $10
customer can make informed choices.
of investors or the public. These million in investments or $40 million in
Moreover, as the exemption itself assets. Under the proposal, a non-
commenters asserted that the exemption
provides, a bank operating under the natural person also would qualify as an
as proposed would allow bank
employees to have a significant exemption also must comply with the ‘‘institutional customer’’ with respect to
salesman’s stake in securities terms and conditions in the statutory a referral if the customer has $25
transactions and encourage bank networking exception (other than the million in assets and the bank employee
employees to act as finders or compensation restrictions in Section refers the customer to the broker-dealer
salespeople for a broker-dealer.84 3(a)(4)(B)(i)(VI) of the Exchange Act’s for investment banking services.
Many commenters, including a networking exception), including the Proposed Rule 701(d)(1) defined a ‘‘high
number that supported the exemption, terms and conditions that require the net worth customer’’ to mean any
also asked that the Agencies modify the disclosure of the uninsured nature of natural person who, either individually
exemption to, among other things, lower securities and that limit the role that a or jointly with his or her spouse, has at
or alter the thresholds at which a person bank employee may have in a brokerage least $5 million in net worth excluding
would be considered an ‘‘institutional transaction.85 These conditions provide the primary residence and associated
customer’’ or ‘‘high net worth customer’’ additional protections to institutional liabilities of the person and, if
under the rule; eliminate the provisions and high net worth customers that may applicable, his or her spouse. Proposed
of the rule requiring the broker-dealer to be referred to a broker-dealer under Rule Rule 701 also included provisions
perform a suitability or sophistication 701. governing the allocation of assets held
analysis in connection with a referral; or by a natural person jointly with his or
eliminate the limitations on the manner The Agencies have modified the final
rule in several respects to, among other her spouse and provided for the dollar
in which a higher-than-nominal referral thresholds in the rule to be adjusted for
fee may be structured. In addition, many things, provide banks and broker-
dealers greater flexibility in complying inflation every five years.
commenters requested that the Agencies
modify the rule in several respects to with the rule’s disclosure requirements A number of commenters argued that
reduce administrative burden and and to make the exemption more the proposed dollar thresholds for both
complexity. For example, several workable in practice. In light of the types of customers were too high in
commenters asked that the Agencies protections retained in the rule, the light of the nature of the transactions
provide a bank and its partner broker- Agencies also have modified the involved and the other requirements of
dealer greater flexibility to assign thresholds at which a non-natural the exemption.86 Commenters asserted
between themselves the responsibility person will be considered an that customers with lower levels of net
for fulfilling the disclosure and other ‘‘institutional customer’’ for purposes of worth, assets or investments are
obligations included in the rule. the rule. These modifications are sophisticated enough to understand and
After carefully considering the discussed further below. evaluate the implications of a higher-
comments, the Agencies have decided than-nominal or contingent referral fee.
to retain the exemption. The Agencies Banks that pay their employees only Commenters suggested a wide variety of
continue to believe that it is appropriate nominal, non-contingent fees in alternative thresholds, with many
to provide an exemption from the accordance with Rule 700 for referring recommending that the Agencies use an
nominal and contingency limitations in customers—including institutional or existing standard established under the
the networking exception for referrals high net worth customers—to a broker- federal securities laws for assessing a
that both involve institutions and dealer do not need to rely on, or comply customer’s investment sophistication.
individuals that meet certain financial with, the exemption provided in Rule For example, commenters
criteria and that occur under other 701. As under the proposal, the final recommended that the Agencies use the
conditions designed for investor rule requires that the written agreement ‘‘accredited investor’’ definition in the
protection. When provided appropriate between a bank operating under the Commission’s Regulation D, or the
information, such institutions and exemption and its partner broker-dealer definition of that term proposed for use
individuals are more likely to be able to include terms that obligate the broker- in connection with investments in
understand and evaluate the dealer to take certain actions. Banks and certain private investment vehicles, for
relationship between a bank and its broker-dealers are expected to comply purposes of defining an institutional or
employees and the bank’s broker-dealer with the terms of their written high net worth customer; 87 treat all
partner and the impact of that networking arrangements. If a bank or corporate and non-natural persons as an
relationship on any resulting securities broker-dealer does not comply with the institutional customer; consider all
transaction with the broker-dealer. The terms of the agreement, however, the persons advised by a bank or a
bank would not become a ‘‘broker’’ registered investment adviser to be
82 See, e.g., BISA Letter, CBA Letter, Citigroup
under Section 3(a)(4) of the Exchange sophisticated; or lower the asset
Letter, ICBA Letter, Roundtable Letter, Securities

Industry and Futures Markets Ass’n (‘‘SIFMA’’) Act or lose its ability to operate under threshold for municipalities or
Letter, State Street Corp. Letter, U.S. Trust Letter, the proposed exemption.
Union Bank Letter. 86 See, e.g., HSBC Bank Letter, U.S. Trust Letter,
83 See CBA Letter. SIFMA Letter, Roundtable Letter.
84 See, e.g., Massachusetts Securities Division 85 See Exchange Act Section 3(a)(4)(B)(i)(V) and 87 See 17 CFR 230.501(a)(3), (5) and (6); Securities
Letter, NASAA Letter. (IX). Act Rel. No. 33–8766, 72 FR 400, Jan. 4, 2007.
charitable organizations.88 Several company should generally have access by a bank employee to a broker-dealer).
commenters also asked that the to the resources and sophistication of The Agencies have not modified the
Agencies allow banks to use a business the controlling company. rule, as requested by some commenters,
customer’s revenues for purposes of The lower revenue threshold for to treat any person advised by a bank or
determining if the customer is an referrals involving investment banking a registered investment adviser as an
institutional customer. services is designed to facilitate access institutional or high net worth
After carefully reviewing the to the capital markets by smaller customer. The existence of such an
comments, the Agencies have modified companies. Like the proposal, the final advisory relationship generally is not,
the definition of an ‘‘institutional rule defines ‘‘investment banking by itself, sufficient to establish the
customer’’ in the final rule to mean any services’’ to include, without limitation, financial sophistication of an individual
corporation, partnership, limited acting as an underwriter in an offering or corporate entity for purposes of the
liability company, trust, or other non- for an issuer, acting as a financial other similar standards in or developed
natural person that has, or is controlled adviser in a merger, acquisition, tender- under the federal securities laws.95
by a non-natural person that has, at offer or similar transaction, providing For purposes of determining whether
least: (i) $10 million in investments; or venture capital, equity lines of credit, a natural person meets the $5 million
(ii) $20 million in revenues; or (iii) $15 private investment-private equity net worth test, the assets of a person
million in revenues if the bank transactions or similar investments, include: (1) Any assets held
employee refers the customer to the serving as placement agent for an issuer, individually; (2) if the person is acting
broker-dealer for investment banking and engaging in similar activities.91 The jointly with his or her spouse, any assets
services.89 When converted to an phrase ‘‘other similar services’’ would of the person’s spouse (whether or not
equivalent asset number, the $20 include, for example, acting as an such assets are held jointly); and (3) if
million and $15 million revenue underwriter in a secondary offering of the person is not acting jointly with his
thresholds in the final rule are securities and acting as a financial or her spouse, fifty percent of any assets
somewhat lower than $40 million and adviser in a divestiture. These examples held jointly with such person’s spouse
$25 million asset thresholds in the are not exhaustive and are provided and any assets in which such person
proposed rule.90 The Agencies believe solely for illustrative purposes.92 shares with such person’s spouse a
that these lower thresholds are The final rule continues to define a community property or similar shared
appropriate for corporate and other non- ‘‘high net worth customer’’ as a natural ownership interest. These rules are
natural customers in light of the other person who, either individually or with designed to ensure that the full amount
protections retained in the final rule, his or her spouse, has at least $5 million of jointly owned assets are not
including the provisions requiring a in net worth excluding the primary considered in cases where one spouse
suitability or sophistication residence and associated liabilities of acts independently of the other in
determination, and the greater internal the person and, if applicable, his or her contacting a broker-dealer.96 The
and external resources that business spouse. In response to comments,93 the Agencies have re-formatted these
entities typically have as compared to Agencies have modified this definition allocation provisions in the final rule to
individuals. The Agencies have to include any revocable, inter vivos or make them easier to understand and
modified the thresholds to be based on living trust the settlor of which is a promote compliance.
revenues (rather than assets) to natural person who, either individually As in the proposal, the dollar
eliminate the potential for borrowings to or jointly with his or her spouse, meets threshold for both institutional
influence the status of a corporate the $5 million in net worth test.94 This customers and high net worth customers
customer and to promote the equivalent change is designed to reflect the fact will be adjusted for inflation on April 1,
treatment of non-financial companies that otherwise sophisticated individuals 2012, and every five years thereafter, to
and financial companies. In addition, may hold assets through such trusts for reflect changes in the value of the
the Agencies have amended the rule to estate planning or other purposes. Personal Consumption Expenditures
provide that a company controlled by an The Agencies believe that customers Chain-Type Price Index, as published by
institutional customer will itself be that meet the net worth, investment and the Department of Commerce, from
considered an institutional customer. A revenue thresholds included in the final December 21, 2006. The Agencies
company controlled by another rule should have the ability to selected this index because it is a
understand and evaluate the financial widely used and broad indicator of
88 See, e.g., ABA Letter, Clearing House Ass’n
interest of the bank employee making a inflation in the U.S. economy.
Letter, State Street Corp. Letter.
89 Rule 701(d)(2).
referral to a broker-dealer under the 2. Determining That a Customer Meets
90 To develop comparable asset and revenue
exemption. In developing these the Relevant Thresholds
thresholds for an institutional customer, the thresholds, the Agencies took into The proposal required the bank to
Agencies used a dataset composed of all publicly account the limited nature of activities determine that the customer being
traded, U.S.-incorporated, non-financial companies covered by the exemption (i.e., a referral
with a market capitalization of greater than $0 and
95 See, e.g., 15 U.S.C. 80a–2(a)(51), 78c(a)(54); 17
for which asset and sales data were available in the 91 See
2005 CompuStat Universe of North American Rule 701(d)(3). CFR 230.501(a).
92 When used in this rule, the term ‘‘include,
companies published by Standard & Poor’s 96 One commenter asserted that the Agencies
Corporation. For more information on the without limitation’’ means a non-exhaustive list. should allow a person to include assets that the
CompuStat Universe, see http:// This usage is not intended to suggest that the term person holds jointly with someone other than a
www2.standardandpoors.com/spf/pdf/products/ ‘‘including’’ as used in the Exchange Act and the spouse, such as a relative or domestic partner, for
Compustat2006.pdf. A company with $40 million rules under that Act means an exhaustive list. The purposes of calculating whether the person meets
in assets and a company with $25 million in assets use of the term ‘‘including, but not limited to’’ in the net worth threshold. See Roundtable Letter. The
would rank at approximately the 27.5th percentile Exchange Act Rules 10b–10 and 15b7–1 is also not Agencies have not modified the rule in this manner
and the 21.9th percentile, respectively, of all intended to create a negative implication regarding to keep the scope of individuals whose assets may
companies within this dataset when ranked the use of ‘‘including’’ without the term ‘‘but not be considered in determining whether a natural
according to assets. When the companies within limited to’’ in other Exchange Act rules. See person has the appropriate level of financial
this dataset are ranked according to sales, the Exchange Act Release No. 49879, 69 FR 39682 (June sophistication consistent with the standards used in
companies at approximately the 27.5th percentile 30, 2004), at footnote 76. determining whether a natural person is an
93 See ABA Letter, PNC Letter, Roundtable Letter.
and the 21.9th percentile have approximately $27.7 accredited investor under the Commission’s
million and $15.7 million in sales. 94 Rule 701(d)(1)(i)(B). Regulation D. See 17 CFR 230.501(a).
referred met the standards to be a high In addition, less information typically is appropriate information concerning the
net worth or institutional customer in the public domain concerning the relationship between the bank and the
either (i) before the referral fee was paid financial resources of an individual than broker-dealer,107 although a few
to the bank employee, in the case of a of a corporation or other business entity questioned whether sophisticated
non-natural person, or (ii) prior to or at and, accordingly, there is a greater customers required any disclosures at
the time of the referral, in the case of a likelihood that a bank employee— all or suggested that more simplified
natural person.97 In making these without further investigation—will be disclosures be permitted.108 A number
determinations for a natural person, the able to preliminarily identify corporate of commenters also asserted that the
proposed rule allowed the bank to rely or other business customers that are requirement that the bank provide these
on a signed acknowledgment from the likely to satisfy the rule’s eligibility disclosures ‘‘prior to or at the time of
person that he or she met the standards criteria than in the case of individuals. the referral’’ was impractical or
to be a high net worth customer.98 The For these reasons, the final rule burdensome.109 Commenters instead
proposed rule also required that the continues to provide for the bank to asserted that the rule should allow the
written agreement between the bank and determine that a natural person is a high disclosures to be provided before the
the broker-dealer provide for the broker- net worth customer before a referral is referral fee is paid or before a securities
dealer to (i) determine that the customer made and before the employee transaction is effected at the broker-
being referred met the standards to be a potentially develops an expectation of a dealer, or allow the bank and the broker-
high net worth customer or institutional higher-than-nominal fee. dealer to determine which entity would
customer before the referral fee was The Agencies, however, have make the disclosures.110
paid,99 and (ii) promptly inform the modified the final rule to make it more The final rule continues to require
bank if the broker-dealer determined flexible while retaining its underlying that a high net worth or institutional
that a customer referred under the purpose by providing that a bank or a customer referred to a broker-dealer
exemption did not meet the applicable broker-dealer satisfies its customer under the exception receive disclosures
standard.100 eligibility requirements if the bank or that clearly and conspicuously disclose
Commenters argued that either the broker-dealer ‘‘has a reasonable basis to (i) the name of the broker-dealer; and (ii)
bank or the broker-dealer, but not both, believe that the customer’’ is an that the bank employee participates in
should be required to make these institutional customer or high net worth an incentive compensation program
customer eligibility determinations and customer before the time specified in under which the bank employee may
that the bank and the broker-dealer the rule.105 A bank or broker-dealer receive a fee of more than a nominal
should be permitted to allocate would have a ‘‘reasonable basis to amount for referring the customer to the
responsibility for these determinations believe’’ that a customer is a high net broker-dealer and that payment of this
between themselves.101 In addition, worth customer or institutional fee may be contingent on whether the
several commenters contended that a customer if, for example, the bank or referral results in a transaction with the
bank should be allowed to make the broker-dealer obtains a signed broker-dealer.111 This requirement
eligibility determinations for both high acknowledgment from the customer (or, ensures that high net worth or
net worth customers and institutional in the case of an institutional customer, institutional customers receive notice of
customers before the referral fee is paid from an appropriate representative of the financial interest the referring
or before a securities transaction is the customer) that the customer meets employee may have in the transaction
effected at the broker-dealer.102 A few the applicable standards to be so they can make informed choices.
commenters also asserted that banks considered a high net worth customer or In light of the comments, the Agencies
and broker-dealers should be permitted an institutional customer, respectively, have modified the provisions of the rule
to rely on a signed acknowledgement and the bank employee making the governing how and when these
from either an institutional or high net referral or the broker-dealer employee disclosures must be provided to make
worth customer.103 dealing with the referred customer does the rule more workable and less
The status of the referred customer as not have information that would cause burdensome while also requiring that
a high net worth or institutional the employee to believe that the customers receive the information in
customer is a fundamental aspect of the information provided by the customer time to make informed choices.
exemption and the final rule continues (or representative) is false. Specifically, the final rule provides two
to provide for both the bank and the options for providing the required
broker-dealer to determine that the 3. Conditions Relating to Disclosures
customer meets the necessary The proposed exemption required 107 See, e.g., ABA Letter, JP Morgan Letter,
qualification criteria to provide added that the bank provide a high net worth Roundtable Letter, BISA Letter.
108 See, e.g., Bank of America Corp. (‘‘BofA’’)
assurance that these criteria are met.104 customer or institutional customer being
Letter and WBA Letter.
referred to the bank’s broker-dealer 109 For example, some commenters noted that
97 Proposed Rule 701(a)(2)(ii). partner certain written disclosures about some referrals may occur only by telephone or
98 Proposed Rule 701(a)(2)(ii)(B)(2). the bank employee’s potential interest asserted that it may be unclear to an employee
99 Proposed Rule 701(a)(3)(i).
in the referral prior to or at the time of when a referral actually occurs.
100 Proposed Rule 701(a)(3)(iii)(A). 110 See, e.g., ABA Letter, BISA Letter, Clearing
the referral.106 Commenters generally
101 See, e.g., BISA Letter, Clearing House Ass’n House Ass’n Letter, HSBC Bank Letter, and WBA
Letter, Citigroup Letter, and SIFMA Letter. Some believed that providing these types of Letter. In addition, some commenters contended
commenters, for example, suggested that requiring disclosures to a high net worth or that banks should be required to provide similar
bank employees to make these determinations institutional customer would help conflict-of-interest disclosures to customers referred
might require the employee to go beyond the to a broker-dealer under the statutory networking
limited role a bank employee is permitted to play
ensure that the customer received exception. See, e.g., Boyd Financial Letter, Pace
in a brokerage transaction under the statute. See, Project Letter, University of Cincinnati Corp. Law
e.g., BISA Letter, ABA Letter. agreement between the bank and the broker-dealer Center Letter. The statutory networking exception
102 See, e.g., ABA Letter, BISA Letter, Clearing to require the broker-dealer to inform the bank if itself sets certain disclosures that the bank or
House Ass’n Letter, HSBC Bank Letter, and PNC the broker-dealer determines that a referred broker-dealer must provide a customer in situations
Letter. customer does not meet the relevant eligibility where the bank employee making the referral may
103 See, e.g., Citigroup Letter, SIFMA Letter. thresholds. See Rule 701(a)(3)(v)(A). receive only a ‘‘nominal’’ referral fee. 15 U.S.C.
104 See Rule 701(a)(2)(ii) and (3)(ii)(B). The final 105 Rule 701(a)(2)(ii). 78c(a)(4)(i)(IX).
rule also continues to provide for the written 106 Proposed Rule 701(a)(2)(i). 111 Rule 701(b).
disclosures. Under the first option, as inform the bank if it determined that a exemption gives a broker-dealer the
under the proposal, the bank must customer referred under the exemption, flexibility to perform a suitability
provide the high net worth or or a transaction to be conducted by the analysis, if one is otherwise required by
institutional customer the disclosures in customer, did not meet the relevant the rule, in connection with all referrals
writing prior to or at the time of the suitability or sophistication standard.116 made under the exemption if the broker-
referral.112 The second option allows Several commenters objected to this dealer determines that such an approach
the bank to provide the disclosure to the suitability/sophistication requirement is appropriate for business, compliance
customer orally prior to or at the time arguing that the broker-dealer should be or other reasons.
of the referral. However, if the bank required to conduct a suitability/ Specifically, for contingent referral
provides the customer the required sophistication analysis only when such fees payable under the exemption, the
disclosures only orally, then either (i) an analysis would otherwise be required written agreement between the bank and
the bank must provide the disclosure to under the rules of the broker-dealer’s the broker-dealer must provide for the
the customer in writing within 3 self-regulatory organization (‘‘SRO’’) broker-dealer to conduct a suitability
business days of the date of the referral; (i.e., in those cases where the broker- analysis of each securities transaction
or (ii) the broker-dealer must be dealer makes a recommendation to the that triggers any portion of the
obligated, under the terms of its written customer concerning securities).117 contingency fee in accordance with the
agreement with the bank, to provide the Commenters also argued that the rules of the broker-dealer’s applicable
disclosures in writing to the suitability/sophistication requirement SRO as if the broker-dealer had
customer.113 If the broker-dealer is was unworkable or unnecessary given recommended the securities
responsible for providing the written that the transaction may involve only a transaction.120 This analysis must be
disclosures, then it must provide the referral (without a securities transaction performed by the broker-dealer before
disclosures to the customer prior to or occurring) of a sophisticated each securities transaction on which the
at the time the customer begins the customer.118 In addition, some referral fee is contingent is conducted.
process of opening an account at the commenters expressed concern that the For non-contingent referral fees
broker-dealer (if the customer does not proposed standards would increase the payable under the exemption, the
already have an account with the potential liability of broker-dealers or written agreement must provide for the
broker-dealer) or prior to the time the delay the ability of a broker-dealer to broker-dealer to conduct, before the
customer places an order for a securities respond to a customer’s instructions. referral fee is paid, either (1) a
transaction with the broker-dealer as a After carefully considering the sophistication analysis of the customer
result of the referral (if the customer comments, the Agencies have retained being referred; or (2) a suitability
already has an account at the broker- the requirement that the parties’ written analysis with respect to all securities
dealer).114 In this way, the rule provides agreement provide for the broker-dealer transactions requested by the customer
a mechanism for customers to receive to perform a suitability analysis when a contemporaneously with the referral in
the disclosures in writing when they referral fee is contingent on a accordance with the rules of the broker-
initially are provided only orally. transaction and a suitability or dealer’s applicable SRO as if the broker-
Whether provided orally or in writing, sophistication analysis for other dealer had recommended the securities
the required disclosures will be referrals. These requirements provide transaction.121 Under the sophistication
considered to have been made in a clear additional investor protections in those analysis option, the broker-dealer must
and conspicuous manner if they are circumstances where the bank employee determine that the customer has the
provided in a manner designed to call making the referral may receive a capability to evaluate investment risk
attention to the nature and significance higher-than-nominal referral fee. The and make independent decisions, and
of the information. suitability and sophistication standards determine that the customer is
included in the final rule are based on exercising independent judgment based
4. Suitability or Sophistication Analysis the standards that broker-dealers on the customer’s own independent
by Broker-Dealer currently must apply and use under assessment of the opportunities and
The proposed exemption required applicable SRO rules and, thus, should risks presented by a potential
that the written agreement between the be familiar to those broker-dealers that investment, market factors, and other
bank and the broker-dealer provide for partner with banks operating under the investment considerations.122 This
the broker-dealer to perform a suitability exemption.119 In addition, the sophistication analysis is based on
or sophistication analysis of a securities
transaction or the customer being 116 Proposed Rule 701(a)(3)(iii)(C). appropriate investment options, including low-cost
referred, respectively. The type and 117 See, e.g., ABA Letter, Clearing House Ass’n options, available to investors. However, given the
Letter, Citigroup Letter, and PNC Letter. See also cost structure of low-cost brokers, the Agencies
timing of the analysis needed to be FINRA Rule 2310 and FINRA IM–2310–3 expect that few such brokers would participate in
conducted by the broker-dealer (discussing suitability obligations of member referral arrangements under the exemption that
depended on whether the referral fee broker-dealers). One commenter also asserted that provides for higher-than-nominal referral fees.
was contingent on the completion of a any expansion of a broker-dealer’s suitability Broker-dealers that do not wish to become obligated
obligations should be processed and approved to perform the suitability/sophistication analyses
securities transaction at the broker- through the normal market regulation and SRO required by the rule also may continue to establish
dealer.115 The proposed rule also process. See SIFMA Letter. and maintain networking arrangements pursuant to
required that the written agreement 118 See, e.g., Clearing House Ass’n Letter, SIFMA the statutory networking exception.
120 Rule 701(a)(3)(ii)(A). Because the exemption
between the bank and its partner broker- Letter. Commenters also asserted that a broker-
dealer may not be able to perform the proposed provides for a broker-dealer to conduct its
dealer obligate the broker-dealer to suitability analysis in accordance with the rules of
‘‘sophistication’’ analysis if the customer does not
open an account or refuses to provide the broker- its applicable SRO, the broker-dealer may follow
112 Rule 700(a)(2)(i). dealer the information necessary to perform the and take advantage of any applicable SRO rules or
113 Rule 701(a)(2)(i) and (a)(3)(i). interpretations that allow the broker-dealer to make
analysis.
114 Rule 701(a)(3)(i). As a general matter, a 119 One commenter expressed concern that the an alternative suitability evaluation. See, e.g.,
customer begins the account-opening process when suitability/sophistication requirements of the rule FINRA IM–2310–3 (discussing a member’s
the customer fills out the appropriate forms may discourage low-cost, execution-only brokers suitability obligations with respect to certain
provided by the broker-dealer to establish an from establishing relationships with banks under institutional investors).
account. the exemption. See Business Law Section Letter. 121 Rule 701(a)(3)(iii)(B).
115 Proposed Rule 701(a)(3)(ii). The Agencies are mindful of the need to keep 122 Rule 701(a)(3)(ii)(B)(1).
elements of FINRA IM–2310–3 The final rule retains these provisions information concerning the employee
(Suitability Obligations to Institutional with the following modifications.128 In from the bank. A broker-dealer fulfills
Customers). response to comments,129 the Agencies its responsibilities under paragraph
The Agencies have modified the final have modified the SRO condition in (a)(3)(ii)(A) of Rule 701 if the broker-
rule to provide for the broker-dealer to paragraph (a)(1)(A) of the Rule to dealer determines that a bank employee
notify the customer, rather than the provide that the employee receiving the is not subject to statutory
bank, if the broker-dealer determines referral fee must not be ‘‘registered or disqualification before the employee
approved, or otherwise required to be first receives a referral fee under Rule
that a high net worth or institutional
registered or approved, in accordance 701 and at least once each year
customer, or a securities transaction to
with the qualification standards thereafter as long as the employee
be conducted by such a customer, does
established by the rules of any self- remains eligible to receive referral fees
not meet the applicable sophistication
regulatory organization.’’ The Agencies under the rule.
or suitability standard.123 Providing As a means designed to ensure that
such notification to the customer should have modified the related language in
paragraph (a)(2)(iii) of the rule in a the broker-dealer has the appropriate
assist the customer in deciding whether information to make these
similar manner.
or not to conduct the transaction. determinations, the rule continues to
Several commenters argued that the
5. Conditions Relating to Bank requirement that a bank employee require that, before a higher-than-
Employees encounter the high net worth or nominal referral fee is paid to a bank
institutional customer ‘‘in the ordinary employee under the exemption, the
Paragraph (b)(1) of the Proposed Rule course of the bank employee’s assigned bank provide the broker-dealer the name
included certain limitations on the duties’’ was unnecessary and of the employee and such other
types of bank employees that may ambiguous.130 The Agencies have identifying information that the broker-
receive a higher-than-nominal referral retained the requirement to help ensure dealer may need to determine whether
fee under the rule. In particular, the that a bank employee making a referral the employee is subject to statutory
Proposed Rule provided that the bank under the rule does so as part of the disqualification.133 Once the
employee: be predominantly engaged in employee’s duties as a bank employee information for a particular employee is
banking activities, other than making and not as a sales representative of the conveyed to the broker-dealer, the bank
referrals to a broker-dealer; encounter broker-dealer. However, the Agencies should provide at least annually its
the high net worth or institutional recognize that in the ordinary course of broker-dealer partner any changes to the
customer in the ordinary course of the his or her assigned duties for the bank, identifying information initially
employee’s assigned business for the a bank employee may encounter provided under paragraph (a)(2)(iii) of
bank; not be qualified or required to be customers or potential customers Rule 701 for an employee who
qualified under the rules of a SRO; and outside the employee’s regular business continues to make referrals and receive
not be subject to statutory hours or at locations outside of the referral fees under the exemption so that
disqualification under Section 3(a)(39) bank, such as at social or civic functions the broker-dealer may perform its
of the Exchange Act (other than or gatherings. periodic review of the employee’s
subparagraph (E) of that Section) A number of commenters contended qualifications under paragraph
(‘‘statutory disqualification’’).124 that the bank and the broker-dealer (a)(3)(ii)(A).
The proposed exemption also should not both be required to verify 6. Good Faith Compliance and
included other provisions related to the that the bank employee is not subject to Corrections by Banks
SRO and statutory disqualification statutory disqualification and suggested
As in the proposal, the final
that the bank and broker-dealer be
conditions. First, it required that the exemption provides that a bank that acts
permitted to allocate this responsibility
written agreement between the bank and in good faith and that has reasonable
between themselves.131 The Agencies
the broker-dealer must provide for the policies and procedures in place to
have modified the rule to provide for
bank and the broker-dealer to comply with the requirements of the
these determinations to be made by the
affirmatively determine, before a referral exemption will not be considered a
broker-dealer under the terms of the ‘‘broker’’ under Section 3(a)(4) of the
fee is paid to a bank employee under the
parties’ written agreement.132 The Exchange Act solely because the bank
exemption, that the employee is not
Agencies believe that broker-dealers are fails, in a particular instance, to
subject to statutory disqualification.125
better suited to make this determination determine that a customer is an
Second, it required that the bank
given their familiarity with the institutional or high net worth
provide the broker-dealer the name of
Exchange Act’s statutory customer, provide the customer the
the employee and such other identifying
disqualification standards, provided required disclosures, or provide the
information that may be necessary for that they receive the necessary
the broker-dealer to determine whether broker-dealer the required information
the bank employee is subject to 128 See Rule 701(a)(1), (a)(2)(iii), (a)(3)(ii)(A), and
concerning the bank employee receiving
statutory disqualification or associated (a)(3)(v)(B). the referral fee within the time periods
with a broker-dealer.126 And third, it 129 See Business Law Section Letter. prescribed. If the bank is seeking to
required that the parties’ written 130 See, e.g., ABA Letter, BISA Letter, Clearing comply and takes reasonable and
agreement obligate the broker-dealer to House Ass’n Letter, Comerica Bank Letter, and U.S. prompt steps to remedy the error, such
Trust Letter. For example, some asserted that bank as by promptly making the required
promptly inform the bank if it employees may be expected to identify and develop
determined the bank employee was client relationships at social or other events and determination or promptly providing
subject to statutory disqualification.127 expressed concern that the language might prevent the broker-dealer the required
a bank employee from receiving a referral fee for information, the bank will not lose the
institutional or high net worth customers exemption from registration in these
123 Rule 701(a)(3)(iv). encountered in these ways.
124 See Proposed Rule 701(a)(1). 131 See, e.g., ABA Letter, BISA Letter, Clearing
circumstances. Similarly, to promote
125 Proposed Rule 701(a)(3)(i)(A).
House Ass’n Letter, Citigroup Letter, PNC Letter, compliance with the terms of the
126 Proposed Rule 701(a)(2)(iii). and SIFMA Letter.
127 Proposed Rule 701(a)(3)(iii)(B). 132 Rule 701(a)(3)(ii)(A). 133 Rule 700(a)(2)(iii).
exemption, the bank must make for investment banking services exception).141 As explained above, these
reasonable efforts to reclaim the portion provided to the customer.139 types of bonus arrangements do not tend
of the referral fee paid to the bank Alternatively, the referral fee may be a to create the kind of financial incentives
employee for a referral that does not, predetermined dollar amount, or a for bank employees that the statute was
following any required remedial actions, dollar amount determined in designed to address.
meet the requirements of the exemption accordance with a predetermined III. Trust and Fiduciary Activities
and that exceeds the amount the bank formula, so long as the amount does not
otherwise would be permitted to pay vary based on (1) the revenue generated A. Trust and Fiduciary Exception and
under the statutory networking by, or the profitability of, securities Proposed Rules
exception and Rule 700.134 transactions conducted by the customer Section 3(a)(4)(B)(ii) of the Exchange
A few commenters suggested that the with the broker-dealer; (2) the quantity, Act (the ‘‘trust and fiduciary
Agencies strike the requirement that the price, or identity of securities purchased exception’’) permits a bank, under
bank seek to reclaim the higher-than- or sold over time by the customer with certain conditions, to effect securities
nominal portion of a referral fee. The the broker-dealer; or (3) the number of transactions in a trustee or fiduciary
Agencies have retained this requirement customer referrals made.140 For these capacity without being registered as a
as it helps provide employees an purposes, ‘‘predetermined’’ means broker.142 A bank must effect such
incentive to comply with the rule.135 established or fixed before the referral is transactions in its trust department, or
7. Referral Fees Permitted Under the made. The requirement that the amount other department that is regularly
Exemption of the referral fee not vary based on the examined by bank examiners for
number of customer referrals made does compliance with fiduciary principles
Proposed Rule 701 placed certain not prohibit an employee from receiving
limits on how a higher-than-nominal and standards.143 In addition the bank
a referral fee for each referral made by must be ‘‘chiefly compensated’’ for such
referral fee paid under the exemption
the employee under the exemption. transactions, consistent with fiduciary
may be structured.136 Some commenters
As the exemption provides, these principles and standards, on the basis
argued that these restrictions are
restrictions do not prevent a referral fee of: (1) An administration or annual fee;
unnecessary in light of the other
from being paid in multiple installments (2) a percentage of assets under
protections included in the exemption,
or that the rule should allow a higher- or from being based on a fixed management; (3) a flat or capped per
than-nominal referral fee to be based on percentage of the total dollar amount of order processing fee that does not
a percentage of any type of securities assets placed in an account with the exceed the cost the bank incurs in
transaction conducted at a broker-dealer broker-dealer. Additionally, these executing such securities transactions;
(rather than just investment banking restrictions do not prevent a referral fee or (4) any combination of such fees.144
from being based on a fixed percentage Banks relying on this exception may
transactions).137 On the other hand, one
of the total dollar amount of assets not publicly solicit brokerage business,
commenter asserted that, by allowing a
(including securities and non-securities other than by advertising that they effect
referral fee to be based on the total
assets) maintained by the customer with transactions in securities in conjunction
amount of assets maintained in an
the broker-dealer. Fees structured in this with advertising their other trust
account with the broker-dealer, the rule
manner and consistent with the activities.145 In addition, a bank that
would provide an incentive for bank
limitations in paragraph (d)(4)(i) of the effects a transaction in the United States
employees to provide ongoing
Rule do not provide a bank employee an of a publicly traded security under the
investment advice to customers.138
The final rule continues to place incentive to recommend the purchase or exception must execute the transaction
limits on the types of referral fees a bank sale of particular securities. In fact, the in accordance with Exchange Act
employee may receive under the bank employee would have no special Section 3(a)(4)(C).146 This Section
exemption. These limitations are incentive to recommend the purchase of requires that the bank direct the trade to
designed to reduce the potential any security, as the addition of cash or a registered broker-dealer for execution,
‘‘salesman’s stake’’ of the bank other non-security instruments to the effect the trade through a cross trade or
employee in securities transactions account would count equally towards substantially similar trade either within
the employee’s compensation as any the bank or between the bank and an
conducted at the broker-dealer.
addition of securities to the account. affiliated fiduciary in a manner that is
Specifically, the exemption provides
not in contravention of fiduciary
that a referral fee paid under the 8. Permissible Bonus Compensation Not principles established under applicable
exemption may be a dollar amount Restricted federal or state law, or effect the trade
based on a fixed percentage of the
The exemption for high net worth and in some other manner that the
revenues received by the broker-dealer
institutional customers expressly Commission permits.147 The trust and
134 Rule provides that nothing in the exemption fiduciary exception recognizes the
701(a)(2)(iv).
135 One commenter requested that the rule prevents or prohibits a bank from
141 Rule 701(c).
provide a similar safe harbor for broker-dealers. See paying, or a bank employee from 142 15
SIFMA Letter. Any obligations of a broker-dealer U.S.C. 78c(a)(4)(B)(ii).
receiving, any type of compensation 143 Id.
that arise by reason of Rule 701 run only to its bank
partner under the terms of their agreement and the under a bonus or similar plan that 144 15 U.S.C. 78c(a)(4)(B)(ii)(I).
Agencies believe the issue of contractual liability would not be considered incentive 145 15 U.S.C. 78c(a)(4)(B)(ii)(II).
between the parties is best addressed by the parties compensation under paragraph (b)(1), or 146 15 U.S.C. 78c(a)(4)(C).
themselves. As stated in the proposal, the that is described in paragraph (b)(2), of 147 15 U.S.C. 78c(a)(4)(C)(i)–(iii). As discussed
Commission anticipates that it may be necessary for infra at Part VI.C, the Agencies have adopted Rule
either FINRA or the Commission to propose a rule Rule 700 (implementing the networking
775 that permits banks, subject to certain
that would require broker-dealers to comply with conditions, to effect trades in securities issued by
the written agreements entered into pursuant to 139 Rule701(d)(4)(ii). an open-end company and certain variable
Rule 701. 140 Rule701(d)(4)(i). A referral fee paid under the insurance contracts without sending the trade to a
136 Proposed Rule 701(d)(4).
exemption may be contingent on whether the registered broker-dealer. Trades effected by a bank
137 See, e.g., Clearing House Ass’n Letter and
customer opens an account with the broker-dealer in accordance with Rule 775 are conducted in
JPMorgan Letter. or executes one or more transactions in the account accordance with Section 3(a)(4)(C) of the Exchange
138 See NASAA Letter. during the initial phases of the account. Act.
traditional securities role banks have B. Joint Final Rules obtained for each of the two
performed for trust and fiduciary immediately preceding years.154
1. ‘‘Chiefly Compensated’’ Test and The final rules (Rule 722) also allow
customers and includes conditions to Bank-Wide Exemption Based on Two-
help ensure that a bank does not operate a bank to use a bank-wide approach to
Year Rolling Averages the ‘‘chiefly compensated’’ condition as
a securities broker in the trust
department. A majority of commenters supported an alternative to the account-by-account
the general approach taken in the approach. To use this bank-wide
The proposed rules provided that a proposed rules implementing the trust methodology, the bank must meet two
bank would meet the ‘‘chiefly and fiduciary exception, including the conditions. First, the ‘‘aggregate
compensated’’ condition in the trust and proposed bank-wide alternative for the relationship-total compensation
fiduciary exception if the bank’s chiefly compensated test. For example, percentage’’ for the bank’s trust and
relationship compensation attributable a number of commenters stated that the fiduciary business as a whole must be
to each trust or fiduciary account proposed bank-wide approach would at least 70 percent.155 The ‘‘aggregate
exceeded 50 percent of the total provide banks an improved, workable relationship-total compensation
compensation attributable to the and flexible method of complying with percentage’’ of a bank operating under
relevant account.148 The proposed rules the statutory exception.149 Some the bank-wide approach is calculated in
also included an exemption that would commenters, however, opposed either a similar manner as the ‘‘relationship-
permit a bank to use a bank-wide the account-by-account or bank-wide total compensation percentage’’ of an
approach to the ‘‘chiefly compensated’’ alternative to the ‘‘chiefly compensated’’ account under the account-by-account,
condition as an alternative to the requirement. For example, some except that the calculations would be
account-by-account approach. A bank commenters argued that the account-by- based on the aggregate relationship
using this proposed alternative would account approach was inconsistent with compensation and total compensation
be able to use the aggregate relationship the terms and purposes of the trust and received by the bank from its trust and
fiduciary exception.150 Another fiduciary business as a whole during
and total compensation that the bank
commenter argued that an account-by- each of the two immediately preceding
received from its trust and fiduciary
account approach to the chiefly years. In other words, the percentage
business as a whole to monitor its would be determined by (1) Dividing
compliance with the chiefly compensated test is the only way to
help ensure that a bank does not operate the relationship compensation
compensated test. The proposed rule attributable to the bank’s trust and
a brokerage business out of its trust or
allowed a bank to use this bank-wide fiduciary business as a whole during
fiduciary departments and, for this
alternative if, among other things, the each of the immediately preceding two
reason, recommended that the Agencies
bank’s aggregate relationship years by the total compensation
eliminate the bank-wide alternative.151
compensation attributable to its trust or Some commenters also requested that attributable to the bank’s trust and
fiduciary business as a whole equaled or the Agencies lower the 70 percent fiduciary business as a whole during the
exceeded 70 percent of the total relationship compensation/total relevant year; (2) translating the
compensation attributable to its trust or compensation percentage required by quotient obtained for each of the two
fiduciary business. This bank-wide the bank-wide exemption to 60 percent years into a percentage; and (3) then
alternative was designed to simplify or 50 percent to make it more consistent averaging the percentages obtained for
compliance, alleviate concerns about with the percentage required by the each of the two immediately preceding
inadvertent noncompliance, and reduce account-by-account approach.152 years.156 Second, the bank must comply
the costs and disruptions banks likely After carefully considering the with the conditions in the trust and
would incur under the account-by- comments, the Agencies have retained fiduciary exception (other than the
account approach. the two alternative approaches in compensation test in Section
substantially the same form as 3(a)(4)(B)(ii)(I)) 157 and comply with
The proposal defined the term Section 3(a)(4)(C) (relating to trade
‘‘relationship compensation’’ to mean proposed. Specifically, Rule 721
provides that a bank meets the ‘‘chiefly execution) of the Exchange Act.158
the types of trust and fiduciary The Agencies believe that providing
compensation specifically identified in compensated’’ condition in the trust and
banks these two alternatives is
fiduciary exception if the ‘‘relationship-
the trust and fiduciary exception. The consistent with the purposes of the trust
total compensation percentage’’ for each
proposed rules also provided examples and fiduciary exception. In this regard,
trust or fiduciary account of the bank is
of fees that would be considered an the availability of these two alternatives
greater than 50 percent.153 The
administration fee or a fee based on a is designed to avoid disrupting the trust
‘‘relationship-total compensation and fiduciary operations of banks. The
percentage of assets under management percentage’’ for a trust or fiduciary
for these purposes. For example, the account is calculated by (1) Dividing the 154 The rule provides for this process to be
proposed rules provided that fees paid relationship compensation attributable accomplished by calculating the ‘‘yearly
by an investment company pursuant to to the account during each of the compensation percentage’’ and the ‘‘relationship-
a plan under 17 CFR 270.12b–1 (‘‘12b– immediately preceding two years by the total compensation percentage’’ for the account. See
1 fees’’) or for personal service or the Rule 721(a)(2) and (3).
total compensation attributable to the 155 Rule 722(a)(2).
maintenance of shareholder accounts account during the relevant year; (2) 156 The rule provides for this process to be
(‘‘service fees’’) would be considered translating the quotient obtained for accomplished by calculating the ‘‘yearly bank-wide
relationship compensation under the each of the two years into a percentage; compensation percentage’’ and the ‘‘aggregate
rules. The proposed rules also and (3) then averaging the percentages relationship-total compensation percentage’’ for the
bank’s trust and fiduciary business as a whole. See
implemented the statute’s advertising
Rule 722(b) and (c).

149 See, e.g., ABA Letter, Roundtable Letter, U.S.
restriction and provided certain other 157 The Agencies have modified the bank-wide
Trust Letter, WBA Letter.
conditional exemptions. 150 See, e.g., Clearing House Ass’n Letter.
exemption to clarify that these conditions include
the advertising restrictions contained in the trust
151 See NASAA Letter.
and fiduciary exception as implemented by Rule
152 See ACB Letter, CBA Letter. 721(b). See Rule 722(a)(1).
148 Proposed Rule 721. 153 Rule 721(a)(1). 158 Rule 722(a)(1).
compensation tests in both the account- The Agencies believe that the bank- of compliance with the exception or
by-account and bank-wide approaches wide alternative as structured provides exemption from year-to-year.
are designed to ensure that a bank’s banks appropriate and adequate Some commenters asked that the
trust department is not unduly flexibility in conducting their trust and Agencies clarify when a bank must
dependent on the types of securities- fiduciary operations while meeting the commence monitoring its compliance
related compensation not permitted by statute’s goals. The bank-wide approach with the two-year rolling compensation
the statute. The 70 percent is designed to reflect both the test. As discussed infra in Part VI.F, a
compensation threshold in the bank- relationship compensation and total bank must comply with the exceptions
wide exemption is higher than that compensation received by a bank in Section 3(a)(4)(B) of the Exchange Act
required under the account-by-account through the conduct of its full range of and the final rules starting the first day
approach in order to compensate for the of the bank’s first fiscal year
trust or fiduciary services, and, thus,
loss of particularity when the chiefly commencing after September 30, 2008.
allow banks to avoid tracking their trust
compensated test is implemented and Thus, a bank that operates on a
or fiduciary revenue back to one or more calendar-year basis must start
monitored on a bank-wide basis, rather specific accounts. At the same time, the
than on an account-by-account basis. monitoring its compliance with the
use of two uniform methodologies compensation requirements on either an
The Agencies note that several (account-by-account or bank-wide)
commenters also asserted that the account-by-account or bank-wide basis
should facilitate the review of bank beginning January 1, 2009, and would
proposed aggregate relationship
compliance during the bank supervisory first have to meet the applicable
compensation-total compensation
process and aid the development of compensation restriction after the
percentage required by the bank-wide
software and related systems by banks conclusion of 2010 (based on the
alternative (70 percent) would not
disrupt the trust and fiduciary and their service providers for average of the bank’s year-end
operations or customer relationships of compliance purposes. Furthermore, compensation ratios for 2009 and
banks in light of the proposal’s because the broker exceptions for a bank 2010).164 To allow banks sufficient time
definition of ‘‘relationship in Section 3(a)(4)(B), including the trust to obtain and verify the relevant
compensation.’’ and fiduciary exception, apply to each compensation data, the Agencies have
bank individually and are not available modified both the account-by-account
Some commenters asked that the to a nonbank entity, including a approach and the bank-wide approach
Agencies modify how the bank-wide nonbank subsidiary or affiliate of a to provide banks up to 60 days after the
exemption could be applied in several bank, the Agencies have not modified end of a year to calculate their
ways. For example, some asserted that the rules to allow a bank to monitor its compliance with the relevant
a bank should be allowed to apply the
compliance with the compensation limit compensation restriction.165 While the
70 percent compensation threshold
in Rule 721 on a combined basis with rules provide for a bank’s compliance
separately to each individual fiduciary
one or more affiliated banks, with the compensation tests to be
business line, operating unit or
subsidiaries or affiliates. The Agencies determined based solely on calculations
geographic region of the bank, rather
also do not believe that requiring banks as of year-end, banks are encouraged to
than only on an aggregate bank-wide
to monitor their compliance with the 70 monitor their trust and fiduciary
basis. Others asked that the Agencies
percent compensation test on a bank- compensation on a regular basis as
allow a bank to use an aggregate
wide basis, rather than on an individual appropriate to identify and address
compensation approach only for some
business line or operating unit basis, potential compliance issues before the
trust or fiduciary business lines and use
will impose significant additional end of the relevant two-year period.
the account-by-account approach for the
bank’s trust or fiduciary accounts in its burdens on banks.162 2. ‘‘Relationship Compensation’’
remaining business lines.159 In addition, A bank has the flexibility to elect to Both the account-by-account and
some asked that a bank be permitted to use a calendar year or the bank’s fiscal bank-wide approaches are based on the
monitor compliance with the 70 percent year for purposes of complying with the ratio of the relationship compensation
compensation test on a combined basis compensation provisions of either the attributable to a trust or fiduciary
with its affiliated entities engaged in account-by-account or bank-wide account or a bank’s trust and fiduciary
trust or fiduciary activities (such as an approach.163 In addition, whether a business to the total compensation
affiliated bank or a subsidiary or affiliate bank decides to use the account-by- attributable to the account or business.
registered as an investment adviser).160 account approach or the bank-wide The proposal defined the term
Some commenters also asked the approach, the bank’s compliance with ‘‘relationship compensation’’ to mean
Agencies to modify the bank-wide the relevant compensation restriction is the types of trust and fiduciary
approach to provide for a bank’s based on a two-year rolling average of compensation identified in the statute:
relationship compensation-total the compensation attributable to the an administration fee; an annual fee
compensation percentage to be trust or fiduciary account or the bank’s (payable on a monthly, quarterly or
calculated based on the compensation trust or fiduciary business, respectively. other basis); a fee based on a percentage
attributable to all of the bank’s trust and This two-year averaging is designed to
fiduciary accounts rather than the allow for short-term fluctuations that 164 This same schedule also would apply to a
compensation from the bank’s ‘‘trust otherwise could lead a bank to fall out bank that operates on an October 1st to September
and fiduciary business.’’ 161 30th fiscal year, but that elects to use the calendar
year for purposes of monitoring its compliance with
162 The Agencies note, for example, that a bank the chiefly compensated test. The Agencies believe
159 See Clearing House Ass’n Letter. that operates under the bank-wide approach may the delay and phased-in nature of the compensation
160 See Citigroup Letter, Clearing House Ass’n use different systems across its trust or fiduciary tests should provide banks as a general matter
Letter, Mellon Bank, N.A. (‘‘Mellon’’) Letter, PNC business lines, units or regions to monitor its sufficient notice and time to address potential
Letter, ABA Letter. compensation within those business lines, units or compensation issues across the full range of their
161 See, e.g., ABA Letter, Joint ABA/ABASA/ regions, provided that such information is then trust and fiduciary accounts, including personal
Clearing House Ass’n Letter of July 16, 2007, BISA aggregated on a bank-wide basis as provided in Rule and charitable accounts and estates. See Business
Letter, Clearing House Ass’n Letter, Comerica Bank 722. Law Section Letter.
Letter. 163 Proposed Rule 721(a)(6). 165 See Rule 721(a)(3)(ii) and Rule 722(c)(2).
of assets under management; a flat or statute, result in the disparate treatment per-order transaction fees that exceed a
capped per order processing fee that is of banks and registered investment bank’s costs, that are limited by the
equal to not more than the cost incurred advisers, and create confusion as to how statute’s chiefly compensated test.
by the bank in connection with 12b–1 fees should be treated under Treating 12b–1 fees in this manner
executing securities transactions for other aspects of the federal securities
also will avoid significant disruptions to
trust or fiduciary accounts; or any laws and rules of the NASD (now
the trust and fiduciary operations of
combination of these fees.166 The FINRA).
proposed rules also provided examples In addition, many commenters asked banks and, when viewed in light of
of fees that would be considered an that the Agencies clarify whether other provisions and protections, is
administration fee or a fee based on a additional types of fees not mentioned consistent with investor protection.
percentage of assets under management in the proposed rules would qualify as Many bank trust and fiduciary
for these purposes. For example, the relationship compensation. For departments, particularly those that act
proposed rules provided that 12b–1 example, commenters asked the as a corporate trustee or as a trustee or
fees,167 service fees,168 and fees for Agencies to confirm that fees separately fiduciary for employee benefit plans,
certain sub-transfer agent, sub- charged a trust or fiduciary customer for receive a significant portion of their
accounting or related services 169 paid custodial services and fees charged or trust and fiduciary compensation
by an investment company on the basis earned in connection with securities through payments made under a 12b–1
of assets under management would be lending and borrowing transactions plan.
considered relationship compensation conducted for a trust or fiduciary
Importantly, as provided in the trust
under the rules. customer are relationship
The Agencies received numerous compensation. and fiduciary exception, all 12b–1 fees
comments on the definition of After carefully considering the received by a bank must be consistent
relationship compensation. A number of comments, the Agencies have retained, with the fiduciary principles and
commenters supported the definition consistent with the statute, the standards governing the bank-customer
including, in particular, the examples definition of relationship compensation relationship,174 and the bank’s
recognizing 12b–1 and service fees as as any compensation that a bank compliance with these principles and
relationship compensation. For receives that is attributable to a trust or standards will continue to be regularly
example, some commenters stated that fiduciary account and that consists of examined by bank examiners during the
treating these fees as relationship (1) an administration fee, (2) an annual bank supervisory and examination
compensation is consistent with the fee (payable on a monthly, quarterly or process. In addition, the treatment of
terms and purposes of the trust and other basis), (3) a fee based on a 12b–1 fees that are paid on the basis of
fiduciary exception and ‘‘critical’’ to percentage of assets under management assets under management and service
ensuring that the rules do not disrupt (an ‘‘AUM fee’’), (4) a flat or capped per fees as ‘‘relationship compensation’’ for
the trust and fiduciary operations and order processing fee, paid by or on purposes of the trust and fiduciary
customer relationships of banks.170 behalf of a customer or beneficiary, that exception and related rules does not
Other commenters, however, argued is equal to not more than the cost affect the treatment of such fees under
that all 12b–1 fees, or the portion of incurred by the bank in connection with other provisions of the federal securities
such fees paid for distribution expenses, executing securities transactions for
laws, the federal banking laws,
should be excluded from relationship trust or fiduciary accounts; or (5) any
applicable trust or fiduciary principles
compensation.171 These commenters combination of these fees.172
The final rules also continue to list all and standards, or the rules of an SRO.
asserted that treating 12b–1 fees as
relationship compensation would allow 12b–1 fees that are paid on the basis of Thus, for example, the treatment of 12b–
banks to have a ‘‘salesman’s stake’’ in assets under management and 1 fees that are paid on the basis of assets
their customers’’ securities transactions attributable to a trust or fiduciary under management and service fees as
in contravention of the purposes of the account (under the account-by-account relationship compensation for purposes
test) or the bank’s trust and fiduciary of these rules does not alter or affect the
166 Proposed Rule 721(a)(4). business as a whole (under the bank-
167 Proposed Rule 721(a)(4)(iii)(A). wide test) as examples of AUM fees that and that is included in the public offering price of
168 Proposed Rule 721(a)(4)(iii)(B).
are relationship compensation. The the shares of an investment company. A deferred
169 See Proposed Rule 721(a)(4)(i) and (iii)(C). sales charge is an amount properly chargeable to
Agencies believe that treating 12b–1 fees sales or promotional expenses that is paid by a
Specifically, these fees, which are hereinafter
referred to as ‘‘sub-transfer agent and related fees’’ in this manner is consistent with both shareholder of an investment company after
are paid for (1) providing transfer agent or sub- the language and purposes of the trust purchase of the company’s shares but before or
transfer agent services for the beneficial owners of and fiduciary exception. When paid on upon redemption. See FINRA Rule 2830(b)(8)(B)
investment company shares; (2) aggregating and and (c); 17 CFR 270.6c–10.
processing purchase and redemption orders for
the basis of a percentage of assets under
174 Section 802(f) of the Uniform Trust Code, for
investment company shares; (3) providing the management these fees fall within the
example, provides that a trustee may receive
beneficial owners with account statements showing types of fees expressly permitted by the compensation from an investment company in
their purchases, sales, and positions in the trust and fiduciary exception. 12b–1 which the trustee has invested trust funds and
investment company; (4) processing dividend
payments to the account for the investment fees that are paid on the basis of assets receipt of such compensation will not be presumed
company; (5) providing sub-accounting services to under management also are to represent a conflict of interest if the investment
the investment company for shares held distinguishable from the types of non- otherwise complies with the jurisdiction’s prudent
beneficially in the account; (6) forwarding investor rule. See Uniform Trust Code, § 902(f) and
relationship compensation, such as related comment (2005). In addition, a bank’s
communications from the investment company to
the beneficial owners, including proxies, front-end or back-end sales loads 173 or receipt of 12b–1 fees from an employee benefit plan
shareholder reports, dividend and tax notices, and for which the bank acts as a fiduciary is governed
updated prospectuses; or (7) receiving, tabulating, 172 Rule 721(a)(4). For banks operating under the by the Employee Retirement Income Security Act
and transmitting proxies executed by the beneficial bank-wide alternative, fees of these types are (‘‘ERISA’’) and the regulations and guidance issued
owners of investment company shares in the relationship compensation if they are attributable to by the Department of Labor thereunder. See 29
account. the bank’s trust or fiduciary business as a whole. U.S.C. 1001 et seq.; DOL Advisory Opinion 2003–
170 See Joint ABA/ABASA/Clearing House Ass’n See Rule 722(c)(1). 09A (June 25, 2003) (discussing conditions under
Letter of June 7, 2007. 173 A front-end sales charge is a charge that is which a directed trustee may receive 12b–1 fees
171 See NASD Letter, NASAA Letter. used to finance sales or sales promotion expenses under ERISA).
treatment of, or limitations imposed on, are provided only for illustrative 3. Excluded Compensation
these fees under FINRA Rule 2830.175 purposes. Other types of fees or fees for A number of commenters asserted
In light of the comments received, the other types of services could be an that the revenues derived from
Agencies have modified Rule 721 to administration fee, annual fee or an securities transactions conducted by a
provide additional examples of the AUM fee. In addition, an administration bank for a trust or fiduciary customer
types of fees that qualify as relationship fee, annual fee or assets under under a different exception or
compensation under the statute and the management fee attributable to a trust or exemption (such as the exemption
rules. For example, the Agencies have fiduciary account or a bank’s trust or provided in Rule 771 for transactions in
modified the rule to include, as fiduciary business is considered Regulation S securities) should be
additional examples of an relationship compensation regardless of excluded from the account-by-account
administration fee, compensation what entity or person pays the fee, and or bank-wide compensation test
received by a bank (1) for disbursing regardless of whether the fee is related completely.179 Others asked that certain
funds from, or for recording payments to only securities assets, to a other types of fees, such as internal
to, a trust or fiduciary account; (2) in combination of securities and non- credits from other areas of the bank,
connection with securities lending and securities assets, or to only non- credits received from broker-dealers for
borrowing transactions conducted for a securities assets. These fees are part of brokerage or research services in
trust or fiduciary account; and (3) for the compensation for acting as a trustee accordance with Section 28(e) of the
custody services provided to a trust or or fiduciary. Exchange Act, or revenues earned from
fiduciary account (whether or not providing trust or fiduciary services to
Some commenters asserted that a
separately charged).176 In addition, the mutual funds, be excluded from the
bank should be permitted to include
Agencies have included (1) as an chiefly compensated calculation as well.
within its relationship compensation
example of an annual fee, an annual fee As discussed in Part I.C supra, if more
any per-transaction securities
paid for assessing the investment than one ‘‘broker’’ exception or
processing fee it charges as a directed
performance of a trust or fiduciary exemption is available for a securities
account or for reviewing such an trustee or in another fiduciary capacity
even if the fee exceeds the bank’s costs transaction effected by a bank for a
account’s compliance with applicable customer, the bank may choose the
investment guidelines or restrictions, in processing the transaction.178 The
statute, however, expressly provides exception or exemption on which it
and (2) as an example of an assets under relies in effecting the transaction. In
management fee, a fee based on the that a per-order securities processing fee
may be counted towards the statute’s light of the comments received, the
financial performance, such as capital Agencies have modified Rules 721 and
gains or capital appreciation, of trust or chiefly compensated requirement only if
the fee is ‘‘equal to not more than the 722 to explicitly provide that, if a bank
fiduciary assets under management. The effects a securities transaction for a trust
Agencies believe the characterization of cost incurred by the bank in connection
with executing securities transactions’’ or fiduciary customer in accordance
these fees comports with the manner in with the terms of an exception or
which banks generally receive for its trust or fiduciary customers. For
this reason, the Agencies have not exemption other than Rule 721 or Rule
compensation for these services. Several 722, the bank may, at its election,
commenters noted that banks currently modified the rule in the manner
requested. exclude the revenues associated with
may receive 12b–1 fees, service fees or those transactions from the applicable
sub-transfer agent and related fees either However, as discussed further in Part relationship-total compensation
directly from a mutual fund or from the V, the Agencies have modified the calculation in Rule 721 or Rule 722.180
fund’s distributor, transfer agent, custody exemption (Rule 760) to permit As the rules provide, if a bank elects to
administrator or adviser.177 In light of banks that accept securities orders as a exclude the revenues associated with
these comments, the Agencies have directed trustee to do so under that transactions conducted under another
eliminated the language in the proposed exemption in lieu of the trust and exception or exemption, the bank must
rules that required that these types of fiduciary exception and related rules. In exclude such revenue from both the
fees be ‘‘paid by an investment addition, as the Agencies explained in bank’s relationship compensation (if the
company.’’ the proposal, a per order processing fee compensation would otherwise qualify
The examples of an administration included in relationship compensation as relationship compensation) and total
fee, annual fee and an asset under may include the fee charged by the compensation. Of course, the bank also
management fee included in Rule 721(b) executing broker-dealer as well as any must comply with the conditions
additional fixed or variable costs applicable to the other available
175 The rules also do not alter or affect the ability
incurred by the bank in processing the exception or exemption on which the
of a nonbank registered investment adviser to
receive 12b–1 fees under the federal securities laws
transaction. If a bank includes any such bank chooses to rely.181
or the rules of an SRO. The ‘‘broker’’ exceptions for additional fixed or variable costs in the In addition, compensation that is not
banks in Section 3(a)(4)(B) of the Exchange Act, per order processing fees it includes in derived from the provision of trust or
including the trust and fiduciary exception, are not its relationship compensation, the bank
available to nonbank entities such as nonbank
fiduciary services should not be
investment advisers. should maintain appropriate policies
176 Rule 721(a)(4)(i)(B), (C) and (D). Because and procedures governing the allocation 179 See, e.g., Institute of Int’l Bankers (‘‘IIB’’)
securities lending/borrowing fees and custody fees of these costs to the orders processed for Letter, Clearing House Ass’n Letter.
may be charged on an assets under management 180 Rule 721(b) and Rule 722(d).
trust or fiduciary customers. This
basis, the rule also provides that these fees are 181 Some commenters asserted that a bank should
relationship compensation when charged in this
should help ensure that profits derived
be allowed to include in its relationship
manner. Rule 721(a)(4)(iii)(E). As with other types from per trade charges are not masked compensation all of the revenue from securities
of relationship compensation, the fees that a bank as costs of processing the trades and transactions conducted for a trust or fiduciary
receives for effecting securities lending/borrowing thereby included in relationship account under another exception or exemption,
transactions for a trust or fiduciary account must be regardless of whether that revenue otherwise
consistent with applicable fiduciary principles and
compensation.
qualifies as relationship compensation. The
standards. Agencies have not amended the rule in this manner
177 See Investment Company Institute (‘‘ICI’’) 178 See, e.g., Wells Fargo & Company (‘‘Wells as it is inconsistent with the terms of the trust and
Letter, Federated Investors, Inc. (‘‘Federated Fargo’’) Letter, State Street Corp. Letter, Mellon fiduciary exception which sets forth the types of
Investors’’) Letter. Letter. fees that are included in relationship compensation.
included in a bank’s relationship or definition also provides that a bank acts proposal, the Agencies will rely on the
total compensation under either the in a ‘‘fiduciary capacity’’ if it acts ‘‘in appropriate federal banking agency for a
account-by-account or bank-wide any other similar capacity’’ to those bank to determine whether the bank’s
alternative. Such compensation specifically identified. Accordingly, the activities are conducted in the bank’s
includes, for example, (1) revenue scope of the term ‘‘fiduciary capacity’’ is trust department or other department
earned by a trust or fiduciary not fixed in time. regularly examined by the agency’s
department from providing back-office The Agencies recognize, moreover, examiners for compliance with
services to an affiliated or unaffiliated that different nomenclature may be used fiduciary principles and standards.188
party,182 (2) revenue from the sale of an to identify a fiduciary capacity in the
5. Exemptions for Special Accounts,
office or assets of the trust department, relevant governing documents or state
Foreign Branches, Transferred
or from the provision on a stand-alone laws. For example, the Uniform Probate
Accounts, and a De Minimis Number of
basis of other services (such as custody Code uses the term ‘‘Personal
Accounts
services or the sale of portfolio representative’’ and similar successor
management software to a third party titles in place of the terms ‘‘executor’’ or The Agencies also proposed a rule
that independently operates and uses ‘‘administrator’’ to identify the (Proposed Rule 723) that would permit
the software in connection with its own representative of a decedent; the a bank to exclude certain types of
business) that do not involve trust or Uniform Custodial Trust Act uses the accounts for purposes of determining its
fiduciary services as defined in section terms ‘‘Conservator’’ and ‘‘Custodial compliance with the account-by-
3(a)(4)(D) of the Act; and (3) internal trustee’’ to refer to persons that act as a account or bank-wide compensation
payments or credits allocated to a bank’s fiduciary for another person who has tests. As proposed, Rule 723 allowed a
trust or fiduciary department or unit become incapacitated; and the Uniform bank, in calculating its compensation
from another department or unit of the Transfers to Minors Act uses both the under either approach, to exclude
bank for deposits and other similar terms ‘‘Conservator’’ and ‘‘Custodian’’ to compensation received from any trust or
services not involving a security. Credits refer to fiduciaries that act on behalf of fiduciary account open only for a short
received by a bank from a broker-dealer a minor.185 period of time (less than 3 months) or
for brokerage and research services Some commenters asked whether a acquired within the past 12 months as
provided by a broker-dealer in bank that engages in trust or fiduciary part of a merger or similar transaction.
accordance with section 28(e) of the Act activities may conduct securities In addition, the Proposed Rule allowed
(15 U.S.C. 78bb(e)) and the regulations transactions under the trust and a bank using the account-by-account
issued thereunder also should be fiduciary exception and related rules approach, subject to certain conditions,
excluded from the compensation tests. even if the bank does not maintain a to (1) exclude the lesser of 1 percent or
The Agencies do not believe these separate trust department or has not had 500 of its trust or fiduciary accounts in
credits constitute compensation to the to obtain formal trust powers from its a year from the chiefly compensated
bank for purposes of the exception and appropriate federal banking agency.186 test, and (2) transfer any trust or
rules because these credits must be The trust and fiduciary exception and fiduciary account ultimately determined
reasonable in relation to the value of the related rules do not require that a bank to be non-conforming to a registered
brokerage and research provided by the effecting securities transactions for a broker-dealer or an unaffiliated entity
broker-dealer in connection with the customer in a trust or fiduciary capacity exempt from registration within 3
bank’s exercise of investment discretion do so through a separate trust months of the end of the relevant year.
for its fiduciary accounts. department or have obtained formal Commenters generally favored these
trust powers from its appropriate federal exemptions. One commenter, however,
4. Trust or Fiduciary Accounts argued that these exemptions should be
banking agency. However, securities
The final rules, like the proposal, transactions conducted for a trust or eliminated because they would allow
define a trust or fiduciary account as an fiduciary customer under the exception banks to manipulate the chiefly
account for which the bank acts in a and related rules must be effected in a compensated test.189 Several
trustee or ‘‘fiduciary capacity’’ as that department of the bank ‘‘that is commenters also requested that the
term is defined in Section 3(a)(4)(D) of regularly examined for compliance with Agencies adopt an additional exemption
the Exchange Act.183 This definition is fiduciary principles and standards’’ by
based on the definition of ‘‘fiduciary the bank’s appropriate federal or state continue to act in a trustee or fiduciary capacity
with respect to the account and, accordingly,
capacity’’ in part 9 of the OCC’s banking supervisor.187 As stated in the should exercise appropriate diligence in selecting
regulations, which relates to the trust persons to provide services to the bank’s trust or
and fiduciary activities of national acting in a ‘‘fiduciary capacity’’ with respect to the fiduciary customers and in overseeing the services
account. provided in accordance with the bank’s fiduciary
banks, in effect at the time of enactment 185 The text of and additional information on obligations. No party, other than the bank
of the GLB Act. these Uniform Codes and Acts, which are (including, without limitation, a transfer agent or
Section 3(a)(4)(D) identifies a number developed under the auspices of the National investment adviser), working in conjunction with
of particular situations where a bank Conference of Commissioners of Uniform State the bank may rely on the bank’s exception or
Laws (‘‘NCCUSL’’), may be found on NCCUSL’s exemption from ‘‘broker’’ status. To the extent that
serves in a fiduciary capacity.184 The Web site at http://www.nccusl.org. any such third party performs activities that would
186 See, e.g., ACB Letter, Roundtable Letter. make that entity a broker under Section 3(a)(4) of
182 On the other hand, the revenue derived from the Exchange Act that entity would be required to
Federal savings associations, for example, are not
providing fiduciary services to investment required to obtain approval from their appropriate register as a broker (in the absence of an applicable
companies or companies affiliated with the bank federal banking agency to act as a trustee for an exemption or regulatory relief) notwithstanding any
should be included in the relevant chiefly individual retirement account under section 408(a) written or unwritten agreement the third party may
compensated calculation. of the Internal Revenue Code. See 12 CFR 550.580. have with the bank.
183 Rule 721(a)(5). 187 15 U.S.C. 78c(a)(4)(B)(ii); Rule 722(a)(1). A 188 The OTS, for example, is in the process of
184 Section 3(a)(4)(D) of the Exchange Act bank effecting transactions for trust or fiduciary revising its examination procedures to provide for
provides that a bank acts in a ‘‘fiduciary capacity’’ customers through a department examined for the regular examination of individual retirement
if, among other situations, the bank has investment compliance with trust or fiduciary principles may accounts held by a federal savings association as
discretion on behalf of another. Thus, for example, use other divisions or departments of the bank, or trustee for compliance with fiduciary principles
if a bank has investment discretion over an escrow other affiliated or unaffiliated third parties, to and standards.
account on behalf of another, the bank would be handle aspects of these transactions. The bank must 189 NASAA Letter.
permitting banks to exclude trust and rule provides that a bank will be before the account is closed.198 The
fiduciary accounts held at a foreign deemed to have reasonable cause to exclusions in Rule 723(a), (b) and (d) are
branch of a bank from the chiefly believe that less than 10 percent of the designed to help prevent such short-
compensated tests.190 These total number of trust or fiduciary term fluctuations in the amount of
commenters contended that few, if any, accounts of the foreign branch are held securities transactions conducted for a
of the trust and fiduciary accounts of a by or for the benefit of a U.S. person if trust or fiduciary account from
foreign branch (other than an offshore the principal mailing address for the distorting, or causing a bank to fail, the
‘‘shell’’ branch servicing U.S. branches accountholder(s) and beneficiary(ies) of relevant compensation test. At the same
of the bank) likely are to be held by or the account is not in the United States, time, these exclusions promote
on behalf of a U.S. person and, or the records of the foreign branch compliance by requiring that the bank
accordingly, the costs of applying the indicate that the accountholder(s) and bring the relevant accounts into
chiefly compensated test to the foreign beneficiary(ies) of the account is not a compliance within a short and
branches of a U.S. bank would U.S. person as defined in 17 CFR prescribed period of time. For this
significantly outweigh any potential 230.902(k). reason, the Agencies do not believe it
benefits to U.S. persons. After carefully The rule defines a ‘‘non-shell foreign would be appropriate to expand the
considering these comments, the branch’’ of a bank to mean a branch of Rule 723(d) to allow a bank to exclude
Agencies have adopted, without change, the bank that is located outside the an account from the chiefly
the exemptions included in Proposed United States and provides banking compensated test in consecutive years
Rule 723. In addition, the Agencies have services to residents of the foreign as requested by some commenters.
adopted a new conditional exemption jurisdiction in which the branch is Some commenters also asked the
(Rule 723(c)) for trust and fiduciary located, and for which the decisions Agencies to raise the 500 account
accounts held at a foreign branch of a relating to day-to-day operations and maximum in Rule 723(d) to avoid
bank. business of the branch are not made by discriminating against large banks.199
Rule 723(a) permits a bank that uses an office of the bank located in the The Agencies expect that most banks
either the account-by-account or bank- United States.194 The Agencies believe that have more than 50,000 trust and
wide compensation test to exclude any this exemption provides appropriate fiduciary accounts, and thus would be
trust or fiduciary account that was open relief to banks with respect to foreign subject to the 500 account cap in Rule
for a period of less than 3 months branches where the records of the bank 723(d), will operate under the bank-
during the relevant year.191 Rule 723(b) indicate that it is not significantly wide test and for this reason have not
permits a bank to exclude, for purposes engaged in providing trust or fiduciary made the requested change.
of determining its compliance with services to U.S. customers. Rule 723(c) also provides that a bank
either compensation test, any trust or Rule 723(e) permits a bank using the that uses the account-by-account
fiduciary account that the bank acquired account-by-account approach to approach will not be considered a
from another person as part of a merger, exclude, for purposes of the chiefly broker for purposes of Section 3(a)(4) of
consolidation, acquisition, purchase of compensated test, the lesser of (1) 1 the Exchange Act solely because a
assets or similar transaction by the bank percent of the total number of trust or particular trust or fiduciary account
for 12 months after the date the bank fiduciary accounts held by the bank; or does not meet the ‘‘chiefly
acquired the account from the other (2) 500 accounts.195 To rely on this compensated’’ test if, within 3 months
person.192 A bank that elects to use Rule exemption with respect to an account, of the end of the year in which the
account fails to meet such standard, the
723(a) or (b) for one or more accounts the bank must not have relied on this
bank transfers the account or the
must exclude both the relationship exemption for such account during the
securities held by or on behalf of the
compensation and total compensation immediately preceding year.196 In
account to a registered broker-dealer or
attributable to such accounts for addition, the bank must maintain
another unaffiliated entity (such as an
purposes of the applicable records demonstrating that the
unaffiliated bank) that is not required to
compensation test. securities transactions conducted by or
be registered as a broker-dealer.200
Rule 723(c) provides a new exemption on behalf of the excluded account were
under which a bank using the bank- undertaken by the bank in the exercise 6. Advertising Restrictions
wide approach may exclude for of its trust or fiduciary responsibilities Proposed Rule 721(b) implemented
purposes of the chiefly compensated with respect to the account.197 the advertising restrictions in Section
test the trust or fiduciary accounts held The Agencies believe these exclusions 3(a)(4)(B)(ii)(II) of the Act applicable to
at a ‘‘non-shell’’ foreign branch of the reduce administrative burdens and banks conducting securities transactions
bank, provided that the bank has facilitate compliance. A bank, consistent under the trust and fiduciary exception.
reasonable cause to believe that the trust with its fiduciary duties, may need to No commenters opposed the advertising
or fiduciary accounts of the foreign conduct a higher level of securities restrictions of the rule and the Agencies
branch held by or for the benefit of a transactions for a trust or fiduciary have adopted these restrictions as
U.S. person constitute less than 10 account at certain times, such as shortly proposed. The final rules provide that a
percent of the total trust or fiduciary after the account is established or bank complies with the advertising
accounts of the foreign branch.193 The acquired from another person or shortly restriction applicable under either Rule
190 See ABA Letter, Clearing House Ass’n Letter, 194 This definition is designed to exclude
198 For example, after a trust or fiduciary account
Joint ABA/ABASA/Clearing House Ass’n Letter of branches that are established in certain offshore is acquired or established, the bank may need to
July 16, 2007. jurisdictions primarily to provide services to U.S. conduct a number of securities transactions to
191 Rule 723(a). customers and, for this reason, are managed on a invest or rebalance the account’s holdings in
192 Rule 723(b). day-to-day basis from the United States. accordance with the terms of the agreement
195 Rule 723(d). Under the rule, if a bank has less
193 The Agencies expect that few, if any banks, establishing the account or, in cases where the bank
that use the account-by-account approach to the than 100 trust or fiduciary accounts in the has investment discretion, to implement the bank’s
chiefly compensated test will have foreign branches aggregate, the bank may exclude 1 account under investment strategy for the account.
engaged in trust or fiduciary services and, the exemption in any given year. 199 See, e.g., ACB Letter; Clearing House Ass’n
196 Rule 723(d)(3). Letter.
accordingly, have limited the exemption to banks
that use the bank-wide approach. 197 Rule 723(d)(1). 200 Rule 723(c).
721 or 722 if advertisements by or on circumstances, subject to certain A bank may effect transactions under
behalf of the bank do not advertise that conditions.205 the sweep exception and Rule 740 as
the bank provides securities brokerage Most commenters that addressed part of a program to sweep deposit
services for trust or fiduciary accounts Proposed Rules 740 and 741 supported funds of, or collected by, another bank
except as part of advertising the bank’s the rules and Rule 741 in particular.206 into a no-load money market fund in
broader trust or fiduciary services, and One commenter objected to the accordance with the exception and the
do not advertise the securities brokerage exemption in Rule 741 on the basis that Rule.
services provided by the bank to trust or it would permit banks to effect
transactions in money market funds that B. Exemption Regarding Money Market
fiduciary accounts more prominently
did not meet the ‘‘no-load’’ Fund Transactions
than the other aspects of the trust or
fiduciary services provided to such requirements of the sweep exception.207 After carefully considering the
accounts.201 Another commenter asked that the comments, the Agencies have adopted
Agencies clarify whether a bank may Rule 741, which permits banks, without
An ‘‘advertisement’’ for these
effect transactions under the rules for registering as a broker, to effect
purposes means any material that is
deposits held by another bank. transactions on behalf of a customer in
published or used in any electronic or
other public media, including any Web A. Rule 740: Definition of Terms Used securities issued by a money market
site, newspaper, magazine or other in Sweep Exception fund under certain conditions.210 To
periodical, radio, television, telephone qualify for this exemption, the bank
As under the proposal, the final rule must provide the customer, directly or
or tape recording, videotape display, defines a ‘‘money market fund’’ for
signs or billboards, motion pictures, indirectly, some other product or
purposes of the sweep exception to service, the provision of which would
blast e-mail, or telephone directories mean an open-end investment company
(other than routine listings).202 Other not, in and of itself, require the bank to
registered under the Investment register as a broker-dealer under Section
types of material or information that is Company Act of 1940 (15 U.S.C. 80a–1
not distributed through public media, 15(a) of the Exchange Act.211 Examples
et seq.) that is regulated as a money of other products or services that may be
such as mailings or e-mails to a bank’s market fund pursuant to 17 CFR 270.2a–
own customers, are not considered an a qualifying ‘‘other’’ product or service
7.208 In addition, consistent with FINRA include an escrow, trust, fiduciary or
advertisement. In addition, in rules, the final rule provides that a class
considering whether an advertisement custody account, a deposit account or a
or series of securities of an investment
advertises the securities brokerage loan or other extension of credit. The
company will be considered ‘‘no-load’’
services provided to trust or fiduciary Agencies have modified the rule to also
if (1) the class or series is not subject to
customers more prominently than the permit a bank to effect transactions
a sales charge or a deferred sales charge;
bank’s other trust or fiduciary services, under the exemption on behalf of
and (2) total charges against net assets
the nature, context and prominence of another bank as part of a program for the
of the class or series of securities for
the information presented—and not investment or reinvestment of the
sales or sales promotion expenses,
simply the length of text or information deposit funds of, or collected by, the
personal service, or the maintenance of
devoted to a particular subject—should other bank.212 This change is designed
shareholder accounts do not exceed
be considered. 0.0025 of average net assets annually.209 to allow banks to provide sweep
services to other banks under the
IV. Sweep Accounts and Transactions 205 Proposed exemption, as they may do under the
Rule 741.
in Money Market Funds 206 See, e.g., Federated Investors Letter, ICBA sweep exception itself.
Letter, Clearing House Ass’n Letter, ABA Letter. The final exemption continues to
Exchange Act Section 3(a)(4)(B)(v) 207 See, e.g., NASAA Letter.
allow banks to effect transactions only
(‘‘sweep exception’’) excepts a bank 208 Rule 740(b). One commenter requested that
in securities of a registered money
from the definition of ‘‘broker’’ to the Rule 740(b) be modified to allow banks to sweep
market fund. In addition, the rule
extent it ‘‘effects transactions as part of deposits into an unregistered investment company
that operates pursuant to Rule 12d1–1 under the continues to provide that, if the class or
a program for the investment or re- Investment Company Act (17 CFR 270.12d1–1). See series of money market fund securities
investment of deposit funds into any no- State Street Corp. Letter. The statutory sweep is not no-load (as defined in Rule 740),
load, open-end management investment exception, however, provides only for deposit funds
the bank may not characterize or refer
company registered under the to be swept into an investment company ‘‘registered
under the Investment Company Act of 1940.’’ to the class or series of securities as no-
Investment Company Act that holds Exchange Act Section 3(a)(4)(B)(v). load and the bank must provide the
itself out as a money market fund.’’ 203 209 See Rule 740(c); FINRA Rule 2830. Consistent
customer, not later than at the time the
To provide banks with guidance on the with FINRA Rule 2830, charges for the following
customer authorizes the bank to effect
sweep exception, Proposed Rule 740 are not be considered charges against net assets of
a class or series of an investment company’s the transactions, a prospectus for the
defined several terms used in the securities for sales or sales promotion expenses, securities.213 The Agencies believe these
exception, including the terms ‘‘money personal service, or the maintenance of shareholder conditions and limitations provide bank
market fund’’ and ‘‘no-load.’’ 204 The accounts: (1) Providing transfer agent or sub-
customers adequate protections in light
Agencies also requested comment on a transfer agent services for beneficial owners of
investment company shares; (2) Aggregating and of the limited nature of the transactions
separate exemption (Proposed Rule 741) processing purchase and redemption orders for
that would permit banks, without Investment company shares; (3) Providing 210 Rule 741.
registering as a broker, to effect beneficial owners with account statements showing 211 Rule 741(a)(1)(A).
transactions in securities issued by a their purchases, sales, and positions in the
212 Rule 741(a)(1)(B).
investment company; (4) Processing dividend
money market fund on behalf of a payments for the investment company; (5) 213 Rule 741(a)(2)(ii). If a bank relies on the
customer in a broader set of Providing sub-accounting services to the investment exemption to sweep the deposits of another bank
company for shares held beneficially; (6) into a money market fund that is not ‘‘no-load,’’
201 Rule
Forwarding communications from the investment then neither the deposit-holding bank nor the
721(b). company to the beneficial owners, including sweeping bank may characterize the fund as a ‘‘no-
202 Rule 721(b)(2) (referencing Rule 760(g)(2)). proxies, shareholder reports, dividend and tax load’’ fund, and either the deposit-taking bank or
203 See Exchange Act Section 3(a)(4)(B)(v) (15
notices, and updated prospectuses; or (7) Receiving, the sweeping bank must provide the customer with
U.S.C. 78c(a)(4)(B)(v)). tabulating, and transmitting proxies executed by a prospectus for the fund within the time prescribed
204 Proposed Rule 740(b) and (c). beneficial owners of investment company shares. by the rule. See Rule 741(a)(2)(ii)(A) and (B).
permitted under the exemption.214 In certain conditions, to accept orders for (e.g., Rule 772, which permits banks to
addition, the exemption recognizes that securities transactions from employee effect securities lending or borrowing
banks have long offered sweeps and benefit plan accounts and individual transactions on behalf of certain non-
other services that invest customer retirement and similar accounts for custodial customers).222 In addition, a
funds in money market funds that do which the bank acts as custodian.216 In bank would not have to rely on Rule 760
not qualify as ‘‘no-load’’ funds under addition, the proposed exemption to the extent the bank holds securities
Commission and FINRA rules. allowed banks, subject to certain in custody for a customer and provides
conditions, to accept orders for clearance and settlement services to the
V. Safekeeping and Custody
securities transactions on an account in connection with such
A. Background accommodation basis from other types securities, but the bank does not accept
Section 3(a)(4)(B)(viii) of the of custody accounts.217 orders for securities transactions for the
Exchange Act provides banks with an Some commenters contended that an account or engage in other activities
exception from the ‘‘broker’’ definition exemption for custodial order-taking with respect to the account that would
for certain bank custody and activity is unnecessary because, they require the bank to be registered as a
safekeeping activities (‘‘custody and argued, order-taking activity is broker.
safekeeping exception’’). In particular, permitted directly under the statutory The following discusses the scope and
this exception allows a bank to perform exception.218 Other commenters stated terms of the custody exemption.
the following activities as part of its that the exemption was important
because it would allow banks to 1. Order-Taking for Employee Benefit
customary banking activities without Plan Accounts and Individual
registering as a ‘‘broker’: continue to provide order-taking
services to employee benefit plans and Retirement or Similar Accounts
• Providing safekeeping or custody
services with respect to securities, individual retirement accounts and We are adopting, largely as proposed,
including the exercise of warrants and similar accounts, or that the restrictions the sections of Rule 760 providing that
other rights on behalf of customers; in the exemption were reasonable.219 a bank will not be considered a broker
• Facilitating the transfer of funds or Another commenter, however, objected to the extent that, as part of its
securities, as a custodian or a clearing to the proposed exemption arguing that customary banking activities, the bank
agency, in connection with the permitting custodial banks to take accepts orders to effect transactions in
clearance and settlement of its orders for securities is inconsistent with securities in an ‘‘employee benefit plan
customers’ transactions in securities; functional regulation.220 account’’ or an ‘‘individual retirement
• Effecting securities lending or B. Rule 760: Custody Exemption
account or similar account’’ for which
borrowing transactions with or on the bank acts as a custodian.223 The rule
behalf of customers as part of the above After carefully considering the defines an ‘‘employee benefit plan
described custodial services or investing comments, the Agencies have adopted account’’ as a pension plan, retirement
cash collateral pledged in connection Rule 760. The Agencies have crafted the plan, profit sharing plan, bonus plan,
with such transactions; exemption to allow banks to continue to thrift savings plan, incentive plan, or
• Holding securities pledged by a accept securities orders in a custodial other similar plan, and provides a
customer to another person or securities capacity and to permit bank customers number of non-exclusive examples of
subject to purchase or resale agreements to take advantage of those order-taking plans that meet this definition.224 The
involving a customer, or facilitating the services subject to important conditions rule defines an ‘‘individual retirement
pledging or transfer of such securities by designed to limit the scope of the account or similar account’’ to mean an
book entry or as otherwise provided activity and provide appropriate
under applicable law, if the bank investor protections. In this way, the 222 One commenter asserted that a bank would
maintains records separately identifying Agencies believe the exemption is not ‘‘accept’’ a securities order if it received the
the securities and the customer; and consistent with functional regulation order from a custodial customer and at the
and the purposes of the GLBA. customer’s request transmitted the order to a
• Serving as a custodian or provider broker-dealer selected by the customer. See Union
of other related administrative services Rule 760 and the other final rules do Bank Letter. Such activities, however, constitute
to any individual retirement account, not implement the statutory custody ‘‘accepting’’ a securities order for purposes of Rule
pension, retirement, profit sharing, and safekeeping exception.221 A bank 760 and a bank engaged in such activities for a
does not need to rely on the custody custodial customer must comply with Rule 760
bonus, thrift savings, incentive, or other unless some other exception or exemption is
similar benefit plan.215 exemption in Rule 760 to the extent the available for the transaction (e.g., Section
The proposed rules included an bank conducts other custodial activities 3(a)(4)(B)(x) of the Act if the transaction involves
exemption to allow banks, subject to permitted by Section municipal securities).
3(a)(4)(B)(viii)(I)(aa)–(ee) (e.g., 223 See Rule 760(a).
224 Rule 760(h)(4). The rule provides that the term
214 Some commenters requested that the exercising warrants or other rights with
‘‘employee benefit plan account’’ includes, without
prospectus-delivery requirement be eliminated or respect to securities or effecting limitation, an employer-sponsored plan qualified
modified so that delivery is required before a securities lending or borrowing
transaction is effected rather than before the under Section 401(a) of the Internal Revenue Code
customer authorizes the transaction. See, e.g., ABA transactions on behalf of custodial (26 U.S.C. 401(a)), a governmental or other plan
Letter, Clearing House Ass’n Letter, and HSBC Bank customers) or another of the final rules described in Section 457 of the Internal Revenue
Letter. The final rule retains this requirement to Code (26 U.S.C. 457), a tax-deferred plan described
ensure that a customer receives notice that its funds 216 Proposed
in Section 403(b) of the Internal Revenue Code (26
Rule 760(a). U.S.C. 403(b)), a church plan, governmental, multi-
are to be invested in a fund that is not ‘‘no-load’’ 217 Proposed Rule 760(b). employer or other plan described in Section 414(d),
before the customer authorizes the transaction(s). If 218 See, e.g., Union Bank Letter, Harris Bank
a customer’s funds are invested in a no-load fund (e) or (f) of the Internal Revenue Code (26 U.S.C.
and the bank is authorized, under the terms of its Letter, Clearing House Ass’n Letter, ABA Letter. 414(d), (e) or (f)), an incentive stock option plan
219 See, e.g., The Charles Schwab Corp.
agreement with the customer to alter the specific described in Section 422 of the Internal Revenue
fund into which the customer’s balances are (‘‘Schwab’’) Letter, ICBA Letter. Code (26 U.S.C. 422); a Voluntary Employee
220 See NASAA Letter.
invested, the bank should provide the customer a Beneficiary Association Plan described in Section
prospectus for any money market fund that is not 221 The Agencies asked for comment on whether 501(c)(9) of the Internal Revenue Code (26 U.S.C.
a ‘‘no-load’’ fund prior to the date on which the the Agencies should adopt rules to implement the 501(c)(9)), a non-qualified deferred compensation
bank first invests the customer’s balances in the statutory custody and safekeeping exception. No plan (including a rabbi or secular trust), a
fund. commenters requested that the Agencies do so at supplemental or mirror plan, and a supplemental
215 15 U.S.C. 78c(a)(4)(B)(viii). this time. unemployment benefit plan.
individual retirement account as types of accounts. In addition, these accounts for which the employee is
defined in Section 408 of the Internal provisions take account of the special responsible.
Revenue Code (26 U.S.C. 408), a Roth mention of these accounts in the As the Agencies noted in the
IRA as defined in Section 408A of the custody and safekeeping exception 227 proposal, the employee compensation
Internal Revenue Code (26 U.S.C. 408A), and the additional protections to which restrictions in Rule 760(c) do not
a health savings account as defined in these accounts typically are subject prohibit a bank employee from receiving
Section 223(d) of the Internal Revenue under the ERISA, the Internal Revenue compensation that is based on whether
Code (26 U.S.C. 223(d)), an Archer Code, and other applicable law. For a customer establishes a custodial
medical savings account as defined in these reasons, the Agencies have not account with the bank, or that is based
Section 220(d) of the Internal Revenue expanded Rule 760(a) to cover accounts on the total amount of assets in a
Code (26 U.S.C. 220(d)), a Coverdell other than employee benefit plan custodial account at account opening or
education savings account as defined in accounts and individual retirement and at any other time. Moreover the rule
Section 530 of the Internal Revenue other similar accounts. Banks may expressly provides that the employee
Code (26 U.S.C. 530), or other similar continue to accept orders from other compensation restrictions do not
account.225 types of accounts for which the bank prevent a bank employee from receiving
A number of commenters supported acts as a custodian under the payments under a bonus or similar plan
these definitions of ‘‘employee benefit accommodation provisions of the rule. that are permissible under the exception
plan account’’ and ‘‘individual in Rule 700(b)(1) as if a referral had
retirement account or similar a. Employee Compensation Restrictions been made by the bank employee, or
account.’’ 226 The Agencies note that We are adopting the employee from receiving any compensation
both definitions, by their terms, compensation restrictions in Rule 760(c) described in Rule 700(b)(2) of the
encompass ‘‘other similar’’ plans or as proposed. These restrictions apply networking rules.229
accounts. So, for example, similar plans Thus, for example, the rule does
when a bank, acting in a custodial
or accounts, such as ‘‘lifetime savings prohibit a bank from directly passing on
capacity, accepts a securities order for
accounts,’’ that are established under to an employee a portion or percentage
an employee benefit plan account or an
the Internal Revenue Code in the future of the 12b–1 fees received by the bank
individual retirement account or similar
would be employee benefit plan from a custody account’s investment in
account under paragraph (a) of the rule, a mutual fund, or a portion of a fee that
accounts or individual retirement and when a bank accepts a securities
accounts or similar accounts for is charged only when, or that varies
order for another type of custodial based on whether, a securities
purposes of the rule. In addition, the account under paragraph (b) of the rule.
term ‘‘employee benefit plan account’’ transaction is executed for the account.
Under these restrictions, if a bank A bank employee may receive payments
includes a non-U.S. plan that meets the accepts securities orders pursuant to
definition of an employee benefit plan under a bonus or similar plan rule that
Rule 760, then no employee of the bank includes within its allocation pool the
account. may receive compensation (including a
Under the final rules, a bank relying revenues generated by one or more
fee paid pursuant to a 12b–1 plan) from custodial accounts if the plan meets the
on the employee benefit plan and
the bank, the executing broker-dealer, or criteria for a discretionary, multi-factor
individual retirement and similar
any other person that is based on: (1) bonus program in Rule 700(b)(1), or the
account provisions must comply with
Whether a securities transaction is bonus program is based on the overall
the advertising and sales literature
executed for the account; or (2) the profitability or revenues of the bank, an
limitations in paragraphs (a)(2) and (3),
quantity, price, or identity of the affiliate, or operating unit and the
the employee compensation limitations
securities purchased or sold by the program complies with the
in paragraph (c), and the other
account. These restrictions are designed requirements of the safe harbor in Rule
conditions in the paragraph (d) of the
to be consistent with banking practices 700(b)(2). If a bank’s compensation
rule. These conditions are discussed
and reduce the financial incentives a practices are inconsistent with these
below.
Some commenters asked that the bank employee might have to encourage limitations, the bank may not rely on
Agencies permit a bank to accept a customer to submit securities orders to the exemption to take securities orders
securities orders for other types of the bank and use a custody account as in a custodial capacity.
accounts that may involve custody of the functional equivalent of a securities
brokerage account. b. Advertisements and Sales Literature
securities, such as accounts for which
the bank acts as escrow agent, issuing Only a few commenters addressed the As under the proposed rule, final Rule
and paying agent, tender agent, or employee compensation restrictions of 760(a)(2) provides that a bank relying on
disbursement agent, subject to the the rule. For example, one commenter the exemption may not advertise that it
conditions applicable to employee asserted that the rule should permit a accepts orders for securities transactions
benefit plan accounts and individual bank to compensate its employees based for employee benefit plan accounts or
retirement and similar accounts, rather on the potential revenues associated individual retirement accounts or
than the expanded set of conditions with a custodial account, including similar accounts for which the bank acts
applicable to accommodation orders revenues received from processing as custodian, except as part of
accepted for other types of custody securities transactions or from a mutual advertising the other custodial or
accounts. The provisions in Rule 760(a) fund in which the account is
229 Because the employee compensation
for employee benefit plan accounts and invested.228 In addition, a commenter
restrictions relate to securities transactions
individual retirement and similar expressed concern that the restrictions conducted in the relevant custody account, they
accounts are designed to reflect the would prohibit employees from would not prevent a bank employee from receiving
extent and manner in which banks receiving bonuses based on the total a referral fee for referring the customer to a broker-
revenues derived from the custodial dealer to engage in securities transactions at the
provide order-taking services for these broker-dealer that are unrelated to the custody
account in accordance with the networking
225 Rule760(h)(5). 227 See Section 3(a)(4)(B)(viii)(I)(ee) of the
exception or the institutional customer and high net
226 See,e.g., ABA Letter, Clearing House Assn. Exchange Act. worth customer exemption (Rule 701) for
Letter, WBA Letter. 228 See, e.g., Wells Fargo Letter. networking arrangements.
safekeeping services the bank provides 2. Order-Taking as an Accommodation accommodation to the customer and in
to these accounts.230 The bank also may for Other Types of Accounts a manner consistent with the custody
not advertise that such accounts are The proposed rule also permitted exemption.240 As part of these reviews,
securities brokerage accounts or that the banks to continue to accept securities Banking Agency examiners also will,
bank’s safekeeping and custody services orders for custodial accounts other than consistent with the rule, consider the
substitute for a securities brokerage employee benefit plan and individual form and substance of the relevant
account.231 Moreover, advertisements retirement and similar accounts as an accounts, transactions, and activities to
and sales literature for individual accommodation to the customer, subject prevent evasions of the requirements of
retirement or similar accounts that are to certain conditions designed to help the rule.241 The Agencies believe this
issued by or on behalf of the bank may ensure that these services continue to be approach, rather than adopting by rule
not describe the securities order-taking provided only as an accommodation to a definition of ‘‘accommodation,’’ is
services provided by the bank to these customers and that a bank does not appropriate given the disparity in the
accounts more prominently than the operate as a securities broker out of its types, characteristics and uses of other
other aspects of the custody or custody department. While commenters custody accounts, the size and
safekeeping services the bank generally supported permitting banks to operations of banks that provide these
provides.232 accept securities orders for other services and the manner in which they
One commenter indicated that these custodial accounts on an do so.
advertising restrictions were accommodation basis, several b. Employee Compensation Restrictions
reasonable.233 Another commenter commenters asked the Agencies to
suggested that these advertising For the reasons stated in the
modify or clarify the scope or terms of
limitations should not apply to certain proposing release, final Rule 760(b)(2)
the exemption, including the meaning
advertisements for which a broker- continues to provide that a bank that
of ‘‘accommodation’’ and the
dealer takes compliance accepts orders for other custody
prohibition on providing investment
responsibility.234 The advertising and accounts must comply with the
advice, research, and recommendations.
sales literature restrictions are designed The Agencies are adopting, largely as employee compensation limitations in
to help prevent a bank from operating a proposed, the provisions of the rule paragraph (c) of the rule. These
brokerage business out of its custody permitting banks to accept orders as an limitations were previously discussed in
department and, for this reason, apply accommodation for these other Part V.B.I.a., supra. 242
to all advertisements and sales literature custodial accounts.237 A bank relying on c. Limitations on Bank Fees
issued by or on behalf of a bank, this part of the exemption must comply
whether or not a broker-dealer has some The rule prohibits a bank that accepts
with the conditions discussed below. accommodation orders for a custody
compliance responsibility with respect
to the advertisement or sales literature. a. Accommodation Basis account from charging or receiving any
These limitations would not, however, fee that varies based on (1) whether the
For the reasons stated in the
apply to the advertisements or sales bank accepted the order for the
proposing release, the final rule, like the
literature that a registered broker-dealer transaction or (2) the quantity or price
proposal, permits a bank to accept
may make to inform the public or others of the securities to be bought or sold.243
securities orders for other types of
about the availability of brokerage custodial accounts only as an These restrictions do not prevent a bank
services from the broker-dealer. accommodation to the customer.238 from charging or receiving a fee that is
based on the type of security purchased
c. Other Conditions Some commenters suggested that the
or sold by the account (e.g., a foreign
Agencies define the term
A bank that accepts orders for a security), provided the fee complies
‘‘accommodation’’ in the rule to mean
securities transaction for an employee with the conditions set forth in Rule
any trade that is effected solely on the
benefit plan account or individual 760(b)(3). Commenters did not raise
request of the customer or on an
retirement account or similar account concerns with these restrictions.
unsolicited basis.239 As noted in the
also must comply with the conditions proposal, the Banking Agencies will d. Advertising and Sales Literature
set forth in paragraph (d) of the Rule.235 develop guidance to assist Banking Restrictions
These conditions are discussed below in Agency examiners in reviewing, as part
Part V.B.3.236 Under the final rule, the bank’s
of the agencies’ ongoing risk-focused advertisements may not state that the
supervisory and examination process, bank accepts orders for securities
230 Rule 760(h)(2) defines an ‘‘advertisement’’ to
mean material that is published or used in any

the order-taking services provided to transactions for a custodial account
electronic or other public media, including any these custodial accounts. The guidance (other than an employee benefit plan or
Web site, newspaper, magazine or other periodical, will describe the types of policies, individual retirement account or similar
radio, television, telephone or tape recording, procedures and systems that a bank
videotape display, signs or billboards, motion account). In addition, the bank’s sales
pictures, or telephone directories (other than
should have in place to help ensure that literature: (1) May state that the bank
routine listings). the bank accepts securities orders for accepts securities orders for such an
231 Rule 760(a)(2)(i) and (ii). these custodial accounts only as an account only as part of describing the
232 Rule 760(a)(3). Rule 760(h)(6) defines ‘‘sales
literature’’ to mean any written or electronic

other custodial or safekeeping services
operating under Rule 760(a) must comply with the
communication, other than an advertisement, that conditions set forth in paragraph (d) as well as with the bank provides to the account, and
is generally distributed or made generally available the employee compensation limitations of (2) may not describe the securities
to customers of the bank or the public, including paragraph (c). See Rule 760(a)(1). This should better order-taking services provided to such
circulars, form letters, brochures, telemarketing clarify banks’ responsibilities under these
scripts, seminar texts, published articles, and press
an account more prominently than the
provisions, and the Agencies have made a

releases concerning the bank’s products or services. conforming change to the text of Rule 760(b) other aspects of the custody or
233 See ICBA Letter. relating to accommodation trades.
234 See UMB Bank, N.A. Letter. 237 Rule 760(b). 240 See 71 FR at 77532–33.
235 Rule 760(a)(1). 238 Rule 760(b)(1). 241 See Rule 760(f).
236 The Agencies have made a technical change 239 See Fiserv Trust Company Letter; Ass’n of 242 Rule 760(b)(2).
from the proposal to make clear that a bank Colorado Trust Companies Letter. 243 Rule 760(b)(3).
safekeeping services provided by the of research, including stock-specific banks from providing investment
bank to the account.244 research, to custody customers that the advice, research or recommendations
bank provides to other persons for concerning securities to, or soliciting
e. Investment Advice or
marketing purposes. Thus, the Agencies securities transactions from, a custody
Recommendations
believe that banks will continue to be account for which the bank accepts
The proposed rule imposed certain able to cross-market their products and orders under the accommodation trade
restrictions on the ability of a bank to services to their custody customers. A authority. The rule does not limit the
provide investment advice or research custody account, however, is not a types of research or other services a
concerning securities to an account for fiduciary account, and a bank operating bank may provide to a customer’s trust
which it accepts accommodations under Rule 760(b) with respect to a or fiduciary account, and the Agencies
orders, make recommendations custodial account may not provide such recognize that a bank may have no
concerning securities to the account, or samples in such a way or with such a control over which account the
otherwise solicit securities transactions frequency as to provide the custody customer uses to place any orders that
from the account.245 account securities services that only are result from such research or other
Several commenters, expressed permissible for a trust or fiduciary services.
concerns with the proposed limitations customer. The bank, moreover, may not The final rule, like the proposal,
on investment advice, research and provide personalized investment advice, continues to provide that, in order to
recommendations. For example, research or recommendations regarding prevent evasions of the custody
commenters expressed concern that the particular securities to the custodial exemption, the Agencies will consider
restrictions would negatively affect a account for any reason.248 both the form and substance of the
bank’s ability to cross-market its trust, Some commenters questioned relevant account(s), transaction(s) and
fiduciary or other services to custody whether providing custody customers activities (including advertising
customers.246 Some expressed concern with a choice of investments from activities) in considering whether a
that the limitations would interfere with which to select would constitute bank meets the terms of the
a bank’s ability to share research with providing investment advice.249 Banks exemption.251 For example, the
custody customers or make the bank’s may use menus or other lists to make Agencies will consider the content,
views concerning securities or markets custodial customers aware of the format and frequency of any investment
available to the public through Web securities available to them through the research provided to an accommodation
sites, mailings, interviews or other custodial account. For example, the custodial account in considering if such
means.247 restrictions in paragraph (b)(6) of the research in purpose or effect evades the
After carefully considering the rule do not prevent a bank from restrictions in the rule or provides a
comments received, the Agencies providing its customers with an online custody account securities services that
believe that no change is necessary to menu of the mutual funds that the only are permissible for a trust or
accommodate the cross-marketing of customer is able to purchase through the fiduciary customer. Similarly, a bank
other bank services. Accordingly, we are custody account. may not evade the rule’s restrictions by
adopting the provisions related to The limitations and restrictions in providing an accommodation customer
investment advice, research and Rule 760(b), including those relating to that has both a custody account and a
recommendations without change. The investment advice and trust or fiduciary account with
Agencies note that the prohibitions do recommendations, relate only to those investment advice, recommendations or
not prevent a bank from cross-marketing custodial accounts for which the bank research that is targeted to the securities
its trust, fiduciary or other services to its accepts securities orders on an held in the customer’s custody account.
custody customers. A bank’s marketing accommodation basis. Thus, for For example, if a customer’s custody
to custody account customers may— example, these limitations would not account has a large position in a
without violating the rule’s general apply to (1) an employee benefit plan particular security and that security is
prohibition against providing advice, account or an individual retirement not held in the customer’s trust or
research or recommendations—include account or similar account; or (2) a trust fiduciary account, a bank may not
non-account specific information or fiduciary account maintained by a routinely provide the customer with
provided in media such as newsletters customer with a bank even if that research focused on that security. Banks
and websites. In addition, the advice, customer also maintains a custodial should have and maintain policies and
research, recommendation and account with the bank. procedures to abide by these limitations
solicitation prohibition does not Commenters asked how the and bank examiners will review bank
prohibit a bank from providing samples limitations on investment advice and compliance with these limits in
research would apply when a customer accordance with the risk-based
244 Rule 760(b)(5). One commenter urged the has both a custody account and a supervisory and examination process,
Agencies to abandon the prohibitions on separate trust or fiduciary account with considering both the form and substance
advertising order-taking as an accommodation to a bank, and asked the Agencies to of the cross-marketing activities in
other custodial accounts, arguing that the
prohibition violates a bank’s constitutional free
clarify that a bank would not violate the applying the anti-evasion provisions of
speech rights. See CBA Letter. The Agencies believe restrictions if the bank provides a trust the rule.
these restrictions are appropriate to effectuate the or fiduciary customer with research or The restrictions in Rule 760(b)(6) do
purposes of the exemption and have tailored the advice that the customer then uses to not prohibit the bank from advertising
restrictions to comply with the customary practices
of banks and minimize potential disruptions. The
make orders through its custody its custodial services and disseminating
Agencies specifically requested comments on the accounts.250 Rule 760(b)(6) prohibits sales literature that meets the conditions
conditions of the rule, and no commenter indicated in the exemption.252 These restrictions
that the advertising restrictions on accommodation 248 This would include providing personalized
also will not prevent a bank employee
trade would materially disrupt their business or advice, research or recommendations concerning
operations. securities to the account in an effort to convert the
from responding to customer inquiries
245 Rule 760(b)(6). account to another type of account, for goodwill or regarding the bank’s safekeeping and
246 See, e.g., Harris Bank Letter; U.S. Trust Letter. to obtain referrals.
247 See, e.g., PNC Letter; National City Corp. 249 See Harris Bank Letter; PNC Letter. 251 Rule 760(e).
Letter. 250 See ABA Letter; Harris Bank Letter. 252 Rule 760(b)(6)(i).
custody services by providing final rule to provide that a bank that acts c. Carrying Broker Provisions
advertisements or sales literature as a directed trustee for an account may
describing the safekeeping, custody and rely on the custody exception to accept A number of commenters addressed
related services the bank offers orders for, and effect transactions in, the proposed provision limiting the
(provided those advertisements and securities for the account.256 If a bank availability of the custody exemption to
sales literature comply with the acting as directed trustee relies on the banks that comply with Section
restrictions in the proposed exemption), rule to effect transactions for an 3(a)(4)(B)(viii)(II) of the Exchange
a prospectus prepared by a registered employee benefit plan account or an Act 261 relating to carrying broker
investment company, sales literature individual retirement account or similar activities.262 Some stated that the
prepared by a registered investment account, the bank must comply with the Agencies should define the term
company or by the broker-dealer that is conditions in Rule 760(a). If a bank ‘‘carrying broker’’ by rule rather than by
the principal underwriter of the acting as directed trustee relies on the interpretation.263 One commenter
registered investment company rule to effect transactions for another requested that we interpret the term
pertaining to the registered investment type of account, the bank must comply based on the view that the essence of a
company’s products, or information carrying broker relationship is
with the conditions governing
based on any of those materials.253 The ‘‘complete dependence’’ of a broker-
accommodation accounts in Rule
exemption allows a bank’s employees to dealer on another entity for back office
760(b).
respond to customer inquiries functions and execution.264 Another
concerning the bank’s safekeeping, The rule defines a directed trustee as commenter took the position that a
custodial or other services, such as ‘‘a trustee that does not exercise custodian bank should not be deemed a
inquiries concerning the customer’s investment discretion with respect to carrying broker so long as ‘‘it is not
account or the availability of sweep or the account.’’ 257 The Agencies also have enabling’’ broker-dealers to avoid the
other services, so long as the bank does modified the definition of ‘‘an account net capital requirements applicable to
not provide investment advice or for which the bank acts as a custodian’’ carrying brokers.265 One commenter
research concerning securities to the to include an account for which a bank generally suggested that we either
account or make a recommendation to acts as a directed trustee.258 Although a eliminate the carrying broker limitation
the account concerning securities.254 bank acting as directed trustee for an from the proposed rules, or amend it to
3. Other Conditions Applicable to account may effect transactions under avoid affecting the ability of banks to
Order-Taking for All Custody Accounts the custody exemption, the bank’s undertake traditional banking
trustee relationship with the account activities.266
The proposed exemption provided remains a trust and fiduciary
that a bank may accept orders for a Section 3(a)(4)(B)(viii)(II) of the
relationship and, as such, the bank must Exchange Act provides that a bank
securities transaction for a custody continue to comply with applicable
account under the exemption only if the relying on the custody exception may
fiduciary principles and standards in its not act as a ‘‘carrying broker,’’ as that
bank (1) does not act in a trustee or
relationships with the account. term and different formulations of the
fiduciary capacity (as defined in section
3(a)(4)(D) of the Exchange Act) with b. Broker Execution Requirement term are used in Section 15(c)(3) of the
respect to the account; (2) complies with Act and the underlying rules and
section 3(a)(4)(C) of the Act in handling Consistent with the requirements of regulations, for a broker-dealer other
any order for a securities transaction for the custody and safekeeping exception, than with respect to government
the account; and (3) complies with Rule 760(d)(2) requires a bank that securities. Section 15(c)(3) of the Act in
section 3(a)(4)(B)(viii)(II) of the Act accepts orders for a custody account relevant part requires broker-dealers to
regarding carrying broker activities. under the rule to comply with Section comply with the Commission’s
3(a)(4)(C) of the Exchange Act 259 in regulations with respect to financial
a. Directed Trustees handling any order for a securities responsibility and related customer
Some commenters requested that the transaction for the account.260 Under protection practices of broker-dealers.267
Agencies modify the exemption to allow this provision, (i) the bank must direct The Commission’s financial
a bank that acts as a directed trustee for the trade to a registered broker-dealer responsibility and customer protection
an account to accept orders and effect for execution, or (ii) the trade must be rules expand on what it means to carry
transactions for the account under the a cross trade or other substantially
custody exemption in Rule 760 in lieu similar trade of a security that is made 261 15 U.S.C. 78c(a)(4)(B)(viii)(II). This provision
of relying on the trust and fiduciary by the bank or between the bank and an prohibits a custodian bank from acting as a carrying
rules (Rule 721 to 723) for the broker (as such term, and different formulations
affiliated fiduciary and is not in thereof, are used in Exchange Act Section 15(c)(3)
transaction.255 In light of the comments contravention of fiduciary principles and the rules and regulations under that Section)
and the protections included in Rule established under applicable Federal or for any broker-dealer, unless such carrying broker
760, the Agencies have modified the State law, or (iii) the trade must be activities are engaged in with respect to government
securities.
253 Rule 760(b)(6)(ii). ‘‘Principal underwriter’’ has
conducted in some other manner 262 Rule 760(d)(3).
the same meaning as in section 2(a)(29) of the permitted under rules, regulations, or 263 See ABA Letter; State Street Corp. Letter; PNC
Investment Company Act of 1940 (15 U.S.C. 80a– orders as the Commission may prescribe Letter.
264 See Clearing House Ass’n Letter.
2(a)(29)). Rule 760(h)(7). or issue.
254 Rule 760(b)(6)(iii). 265 See U.S. Trust Letter.
255 See Teachers Insurance and Annuity 266 See HSBC Bank Letter. In addition, a few
256 See Rule 760(d)(1). Alternatively, the bank
Association of America and College Retirement commenters asserted that the description of
may continue to effect transactions for the account
Equities Fund (‘‘TIAA–CREF’’) Letter; ACB Letter; potential carrying broker activity in prior
under the rules relating to trust or fiduciary rulemakings under the GLB Act would, if adopted,
Roma Bank Letter. Commenters asserted, for
accounts. be highly problematic and disruptive for banks and
example, that a bank acting as a directed trustee 257 Rule 760(h)(3).
provides services that are functionally similar to broker-dealers. See Clearing House Ass’n Letter;
258 See Rule 760(h)(1).
those provided as a custodian and in either case ABA Letter.
259 15 U.S.C. 78c(a)(4)(C).
does not have investment discretion with respect to 267 Exchange Act Section 15(c)(3)(A), 15 U.S.C.
the account. 260 See Rule 760(d)(2). 78o(c)(3)(A).
customer securities.268 In general, and securities in accounts at the broker- 4. Custodians, Subcustodians and
broker-dealers establish carrying dealer (thereby avoiding the broker- Administrators/Recordkeepers
arrangements in which other broker- dealer’s financial and related a. ‘‘Account for which a bank acts as a
dealers carry their accounts to permit responsibilities). The existence of a custodian’’
the non-carrying broker-dealer to be substantial number of common
subject to lesser financial responsibility customers between a broker-dealer and As a general matter, the exemption in
requirements under the Exchange Act. A a bank’s custody department in the Rule 760 is available only for an
broker-dealer entering into such an absence of such an arrangement or ‘‘account for which the bank acts as a
agreement with a carrying entity that is structure would not cause the bank to custodian.’’ The proposed rule defined
not a registered broker-dealer, however, act as a carrying broker for the broker- this term to mean an account that is: (i)
may not take advantage of those lesser dealer. An employee benefit plan account for
requirements.269 Similarly, a bank may perform or which the bank acts as a custodian; (ii)
After carefully considering the share systems that perform limited back- an individual retirement account or
comments, the Agencies have retained office functions on behalf of a broker- similar account for which the bank acts
this limitation as a condition of the dealer without becoming a carrying as a custodian; or (iii) an account
custody exemption without change as it broker for the broker-dealer. A broker- established by a written agreement
is a term of the statutory custody dealer, for example, may contract with between the bank and the customer that
exception. Banks may look to certain an unregistered party such as a bank to sets forth the terms that will govern the
key factors to help distinguish send out transaction confirmations on fees payable to, and rights and
permissible custodial activity from behalf of the broker-dealer or have an obligations of, the bank regarding the
impermissible carrying broker activity. arrangement with an affiliated bank to safekeeping or custody of securities.274
In particular, key factors in considering provide customers with combined As discussed in Part V.B.3.a supra, the
whether the existence of shared statements, with the broker-dealer Agencies have amended this definition
customers between a broker-dealer and remaining responsible for the accuracy in the final rule also to include an
a bank may entail impermissible and completeness of those account for which a bank acts as a
carrying broker activity by the bank are confirmations and the broker-dealer directed trustee.
the broker-dealer’s own regulatory aspects of the statements. A bank and an A few commenters asked whether a
obligations and whether the broker- affiliated broker-dealer also may share bank performing custodial functions in
dealer either makes formal or informal or coordinate risk management systems a non-trustee and non-fiduciary capacity
arrangements with the bank or such as, for example, those relating to (such as escrow agent, fiscal agent or
structures its operations or offerings to Bank Secrecy Act and anti-money paying agent) may use the custody
cause the broker-dealer’s customers laundering compliance.270 A broker- exemption even if it is not formally
generally (or one or more broad dealer, however, may not delegate core designated as ‘‘custodian’’ by the bank-
segments of the broker-dealer’s functions to a bank or other unregistered customer agreement.275 Whether a bank
customers) to use the bank’s custody entity or functions that would require serves as custodian for the securities or
accounts instead of maintaining funds an individual to pass a qualification other assets of an account depends on
examination or register with an SRO.271 the services the bank provides to the
268 The Commission’s net capital rule specifies A broker-dealer also must maintain account with respect to such securities
that a broker-dealer shall be deemed to carry possession or control over the broker- or assets, not the label used to identify
customer or broker-dealer accounts ‘‘if, in dealer’s proprietary cash or securities
connection with its activities as a broker or dealer,
the account or the bank’s services in the
it receives checks, drafts, or other evidences of and its customers’ cash or securities in agreement between the bank and the
indebtedness made payable to itself or persons accordance with the Commission’s customer. Thus, for example, a bank
other than the requisite registered broker or dealer financial responsibility rules.272 Of that acts as an escrow agent, fiscal agent
carrying the account of a customer, escrow agent, course, a bank may serve as custodian
issuer, underwriter, sponsor, or other distributor of
or paying agent with respect to an
securities’’ or ‘‘if it does not promptly forward or for proprietary or customer cash or account, and that provides safekeeping
promptly deliver all of the securities of customers securities of the broker-dealer and may or custody services for the securities or
or of other brokers or dealers received by the firm accept and use in the ordinary course of other assets in the account, is
in connection with its activities as a broker or its banking business cash deposited
dealer.’’ Exchange Act Rule 15c3–1(a)(2)(i)
considered to be a custodian for the
The Commission’s customer protection rule
with the bank by the broker-dealer or its account for purpose of the rule
governing reserves and custody of securities defines customers.273 regardless of whether the account
the term ‘‘securities carried for the account of a agreement uses the term ‘‘custodian’’ or
customer’’ to mean ‘‘securities received by or on 270 Other examples of current permissible
any other particular language.
behalf of a broker or dealer for the account of any coordination arrangements between banks and
customer and securities carried long by a broker or broker-dealers include legal and compliance b. Administrators/Recordkeepers and
dealer for the account of any customer,’’ as well as functions, accounting and finance functions (such
securities sold to, or bought for, a customer by a as payroll and expense account reporting),
Subcustodians
broker-dealer. Exchange Act Rule 15c3–3(a)(2). information technology, operations functions (such The proposed exemption permitted a
269 Within common securities industry usage, the as disaster recovery services), and administration
functions (such as human resources and internal
bank acting as a non-fiduciary and non-
terms ‘‘carrying broker’’ and ‘‘clearing broker’’ are
virtually identical and often are used audits). See NASD Notice to Members 05–48 (July custodial administrator or recordkeeper
interchangeably. In certain instances, the terms 2005) at 2. for an employee benefit plan to accept
271 NASD Notice to Members 05–48 (July 2005),
mean a broker that, as part of an arrangement with securities orders for the plan on behalf
a second broker (an ‘‘introducing’’ or ‘‘Outsourcing,’’ provides guidance to member firms
regarding the outsourcing activities and functions
of a custodian bank.276 Under the
‘‘corresponding’’ broker), allows the second broker
to be subject to lesser regulatory requirements (e.g., that, if performed directly by members, would be proposed exemption, both the
under the net capital provisions of Exchange Act required to be the subject of a supervisory system administrator/recordkeeper bank and
Rule 15c3–1 and the customer protection provisions and written supervisory procedures pursuant to the custodial bank had to comply with
of Exchange Act Rule 15c3–3). Technically, NASD Rule 3010.
272 See e.g., Rules 15c3–1 and 15c3–3 [17 CFR
the requirements relating to employee
however, a ‘‘carrying broker’’ is a broker that holds
funds and securities on behalf of customers, 240.15c3–1, 15c3–3]. This is true even if the broker-
274 Proposed Rule 760(g)(1).
whether its own customers or customers introduced dealer is not ‘‘completely dependent’’ on the bank
for all back office functions and execution. 275 See Union Bank Letter, Wells Fargo Letter.
by another broker-dealer, and a ‘‘clearing broker’’ is
a member of a registered clearing agency. 273 See Rule 15c3–3(c)(5). 276 Proposed Rule 760(e).
benefit plan accounts.277 In addition, adopted a new paragraph (f) of the rule banks from establishing a market for
the proposed rule prohibited an that permits a bank that acts as a securities under the exemption.
administrator/recordkeeper bank from subcustodian for any type of account for The Agencies note that these
executing a cross-trade with or for the which another bank acts as custodian to provisions do not apply to a bank that
employee benefit plan or from netting accept orders for the account under Rule provides custody and order-taking
orders for securities for the plan, other 760. This change was made in response services to the trust or fiduciary
than orders for shares of open-end to comments that greater flexibility and accounts of another bank. In these
investment companies not traded on an clarity was needed for banks that use, circumstances, the bank providing
exchange.278 and banks that provide, subcustodial custodial services is treated as a
A few commenters supported these services. Under these provisions of the custodian, and not a subcustodian, for
provisions, but opposed the restrictions final rule, the administrator/ purposes of the rule and may provide
on cross-trading and netting.279 One recordkeeper bank or subcustodian order-taking services to the account in
commenter maintained that the bank, as well as the initial custodian accordance with the provisions of Rule
administrator/recordkeeper provisions bank for the account, must comply with 760(a) or (b) applicable to the type of
should also be available to banks the provisions of Rule 760 applicable to account involved.
providing administrative services to the type of account involved (i.e.
individual retirement accounts.280 5. Evasions
employee benefit plan account,
Some commenters also questioned The Agencies are adopting, as
individual retirement account or similar
whether or how the proposed proposed, the provision that states the
account, or other types of accounts).284
exemption would apply to a bank that Agencies will consider both the form
acts as a subcustodian for the trust or The final rule generally prohibits a and substance of the relevant accounts,
fiduciary or custody accounts of another recordkeeper/administrator bank or transactions and activities (including
bank. For example, some commenters subcustodian bank relying on the advertising activities) in considering
asserted that a bank acting as a exemption from executing a cross-trade whether a bank meets the terms of the
subcustodian for another bank’s trust or or netting orders with or for the relevant exemption, to prevent evasions of the
fiduciary accounts should be permitted account.285 However, the Agencies have exemption.288 We received no
to accept orders for those accounts expanded the exceptions to this general comments on this anti-evasion
under the less restrictive conditions in prohibition in light of the comments provision. As part of the regular risk-
Rule 760(a) regardless of the type of received. In particular, the final rule focused examination process, the
accounts actually involved.281 Other permits the administrator/recordkeeper Banking Agencies will monitor the
commenters suggested that a bank or subcustodian bank to cross or securities transactions in custodial
subcustodian bank be permitted to effect net orders for shares of open-end accounts. If the appropriate Banking
trades for the accounts of the other bank investment companies not traded on an Agency were to find that a bank is
with a direct custodial relationship with exchange.286 In addition, the final rule evading the terms of the custody
the customer under the same rules (e.g., permits the administrator/recordkeeper exemption to run a brokerage business
trust and fiduciary or custody), and bank or subcustodian bank to cross out of its custody department, the
subject to the same conditions, that orders between or net orders for agency would take appropriate action to
would apply to the other bank if it accounts of the custodian bank that address the problem.
conducted the transactions directly.282 contracted with the administrator/
Commenters also noted that banks, and recordkeeper bank or subcustodian bank VI. Other Exemptions
particularly smaller banks, at times use for services.287 Permitting this The Agencies also are adopting
subcustodian arrangements with other additional type of cross-trade and certain other exemptions relating to the
banks to provide their customers netting activity is consistent with the securities ‘‘broker’’ activities of banks.
custodial services more efficiently and exceptions to broker execution These are discussed below.
at lower cost than they may be able to requirement in section 3(a)(4)(C) of the
Exchange Act and should allow cost- A. Exemption for Regulation S
do on their own.
After carefully considering the savings for the customer by eliminating Transactions With Non-U.S. Persons
comments, the Agencies have adopted the need for a broker intermediary. At and Broker-Dealers
Rule 760(e), which permits a bank that the same time, by prohibiting an We are adopting Rule 771 of
acts as a non-fiduciary and non- administrator/recordkeeper bank or Regulation R to exempt banks from the
custodial administrator or recordkeeper subcustodian bank operating under the definition of ‘‘broker’’ under the
for an employee benefit plan for which rule from executing cross-trades or Exchange Act for certain agency
another bank acts as a custodian to netting orders among the accounts of transactions involving Regulation S
accept orders for the account under Rule different custodian banks to which it securities.289 As with Rule 3a5–2 under
760.283 In addition, the Agencies have provides services will help prevent
288 Rule 760(g).
277 Proposed 289 The Commission’s Regulation S (17 CFR
Rule 760(e)(1). to accounts other than employee benefit plan
278 Proposed Rule 760(e)(2). 230.901 et seq.) provides that offers and sales of
accounts and, for this reason, have not expanded
279 See ABA Letter; Clearing House Ass’n Letter; securities conducted in accordance with the terms
the paragraph to cover other types of accounts.
of the regulation will not be deemed to constitute
CBA Letter. The commenters asserted that the cross- 284 See Rule 760(e)(1) and (f)(1) and (2). The
an offer, offer to sell, sale or offer to buy within the
trading and netting restrictions were too restrictive Agencies made a technical change to Rule 760(e) to United States for purposes of the securities
and noted that section 3(a)(4)(C) of the Exchange clarify that the administrator/recordkeeper bank registration requirements of Section 5 of the
Act permits bank custodians to engage in a broader and the custodial bank for employee benefit Securities Act. See 17 CFR 230.901. Specifically,
range of cross-trade and netting activities. accounts need to comply only with the Rule 903 of Regulation S provides that an offer or
280 See CBA Letter. requirements in the rule applicable to employee sale of securities by the issuer, a distributor, or an
281 See, e.g., ABA Letter, CBA Letter, PNC Letter, benefit plan accounts and do not need to comply affiliate or a person acting on their behalf shall be
Schwab Letter. with the conditions applicable to accommodation deemed to occur outside the U.S. within the
282 See TIAA–CREF Letter. trades. meaning of Rule 901 if the offer or sale is made in
283 The Agencies understand that the type of 285 Rule 760(e)(2) and (f)(3).
an offshore transaction (as defined in Rule 901), and
286 See Rule 760(e)(2)(i) and (f)(3)(i).
administrator/recordkeeper arrangements described no directed selling efforts are made in the U.S. by
in Rule 760(e) are not typically used with respect 287 See Rule 760(e)(2)(ii) and (f)(3)(ii). the issuer, a distributor, affiliate, or person acting
the Exchange Act, which the with the resale restrictions in Rule 904 Regulation S, the resale must be made
Commission separately is adopting to of Regulation S if the bank effects a in compliance with the requirements of
permit banks to engage in certain resale of an eligible security in Rule 904 of Regulation S.296
Regulation S transactions on a riskless accordance with Rule 903 of Regulation The third part of the exemption
principal basis without being ‘‘dealers,’’ S prior to the end of any applicable permits a bank to effect, by or on behalf
Rule 771 recognizes that non-U.S. distribution compliance period for the of a registered broker-dealer, a resale of
persons located outside the United security.292 Commenters also urged the an eligible security after its initial sale
States generally will not rely on the Agencies to make the proposed ‘‘broker’’ to a purchaser who is not in the United
protections of the U.S. securities laws exemption in Regulation R and the States.297 As under the second part, the
when purchasing Regulation S ‘‘dealer’’ exemption proposed by the bank must have a reasonable belief that
securities from U.S. banks, and that Commission as consistent as possible the eligible security was initially sold
those persons may purchase the same and to make both exemptions as outside of the United States within the
securities from foreign banks located consistent as possible with Regulation meaning of and in compliance with
outside the U.S. without subjecting the S. Rule 903 of Regulation S and, if the
foreign bank to U.S. broker-dealer The Agencies have modified the rule resale is made prior to the expiration of
registration. in several respects in light of the any applicable distribution compliance
Commenters generally supported the comments, to enhance its clarity and to period in Rules 903(b)(2) or (b)(3) of
proposal while suggesting certain better conform it to Regulation S. The Regulation S, the bank must effect the
modifications and clarifications.290 For final rule, like the proposed rule, resale in compliance with the
example, commenters requested that the continues to have three parts. The first requirements of Rule 904 of Regulation
Agencies clarify that the exemption is part permits a bank to effect a sale of an S. The proposed rule would have
available to banks both during and after eligible security in compliance with the allowed a bank to rely on a reasonable
any applicable distribution compliance requirements of Rule 903 of Regulation belief that the security was sold in
period for the securities required by S to a purchaser who is not in the compliance with Regulation S only
Regulation S, and allow banks to United States.293 The term ‘‘purchaser’’
when it purchases a security from a
conduct resales of eligible securities for is defined to mean a person who
non-U.S. person but not when it
either non-U.S. persons or registered purchases an eligible security and who
purchases a security from a broker-
broker-dealers if the bank has a is not a U.S. person under Rule 902(k)
dealer. In light of comments received,
reasonable belief that the securities were of Regulation S.294
The second part permits a bank to the reasonable belief standard is also
initially sold in compliance with
effect, by or on behalf of a person who available under the final rule for a
Regulation S.291 In addition, some
is not a U.S. person under Rule 902(k) bank’s transactions with a broker-dealer
commenters argued that the exemption
of Regulation S, a resale of an eligible because the process of determining
should not require a bank to comply
security after its initial sale to a whether a security initially was issued
on their behalf. Other conditions may also apply purchaser who is not in the United in compliance with Regulation S should
depending on the place of incorporation and States or to a registered broker-dealer.295 be similar whether the purchase is from
reporting status of the issuer, and the amount of
To take advantage of this second a broker-dealer or a non-U.S. person.298
U.S. market interest in the securities. As the rule makes clear, a bank effecting
Rule 904 of Regulation S provides that an offer exemption, the bank (1) must have a
reasonable belief that the eligible a resale of an eligible security under the
or sale of securities by any person other than the
issuer, a distributor, an affiliate (except an officer security was initially sold outside of the exemption must effect the transaction in
or director who is an affiliate solely by virtue of that United States within the meaning of and accordance with the conditions of Rule
position) or person acting on their behalf will be 904 if the transaction occurs during, but
deemed to occur outside the U.S. within the in compliance with Rule 903 of
meaning of Rule 901 if the offer or sale is made in Regulation S, and (2) if the resale is not after, any applicable distribution
an offshore transaction (as defined in Rule 901), and made prior to any applicable compliance period for the security
no directed selling efforts are made in the U.S. by distribution compliance period under Rule 903(b)(2) or (b)(3) of
the seller, an affiliate or person acting on their Regulation S.
behalf. Additional conditions apply in the case of specified in Rules 903(b)(2) or (b)(3) of
resales of certain types of securities by dealers and The final rule continues to require,
persons receiving selling concessions, and in the 292 See IIB Letter. however, that any sale effected under
case of resales by certain affiliates of the issuer or 293 Rule 771(a)(1). paragraph (b)(1) of the Rule, or resale
a distributor. 294 Rule 771(b)(3). Rule 902(k) of Regulation S
290 See IIB Letter; ABA Letter; Clearing House
effected under paragraphs (b)(2) or (b)(3)
defines the term ‘‘U.S. person’’ to mean: (i) Any
Ass’n Letter. natural person resident in the U.S.; (ii) any
of the Rule (other than one to a
291 See IIB Letter; Clearing House Ass’n Letter.
partnership or corporation organized or registered broker-dealer), be to a
Rules 903(b)(2) and (b)(3) of Regulation S subject incorporated under the laws of the U.S.; (iii) any ‘‘purchaser who is not in the United
Category 2 securities and Category 3 debt securities estate of which any executor or administrator is a States.’’ This is true even if the
to a 40-day distribution compliance period, and U.S. person; (iv) any trust of which any trustee is
subject Category 3 equity securities to a one-year a U.S. person; (v) any agency or branch of a foreign
applicable distribution compliance
distribution compliance period, during which entity located in the U.S.; (vi) any non-discretionary period for the overseas offering of the
certain restrictions apply to offers or sales of the account or similar account (other than an estate or security under Regulation S has expired.
securities in order to preserve the foreign nature of trust) held by a dealer or other fiduciary for the Consistent with Regulation S, which
the transactions. Under Rule 903 of Regulation S, benefit or account of a U.S. person; and (vii) any
Category 1 encompasses certain securities: (i) Issued discretionary account or similar account (other than permits the offshore resale of securities,
by a foreign issuer, for which there is no substantial an estate or trust) held by a dealer or other fiduciary the purpose of the exemption in Rule
U.S. market interest, (ii) that are offered and sold organized, incorporated, or (if an individual) 771 is to permit U.S. banks to sell
in an overseas directed offering, (iii) that are backed resident in the U.S., and (viii) any partnership or Regulation S securities to customers
by the full faith and credit of a foreign government, corporation if (A) organized or incorporated under
or (iv) that are offered and sold to employees of the the laws of any foreign jurisdiction, and (B) formed outside the United States. It does not
issuer or its affiliates pursuant to certain foreign by a U.S. person principally for the purpose of permit banks to sell those securities
employee benefit plans. Category 2 encompasses investing in securities not registered under the Act, domestically (other than to a registered
securities, not eligible for Category 1, that are equity unless it is organized or incorporated, and owned,
securities of a reporting foreign issuer, or debt by accredited investors (as defined in Rule 501(a)
296 Rule 771(a)(2).
securities of a reporting issuer or of a non-reporting under the Securities Act) who are not natural
persons, estates or trusts. 297 Rule 771(a)(3).
foreign issuer. Category 3 applies to all offerings of
securities that do not fall within Category 1 or 2. 295 Rule 771(a)(2). 298 See IIB Letter and Clearing House Ass’n Letter.
broker-dealer).299 For purposes of the Most commenters that addressed the or on behalf of a person that the bank
exemption, an ‘‘eligible security’’ means exemption supported its adoption.303 reasonably believes to be: (1) A qualified
any security other than a security that One commenter opposed the exemption, investor as defined in Section
is being sold from the inventory of the arguing that securities lending and 3(a)(54)(A) of the Exchange Act;308 or (2)
bank or an affiliate of the bank or that borrowing transactions should be any employee benefit plan that owns
is being underwritten by the bank or an conducted only by broker-dealers or, and invests, on a discretionary basis, not
affiliate of the bank on a firm- alternatively, banks providing such less than $25 million in investments.
commitment basis unless the bank services should be subject to additional One commenter requested that the
acquired the security from an disclosure and customer approval Agencies modify the rule to allow banks
unaffiliated distributor that did not requirements.304 The Agencies continue to engage in securities lending
purchase the security from the bank or to believe that the exemption is transactions under the exemption as
an affiliate of the bank.300 Commenters appropriate and necessary. The agent for institutional customers that
requested that the Agencies clarify that exemption enables sizable and have less than $25 million in
the definition of ‘‘eligible security’’ sophisticated customers to divide investments.309 We have not amended
would not prohibit a bank from effecting custody and securities lending the investment requirements, however,
transactions under the exemption in management between two expert as we believe they are consistent with
securities that have been issued by the entities when the customer decides such the nature of customers that utilize
bank or an affiliate.301 A security that is actions are in the customer’s interest, banks for non-custodial securities
issued by a bank or an affiliate of a and permits banks to continue to lending transactions.310
bank, such as a structured note or share provide the types of non-custodial Another commenter suggested that
in a pooled investment vehicle, may be securities lending services that they the Agencies exempt banks involved, as
an eligible security if it otherwise meets currently provide without disruption. agent, in securities repurchase and
the terms of paragraph (b)(2) of Rule The Agencies note, moreover, that the reverse repurchase transactions in non-
771. statutory custody and safekeeping exempt securities from the ‘‘broker’’
exception permits banks to effect definition, stating that repurchase and
B. Exemption for Non-Custodial reverse repurchase activities are
securities lending transactions (and
Securities Lending Transactions functionally equivalent to securities
provide related securities lending
The Agencies are adopting, as services) when the bank has custody of lending.311 As discussed in the
proposed, Rule 772 of Regulation R to the securities. A bank need not rely on accompanying release, moreover, a
provide banks engaged in certain the exemption in Rule 772 to engage in number of commenters also requested
securities lending transactions with a securities lending transactions when that banks be exempted from the
conditional exemption from the acting in this capacity. ‘‘dealer’’ definition for repurchase and
definition of ‘‘broker.’’ The exemption Rule 772 provides that a bank is reverse repurchase agreement activities
allows a bank to engage in securities exempt from the broker definition to the involving non-exempt securities they
lending transactions as agent in extent that, as agent, it engages in or undertake in a principal capacity.312
circumstances where the bank does not effects certain ‘‘securities lending The Agencies have not acted on these
have custody of the securities or has transactions’’ 305 and ‘‘securities lending requests at this time because we believe
custody of such securities for less than services’’ 306 in connection with such additional information from banks and
the entire period of the transaction. This transactions.307 The exemption applies other interested parties would be
exemption reinstates, without only to securities lending activities with helpful in understanding the issues
modification, an exemption that the raised by these requests. For this reason,
Commission adopted previously.302 amended Rule 15a–11 to remove the ‘‘broker’’ we invite comment on the following
aspects of that rule. As discussed in the matters, as well as any other matters
accompanying release, the Commission is re-
299 The Agencies recognize that the ‘‘offshore
adopting, without modification, the ‘‘dealer’’
that interested parties believe may be
transaction’’ condition in Rules 903 and 904 of relevant to the Agencies’ consideration
Regulation S also require that the offer not be made portions of Rule 15a–11, as Exchange Act Rule 3a5–
to a person in the United States. See 17 CFR 3. See Exchange Act Release No. 56502 (Sept. 24, of the issues posed by the requests: (1)
230.902(h), 230.903(a)(1) and 230.904(a)(1). For this 2007). The nature, structure (including term
303 See, e.g., State Street Corp. Letter, PNC Letter,
reason, one commenter stated that the rule simply and type of security involved), and
should refer to sales to a ‘‘purchaser,’’ rather than Mellon Letter, and ABA Letter.
to a purchaser who is outside the United States. See 304 See NASAA Letter. purpose of repurchase and reverse
IIB Letter. The Agencies have retained the 305 Rule 772(b) defines the term ‘‘securities repurchase agreements currently
‘‘purchaser who is not in the United States’’ lending transaction’’ to mean a transaction in which conducted with respect to non-exempt
language in the final rule, even for those the owner of a security lends the security securities; (2) the types of customers
transactions that must be conducted in accordance temporarily to another party pursuant to a written
with Rule 903 or 904 of Regulation S, to highlight securities lending agreement under which the
308 15 U.S.C. 78c(a)(54)(A). In part, this definition
and reaffirm that these transactions must be with lender retains the economic interests of an owner
persons outside the United States. of such securities, and has the right to terminate the encompasses corporations and partnerships with at
300 Rule 771(b)(1). For purposes of the rule, the transaction and to recall the loaned securities on least $25 million in investments.
309 See Union Bank Letter.
term ‘‘distributor’’ has the same meaning as in Rule terms agreed by the parties.
310 See, e.g. Letter from Edward J. Rosen, Cleary,
902(k) of Regulation S (17 CFR 230.902(k)). 306 Rule 772(c) defines the term ‘‘securities
301 See IIB Letter, ABA Letter. lending services’’ to mean: (1) Selecting and Gottlieb, Stein & Hamilton, to Annette Nazareth,
302 See Exchange Act Release No. 47364 (Feb. 13, negotiating with a borrower and executing, or Director, Division of Market Regulation,
2003), 68 FR 8686 (Feb. 24, 2003) (adopting directing the execution of the loan with the Commission, dated Oct. 9, 2002 (requesting that the
Exchange Act Rule 15a–11 to provide an exemption borrower; (2) receiving, delivering, or directing the exemption encompass banks’ securities lending
from the definitions of both ‘‘broker’’ and ‘‘dealer’’ receipt or delivery of loaned securities; (3) activity involving any entity that owns and invests
for banks engaging in securities lending receiving, delivering, or directing the receipt or on a discretionary basis at least $25 million in
transactions). The broker provisions of the Rule delivery of collateral; (4) providing mark-to-market, investments).
15a–11 exemption, which never became operable corporate action, recordkeeping or other services 311 See Clearing House Ass’n Letter. Banks are
due to the temporary exemption applicable to all incidental to the administration of the securities permitted by statutory exception to engage in
bank broker activities, will become void under the lending transaction; (5) investing, or directing the repurchase and reverse repurchase activities with
Regulatory Relief Act with the Agencies’ adoption investment of, cash collateral; or (6) indemnifying respect to exempt securities such as government
of a single set of final ‘‘broker’’ rules. See Pub. L. the lender of securities with respect to various securities. Exchange Act Section 3(a)(5)(C)(i)(II).
No. 109–351, § 101(a)(3), 120 Stat. 1968 (1999). In matters. 312 See Exchange Act Release No. [llll]
light of this, the Commission separately has 307 Rule 772(a). (Sept. ll, 2007).
and financial institutions currently transactions in variable annuity and company or a separate account that is
involved in repurchase and reverse variable life products typically are excluded from the definition of transfer
repurchase agreements with respect to effected directly with the relevant agent in Section 3(a)(25) of the
non-exempt securities; (3) the extent to insurance company.315 Exchange Act.320
and manner in which banks currently In light of these comments, the
Agencies have expanded the rule to D. Exemption for Certain Transactions
engage, as agent or principal, in
cover transactions involving variable involving a Company’s Securities for its
repurchase and reverse repurchase
annuities and variable life insurance Employee Benefit Plans and
agreements with respect to non-exempt
policies, as well as transactions Participants
securities; (4) recent developments or
trends in the market for repurchase and involving mutual funds. Applying the In response to issues raised by a
reverse repurchase agreements with exemption to transactions in variable commenter, the Agencies are adopting
respect to non-exempt securities; (5) any insurance products, as well as to an additional exemption (Rule 776) to
material similarities or differences in transactions involving mutual funds, permit banks that rely on certain
the use, structure, customer base, or will avoid needless disruptions and exceptions and exemptions to effect
legal, regulatory, tax or accounting costs with respect to banks’ transactions certain transactions involving the
treatment of repurchase and reverse with customers in which interposing an securities of a company for the
repurchase agreements with respect to executing broker-dealer would be company’s employee benefit plans and
non-exempt securities, on the one hand, inefficient, inconsistent with market participants without complying with the
and repurchase or reverse repurchase practice and unnecessary for investor broker-execution requirements of
agreements with respect to exempt protection. Exchange Act Section 3(a)(4)(C)(i).321
securities or securities lending Specifically, Rule 775 as modified is The commenter stated that banks that
transactions involving exempt or non- available for transactions involving act as trustee or custodian for the
exempt securities. The information we securities issued by an open-end defined benefit or defined contribution
receive through this process should help company, as defined by Section 5(a)(1) plans of a company at times effect in-
inform any future actions the Agencies of the Investment Company Act,316 that kind contributions, purchases and sales,
may take in this area. is registered under that Act,317 as well and distribution transactions for the
as variable insurance contracts funded plan involving the securities of the
C. Exemption for Banks Effecting company without the involvement of a
by any separate account, as defined by
Certain Excepted or Exempted broker-dealer. The commenter indicated
Section 2(a)(37) of the Investment
Transactions in Investment Company that these transactions are effected
Company Act, that is registered under
Securities and Variable Insurance through the company’s transfer agent
Products that Act. To take advantage of the
exemption, the security must not be and that no commission is charged in
The Agencies are adopting Rule 775 traded on a national securities exchange connection with the transaction.322
of Regulation R to allow banks to take or traded through the facilities of a In light of these comments, Rule 776
advantage of certain exceptions and national securities association or an permits a bank utilizing particular
exemptions to the broker definition for interdealer quotation system.318 In exceptions and exemptions to effect a
transactions involving mutual funds, addition, the securities must be transaction in the securities of a
variable annuity contracts and variable distributed by a registered broker-dealer, company to do so directly with a
life insurance policies without having to or the sales charge must be no more transfer agent acting for the company,
comply with the broker-execution than the amount permissible for a subject to four conditions. First, no
requirement of Exchange Act Section security sold by a registered broker- commission may be charged with
3(a)(4)(C)(i).313 The rule as proposed dealer pursuant to any applicable rules respect to the transaction.323 Second,
permitted banks to effect transactions in of a registered securities association.319 the transaction must be conducted
open-end mutual funds through the Finally, the transaction must be effected solely for the benefit of an employee
National Securities Clearing Corporation through the NSCC, or directly with a benefit plan.324 Third, the security must
(‘‘NSCC’’) or the fund’s transfer agent, transfer agent or with an insurance be obtained directly from the company
rather than through a broker-dealer. or an employee benefit plan of the
A number of commenters stated, Letter, Business Law Section Letter, The Depository
company.325 And fourth, the security
however, that the exemption should be Trust & Clearing Corp. (‘‘DTCC’’) Letter. must be transferred only to the company
broadened to also encompass variable 315 See ACLI March 26 Letter, DTCC Letter. or an employee benefit plan of the
annuities and variable life insurance, 316 Rule 775(b)(1). We note that banks may effect company.326 Securities obtained from,
with some commenters noting that only transactions in securities that meet the conditions or transferred to, a participant in an
variable annuities and mutual funds are to be an ‘‘exempted security’’ under Exchange Act employee benefit plan on behalf of the
Section 3(a)(12)(A)(iv) without complying with the
permissible investments for 403(b) exemption provided by Rule 775. Exchange Act
plans.314 Commenters noted that Section 3(a)(4)(B)(iii)(II) permits banks to effect 320 Rule 775(a)(3).
transactions involving ‘‘exempted securities’’ 321 See note 313 supra for a listing of the relevant
313 As discussed above, Section 3(a)(4)(C) without registering as a broker and without exceptions and exemptions.
generally provides that a bank effecting a effecting the transaction through a registered 322 See The Northern Trust Company Letter. The
transaction in any ‘‘publicly traded security’’ in the broker-dealer. commenter further stated that ERISA effectively
United States under the trust and fiduciary, stock 317 Rule 775(b)(2). prohibits a commission from being charged in
purchase plan, or custody and safekeeping 318 Rule 775(a)(1). connection with in-kind contributions by a
exception must direct the resulting trade to a 319 Rule 775(a)(2). FINRA currently is the only company of its stock to the company’s benefit plans
broker-dealer for execution unless the trade is a registered securities association. FINRA Rule 2830 and direct purchases and sales by the company of
cross trade or similar trade or the trade otherwise limits the sales charges associated with open-end its stock with the company’s plans.
323 Rule 776(a)(1).
is permitted by Commission rule, regulation or mutual funds. Currently, there are no FINRA rules
order. 15 U.S.C. 78c(a)(4)(C). Rule 760, the 324 Rule 776(a)(2). For these purposes, an
limiting the sales charges associated with the
exemption for order-taking by banks acting as insurance securities subject to Rule 775. Therefore ‘‘employee benefit plan’’ is defined to mean any
custodians, also requires banks to comply with currently, in all cases, these insurance securities pension plan, retirement plan, profit sharing plan,
Section 3(a)(4)(C). See Rule 760(d)(2). would satisfy the condition under Rule 775(a)(2) bonus plan, thrift savings plan, incentive plan, or
314 See ABA Letter; TIAA–CREF Letter; American that the sales charge be no more than the amount other similar plan. Rule 776(b).
325 Rule 776(a)(3).
Council of Life Insurers Letters of March 26 (‘‘ACLI permissible under applicable registered securities
March 26 Letter’’) and August 2, 2007, Roundtable association rules. 326 Rule 776(d).
plan are considered to be obtained from, conditions are met. First, at the time the 781 grants or recognizes an exemption
or transferred to, the plan. contract was created, the bank must or relieves a restriction and also that
We are adopting this rule because we have acted in good faith and had there is good cause for adopting Rule
believe that requiring banks to send reasonable policies and procedures in 781 without a delayed effective date
these types of transactions to a broker- place to comply with Section 3(a)(4)(B) because it is in the public interest that
dealer for execution—as would be of the Exchange Act, and the rules and banks not unnecessarily incur costs to
required to comply with Section regulations, thereunder. Second, any comply with the statutory exceptions
3(a)(4)(C)(i) of the Exchange Act—at violation of the registration and related rules before such exceptions
times would preclude plans from requirements by the bank must not have and rules would become effective in
engaging in these transactions, would resulted in any significant harm, accordance with Rule 781.333
disrupt existing practices and otherwise financial loss or cost to the person
would introduce cost and complexity to VII. Finding That the Exemptions are
seeking to void the contract. This Appropriate in the Public Interest and
those transactions without materially exemption is provided because a bank
promoting functional regulation and Consistent With the Protection of
that is acting in good faith and has Investors
investor protection.327 reasonable policies and procedures in
effect at the time a securities contract is Section 36(a)(1) of the Exchange Act
E. Temporary and Permanent generally provides that the Commission
Exemption for Contracts Entered Into by created should not be subject to
rescission claims as a result of an may conditionally or unconditionally
Banks From Being Considered Void or exempt any person or class of persons
Voidable inadvertent failure to comply with the
requirements under Section 3(c)(4) of from any provision of the Exchange Act
The Agencies are adopting as the Exchange Act if customers are not to the extent that an exemption is
proposed Rule 780, which grants one significantly harmed. One commenter necessary or appropriate in the public
temporary and one permanent supported the exemptions,330 and no interest and consistent with the
exemption from section 29(b) of the commenters objected to their adoption. protection of investors.334 Taken as a
Exchange Act, which addresses whole, the exemptions will implement
inadvertent failures by banks that could F. Extension of Time and Transition the bank broker provisions of the GLBA
trigger rescission of contracts between a Period while providing banks with flexibility to
bank and a customer.328 Under the The Agencies are further extending structure their business models under
temporary exemption, no contract the time that banks have to come into conditions designed to preserve key
entered into before 18 months after the compliance with the Exchange Act investor protections, and therefore, as
effective date of the exemption would provisions relating to the definition of discussed above more fully, are
be void or considered voidable by ‘‘broker.’’ Under the final rule, a bank is appropriate in the public interest and
reason of Section 29 of the Exchange exempt from the definition of ‘‘broker’’ consistent with the protection of
Act because any bank that is a party to under Section 3(a)(4) of the Exchange investors.
the contract violated the registration Act until the first day of its first fiscal VIII. Withdrawal of Proposed
requirements of Section 15(a) of the year commencing after September 30, Regulation B and Removal of Exchange
Exchange Act, any other applicable 2008. This is an additional calendar Act Rules 3a4–2 Through 3a4–6, and
provision of that Act, or the rules and quarter beyond the date (June 30, 2008) 3b–17
regulations adopted under the Exchange provided in the proposed rule. A bank
Act based solely on the bank’s status as Under the Regulatory Relief Act, a
that has a fiscal year based on the
a broker when the contract was final single set of rules or regulations
calendar year, for example, must
created.329 jointly adopted by the Board and
comply with the new exceptions for
Under the permanent exemption, no Commission in accordance with that
banks and these rules beginning on
contract entered into is void or Act shall supersede any other proposed
January 1, 2009. Some commenters or final rule issued by the Commission
considered voidable by reason of noted that banks and broker-dealers
Section 29(b) of the Exchange Act on or after the date of enactment of
would need sufficient time to make the Section 201 of the GLBA with regard to
because any bank that is a party to the changes necessary to come into
contract violated the registration the definition of ‘‘broker’’ under
compliance with the statute and these Exchange Act Section 3(a)(4).335
requirements of Section 15(a) of the rules.331 The Agencies believe that the
Exchange Act or the rules and Moreover, the law states that ‘‘[n]o such
extension granted by the rule, which is other rule, whether or not issued in final
regulations adopted thereunder based a minimum of one year, should provide
solely on the bank’s status as a broker form, shall have any force or effect on
banks a reasonable period of time to or after that date of enactment.’’
when the contract was created if two come into compliance with these In 2001, the Commission adopted
327 The commenter also stated that banks acting
provisions. Interim Rules discussing the way in
The Administrative Procedure Act
as trustees and custodians at times directly effect
transactions with and for different employee benefit (‘‘APA’’) permits an agency to issue a prior to its effective date, except ‘‘(1) a substantive
plans involved in a corporate spin-off transaction rule without delaying its effective date rule which grants or recognizes an exemption or
with respect to company stock of both companies for 30 days from the date of publication relieves a restriction; (2) interpretive rules and
involved in the spin-off transaction. See Northern if, among other reasons, the rule is a statements of policy; or (3) otherwise provided by
Trust letter. We understand that the same bank the agency for good cause found and published
typically is the trustee or custodian for the different substantive rule which grants or with the rule.’’ 5 U.S.C. 553(d).
plans in such transactions and conducts such recognizes an exemption or relieves a 333 This finding also satisfies the requirements of
transactions through cross-trades within the bank. restriction, or if the agency finds good 5 U.S.C. Section 808(2), which allows a rule to
Accordingly, no additional exemption is required cause and publishes its finding with the become effective immediately notwithstanding the
for these transactions. requirements of 5 U.S.C. Section 801 if an agency

328 15 U.S.C. 78cc(b). Exchange Act Section 29(b) rule.332 The Agencies find that this Rule ‘‘for good cause finds that notice and public
provides, in pertinent part, that every contract made procedure thereon are impracticable, unnecessary,
330 ICBA Letter. or contrary to the public interest.’’
in violation of the Exchange Act or of any rule or
regulation adopted under the Exchange Act (with 331 See,e.g., HSBC Securities Letter. 334 15 U.S.C. 78mm(a)(1).
certain exceptions) shall be void. 332 The APA provides that publication of a 335 President Clinton signed the GLBA into law
329 Rule 780(a). substantive rule must be made not less than 30 days on November 12, 1999.
which the Commission would interpret 4025). The Board’s OMB control number Act).344 In addition, Rule 701(a)(3)(iv)
the GLBA.336 The rules that address the will be 7100–0316. An agency may not requires the written agreement to
definition of ‘‘broker’’ under Section conduct or sponsor, and a person is not obligate the broker-dealer to notify the
3(a)(4) of the Exchange Act (and required to respond to, a collection of customer if the securities transaction(s)
applicable exemptions) are Exchange information unless it displays a to be conducted by the customer or the
Act Rules 3a4–2 through 3a4–6 and currently valid control number.341 We customer do not meet the applicable
Rule 3b–17.337 In 2004, the Commission received no comments on the suitability or sophistication
proposed to revise and restructure the paperwork reduction analysis in the determination standards set forth in the
‘‘broker’’ provisions of the Interim Rules proposal. rule.345 Similarly, the bank is required
and codify them in a new regulation, to provide its broker-dealer partner with
1. Rule 701
proposed Regulation B, which would the name of the bank employee
consist of proposed new Exchange Act Rule 701 provides a conditional receiving the referral fee and certain
Rules 710 through 781.338 By operation exemption from the requirements under other identifying information.346
of the Regulatory Relief Act, the joint the networking exception under the
Exchange Act. This exemption permits b. Use of Information
adoption of these final rules by the
Board and the Commission supersedes bank employees to receive payment of The purpose of the collection of
Exchange Act Rules 3a4–2 through 3a4– more than a nominal amount for information in Rules 701(a)(2)(i),
6, 3b–17, and proposed Rules 710 referring institutional customers and (a)(3)(i) and (b) is to provide a customer
through 781. Any discussion or high net worth customers to a broker- of a bank relying on the exemption with
interpretation of these prior rules in dealer and permits such payments to be information to assist the customer in
their accompanying releases does not contingent on whether the customer identifying and assessing any conflict of
apply to this single set of rules adopted effects a securities transaction with the interest on the part of the bank
by the Agencies. broker-dealer. employee making a referral to a broker-
dealer and for which the bank employee
IX. Administrative Law Matters a. Collection of Information may receive a higher-than-nominal and/
A. Paperwork Reduction Act Analysis Rules 701(a)(2)(i), (a)(3)(i) and (b) or contingent referral fee. The collection
require banks or their broker-dealer of information in Rule 701(a)(2)(iii) and
Certain provisions of Rules 701, 723,
partners that utilize the exemption (a)(3)(v) is designed to help a bank
and 741, contain ‘‘collection of
provided in this rule to make certain determine whether it is acting in
information’’ requirements within the
disclosures to high net worth or compliance with the exemption. The
meaning of the Paperwork Reduction
institutional customers. Specifically, collection of information in Rule
Act of 1995.339 The Commission has
these disclosures must clearly and 701(a)(3)(iv) is designed to provide the
submitted these information collections
conspicuously disclose (1) the name of customer with information that may be
to the Office of Management and Budget
the broker-dealer; and (2) that the bank helpful to the customer in deciding
(‘‘OMB’’) for review in accordance with
employee participates in an incentive whether to engage in a securities
44 U.S.C. 3507(d) and 5 CFR 1320.11.
compensation program under which the transaction with the broker-dealer.
The Board has reviewed the rules under
authority delegated by OMB.340 bank employee may receive a fee of c. Respondents
The collections of information under more than a nominal amount for
referring the customer to the broker- The collections of information in Rule
Rules 701, 723, and 741 are new. The 701 will apply to banks that wish to
Commission’s title for the new dealer and payment of this fee may be
contingent on whether the referral utilize the exemption provided in this
collection of information under Rule rule and broker-dealers with which
701 is ‘‘Rule 701: Exemption from the results in a transaction with the broker-
dealer.342 These requirements were those banks enter into networking
definition of ‘broker’ for certain arrangements.
institutional referrals.’’ The modified from the proposal to permit
Commission’s title for the new timely oral disclosure of this d. Disclosure Burden
collection of information under Rule information, followed by written
The Agencies estimate that
723 is ‘‘Rule 723: Exemptions for special disclosure, to better accommodate the
approximately 1,000 banks annually
accounts, foreign branches, transferred variety of circumstances in which
will use the exemption in Rule 701 and
accounts, and a de minimis number of referrals may occur.
In addition, one of the conditions of that each bank, individually or working
accounts.’’ The Commission’s title for with its partner broker-dealer, will on
the new collection of information under the exemption is that the broker-dealer
average make the required referral fee
Rule 741 is ‘‘Rule 741: Exemption for and the bank need to have a contractual
disclosures to 200 customers annually.
banks effecting transactions in money or other written arrangement containing
In addition, we estimate that each bank
market funds.’’ The Commission’s OMB certain elements, including notification
will provide one notice annually to its
control number for the three rules is and information requirements.343 Rule
broker-dealer partner regarding names
3235–0624. The Board’s title for the new 701(a)(3)(v) requires the written
and other identifying information about
collection of information under Rules agreement to obligate a broker-dealer to
bank employees. The Agencies also
701, 723, and 741 is ‘‘Recordkeeping notify its bank partner if the broker-
estimate that broker-dealers will, on
and Disclosure Requirements dealer determines that (1) the customer
average, notify each of the 1,000 banks
Associated with Regulation R’’ (FR referred under the exemption is not a approximately twice a year about a
high net worth or institutional determination regarding a customer’s
336 Exchange Act Release No. 44291 (May 11, customer, as applicable; or (2) the bank high net worth or institutional status as
2001), 66 FR 27760 (May 18, 2001). employee making the referral is subject well as a bank employee’s statutory
337 17 CFR 240.3a4–2 through 3a4–6 and 17 CFR

to statutory disqualification (as defined
240.3b–17.
338 17 CFR 242.710 through 781. See Exchange
in Section 3(a)(39) of the Exchange 344 See Rule 701(a)(3)(v). The latter requirement
Act Release No. 49879 (June 17, 2004), 69 FR 39682 does not apply to subparagraph (E) of Section
(June 30, 2004). 341 44 U.S.C. 3512. 3(a)(39) of the Exchange Act ((15 U.S.C. 78c(a)(39)).
339 44 U.S.C. 3501, et seq. 342 See Rules 701(a)(2)(i), (a)(3)(i) and (b). 345 See Rule 701(a)(3)(iv).
340 5 CFR 1320.16; Appendix A.1. 343 See Rule 701(a) and (a)(3). 346 See Rule 701(a)(2)(iii).
disqualification status. The Agencies g. Record Retention Period for which records are required to be
further estimate that each broker-dealer Rule 701 does not include a specific maintained. The Agencies anticipate
will notify three customers of each record retention requirement. Banks, that these records will consist of records
partner bank per year concerning however, are required to retain the that are generally created as part of the
transaction suitability or the customer’s records in compliance with any existing securities transaction and the account
financial sophistication. or future recordkeeping or disclosure relationship and minimal additional
Based on these estimates, the requirements established by the Banking time will be required in maintaining
Agencies. Broker-dealers are also these records. Based on this analysis,
Agencies anticipate that Rule 701 will
required to retain records in compliance the Agencies estimate that a bank will
result in approximately 200,000
with existing or future recordkeeping or spend approximately 15 minutes per
disclosures to customers, 1,000 notices
disclosure requirements established by account to comply with the record
to broker-dealers about bank employees,
the Commission or any self-regulatory maintenance requirement of Rule 723.
2,000 notices to banks about customer
organization. Thus, the estimated total annual
status, and 3,000 notices to customers recordkeeping burden for Rule 723 is
per year about suitability or 2. Rule 723 125 hours.
sophistication. The Agencies further
estimate (based on the level of difficulty a. Collection of Information e. Collection of Information Is
and complexity of the applicable Rule 723(e)(1) requires a bank that Mandatory
activities) that a bank or broker-dealer desires to exclude a trust or fiduciary This collection of information is
will spend approximately 5 minutes per account in determining its compliance mandatory for banks desiring to rely on
customer to comply with the disclosure with the chiefly compensated test, de minimis exclusion contained in Rule
requirement, and that a bank will spend pursuant to a de minimis exclusion,349 723.
approximately 15 minutes per notice to to maintain records demonstrating that
a broker-dealer. The Agencies also the securities transactions conducted by f. Confidentiality
estimate that a broker-dealer will spend or on behalf of the account were Rule 723 does not address or restrict
approximately 15 minutes per notice to undertaken by the bank in the exercise the confidentiality of the documentation
a bank or customer. Thus, the estimated of its trust or fiduciary responsibilities prepared by banks under the rule.
total annual disclosure burden for these with respect to the account.350 Accordingly, banks will have to make
requirements in Rule 701 is b. Use of Information the information available to regulatory
approximately 8,583 hours for banks authorities or other persons to the extent
and approximately 9,583 hours for The collection of information in Rule otherwise provided by law.
broker-dealers.347 723 is designed to help ensure that a
bank relying on the de minimis g. Record Retention Period
e. Collection of Information Is exclusion is able to demonstrate that it Rule 723 will include a requirement
Mandatory was acting in a trust or fiduciary to maintain records related to certain
capacity with respect to an account securities transactions. Banks will be
This collection of information is excluded from the chiefly compensated required to retain these records in
mandatory for banks relying on Rule test in Rule 721(a)(1). compliance with any existing or future
701 and their broker-dealer partners. recordkeeping requirements established
c. Respondents
f. Confidentiality by the Banking Agencies.
The collection of information in Rule
723 will apply to banks relying on the 3. Rule 741
A bank relying on the exemption
provided in Rule 701 or its partner de minimis exclusion from the chiefly a. Collection of Information
broker-dealer is required to provide compensated test. Rule 741(a)(2)(ii)(A) requires a bank
certain referral fee disclosures to the d. Recordkeeping Burden relying on this exemption (i.e., the
customers referred by the bank under exemption from the definition of the
Because the Agencies expect a small
this rule. Banks relying on the term ‘‘broker’’ under Section 3(a)(4) of
number of banks may use the account-
exemption provided in Rule 701 are the Exchange Act for effecting
by-account approach in monitoring their
required also to enter into agreements transactions on behalf of a customer in
compliance with the chiefly
with a broker-dealer obligating the securities issued by a money market
compensated test, the Agencies estimate
broker-dealer to notify the bank upon fund) to provide customers with a
that approximately 50 banks annually
becoming aware of certain information prospectus of the money market fund
will use the de minimis exclusion in
with respect to the customer or the bank securities, not later than the time the
Rule 723 and each such bank will, on
employee, and to notify the customer customer authorizes the bank to effect
average, need to maintain records with
upon becoming aware of certain the transaction in such securities, if they
respect to 10 trust or fiduciary accounts
information concerning the customer or are not no-load. In situations where a
annually conducted in the exercise of
the nature of a securities transaction.348 bank effects transactions under the
the banks’ trust or fiduciary
Similarly, a bank is required to notify a exemption as part of a program for the
responsibilities. Therefore, the Agencies
broker-dealer about the name of the investment or reinvestment of deposits
estimate that Rule 723 will result in
bank employee receiving a referral fee funds of, or collected by, another bank,
approximately 500 accounts annually
and certain other identifying the rule permits either the effecting
information. 349 See Rule 723(e)(2), which requires that the bank or deposit-taking bank to provide
total number of accounts excluded by the bank, the customer a prospectus for the money
347 Because banks and broker-dealers will share under the exclusion from the chiefly compensated market fund securities.
the disclosure obligation under the final rule, these test in Rule 721(a)(1), do not exceed the lesser of
estimates attribute 50 percent of that disclosure 1 percent of the total number of trust or fiduciary b. Use of Information
burden to banks and 50 percent to broker-dealers. accounts held by the bank (if the number so
348 These requirements are discussed in more obtained is less than 1, the amount will be rounded The purpose of the collection of
detail in section 1.d (Rule 701, Disclosure Burden), up to 1) or 500. information in Rule 741 is to help
supra. 350 See Rule 723(e)(1). ensure that a customer of a bank whose
funds or deposits are invested into a as such. The GLBA replaced banks’ the minimum and maximum annual
money market fund that is not a no-load historic exemption from the definition base salary established by the bank for
fund under the exemption will have of ‘‘broker’’ with eleven exceptions.351 the current or prior year for the job
sufficient information upon which to While banks’ efforts to comply with family that includes the employee; (2)
make an informed investment decision, the GLBA and the exemptions will twice the employee’s actual base hourly
in particular, regarding the fees the result in certain costs, the Agencies wage or 1/1000th of the employee’s
customer will pay with respect to the have sought to minimize these burdens actual annual base salary; or (3) twenty-
securities. to the extent possible consistent with five dollars ($25), as adjusted for
the language and purposes of the GLBA. inflation pursuant to Rule 700(f).
c. Respondents For example, the Agencies are adopting The Agencies believe these
The collection of information in Rule exemptions and interpretations that are alternatives likely will provide banks
741 applies to banks that directly or expected to provide banks with appropriate flexibility while being
indirectly rely on the exemption increased options and flexibility and consistent with the statute. For example,
provided in the rule in the manner help to reduce overall costs. Some some banks, and particularly small
described above. commenters noted that the rules as banks, may find it most useful to
d. Disclosure Burden proposed will give banks flexibility in establish a flat fee or inflation-adjusted
structuring their operations, and one fee for securities referrals as this method
The Agencies believe that banks bank trade association stated that small is easy to understand and requires no
generally sweep or invest their customer banks will be able to comply with the complicated calculations. In addition,
funds into no-load money market funds. proposed rules without significantly permitting banks to pay referral fees
Accordingly, the Agencies estimate that altering their activities.352 Two based on either an employee’s base
approximately 500 banks annually will commenters stated that the Agencies hourly or annual rate of pay or the
use the exemption in Rule 741 and each had underestimated the costs associated average hourly or annual rate of pay for
bank (or its partner bank), on average, with coming into compliance with a job family gives banks objective and
will deliver the prospectus required by Regulation R and also provided easily calculable approaches to paying
the rule to approximately 1,000 estimates of ongoing compliance their employees referrals while
customers annually. Therefore, the costs.353 remaining consistent with the
Agencies estimate that Rule 741 will requirements of the GLBA that such fees
result in approximately 500,000 2. Discussion of Rule Interpretations be ‘‘nominal’’ in relation to the overall
disclosures per year. The Agencies and Exemptions compensation of the referring
estimate further that a bank will spend The benefits and costs of the principal employees. While some start-up costs
approximately 5 minutes per response exemptions and interpretations in the may be incurred by banks in the process
to comply with the delivery requirement rules are discussed below. of developing a fee structure in line
of Rule 741. Thus, the estimated total with the requirements of the GLBA, the
annual disclosure burden for Rule 741 a. Networking Exception
ability to choose among alternative
is 41,667 hours. Exchange Act Section 3(a)(4)(B)(i) methods (as reflected in the rules) is
excepts banks from the definition of expected to enable banks to minimize
e. Collection of Information Is ‘‘broker’’ if they enter into a contractual
Mandatory their overall costs based on their
or other written arrangement with a individual referral programs and cost
This collection of information is registered broker-dealer under which structures. Several commenters
mandatory for banks relying on the the broker-dealer offers brokerage supported these alternatives, or stated
exemption. services to bank customers. This that the rules implementing the
f. Confidentiality networking exception is subject to networking exception as a whole struck
several conditions. The Section also an appropriate balance.355
The collection of information prohibits banks from paying In light of the statutory provision
delivered pursuant to Rule 741 must be unregistered bank employees—such as allowing banks to pay a ‘‘nominal one-
provided by banks relying on the tellers, loan officers, and private time cash fee,’’ the rule requires that all
exemption in this rule (or in the case of bankers—‘‘incentive compensation’’ for referral fees paid under the exception be
programs involving deposits of another any brokerage transaction, except that paid in cash. At the same time, the
bank, the other bank) to customers that bank employees may receive a Agencies have clarified that banks have
are engaging in transactions in securities ‘‘nominal’’ referral fee for referring bank the flexibility to use cash-equivalent
issued by a money market fund that is customers to their broker-dealer points, paid no less often than quarterly,
not a no-load fund. networking partners.354 in paying nominal referral fees under
g. Record Retention Period Under the rule, a ‘‘nominal’’ referral the exception.
fee is defined as a fee that does not Rule 700(b) also contains a definition
Rule 741 does not include a record exceed any of the following standards: of ‘‘incentive compensation’’ and
retention requirement. (1) Twice the average of the minimum excludes from this definition
B. Consideration of Benefits and Costs and maximum hourly wage established compensation paid by a bank under a
by the bank for the current or prior year bonus or similar plan that meets certain
1. Introduction
for the job family that includes the criteria. The bonus or similar program
Prior to enactment of the GLBA, banks employee or 1/1000th of the average of must be paid on a discretionary basis
were exempted from the definition of and based on multiple factors or
‘‘broker’’ in Section 3(a)(4) of the 351 See Exchange Act Section 3(a)(4)(B)(i)–(xi). variables. These factors or variables
Exchange Act. Therefore, 352 See Citigroup Letter, ACB Letter, ICBA Letter. must include multiple, significant
notwithstanding the fact that banks may 353 See Fiserv Letter, Colorado Trust Letter.
factors or variables that are not related
354 Exchange Act Section 3(a)(4)(B)(i)(VI) limits
have conducted activities that will have to securities transactions at the broker-
such referral fees to a ‘‘nominal one-time cash fee
brought them within the scope of the of a fixed dollar amount’’ and requires that the
broker definition, they were not payment of the fees not be contingent on whether 355 See ABA Letter, Roundtable Letter, ACB
required by the Exchange Act to register the referral results in a transaction. Letter.
dealer. Moreover, a referral made by the regularly examined by bank examiners As previously noted, banks are likely
employee may not be a factor or variable for compliance with fiduciary principles to incur some costs to comply with the
in determining the employee’s and standards without registering as a GLBA. The rules, however, include a
compensation under the plan and the broker. To qualify for the trust and number of exemptions which are
employee’s compensation under the fiduciary activities exception, Exchange intended to help to reduce overall costs.
plan may not be determined by Act Section 3(a)(4)(B)(ii) requires that As a result, the Agencies do not believe
reference to referrals made by any other the bank be ‘‘chiefly compensated’’ for that banks will incur significant
person. Rule 700(b) also provides a such transactions on the basis of the additional costs to comply with the
conditional safe harbor from the types of fees specified in the GLBA and liberalized exemptions of Rules 722
definition of ‘‘incentive compensation’’ comply with certain advertising through 723 or the definitional guidance
for certain bonus or similar plans that restrictions set forth in the statute. of Rule 721.
are based on any measure of the overall The Agencies believe that the rules c. Sweep Accounts and Transactions in
profitability of a bank; an affiliate of a dealing with the trust and fiduciary Money Market Funds
bank (other than a broker-dealer); an activities exception will provide a
operating unit of a bank or of an affiliate number of benefits to banks and their Section 3(a)(4)(B)(v) of the Exchange
of a bank (other than a broker-dealer); or customers without imposing significant Act provides a bank with an exception
a broker-dealer (if the bonus plan meets costs on either group.358 The provisions from the definition of ‘‘broker’’ to the
certain criteria designed to ensure, regarding the ‘‘chiefly compensated’’ extent it effects transactions as part of a
among other things, that the plan condition and related exemptions, while program for the investment or re-
includes other factors or variables). The imposing some costs related to systems investment of deposit funds for a
final definition has been revised from necessary to perform the calculations customer or on behalf of another bank
the proposal to give banks more and track compensation, are expected to into any no-load, open-end management
flexibility in using their existing bonus reduce banks’ compliance costs and investment company registered under
plans within the framework required by make the trust and fiduciary activities the Investment Company Act that holds
the GLBA. exception more useful. For example, the itself out as a money market fund. The
The rules also include a conditional rules permit a bank to follow an rules provide guidance, consistent with
exemption to permit a bank to pay an alternate test to the account-by-account FINRA rules,362 regarding the definition
employee a contingent referral fee of approach to the ‘‘chiefly compensated’’ of ‘‘no-load’’ as used in the exception.
more than a nominal amount for condition. Under this exemption, a bank This guidance likely will benefit banks
referring an institutional customer or may calculate the compensation it by clarifying the types of charges that
high net worth customer to a broker- receives from its trust and fiduciary are permissible and by providing greater
dealer with which the bank has a business as a whole on a bank-wide legal certainty.
contractual or other written networking basis, subject to certain conditions.359 The rules also contain an exemption
arrangement. This exemption provides a that permits banks to effect transactions
This alternative is designed to provide
benefit to banks by expanding the types on behalf of a customer, or for the
banks with a potentially less costly
of referral fees that banks may utilize deposit funds of another bank, in
approach for determining compliance
with respect to institutional customers securities issued by a money market
with the trust and fiduciary activities
and high net worth customers. A fund, subject to certain conditions.363
exception. Some commenters noted that
number of commenters supported this alternative approach was While compliance with the conditions
granting an exemption for such workable.360 Similarly, the Agencies’ associated with this exemption, such as
referrals.356 There likely will be costs the prospectus delivery requirement in
exemptions from the ‘‘chiefly
associated with complying with the certain circumstances, may require
compensated’’ condition for certain
conditions in the exemption (such as banks to incur some costs, these costs
short-term accounts, accounts acquired
the requirement for banks to make as part of a business combination or are likely to be more than justified by
certain disclosures to high net worth or the investor protection benefits enjoyed
asset acquisition, accounts held at a
institutional customers and the by the banks’ customers and the
non-shell foreign branch, accounts
requirement for broker-dealers to make enhanced flexibility granted banks by
transferred to a broker-dealer or other
certain determinations and provide the exemption. Furthermore, because
unaffiliated entity, and a de minimis
certain notifications to banks or a banks are free to determine whether to
number of accounts are expected also to
customer) 357 as well as the other terms incur these costs, the exemption is
reduce banks’ compliance costs by
and conditions in the statutory facilitating banks’ ability to comply with expected to provide a net benefit for
networking exception. These costs, banks that wish to utilize the
the ‘‘chiefly compensated’’ condition.361
however, will be either a result of the exemption.
While compliance with the conditions
statutory requirements or costs in these exemptions likely will result in d. Safekeeping and Custody Exception
voluntarily incurred by banks because some costs, such as the recordkeeping
they want to take advantage of the Section 3(a)(4)(B)(viii) of the
requirement associated with the de Exchange Act provides banks with an
exemption. minimis exclusion, these costs are likely exception from the definition of
b. Trust and Fiduciary Activities more than justified by the benefits ‘‘broker’’ for certain bank custody and
Exception associated with the exemptions given safekeeping activities. The rules contain
that banks could individually determine an exemption that permits a bank,
Exchange Act Section 3(a)(4)(B)(ii) whether they wish to utilize the
permits a bank, under certain subject to certain conditions, to accept
exemptions. orders to effect transactions in securities
conditions, to effect transactions in a
trustee or fiduciary capacity in its trust 358 The trust and fiduciary exception is addressed
for accounts for which the bank acts as
department or other department that is in Rules 721–723. a custodian (including an account for
359 See Rule 722. which a bank acts as directed trustee),
356 See State Street Letter, SIMFA Letter, U.S. 360 See, e.g., ABA Letter, WBA Letter, U.S. Trust
Trust Letter, BISA Letter. Letter, PNC Letter. 362 See FINRA Rule 2830.
357 Rule 701(a)(2)(i), (a)(3)(iii)–(v), and 701(b). 361 See Rule 723. 363 See Rule 741.
or, in some cases, for which the bank permits a bank, as agent, to effect exemptions offer. For example, the
acts as a subcustodian or a non- securities lending transactions (and Regulation S exemption may impose
fiduciary administrator or recordkeeper. engage in related securities lending certain costs on banks that are designed
Specifically, this custody exemption services) for securities that they do not to ensure that they remain in
(Rule 760) allows banks, subject to hold in custody with or on behalf of a compliance with the conditions under
certain conditions, to accept orders for person the bank reasonably believes is the exemption. In particular, the
securities transactions from employee a qualified investor (as defined in exemption permits banks to rely on the
benefit plan accounts and individual Section 3(a)(54)(A) of the Exchange Act) exemption only for transactions in
retirement and similar accounts for or any employee benefit plan that owns ‘‘eligible securities’’ and with either
which the bank acts as a custodian. In and invests on a discretionary basis at broker-dealers or purchasers who are
addition, the exemption allows banks, least $25 million in investments.366 We not U.S. persons within the meaning of
subject to certain conditions, to accept also are extending the exemption from Section 903 of Regulation S. Banks may
orders for securities transactions on an rescission liability under Exchange Act incur certain administrative costs to
accommodation basis from other types Section 29 to contracts entered into by ensure that a transaction meets these
of custodial accounts. This exemption banks acting in a broker capacity until requirements. Nevertheless, the
allows banks to accept orders from a date that is 18 months after the exemption is an accommodation to
custody accounts while imposing effective date of the final rule.367 This banks that wish to effect transactions in
conditions designed to prevent a bank exemption also provides, under certain Regulation S securities and, as a result,
from operating a brokerage business out circumstances, protections from the compliance costs will be imposed
of its custody department. rescission liability under Exchange Act only on those banks that believe that it
The exemption is designed to benefit Section 29 resulting solely from a bank’s is in their best business interests to take
banks by permitting certain order-taking status as a broker, if the bank has acted advantage of the exemption.
activities for securities transactions. in good faith, adopted reasonable Given that Exchange Act Section 29 is
While banks may incur some costs in policies and procedures, and any rarely used as a remedy, we do not
complying with the conditions violation of broker registration anticipate that this exemption will
contained in the exemption, such as requirements did not result in impose significant costs on the industry
developing systems for making significant harm or financial loss to the or on investors.
determinations regarding compliance person seeking to void the contract.368
with advertising and compensation 3. General Costs and Benefits
Finally, we are issuing a temporary
restrictions, the Agencies believe the general exemption from the definition of Based on the burden hours discussed
conditions contained in the rules are ‘‘broker’’ under Section 3(a)(4) of the in the Paperwork Reduction Act
consistent with the practices of banks Exchange Act until the first day of a Analysis section, supra, the Agencies
and any costs will only be imposed on bank’s first fiscal year commencing after expect the ongoing requirements of the
banks that choose to utilize the September 30, 2008.369 rules to result in a total of 50,375 annual
exemption. The Agencies believe these provisions burden hours for banks and 9583 annual
offer a number of benefits to banks and burden hours for broker-dealers, for a
e. Other Rules
their customers. In particular, the grand total of 59,958 annual burden
The Agencies are also adopting Regulation S exemption helps ensure hours.370 The Agencies estimate that the
certain special purpose exemptions. that U.S. banks that effect transactions hourly costs for these burden hours will
Specifically, we are adopting an in Regulation S securities with non-U.S. be approximately $68 per hour.371
exemption that permits banks to effect customers will be more competitive Therefore, the annual total costs will be
transactions in Regulation S securities with foreign banks or other entities that approximately $4,077,144.
with non-U.S. persons or registered offer those services without being In addition to the costs associated
broker-dealers.364 Another exemption registered as broker-dealers. The with burden hours discussed in the
also allows, under certain conditions, a exemption from rescission liability Paperwork Reduction Act Analysis
bank to effect transactions in investment under Exchange Act Section 29 also section, supra, the Agencies expect that
company securities and variable life provides banks some legal certainty, many banks also could incur start-up
insurance and variable annuities both temporarily and on a permanent costs for legal and other professional
through the National Securities Clearing basis, as they conduct their securities services.372 Many banks will utilize
Corporation or directly with a transfer activities. The exemption related to their in-house counsel, accountants,
agent or insurance company or separate securities lending services enables compliance officers, and programmers
account that is excluded from the banks to engage in the types of services in an effort to achieve compliance with
definition of transfer agent, instead of in which they currently engage thereby the rules. Industry sources indicate the
through a broker-dealer.365 In addition, minimizing compliance costs, while
an exemption permits banks that rely on providing the banks’ customers with 370 See infra at VIII.A.1.d., VIII.A.2.d., and
certain exceptions and exemptions to VIII.A.3.d.

continuity of service. The temporary 371 $68/hour figure for a clerk (e.g. compliance
effect certain transactions involving the general exemption from the definition of clerk) is from the Securities Industry Association
securities of a company for the ‘‘broker’’ also benefits banks by (now SIFMA) Report on Office Salaries in the
company’s employee benefit plans and providing them with an adequate period Securities Industry 2005, modified to account for an
participants through the National of time to transition to the requirements 1800-hour work-year and multiplied by 2.93 to
Securities Clearing Corporation or account for bonuses, firm size, employee benefits
under the statute and the rules. and overhead.
directly with a transfer agent or The Agencies estimate that the costs 372 For example, banks may incur start-up costs
insurance company or separate account of these exemptions will be minimal in the process of reviewing or developing their
that is excluded from the definition of and are justified by the benefits the networking arrangements in line with the
transfer agent, instead of through a requirements of the rules. See supra at VIII.B.2.a.
In addition, there likely will be costs for developing
broker-dealer. An additional exemption 366 See Rule 772. systems for making determinations regarding
367 See Rule 780. compliance with advertising and compensation
364 See Rule 771. 368 Id.
restrictions pursuant to the rules regarding
365 See Rule 775. 369 See Rule 781. safekeeping and custody. See supra at VIII.B.2.d.
following hourly labor costs: approximately 60 comments, primarily C. Consideration of Burden on

Attorneys—$324 per hour, intermediate from banks and banking industry Competition, and on Promotion of
accountants—$162 per hour, groups, and the comments generally Efficiency, Competition, and Capital
compliance manager—$205 per hour, were favorable. Only these two Formation
and senior programmer—$268.373 commenters stated that the Agencies Exchange Act Section 3(f) requires the
Taking an average of these professional had underestimated start-up and Commission, whenever it engages in
costs, the Agencies estimate a general continuing compliance costs. The rulemaking and is required to consider
hourly in-house labor cost of $240 per Agencies therefore believe that the or determine if an action is necessary or
hour for professional services. estimates in the proposal reflect the
Based on our expectation that most appropriate in the public interest, to
costs that the majority of the banks consider whether the action will
start-up costs will involve bringing
systems into compliance and that many affected by the rules are likely, on promote efficiency, competition, and
banks will be able to do so either using average, to incur, and are appropriately capital formation.376 Exchange Act
existing systems or by slightly used to estimate the overall compliance Section 23(a)(2) requires the
modifying existing systems, the costs of Regulation R. Commission, in adopting rules under
Agencies estimate that the rules will The Agencies believe that the rules that Act, to consider the impact that any
require banks to utilize an average of 30 will provide greater legal certainty for such rule will have on competition.
hours of professional services. The This Section also prohibits the
banks in connection with their
Agencies expect that most banks Commission from adopting any rule that
determination of whether they meet the
affected by the rules will either use in- will impose a burden on competition
terms and conditions for an exception to not necessary or appropriate in
house counsel or employees resulting in the definition of broker under the
an average total cost of $7,200 per furtherance of the purposes of the
Exchange Act as well as provide Exchange Act.377
affected bank.374 The Agencies estimate additional relief through the
that the rules will apply to The Agencies have designed the
exemptions. Without the rules, banks interpretations, definitions, and
approximately 9,475 banks and
may have difficulty planning their exemptions to minimize any burden on
approximately 25 percent of these banks
will incur more than a de minimis cost. businesses and determining whether competition. Indeed, the Agencies
Using these values, the Agencies their operations are in compliance with believe that by providing legal certainty
estimate total start-up costs of the GLBA. This, in turn, could hamper to banks that conduct securities
$17,055,000 (9,475 × .25 × $7,200). As their business. The Agencies anticipate activities, by clarifying the GLBA
previously discussed, the Agencies have these benefits will be useful to banks in requirements, and by exempting a
sought to minimize these costs to the a number of ways. number of activities from those
extent possible consistent with the The Agencies expect that one requirements, the rules allow banks to
language and purposes of the GLBA. component of the benefits to banks will continue to conduct securities activities
Two commenters stated that the be savings in legal fees, given that consistent with the GLBA.
Agencies’ estimates of hourly rates in difficulties in interpreting the GLBA The rules define terms in the statutory
the proposal were fair, but that the absent any regulatory guidance could exceptions to the definition of broker
estimates of the time requirements were added to the Exchange Act by Congress
result in the need for greater input from
too low. These commenters estimated in the GLBA, and provide guidance to
outside counsel. Based on the number of
startup costs of between $43,000 and banks as to the appropriate scope of
$55,000.375 In addition, these interpretive issues raised by the GLBA,
those exceptions. In addition, the rules
commenters estimated ongoing costs to the Agencies estimate that, absent any contain a number of exemptions that
be between $60,000 and $95,000 per regulatory guidance, banks on average provide banks flexibility in conducting
year. Based on these commenters’ will use the services of outside counsel their securities activities, which will
estimates, startup costs would range for approximately 25 more hours for the promote competition and reduce costs.
from $101.9 million (9475 banks × 0.25 initial year and 5 more hours per year
affected × $43,000) to $130.3 million thereafter, than with the existence of the D. Final Regulatory Flexibility Analysis
(9475 × 0.25 × $55,000), and a range of rules. Industry sources indicate that the The Agencies have prepared a Final
annual ongoing costs of $142.1 million hourly costs for hiring outside counsel Regulatory Flexibility Analysis
(9475 × 0.25 × $60,000) to $225 million are approximately $400 per hour. The (‘‘FRFA’’), in accordance with the
(9475 × 0.25 × $95,000). The Agencies, rules will therefore result in an average provisions of the Regulatory Flexibility
however, believe that these cost total cost savings of approximately Act (‘‘RFA’’),378 regarding the rules.
estimates are not representative of the $10,000 per affected bank per year
costs for the majority of banks affected 1. Reasons for the Action
during the initial year and $2,000 per
by Regulation R. The Agencies received affected bank per year thereafter. The Section 201 of the GLBA amended the
Agencies estimate that the rules will definition of ‘‘broker’’ in Section 3(a)(4)
373 The hourly figures for an attorney,
apply to approximately 9,475 banks and of the Exchange Act to replace a blanket
intermediate account, and compliance manager is
from the SIA Report on Management & Professional approximately 25 percent of these banks exemption from that term for ‘‘banks,’’
Earnings in the Securities Industry 2005, modified will enjoy more than a de minimis cost as defined in Section 3(a)(6) of the
to account for an 1800-hour work-year and
savings benefit. Using these values, the Exchange Act. Congress replaced this
multiplied by 5.35 to account for bonuses, firm size, blanket exemption with eleven specific
employee benefits and overhead. Agencies estimate a cost savings related
exceptions for securities activities
374 Some banks may choose to utilize outside
to reduced legal fees of $23,687,500
conducted by banks.379 On October 13,
counsel, either exclusively or as a supplement to in- (9,475 × 0.25 × $10,000) for the initial
house resources. The Agencies estimate these costs 2006, President Bush signed into law
as being similar to the in-house costs (Industry year and $4,737,500 (9,475 × 0.25 ×
sources indicate the following hourly costs for $2,000) per year thereafter. 376 15
hiring external workers: Attorneys—$400, U.S.C. 78c(f).
accountant—$250, auditor—$250, and The Agencies believe that the benefits 377 15 U.S.C. 78w(a)(2).
programmer—$160.). of Regulation R justify the costs. 378 5 U.S.C. 604.
375 See Fiserv Letter, Colorado Trust Letter. 379 15 U.S.C. 78c(a)(4).
the Regulatory Relief Act.380 Section generally apply to all banks, including As discussed above, the GLBA does
101 of that Act, among other things, banks that would be considered small not exempt small entity banks from the
requires the Agencies jointly to issue a entities (i.e., banks with total assets of Exchange Act broker registration
single set of rules implementing the $165 million or less) for purposes of the requirements and because the rules are
bank broker exceptions in Section RFA.383 The Agencies, however, have intended to provide guidance to, and
3(a)(4) of the Exchange Act.381 These adopted several interpretations or exemptions for, all banks that are
rules are being adopted by the Agencies exceptions that likely will be subject to the GLBA and are designed to
to fulfill this requirement. The rules are particularly useful for small banks such accommodate the business practices of
designed generally to provide guidance as, for example, the fixed inflation- all banks (including small entity banks),
on the GLBA’s bank exceptions from the adjusted dollar alternative to the the Agencies determined that it would
definition of broker in Exchange Act ‘‘nominal’’ requirement in the not be appropriate or necessary to
Section 3(a)(4) and to provide networking exception and the exception exempt small entity banks from the
conditional exemptions from the broker in Rule 723 from the chiefly operation of the rules. Moreover,
definition consistent with the purposes compensated test for a de minimis providing one or more special
of the Exchange Act and the GLBA. number of trust or fiduciary accounts. exemptions for small banks could place
The Agencies estimate that the rules broker-dealers, including small broker-
2. Objectives
will apply to approximately 9,475 dealers, or larger banks at a competitive
The rules provide guidance to the banks, approximately 5,816 of which disadvantage versus small banks.
industry with respect to the GLBA could be considered small banks with The rules are intended to clarify and
requirements. The rules also provide assets of $165 million or less. Moreover, simplify compliance with the GLBA by
certain conditional exemptions from the we do not anticipate any significant providing guidance with respect to
broker definition to allow banks to costs to small entity banks as a result of exceptions and by providing additional
perform certain securities activities. The the rules. We note that a trade exemptions. As such, the rules are
Supplementary Information section, association whose membership consists expected to facilitate compliance by
supra, contains more detailed primarily of small banking organizations banks of all sizes, including small entity
information on the objectives of the indicated that small banks would be banks.
rules. able to comply with the rules as The Agencies do not believe that it is
proposed without significantly altering necessary to consider whether small
3. Legal Basis
their activities.384 entity banks should be permitted to use
Pursuant to Section 101 of the performance rather than design
Regulatory Relief Act, the Agencies are 5. Reporting, Recordkeeping and Other standards to comply with the rules
issuing the rules. Compliance Requirements because the rules already use
4. Small Entities Subject to the Rule The rules will not impose any performance standards. Moreover, the
significant reporting, recordkeeping, or rules do not dictate for entities of any
The rules apply to ‘‘banks,’’ which is size any particular design standards
defined in Section 3(a)(6) of the other compliance requirements on
banks that are small entities.385 (e.g., technology) that must be employed
Exchange Act to include banking
to achieve the objectives of the rules.
institutions organized in the United 6. Duplicative, Overlapping, or
States, including members of the Conflicting Federal Rules E. Plain Language
Federal Reserve System, Federal savings Section 722 of the GLBA (12 U.S.C.
associations, as defined in Section 2(5) The Agencies believe that no other
rules duplicate, overlap, or conflict with 4809) requires the Board to use plain
of the Home Owners’ Loan Act, and language in all proposed and final rules
other commercial banks, savings the final rules.
published by the Board after January 1,
associations, and nondepository trust 7. Significant Alternatives 2000. The Board believes the rules, to
companies that are organized under the the maximum extent possible, are
laws of a state or the United States and Pursuant to Section 3(a) of the
RFA,386 the Agencies must consider the presented in a simple and
subject to supervision and examination straightforward manner.
by state or federal authorities having following types of alternatives: (1) The
supervision over banks and savings establishment of differing compliance or X. Statutory Authority
associations.382 Congress did not reporting requirements or timetables
Pursuant to authority set forth in the
exempt small entity banks from the that take into account the resources
Exchange Act and particularly Sections
application of the GLBA. Moreover, available to small entities; (2) the
3(a)(4), 3(b), 15, 17, 23(a), and 36 thereof
because the rules are intended to clarification, consolidation, or
(15 U.S.C. 78c(a)(4), 78c(b), 78o, 78q,
provide guidance to, and exemptions simplification of compliance and
78w(a), and 78mm, respectively) the
for, all banks that are subject to the reporting requirements under the rule
Commission is repealing by operation of
GBLA, the Agencies determined that it for small entities; (3) the use of
statute current Rules 3a4–2, 3a4–3, 3a4–
would not be appropriate or necessary performance rather than design
4, 3a4–5, 3a4–6, and 3b–17 (§§ 240.3a4–
to exempt small entity banks from the standards; and (4) an exemption from
2, 240.3a4–3, 240.3a4–4, 240.3a4–5,
operation of the rules. The rules coverage of the rules, or any part
240.3a4–6, and 240.3b–17, respectively).
thereof, for small entities.
The Commission is repealing Exchange
380 Pub. L. No. 109–351, 120 Stat. 1966 (2006).
383 Small Business Administration regulations
Act Rules 15a–7 and 15a–8 (§ 240.15a–
381 See Exchange Act Section 3(a)(4)(F), as added
define ‘‘small entities’’ to include banks and savings 7 and § 240.15a–8, respectively). The
by Section 101 of the Regulatory Relief Act. The
Regulatory Relief Act also requires that the Board associations with total assets of $165 million or Commission, jointly with the Board of
and SEC consult with, and seek the concurrence of, less. 13 CFR 121.201. Governors of the Federal Reserve
384 See ICBA Letter.
the OCC, FDIC and OTS prior to jointly adopting System, is also adopting new Rules 700,
final rules. As noted above, the Board and the SEC 385 The Agencies’ estimates related to
701, 721, 722, 723, 740, 741, 760, 771,
also have consulted extensively with the OCC, FDIC recordkeeping and disclosure are detailed in the
and OTS in developing these joint rules. ‘‘Paperwork Reduction Act Analysis’’ Section of 772, 775, 776, 780, and 781 under the
382 See 15 U.S.C. 78c(a)(6); Pub. L. No. 109–351, this Release. Exchange Act (§§ 247.700, 247.701,
120 Stat. 1966 (2006). 386 5 U.S.C. 604(a). 247.721, 247.722, 247.723, 247.740,
247.741, 247.760, 247.771, 247.772, 218.780 Exemption for banks from liability 247.771 Exemption from the definition of
247.775, 247.776, 247.780, and 247.881, under section 29 of the Securities ‘‘broker’’ for banks effecting transactions
respectively). Exchange Act of 1934. in securities issued pursuant to
218.781 Exemption from the definition of Regulation S.
XI. Text of Rules and Rule Amendment ‘‘broker’’ for banks for a limited period 247.772 Exemption from the definition of
of time. ‘‘broker’’ for banks engaging in securities
List of Subjects lending transactions.
Authority: 15 U.S.C. 78c(a)(4)(F).
12 CFR Part 218 247.775 Exemption from the definition of
Securities and Exchange Commission ‘‘broker’’ for banks effecting certain
Banks, Brokers, Securities. excepted or exempted transactions in
Authority and Issuance investment company securities.
17 CFR Part 240
247.776 Exemption from the definition of
Broker-dealers, Reporting and ■ For the reasons set forth in the ‘‘broker’’ for banks effecting certain
recordkeeping requirements, Securities. preamble, the Commission amends Title excepted or exempted transactions in a
17, Chapter II of the Code of Federal company’s securities for its employee
17 CFR Part 247 Regulations as follows: benefit plans.
Banks, Brokers, Securities. 247.780 Exemption for banks from liability
PART 240—GENERAL RULES AND under section 29 of the Securities
Federal Reserve System REGULATIONS, SECURITIES Exchange Act of 1934.
Authority and Issuance EXCHANGE ACT OF 1934 247.781 Exemption from the definition of
‘‘broker’’ for banks for a limited period
■ For the reasons set forth in the ■ 1. The authority citation for part 240 of time.
preamble, the Board amends Title 12, continues to read, in part, as follows: Authority: 15 U.S.C. 78c, 78o, 78q, 78w,
Chapter II of the Code of Federal Authority: 15 U.S.C. 77c, 77d, 77g, 77j, and 78mm.
Regulations by adding a new Part 218 as 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
set forth under Common Rules at the 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, Common Rules
end of this document: 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, The common rules that are adopted
78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a– by the Commission as Part 247 of Title
PART 218—EXCEPTIONS FOR BANKS 20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4, 17, Chapter II of the Code of Federal
FROM THE DEFINITION OF BROKER 80b–11, and 7201 et seq.; and 18 U.S.C. 1350,
unless otherwise noted.
Regulations and by the Board as Part
IN THE SECURITIES EXCHANGE ACT 218 of Title 12, Chapter II of the Code
OF 1934 (REGULATION R) §§ 240.3a4–2 through 240.3a4–6, 240.3b–17, of Federal Regulations follow:
240.15a–7, and 240.15a–8 [Removed and
Sec. § ll.100 Definition.
Reserved]
218.100 Definition.
218.700 Defined terms relating to the ■ 2. Sections 240.3a4–2 through For purposes of this part the following
networking exception from the definition 240.3a4–6, 240.3b–17, 240.15a–7, and definition shall apply: Act means the
of ‘‘broker.’’ 240.15a–8 are removed and reserved. Securities Exchange Act of 1934 (15
218.701 Exemption from the definition of U.S.C. 78a et seq.).
■ 3. Part 247 is added as set forth under
‘‘broker’’ for certain institutional
referrals. Common Rules at the end of this § ll.700 Defined terms relating to the
218.721 Defined terms relating to the trust document: networking exception from the definition of
and fiduciary activities exception from ‘‘broker.’’
the definition of ‘‘broker.’’ PART 247—REGULATION R— When used with respect to the Third
218.722 Exemption allowing banks to EXEMPTIONS AND DEFINITIONS Party Brokerage Arrangements
calculate trust and fiduciary RELATED TO THE EXCEPTIONS FOR (‘‘Networking’’) Exception from the
compensation on a bank-wide basis. BANKS FROM THE DEFINITION OF definition of the term ‘‘broker’’ in
218.723 Exemptions for special accounts, BROKER section 3(a)(4)(B)(i) of the Act (15 U.S.C.
transferred accounts, and a de minimis
78c(a)(4)(B)(i)) in the context of
number of accounts. Sec.
218.740 Defined terms relating to the sweep 247.100 Definition. transactions with a customer, the
accounts exception from the definition of 247.700 Defined terms relating to the following terms shall have the meaning
‘‘broker.’’ networking exception from the definition provided:
218.741 Exemption for banks effecting of ‘‘broker.’’ (a) Contingent on whether the referral
transactions in money market funds. 247.701 Exemption from the definition of results in a transaction means
218.760 Exemption from definition of ‘‘broker’’ for certain institutional dependent on whether the referral
‘‘broker’’ for banks accepting orders to referrals. results in a purchase or sale of a
effect transactions in securities from or 247.721 Defined terms relating to the trust security; whether an account is opened
on behalf of custody accounts. and fiduciary activities exception from
with a broker or dealer; whether the
218.771 Exemption from the definition of the definition of ‘‘broker.’’
‘‘broker’’ for banks effecting transactions 247.722 Exemption allowing banks to referral results in a transaction
in securities issued pursuant to calculate trust and fiduciary involving a particular type of security;
Regulation S. compensation on a bank-wide basis. or whether it results in multiple
218.772 Exemption from the definition of 247.723 Exemptions for special accounts, securities transactions; provided,
‘‘broker’’ for banks engaging in securities transferred accounts, and a de minimis however, that a referral fee may be
lending transactions. number of accounts. contingent on whether a customer:
218.775 Exemption from the definition of 247.740 Defined terms relating to the sweep (1) Contacts or keeps an appointment
‘‘broker’’ for banks effecting certain accounts exception from the definition of with a broker or dealer as a result of the
excepted or exempted transactions in ‘‘broker.’’
referral; or
investment company securities. 247.741 Exemption for banks effecting
218.776 Exemption from the definition of transactions in money market funds.
(2) Meets any objective, base-line
‘‘broker’’ for banks effecting certain 247.760 Exemption from definition of qualification criteria established by the
excepted or exempted transactions in a ‘‘broker’’ for banks accepting orders to bank or broker or dealer for customer
company’s securities for its employee effect transactions in securities from or referrals, including such criteria as
benefit plans. on behalf of custody accounts. minimum assets, net worth, income, or
marginal federal or state income tax employee who was personally involved definition of ‘‘broker’’ under section
rate, or any requirement for citizenship in referring the customer to the broker 3(a)(4)(B)(i) of the Act (15 U.S.C.
or residency that the broker or dealer, or or dealer, in an amount that meets any 78c(a)(4)(B)(i)), other than section
the bank, may have established of the following standards: 3(a)(4)(B)(i)(VI) of the Act (15 U.S.C.
generally for referrals for securities (1) The payment does not exceed: 78c(a)(4)(B)(i)(VI)), is exempt from the
brokerage accounts. (i) Twice the average of the minimum conditions of section 3(a)(4)(B)(i)(VI) of
(b)(1) Incentive compensation means and maximum hourly wage established the Act solely to the extent that a bank
compensation that is intended to by the bank for the current or prior year employee receives a referral fee for
encourage a bank employee to refer for the job family that includes the referring a high net worth customer or
customers to a broker or dealer or give employee; or institutional customer to a broker or
a bank employee an interest in the (ii) 1/1000th of the average of the dealer with which the bank has a
success of a securities transaction at a minimum and maximum annual base contractual or other written arrangement
broker or dealer. The term does not salary established by the bank for the of the type specified in section
include compensation paid by a bank current or prior year for the job family 3(a)(4)(B)(i) of the Act, if:
under a bonus or similar plan that is: that includes the employee; or (1) Bank employee. (i) The bank
(i) Paid on a discretionary basis; and (2) The payment does not exceed employee is:
(ii) Based on multiple factors or twice the employee’s actual base hourly (A) Not registered or approved, or
variables and: wage or 1/1000th of the employee’s otherwise required to be registered or
(A) Those factors or variables include actual annual base salary; or approved, in accordance with the
multiple significant factors or variables (3) The payment does not exceed qualification standards established by
that are not related to securities twenty-five dollars ($25), as adjusted in the rules of any self-regulatory
transactions at the broker or dealer; accordance with paragraph (f) of this organization;
(B) A referral made by the employee section. (B) Predominantly engaged in banking
is not a factor or variable in determining (d) Job family means a group of jobs
activities other than making referrals to
the employee’s compensation under the or positions involving similar
a broker or dealer; and
plan; and responsibilities, or requiring similar (C) Not subject to statutory
(C) The employee’s compensation skills, education or training, that a bank, disqualification, as that term is defined
under the plan is not determined by or a separate unit, branch or department in section 3(a)(39) of the Act (15 U.S.C.
reference to referrals made by any other of a bank, has established and uses in 78c(a)(39)), except subparagraph (E) of
person. the ordinary course of its business to
that section; and
(2) Nothing in this paragraph (b) shall distinguish among its employees for (ii) The high net worth customer or
be construed to prevent a bank from purposes of hiring, promotion, and institutional customer is encountered by
compensating an officer, director or compensation. the bank employee in the ordinary
employee under a bonus or similar plan (e) Referral means the action taken by
course of the employee’s assigned duties
on the basis of any measure of the one or more bank employees to direct a
for the bank.
overall profitability or revenue of: customer of the bank to a broker or
(2) Bank determinations and
(i) The bank, either on a stand-alone dealer for the purchase or sale of
obligations—(i) Disclosures. The bank
or consolidated basis; securities for the customer’s account.
(f) Inflation adjustment—(1) In provides the high net worth customer or
(ii) Any affiliate of the bank (other institutional customer the information
general. On April 1, 2012, and on the 1st
than a broker or dealer), or any set forth in paragraph (b) of this section
day of each subsequent 5-year period,
operating unit of the bank or an affiliate (A) In writing prior to or at the time
the dollar amount referred to in
(other than a broker or dealer), if the of the referral; or
paragraph (c)(3) of this section shall be
affiliate or operating unit does not over (B) Orally prior to or at the time of the
adjusted by:
time predominately engage in the (i) Dividing the annual value of the referral and
business of making referrals to a broker (1) The bank provides such
Employment Cost Index For Wages and
or dealer; or information to the customer in writing
Salaries, Private Industry Workers (or
(iii) A broker or dealer if: within 3 business days of the date on
any successor index thereto), as
(A) Such measure of overall which the bank employee refers the
published by the Bureau of Labor
profitability or revenue is only one of customer to the broker or dealer; or
Statistics, for the calendar year
multiple factors or variables used to (2) The written agreement between
preceding the calendar year in which
determine the compensation of the the bank and the broker or dealer
the adjustment is being made by the
officer, director or employee; provides for the broker or dealer to
annual value of such index (or
(B) The factors or variables used to provide such information to the
successor) for the calendar year ending
determine the compensation of the customer in writing in accordance with
December 31, 2006; and
officer, director or employee include (ii) Multiplying the dollar amount by paragraph (a)(3)(i) of this section.
multiple significant factors or variables (ii) Customer qualification. (A) In the
the quotient obtained in paragraph
that are not related to the profitability or case of a customer that is a not a natural
(f)(1)(i) of this section.
revenue of the broker or dealer; (2) Rounding. If the adjusted dollar person, the bank has a reasonable basis
(C) A referral made by the employee amount determined under paragraph to believe that the customer is an
is not a factor or variable in determining (f)(1) of this section for any period is not institutional customer before the referral
the employee’s compensation under the a multiple of $1, the amount so fee is paid to the bank employee.
plan; and determined shall be rounded to the (B) In the case of a customer that is
(D) The employee’s compensation nearest multiple of $1. a natural person, the bank has a
under the plan is not determined by reasonable basis to believe that the
reference to referrals made by any other § ll.701 Exemption from the definition customer is a high net worth customer
person. of ‘‘broker’’ for certain institutional prior to or at the time of the referral.
(c) Nominal one-time cash fee of a referrals. (iii) Employee qualification
fixed dollar amount means a cash (a) General. A bank that meets the information. Before a referral fee is paid
payment for a referral, to a bank requirements for the exception from the to a bank employee under this section,
the bank provides the broker or dealer statutory disqualification, as that term is customer pursuant to paragraphs
the name of the employee and such defined in section 3(a)(39) of the Act (15 (a)(2)(i) or (a)(3)(i) of this section shall
other identifying information that may U.S.C. 78c(a)(39)), except subparagraph clearly and conspicuously disclose
be necessary for the broker or dealer to (E) of that section; and (1) The name of the broker or dealer;
determine whether the bank employee (B) The broker or dealer has a and
is registered or approved, or otherwise reasonable basis to believe that the (2) That the bank employee
required to be registered or approved, in customer is a high net worth customer participates in an incentive
accordance with the qualification or an institutional customer. compensation program under which the
standards established by the rules of any (iii) Suitability or sophistication bank employee may receive a fee of
self-regulatory organization or is subject determination by broker or dealer—(A) more than a nominal amount for
to statutory disqualification, as that term Contingent referral fees. In any case in referring the customer to the broker or
is defined in section 3(a)(39) of the Act which payment of the referral fee is dealer and payment of this fee may be
(15 U.S.C. 78c(a)(39)), except contingent on completion of a securities contingent on whether the referral
subparagraph (E) of that section. transaction at the broker or dealer, the results in a transaction with the broker
(iv) Good faith compliance and broker or dealer, before such securities or dealer.
corrections. A bank that acts in good transaction is conducted, perform a (c) Receipt of other compensation.
faith and that has reasonable policies suitability analysis of the securities Nothing in this section prevents or
and procedures in place to comply with transaction in accordance with the rules prohibits a bank from paying or a bank
the requirements of this section shall of the broker or dealer’s applicable self- employee from receiving any type of
not be considered a ‘‘broker’’ under regulatory organization as if the broker compensation that would not be
section 3(a)(4) of the Act (15 U.S.C. or dealer had recommended the considered incentive compensation
78c(a)(4)) solely because the bank fails securities transaction. under § ll.700(b)(1) or that is
to comply with the provisions of this (B) Non-contingent referral fees. In described in § ll.700(b)(2).
paragraph (a)(2) with respect to a any case in which payment of the (d) Definitions. When used in this
particular customer if the bank: referral fee is not contingent on the section:
(A) Takes reasonable and prompt completion of a securities transaction at (1) High net worth customer—(i)
steps to remedy the error (such as, for the broker or dealer, the broker or General. High net worth customer
example, by promptly making the dealer, before the referral fee is paid, means:
(A) Any natural person who, either
required determination or promptly either:
(1) Determine that the customer: individually or jointly with his or her
providing the broker or dealer the
(i) Has the capability to evaluate spouse, has at least $5 million in net
required information); and
(B) Makes reasonable efforts to investment risk and make independent worth excluding the primary residence
reclaim the portion of the referral fee decisions; and and associated liabilities of the person
paid to the bank employee for the (ii) Is exercising independent and, if applicable, his or her spouse; and
judgment based on the customer’s own (B) Any revocable, inter vivos or
referral that does not, following any
independent assessment of the living trust the settlor of which is a
required remedial action, meet the
opportunities and risks presented by a natural person who, either individually
requirements of this section and that
potential investment, market factors and or jointly with his or her spouse, meets
exceeds the amount otherwise permitted the net worth standard set forth in
under section 3(a)(4)(B)(i)(VI) of the Act other investment considerations; or
(2) Perform a suitability analysis of all paragraph (d)(1)(i)(A) of this section.
(15 U.S.C. 78c(a)(4)(B)(i)(VI)) and (ii) Individual and spousal assets. In
§ ll.700. securities transactions requested by the
determining whether any person is a
(3) Provisions of written agreement. customer contemporaneously with the
high net worth customer, there may be
The written agreement between the referral in accordance with the rules of
included in the assets of such person
bank and the broker or dealer shall the broker or dealer’s applicable self- (A) Any assets held individually;
require that: regulatory organization as if the broker (B) If the person is acting jointly with
(i) Broker-dealer written disclosures. or dealer had recommended the his or her spouse, any assets of the
If, pursuant to paragraph (a)(2)(i)(B)(2) securities transaction. person’s spouse (whether or not such
of this section, the broker or dealer is to (iv) Notice to the customer. The assets are held jointly); and
provide the customer in writing the broker or dealer inform the customer if (C) If the person is not acting jointly
disclosures set forth in paragraph (b) of the broker or dealer determines that the with his or her spouse, fifty percent of
this section, the broker or dealer customer or the securities transaction(s) any assets held jointly with such
provides such information to the to be conducted by the customer does person’s spouse and any assets in which
customer in writing: not meet the applicable standard set such person shares with such person’s
(A) Prior to or at the time the forth in paragraph (a)(3)(iii) of this spouse a community property or similar
customer begins the process of opening section. shared ownership interest.
an account at the broker or dealer, if the (v) Notice to the bank. The broker or (2) Institutional customer means any
customer does not have an account with dealer promptly inform the bank if the corporation, partnership, limited
the broker or dealer; or broker or dealer determines that: liability company, trust or other non-
(B) Prior to the time the customer (A) The customer is not a high net natural person that has, or is controlled
places an order for a securities worth customer or institutional by a non-natural person that has, at
transaction with the broker or dealer as customer, as applicable; or least:
a result of the referral, if the customer (B) The bank employee is subject to (i) $10 million in investments; or
already has an account at the broker or statutory disqualification, as that term is (ii) $20 million in revenues; or
dealer. defined in section 3(a)(39) of the Act (15 (iii) $15 million in revenues if the
(ii) Customer and employee U.S.C. 78c(a)(39)), except subparagraph bank employee refers the customer to
qualifications. Before the referral fee is (E) of that section. the broker or dealer for investment
paid to the bank employee: (b) Required disclosures. The banking services.
(A) The broker or dealer determine disclosures provided to the high net (3) Investment banking services
that the bank employee is not subject to worth customer or institutional includes, without limitation, acting as
an underwriter in an offering for an (1) Chiefly compensated—account-by- (II) Aggregating and processing
issuer; acting as a financial adviser in a account test. Chiefly compensated shall purchase and redemption orders for
merger, acquisition, tender offer or mean the relationship-total investment company shares;
similar transaction; providing venture compensation percentage for each trust (III) Providing beneficial owners with
capital, equity lines of credit, private or fiduciary account of the bank is account statements showing their
investment-private equity transactions greater than 50 percent. purchases, sales, and positions in the
or similar investments; serving as (2) The relationship-total investment company;
placement agent for an issuer; and compensation percentage for a trust or (IV) Processing dividend payments for
engaging in similar activities. fiduciary account shall be the mean of the investment company;
(4) Referral fee means a fee (paid in the yearly compensation percentage for (V) Providing sub-accounting services
one or more installments) for the referral the account for the immediately to the investment company for shares
of a customer to a broker or dealer that preceding year and the yearly held beneficially;
is: compensation percentage for the (VI) Forwarding communications
(i) A predetermined dollar amount, or account for the year immediately from the investment company to the
a dollar amount determined in preceding that year. beneficial owners, including proxies,
accordance with a predetermined (3) The yearly compensation shareholder reports, dividend and tax
formula (such as a fixed percentage of percentage for a trust or fiduciary notices, and updated prospectuses; or
the dollar amount of total assets placed account shall be (VII) Receiving, tabulating, and
in an account with the broker or dealer), (i) Equal to the relationship
transmitting proxies executed by
that does not vary based on: compensation attributable to the trust or
beneficial owners of investment
(A) The revenue generated by or the fiduciary account during the year
company shares;
profitability of securities transactions divided by the total compensation
(D) Based on the financial
conducted by the customer with the attributable to the trust or fiduciary
account during that year, with the performance of the assets in an account;
broker or dealer; or or
(B) The quantity, price, or identity of quotient expressed as a percentage; and
(ii) Calculated within 60 days of the (E) For the types of services described
securities transactions conducted over in paragraph (a)(4)(i)(C) or (D) of this
time by the customer with the broker or end of the year.
(4) Relationship compensation means section if paid based on a percentage of
dealer; or assets under management;
(C) The number of customer referrals any compensation a bank receives
attributable to a trust or fiduciary (iv) A flat or capped per order
made; or processing fee, paid by or on behalf of
(ii) A dollar amount based on a fixed account that consists of:
(i) An administration fee, including, a customer or beneficiary, that is equal
percentage of the revenues received by to not more than the cost incurred by
without limitation, a fee paid—
the broker or dealer for investment (A) For personal services, tax the bank in connection with executing
banking services provided to the preparation, or real estate settlement securities transactions for trust or
customer. services; fiduciary accounts; or
(e) Inflation adjustments—(1) In (B) For disbursing funds from, or for (v) Any combination of such fees.
general. On April 1, 2012, and on the 1st recording receipt of payments to, a trust (6) Trust or fiduciary account means
day of each subsequent 5-year period, or fiduciary account; an account for which the bank acts in
each dollar amount in paragraphs (d)(1) (C) In connection with securities a trustee or fiduciary capacity as defined
and (d)(2) of this section shall be lending or borrowing transactions; in section 3(a)(4)(D) of the Act (15
adjusted by: (D) For custody services; or U.S.C. 78c(a)(4)(D)).
(i) Dividing the annual value of the (E) In connection with an investment (7) Year means a calendar year, or
Personal Consumption Expenditures in shares of an investment company for fiscal year consistently used by the bank
Chain-Type Price Index (or any personal service, the maintenance of for recordkeeping and reporting
successor index thereto), as published shareholder accounts or any service purposes.
by the Department of Commerce, for the described in paragraph (a)(4)(iii)(C) of (b) Revenues derived from
calendar year preceding the calendar this section; transactions conducted under other
year in which the adjustment is being (ii) An annual fee (payable on a
exceptions or exemptions. For purposes
made by the annual value of such index monthly, quarterly or other basis),
of calculating the yearly compensation
(or successor) for the calendar year including, without limitation, a fee paid
percentage for a trust or fiduciary
ending December 31, 2006; and for assessing investment performance or
account, a bank may at its election
(ii) Multiplying the dollar amount by for reviewing compliance with
applicable investment guidelines or exclude the compensation associated
the quotient obtained in paragraph
restrictions; with any securities transaction
(e)(1)(i) of this section.
(2) Rounding. If the adjusted dollar (iii) A fee based on a percentage of conducted in accordance with the
amount determined under paragraph assets under management, including, exceptions in section 3(a)(4)(B)(i) or
(e)(1) of this section for any period is without limitation, a fee paid sections 3(a)(4)(B)(iii)–(xi) of the Act (15
not a multiple of $100,000, the amount (A) Pursuant to a plan under U.S.C. 78c(a)(4)(B)(i) or 78c(a)(4)(B)(iii)–
so determined shall be rounded to the § 270.12b–1; (xi)) and the rules issued thereunder,
nearest multiple of $100,000. (B) In connection with an investment including any exemption related to such
in shares of an investment company for exceptions jointly adopted by the
§ ll.721 Defined terms relating to the personal service or the maintenance of Commission and the Board, provided
trust and fiduciary activities exception from shareholder accounts; that if the bank elects to exclude such
the definition of ‘‘broker.’’
(C) Based on a percentage of assets compensation, the bank must exclude

(a) Defined terms for chiefly under management for any of the the compensation from both the
compensated test. For purposes of this following services— relationship compensation (if
part and section 3(a)(4)(B)(ii) of the Act (I) Providing transfer agent or sub- applicable) and total compensation for
(15 U.S.C. 78c(a)(4)(B)(ii)), the following transfer agent services for beneficial the account.
terms shall have the meaning provided: owners of investment company shares; (c) Advertising restrictions—
(1) In general. A bank complies with during that year, with the quotient account of a foreign branch of the bank
the advertising restriction in section expressed as a percentage; and is not held by or for the benefit of a U.S.
3(a)(4)(B)(ii)(II) of the Act (15 U.S.C. (2) Calculated within 60 days of the person if
78c(a)(4)(B)(ii)(II)) if advertisements by end of the year. (i) The principal mailing address
or on behalf of the bank do not (d) Revenues derived from maintained and used by the foreign
advertise— transactions conducted under other branch for the accountholder(s) and
(i) That the bank provides securities exceptions or exemptions. For purposes beneficiary(ies) of the account is not in
brokerage services for trust or fiduciary of calculating the yearly compensation the United States; or
accounts except as part of advertising percentage for a trust or fiduciary (ii) The records of the foreign branch
the bank’s broader trust or fiduciary account, a bank may at its election indicate that the accountholder(s) and
services; and exclude the compensation associated beneficiary(ies) of the account is not a
(ii) The securities brokerage services with any securities transaction U.S. person as defined in 17 CFR
provided by the bank to trust or conducted in accordance with the 230.902(k).
fiduciary accounts more prominently exceptions in section 3(a)(4)(B)(i) or (3) Non-shell foreign branch. Solely
than the other aspects of the trust or sections 3(a)(4)(B)(iii)–(xi) of the Act (15 for purposes of this paragraph (c), a non-
fiduciary services provided to such U.S.C. 78c(a)(4)(B)(i) or 78c(a)(4)(B)(iii)– shell foreign branch of a bank means a
accounts. (xi)) and the rules issued thereunder, branch of the bank
(2) Advertisement. For purposes of including any exemption related to such (i) That is located outside the United
this section, the term advertisement has sections jointly adopted by the States and provides banking services to
the same meaning as in § ll.760(g)(2). Commission and the Board, provided residents of the foreign jurisdiction in
that if the bank elects to exclude such which the branch is located; and
§ ll.722 Exemption allowing banks to (ii) For which the decisions relating to
compensation, the bank must exclude
calculate trust and fiduciary compensation day-to-day operations and business of
on a bank-wide basis. the compensation from both the
relationship compensation (if the branch are made at that branch and
(a) General. A bank is exempt from are not made by an office of the bank
applicable) and total compensation of
meeting the ‘‘chiefly compensated’’ located in the United States.
the bank.
condition in section 3(a)(4)(B)(ii)(I) of (d) Accounts transferred to a broker or
the Act (15 U.S.C. 78c(a)(4)(B)(ii)(I)) to § ll.723 Exemptions for special dealer or other unaffiliated entity.
the extent that it effects transactions in accounts, transferred accounts, foreign Notwithstanding section 3(a)(4)(B)(ii)(I)
securities for any account in a trustee or branches and a de minimis number of of the Act (15 U.S.C. 78c(a)(4)(B)(ii)(I))
fiduciary capacity within the scope of accounts. and § ll.721(a)(1) of this part, a bank
section 3(a)(4)(D) of the Act (15 U.S.C. (a) Short-term accounts. A bank may, operating under § ll.721(a)(1) shall
78c(a)(4)(D)) if: in determining its compliance with the not be considered a broker for purposes
(1) The bank meets the other chiefly compensated test in of section 3(a)(4) of the Act (15 U.S.C.
conditions for the exception from the § ll.721(a)(1) or § ll.722(a)(2), 78c(a)(4)) solely because a trust or
definition of the term ‘‘broker’’ under exclude any trust or fiduciary account fiduciary account does not meet the
sections 3(a)(4)(B)(ii) and 3(a)(4)(C) of that had been open for a period of less chiefly compensated standard in
the Act (15 U.S.C. 78c(a)(4)(B)(ii) and 15 than 3 months during the relevant year. § ll.721(a)(1) if, within 3 months of
U.S.C. 78c(a)(4)(C)), including the (b) Accounts acquired as part of a the end of the year in which the account
advertising restrictions in section business combination or asset fails to meet such standard, the bank
3(a)(4)(B)(ii)(II) of the Act (15 U.S.C. acquisition. For purposes of transfers the account or the securities
78c(a)(4)(B)(ii)(II) as implemented by determining compliance with the held by or on behalf of the account to
§ l.721(c); and chiefly compensated test in a broker or dealer registered under
(2) The aggregate relationship-total § ll.721(a)(1) or § ll.722(a)(2), any section 15 of the Act (15 U.S.C. 78o) or
compensation percentage for the bank’s trust or fiduciary account that a bank another entity that is not an affiliate of
trust and fiduciary business is at least acquired from another person as part of the bank and is not required to be
70 percent. a merger, consolidation, acquisition, registered as a broker or dealer.
(b) Aggregate relationship-total purchase of assets or similar transaction (e) De minimis exclusion. A bank
compensation percentage. For purposes may be excluded by the bank for 12 may, in determining its compliance
of this section, the aggregate months after the date the bank acquired with the chiefly compensated test in
relationship-total compensation the account from the other person. § ll.721(a)(1), exclude a trust or
percentage for a bank’s trust and (c) Non-shell foreign branches—(1) fiduciary account if:
fiduciary business shall be the mean of Exemption. For purposes of determining (1) The bank maintains records
the bank’s yearly bank-wide compliance with the chiefly demonstrating that the securities
compensation percentage for the compensated test in § ll.722(a)(2), a transactions conducted by or on behalf
immediately preceding year and the bank may exclude the trust or fiduciary of the account were undertaken by the
bank’s yearly bank-wide compensation accounts held at a non-shell foreign bank in the exercise of its trust or
percentage for the year immediately branch of the bank if the bank has fiduciary responsibilities with respect to
preceding that year. reasonable cause to believe that trust or the account;
(c) Yearly bank-wide compensation fiduciary accounts of the foreign branch (2) The total number of accounts
percentage. For purposes of this section, held by or for the benefit of a U.S. excluded by the bank under this
a bank’s yearly bank-wide compensation person as defined in 17 CFR 230.902(k) paragraph (d) does not exceed the lesser
percentage for a year shall be constitute less than 10 percent of the of—
(1) Equal to the relationship total number of trust or fiduciary (i) 1 percent of the total number of
compensation attributable to the bank’s accounts of the foreign branch. trust or fiduciary accounts held by the
trust and fiduciary business as a whole (2) Rules of construction. Solely for bank, provided that if the number so
during the year divided by the total purposes of this paragraph (c), a bank obtained is less than 1 the amount shall
compensation attributable to the bank’s will be deemed to have reasonable cause be rounded up to 1; or
trust and fiduciary business as a whole to believe that a trust or fiduciary (ii) 500; and
(3) The bank did not rely on this Investment Company Act of 1940 (15 The bank complies with the employee
paragraph (d) with respect to such U.S.C. 80a–5(a)(1)). compensation restrictions in paragraph
account during the immediately (e) Sales load has the same meaning (c) of this section and the other
preceding year. as in section 2(a)(35) of the Investment conditions in paragraph (d) of this
Company Act of 1940 (15 U.S.C. 80a– section;
§ ll.740 Defined terms relating to the 2(a)(35)).
sweep accounts exception from the
(2) Advertisements. Advertisements
definition of ‘‘broker.’’ by or on behalf of the bank do not:
§ ll.741 Exemption for banks effecting
For purposes of section 3(a)(4)(B)(v) of transactions in money market funds. (i) Advertise that the bank accepts
the Act (15 U.S.C. 78c(a)(4)(B)(v)), the orders for securities transactions for
(a) A bank is exempt from the
following terms shall have the meaning employee benefit plan accounts or
definition of the term ‘‘broker’’ under
provided: individual retirement accounts or
section 3(a)(4) of the Act (15 U.S.C.
(a) Deferred sales load has the same similar accounts, except as part of
78c(a)(4)) to the extent that it effects
meaning as in 17 CFR 270.6c–10. advertising the other custodial or
transactions on behalf of a customer in
(b) Money market fund means an safekeeping services the bank provides
securities issued by a money market
open-end company registered under the to these accounts; or
fund, provided that:
Investment Company Act of 1940 (15 (1) The bank either (ii) Advertise that such accounts are
U.S.C. 80a–1 et seq.) that is regulated as (A) Provides the customer, directly or securities brokerage accounts or that the
a money market fund pursuant to 17 indirectly, any other product or service, bank’s safekeeping and custody services
CFR 270.2a–7. the provision of which would not, in substitute for a securities brokerage
(c)(1) No-load, in the context of an and of itself, require the bank to register account; and
investment company or the securities as a broker or dealer under section 15(a) (3) Advertisements and sales
issued by an investment company, of the Act (15 U.S.C. 78o(a)); or literature for individual retirement or
means, for securities of the class or (B) Effects the transactions on behalf similar accounts. Advertisements and
series in which a bank effects of another bank as part of a program for sales literature issued by or on behalf of
transactions, that: the investment or reinvestment of the bank do not describe the securities
(i) That class or series is not subject deposit funds of, or collected by, the order-taking services provided by the
to a sales load or a deferred sales load; other bank; and bank to individual retirement accounts
and (2)(i) The class or series of securities or similar accounts more prominently
(ii) Total charges against net assets of is no-load; or than the other aspects of the custody or
that class or series of the investment (ii) If the class or series of securities safekeeping services provided by the
company’s securities for sales or sales is not no-load bank to these accounts.
promotion expenses, for personal (A) The bank or, if applicable, the (b) Accommodation trades for other
service, or for the maintenance of other bank described in paragraph custodial accounts. A bank is exempt
shareholder accounts do not exceed 0.25 (a)(1)(B) of this section provides the from the definition of the term ‘‘broker’’
of 1% of average net assets annually. customer, not later than at the time the under section 3(a)(4) of the Act (15
(2) For purposes of this definition, customer authorizes the securities U.S.C. 78c(a)(4)) to the extent that, as
charges for the following will not be transactions, a prospectus for the part of its customary banking activities,
considered charges against net assets of securities; and the bank accepts orders to effect
a class or series of an investment (B) The bank and, if applicable, the transactions in securities for an account
company’s securities for sales or sales other bank described in paragraph for which the bank acts as custodian
promotion expenses, for personal (a)(1)(B) of this section do not other than an employee benefit plan
service, or for the maintenance of characterize or refer to the class or series account or an individual retirement
shareholder accounts: of securities as no-load. account or similar account if:
(i) Providing transfer agent or sub- (b) Definitions. For purposes of this (1) Accommodation. The bank accepts
transfer agent services for beneficial section: orders to effect transactions in securities
owners of investment company shares; (1) Money market fund has the same for the account only as an
(ii) Aggregating and processing meaning as in § ll.740(b). accommodation to the customer;
purchase and redemption orders for (2) No-load has the same meaning as (2) Employee compensation
investment company shares; in § ll.740(c). restriction and additional conditions.
(iii) Providing beneficial owners with
§ ll.760 Exemption from definition of The bank complies with the employee
account statements showing their
‘‘broker’’ for banks accepting orders to compensation restrictions in paragraph
purchases, sales, and positions in the
effect transactions in securities from or on (c) of this section and the other
investment company;
(iv) Processing dividend payments for behalf of custody accounts. conditions in paragraph (d) of this
the investment company; (a) Employee benefit plan accounts section;
(v) Providing sub-accounting services and individual retirement accounts or (3) Bank fees. Any fee charged or
to the investment company for shares similar accounts. A bank is exempt from received by the bank for effecting a
held beneficially; the definition of the term ‘‘broker’’ securities transaction for the account
(vi) Forwarding communications from under section 3(a)(4) of the Act (15 does not vary based on:
the investment company to the U.S.C. 78c(a)(4)) to the extent that, as (i) Whether the bank accepted the
beneficial owners, including proxies, part of its customary banking activities, order for the transaction; or
shareholder reports, dividend and tax the bank accepts orders to effect (ii) The quantity or price of the
notices, and updated prospectuses; or transactions in securities for an securities to be bought or sold;
(vii) Receiving, tabulating, and employee benefit plan account or an (4) Advertisements. Advertisements
transmitting proxies executed by individual retirement account or similar by or on behalf of the bank do not state
beneficial owners of investment account for which the bank acts as a that the bank accepts orders for
company shares. custodian if: securities transactions for the account;
(d) Open-end company has the same (1) Employee compensation (5) Sales literature. Sales literature
meaning as in section 5(a)(1) of the restriction and additional conditions. issued by or on behalf of the bank:
(i) Does not state that the bank accepts sold by such account, provided that requirements of paragraphs (b), (c) and
orders for securities transactions for the nothing in this paragraph shall prohibit (d) of this section; and
account except as part of describing the a bank employee from receiving (3) The subcustodian bank does not
other custodial or safekeeping services compensation that would not be execute a cross-trade with or for the
the bank provides to the account; and considered incentive compensation account or net orders for securities for
(ii) Does not describe the securities under § ll.700(b)(1) as if a referral had the account, other than:
order-taking services provided to the been made by the bank employee, or (i) Crossing or netting orders for
account more prominently than the any compensation described in shares of open-end investment
other aspects of the custody or § ll.700(b)(2). companies not traded on an exchange,
safekeeping services provided by the (d) Other conditions. A bank may or
bank to the account; and accept orders for a securities transaction (ii) Crossing orders between or netting
(6) Investment advice and for an account for which the bank acts orders for accounts of the custodian
recommendations. The bank does not as a custodian under this section only bank.
provide investment advice or research if the bank: (g) Evasions. In considering whether a
concerning securities to the account, (1) Does not act in a trustee or bank meets the terms of this section,
make recommendations to the account fiduciary capacity (as defined in section both the form and substance of the
concerning securities or otherwise 3(a)(4)(D) of the Act (15 U.S.C. relevant account(s), transaction(s) and
solicit securities transactions from the 78c(a)(4)(D)) with respect to the activities (including advertising
account; provided, however, that account, other than as a directed trustee; activities) of the bank will be considered
nothing in this paragraph (b)(6) shall (2) Complies with section 3(a)(4)(C) of in order to prevent evasions of the
prevent a bank from: the Act (15 U.S.C. 78c(a)(4)(C)) in requirements of this section.
(i) Publishing, using or disseminating handling any order for a securities (h) Definitions. When used in this
advertisements and sales literature in transaction for the account; and section:
accordance with paragraphs (b)(4) and (3) Complies with section (1) Account for which the bank acts
(b)(5) of this section; and 3(a)(4)(B)(viii)(II) of the Act (15 U.S.C. as a custodian means an account that is:
(ii) Responding to customer inquiries 78c(a)(4)(B)(viii)(II)) regarding carrying (i) An employee benefit plan account
regarding the bank’s safekeeping and broker activities. for which the bank acts as a custodian;
custody services by providing: (e) Non-fiduciary administrators and (ii) An individual retirement account
(A) Advertisements or sales literature recordkeepers. A bank that acts as a or similar account for which the bank
consistent with the provisions of non-fiduciary and non-custodial acts as a custodian;
paragraphs (b)(4) and (b)(5) of this administrator or recordkeeper for an (iii) An account established by a
section describing the safekeeping, employee benefit plan account for written agreement between the bank and
custody and related services that the which another bank acts as custodian the customer that sets forth the terms
bank offers; may rely on the exemption provided in that will govern the fees payable to, and
(B) A prospectus prepared by a this section if: rights and obligations of, the bank
registered investment company, or sales (1) Both the custodian bank and the regarding the safekeeping or custody of
literature prepared by a registered administrator or recordkeeper bank securities; or
investment company or by the broker or comply with paragraphs (a), (c) and (d) (iv) An account for which the bank
dealer that is the principal underwriter of this section; and acts as a directed trustee.
of the registered investment company (2) The administrator or recordkeeper (2) Advertisement means any material
pertaining to the registered investment bank does not execute a cross-trade with that is published or used in any
company’s products; or for the employee benefit plan account electronic or other public media,
(C) Information based on the materials or net orders for securities for the including any Web site, newspaper,
described in paragraphs (b)(6)(ii)(A) and employee benefit plan account, other magazine or other periodical, radio,
(B) of this section; or than: television, telephone or tape recording,
(iii) Responding to inquiries regarding (i) Crossing or netting orders for videotape display, signs or billboards,
the bank’s safekeeping, custody or other shares of open-end investment motion pictures, or telephone
services, such as inquiries concerning companies not traded on an exchange, directories (other than routine listings).
the customer’s account or the or (3) Directed trustee means a trustee
availability of sweep or other services, (ii) Crossing orders between or netting that does not exercise investment
so long as the bank does not provide orders for accounts of the custodian discretion with respect to the account.
investment advice or research bank that contracted with the (4) Employee benefit plan account
concerning securities to the account or administrator or recordkeeper bank for means a pension plan, retirement plan,
make a recommendation to the account services. profit sharing plan, bonus plan, thrift
concerning securities. (f) Subcustodians. A bank that acts as savings plan, incentive plan, or other
(c) Employee compensation a subcustodian for an account for which similar plan, including, without
restriction. A bank may accept orders another bank acts as custodian may rely limitation, an employer-sponsored plan
pursuant to this section for a securities on the exemptions provided in this qualified under section 401(a) of the
transaction for an account described in section if: Internal Revenue Code (26 U.S.C.
paragraph (a) or (b) of this section only (1) For employee benefit plan 401(a)), a governmental or other plan
if no bank employee receives accounts and individual retirement described in section 457 of the Internal
compensation, including a fee paid accounts or similar accounts, both the Revenue Code (26 U.S.C. 457), a tax-
pursuant to a plan under 17 CFR custodian bank and the subcustodian deferred plan described in section
270.12b–1, from the bank, the executing bank meet the requirements of 403(b) of the Internal Revenue Code (26
broker or dealer, or any other person paragraphs (a), (c) and (d) of this U.S.C. 403(b)), a church plan,
that is based on whether a securities section; governmental, multiemployer or other
transaction is executed for the account (2) For other custodial accounts, both plan described in section 414(d), (e) or
or that is based on the quantity, price, the custodian bank and the (f) of the Internal Revenue Code (26
or identity of securities purchased or subcustodian bank meet the U.S.C. 414(d), (e) or (f)), an incentive
stock option plan described in section compliance with the requirements of 17 (c) Securities lending services means:
422 of the Internal Revenue Code (26 CFR 230.904; or (1) Selecting and negotiating with a
U.S.C. 422); a Voluntary Employee (3) Effects, by or on behalf of a borrower and executing, or directing the
Beneficiary Association Plan described registered broker or dealer, a resale of an execution of the loan with the borrower;
in section 501(c)(9) of the Internal eligible security after its initial sale with (2) Receiving, delivering, or directing
Revenue Code (26 U.S.C. 501(c)(9)), a a reasonable belief that the eligible the receipt or delivery of loaned
non-qualified deferred compensation security was initially sold outside of the securities;
plan (including a rabbi or secular trust), United States within the meaning of and (3) Receiving, delivering, or directing
a supplemental or mirror plan, and a in compliance with the requirements of the receipt or delivery of collateral;
supplemental unemployment benefit 17 CFR 230.903 to a purchaser who is (4) Providing mark-to-market,
plan. not in the United States, provided that corporate action, recordkeeping or other
(5) Individual retirement account or if the resale is made prior to the services incidental to the administration
similar account means an individual expiration of any applicable distribution of the securities lending transaction;
retirement account as defined in section compliance period specified in 17 CFR (5) Investing, or directing the
408 of the Internal Revenue Code (26 230.903(b)(2) or (b)(3), the resale is investment of, cash collateral; or
U.S.C. 408), Roth IRA as defined in made in compliance with the (6) Indemnifying the lender of
section 408A of the Internal Revenue requirements of 17 CFR 230.904. securities with respect to various
Code (26 U.S.C. 408A), health savings (b) Definitions. For purposes of this matters.
account as defined in section 223(d) of section:
the Internal Revenue Code (26 U.S.C. (1) Distributor has the same meaning § ll.775 Exemption from the definition
223(d)), Archer medical savings account as in 17 CFR 230.902(d). of ‘‘broker’’ for banks effecting certain
as defined in section 220(d) of the (2) Eligible security means a security excepted or exempted transactions in
Internal Revenue Code (26 U.S.C. that: investment company securities.
220(d)), Coverdell education savings (i) Is not being sold from the (a) A bank that meets the conditions
account as defined in section 530 of the inventory of the bank or an affiliate of for an exception or exemption from the
Internal Revenue Code (26 U.S.C. 530), the bank; and definition of the term ‘‘broker’’ except
or other similar account. (ii) Is not being underwritten by the for the condition in section 3(a)(4)(C)(i)
(6) Sales literature means any written bank or an affiliate of the bank on a of the Act (15 U.S.C. 78c(a)(4)(C)(i)), is
or electronic communication, other than firm-commitment basis, unless the bank exempt from such condition to the
an advertisement, that is generally acquired the security from an extent that it effects a transaction in a
distributed or made generally available unaffiliated distributor that did not covered security, if:
to customers of the bank or the public, purchase the security from the bank or (1) Any such security is neither traded
including circulars, form letters, an affiliate of the bank. on a national securities exchange nor
brochures, telemarketing scripts, (3) Purchaser means a person who through the facilities of a national
seminar texts, published articles, and purchases an eligible security and who securities association or an interdealer
press releases concerning the bank’s is not a U.S. person under 17 CFR quotation system;
products or services. 230.902(k). (2) The security is distributed by a
(7) Principal underwriter has the same registered broker or dealer, or the sales
§ ll.772 Exemption from the definition
meaning as in section 2(a)(29) of the of ‘‘broker’’ for banks engaging in charge is no more than the amount
Investment Company Act of 1940 (15 securities lending transactions. permissible for a security sold by a
U.S.C. 80a–2(a)(29)). registered broker or dealer pursuant to
(a) A bank is exempt from the
definition of the term ‘‘broker’’ under any applicable rules adopted pursuant
§ l.771 Exemption from the definition of
‘‘broker’’ for banks effecting transactions in section 3(a)(4) of the Act (15 U.S.C. to section 22(b)(1) of the Investment
securities issued pursuant to Regulation S. 78c(a)(4)), to the extent that, as an agent, Company Act of 1940 (15 U.S.C. 80a–
(a) A bank is exempt from the it engages in or effects securities lending 22(b)(1)) by a securities association
definition of the term ‘‘broker’’ under transactions, and any securities lending registered under section 15A of the Act
section 3(a)(4) of the Act (15 U.S.C. services in connection with such (15 U.S.C. 78o–3); and
78c(a)(4)), to the extent that, as agent, transactions, with or on behalf of a (3) Any such transaction is effected:
the bank: person the bank reasonably believes to (i) Through the National Securities
(1) Effects a sale in compliance with be: Clearing Corporation; or
the requirements of 17 CFR 230.903 of (1) A qualified investor as defined in (ii) Directly with a transfer agent or
an eligible security to a purchaser who section 3(a)(54)(A) of the Act (15 U.S.C. with an insurance company or separate
is not in the United States; 78c(a)(54)(A)); or account that is excluded from the
(2) Effects, by or on behalf of a person (2) Any employee benefit plan that definition of transfer agent in Section
who is not a U.S. person under 17 CFR owns and invests on a discretionary 3(a)(25) of the Act.
230.902(k), a resale of an eligible basis, not less than $ 25,000,000 in (b) Definitions. For purposes of this
security after its initial sale with a investments. section:
reasonable belief that the eligible (b) Securities lending transaction (1) Covered security means:
security was initially sold outside of the means a transaction in which the owner (i) Any security issued by an open-
United States within the meaning of and of a security lends the security end company, as defined by section
in compliance with the requirements of temporarily to another party pursuant to 5(a)(1) of the Investment Company Act
17 CFR 230.903 to a purchaser who is a written securities lending agreement (15 U.S.C. 80a5(a)(1)), that is registered
not in the United States or a registered under which the lender retains the under that Act; and
broker or dealer, provided that if the economic interests of an owner of such (ii) Any variable insurance contract
resale is made prior to the expiration of securities, and has the right to terminate funded by a separate account, as defined
any applicable distribution compliance the transaction and to recall the loaned by section 2(a)(37) of the Investment
period specified in 17 CFR 230.903(b)(2) securities on terms agreed by the Company Act (15 U.S.C. 80a–2(a)(37)),
or (b)(3), the resale is made in parties. that is registered under that Act.
(2) Interdealer quotation system has 78c(a)(4)(B)) and the rules and broker-dealers to the amended
the same meaning as in 17 CFR regulations thereunder; and definitions of ‘‘broker’’ and ‘‘dealer’’
240.15c2–11. (2) At the time the contract was under the Exchange Act. Finally, the
(3) Insurance company has the same created, any violation of the registration Commission is withdrawing three rules
meaning as in 15 U.S.C. 77b(a)(13). requirements of section 15(a) of the Act under the Exchange Act: A rule defining
by the bank did not result in any the term ‘‘bank’’ for purposes of the
§ ll.776 Exemption from the definition Exchange Act’s definitions of ‘‘broker’’
significant harm or financial loss or cost
of ‘‘broker’’ for banks effecting certain
excepted or exempted transactions in a to the person seeking to void the and ‘‘dealer,’’ due to judicial
company’s securities for its employee contract. invalidation; a time-limited exemption
benefit plans. for banks’ securities activities, due to
§ ll.781 Exemption from the definition the passage of time; and an exemption
(a) A bank that meets the conditions of ‘‘broker’’ for banks for a limited period
for an exception or exemption from the from the definitions of ‘‘broker’’ and
of time.
definition of the term ‘‘broker’’ except ‘‘dealer’’ for savings associations and
A bank is exempt from the definition savings banks, as the exemption no
for the condition in section 3(a)(4)(C)(i) of the term ‘‘broker’’ under section
of the Act (15 U.S.C. 78c(a)(4)(C)(i)), is longer necessary in light of subsequent
3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) legislation.
exempt from such condition to the until the first day of its first fiscal year
extent that it effects a transaction in the DATES: Effective Date: The final rules are
commencing after September 30, 2008.
securities of a company directly with a effective on November 2, 2007.
By order of the Board of Governors of the FOR FURTHER INFORMATION CONTACT:
transfer agent acting for the company
Federal Reserve System, September 24, 2007. Catherine McGuire, Chief Counsel,
that issued the security, if:
(1) No commission is charged with Jennifer J. Johnson, Linda Stamp Sundberg, Senior Special
respect to the transaction; Secretary of the Board. Counsel, Joshua Kans, Senior Special
(2) The transaction is conducted by Dated: September 24, 2007. Counsel, John Fahey, Branch Chief, or
the bank solely for the benefit of an By the Securities and Exchange Elizabeth K. MacDonald, Special
employee benefit plan account; Commission. Counsel, at (202) 551–5550, Office of
(3) Any such security is obtained Nancy M. Morris, Chief Counsel, Division of Market
directly from: Secretary. Regulation, Securities and Exchange
(i) The company; or [FR Doc. 07–4769 Filed 9–28–07; 8:45 am] Commission, 100 F Street, NE.,
(ii) An employee benefit plan of the Washington, DC 20549.
BILLING CODE 8011–01–P; 6210–01–P
company; and SUPPLEMENTARY INFORMATION: The
(4) Any such security is transferred Commission is adopting new Rules 3a5–
only to: SECURITIES AND EXCHANGE 2 [17 CFR 240.3a5–2] and 3a5–3 [17
(i) The company; or COMMISSION CFR 3a5–3], amending Rule 15a–6 [17
(ii) An employee benefit plan of the
CFR 240.15a–6], and withdrawing Rules
company. 17 CFR Part 240 3b–9 [17 CFR 240.3b–9], 15a–8 [17 CFR
(b) For purposes of this section, the
[Release No. 34–56502; File No. S7–23–06] 240.15a–8], 15a–9 [17 CFR 240.15a–9]
term employee benefit plan account has
and 15a–11 [17 CFR 15a–11] under the
the same meaning as in § ll.760(h)(4). RIN 3235–AJ77 Exchange Act.
§ ll.780 Exemption for banks from Exemptions for Banks Under Section Table of Contents
liability under section 29 of the Securities
Exchange Act of 1934.
3(a)(5) of the Securities Exchange Act I. Introduction and Background
of 1934 and Related Rules II. Adopted Rules and Rule Amendments
(a) No contract entered into before A. Regulation S Transactions with Non-
March 31, 2009, shall be void or AGENCY: Securities and Exchange U.S. Persons
considered voidable by reason of section Commission. B. Amendment to Exchange Act Rule 15a–
29(b) of the Act (15 U.S.C. 78cc(b)) ACTION: Final rule. 6
because any bank that is a party to the C. Securities Lending by Bank Dealers
contract violated the registration SUMMARY: The Securities and Exchange D. Withdrawal of Exchange Act Rule 3b–
Commission (‘‘Commission’’) is 9, Rule 15a–8, and Rule 15a–9
requirements of section 15(a) of the Act III. Administrative Law Matters
(15 U.S.C. 78o(a)), any other applicable adopting rules and rule amendments A. Paperwork Reduction Act Analysis
provision of the Act, or the rules and regarding exemptions from the B. Consideration of Benefits and Costs
regulations thereunder based solely on definitions of ‘‘broker’’ and ‘‘dealer’’ C. Consideration of Burden on
the bank’s status as a broker when the under the Securities Exchange Act of Competition, and on Promotion of
contract was created. 1934 (‘‘Exchange Act’’) for banks’ Efficiency, Competition, and Capital
(b) No contract shall be void or securities activities. In particular, the Formation
considered voidable by reason of section Commission is adopting a conditional D. Regulatory Flexibility Certification
IV. Statutory Authority
29(b) of the Act (15 U.S.C. 78cc(b)) exemption that will allow banks to
V. Text of Final Rules and Rule Amendments
because any bank that is a party to the effect riskless principal transactions
contract violated the registration with non-U.S. persons pursuant to I. Introduction and Background
requirements of section 15(a) of the Act Regulation S under the Securities Act of The rules and rule amendments
(15 U.S.C. 78o(a)) or the rules and 1933 (‘‘Securities Act’’). The discussed below complement
regulations thereunder based solely on Commission also is amending and Regulation R, which we are adopting
the bank’s status as a broker when the redesignating an existing exemption jointly with the Board of Governors of
contract was created, if: from the definition of ‘‘dealer’’ for the Federal Reserve System (‘‘Board’’).1
(1) At the time the contract was banks’ securities lending activities as a These rules and rule amendments in
created, the bank acted in good faith and conduit lender. In addition, the large part reflect changes that the
had reasonable policies and procedures Commission is conforming a rule that
in place to comply with section grants a limited exemption from U.S. 1 Exchange Act Release No. 56501 (Sept. 24,
3(a)(4)(B) of the Act (15 U.S.C. broker-dealer registration for foreign 2007).

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Wednesday,

22 Commenters generally did not request that the

35 15 U.S.C. 78c(a)(4)(B)(i). (‘‘BISA’’) Letter, Wisconsin Bankers Ass’n (‘‘WBA’’)

exceptions in the GLBA. required to be registered or approved, in accordance Letter.

on whether the referral results in a only one of multiple factors or variables

72 See, e.g., ABA Letter, Clearing House Ass’n

operating units. The Agencies believe providing an exemption for referrals

Letter, ICBA Letter, Roundtable Letter, Securities

Rule 722(b) and (c).

mean material that is published or used in any

literature’’ to mean any written or electronic

provisions, and the Agencies have made a

the account. 260 See Rule 760(d)(2). 78o(c)(3)(A).

for these transactions. requirements of 5 U.S.C. Section 801 if an agency

337 17 CFR 240.3a4–2 through 3a4–6 and 17 CFR

certain exceptions and exemptions to VIII.A.3.d.

following hourly labor costs: approximately 60 comments, primarily C. Consideration of Burden on

(C) Based on a percentage of assets compensation, the bank must exclude

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