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Federal Reserve Bank
of Dallas

DALLAS, TEXAS
75265-5906

July 19, 2001

Notice 01-54

TO: The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District

SUBJECT
Letter to Securities and Exchange Commission Concerning
Rules on Broker and Dealer Exemptions
DETAILS
The Board of Governors of the Federal Reserve System joined the Office of the
Comptroller of the Currency and the Federal Deposit Insurance Corporation in a letter to the
Securities and Exchange Commission (SEC) concerning the SEC’s interim final rules on broker
and dealer exemptions.
ATTACHMENTS
Attached are the Board’s press release and the agencies’ comment letter. The appendix to the letter, which contains comments regarding the SEC’s interim final rules, can be located
at http://www.federalreserve.gov/boarddocs/press/general/2001/20010702/.
MORE INFORMATION
For more information, please contact Jane Anne Schmoker, Legal Department, at
(214) 922-5101. For additional copies of this Bank’s notice, contact the Public Affairs
Department at (214) 922-5254 or access District Notices on our web site at
http://www.dallasfed.org/banking/notices/index.html.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

Federal Reserve Release
For immediate release

July 2, 2001

The Federal Reserve Board is joining the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation in a letter to the Securities and Exchange Commission
(SEC) concerning the SEC’s interim final rules to implement provisions of the Gramm-LeachBliley Act that provide specific exemptions from the broker and dealer definitions that permit
banks to continue providing trust and fiduciary, and other specified traditional banking products
and services.
The agencies’ comment letter is attached.

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
FEDERAL DEPOSIT INSURANCE CORPORATION
OFFICE OF THE COMPTROLLER OF THE CURRENCY

June 29, 2001
Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609
Re:

Interim Final Rules for Banks, Savings Associations, and Savings Banks
Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (the
“Exchange Act”), Release File No. S7-12-01 (“Interim Final Rules")

Dear Mr. Katz:
The Federal Reserve Board, Federal Deposit Insurance Corporation, and the Office of the
Comptroller of the Currency (“Banking Agencies”) appreciate this opportunity to provide
comments on the Interim Final Rules issued by the Securities and Exchange Commission
(the “Commission” or “SEC”). In brief, we have very serious concerns about the validity
and content of a number of provisions of the Interim Final Rules, as well as the process
the Commission employed to issue them.
The Interim Final Rules implement provisions of the Gramm-Leach-Bliley Act
(“GLB Act”) that eliminate the blanket exemptions for banks from the definitions of
“broker” and “dealer” under the Exchange Act, and replace those exemptions with more
specific activity-focused exemptions. Congress designed the new exemptions to permit
banks to continue providing trust, fiduciary, custodial, and other traditional banking
services to meet customers’ financial needs.
The Interim Final Rules, however, are, in a number of critical respects, contrary to the
express statutory language in the exemptions and congressional intent. The Interim Final
Rules also create an extremely burdensome regime of overly complex, costly and
unworkable requirements that effectively negate the statutory exemptions and the
congressional intent underlying those exemptions. By regulating and restricting banking
operations, the Rules adopt an approach that is fundamentally inconsistent with the
principles of functional regulation that underlie the GLB Act.

As we discuss in more detail in the attached Appendix, the Interim Final Rules are
premised on misunderstandings of how certain activities are conducted by banks. As a
result, the Rules will significantly disrupt and may force discontinuation of major lines of
business for banks and longstanding relationships with their customers. Because of the
complexity and numerous non-statutory conditions imposed by the Rules, the Rules will
also impose substantial additional costs on banks. As a result, customer costs may
increase. These consequences of the Rules are wholly unwarranted given longstanding
customer protections provided under federal and state banking and fiduciary laws, and
congressional recognition that banks have provided these services “without any problem
for years.”1
The Interim Final Rules also were issued without the benefit of the normal notice and
public comment process. This is a particular concern because our agencies advised
Commission staff of the significant practical operational implications of potential
approaches to implementing the revised exemptions. We specifically urged that
understanding and resolution of those issues could be greatly aided by an open process of
public comment on a proposal. Given the magnitude of the impact of the Rules on the
traditional practices of banks and on bank customers, we believe that the process used by
the Commission of publishing Interim Final Rules without first receiving the benefit of
public comment is fundamentally unfair and inconsistent with sound administrative
practice.
Moreover, use of Interim Final Rules with an immediate effective date, coupled with
exemptions that function only to temporarily suspend the Rules’ effectiveness, places
banks in an untenable position. Although the Rules require substantial modification,
banks must take steps now to comply with them by the effective date, since they have no
way of knowing how or when the Rules may be changed. We believe it is wrong to
require banks to establish procedures to comply with the Interim Final Rules before the
Commission has reviewed public comments and addressed the significant concerns raised
by the Banking Agencies and the banking industry.
Given the critical flaws in the Interim Final Rules and their impact, we strongly urge the
Commission to take steps immediately to formally treat the Interim Final Rules as
proposed rules and take the steps necessary to address the concerns outlined in this letter,
the attached Appendix and public comments. In addition, because of the fundamental
unfairness of requiring banks to conform to costly requirements that need to be revised
substantially, we believe that the Commission should immediately further extend the
effective date of the GLB Act’s push-out provisions until after the proposed rules are
issued as final rules. We also believe that the Commission should provide banks at least
a one-year transition period after the revised rules become final to bring their operations
into compliance with those new rules.
Our major concerns with the Interim Final Rules are summarized below, and are set forth
in detail in the attached Appendix.
1

S. Rep. No. 106-44 at 10 (1999).

2

I. Background
The GLB Act provides specific exemptions from the broker and dealer definitions that
permit banks to continue providing trust and fiduciary, custody and safekeeping, assetbacked securities, and other specified traditional banking products and services. In
enacting these exemptions, Congress recognized that banks have the expertise and
customer relationships that make them uniquely qualified to provide these products and
services. Congress also recognized that banks have provided these products and services
effectively, under applicable regulatory requirements, for years. As noted in the
Conference Report, the GLB Act provides specific exemptions for banking activities
from broker-dealer requirements to “facilitate certain activities in which banks have
traditionally engaged.” Congress also expressed its expectation, “that the Commission
will not disturb traditional bank trust activities."2
II.

Trust and Fiduciary Activities

The Interim Final Rules are contrary to the GLB Act’s exemption for trust and fiduciary
activities because they impose unworkable requirements not found in the statute that
effectively negate the availability of the exemption for many banks. This result also is
directly contrary to congressional intent that traditional bank trust and fiduciary activities
not be disturbed by the Commission’s rules. 3 Trust and fiduciary products and services
have long been offered to bank customers subject to comprehensive legal requirements
that offer extensive customer protections. Bank examiners regularly examine these
activities for compliance with trust and fiduciary principles. In light of the extensive
regulation of bank trust and fiduciary activities, Congress adopted the exemption to
permit banks to continue providing these traditional customer services.4
The Interim Final Rules also fail to recognize the fundamental reality of the trust
business. State laws typically limit which corporations may serve as trustees. Banks and
trust companies, but not broker-dealers, generally are authorized to act as trustees subject
to a comprehensive regulatory scheme under state and Federal law. If the Interim Final
Rules force trust activities out of banks, customers will have fragmented relationships
with their chosen trustee and a third-party broker-dealer, and be burdened with additional
costs that are unnecessary in light of the strong protections already afforded by the
fiduciary requirements imposed on trustees.
2
3

See H.R. Conf. Rep. No. 106-434 at 163, 164 (1999).
Id. See also S. Rep. No. 106-44 at 10 (1999).

4

The Senate Report states “Banks have historically provided securities services largely through their trust
departments, or as an accommodation to certain customers. Banks are uniquely qualified to provide these
services and have done so without any problems for years. Banks provided trust services under the strict
mandates of State trust and fiduciary law without problems long before Glass-Steagall was enacted; there is
no compelling policy reason for changing Federal regulation of bank trust departments, solely because
Glass-Steagall is being modified.” S. Rep. No. 106-44 at 10 (1999).

3

A.

Chiefly Compensated

Although Congress wanted to preserve traditional trust and fiduciary activities of banks,
Congress did not want banks to circumvent the securities laws by operating a full-scale
brokerage business through their trust departments. Congress addressed this concern
through the exemption for trust and fiduciary activities by requiring a bank to be “chiefly
compensated” for its trustee or fiduciary related transactions on the basis of nonbrokerage related fees and by prohibiting the bank from publicly soliciting brokerage
business. At the same time, Congress concluded that the trust and fiduciary laws and the
oversight by Federal and state banking agencies provide sufficient consumer protection
for banks that operate within the statutory standards. The Interim Final Rules, on the
other hand, attempt to address the Commission’s concern by unduly narrowing the limits
on compensation a bank can receive from its trust and fiduciary accounts.
The language of the GLB Act and its legislative history suggest that the chiefly
compensated limit should be applied on an aggregate basis to the bank’s trust and
fiduciary activities, and not on an account-by-account basis, to achieve its purpose.5 The
Interim Final Rules, however, require banks to conduct an account-by-account review,
and establish for each individual trust or fiduciary account, that the bank is “chiefly
compensated” by specified fees. This approach is inappropriate and, in many cases,
unworkable as applied to banks’ multi-faceted trust and fiduciary services and frequent
multi-party trust and fiduciary relationships. Moreover, the Rules create a unique
definition of compensation for purposes of the "chiefly compensated" computation that
excludes legitimate, long-recognized forms of fiduciary compensation. These exclusions
are nowhere found in the statute and will unnecessarily force banks to restructure existing
customer relationships at great costs to both themselves and their trust and fiduciary
customers.
B.

Trustee Exemption

The GLB Act expressly provides that the exemption is available when banks effect
transactions in a “trustee” capacity provided the bank complies with certain requirements.
Despite the plain language of the GLB Act, the Interim Final Rules create ambiguity
concerning the scope of this important term by suggesting that some parties treated as
trustees under Federal and state law may be excluded from the definition of "trustees" for
purposes of this exemption. This provision, too, is contrary to plain language and the
clear intent of Congress to preserve traditional bank trust activities.

5

See H.R. Rep. No. 106-74, pt. 3, at 164 (1999) (A "bank must be chiefly compensated for its trust and
fiduciary activities" on the basis of the fees specified by the Act.) (emphasis added).

4

C.

Investment Advice for a Fee

The Interim Final Rules also are contrary to the statutory language in the GLB Act that
defines investment advice for a fee as a fiduciary activity. The plain language of the
GLB Act establishes that banks providing investment advice for a fee fall within the trust
and fiduciary exemption. These activities are explicitly defined as fiduciary under
Federal banking regulations.6 The Interim Final Rules here again devise a new, more
constricted, definition not found in the statute. Under the Interim Final Rules, an
investment advisor is engaged in fiduciary activities only if it provides continuous and
regular investment advice to the customer’s account and meets other additional
requirements. This result also is contrary the literal words of the GLB Act and to
congressional intent to preserve this longstanding fiduciary activity.
III.

Custody and Safekeeping Activities

The Interim Final Rules also are contrary to the statute and legislative history of the GLB
Act’s exemption for custody and safekeeping activities because they exclude order-taking
activities that are part of customary banking activities. Bank custodians have a longstanding history of accommodating customers by accepting and transferring orders for
securities to a registered broker-dealer. The GLB Act includes an exception for
safekeeping and custody services to preserve the traditional role of banks in providing
customary custodial services for their customers, which customarily included ordertaking. In enacting this exemption, Congress expressed clear intent that traditional
custodial, safekeeping and clearing activities, including custodial IRA relationships, be
allowed to remain within the bank.7 Contrary to this statutory scheme and congressional
intent, the Interim Final Rules do not include customary custodial order-taking services
within the exemption.
The Interim Final Rules create two special exemptions that would not be needed if the
Commission recognized that the Act permits banks to continue offering order-taking
services to customers. One exemption permits bank custodians to continue providing
customary order taking services if they do not charge any fees for the service. Neither
the statute nor its legislative history provides any support for prohibiting banks from
charging fees for their customary custody and safekeeping activities. This restriction will
cause banks either to stop offering this service, or to move custodial activities outside the
bank, contrary to the statute and congressional intent.8

6

12 C.F.R. § 9.2 (e).

7

The Senate Report states “the Committee believes that bank custodial, safekeeping, and clearing activities
with respect to IRAs do not need to be pushed-out into a Commission registered broker-dealer.” S. Rep.
No. 106-44, at 10 (1999).
8

The other exemption applies only to small banks and includes numerous burdensome restrictions.

5

IV.

Networking

The Interim Final Rules are contrary to the statutory language of the GLB Act’s
exemption for networking because they create new limits on referral fees that are not
found in the statute. The GLB Act specifically permits a bank employee to receive a
nominal one-time cash fee of a fixed dollar amount for referring customers to the brokerdealer. The Interim Final Rules impose completely new requirements on the amount that
may be paid for these referrals and the manner in which they may be paid that will
effectively negate for many banks the availability of the specific statutory provision
allowing for referral fees.
V.

Cure Mechanism

The Interim Final Rules fail to address their effect on banks that discover some securities
transactions do not comply with an exemption due to inadvertent errors or unforeseen
circumstances. Banks that take reasonable steps and attempt in good faith to comply with
the Rules may suffer unduly harsh and inappropriate consequences from minor
infractions. For example, because some calculations required under the Rules are
completed at year-end, a bank may not learn until then that a minor inadvertent error
caused it to be out of compliance during the entire past year. Or, a single transaction that
fails to meet a technical requirement under the Rules may cause a bank to become an
unregistered broker-dealer, subject to considerable liabilities under the Exchange Act.
The Banking Agencies believe it is critically important for the Commission to clarify that
a bank will not be considered a broker-dealer if it has policies and procedures reasonably
designed to comply with exemptions and attempts in good faith to conform to the
exceptions. The Commission should offer the bank a reasonable period of time to bring
its operations into compliance in these circumstances.
VI.

Recordkeeping Requirements

Section 204 of the GLB Act explicitly directed the Banking Agencies to establish
recordkeeping requirements for banks relying on the broker-dealer exemptions. Even so,
the Commission solicits comments on whether it should issue these recordkeeping
requirements. This proposal is contrary to the plain language of § 204, which specifically
grants the Banking Agencies authority to establish these recordkeeping requirements.
VII.

Other Areas of Concern

The Interim Final Rules also raise concerns in several other significant areas that are
addressed in more detail in the attached Appendix. These areas include the exemptions
for affiliate transactions, sweep accounts, asset-backed securities activities, and
supervision of dual employees. Further, the failure of the Interim Final Rules to comply
with the language and intent of the GLB Act raises serious questions about how the
Commission may later interpret exemptions that are not addressed by the Rules. We
believe it is imperative that the Interim Final Rules comport with the language and intent

6

of the GLB Act provisions they address, so that banks know they may rely on the
language and intent of other GLB Act provisions in conducting their activities.
VIII. Conclusion
In summary, we believe the Interim Final Rules are contrary to the plain language of the
GLB Act and its legislative history in various critical respects. By imposing
unnecessarily burdensome, costly and unworkable requirements, the Interim Final Rules
effectively eliminate exemptions established by statute, disrupt existing customer
relationships and force traditional banking activities out of banks, a result that Congress
specifically sought to avoid. Given the magnitude of the issues presented and the extent
of the impact of the Rules on major activities in the banking industry, we urge the
Commission to take the steps described at the outset of this letter in order to faithfully
implement the statute in accordance with its terms and legislative intent. Our agencies
stand ready to provide the Commission with information concerning the traditional and
customary activities of banks that Congress sought to protect and to work with the
Commission and its staff to address the concerns expressed in this letter in order to
develop rules that are consistent with both the spirit and language of the GLB Act.
Sincerely,

_____________/s/________________
Alan Greenspan, Chairman
Board of Governors of the
Federal Reserve System

_____________/s/________________
Donna Tanoue, Chairman
Federal Deposit Insurance Corporation

_____________/s/________________
John D. Hawke, Jr.
Comptroller of the Currency

7


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102