CUNA Regulatory Comment Call
July 2, 2004
Proposal Grants Credit Unions Some Broker-Dealer Exemptions Given Banks
(A Major Proposal)
The Securities and Exchange Commission (SEC) has issued a proposed rule ("Regulation B") that would grant credit unions some of the exemptions from the broker-dealer registration requirements that banks currently receive and provide new exemptions for banks. These exceptions are provided under the Securities Exchange Act of 1934 "Exchange Act," as amended by the Gramm-Leach-Bliley Act ("GLBA"). At the urging of CUNA and other trade associations, the proposal grants credit unions three exceptions, whereby they could conduct certain securities-related activities without registering as a broker or dealer. These exceptions and how the SEC proposes to treat credit unions under Regulation B are described below:
- First, the proposal would allow credit unions to enter into the same networking arrangements with broker-dealers that banks can. Currently, credit unions may enter into networking arrangements with broker-dealers under the conditions set forth in an SEC opinion letter ("Chubb letter"). However, banks can network with broker-dealers under the terms of the Exchange Act bank exception for third-party brokerage arrangements. This proposal extends that Exchange Act exception to include credit unions, and would thereby supercede the Chubb letter.
- Second, the proposal would permit credit unions to sweep deposit accounts into no-load money market funds under the same terms as banks can under the bank exception in the Exchange Act. The SEC states that the statutory exception is limited and should place financial institutions offering similar services on a more level playing field.
- Third, the proposal permits credit unions to buy and sell securities for investment purposes for themselves, or for accounts for which they act as trustee or fiduciary under the terms of the investments transaction exception in the Exchange Act.
- The proposal would permit all credit unions, including federal- and state-chartered credit unions, as well as federally insured and privately insured credit unions to utilize the exemptions that are described above. Although the proposal would grant credit unions these three exceptions, it would not automatically give them any associated exemptions given to banks in the future. Moreover, the proposal does not grant credit unions all the exceptions that banks currently have. The SEC requests comments on whether all credit unions should be included in the current proposal, and asks for information on the regulatory oversight given all types of credit unions
- The proposal does not extend to credit unions an exemption to conduct safekeeping and custody activities because the SEC claims it did not find that credit unions engage in activities included in the safekeeping and custody exemption. Under this exception, a bank does not have to register as a broker, if it engages in certain specified types of safekeeping and custody services with respect to securities on behalf of its customers. The SEC invites comment on whether credit unions engage in these types of activities and what legal authority they use to do so. CUNA asked in its comment letter that credit unions be given this authority.
- SEC has issued Regulation B and it amends a previous proposal ("Interim Rules") that provided guidance on the bank exceptions for banks and thrifts under the Exchange Act.
- Comments are due to CUNA by August 13, 2004 and comments on the proposed rule are due to the SEC by September 1, 2004
Please feel free to fax your responses to CUNA at 202-638-7052; or e-mail them to Associate General Counsel Mary Dunn at firstname.lastname@example.org and to Assistant General Counsel Michelle Profit at email@example.com; or mail them to Mary and Michelle c/o CUNAs Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. You may also access the proposed rule at http://www.sec.gov/rules/proposed/34-49879.htm
The Exchange Act provides that a bank is not considered a broker to the extent it meets the requirements of eleven specific exceptions. Each of these exceptions permits a bank to act as an agent with respect to specified securities products or in transactions that meet specific statutory conditions. In particular, the Exchange Act provides conditional exceptions from the definition of broker for banks that engage in third-party brokerage arrangements; trust and fiduciary activities; permissible securities transactions; certain stock purchase plans; sweep accounts; affiliate transactions; private securities offerings; safekeeping and custody activities; identified banking products; municipal securities; and de minimis transactions. A bank that conducts transactions in securities as agent outside the scope of these exceptions is required to register as a broker in accordance with the Exchange Act.
The proposed Regulation B includes rules designed to define and clarify a number of the statutory exceptions from the definition of broker. In addition, the proposed regulation B would extend some of these bank exceptions to credit unions and would grant new exemptions to banks. According to the Exchange Act, credit unions are not banks, and therefore, they cannot utilize the bank exceptions from the definition of broker and dealer, without specific regulatory approval to do so from the SEC.
The specific exemptions that the SEC has granted to credit unions are described in detail below, and the exemptions withheld from credit unions are summarized.
ThirdParty Brokerage/ Networking Arrangements
The proposal would allow credit unions to enter into the same third-party brokerage, otherwise known as networking arrangements, with broker-dealers that banks can. The networking exception in the Exchange Act allows banks to partner with broker-dealers in offering their customers a wide range of financial services, including securities brokerage. Specifically, the exception provides that a bank will not be considered a broker if, under certain conditions, the bank enters into a contractual or other written arrangement with a registered broker-dealer under which the broker- dealer offers brokerage services to bank customers ("networking arrangement"). If the banks networking activities meet the conditions of the exception, it may, without itself being registered as a broker-dealer, receive compensation related to brokerage transactions the broker- dealer conducts as a result of the networking arrangements. The exception also allows unregistered bank employees to engage in limited securities-related activities and to receive incentive compensation in the form of a "nominal one-time cash fee of a fixed dollar amount" for referring bank customers to the broker-dealer.
This proposal would extend that Exchange Act exception to credit unions, and would thereby supercede the Chubb letter. Currently, credit unions may enter into networking arrangements with broker-dealers under the conditions set forth in the Chubb letter. According to the SEC, this uniformity should simplify compliance for credit unions as well as for the broker-dealers that enter into networking arrangements with different types of retail depository institutions.
At the same time the SEC extends the networking exception to credit unions, it is revising the exception. The revisions to the networking exception that would affect both credit unions and banks are described below.
Proposed Amendments to Definition of "Nominal One-Time Cash Fee of a Fixed Dollar Amount
The proposal would amend the definition of "nominal one-time cash fee of a fixed dollar amount" to clarify the statutory definition. The SEC proposes to amend the definition of a "nominal one-time cash fee of a fixed dollar amount" to mean that a referral payment must have a value that does not exceed the greater of three alternative measures: the employees base hourly rate of pay, a dollar amount equal to $15 in 1999 plus an adjustment for inflation, or $25. The fee could be paid to a bank employee no more than one time per customer referred by that employee. If the referral is not paid entirely in cash, the value of the non-cash payment must be readily ascertainable to the bank and the employee at the time of the referral. Also, any non-cash portion of the payment would have to have a value such that the value of the entire payment is nominal, and the non-cash portion would have to be paid under an incentive program that covers a broad range of products and that is designed primarily to reward activities unrelated to securities. Finally, the fee would have to be the same for any securities referral made by that particular employee, with a flat value that does not vary based on factors such as the financial status of a customer, the identity of the broker-dealer to which the customer is referred, the number of referrals the employee makes, or whether the customer expresses an interest in a particular type of securities product.
The Meaning of "One-Time"
The SEC would clarify the definition of "one-time nominal cash fee of a fixed dollar amount" and interpretation of the term "one-time" to clarify that a referral fee may be paid to a bank employee no more than one time per customer referred by that employee. The SEC states that this is grounded in the statute.
The SEC prohibits bonuses that are based in part, directly or indirectly, on a referral for which the employee has already received a referral fee. The SEC allows other types of bonuses that do not give unregistered bank employees a promotional interest in securities brokerage, such as one based on the overall profitability of a bank. The SEC bases this distinction on the fact that the former violates the "one-time" requirement.
Meaning of Cash Fee
The SEC amends the definition of "nominal one-time cash fee of a fixed dollar amount". The proposal would allow the payment of referral fees or portions of referral fees other than in cash to the extent that (1) such payments are in units of value with a readily ascertainable cash equivalent; (2) the total value of the referral fee meets the nominal value conditions of the proposed amended definition; and (3) the payment is made under an incentive program that covers a broad range of products and that is designed primarily to reward activities unrelated to securities. The referral fee for points must also meet other conditions of the networking exception.
Meaning of "Fixed Dollar Amount"
The SEC also proposes to amend the definition of "nominal one-time cash fee of a fixed dollar amount" to specify that a "fee of a fixed dollar amount" means a flat fee. The proposed definition would state that fees paid for brokerage referrals made by a particular employee must have a set value and may not vary based on factors such as the financial status of a customer the employee refers, the identity of the broker-dealer to which the customer is referred, the number of referrals the employee makes, or whether the customer expresses an interest in a particular type of securities product.
The SEC proposes to simplify the definition of referral so that it would mean the action taken by a bank employee to direct a customer of the bank to a registered broker or dealer for the purchase or sale of securities for the customers account. Also, the amendment specifies that a bank may pay a fee for a brokerage referral only to the employee who made the referral and not to other employees, such as a branch manager or other supervisor.
Proposed New Definition of "Contingent on Whether the Referral results in a Transaction"
The Interim Rule stated that the payment of a "nominal one-time cash fee of a fixed dollar amount" for a referral cannot be related to the following factors: whether the referral results in a securities transaction, the value of any securities transaction, or a customers financial status. The SEC proposes to define the term "contingent on whether the referral results in transaction" to mean, with two exceptions, contingent on any factor related to whether the referral results in a transaction, including whether it is likely to result in a transaction, whether it results in a particular type of transaction, or whether it results in multiple transactions. In response to comments on the Interim Rules, the referral fee could be contingent on whether a customer contacts or keeps an appointment with a broker-dealer as a result of a referral. Second referral fees may be contingent on whether a bank customer has assets meeting any minimum requirements that the registered broker-dealer, or the bank, may have established generally for referrals for securities brokerage accounts.
The Commission staff also has received informal requests for guidance on whether particular activities are clerical or ministerial, and thus can be performed by unregistered bank employees within the scope of the networking exception. Clerical and ministerial functions are those such as scheduling appointments with a broker-dealer that do not require specific qualifications or licensing when performed by an employee of a broker-dealer. These functions do not require familiarity with the securities industry, or the exercise of judgment concerning securities.
Sweep Account Exception
The SEC has extended to credit unions the sweep account exception, as requested in CUNAs comment letter on the subject. Generally, any person that induces transactions in securities for the account of others by selling securities products or services together with other, non-securities products or services sold by that person would be a broker required to register with the SEC. The sweep accounts exception, however, would permit a credit union to participate in mixed product arrangements in which the credit union offers a mutual fund "sweep" service linked to deposit accounts under certain conditions. Specifically, this section exempts a credit union from the definition of "broker" to the extent it conducts transactions as part of a program for the investment or re-investment of deposit funds into any no-load, open-end management investment company registered under the Investment Company Act that holds itself out as a money market fund.
To provide guidance to banks seeking to rely on the sweep accounts exception, the Interim Rules defined the term "money market fund" and "no-load". The proposal would retain the definition of "no-load" substantially as in the Interim Rules. The SEC also proposes to provide a new exemption for banks conducting transactions for certain customers in money market funds, including, with certain disclosures, money market funds that would not qualify as "no-load" funds. The SEC proposal requires, consistent with its rules and NASD rules that a bank may not use the sweep accounts exception, which covers only transactions in no-load money market fund securities, to conduct transactions in securities that are subject to more than 25 basis points in charges against net assets for distribution. The SEC also defines an acceptable sweeps "program" as one that makes regular, automatic sweeps. They also consider a program to refer to a banks investment and reinvestment of deposit balances held at the bank by the banks own customers.
Investment Transaction Exception
The proposal would extend to credit unions an exemption from the definition of dealer to permit credit unions to buy and sell securities for investment purposes for themselves, or for accounts for which they act as trustee or fiduciary under the terms of the bank exception in the Exchange Act. The "dealer" exception for trustee and fiduciary transactions only applies when the bank buys or sells securities for investment purposes for the bank, or for accounts for which the bank acts as a trustee or fiduciary. This exception is limited to the portfolio trading of the bank and the accounts for which it makes investment decisions.
The Exchange Act permits a bank, under certain conditions, to conduct transactions in a trustee or fiduciary capacity without registering as a broker. This exception was not extended to credit unions. However, the proposal refines this exception and it is summarized below. Under this exception, a bank must affect such transactions in its trust department, or a similar department. The bank also must be "chiefly compensated" for such transactions, consistent with fiduciary principles and standards, on the basis of: (1) an administration or annual fee, (2) a percentage of assets under management, (3) a flat or capped per order processing fee that does not exceed the cost the bank incurs in executing such securities transactions, or, (4) any combination of such fees. This term is not defined in the GLBA.
By its terms, the "chiefly compensated" condition divides a banks compensation into qualifying (traditional fees received by trustees and fiduciaries) and non-qualifying types (traditional fees received by broker-dealers), and limits the amount of non-qualifying compensation a bank may receive and still rely on the exception. In other words, the Exchange Act contemplates that a bank relying on the trust and fiduciary activities exception will need to limit its non-qualifying compensation and will need to have a mechanism in place to determine whether it has succeeded in doing so.
To determine compliance with the "chiefly compensated" condition, current Exchange Act Rules require banks to compare their "relationship compensation" to their "sales compensation" annually, on an account-by-account basis. Unrelated compensation is not included in the "chiefly compensated" calculation because it is not relevant to whether a bank is acting as a broker. The Interim Rules also provided two exemptions from the general requirements of the "chiefly compensated" condition. First, the Exchange Act exempts banks that receive less than ten percent sales compensation from making calculations on an account-by-account basis. Second, the Exchange Act exempts banks from the definition of broker when they act in the narrow role of indenture trustees investing in no-load money market funds.
In response to comments, the SEC is proposing a "line of business" alternative to the account- by-account methodology. Moreover, the Commission is proposing to exempt existing living, testamentary, and charitable trust account from the chiefly compensated calculation. Finally the Commission is proposing to establish a multi-tiered "safe harbor" for banks determining compliance on an account-by-account basis that find themselves out of compliance with respect to particular accounts. The proposed safe harbors would provide banks with legal certainty during those periods in which there were not compliant and would provide them opportunities to come into compliance with the "chiefly compensated" condition.
In response to comments, the SEC proposes to adopt a "line-of-business" approach in the proposal. The proposal would define a "line of business" as an identifiable department, unit, or division of a bank organized and operated on an ongoing basis for business reasons with similar types of accounts and for which the bank acts in a similar type of fiduciary capacity. Under the proposal, a bank could use an alternative calculation for "chiefly compensated" during one year if it could demonstrate that during the preceding year its ratio of "sales compensation" to "relationship compensation" was no more than one to nine either on a line-of-business or bank-wide basis (i.e., "one to nine ratio"). A bank could use this proposed alternative on a line-of- business basis provided that the "sales compensation" and "relationship compensation" from all trust and fiduciary activity accounts within a particular line of business (or all such accounts within a particular line of business established before a single date certain) are used to determine whether the bank meets this condition.
Proposed New Living, Testamentary, and Charitable Trust Account Exemption
The proposed rule would exempt a bank, but not a credit union, from meeting the "chiefly compensated" condition to the extent that it conducts transactions for a living, testamentary, or charitable trust account opened, or established before July 30, 2004, in a trustee or fiduciary capacity if the bank does not individually negotiate with the account holder or beneficiary of the account to increase the proportion of "sales compensation" as compared to "relationship compensation" after July 30, 2004. For purposes of this proposed rule, a testamentary trust may be deemed to be established as of the date of the will that directed that the trust be established. Banks making an account by account calculation that rely on a particular exemption must comply with all of the requirements in that exemption, but have the option of choosing the exemption or exemptions they need to match their business.
The SEC also proposes to adopt a one-year conditional safe harbor for a bank that exceeds the one to nine ratios that it would need to meet to rely on the line-of business alternative in proposed Exchange Act Rule 721. Under this safe harbor, a bank that exceeds the one to nine ratios in any given year may continue to rely on the proposed line of-business alternative for the following year if it meets three requirements. First, it must meet the other requirements of the rule and the other requirements of the trust and fiduciary activities exception. Second, the banks ratio of "sale compensation" to "relationship compensation" that the bank received from its qualifying fiduciary business must have been no more that one to seven. Third, it may not have relied on this safe harbor during any of the five preceding years.
The new safe harbor should supplement the rules general exemption in addressing banks concerns that if they inadvertently exceed the exemptions "sales compensation" percentage in one year, they would not immediately need to conduct an account-by-account analysis to determine whether they are in compliance with the "chiefly compensated" condition.
The proposed account-by-account exemption is intended to provide banks that determine compliance with the "chiefly compensated" condition through an account-by-account calculation with the legal certainty for one year based on their demonstrated compliance for the previous year. In the proposal, a bank would be exempt from the "chiefly compensated" condition with respect to a particular account during any year if it meets four conditions. First, the bank would be required to meet the other conditions of the trust and fiduciary activities exception. Second, the bank must have met the "chiefly compensated" condition with respect to that particular account during the preceding year. Third, a bank would be required to maintain procedures reasonably designed to ensure that, before opening or establishing an account, the bank reviews the account to ensure that the bank is likely to receive more "relationship compensation" than "sales compensation" with respect to that account. Fourth, a bank would be required to maintain procedures to ensure that, when the bank individually negotiates with the accountholder or beneficiary of that account to increase the proportion of "sales compensation" to "relationship compensation" the bank reviews the account to ensure that the bank is likely to receive more "relationship compensation" than "sales compensation" with respect to that account.
The SEC proposes a one-year conditional safe harbor for a bank that does not meet the "chiefly compensated" requirement with respect to a particular account. According to the SEC, this new safe harbor would provide a bank time to bring its compensation arrangements for that account into compliance with the "chiefly compensated" condition.
Under the proposed safe harbor, a bank with one or more accounts that exceed the "chiefly compensated" requirement could continue to rely on the trust and fiduciary activities exemption in the next year for these "sales compensation" accounts so long as these accounts represent ten percent or less of the total number of accounts for which the bank acts in a trustee or fiduciary capacity. A bank relying on this exemption would need to meet two requirements. First, it must meet the other requirements of the rule, as well as the other requirements of the trust and fiduciary activities exception. Second, the bank may not have relied on this safe harbor with respect to the particular "sales compensation" account during any of the five preceding years.
In addition, to this general safe harbor, the SEC proposes to give additional flexibility to banks when a small number of accounts do not meet the "chiefly compensated" condition more frequently than once in a five year period. Under this provision, a bank can continue to be exempt even though the lesser of 500 accounts or 1 percent of the total number of its qualifying fiduciary activity accounts continue not to meet the "chiefly compensated" condition, provided the bank has documented the reason that each such account does not meet the condition and linked that reason to the banks exercise of fiduciary responsibility.
In addition to expanding the exemptions, the SEC proposes several technical changes to the definitions and proposes to expand the definition of "relationship compensation."
The proposed rule also amends the definition of "sales compensation", which adds two formulas to allow banks to estimate the amount an individual account pays annually in Rule 12b-1 fees that are paid on an entity basis. This amendment to the definition also allows a bank to estimate the amount that it receives annually that is attributable to an individual account, but that is not paid directly from the account, by using two methods.
The proposal also keeps, but broadens to a general exemption one that would permit banks to conduct transactions for qualified investors and certain other investors in money market funds. The SEC proposes to eliminate the definition of "trustee capacity" and not specifically identify trustee capacities that would provide a basis for relying on the trust and fiduciary activities exception.
The SEC proposal clarifies that the trust and fiduciary activities exception is available to a bank providing investment advice for a fee only if the bank does so in a fiduciary capacity in which the bank owes its advisory customer a duty of loyalty.
Safekeeping and Custody Activities Exception
The SEC specifically declined to grant our request that credit unions be eligible for the safekeeping and custody exception purportedly on the basis that credit unions do not perform those functions. According to the SEC, it did not grant these powers to credit unions because it did not find that they have the authority to use them. The SEC requested that credit unions present evidence that they use these powers and evidence of the legal authority for using them, as part of any request that this exception be extended to credit unions.
The Exchange Act provides an exception from broker-dealer registration with respect to certain securities-related safekeeping and custody services that banks may perform for their customers. The exception explicitly allows a bank that hold funds and securities for its customers as part of "customary banking" activities to perform specified securities-related functions with respect to those securities without registering as a broker. In particular, a bank may among other things exercise warrants or other rights, facilitate the transfer of funds or securities in connection with clearing and settling customers securities transactions, conduct securities lending or borrowing transactions, and hold securities pledged by a customer or facilitate the pledging or transfer of securities that involve the sale of those securities. In addition, the exception expressly permits a bank to "serve as a custodian or provider of other related administrative services" to IRAs, pension, retirement, profit sharing, bonus, thrift savings, incentive, or other similar benefit plans without being considered a broker. The exception does not apply, however, to a bank that acts as a carrying broker or clearing broker in connections with securities transactions (other than with respect to government securities).
To mitigate unnecessary disruptions in banks existing safekeeping and custody practices that the GLBA might have caused, the Interim Rules provided conditional exemptions to permit banks to conduct transactions in securities over which they have custody. In particular, the Act permits all banks to conduct transactions in any security for custody accounts under narrow conditions. In addition, current Exchange Act Rules permit small banks to conduct transactions in mutual funds for tax-deferred custody accounts.
Since this exception was not granted to credit unions, the details of the exception itself are beyond the scope of this comment call and credit unions are urged to provide CUNA with comments on why the exception should by granted to credit unions. Nevertheless a summation of this exception is described herein. The proposal amends this exception in the following ways it: modifies the general bank custody exemption; imposes solicitation restrictions; eliminates a provision that prohibits the use of dually licensed employees to conduct transactions; eliminates some other employee activity and compensation restrictions; restricts the custody exemption to those custody accounts in which an institutions does not act in a trustee or fiduciary capacity; does not allow banks to conduct transactions in securities for an employee benefit plan account; makes small banks choose to use the general bank custody exemption or the small bank exemption; defines custody accounts; and defines a carrying broker, which cannot use the safekeeping and custody exception or the networking exception.
The proposal also modifies other bank exceptions that credit unions did not request and did not receive including the: affiliate transactions exception; the small bank custody exemption; the general exemption; the employee benefit plan exemption (which exempts from the definition of "broker" bank trustees and certain administrators that affect transactions in securities of open-end companies for participants in employee benefit plans); Regulation S transactions with non-US persons; re-designation and revision of exemptions for savings associations and savings banks; and temporary exemptions.
Among these exemptions, the SEC grants banks a new exemption that would allow banks to buy and sell money market securities for bank customers who are "qualified investors," a person who directs the purchase of securities from any cash flows that relate to an asset-backed security that has a minimum original asset amount of $25 million, and for other customers for whom banks act in a trustee or fiduciary capacity, or in an escrow agent, collateral agent, depository agent, or paying agent capacity. The new exemption, is intended to help banks with cash management by permitting them to make available money market funds for cash management purposes to customers that have particular cash management needs and that prefer to compensate banks for these or other services through 12b-1 fees.
The SEC also offers temporary exemption for banks. The SEC amends the rule to give banks one year to develop a compliance system to comply with the bank exceptions from the definition of broker. In addition, the SEC amends this proposal to provide a transitional period from rescission liability under Exchange Act Section 29 on contracts entered into by banks in a dealer capacity for a finite period until March 31, 2005.
In addition, to soliciting comments on specific proposals, the SEC requests comments on all aspects of these proposed new rules and rule amendments. SEC requests comments on the portion of the Interim Rules, which provide an exemption from the definitions of "broker" and "dealer" for savings associations and savings banks. The SEC states that comments should provide SEC with empirical data to support their views. Commenters who suggest alternative approaches should provide comprehensive proposals, including any conditions or limitations they believe should apply. SEC also requests comments on effective dates contained within this proposal.
QUESTIONS REGARDING THE PROPOSAL
- The proposal would allow credit unions to enter into the same networking arrangements with
broker-dealers that banks can. The SEC request comments on whether this extension is
appropriate and whether any additional conditions should be imposed on credit unions that
enter into networking arrangements with broker-dealers. These conditions would not apply to
banks. Please explain.
- The proposal grants new exemptions to all credit unions. The SEC requests comment,
however, on whether state-chartered and privately insured credit unions, both of which do not
have a federal regulator should have the benefit of the new exemptions provided to credit
unions. The SEC asks commenters to discuss the scope of the supervision of state-chartered,
privately insured credit unions and the legal framework applicable to these entities. Do
these credit unions receive sufficient supervision and legal oversight to justify extension of
these exemptions? Please explain.
- The proposal does not give credit unions an exception to conduct safekeeping and custody
activities because the SEC asserts that it found no evidence that credit unions engage in
activities included in the safekeeping and custody exemption. The SEC requests comment on the
extent to which credit unions utilize their authority to hold custody of customer funds and
securities, and whether credit unions engage in any of the types of transactions enumerated in
the bank safekeeping and custody exception. The exception allows a bank to, among other
things, exercise warrants or other rights, facilitate the transfer of funds or securities in
connection with clearing and settling customers securities transactions, conduct securities
lending or borrowing transactions, and hold securities pledged by a customer or facilitate the
pledging or transfer of securities that involve the sale of those securities. In addition,
the exception expressly permits a bank to "serve as a custodian or provider of other related
administrative services" to IRAs, pension, retirement, profit sharing, bonus, thrift savings,
incentive, or other similar benefit plans without being considered a broker. Please provide
any empirical data or evidence that you have that credit unions do engage in the above-
mentioned activities allowed under that exemption.
- Do credit unions hold custody of customer funds and securities in connection with
transactions other than with the networking, sweep accounts, or investment transactions? The
SEC asks credit unions that comment to discuss any legal authority on which they currently
rely to engage in any of these additional activities. Please explain.
- Do you believe that credit unions require exemptions for the safekeeping and custody of
customer funds and securities in connection with securities transactions? Please explain
which activities credit unions should receive exceptions for and what conditions, if any, that
are different from banks should apply.
- If you believe that credit unions should have an additional exemption for the safekeeping
and custody of customer funds and securities in connection with securities transactions,
please explain why it is needed.
- If you believe that a custody and safekeeping exemption is needed, please discuss how it
would be in the public interest? Would it be necessary to add additional conditions to the
exemption to protect investors? Please explain.
- Under the networking exception, the SEC would allow a normal referral fee to be given that
is equivalent to the base hourly pay. The SEC requests comments on this change and whether it
might lead to some highly compensated bank employees being given a salesmans stake in the
securities activities of the banks customers.
- Under the networking exception, the SEC requests comment on the proposed dollar-amount
and hourly compensation standards for measuring nominal value in the proposed amended
definition of "nominal one-time cash fee of a fixed dollar amount." In particular, is the $25
amount appropriate as one fee alternative?
- The Commission also solicits comments on the merits of providing another alternative
standard for determining whether a referral fee is nominal that would be based on the incentive
a bank would pay its employee for the sale or renewal of a certificate of deposit ("CD"). To
avoid such a standard leading to referral fees with non-nominal values equivalent to what a bank
might pay for the sale of a large, long-term CD, the measure would refer to a CD with a term and
value equal to the term and value of the CDs banks most frequently issue. Should the SEC provide
this alternative? Please explain.
- The SEC also solicits comments on other possible objective measures banks could use to
gauge whether the referral fees they pay are nominal.
- The SEC requests comments on the interpretation of the term "one-time" in the proposed
amended definition of "nominal one-time cash fee of a fixed dollar amount." The SEC also
solicits comments on what additional guidance, if any, commenters would find useful with
respect to bonus programs.
- The SEC requests comments on the proposed interpretation of the exceptions "cash fee"
requirement. In particular, commenters are invited to discuss whether the limitations in this
provision would be sufficient to assure that unregistered bank employees are not given
incentives to promote broker-dealers brokerage business by engaging in more than the limited
activities permitted under the exception. The SEC also solicits comments on what additional
guidance, if any, would be helpful.
- Do you have comments on the SEC amendment to the term "referral?" The SEC proposed to
simplify the definition of referral so that it would mean the action taken by a bank employee
to direct a customer of the bank to a registered broker-dealer for the purchase or sale of
securities for the customers account. Also, the amendment specifies that a bank may pay a fee
for a brokerage referral only to the employee who made the referral and not to other employees,
such as a branch manager or other supervisor. Please explain your comments.
- The SEC requests comments on the proposed definition of "contingent on whether the referral
results in a transaction." In particular, the SEC seeks comments on whether there are additional
contingencies that banks currently place on referral fees that should be permissible under the
proposed definition of "contingent on whether the referral results in a transaction."
- The SEC seeks comments on whether banks should be able to condition the payment of referral
fees on other criteria relating to other aspects of a customers financial profile, such as a
tax bracket. Credit unions also are invited to discuss whether they would be able to continue
their existing networking activities if the current rules were amended as described above. If
not, credit unions should explain what proposed rule provisions would prevent them from doing so.
Credit unions should also explain what changes, if any, they would need to make their existing
networking programs to comply with the amended rules.
- The SEC asks for comments on other areas where they believe the Commission should grant
exemptive relief related to networking arrangements.
- Do you have comments or requests for no action relief or interpretive guidance with
respect to specific activities that unregistered credit union employees could perform under
the networking exception?
- For sweep accounts, which must use no-load funds, the SEC requests comment on the
provision that "no-load" means not subject to Rule 12b-1 fees and certain other charges of
more than 25 basis points.
- The SEC also requests comment on whether rate spread or retained yield fees should be counted
as sales charges in determining whether money market funds in a sweep account program involving
such fees should be considered "no-load" for purposes of the exception.
- The SEC also requests comment on its definition of a sweep program as an automatic,
regular process that refers to a credit unions investment and reinvestment of deposit
balances held at the bank by the banks own customers. Do you support this interpretation of
program and believe that the term should be defined in the rule?
- Should credit union receive any more bank exemptions under the Exchange Act? Please explain
why these exemptions are necessary and what additional conditions are necessary.
- Does retaining any of the exemptions exclusively for banks place credit unions at competitive
disadvantage. Please explain.
- Do you have any additional comments on this proposal?
- Please submit your name, address, and phone number.
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Associate General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Catherine Orr Senior Regulatory Counsel (202) 508-6743 email@example.com