[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]

                      PUSHING BACK THE PUSHOUTS: 
                     THE SEC's BROKER-DEALER RULES


                             JOINT HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND 

                                AND THE

                            SUBCOMMITTEE ON

                                 OF THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION


                             AUGUST 2, 2001


       Printed for the use of the Committee on Financial Services

                           Serial No. 107-43


74-626                     WASHINGTON : 2001

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                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD, Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSELLA, New York               JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missiouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         

             Terry Haines, Chief Counsel and Staff Director
            Subcommittee on Capital Markets, Insurance, and 
                    Government Sponsored Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman   PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER COX, California          NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio                KEN BENTSEN, Texas
RON PAUL, Texas                      MAX SANDLIN, Texas
SPENCER BACHUS, Alabama              JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware          DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California          FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma             STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia                    MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina      BRAD SHERMAN, California
JOHN B. SHADEGG, Arizona             JAY INSLEE, Washington
DAVE WELDON, Florida                 DENNIS MOORE, Kansas
JIM RYUN, Kansas                     CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama                   HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York              RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
GARY G. MILLER, California           RONNIE SHOWS, Mississippi
DOUG OSE, California                 JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey            MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania

       Subcommittee on Financial Institutions and Consumer Credit

                   SPENCER BACHUS, Alabama, Chairman

DAVE WELDON, Florida, Vice Chairman  MAXINE WATERS, California
MARGE ROUKEMA, New Jersey            CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska              MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana          GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware          KEN BENTSEN, Texas
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             MAX SANDLIN, Texas
BOB BARR, Georgia                    GREGORY W. MEEKS, New York
SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
PAUL E. GILLMOR, Ohio                FRANK MASCARA, Pennsylvania
JIM RYUN, Kansas                     DENNIS MOORE, Kansas
BOB RILEY, Alabama                   CHARLES A. GONZALEZ, Texas
STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois         JAMES H. MALONEY, Connecticut
WALTER B. JONES, North Carolina      DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania      BARBARA LEE, California
ERIC CANTOR, Virginia                HAROLD E. FORD, Jr., Tennessee
FELIX J. GRUCCI, Jr, New York        RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania        KEN LUCAS, Kentucky
MIKE FERGUSON, New Jersey            JOSEPH CROWLEY, New York

                            C O N T E N T S

Hearing held on:
    August 2, 2001...............................................     1
    August 2, 2001...............................................    49

                        Thursday, August 2, 2001

Broadman, Ellen, Director, Securities and Corporate Practices 
  Division, Office of the Comptroller of the Currency............    19
Higgins, Edward D., Executive Vice President, U.S. Bancorp, on 
  behalf of the American Bankers Association and the ABA 
  Securities Association.........................................    32
Kroener, William F., III, General Counsel, Federal Deposit 
  Corporation....................................................    17
Kurucza, Robert M., Partner, Morrison & Foerster LLP, General 
  Counsel, Bank Securities Association...........................    34
Maloney, Eugene F., Executive Vice President and Corporate 
  Federated Investors, Inc.......................................    38
Meyer, Hon. Laurence H., Member, Board of Governors, Federal 
  Reserve System.................................................    15
Patterson, Michael E., Vice Chairman, J.P. Morgan Chase & Co.....    31
Pollard, K. Reid, President and CEO, Randolph Bank & Trust, 
  Asheboro, NC, on behalf of the Independent Community Bankers of 
  America........................................................    36
Unger, Hon. Laura S., Acting Chairwoman, U.S. Securities and 
  Exchange Commission............................................     4


Prepared statements:
    Oxley, Hon. Michael G........................................    50
    Bachus, Hon. Spencer.........................................    52
    LaFalce, Hon. John J.........................................    55
    Broadman, Ellen (with attachments)...........................   116
    Higgins, Edward D............................................   179
    Kroener, William F., III.....................................    99
    Kurucza, Robert M. (with attachments)........................   198
    Maloney, Eugene F. (with attachments)........................   262
    Meyer, Hon. Laurence H.......................................    81
    Patterson, Michael E.........................................   168
    Pollard, K. Reid (with attachments)..........................   230
    Unger, Hon. Laura S..........................................    59

              Additional Material Submitted for the Record

Watt, Hon. Melvin L.:
    Federated Investors, Inc., letter, Aug. 9, 2001..............    56

                      PUSHING BACK THE PUSHOUTS: 
                     THE SEC's BROKER-DEALER RULES


                        THURSDAY, AUGUST 2, 2001

             U.S. House of Representatives,
        Subcommittee on Capital Markets, Insurance 
              and Government Sponsored Enterprises,
                                     joint with the
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                    Washington, DC.
    The joint subcommittees met, pursuant to call, at 10:05 
a.m., in room 2128, Rayburn House Office Building, Hon. Michael 
G. Oxley, [chairman of the Committee on Financial Services], 
Hon. Richard H. Baker, [chairman of the Subcommittee on Capital 
Markets, Insurance and Government Sponsored Enterprises], and 
Spencer Bachus, [chairman of the Subcommittee on Financial 
Institutions and Consumer Credit], presiding.
    Present from the Committee on Financial Services: Chairman 
    Present from the Subcommittee on Capital Markets, Insurance 
and Government Sponsored Enterprises: Chairman Baker; 
Representatives Bachus, Hart, Cox, Weldon, Ackerman, Bentsen, 
Sherman, Inslee, Capuano, K. Lucas of Kentucky, Israel, and S. 
Jones of Ohio.
    Present from the Subcommittee on Financial Institutions and 
Consumer Credit: Chairman Bachus; Representatives Baker, Kelly, 
Cantor, Grucci, Capito, C. Maloney of New York, Manzullo, Hart, 
Ackerman, Bentsen, Sherman, K. Lucas of Kentucky, Waters, 
Tiberi, and Watt.
    Chairman Baker. Good morning. I just wanted to make an 
announcement for those interested in the hearing this morning. 
I am advised that we will have a minimum of two votes which 
just were called. It appears that because of the timing of the 
votes we would probably have a likely start time of about 
10:30. I know how it feels to be on the tarmac in the plane 
wondering what's going on. Our on-time departure will now be 
probably 10:35. We hope to make up for that in the air, and we 
will be back soon. Thank you.
    Chairman Baker. Due to the time constraints of not only our 
panelists, but Members this morning, there are numerous 
activities ongoing this morning, I'm going to call our meeting 
to order. I do expect Members' participation as they return 
from the vote currently pending. To facilitate important 
testimony, I'd like to recognize Chairman Oxley at this time 
for his opening statement.
    Mr. Oxley. Thank you, Chairman Baker and also to Chairman 
Bachus for calling this hearing on the Securities and Exchange 
Commission's interim final rules. One of the important duties 
of these subommittees is not only to make law, but also ensure 
that the laws are correctly understood and implemented by 
agencies under our jurisdiction. Today's hearing provides us an 
opportunity to demonstrate why this second rule is so 
    When Gramm-Leach-Bliley became law in November of 1999, the 
regulatory landscape for the American financial services 
industry was fundamentally changed. The Gramm-Leach-Bliley Act 
replaced Depression-era laws with a comprehensive framework for 
banking, securities and insurance geared for the 21st century. 
The old financial services laws were not designed for a world 
where technology would give consumers almost limitless 
investment options. But in order for consumers to exercise that 
freedom, artificial barriers to providing banking, insurance 
and securities services needed to be removed, and that's 
exactly what Gramm-Leach-Bliley did.
    Functional regulation has taken the place of the inflexible 
one-size-fits-all approach that existed before the Act. The 
``push-out'' provisions were designed to allow banks to 
continue to perform such traditional activities as providing 
investment advice and acting as trustees without having to 
register under the securities laws. At the same time, banks 
would not be given limitless authority to engage in the 
securities business.
    Functional regulation means that banking activities will be 
regulated by the banking authorities and securities activities 
will be regulated, of course, by the SEC.
    The SEC's interim final rules raise troubling questions as 
to whether that agency has upheld the letter and the spirit of 
the law. GLB was never meant to make banks disrupt their 
customer relationships and force traditional banking activities 
into broker-dealer affiliates. But the SEC's rules, were they 
to become final as written, would do just that. I'm encouraged 
that the SEC has extended both the comment period and the 
effective date of its rules, and I hope this hearing will 
provide the SEC with an opportunity to receive valuable input 
on how the law was meant to be implemented.
    I want to say I look forward to hearing from all of our 
witnesses today and exploring this topic further. The great 
strides made by Gramm-Leach-Bliley are too important to be 
undone by misguided attempts to implement the law, no matter 
how well intentioned. And I want to emphasize that GLB, in 
particular, the functional regulation provisions of Title II, 
was negotiated over a very long period of time. Boy, was it 
    And the Congress gave consideration to concerns raised by 
not only every witness represented here today, but every other 
affected party and the public, and I'm proud of our work on 
that historic piece of legislation and have no intention of 
reopening debates that were so carefully and fairly resolved.
    The SEC's interim final rules, however, clearly need 
substantial revision to accurately reflect Congress' intent in 
that statute, and this hearing is an important step in that 
    And let me pay a special welcome to Chairwoman Unger for 
being here two days in a row. You'll get combat pay. And in 
your final appearance as Acting Chairwoman, we've been proud of 
the work that you've done there and hope you continue on as a 
Commissioner there doing the fine work that you've done over a 
number of years. And with that, Mr. Chairman, I yield back.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 50 in the appendix.]
    Chairman Baker. Thank you, Mr. Chairman. I, too, would like 
to add my expression of appreciation, Ms. Unger, for your work. 
We certainly have enjoyed having your opinions and professional 
guidance in matters before the committee and certainly wish you 
well in all future endeavors.
    Ms. Unger. Thank you.
    Chairman Baker. Our hearing here this morning is a joint 
hearing, which I am acting as Chair for Panel I. Chairman 
Bachus will chair Panel II. The Financial Institutions 
Subcommittee and the Capital Markets Subcommittee both have 
expressed concern about the pending rules which were pursuant 
to Title II of Gramm-Leach-Bliley. The Commission, on May 11th 
issued an interim final rule concerning definitions and 
exemptions for banks, savings associations pursuant to Sections 
3(a)(4) and 3(a)(5) of the Act of 1934.
    Initially, the implementation date was October of this 
year. Now as a result of the Commission's actions, the date has 
been pushed back to May 2002 to give affected parties and the 
Congress the opportunity to make comment.
    Without doubt, the rule has generated controversy not only 
from market participants' perspective, but also among almost 
all financial regulatory interests.
    The intent of Gramm-Leach-Bliley was, to the best of our 
ability, to the field not only from a market, but a regulatory 
perspective, among banking, insurance and securities 
participants. And certainly that was aimed at fairness in 
regulatory constraints. I would only add at this point that I 
feel it is important from here forward that all financial 
regulators given the consolidated business structures which are 
now commonplace in the market, should to the extent practicable 
discuss and consider from all perspectives rules which will 
have effect on your respective market participants.
    The lines which historically divided business practice was 
clearly eroded by market practice and by statute, and this 
creates additional burdens, understandably, on the regulators 
to consult and understand the consequences. But I think it very 
important that the development of this rule perhaps could have 
had an easier road had such preliminary discussions been 
engaged in.
    At this time, to facilitate, I'm going to ask the Members' 
permission. Chairman Bachus has an opening statement. I don't 
know if a Member on the other side would have an opening 
statement. Ms. Unger has some time constraints, and for Members 
to facilitate questions of Ms. Unger, I would suggest, with 
your permission, that Mr. Bachus be recognized for an opening 
statement, and to go directly to Chairwoman Unger so Members 
may have an opportunity for questions.
    Without objection, Chairman Bachus.
    Chairman Bachus. Thank you. I have a written statement. I'm 
going to introduce it into the record and in the interest of 
time depart from that and just make two points.
    The first point is that when Chairman Baker says there's 
been concern expressed, ``concern'' is too mild a word. 
Hysteria may be more----
    Chairman Baker. I'm always a person of understatement. You 
know that.
    Chairman Bachus. This rule would cause changes that I think 
our financial institutions--that they're not necessary and 
unwise and would cause many of the traditional functions that 
they've done, done well, and done safely to unnecessary changes 
in how they do it and pushing those out.
    The other point that I would emphasize is that with the 
blending of securities, insurance and banking, the regulators 
have got to work together. You've got to rely on each other for 
expertise. Not talk at each other, but talk with each other. 
Sit down and have serious discussions I think before some of 
these rules are released. It undermines I think the faith in 
the regulatory system when we have rules that come out that are 
then--well, they come out and there are flaws and I think 
significant, fundamental problems with them. And you can tell 
that in this instance we have that case, because you can read 
what the Federal Reserve and other bank regulators say about 
it, what the industry says about it, and see the profound 
differences in opinion. And I think some of these can be 
avoided. And I'm not criticizing any one agency. I think we 
could have that happen by any agency.
    But I would hope that there would be much more cooperation 
and discussions and reviews among the agencies before these 
things are announced to the public.
    And those are my two points, Mr. Chairman.
    Chairman Baker. Thank you, Chairman.
    Chairman Bachus. And I appreciate you convening this 
    [The prepared statement of Hon. Spencer Bachus can be found 
on page 52 in the appendix.]
    Chairman Baker. Thank you very much for your interest and 
leadership in this matter as well.
    At this time I'd like to recognize our first witness, which 
we will depart a little bit from customary practice. We would 
receive Ms. Unger's testimony and then have subcommittee 
questions in order to facilitate her departure time.
    It's a pleasure to have you back, Chairwoman Laura Unger, 
of the Securities and Exchange Commission. Welcome.

                    AND EXCHANGE COMMISSION

    Ms. Unger. Thank you very much, Chairman Baker and Chairman 
Bachus. And I appreciate your kind words, Chairman Baker, as to 
my tenure as Acting Chairwoman. This may be the last time you 
get to call me Chairwoman, so feel free to use it as many times 
as you like.
    I am actually pleased to be here today to talk about Gramm-
Leach-Bliley and the historic legislation and the 
implementation of the functional regulation provisions in Title 
II of this legislation. We recognize, as has already been 
indicated today, that there are a number of significant issues 
that have been raised about the Commission's rulemaking in this 
area, and I want to assure you that we are listening very 
closely to these concerns.
    I thought I would just touch on a couple of general issues 
today rather than the more specific and technical parts of our 
rules since the comment period is still open on those rules.
    Most importantly, I do want to emphasize to you our 
commitment to implement Title II of Gramm-Leach-Bliley Act in a 
manner that faithfully upholds the plain meaning of the Act and 
Congress's intent in enacting the legislation. We are eager to 
work with the banks and the bank regulators to reach the 
appropriate balance in the rules consistent with our mandate to 
protect investors. We also are committed to easing the 
transition process for banks in implementing this historic 
    In enacting the Gramm-Leach-Bliley Act, Congress determined 
that functional regulation was necessary. That is, any bank 
that conducts a full-scale securities business has to do so 
through a registered broker-dealer. Without functional 
regulations, some investors would have different rights and 
protections than others, depending on where they did business. 
And we at the Commission strongly believe that investors 
deserve the same protection, regardless of where they buy and 
sell securities.
    In preserving some of the exemptions to the definitions of 
``broker'' and ``dealer'', however, Congress determined that 
certain traditional bank activities should not be disturbed. 
This creates a tension in the statute between the objective of 
having the full-scale brokerage activities occur in a 
registered broker-dealer, and the goal that certain traditional 
bank activities, such as trust activities, would not be 
    The Commission, as you know, is statutorily charged with 
interpreting the functional regulation provisions of the Act, 
and the rules that we issued represent our judgment as to how 
to effectively implement the statute consistent with Congress's 
intent. The rules were intended to provide legal certainty 
about some issues of concern that the banking community 
actually brought to our attention as creating some ambiguity.
    I thought I would take a few minutes to talk about the 
process that we used to interpret the terms in the statute. The 
Gramm-Leach-Bliley Act does not specifically mandate or require 
the Commission to engage in rulemaking in this area. And 
initially, we didn't think that we would engage in rulemaking 
in this area, and that, in fact, we would act on a case-by-case 
basis and provide exemptions and interpretive relief. At the 
time, the banking community did not bring any particular 
concerns to our attention, so we assumed this was the correct 
    As we moved closer to the effective date for implementation 
of the Act, however, the banking community became more vocal 
about the nature and degree of uncertainty regarding the scope 
of the statutory exceptions.
    As we gradually heard from more banks and their 
representatives, we realized that more general guidance was 
necessary. Unfortunately, at the point that this occurred, we 
were bumping up against the effective date of the functional 
regulation provisions. So we issued these rules as interim 
final rules, a procedure the Commission does not often use, but 
that our banking regulators do use, and we thought maybe this 
was the appropriate time to try them in the context of banking 
legislation. By issuing interim final rules, we were able to 
provide quick and definitive guidance to the industry in the 
short time remaining before the effective date.
    We determined that the interim final rules would grant 
immediate relief to banks from certain of the statutory 
provisions while affording opportunity to get substantive 
comments by delaying the effectiveness of the other provisions. 
We have definitely gotten some substantive comment.
    But I want to underscore that the rules were interim in 
nature and that we have sought public comment on these rules. 
Our interim final rules extended the May 12, 2001 effective 
date for the functional regulation provisions so that we could 
meaningfully respond to the comments. On July 18th, as you 
know, we extended the comment period for the interim final 
rules until September 4th of this year, and the effective date 
for the rules even further, to May 12th, 2002. As a result of 
this extension, banks have another year to conform their 
securities activities to the requirements of the Gramm-Leach-
Bliley Act.
    We also indicated that we intend to amend the interim final 
rules. And we do not expect the banks to adjust their internal 
compliance systems until after the amendments are adopted. And 
we will extend the compliance date once again for the rules 
once the amended rules are issued.
    Our expectation is that these extensions of time should 
provide ample opportunity for the Commission to continue what 
we believe have become constructive dialogues with the banking 
industry and the bank regulators to craft rules that will 
implement the functional regulation provisions in the most 
reasonable, cost-effective possible manner consistent with 
investor protection.
    I want to stress, as Chairman Oxley pointed out, that the 
statutory exemptions are extremely complex and that it did take 
a long time to adopt the legislation. In fact, it took 20 
years, to the best of my knowledge. So our goal in this 
rulemaking is not to extend our jurisdiction, but to adopt 
rules that are consistent with the language and Congressional 
intent of the Gramm-Leach-Bliley Act, and with the Commission's 
primary mandate to protect investors.
    We welcome your continuing interest in this issue, and we 
commend you all for your important role that you have played in 
modernizing the Nation's financial services industry.
    Thank you very much for the opportunity to testify, and I 
look forward to any questions.
    [The prepared statement of Hon. Laura S. Unger can be found 
on page 59 in the appendix.]
    Chairman Baker. Thank you very much, Ms. Unger. To try to 
put a fine point on this, in my view the Gramm-Leach-Bliley 
provisions relative to broker-dealer matters was constructed to 
facilitate certain activities in which banks traditionally 
engaged, which included trust and fiduciary activities, the 
offering of investment advice, custody and safekeeping 
activities, the use of sweep accounts, and transactions and 
asset-backed securities.
    The concern I have in the operational consequence of the 
rule as promulgated is that activities historically engaged in 
by financial institutions, particularly in communities where 
financial services providers are limited in many rural areas of 
the Nation, the consequences of the Act where an institution 
does not deem it advisable financially to create the structure 
necessary to provide the services outside its own bank lobby 
will in net effect result in a public consequence of services 
simply not being provided.
    Is there a view at the Commission that the consequence of 
the rule would, in fact, result in that, or was this something 
that was not foreseen when the rule was ultimately promulgated?
    Ms. Unger. If you're asking about small banks and what the 
    Chairman Baker. Trust activities.
    Ms. Unger.----has been with respect to that, there are two 
parts to that answer. One is the trust activity generally and 
the other is small bank trust activity. With respect to small 
banks, the Commission has always been concerned about small 
entities, including broker-dealers and other institutions that 
we regulate on an ongoing basis. We have reached out to the 
small bank community, and in fact we are instituting a number 
of meetings that are upcoming to really find out from them how 
the interim final rules impact the way they do business and how 
we can preserve their ability to carry on these traditional 
bank activities without them crossing the line into wholesale 
    As far as trust activities, I think the interim final rules 
don't preclude certain trust activities such as custody. When 
you get into order-taking--and areas where we traditionally 
have regulated order-taking--it really depends on what the 
activity is by the institution. Order-taking with a de minimis 
payment for order-taking is different than commission-based 
order-taking. Once you move toward a commission-based order-
taking, to me that looks like brokerage activity.
    This is why a dialogue is very important. We wouldn't want 
to preclude order-taking for a de minimis cover-your-cost kind 
of fee, but once a bank has a salesman's stake in that 
transaction, then that is securities activity. And so we start 
with that concept and that belief, and we want to hear why it's 
    Chairman Baker. I just want to express the view that the 
more, how shall I say it, generous terms of defining 
appropriate conduct, particularly in the area of trust 
activities in the community bank environment, would be very, 
very helpful I think in the overall receptivity of the rule as 
currently constructed.
    Now there are other issues, and I'm sure other Members will 
speak to those. But that is one around which I had particular 
    Ms. Waters, did you have questions?
    Ms. Waters. Thank you very much, Mr. Chairman, and thanks 
to our panelists for being here today. I would like to ask you 
about certain parts of your testimony. As you note in your 
statement, you reference the fact that Congress directed the 
SEC not to disturb the traditional trust activities of banks. 
The rules that your agency adopted for trust activities, 
however, appeared to create a great deal of disturbance in the 
trust departments of banks, inserting the SEC far into the 
relationship of the banks and their customers in particular.
    The rules your agency has adopted may require many banks to 
renegotiate trust compensation agreements with customers that 
were designed to comply with the requirements of the trust and 
fiduciary laws. Could you comment as to why you thought it was 
necessary to impose very detailed, account-by-account 
requirements even though trust compensation arrangements must 
comply with the bank's fiduciary obligations?
    Ms. Unger. Well, my testimony noted that we were charged 
with interpreting what the exemptions meant and that, in doing 
so, Congress charged us to make sure that banks don't engage in 
wholesale brokerage inside the bank yet enable banks to keep 
intact their traditional bank activities.
    The account-by-account interpretation was intended to 
prevent wholesale brokerage from occurring within the 
institution. If we were to say, OK, 51 percent of your activity 
is banking and 49 percent could be wholesale brokerage or could 
be brokerage, then there could be a number of accounts in the 
trust department that were, in fact, wholesale brokerage. So we 
determined that an account-by-account calculation would prevent 
wholesale brokerage activity from occurring in the trust 
    Now we did say that a bank would not have to engage in an 
account-by-account calculation if its sales compensation from 
the trust activities is less than 10 percent of the total 
compensation coming from these activities. So our understanding 
was that the 10 percent exception would allow banks that have 
just traditional trust activities to continue those activities. 
If that 10 percent level is too low, then of course we would 
like to consider what would be the appropriate level. But that 
10 percent threshold would mean you would not have to keep 
track on an account-by-account basis.
    Ms. Waters. Could you refer to the part of my question that 
asked whether or not the rules your agency adopted may require 
banks to renegotiate trust compensation agreements with 
customers that were designed to comply with the requirements of 
the trust and fiduciary laws?
    Ms. Unger. I might not know enough of the specifics to 
answer this fully, but I will get you a more fulsome answer. My 
understanding is that we will look not just at the label of the 
relationship, but the actual nature of the relationship. And as 
in my answer to Chairman Baker, the more there is a salesman's 
stake in the outcome of the account, the more it looks like 
brokerage activity.
    So to the extent you're advising the clients and managing 
their trust account, that would probably not come under 
traditional brokerage. But we can't just say, well, because you 
say it's a fiduciary relationship, that's enough to satisfy us 
that it's not brokerage activity.
    Ms. Waters. OK. So, I guess we are at this point because 
the Act itself did not specifically require you to do 
rulemaking and you decided that you didn't have to do it, and 
you came up with some new rules that kind of say, well, the 10 
percent rule and some other things and case-by-case, and you 
think that that is good enough, that that takes care of any 
concerns that one may have about the intent of the Act?
    Ms. Unger. No. I think we're trying to balance what 
Congress told us to do, and that is to maintain the traditional 
bank activities without allowing wholesale brokerage in the 
bank. We sought input from the banking industry who told us 
they wanted more guidance, and that is what led to the rules, 
and to the timing of the rules.
    We continue to seek input on this provision. It was our 
best judgment that, based on the information we had at the 
time, the 10 percent was sufficient to allow banks to continue 
traditional trust activity without having to account for it on 
an account-by-account basis.
    Ms. Waters. Do you still think that you made the correct 
decision not to do rulemaking, but rather the way that you are 
doing it is going to work out?
    Ms. Unger. Well, this is a rulemaking. It's not the way the 
Commission traditionally proposes its rules. But again, we had 
the time pressure that led us to conclude this was the best.
    Ms. Waters. Well, of course, you know this is not the 
rulemaking, the traditional rulemaking that we're referencing. 
You know this is different.
    Ms. Unger. This is different for us, too. It's not 
different for the bank regulators. So we're trying to emulate 
the bank regulators, but maybe not to your satisfaction.
    Ms. Waters. You're right about that.
    Ms. Unger. I suspected. The reason that we extended the 
time period, though, is that we heard a lot from the banking 
industry and from the bank regulators that we didn't get it 
exactly right. So we're going to continue to work to get it 
exactly right.
    Ms. Waters. That's right. You didn't get it right and we're 
glad to hear you say that, and you're right. We've got to get 
it right. Thank you.
    Ms. Unger. You're welcome. Thank you.
    Chairman Baker. Before recognizing Mr. Bachus, I think I 
want to take just 30 seconds to make the expression of my 
position more clear. And as I am understanding it, if you get 
to the activities of a trust--and let's assume for the moment 
now we're not talking about a small bank, we're talking about a 
complicated trust--where there may be various accounts within 
the construct of that trust, the presumption under the rule as 
constructed would be you'd have to go to each account activity 
to determine the appropriate regulatory constraint as opposed 
to what I would view as the historic presumption that the trust 
itself--that any activity performed by a bank in the capacity 
of trustee is covered by the trust exemption, unless there is a 
specific finding by the Commission that a particular activity 
should not.
    So I think the view is a reversal of the presumptions here, 
not necessarily the applicability of the regulatory oversight. 
Thank you, Mr. Bachus. Mr. Bachus?
    Chairman Bachus. Thank you. Looking at Gramm-Leach-Bliley 
in its entirety, does the SEC maintain that it was Congress's 
intent to require traditional bank practices such as trust and 
fiduciary services to be moved from the bank to a broker-
    Ms. Unger. Well, you know, what is interesting, Chairman 
Bachus, is the fact that what people might consider to be 
traditional bank activities has really evolved in the 20 years 
of talking about financial modernization. And I think there has 
always been some concern about securities activities being 
conducted in the banks.
    So now that we are supposed to functionally regulate banks' 
securities activities, I think the fact that the banks have 
been conducting these activities for a long period of time 
doesn't make them any less securities activities. And so we're 
trying to balance our urge to regulate securities activities 
with the business practices of banks.
    So, we want to fulfill our mandate of protecting investors 
and regulating securities activities, as we think you want us 
to, while preserving the ability of the bank to conduct what 
they consider to be traditional bank activities.
    Chairman Bachus. But, I guess my question was, are you 
contending that these trusts and fiduciary activities should be 
moved from the bank to a broker-dealer? Or do you think that 
that's what the Congress intended?
    Ms. Unger. You mean wholesale? It would probably make it a 
lot easier.
    Chairman Bachus. Any move. Any change in the present status 
    Ms. Unger. No, I don't. I think it's something that we 
really need to work with the bank regulators and the banking 
industry on to figure out where to draw the lines.
    Chairman Bachus. All right. How can Congress be assured 
that the Commission will amend their interim final rules in a 
way that meaningfully addresses the concerns that the other 
regulators on our panel expressed in their opening statements 
that I've read and have raised regarding bank trust activities, 
custodial activities, investment advisory activities? In other 
words, can we get some assurance?
    Ms. Unger. That we'll get it right the second time.
    Chairman Bachus. Can we get some commitment?
    Ms. Unger. I can absolutely commit to you that I would not 
want to come back and testify after our final rules are adopted 
about why we didn't get it right the second time. We are 
committed to working with the bank regulators and the industry 
to balance the two competing interests, which are very 
difficult to balance. I think, given the time extension, that 
we can do that.
    Chairman Bachus. And substantial changes will be made?
    Ms. Unger. I don't know if your definition of 
``substantial'' would be the same as mine, but I can assure you 
that we absolutely intend to amend the rules that were 
    Chairman Bachus. I don't know if I still have some time. 
I'll ask the bank regulators. Have there been any problems in 
the areas of trust and fiduciary services that would lead to 
the need for an SEC oversight in addition to the oversight that 
Federal and State banking regulators supply today?
    Mr. Meyer. Mr. Chairman, I don't believe so. But as the 
Chairwoman has indicated, there is an urge on the part of the 
SEC to oversee and to regulate all securities activities 
wherever they lie. Banking agencies for a long time before 
there was an SEC were supervising security activities that are 
going on in banks. We have a process of doing so. We operate 
under the fiduciary and trust law. We have bank examinations 
that effectively assure compliance with those laws. No, we 
don't think there's any necessity to have another regulator 
duplicate and oversee those activities.
    Mr. Kroener. Let me just add to that, I think a fair 
reading of the legislative history and the intent here of the 
Congress indicates an awareness that there had not been 
significant securities-related problems arising out of these 
traditional activities, and that was the fundamental basis on 
which Congress created these exemptions.
    Chairman Bachus. I would agree.
    Ms. Broadman. I'll agree with both of those statements. 
We're not aware of reasons to push these activities out of the 
bank. And in fact, we will note that bank fiduciary and trust 
activities are subject to a comprehensive regulatory scheme. 
They are closely examined by bank regulators. Trustees have the 
highest duties that they owe to their customers, higher in many 
respects than broker-dealers.
    Chairman Bachus. Thank you. And let me just close by saying 
Chairwoman Unger, I am very impressed with your willingness to 
work and to promise cooperation and to make a commitment to go 
forward with an upside-down look and review of these rules. I 
mean that sincerely. I thank you.
    Ms. Unger. Well, thank you, Chairman. I think you just 
heard the dilemma that we face, which is how we accomplish 
functional regulation of ``traditional'' bank securities 
    Chairman Bachus. I don't think Congress intended another 
layer of regulation over what has been in place.
    Ms. Unger. No. Nor do we want to provide another layer.
    Chairman Bachus. And I think what's been in place has 
worked well. But I sincerely appreciate your willingness to 
work with us and with the industry and with the other 
regulators. I mean that.
    Ms. Unger. Thank you.
    Chairman Baker. Thank you, Chairman Bachus.
    To restate where we are for Members since folks are busy 
this morning, in and out, we recognized Ms. Unger for her 
opening remarks and we have not yet heard the testimony from 
our other three witnesses in order to facilitate an early 
departure for Ms. Unger. Mr. Watt, you would be next for 
questions. I would ask that Members, if you do not feel the 
need to pursue questions of Ms. Unger at this time, because we 
will have further discussions from the other witnesses as well, 
but, Mr. Watt, you're up next in regular order.
    Mr. Watt. Thank you, Mr. Chairman. I assume your 
encouragement not to ask questions doesn't extend to an 
encouragement not to praise the Chairman. So I want to start by 
praising the Chairman, both Chairs, for convening this hearing 
quickly and helping to kind of create some momentum here for a 
discussion, public discussion, about what I think is an 
extremely difficult issue.
    My initial reaction, and I continue to have this reaction, 
is that the SEC clearly probably overstepped. And my initial 
inclination was to do a letter expressing that as a number of 
people on the subcommittees have done. But once a hearing was 
scheduled, it seemed to me to be an appropriate step to have 
the benefit of the testimony and discussion before getting too 
far out there.
    And I want to join with Chairman Bachus in expressing my 
feeling that your response appears to me to be a very, very 
appropriate response and balanced response. That you put 
something out there, you probably realized that it would 
provoke some discussion, probably not as much as it has 
provoked, and you want to now proceed with caution and try to 
work out what the appropriate balance is.
    I think we should resist the temptation to get into a 
battle between the regulators, though, just on the question of 
whose turf is here and remember that our objective is to create 
a set of rules going forward that work for the new world that 
we have created and sanctioned under Gramm-Leach-Bliley. So it 
can't always be business as usual, because Gramm-Leach-Bliley 
is not business as usual. And I think inherently, we are going 
to have these kinds of tensions being raised, and it is good to 
have an aggressive public discussion about them. And while I 
don't want to leave any impression that I think the balance 
that you achieved in the initial rulemaking was the appropriate 
balance, I think it's good to have this discussion, and I think 
it's good that this discussion has been provoked by the rules 
or the proposals that you have come forward with.
    So, in that context, I think we've got some difficult times 
ahead not only on this set of issues, but on a number of issues 
that I think we're going to have to work out between historical 
patterns of regulation. And I do think it's important for us as 
Members of these subcommittees to keep in mind that the 
overwhelming responsibility of the SEC is to assure the 
protection of the public and customers. And while that is not 
adverse to any of the other regulators, they have exercised 
that jurisdiction historically in an aggressive fashion, and I 
hope they will continue to exercise it in an aggressive 
fashion. And I hope the regulators won't get to the point where 
you are just kind of jockeying for power and position here, but 
that all of the regulators will keep in mind that this is about 
protecting the public and consumers and customers at the end of 
the day.
    I didn't ask a single a question.
    Ms. Unger. I could pretend you did.
    Chairman Baker. You started out very well, though.
    Mr. Watt. But I praised the Chairmen and I praised the SEC 
representative, so I guess I'm doing all right.
    Chairman Baker. I won't forget that. Thank you, Mr. Watt.
    Ms. Unger. Thank you.
    Chairman Baker. Mr. Manzullo, you're next by time of 
arrival, but I have to advise the subcommittees that the 
Chairwoman needs to be out of here by 11:20, so Mr. Manzullo, 
proceed accordingly, but we have to excuse our witness timely.
    Mr. Manzullo. I just have a comment. In addition to being 
on the panel here, I'm the Chairman of the Small Business 
Committee. And you're in a very difficult position. I think you 
did a great job of defending the interim final regulations, 
whatever those are called. But my question would be on behalf 
of the small banks in this country and also of the tons of 
small banks that are in the Congressional district that I 
represent, which has a lot of rural areas, did you seek any 
comment prior to issuing the interim final rules from the small 
banks or small bank organizations or Congressional panels?
    Ms. Unger. We did, but we are making a much more concerted 
effort to reach out to the small bank community. We have 
scheduled a number of meetings, and are in the process of 
scheduling more meetings to make sure that we do address the 
particular concerns of small banks. The Commission has always 
expressed concern about small institutions. We're always 
mindful in any regulation of the cost and benefit and burdens 
to the smaller institutions, and we routinely grant exemptions 
to smaller institutions.
    Mr. Manzullo. I guess the other question would be with 
regard to whether or not the SEC should have even promulgated 
rules into traditional bank activities where the area there was 
gray and you went ahead and issued the rules. Did you confer 
with any Congressional panels or Members of the Banking 
Committee for further elucidation on that issue?
    Ms. Unger. We did not reach out to the Members. I believe 
we worked with the staff, we worked with the banking community, 
the bank regulators and really it was the banking community 
that led us to believe that the interim final rules were 
necessary and that there was more general guidance needed than 
what we were intending to provide, given our statutory 
obligation under Gramm-Leach-Bliley, which was through granting 
exemptions and providing interpretive relief.
    Mr. Manzullo. Thank you. I yield the balance of my time to 
Mrs. Kelly.
    Mrs. Kelly. Thank you. Thank you very much, Mr. Manzullo.
    Ms. Unger, an interim final rule sounds to me like an 
oxymoron. I don't see that that's something--I mean, if you're 
going to amend an interim final rule, how is it final?
    My concern with regard to what is happening here is 
twofold. Normally when an agency issues a major rule in a final 
form without having any kind of a comment period, no area, no 
time period for notice and comment, that's very, very unusual. 
And taking the form of an interim final rule, I'd like to know 
why the SEC took that stand.
    Ms. Unger. That's a very fair question, because the 
Commission does not usually issue interim final rules. I had 
said in my testimony that what happened was, we had initially 
intended to issue interpretive relief and guidance on a case-
by-case basis, and we encouraged the industry to let us know if 
there was confusion and a need for guidance.
    It wasn't until we bumped up to the time where the statute 
was going to take effect that we found out there was general 
confusion and the need for more general guidance. We actually 
looked to the bank regulators practice in issuing the interim 
final rules. They do this type of rulemaking routinely. It's 
unusual for our agency. There is a comment period, however, 
even with interim final rules. We even extended that comment 
period. The comment period had originally expired on July 18th.
    We extended it to September 4th in response to the numerous 
comments and letters that we received with respect to the 
interim final rules. We've been using the time in the interim 
to meet with the interested groups, to reach out to small 
banks, to really try to get together with the constituencies 
who expressed concern about our interim final rules. We also 
have plans to sit down with the bank regulators. I think we're 
in the process of scheduling something so that we may resume 
our conversations with them as well.
    But what's interesting about this is what Congressman Watt 
was talking about. We don't want to duplicate regulation. We 
want efficient, effective regulation. We want a seamless web of 
regulation, and that's what we're trying to achieve with the 
bank regulators. You hear them talk about them regulating bank 
securities activities, and yet we're told to regulate bank 
securities activities. So we just need to figure out how we can 
do the best job consistent with the business practices of banks 
and make it work.
    Mrs. Kelly. Well, I guess what I find disappointing here is 
the fact that when we worked so hard to craft the Gramm-Leach-
Bliley bill, we were very clear that we expected the regulators 
to work together. And what I feel here I'm really disappointed 
that the SEC didn't work with the other regulators before they 
did this interim final rule.
    I just think that this has created a tremendous legal 
uncertainty for the banks that are trying to figure out what 
their obligations are under this new rule and by extending a 
comment period and by doing the issue of an interim final rule 
prior to having enough period for comment and workout, I think 
that this has the potential for allowing the banks and the bank 
customer relations to deteriorate during this timeframe. I 
would hope that you would address that. And I would hope that 
you would be very specific and very clear when you're dealing 
with the banks. They need some guidelines. And I feel that this 
may unfairly affect their relationship with the general public. 
I don't know how you feel about that, if you want to respond to 
    Ms. Unger. Well, I think the fact that we didn't know they 
wanted more general guidance was maybe the first misstep in 
what may be viewed as a series of missteps. We're trying to 
have a relationship with the bank regulators--but this is 
really the first time we're charged with coming up with a 
seamless web or system of regulation.
    We sat down with them. I think they didn't like what we 
said and maybe we didn't agree with some of what they said. I 
think now it's clear we came up with our best judgment about 
how to make sure banks don't engage in wholesale brokerage 
activity within the institution, yet preserve the traditional 
bank activities.
    I think a certain amount of it reflects a learning curve. I 
think we're continuing to learn, we're continuing the dialogue, 
and we really don't want to duplicate regulation. But I don't 
want to be called up here in 6 months and have you say that 
it's your job to regulate the securities activities of banks, 
and you didn't. So I think we want to be very careful that we 
get it right, because this is very big, it's historic 
legislation, as you said, and you're talking about a 
substantial part of the financial industry.
    Chairman Baker. Ms. Unger, Mr. Manzullo's time has expired, 
Mrs. Kelly, and I feel an obligation to facilitate Ms. Unger's 
departure here. She's been gracious with her time and we're 
past your departure schedule.
    With the subcommittees' understanding, we will return to 
regular order and hear the testimony of our other witnesses. 
I'd like to at this time excuse Ms. Unger. I am confident there 
are Members who would like to make further expression or pose 
further questions with regard to the testimony. The record 
remains open, and we may get back to you in writing.
    Ms. Unger. Thank you very much.
    Chairman Baker. Thank you for your participation this 
    Ms. Unger. I appreciate that. I hope the Members leave 
feeling that we are sincere in our efforts to continue a 
cooperative dialogue with everybody who's interested in having 
    Chairman Baker. For that, we are appreciative. Thank you 
very much for your appearance here today.
    Proceeding now in regular order, our next witness this 
morning is the Honorable Laurence Meyer, a Member of the Board 
of Governors of the Federal Reserve System, no stranger to the 
subcommittees. Welcome, sir.


    Mr. Meyer. Thank you. Chairman Baker and Members of the 
subcommittees, I appreciate this opportunity to present the 
views of the Federal Reserve system on the interim final rules 
issued by the SEC to implement the bank securities provisions 
of the Gramm-Leach-Bliley Act. The manner in which these 
provisions are implemented is extremely important to banks and 
their customers and well deserves your attention.
    As the banking agencies detailed in our official comment to 
the Commission, we believe the rules are, in a number of 
critical areas, inconsistent with the language and purposes of 
the GLB Act and create an overly complex, burdensome, and 
unnecessary regulatory regime. The rules as currently drafted 
would disrupt the traditional operations of banks and impose 
significant and unwarranted costs on banks and their customers.
    We support the Commission's recent actions to address 
important procedural aspects of the rules by providing or 
promising various extensions to the rules and the underlying 
statutory provisions. We believe these procedural steps are 
both necessary and appropriate to ensure there is a meaningful 
public comment process and that the SEC receives much needed 
information regarding the practical effects of its rules on the 
traditional activities of banks.
    More importantly, we look forward to engaging in a 
constructive dialogue with the Commission and its staff and to 
assisting them in modifying the substance of the rules in a 
manner that gives effect to Congress's intent and does not 
disrupt the traditional activities of banks.
    However, we are concerned that the SEC testimony today--and 
I refer specifically to their more detailed written testimony--
suggests that the SEC is not prepared to make the substantive 
changes needed to make the rules conform to the language of the 
GLB Act and the intent of Congress.
    Congress worked carefully in designing the securities 
provisions so as not to disrupt the traditional activities of 
banks. It is important to keep in mind that these provisions 
were not imposed because abuses had occurred in the traditional 
securities activities of banks. In fact, banks generally have 
conducted their securities activities responsibly and in 
accordance with bank regulatory requirements and other 
applicable law. Nor was this change undertaken in order to 
extend regulation to an unsupervised activity. Banks in the 
securities activities they conduct as part of their banking 
business are supervised, regulated, and examined by the 
relevant Federal and State banking agencies.
    Rather, the review of the bank exception was undertaken to 
address a concern that, with Glass-Steagall repeal, security 
firms might acquire a bank and move the securities activities 
of the broker-dealer into the bank in order to avoid SEC 
supervision and regulation.
    Some also expressed concern that banks might in the future 
significantly expand their securities activities beyond the 
traditional services provided to bank customers. Congress 
sought to balance these concerns with a desire to ensure that 
banks could continue to provide their customers the securities 
services that they had traditionally provided as part of their 
customary banking activities, without significant problems, and 
subject to the effective supervision and regulation of the 
banking agencies.
    The end result--the GLB Act--replaced the blanket exception 
for banks from the definitions of ``broker'' and ``dealer'' 
with 15 exceptions tailored to allow the continuation of key 
bank security activities.
    While we differ with the Commission on a number of aspects 
of the rules, we are most concerned with the provisions that 
implement the statutory exception for the trust and fiduciary 
activities of banks. Trust and fiduciary activities are part of 
the core functions of banks, and banks have long bought and 
sold securities for their trust and fiduciary customers, under 
the strong protections afforded by fiduciary laws and under the 
supervision and examination of the banking agencies. In fact, 
the Conference Report for the GLB Act specifically states that, 
I quote: ``the conferees expect that the SEC will not disturb 
the traditional bank trust activities'' under this exception.
    The interim final rules, however, impose compensation 
requirements on an account-by-account basis that are 
unworkable, overly burdensome, and at odds with both the 
language and the purposes of the exception. Under the rules as 
written, many customers that have chosen to establish trust and 
fiduciary relationships with banks will be forced to terminate 
these relationships or have duplicate accounts at the bank and 
a broker-dealer resulting in increased costs and burden. This 
was very clearly not the result intended by Congress.
    Another of the exceptions included by Congress in the GLB 
Act was designed to protect the custodial and safekeeping 
services that banks have long provided as part of their 
customary banking activities. Bank-offered custodial IRAs 
provide consumers throughout America a convenient and 
economical way of investing for retirement on a tax-deferred 
basis, and banks have long executed securities transactions for 
these accounts, subject to IRS requirements and the supervision 
and regulation of banking agencies.
    Banks, as part of their customary banking activities, also 
provide benefit plans with security execution services and 
execute securities transactions on an accommodation basis for 
other custodial customers. The Commission has stated, however, 
that the custody exception does not allow a bank to effect 
security transactions for its custodial IRA accounts, for 
benefit plan accounts, or as an accommodation for custodial 
accounts. This position essentially reads the explicit 
authorization adopted by Congress out of the statute, is 
completely contrary to the purposes of the Act, and would 
disrupt longstanding relationships between banks and their 
    The interim final rules also impose unworkable or overly 
broad restrictions on the networking arrangements a bank may 
have with a third-party broker.
    In addition, we strongly believe that the rules should 
provide a cure or leeway period to banks that are attempting in 
good faith to comply with the exceptions, particularly given 
the complexity of the rules. Indeed, in some cases, banks will 
not even be able to confirm that their security transactions 
will comply with an exception at the time they are conducted.
    The Board stands ready to work with the SEC and the banking 
industry to make sure the significant extent of changes to the 
rules that are needed to ensure that any final rules reflect 
the words of the statute and the intention of Congress.
    Thank you.
    [The prepared statement of Hon. Laurence H. Meyer can be 
found on page 81 in the appendix.]
    Chairman Baker. Thank you very much, Governor Meyer.
    Our next witness is the General Counsel for the Federal 
Deposit Insurance Corporation, Mr. William Kroener. Welcome, 


    Mr. Kroener. Thank you. Chairman Baker, Chairman Bachus, 
Members of the subcommittees, I appreciate the opportunity to 
testify on behalf of the FDIC regarding the implementation by 
the Federal Deposit Insurance Corporation and other Federal 
banking agencies of Title II of the Gramm-Leach-Bliley Act.
    My testimony today will discuss our view of the Securities 
and Exchange Commission's interim final rules that seek to 
implement the bank broker-dealer exceptions set forth in Title 
II. Those views are also set out very completely in the 
official comment letter of the banking agencies to the SEC.
    We are concerned that the burden on banks resulting from 
the SEC's interim final rules would force the push-out of 
various lines of business by banks that meet the statutory 
exceptions in Title II of the Gramm-Leach-Bliley Act. As you 
know, Title II was a carefully crafted compromise intended to 
allow these lines of business to be offered by banks. The SEC's 
interim rules would effectively overturn this compromise.
    The adverse impact of the interim final rules would be 
especially painful for hundreds of community banks that do not 
have SEC-registered broker-dealer affiliates. These banks 
provide important trust and custody services to their 
communities. If the SEC's interim final rules stand as 
currently drafted, customers of community banks would lose 
these important services.
    As published in the Federal Register of May 18th, the 
interim final rules are intended to clarify the SEC's 
interpretation of various bank exceptions from the definition 
of ``broker'' and ``dealer'' in the Exchange Act. However, 
instead, the rules in effect significantly revise the statutory 
language in Title II and disregard Congressional intent 
regarding the various statutory exceptions.
    First, the trust and fiduciary exception. Of greatest 
concern to the FDIC and the other banking agencies are the 
provisions of the final rules that implement the statutory 
exemption for traditional trust and fiduciary activities. We 
believe many of these provisions conflict with the statutory 
language of the Gramm-Leach-Bliley Act and will significantly 
interfere with the traditional trust and fiduciary activities 
of banks. These activities are a key component of the business 
of banking for many banks, including more than 1,000 community 
banks. They have long been offered to bank customers without 
significant securities-related problems, and are already 
regularly examined by bank examiners for compliance with trust 
and fiduciary principles that provide strong customer 
    The trust and fiduciary exception in Title II broadly 
authorizes the bank, without registering as a broker-dealer, to 
effect securities transactions in a trustee capacity so long as 
the bank is ``chiefly compensated'' for such securities 
transactions by forms of trustee compensation and if other 
statutory conditions are met.
    The SEC's interim final rules provide that a bank meets the 
Act's chiefly compensated requirement only if, on an annual 
basis, the amount of the relationship compensation received by 
the bank from each trust account exceeds the sales compensation 
received by the bank from that account.
    The FDIC and the other banking agencies strongly disagree 
with the SEC's position that the Act's chiefly compensated 
condition for the trust and fiduciary exception may be 
implemented on an account-by-account basis.
    Second, the custody and safekeeping exception. We also 
disagree with the SEC's treatment of the Act's custody and 
safekeeping exception. That statutory exception permits a bank, 
without registering as a ``broker'' under the Exchange Act, to 
engage in various custodial and safekeeping-related activities, 
``as part of its customary banking activities.'' This exception 
also allows banks to engage in other activities as part of 
their customary safekeeping and custody operations, including 
facilitating transfer of funds or securities as a custodian or 
clearing agency, effecting securities lending and borrowing 
transactions from customers, and holding securities pledged by 
a customer.
    We strongly disagree with the SEC's position that the 
custody and safekeeping exception does not permit banks to 
accept securities orders for their custodial IRA customers, for 
Section 401(k) and benefit plans that receive custodial and 
administrative services from the bank, or as an accommodation 
to custodial customers. We understand that one of the changes 
made in the Conference Committee in enacting the Gramm-Leach-
Bliley Act was intended to address precisely this. Although the 
SEC's interim final rules include two SEC-granted exemptions 
for custodial-related transactions, including a small bank 
exemption, these exemptions are subject to numerous burdensome 
conditions so that the result is little benefit to banks and 
enormous disruption.
    Third and finally, the networking exception. We are 
concerned with respect to that exception that the SEC's 
interpretation of the term, ``nominal one-time cash fee of a 
fixed dollar amount'', imposes unnecessary limitations on the 
securities referral programs of banks that are not required by 
the statute. Prior SEC precedents regarding networking arranged 
by banks and savings associations did not involve such 
restrictions on bonus programs and referral fees as are 
contained in the interim final rules.
    To conclude, the FDIC commends the subcommittees for 
focusing attention on the significant impact of the SEC's 
interim final rules on the banking industry.
    Given the profound impact of the interim final rules on the 
functional regulation of securities activities of banks, we 
hope that the SEC will engage in a meaningful dialogue with the 
banking agencies to produce a final rule that significantly 
limits unnecessary termination of traditional banking services 
or, in the alternative, does not force customers to have to 
seek duplicative account arrangements.
    Thank you.
    [The prepared statement of William F. Kroener can be found 
on page 99 in the appendix.]
    Chairman Baker. Thank you very much, Mr. Kroener.
    Our final witness on this panel is Ms. Ellen Broadman, 
Director of Securities and Corporate Practices, Office of the 
Comptroller of the Currency. Welcome, Ms. Broadman.


    Ms. Broadman. Thank you. Chairman Baker, Chairman Bachus, 
Members of the subcommittee----
    Chairman Baker. And you need to pull that mike. They're not 
very sensitive. You have to just pull it close.
    Ms. Broadman. Can you hear me now?
    Chairman Baker. Absolutely.
    Ms. Broadman. Oh, good. OK. Chairman Baker, Chairman 
Bachus, Members of the subcommittees, thank you for this 
opportunity to discuss the SEC's interim final rules. We 
appreciate the subcommittees' efforts to review the significant 
issues that the rules raise.
    To begin, I would like to commend the Commission for its 
recent actions on the rules. The Commission's recent decision 
to extend the time for banks to comply with the rules was a 
constructive first step.
    We also welcome and view as essential its commitment to 
further extend the compliance time once final rules are adopted 
so banks have sufficient time to bring their operations into 
compliance with the rules. And we are especially pleased that 
the Commission recognizes the importance of and anticipates 
amending the rules.
    The banking agencies are currently working together to 
develop for the Commission suggested approaches for revising 
the rules. We look forward to working with the Commission in 
developing rules that are workable for banks and that are 
consistent with the statutory language and Congressional intent 
behind the rules.
    We especially appreciate the subcommittees' support for 
this collaborative effort. The Office of the Comptroller of the 
Currency and the other banking agencies provided the Commission 
with comprehensive and detailed comments on the rules because 
of the significant issues they raise. We are concerned that the 
rules create unworkable requirements that would force banks to 
discontinue traditional banking activities that Congress 
specifically intended to preserve under the Gramm-Leach-Bliley 
    We are concerned that the rules would significantly disrupt 
longstanding relationships between banks and their customers, 
would restrict customer choices and increase customer costs. 
This result is unnecessary and inconsistent with the intent 
expressed by Congress in enacting these provisions.
    One particularly troubling area is how the rules would 
treat trust and fiduciary activities subject to the exemption. 
Congress adopted this exemption to permit banks to continue 
offering traditional trust and fiduciary services. To qualify 
for this exemption, the rules require banks to conduct account-
by-account reviews and establish for each individual account 
that the account meets very complicated compensation 
requirements. This provision and other provisions in the rules 
are so burdensome for banks and so impractical that they will 
effectively force banks of all sizes, large and small, to 
discontinue significant aspects of their traditional trust and 
fiduciary business.
    Another area of concern is the treatment of custody and 
safekeeping activities. These activities, like trust and 
fiduciary activities, are part of the core business of banking. 
Congress created a custody and safekeeping exemption to allow 
banks to continue providing the full range of customary custody 
and safekeeping services. Bank custodians have a long history 
of providing to customers order transfers to registered broker-
dealers. Despite this longstanding history, the rules do not 
include customary custodial order-taking within the exemption. 
Instead, the rules create an exemption that permits bank 
custodians to continue taking orders if they do not charge any 
fees for the service.
    To the extent that the rules force banks to stop offering 
order-taking as a convenience, customers will no longer have 
the choice of using their selected custodian to submit their 
orders. We believe this is contrary to both the language and 
the Congressional intent of the statute.
    We have a number of other areas of concern that are 
detailed in our comment letter that also are very important and 
that need to be addressed by the Commission in revising its 
    Our comment letter also expressed concerns with the process 
that was employed in adopting the rules. Final rules were 
issued prior to a notice and public comment period. This is not 
the normal way that the banking agencies issue their rules. 
This placed banks in an untenable position. Without knowing how 
the rules would be changed, banks were required to take 
immediate steps to comply with the rules without knowing how 
the rules would be changed prior to the effective date. Our 
letter urged the Commission to review public comments before 
establishing final rules and then grant banks sufficient time 
to bring their operations into compliance.
    We appreciate the Commission's response in which it pledged 
to address these problems. We believe the Commission has taken 
a positive step by extending the dates for compliance and 
acknowledging that the rules must be changed after 
consideration of the public comments.
    We stand ready to provide the Commission assistance in this 
process. And again, we appreciate the attention the 
subcommittees have given to the significant issues raised by 
the Commission's rules and appreciate this opportunity to 
express our views.
    [The prepared statement of Ms. Ellen Broadman can be found 
on page 116 in the appendix.]
    Chairman Baker. Thank you very much, Ms. Broadman. I would 
quickly add to your comment, it's apparent Members of the 
subcommittees have a very keen interest in resolution of the 
matter. And as you and the other panelists reach conclusions 
about remedies that would be appropriate, we would be very 
appreciative of being engaged in that discussion.
    I was visiting with Chairman Bachus during the course of 
the hearing this morning--and we've pretty much, at least on 
our behalf, reached a conclusion that we'd like to have those 
remedies--so in the event the remaining months ahead don't 
bring appropriate resolution, we might have an approach that 
might be helpful. And Chairman Bachus may wish to address that 
at a later time.
    Mr. Kroener, I want to understand it from a consumer 
perspective here for a minute. You're my banker. I come in to 
see you and I want to set up a trust for the kids. And pre-
Gramm-Leach-Bliley, as long as your compensation package didn't 
trigger certain things, you could in your capacity as the 
trustee get all of it done and tell me where to sign. Today if 
the SEC rule would go into effect, depending on account-by-
account how your income is derived, not with regard to my 
business, but generally in the banking practice, you may in 
order to facilitate the distribution of my investment strategy, 
have to go to a broker-dealer.
    Now beyond the disruptive effect of that new arrangement, 
there is a potential to increase the cost to me as the consumer 
for those services, because in your capacity as a trustee, 
you're going to be compensated because of those arrangements. 
And now we have to add on the broker-dealer for whatever it is 
he's going to do. Is that a fair assumption.
    Mr. Kroener. Yes. I think it's fair. Let me expand on that 
a little. Right now if you come to me to set up a trust account 
for your family and others, the bank will act as trustee, agree 
to set up the trust account, look at the asset composition and 
decide, given the objectives of your trust and the needs, the 
various transactions needed to be performed to set the 
portfolio correctly. And the bank will then charge you fees, 
and it may also do transactions through a registered broker-
dealer and charge the account amounts for those transactions.
    Under the new rule as proposed, the process of initially 
setting up the portfolio will incur fees through the broker-
dealer that will count as the bad type of compensation that 
banks cannot receive--not relationship compensation. So if the 
bank actually has the misfortune that you've come to them to 
set up the portfolio in December of a year and the bank goes 
ahead and executes the transactions in December of that year, 
the compensation to the broker-dealer for setting up the 
portfolio the way it needs to be in the bank's view as trustee 
will be much higher than the other fees that the trustee would 
receive for the year. So that account would not be exempt, even 
on an account-by-account basis. And it would be necessary for 
the bank in that circumstance to require you not only to open 
the trust account, but also for you to open a separate 
brokerage account with a broker-dealer and for the customer to 
actually go to the broker-dealer to arrange these transactions, 
as I understand it.
    Now that's an extreme example, because I've picked December 
of a year. But that's a single account. And that one account 
may cause the bank to not avail itself of the exemptions in the 
Act for these traditional trust services. The bank has to track 
it in a very different way than it would have prior to the Act. 
And it may not even be possible for the account to be done at 
    Chairman Baker. Well I take that as a yes.
    Chairman Baker. And secondarily, my point is, this is not 
just a matter of which regulator gets to look at the books, nor 
a matter of which industry makes the fees, there is an 
operative consequence to a consumer as a result of the 
implementation of these rules, and my concern is that we are, 
in fact, layering a regulatory oversight, increasing the net 
cost to the consumer of fiduciary services. And I think that is 
the principal focus which I hope the subcommittees will take.
    I'm just about to expire my time.
    Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman.
    Mr. Meyer, let me understand whether your position is that 
if a bank were engaging in an activity before Gramm-Leach-
Bliley, would there be any circumstance under which you would 
think that the SEC would come in and do regulation of that 
activity as opposed to the banking regulators?
    Mr. Meyer. I think the issue here is: are there activities 
that should be legitimately pushed out of banks under these 
    Mr. Watt. All right. So you're saying if there is such an 
activity, it ought to be pushed out of the bank and not be 
retained in the bank and therefore there is no activity that 
should be retained in the bank----
    Mr. Meyer. And double-regulated.
    Mr. Watt.----that the SEC should have any jurisdiction 
    Mr. Meyer. No. Not double regulation, not double oversight, 
no. But I think the tension here is that the SEC may have 
concerns that banks would try to become engaged in a general 
retail brokerage business not related to their trust accounts, 
not related to their custodial accounts. And it seems to me 
that's what this whole push-out was about--to prevent banks 
from moving in directions beyond their customary ones.
    Mr. Watt. OK. Let me go back to not a trust account, but an 
IRA account. Maybe there's no difference between the two 
technically, but in my mind--I'm directing my own IRA account. 
Are banks doing that inside the bank now?
    Mr. Meyer. Absolutely.
    Mr. Watt. OK. And when there is a transaction of 
securities, I call and I say I want to transfer----
    Mr. Meyer. You want to make a change.
    Mr. Watt. I want to sell IBM and buy something else. Does 
the bank get a separate commission there?
    Mr. Meyer. It can. It takes the order, and it can get paid 
for taking that order, although it is effected and actually 
executed ultimately through a broker-dealer.
    Mr. Watt. OK. Does the bank get a commission, or does the 
commission go to the broker-dealer?
    Mr. Meyer. Well, the bank can charge for that.
    Mr. Watt. I think you're sidestepping my question. Does the 
bank get a commission? Do they get a commission, or have they 
been paid a separate fee for just being the administrator of my 
    Mr. Meyer. Well, no, they can get a fee for administering, 
but they get a fee that has to cover any fee charged by the 
broker-dealer for executing the commission, and they can also 
charge a fee for taking that order.
    Mr. Watt. OK. But they can't get a commission on the sale 
    Mr. Meyer. They get a commission for taking the order, if 
you like. The actual execution is done ultimately by the 
broker-dealer. But they pass that through to the customer.
    Mr. Watt. Well, I'm assuming they pass all this through to 
the customer.
    Mr. Meyer. Right.
    Mr. Watt. The question is whether that person--well, let's 
cut the broker-dealer out. Let's say they did it online. They 
can't do that?
    Mr. Meyer. They always do it and they have to do it through 
a broker-dealer.
    Mr. Watt. OK. So you can't do it online. They can't just 
sit in the office and do it online and take a commission there. 
But they can charge a fee and then charge the broker-dealer's 
commission back to the customer, right?
    Mr. Meyer. Of course.
    Mr. Watt. OK. All right. I don't have a position on this. 
I'm just trying to figure out what the appropriate response is. 
And you're saying the broker-dealer part of that has got to be 
pushed out?
    Mr. Meyer. What the SEC says is that the bank can hold as a 
custodian the securities, but can't be involved in any 
activities related to order-taking.
    Mr. Watt. OK. If they have a securities subsidiary or 
affiliate, can they go to their own affiliate and use them as 
the broker-dealer?
    Mr. Meyer. Well, of course, they could do that, certainly. 
They could use a broker-dealer, including an affiliate.
    Mr. Watt. OK. I'm just----
    Mr. Meyer. But the issue here is that customers are used to 
working with banks who administer their IRA accounts and doing 
their customary business. If I want to make a change in my IRA 
account, I can do it through the bank. I call up the bank. I 
tell them exactly what I want to do. I don't have to set up two 
accounts, one with my bank and another with a separate broker-
dealer in order to get that transaction done. That would be 
burdensome, break the normal relationships, and be added cost 
for the bank customer.
    Mr. Watt. Thank you, Mr. Chairman. This is enlightening. I 
think more educational than----
    Mr. Meyer. Could I make another point about this, because 
this was an issue that came up during the Conference Committee, 
as Members of the subcommittees I'm sure are aware. At that 
time, we thought there was no problem with these transactions 
and this order-taking as part of custodial IRA accounts, but 
the banking agencies got wind that the SEC was taking a 
different interpretation, and we included a specific provision, 
or the Conference Committee added a provision to the bill that 
clarified, we thought, that these kinds of order-taking and 
securities transactions could be undertaken as part of 
custodial IRA accounts, and we thought the issue was settled.
    Chairman Baker. Mr. Watt, if I may jump in just for a 
moment. I recall the confusion in the Conference about the 
disposition of these accounts, and there was an affirmative 
line inserted which said traditional trust activities would not 
be affected by the adoption of the Act, and at issue is the SEC 
rule affecting those historic traditional services being 
provided by the bank. I'm told that about 90 percent of the 
securities activities that result in commissions are done 
through broker-dealers anyway. So this is not about diverting 
order flow from broker-dealers to banks, who are going to take 
the commissions from the SEC certified broker-dealer. It is 
more a question of how the customer engages with the bank and 
gets a product delivered by his bank to him. Either way you go, 
the customer is going to pay. You're absolutely right. My 
concern is that just with a different layer of authority, you 
could have the potential for higher cost assessments on the 
    Mr. Watt. I appreciate the Chairman giving me a little 
extra time. And I guess my concern is in that 10 percent. I 
think the 90 percent, there's a clear understanding of that.
    Chairman Baker. And my understanding is, and Governor Meyer 
may want to jump in, is that in that remaining area where the 
trustee is compensated in his capacity as a trustee and 
administration official of the trust activities, he is 
compensated in that fashion and not as a commission as a 
broker-dealer would be compensated. So as long as he's engaging 
in his administrative responsibilities to facilitate the order 
or the instructions for the trust, I think that's sort of the 
catch-all here. And when you get beyond that pale, then you do 
have to have a broker-dealer. I think.
    Mr. Bachus.
    Mr. Bachus. Thank you. I'm not going to ask any questions 
of the panel, because everything you said I agreed with.
    I don't want to elicit a negative response. Let me simply 
say this. I am going to yield to the gentlewoman from 
Pennsylvania for questions. But I will tell you, picking up on 
what Chairman Baker said, that there is sentiment on both sides 
of the aisle. I've talked to my counterpart in the Senate. I 
think we've got a commitment here this morning for substantial 
changes in the rules by the SEC. I know Chairman Pitt will be 
on the Hill in discussions. We hope to get the same commitment 
from him.
    If there are not substantial changes in the rules by the 
SEC, then substantial changes will be made legislatively, and I 
hope we can avoid that. But there will be substantial changes 
to the rules one way or the other.
    Chairman Baker. Thank you.
    Chairman Bachus. Thank you.
    Chairman Baker. Thank you, Mr. Bachus.
    Ms. Jones.
    The gentleman has yielded his time to Ms. Hart. Thank you.
    Ms. Hart. Thank you, Mr. Bachus, I appreciate that. And 
thank you, Mr. Chairman. I won't take too much time either. 
Listening to the testimony actually from the SEC and now from 
the three of you, I still don't know if before these rules were 
issued there was some contact or conference among the four of 
you or your organizations. Could you sort of enlighten me a 
little bit more about exactly what type of contact there was 
prior to these rules actually being issued?
    Mr. Kroener. Let me try to respond to that. I, as FDIC 
General Counsel, was involved with the general counsels of the 
other banking agencies in overseeing and monitoring the 
implementation of Gramm-Leach-Bliley generally, including these 
rules. There came a time when speeches were made by SEC staff 
members, with the disclaimer they did not represent the 
official position of the SEC, that gave us great concern. And 
we, the banking agency general counsels, sought to schedule, 
did schedule and had a meeting with the SEC staff to discuss 
our concerns about the rules, our view of how the rules ought 
to be--our views of the legislative history. That occurred, I 
think, in March of this year. It did take a long time, and it 
was late in the game.
    In the course of that meeting, I think we did give them a 
letter that had been received by one of the banks that one of 
us regulates saying that one of the big mutual fund groups was 
actually going to discontinue business with that bank because 
of continuing uncertainties. But we did express our views. We 
did make our views known about the legislative history. As I 
say, I think that meeting was March 7th of this year. And the 
next thing that really happened was the interim final rules 
came out.
    Ms. Hart. Which was something that you didn't actually 
expect to see?
    Mr. Kroener. That is correct.
    Ms. Hart. Mr. Meyer.
    Mr. Meyer. I would just point out that the SEC did not 
reach out to the banking agencies as they were beginning their 
thinking about formulating the rules. The banking agencies had 
to initiate the meeting when we understood they were going into 
this process, and we had an idea from their speeches that they 
were going to be very contrary to what our view was of the 
intent of Congress in the provisions of GLB.
    That meeting was not, shall we say, interactive and 
collaborative, but it was an opportunity to voice our concerns. 
But we got very little from that effort by the time those rules 
were actually released.
    Ms. Hart. And there was no contact? OK. And I guess we have 
a vote. But I just quickly also wanted to ask one question as 
well. Did you foresee after Gramm-Leach-Bliley that the 
regulation of the traditional securities-related activities 
would be overseen more by the SEC?
    Mr. Meyer. No. Actually, we thought the plain language of 
the Act in this case was very clear. And for a time, we didn't 
think there would be any rule writing and that it might not be 
    So the rules were a surprise and the content was a major 
    Ms. Hart. Is that pretty fair to assume that all of you 
    Mr. Kroener. Yes.
    Ms. Broadman. We agree with that.
    Ms. Hart. OK. Thank you. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Ms. Hart.
    Just as sort of announcement of schedule here, Mr. Bachus 
has departed for the floor to vote, so we can continue with our 
hearing. Those who wish to leave and come right back, I would 
encourage you. Ms. Jones is next for questions, and you're 
    Ms. Jones. Thank you, Mr. Chairman. I'm sitting here 
smiling only because last year when I came to Congress, last 
year, last term, and Gramm-Leach-Bliley was on our plate, I 
can't believe that none of us or you did not contemplate the 
possibility of the situation that you find yourselves in right 
now. Now that's not to say I don't support or that I do support 
the position.
    But let's look at it from this perspective just for a 
moment. If we're talking about the consumer and we're talking 
about you acting in trust, I'm saying a banker acting in trust 
for a consumer, assume, just for example, that something goes 
wrong with the transaction. Assume that the consumer then tries 
to figure out who is responsible for the problem with the 
transaction with their trust. Should not they be able to come 
back to you or to the broker-dealer or to understand the 
obligation or who's regulating that conduct if you are, in 
fact, engaging in conduct that traditionally had not been the 
conduct you had engaged in prior to Gramm-Leach-Bliley?
    Mr. Meyer.
    Mr. Meyer. No. But we're talking about activities that were 
engaged in prior to Gramm-Leach-Bliley and that banks have 
sought to retain after Gramm-Leach-Bliley. So those activities 
were customary. Should the customer have a place to go to? 
Absolutely. It can complain to the bank and its supervisors 
that oversee this, and we look at those complaints. We have 
that responsibility to protect the investor's interest. 
Absolutely. It is not a question that the SEC is the only 
supervisor out there that is capable of protecting investors' 
interests. Bank supervisors have acted in this capacity for a 
long time.
    Ms. Jones. But in the course of your discussion----
    Ms. Broadman. May I add something?
    Ms. Jones. I only have 5 minutes, so I don't want two 
answers to the same question, unfortunately. I'm sorry. In the 
course of our whole discussion are 20 years of trying to decide 
whether we were going to let banks and securities and everybody 
do each other's business. Surely you contemplated down the line 
that there would be a point where you would cross over and 
there would have to be some type of interagency regulation. Mr. 
Kroener, are you confused by my question? You had a frown on 
your face. So if you are, I want to clear it up for you.
    Mr. Kroener. Let me try. Sorry. No, I wasn't confused by 
the question. It has been clear for decades that a bank acting 
as trustee has responsibilities to the customer, is fully 
answerable to the customer. It is one of the highest duties in 
the law.
    Ms. Jones. And can receive compensation for the work that 
they do?
    Mr. Kroener. The trustee receives compensation. And a 
trustee may be surcharged for mishandling the trust. That had 
been long established. Banks have executed security 
transactions in their capacity as trustee for decades, without 
major problems having arisen. And so when the legislation was 
passed, there were discussions about whether it was necessary 
for those traditional activities that banks were doing to be 
swept into the push-out provisions that would subject them to--
    Ms. Jones. Let me just stop you for a moment. Assuming I 
agree with you for purposes of this short discussion that we 
had that these are traditional conduct or business that you've 
previously engaged in, none of you are saying then that if you 
operate outside of the traditional trust conduct that you 
should not be regulated by the SEC? If your bank decides to 
sell securities or whatever, right? Question? In other words, 
you act outside of the traditional trust relationships. That's 
what you were just saying, what you traditionally do as a 
trustee. If you act outside of that and you begin to engage in 
conduct that is that of a broker-dealer that you should not be 
regulated by the SEC.
    Maybe I'll go to Ms. Broadman. Maybe she understands my 
    Ms. Broadman. I understand. I think that Congress 
recognized that nobody wanted to put full-scale brokerage 
operations in banks. And in fact, that was the intent of the 
Gramm-Leach-Bliley Act. Our concern is that the way the 
Commission has implemented the Act. They're doing it a way that 
is not needed to to make sure that full-scale brokerage 
activities are pushed out.
    If you look at the trust area, there are enormous 
regulations, fiduciary duties. There are customer protections. 
I think you're right to be looking at is the customer 
protected. Where a bank is acting as a trustee, they have the 
highest duties. Consumers can sue them if they don't act in the 
best interest of the customers. They can recover costs. There 
is customer protection there.
    Ms. Jones. I'm almost running out of time, Ms. Broadman. 
Let me just ask you this question. But there is nothing in 
Gramm-Leach-Bliley that keeps a bank from deciding that now I 
want to be a broker-dealer and creating a broker-dealer within 
the bank? That's what the purpose----
    Ms. Broadman. There are. There are advertising 
restrictions. A bank can't run a full-scale brokerage operation 
such as----
    Ms. Jones. Stephanie Tubbs Jones Incorporated Bank could 
create Stephanie Tubbs Jones, a broker and agency separate and 
apart from the bank, right?
    Mr. Meyer. No. But that is not one of the exceptions. There 
are specific exceptions that are tailored----
    Ms. Jones. But my question is not whether that's one of the 
exceptions. I'm just saying that you could, in fact, create a 
broker. Someone else could create it and call it Stephanie 
Tubbs Jones Inc.
    Mr. Meyer. Could not.
    Ms. Broadman. Banks can create subsidiaries that are 
brokers. They're separate. But they can't put it in the bank.
    Ms. Jones. Right. So the answer is yes?
    Mr. Meyer. No, not inside the bank.
    Ms. Broadman. It's a separate entity.
    Ms. Jones. A separate entity. That's what I just said.
    Ms. Broadman. But Gramm-Leach-Bliley doesn't permit that to 
take place within the bank.
    Ms. Jones. I should not have said within the bank. Because 
really you're just engaging in the same shell game that you 
engaged in before Gramm-Leach-Bliley, that there was another 
company that you could use to do what you couldn't do under 
Gramm-Leach-Bliley. Are you with me?
    Mr. Kroener. Absolutely.
    Chairman Baker. Ms. Jones, your time has expired.
    Ms. Jones. Thank you very, very much.
    Chairman Baker. I would clarify it as a pot plant rule. 
This one you can't do behind the pot plant, you've got to have 
it down the hall in another room.
    Ms. Jones. Exactly. Thank you.
    Chairman Baker. And the question is, if the bank doesn't 
have the money to do that, are we depriving customers of 
services they are otherwise provided? I'd like to recognize Mr. 
Tiberi at this time.
    Mr. Tiberi. Thank you, Chairman Baker.
    Kind of following up on my colleague from Ohio's comments, 
having now established that we all agree that there's 
differences between bank trust departments and the way the 
oversight is and the oversight on brokerage firms. Would you 
all agree--could you explain, I guess, first, the oversight 
that a bank trust has, and would you all agree that the need 
for additional SEC oversight is unnecessary?
    Mr. Meyer. Yes. I think there are two major areas. One, the 
bank trust departments operate under trust and fiduciary law. 
And bank examiners examine these departments for compliance 
with that law. Then they examine to make sure that there are 
policies and procedures in place that govern that compliance. 
They make sure that there are no conflicts of interest, and all 
the other things that the SEC could do to protect investors' 
interests are being undertaken by the bank regulators and their 
examination of the trust departments.
    So there is absolutely no need for a duplicative second set 
of supervisors and oversight of these responsibilities. I mean, 
the problem here is clearly that the SEC believes that they're 
the only ones that should have the authority to supervise those 
    Mr. Tiberi. Thank you.
    Ms. Broadman. I think it's important, too, just to add to 
that, to look at it from the customer perspective. There are 
customers who would prefer to do business with a bank than with 
a registered broker-dealer. And to the extent that the rules 
force activities out into broker-dealers, they are denying 
customers that choice.
    Also, some people feel that the regulation in the banks, 
the fiduciary or the trust requirements, impose higher duties 
than those that are imposed on broker-dealers, so they would 
rather do business there. But in any case, we agree fully with 
Governor Meyer's comment that in the trust and fiduciary area, 
there are extensive regulations both under State law, under 
Federal law, and under our regulations.
    We have examiners that are in the banks. In the largest 
banks, we have examiners that are there on a full-time basis 
constantly reviewing what's going on, and in the smaller banks 
on a regular basis looking at their activities, so that you do 
have a pervasive legal regulatory scheme as well as pervasive 
oversight by the bank examiners.
    Mr. Kroener. I don't have anything to add to the prior 
answers of the other two witnesses.
    Mr. Tiberi. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Tiberi. We're down to about 
two-and-a-half minutes. I'm going to have to run to the vote. 
Mr. Bachus, I understand, is on his way back. So we would stand 
in recess for just a few minutes until Chairman Bachus returns.
    I would just make the observation, it appears to me just 
from a casual reading of the papers that the SEC has a lot of 
responsibilities to conduct in other areas, and it would seem 
pursuing inappropriate conduct within the bank that's already 
subject to banking regulators' oversight might not be an 
effective use of resources. So we have some concerns that I 
think need to be addressed.
    We stand in recess.
    Chairman Bachus. The Capital Markets and the Financial 
Services Joint Committee hearing is called to order. When we 
recessed, we had anticipated--two Members had requested that we 
return and allow them to ask questions. They have not returned. 
I'm going to ask one final question. Once you answer that, if 
they're not back, we will adjourn the first panel.
    My question--and this for the record--in defending their 
rulemaking process on the push-out proposal, the SEC testified 
earlier that the banking agencies routinely issue, ``interim 
final rules.'' Is that true? Under what circumstances have your 
agencies issued such interim final rules in the past?
    Mr. Meyer. We occasionally issue interim final rules, and 
I'll give you an example. Under Gramm-Leach-Bliley, we were 
operating under very short timeframes for when new activities 
in the statute were becoming effective. And so we had interim 
rules to open up access to the new activities for banks so they 
wouldn't be delayed. So when it came to qualifications for 
financial holding companies, that was an interim final rule to 
get that going so that banks could immediately have access to 
it. When it came to new activities that banks could engage in, 
in affiliates, and so forth, those were interim final rules.
    When we had a controversial case that would impose a new 
burden on a bank, we did not use interim final rules. The 
capital under merchant banking is a perfect example. We put out 
a proposal. We knew it would be contentious. After all of the 
discussion, we didn't put out then a final rule, but we issued 
it again as a proposal to allow further comment on it. And I 
think that's the model that we feel is the appropriate one in 
this context.
    Chairman Bachus. And ``routine'' would be that you all 
don't routinely issue?
    Mr. Meyer. Right.
    Ms. Broadman. We are the same. We would not routinely use 
the interim final rule approach. We've used it in unusual 
circumstances to relieve burden. We would not use it in a case 
like this where we're imposing new burdens on banks that are 
going to be very controversial. So we take a similar approach 
to the Federal Reserve Board.
    Mr. Kroener. And the same is true, Congressman, of the 
FDIC. We have used interim final rules where it expands 
authority of banking organizations, but not for the first time 
to restrict or prohibit or significantly affect existing 
    Chairman Bachus. I appreciate your answers. If there are no 
further questions, the first panel is discharged. And we'll go 
right to the second panel. We certainly appreciate your 
testimony and appreciate you being here, and apologize for the 
    I want to welcome the second panel and look forward to your 
testimony. The second panel is consisted from my left to right 
of Mr. Michael Patterson, Vice Chairman, J.P. Morgan Chase & 
Company; Mr. Edward Higgins, Executive Vice President, U.S. 
Bancorp. You're testifying on behalf of the American Banking 
    Mr. Higgins. Yes, Mr. Chairman.
    Chairman Bachus. I see. And Mr. Robert Kurucza, General 
Counsel of the Bank Securities Association. Mr. Reid Polland, 
President and Chief Executive Officer, Randolph Bank & Trust 
Company, also testifying on behalf of the Independent Community 
Bankers. And finally, Mr. Eugene F. Maloney, Executive Vice 
President and Corporate Counsel, Federated Investors. Welcome 
to you all. We have a mix of veterans before the subcommittees 
and first-time witnesses. At this time, Mr. Patterson, we'll 
start with you. Thank you.

                          CHASE & CO.

    Mr. Patterson. Thank you, Chairman Bachus. I very much 
appreciate the opportunity to be with you today to comment on 
the SEC's interim final rules. My brief remarks will touch only 
on a few specific aspects of the rules that are illustrative of 
our broader concerns. And my written statement addresses 
additional issues which have been part of an ongoing dialogue 
between banking organizations and the Commission's staff.
    At the outset, let me emphasize that we are not opposed to 
functional regulation or to full compliance with Title II of 
the Gramm-Leach-Bliley Act. Quite the contrary. Congress made a 
clear determination that certain activities once conducted by 
banks should now be conducted by SEC-registered broker-dealers, 
and at J.P. Morgan we are moving various activities into our 
broker-dealers and, indeed, over 1,000 of our bank employees 
have qualified to become SEC-registered representatives.
    Our basic concern is that the interim final rules impose 
detailed, complex requirements on activities that Congress 
decided to leave in banks. The cost of complying with these 
requirements would be very substantial, and in some cases, the 
rules would make it virtually impossible for banks to continue 
those activities.
    The rules evince a suspicion on the part of the Commission 
that without the straitjacket of the rules, banks would conduct 
a wholesale brokerage operation under the guise of a trust or a 
custody department. Given the conditions in the statute itself, 
we don't think that suspicion has any basis that would justify 
the burdens imposed by the rules. These bank activities are 
subject to extensive fiduciary and other legal duties and 
potential liabilities and are intensively supervised by bank 
regulators. Given these constraints, we don't believe it would 
be rational or possible for a bank to try to provide a full 
service brokerage in disguise.
    Several of our concerns with the interim final rules relate 
to compensation. Under the Act, transactions in a trustee or 
fiduciary capacity are exempt only if the bank is ``chiefly 
compensated'' on the basis of administration or certain other 
fees. The SEC rules propose that the chiefly compensated test, 
which has very complex definitions of different categories of 
compensation, be applied to every single account. For J.P. 
Morgan, this would require a periodic review of more than 
50,000 trust and fiduciary accounts to determine and document 
their compliance. Our firm's existing management information 
systems--and we suspect those of most other banks--do not 
provide data using all the categories required by the SEC's 
test. We could, of course, create new systems given enough time 
and money. In fact, I believe one bank has estimated that doing 
so will cost it at least $15 million.
    But we do not believe that Congress could possibly have 
intended banks to assume a burden of this magnitude in order to 
demonstrate that a traditional banking business should not be 
pushed out of the bank. Instead of an account-by-account 
approach, we agree with the banking regulators that the 
Commission should adopt a test that measures chiefly 
compensated ``on an aggregate basis,'' and hopefully, with 
simplified compensation calculations.
    We're also concerned about the provisions related to 
employee compensation, including the SEC's discussion of bonus 
plans. Bonus plans are not mentioned in the Act. However, the 
Commission seems to take the view that unregistered bank 
employees may not receive bonuses based in any part on 
securities transactions unless the bonuses are based on the 
overall profitability of the bank. But few if any bonus plans 
are based on the stand-alone profitability of a bank as opposed 
to the profitability of the overall financial institution or a 
business unit within it. This requirement would effectively 
regulate the structure of bank bonus compensation plans and we 
think is another example of the SEC's unnecessarily broad 
approach to eliminate the perceived, but we think 
unsubstantiated, risk of evasion.
    One final example of overreaching intervention in 
traditional bank activities is the interim rules' treatment of 
bank employees who also have been registered as employees of a 
broker-dealer affiliate, of whom, as I mentioned, we have over 
1,000. When performing in the latter role, these dual employees 
would quite properly be subject to the supervision of the 
broker-dealer. However, the SEC's release indicates that it 
believes that the bank securities activities of the employees 
should also be subject to broker-dealer supervision, including 
approval and recordkeeping requirements. This duplicative 
supervision is not only unnecessary and burdensome, but in our 
view flies in the face of the principal of functional 
regulation underlying Title II.
    Thank you for your attention, and I'd be pleased to answer 
any questions.
    [The prepared statement of Michael E. Patterson can be 
found on page 168 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Higgins.


    Mr. Higgins. Mr. Chairman, I'm Ed Higgins, Managing 
Director of the Private Client Group at Firstar, a subsidiary 
of US Bancorp. We operate in 25 States, primarily in the 
Midwest, West, and in Florida. I am here today on behalf of the 
American Bankers Association and the ABA Securities 
    As you have heard, the issues raised by these rules are of 
great concern to all banks, large and small. Many services 
offered to bank clients, including self-directed IRA account 
holders and Section 401(k) plan participants will be 
significantly and negatively impacted if the SEC's interim 
final rules are not amended. Brokerage services offered to 
retail customers from the bank lobby through registered broker-
dealers and sweep services offered deposit account holders are 
two other products that will suffer under the SEC's rules.
    Before I discuss these issues in greater detail----
    Chairman Bachus. Could you slide that mike up a little 
    Mr. Higgins. Before I discuss these issues in greater 
detail, however, I wish to go on record regarding the recent 
initiatives undertaken by the SEC. We are grateful that the SEC 
has moved the compliance date to next May and has indicated 
further additional time to comply will be given once the SEC 
issues amended final rules. Industry discussions held since the 
SEC first issued its interim final rules have been helpful, and 
we hope that they will continue as the SEC continues to learn 
more about our banking industry.
    One of the industry's top concerns with the final rules is 
the trust and fiduciary exemption's chiefly compensated 
requirement as interpreted by the SEC. We believe that the SEC 
has interpreted the statute in such a way that banks will be 
forced to push out many of the traditional trust and fiduciary 
activities in direct contravention of Congressional intent, or 
alternatively, expend millions of dollars to develop the 
requisite technology to comply.
    The SEC's narrow interpretation also harms consumers. For 
example, employers who sponsor retirement plans for employees 
often negotiate for bank trustees of Section 401(k) plans to be 
compensated through the use of Section 12(b)(1) shareholder 
servicing fees and other fees paid by the mutual funds in which 
the plan assets are invested. Although this process and 
practice has been allowed for years by the Department of Labor, 
the agency charged under the Employee Retirement Income 
Security Act with regulating Section 401(k) plans, accounts 
earning these fees would not pass the chiefly compensated test. 
Many small employers can only afford to offer their employees' 
Section 401(k) plans through these fee arrangements. At a time 
when we are encouraging consumers to save for their retirement, 
it just does not seem right to eliminate options that would 
allow consumers to do just that.
    Order taking is another service offered by the banks where 
SEC has taken an exceedingly narrow position with regard to the 
push-out provisions that effectively prohibit banks from taking 
orders from Section 401(k) participants, self-directed IRA 
customers and many other consumers. The Act provides without 
limitations that banks as part of their customary banking 
activities, that offer safekeeping and custody services with 
respect to securities, will be exempted from the brokerage 
    Order taking and buying or selling securities at customer 
direction, and as an adjunct to custody relationships, has long 
been a traditional bank service. The Department of the 
Treasury, bank regulators and well-known trust authorities 
dating back as early as the 1930s have all recognized that 
order taking is a customary custody service.
    The SEC disagrees, despite the fact that Members of the 
subcommittees specifically added self-directed IRAs to the 
statute to make clear that these accounts were adequately 
protected under the legislation.
    Broker-dealer firms do not want to assume order execution 
responsibility for bank custody accounts. Thousands of accounts 
would have to be opened under individual customer account 
names. Records for these accounts would have to be established 
and maintained, compliance responsibilities would be expanded 
by adding these accounts to the broker's book. Yet no assets 
would be held in the account as the actual custodial account 
and assets would remain in the bank. Consequently, not even our 
members' broker-dealer affiliates wish to assume a business 
that significantly increases compliance costs and regulatory 
burdens for very little compensation.
    For the first time ever, the SEC has defined the term 
``nominal one-time cash fee of a fixed dollar amount'' to mean 
a payment that does not exceed one hour of the gross cash wages 
of the unregistered bank employee making the referral. In 
addition, the SEC interpretation requires all points paid under 
a referral fee program to be the same for all products.
    Our members, banks and broker-dealers alike, have long 
operated their referral fee programs in compliance with all 
applicable guidance, including guidance previously issued by 
the Securities and Exchange Commission. In fact, the 
requirements that formed the framework for the development of 
many bank referral fee programs involving products and other 
services rather than just securities are based on these SEC 
    Finally, the Gramm-Leach-Bliley Act provides an exemption 
from push-out for bank sweep services. I know that other 
members of this panel will also discuss this issue, so I'll 
merely close by suggesting that before the SEC takes any action 
that might encourage consumers to move their sweep deposit 
accounts from banks to broker-dealers, consideration should be 
given as to what impact such movement would have on the 
availability of deposits to fund loans in our local 
communities. It would be prudent for the SEC and the bank 
regulators to consider this issue jointly before any regulatory 
action is taken that could cause significant disintermediation 
of bank deposits.
    Thank you for your time.
    [The prepared statement of Edward D. Higgins can be found 
on page 179 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Kurucza.

                     SECURITIES ASSOCIATION

    Mr. Kurucza. Thank you, Chairman Bachus. My name is Bob 
Kurucza. I am a partner in the law firm of Morrison & Foerster 
and serve as General Counsel to the Bank Securities Association 
(BSA). Prior to joining Morrison & Foerster, I served as 
Director of the Securities and Corporate Practices Division at 
the OCC, and as an Assistant Director in the Division of 
Investment Management at the SEC. Accordingly, I have been 
involved in bank securities matters for over 20 years, both as 
a regulator and as a private practitioner.
    I am pleased to have the opportunity to appear today to 
discuss the SEC's ``push-out'' rules. As you know, these rules 
relate to the bank broker-dealer exceptions in Title II of the 
Gramm-Leach-Bliley Act, the so-called Title II Exceptions. This 
is a vitally important matter for the banking industry, and we 
commend your leadership in holding this hearing. We clearly 
need your help.
     The Gramm-Leach-Bliley Act was intended to modernize the 
regulatory scheme for the financial services industry. There is 
no question that functional regulation is a key component of 
the new regulatory regime. However, Congress recognized the 
limits of functional regulation. This is why it provided the 
Title II Exceptions. There was no need to subject activities 
that had been conducted safely and soundly by banks--in many 
cases for over 100 years--such as trust, fiduciary and sweep 
account services--to redundant broker-dealer regulation. These 
activities have and continue to be effectively regulated by 
Federal and State banking authorities without any history of 
significant problems.
    The Title II Exceptions were clearly intended to allow 
banks to continue to conduct traditional securities-related 
activities undisturbed, without having to register as broker-
dealers. The SEC seems to have missed this fundamental point.
    It is not surprising that the push-out rules, which in 
effect nullify many of the Title II Exceptions, have met with 
almost universal criticism. The BSA has been a loud voice in 
this chorus of critics. It believes the rules are fundamentally 
flawed from both a procedural and substantive perspective.
    As to process, the BSA believes that a substantial doubt 
exists, from a legal standpoint, as to whether the SEC in 
issuing the rules as ``final rules'' has met the stringent 
standards imposed under the Administrative Procedures Act. 
There clearly was no urgent need to adopt definitive rules. The 
only thing that had to happen immediately was the deferral of 
the May 12th effective date.
    By issuing final rules without providing prior notice or 
the opportunity for public comment, the SEC placed banks in a 
Catch-22 position. To its credit, the SEC recognized the 
quandary in which it had put banks, and recently extended the 
Title II compliance dates until May of next year. This is a 
welcome first step in the right direction. However, no amount 
of time delay will cure the substantive defects in the rules.
    In this regard, the BSA believes that most of the rules 
will greatly diminish the ability of banks to provide 
longstanding services to their customers. Accordingly, they 
clearly contravene Congressional intent and reflect a basic 
lack of understanding as to the nature, structure and pricing 
of these services. The rules are replete with departures from 
Congressional intent. This is the case with almost all of the 
Title II Exceptions. Even in cases where the SEC ostensibly is 
attempting to provide relief or flexibility, it conditions the 
availability of the relief on such onerous and unworkable 
conditions that it is rendered meaningless.
    As the SEC has acknowledged, banks now conduct most of 
their core securities activities, such as full service 
brokerage, through registered broker-dealers. Nonetheless, the 
SEC somehow believes that banks will use the Title II 
Exceptions to evade broker-dealer regulation. This is pure 
sophistry of the highest degree. Banks have been conducting 
most of their securities activities through registered broker-
dealers for many years. They have done so voluntarily even 
though a blanket exemption from regulation was available.
    Where does this leave us? There is no question that the 
rules must be rebuilt from the ground up. We would hope that 
the SEC would heed the concerns expressed by your subcommittees 
and other interested parties. Based on this input, we would 
urge the SEC to start afresh and republish the rules as 
proposed rules that follow Congress's mandate and conform to a 
normal rulemaking process.
    Thank you again for the opportunity to appear. We greatly 
appreciate it. I would be happy to answer any questions that 
you may have.
    [The prepared statement of Robert M. Kurucza can be found 
on page 198 in the appendix.]
    Chairman Bachus. I appreciate that.
    Mr. Pollard.


    Mr. Pollard. Chairman Bachus, Members of the subcommittees, 
my name is Reid Pollard, and I am President and CEO of Randolph 
Bank & Trust Company, a $186 million community bank in 
Asheboro, North Carolina. I also serve on the Federal 
Legislation Committee of the Independent Community Bankers of 
America (ICBA), on whose behalf I am testifying today.
    Thank you for this opportunity to express our views on the 
effect the SEC's proposed broker-dealer rule would have on 
community banks. We believe the SEC's rule in its present form 
is incompatible with Congressional intent. To quote from your 
letter of July 19 by Chairman Oxley and every subcommittee 
chair: ``We are troubled that the rules do not reflect the 
statutory intent of Congress to allow certain traditional 
banking activities involving securities, such as trust and 
custody services, to remain in the bank and outside SEC 
    A separate letter sent by Ranking Member LaFalce expressed 
similar concerns. Clearly, this subcommittee, the subcommittee 
of primary jurisdiction, knows what Congress intended when it 
passed the Gramm-Leach-Bliley Act. We encourage the SEC to 
develop a regulatory scheme that meets this intent.
    We are greatly concerned that the SEC's proposal in its 
present form would impose unworkable and burdensome 
requirements on small banks.
    Indeed, we believe that in some cases the additional 
requirements placed on banks to comply with the rule would 
essentially nullify the exceptions that Congress wisely wrote 
into the law. These exceptions are extremely important for 
community banks and our customers. Registering as broker-
dealers is simply not an option for most small banks.
    It appears that the SEC has failed to take into account the 
extensive fiduciary requirements that other laws impose on bank 
trust and fiduciary activities as well as the existing 
supervisory framework that Federal banking agencies have 
established to supervise these activities.
    Nullifying the exceptions or rendering them useless because 
of unnecessarily restrictive regulations would have a damaging 
effect on our banks and our communities.
    If community banks lose these exceptions, customers in many 
rural areas might not have anywhere else to turn for these 
services. That is why it is so important to get this rule 
right, to adhere to the intent of Congress as closely as 
possible to allow banks to continue to do the things we have 
been doing for many years without any problems. And many banks 
have been doing it for quite some time. Our bank has been 
offering securities and other nondeposit products and services 
for over 9 years. We are very pleased with how we have assisted 
our customers and grown to become a total financial services 
center in our community.
    Like you, Mr. Chairman, we have a number of substantive 
concerns which we have spelled out in detail in our comment 
letter. We feel the interim final rule would be very disruptive 
for custodial services, retirement plans, and many other 
products and services that include security services that banks 
have offered their customers for many years without problems. 
These products and services were and should be exempted by 
statute. Unfortunately, the existing SEC approach goes in a 
very different direction, and in some instances what is 
supposed to be investor protection would actually be investor 
    Like you, Mr. Chairman, we very much welcome and appreciate 
the SEC's announcement on July 17 that the compliance date and 
comment period for this rule would be extended and that the 
rule would be amended. But we ask the SEC to take it a step 
further. We believe the SEC should issue a substantially 
revised proposal for public comment. We believe it would be an 
error for the SEC to try to fix this rule based on comments on 
the existing flawed interim final rules. Rather, a new proposal 
is needed that takes into account the comments the agency has 
already received, and it is extremely important that the public 
have a further opportunity to comment on a revised proposal.
    We believe the SEC should work closely with the Federal 
banking agencies as it drafts a proposal that would impact the 
banking industry.
    Finally, we believe that the SEC should defer compliance 
for at least 12 months after a final rule is published. This is 
critical to allow banks the time to adopt systems, procedures 
and products and services.
    Mr. Chairman, we want to thank you and the other Members on 
the subcommittees who have brought critical attention and focus 
to this issue. You have provided the leadership necessary to 
get the bank broker-dealer exceptions back on the right track, 
the track that you intended in adopting the Gramm-Leach-Bliley 
Act some 20 years ago.
    Thank you again for this opportunity to testify. I will be 
happy to answer any questions you may have.
    [The prepared statement of K. Reid Pollard can be found on 
page 230 in the appendix.]
    Chairman Bachus. Mr. Maloney, I noticed from reading your 
written testimony that you are also a faculty member at Boston 
    Mr. Maloney. I had the misfortune of being trained as a 
lawyer, yes, Mr. Chairman.
    Chairman Bachus. But you teach trust and securities 
    Mr. Maloney. Yes, sir.
    Chairman Bachus. So we're very much looking forward to your 


    Mr. Maloney. I have two roles, Mr. Chairman. I'm a senior 
officer in my company, and for the last 13 years, I have been a 
member of the faculty of Boston University Law School. And I 
teach a course on the trust and securities activities of banks. 
So this is an issue that I've been involved in both 
corporately, but academically as well.
    My company is involved in Gramm-Leach-Bliley primarily 
because of the $160 billion in the mutual funds that we manage. 
Easily 50 percent comes from the 1,400 bank trust departments 
throughout the country that we do business with. And I'm really 
not here today in behalf of my company. I'm here in behalf of 
our clients. And they aren't just clients, they're friends.
    I got involved in H.R. 10 when to our surprise it made it 
through the House by one vote. We looked at Title II and the 11 
Exceptions from broker-dealer status, and we superimposed those 
11 Exceptions on the typical book of business of a community 
bank trust department, and were very, very concerned that 
between 10 and 15 percent of the traditional products and 
services offered by a community bank trust department would 
have to be pushed out to a broker-dealer.
    We came down here and spoke to folks on the Senate side. 
And we had two questions. One, here's an examination procedures 
checklist. And every time a bank examiner goes into a bank 
trust department, he or she is required to make sure that the 
bank employee has the requisite level of training, supervision 
and education to perform their role. We don't see the need for 
SEC supervision and a securities license for those kinds of 
people. And I guess we were interested in hearing what had come 
to the attention of Congress that would somehow warrant the 
involvement of the SEC in an industry that certainly in my 29 
years has largely been problem-free.
    We were told that our arguments had merit, but we were 
simply too late. Congress, as you know, time ran out. We knew 
there would be a son of H.R. 10. And we were here first at the 
table in the spring of 1999. We again worked with the folks on 
the Senate side of the table. And again, our concern was that 
the overly broad language in Title II would cause our clients 
to have to discontinue services which they had been offering 
problem-free for decades.
    Participant-directed Section 401(k) was one that we were 
particularly concerned about. We were told that again our 
arguments had merit. The Senate would certainly consider them. 
The Senate version of Title II, as you know, was not passed, 
and Title II in the House version was, in fact, passed. I gave 
my first speech on Gramm-Leach-Bliley in Chicago in January of 
2000 to 400 community bankers, and they were in a very 
celebratory mood. They had party hats on and noisemakers. And 
my comments were twofold. One, if this thing is read wrong, it 
could take 2,000 community bank trust departments off the 
competitive board in a heartbeat. And number two, anything that 
takes 50 lawyers two days to explain can't be all that great. 
And I sat down.
    It was clear to us that the SEC was going to make a place 
for itself in bank trust departments. My company has a habit of 
working with the regulatory agencies in behalf of our clients, 
and I was dispatched to Washington to really work with the 
staff of the Securities and Exchange Commission, not to dispute 
their jurisdiction, but to rather educate them on what goes on 
inside a bank trust department. I can tell you personally that 
I have not had a better, more positive, constructive experience 
with a regulatory agency than we did with the professionals at 
the Securities and Exchange Commission. We found them willing 
to listen. We had access anytime we wished. They were eager to 
learn. And frankly, the 158-page effort we feel is 
extraordinary, given an agency that came from a standing start.
    But there are problems. And I think the problems really 
stem from what the SEC is and how they go about the regulatory 
process. To the SEC, everything is brokerage and everything is 
a brokerage commission until proven to the contrary. It's 
almost like the French system of justice. We have taken the 
position--and you'll see it in our comment letter, Mr. 
Chairman--that the assumption should be that everything that 
goes on inside of a bank trust department should be fiduciary 
in nature. And indeed, there's a pervasive body of State trust 
law and ERISA at the Federal level that basically precludes a 
fiduciary from receiving a commission as a byproduct of an 
investment decision. So if there is brokerage activity lurking 
out there, it certainly escaped our observation.
    We're particularly concerned as banks start to take their 
rightful place in the financial services community, they're 
starting to price their products, processes and services the 
same way their competitors are. And they're starting to use 
mutual funds packaged products, if you will, as delivery 
vehicles for pooled investment management. They're starting to 
replace traditional trust delivery vehicles, common trust funds 
and collective investment funds.
    There are statutes in all 50 States that permit a fiduciary 
to make an investment decision to use a mutual fund and at the 
same time provide discrete services to those mutual funds for 
which they receive additional fund-level compensation. All 
three bank regulatory agencies have examined these statutes, 
looked at the practices, and concluded that they're consistent 
with the law of trust. The problem, of course, is it bumps 
right into the chiefly compensated test.
    We were the organization in the spring of 1994, in response 
to requests from our very large bank clients, that came up with 
the concept of bundled fees for defined contribution plans. 
Large bank after large bank would complain to us that in a 
competitive setting, the explicit nature of their fees when 
matched against mutual funds sponsors or broker-dealers, where 
their fees were built into the products and processes, put them 
at an enormous competitive advantage. So why can't you, with 
all of your legal resources, come up with a way for us to price 
our products and process implicitly as well?
    The Department of Labor looked at fund-level compensation 
in defined contribution relationships for the better part of 
two-and-a-half years, issued two advisory opinions specifically 
authorizing directed trustees to receive fund-level 
compensation, and while doing so, not creating a conflict of 
interest or a prohibited transaction. That's what Ed Higgins 
was referring to in his comments. It was wonderful for us to 
see our clients now being able to offer competitive products 
and processes to that defined contribution marketplace.
    And now, of course, you run into the issue of whether or 
not if all of the compensation takes place at the fund level, 
if that's deemed to be brokerage, the vast majority of 
community banks in this country simply can't organize broker-
dealers. I wish Mrs. Jones was here to hear this. When the 
prospect of push-out and community banks surfaced, we hired a 
former senior official from the Securities and Exchange 
Commission to advise us on the likelihood of community banks 
being meaningful players if they had to organize broker-
dealers. He said simply, forget it. It's too expensive. The 
compliance process is too overbearing.
    So there are practical issues at work here as well. The 
chiefly compensated test is hopelessly complex. If I was going 
to give you a two-word summary of where our clients would be on 
this, they won't do it. It's very simply. They simply won't do 
it. A large bank client of our firm in anticipation of my 
appearing today called and said we have 8,000 separate fee 
schedules for personal trust. I was going to bring one fee 
schedule with me of a large bank client of ours. It looks like 
a small suburban telephone book. And if you read the SEC 
release, the assumption is that since all clients pay the same 
fee, it's a simple arithmetic calculation to determine if the 
chiefly compensated test has been met or exceeded. That simply 
isn't reality.
    So it's a problem. It's a great problem. And we're not here 
today to suggest solutions. But we are here today to suggest 
there has to be a dialogue between the Commission and the bank 
regulatory agencies, and the community banks of this country 
can't be in the middle of the problem.
    Thank you.
    [The prepared statement of Eugene F. Maloney can be found 
on page 262 in the appendix.]
    Chairman Bachus. We very much appreciate your testimony.
    Mr. Watt, you were so kind to yield to multiple opening 
statements over here. I would like to return the favor.
    Mr. Watt. That's mighty kind of you, Mr. Chairman. And I 
want to thank all of you for being here. I apologize to the 
first two-and-a-half witnesses for missing your testimony. I 
was trying to get back, but just couldn't get here in time, to 
extend a special welcome to Mr. Pollard from North Carolina, a 
well respected and admired member of our community in North 
    I think we were doing all right until we got to Mr. 
Maloney, and all of a sudden, what everybody had been saying, 
it sounds to me like he may have exploded. Mr. Pollard--well, 
I'd have to say, I leaned over to one of the staff people back 
here when Mr. Pollard said if there's anybody who knows what 
the intent of Gramm-Leach-Bliley was, it was Members of this 
subcommittee, I said ``I don't think so.'' You ask 50-some 
Members of this subcommittee, you'd probably get 50-some 
different intents of what Gramm-Leach-Bliley was all about. And 
a lot of uncertainty and a lot of, well, I didn't even think 
about that issue.
    So then we get to Mr. Maloney and he says, OK, well, we had 
a legislative intent. We took it to the U.S. Senate. And the 
U.S. Senate put it in their bill, but the U.S. Senate bill was 
not the bill that got passed. So if that's the case, then maybe 
this clarity about what the legislative intent was is not 
nearly as clear as we would like to think that it is. Because 
if Mr. Maloney was working with the Senate and he put what he 
wanted in the Senate bill and then the House didn't pass that 
version of it and the final bill was the House version, what 
does that do to the legislative intent that we thought was so 
clear on this issue?
    Now, having said that, we've got a problem and I think we 
put our finger on it. I may have stumbled on the right question 
in my question to Mr. Meyer when I asked him whether there were 
any things that banks were doing that the SEC ought to be 
regulating. He said if banks are doing anything that the SEC 
ought to be regulating, then that activity has to be pushed 
out, which presents some serious, it sounds to me, problems for 
particularly community banks, because I thought I heard Mr. 
Pollard say at least a substantial minority part of what he 
does--maybe 10, 15 percent, according to Mr. Maloney--is 
securities services. I'm not sure what that is. But if those 
securities services are the things that are typically under the 
review and jurisdiction of the SEC, Mr. Meyer just told me on 
the preceding panel that those services have to be pushed out, 
which is something that community banks don't want. But if they 
are securities services that are typically regulated by SEC, 
then I hear everybody else saying we don't want the SEC 
regulating them if they're being done inside banks. So we've 
got a real problem on that 10 to 15 percent of business unless 
I'm misdefining the problem.
    So I've defined the problem. First of all, I guess the 
question is, what is your reaction to Mr. Meyer's position that 
everything that banks are doing that SEC ought to have some--
may have some jurisdiction over has got to be pushed out of the 
    Mr. Maloney. Mr. Watt, let me help you with your problem.
    Mr. Watt. All right. Help me.
    Mr. Maloney. Let's take participant-directed Section 
401(k). A growth area for banks, large, medium and small. This 
is the way the product works. Now bear in mind, in Title II, 
there's a two-part test. Part one is the nature of the 
relationship the bank has with its customer, the so-called 
fiduciary relationship.
    Now the SEC has given us a specific exemption in their 
release for participant-directed Section 401(k). They argued 
the issue of whether or not it was a fiduciary relationship, 
but they conceded maybe it is. That's part one of the test. 
Number two is the chiefly compensated test. So you could have a 
fiduciary relationship that passes part one, but flunks part 
two because of the nature of the compensation arrangement you 
    Now in a participant-directed Section 401(k) product, it's 
typically a menu of mutual funds. If it's a large bank, it's 
proprietary funds--FirstUnion would be a good example in your 
State, sir, or Bank of America--and a mix of third-party funds, 
depending on their investment objectives and policies. It's 
almost certain that the compensation that the bank is going to 
receive for the various services it provides in connection with 
that product is going to come from payments at the mutual fund 
    The services the bank provides are investment, directed 
trustee, reporting and recordkeeping. You probably didn't 
notice sales or commission-driven activities. The mere fact 
that the bank gets all of its compensation at the fund level, 
because that's the way its competitors are pricing their 
services, triggers the chiefly compensated test. That was the 
point I was making.
    Mr. Watt. All right. Let me ask Mr. Pollard whether there 
are any things in what you called securities services--that's 
the term you used--that you're doing in the bank, inside the 
bank, that would traditionally be regulated by the SEC, and 
what your reaction is to the prospect of having to push those 
things out.
    Mr. Pollard. The prospect of having to push those things 
out is very scary.
    Mr. Watt. What are they? Just give me a couple of examples.
    Mr. Pollard. Those securities services, they're the things 
like you talked about with the previous panel. A customer may 
come in and want a self-directed retirement plan or just funds 
that they want to invest for their financial welfare that they 
do not intend to put in an insured bank product. That can be 
mutual funds, that can be annuities, that can be a basket of 
stocks. Those activities we are conducting at the present time 
in a wholly-owned subsidiary of the bank.
    Our State commissioner's office has interpreted Gramm-
Leach-Bliley to say that the intent of Gramm-Leach-Bliley is 
that we could conduct those activities in the bank without a 
separate wholly-owned subsidiary in the future. They have told 
banks in the State that you no longer have to form that 
subsidiary to conduct that per Gramm-Leach-Bliley. So there you 
have an interpretation very much different than that of the SEC 
as to what the intent of the subcommittees and the Congress was 
with Gramm-Leach-Bliley.
    But we conduct that, have conducted it for 9 years, in a 
subsidiary of the bank. We have a third-party broker-dealer 
relationship with a large, established, SEC-regulated broker-
dealer. Our revenue comes from a split of that revenue from the 
third-party vendor. We do not charge the customer additional 
fees. I think that was the question you were trying to get at 
with the previous panel. As Mr. Maloney stated, our revenue 
comes from our agreement with the third-party provider out of 
those products. And it would be difficult for a $186 million 
bank to push those out, whatever they may be. Right now it is 
very difficult to determine, and it's very, I guess you could 
say, frightening to determine where it could be pushed out.
    Mr. Watt. Mr. Chairman, I'm well over my time. You've been 
very generous. You all have been very generous with your time. 
Could I just ask Mr. Maloney to do one thing? Not a verbal 
response, but it would be helpful if we knew if you had the 
ideal that would have addressed this issue had we adopted that 
language as opposed to the language that's actually in Gramm-
Leach-Bliley. Because it may well be that this is sufficiently 
murky at this point that we may have to go back and revisit 
this issue, because from what I'm hearing, the legislative 
intent may not be as clear as everybody is saying the 
legislative intent was. But if we were going to address this 
problem and correct it in the way that you would have had 
Gramm-Leach-Bliley address it in the first place, it might be 
helpful to have that specific language.
    Mr. Maloney. Yes, sir. Be happy to.
    Mr. Kurucza. Mr. Watt, may I jump in here?
    Mr. Watt. Sure. I'm sorry. I didn't mean to cut anybody 
off. My red light has been on for a good while, so I was just 
trying to make a graceful exit.
    Mr. Kurucza. It might be useful to just back up a little 
bit and provide a perspective. As I mentioned in my remarks 
today, while a general bank exemption still exists, which would 
have expired on May 12th without the deferral by the SEC, over 
90 percent of all bank securities activities are today 
conducted through registered broker-dealers. And so you have a 
situation where banks, for safety and soundness and other 
reasons, and being very prudent for well over 15 years, have 
pushed out voluntarily, their activities into registered 
broker-dealers. Stated simply, when the banks recognize a true 
securities activity without any prompting, without any forcing 
from the SEC, they have volunteered registration as broker-
    Mr. Watt. But if we got a State regulator who's telling 
community banks all of a sudden you don't have to push that out 
anymore, you don't even have to have a separate subsidiary to 
do it, maybe that 10 percent gets bigger over time. But even if 
it doesn't, the gray area is still that 10 percent, which is 
what I was saying to Mr. Baker earlier. It's not the 90 percent 
that's causing the problem. I think everybody is in agreement 
on that. The question is, who has regulatory authority in that 
10 percent area and how does it get exercised in some 
responsible way? And how does it get exercised in a 
nonduplicative way? Because I think we all agree that you 
shouldn't have--maybe you've got shared responsibility for the 
regulation, but you shouldn't have one set of regulations by 
the banking regulators and a separate set superimposed on top 
of that by SEC.
    Mr. Kurucza. Mr. Watt, I believe you're quite correct. It's 
that 10 percent. But I would submit to you that I think we need 
further refinement of that 10 percent in terms of what are the 
nature of the activities involved? In other words, if in 
talking about that 10 percent bucket, we're talking about pure 
full-service brokerage activities, registration may be 
appropriate, versus what I think has been the topic of today, 
the nature of the activities covered by the Title II 
exceptions, which, quite frankly, get into a marginal gray area 
of traditional bank activities where registration is not 
justified. In all cases we must concede there is some 
securities-related aspect. It's almost by definition. There 
would be no need for the exceptions but for this fact.
    If you looked at these activities in isolation, putting on 
my old SEC hat, I'd conclude that they were brokerage 
activities. But the reason for the exceptions is 
notwithstanding this, because they're traditional activities 
that have been effectively regulated by the bank regulators for 
umpteen years, there's really no need to superimpose redundant 
regulation by the SEC on top of that.
    Chairman Bachus. I appreciate that. Regulatory oversight of 
a bank trust department is significantly different from 
oversight of a brokerage firm. Could you briefly describe the 
oversight that a bank trust department receives and why 
additional SEC oversight would be unnecessary? And Mr. Higgins 
representing a large bank, and Mr. Pollard, maybe a smaller 
institution. Mr. Maloney, your clients are obviously banks. And 
either of the other two gentlemen that would like to offer any 
comment. If you agree with that.
    Mr. Higgins. Thank you, Mr. Chairman. The primary regulator 
of national banks is the Office of the Comptroller of the 
Currency. And with all due respect to Ms. Broadman and her 
demure presence here today, it is a five-alarm fire when a 
complaint letter flows through the OCC to our bank or any 
national bank. We take that extremely seriously.
    We have OCC regulators who, because of the size of our 
organization, are resident in the bank. They have offices in 
the bank 5 days a week, 52 weeks a year, and are almost a part 
of our management team. Their efforts are supplemented by our 
outside auditors, in our case, Price-Waterhouse-Coopers. In 
addition, we have an audit department that oversees all of our 
banking activities. We have a compliance group specifically 
dedicated to trust, headed in our case by a former OCC bank 
examiner. So I think our self-policing is extremely strong.
    I also question whether or not the consumer is better 
served by having the SEC represent their interests. As I 
understand it, the course of action open most often to an 
aggrieved investor in a brokerage firm is mediation or 
arbitration I should say. On the other hand, if you have a 
grievance against a bank trust department, you're free to sue 
us in State court before a jury with the opportunity perhaps to 
collect punitive damages. So I'm not so sure that necessarily 
pushing out these accounts to a broker-dealer puts the consumer 
in a better position.
    Chairman Bachus. Mr. Pollard.
    Mr. Pollard. The FDIC is our primary regulator, and they 
have always reviewed thoroughly our activities in the 
securities business. We have never had any significant 
problems. In fact, they're in there now. In another 3 weeks, I 
hope to be able to tell you the same thing.
    Our bank compliance officer regularly reviews these types 
of transactions. We are audited periodically by the compliance 
manager of our broker-dealer. A representative of our broker-
dealer that we use, comes into the bank, comes into these 
offices, and reviews the various transactions for compliance 
with all the laws and regulations. We have not had any 
significant problems from customers because we are trying to 
look out, we hope, for their best interest and to develop a 
full relationship.
    We believe that the FDIC, our State office of Commissioner 
of Banks, and the regulation from the compliance department of 
our broker-dealer, have been very adequate for our activities.
    Chairman Bachus. Thank you. Anyone else who would like to 
    Mr. Maloney. The checklist that a bank examiner is required 
to work from, when he or she examines a bank trust department 
is very detailed, exquisitely detailed. When we were talking to 
folks on the Senate side with respect to Gramm-Leach-Bliley, 
they asked us to prepare a memorandum of law comparing the 
standard of care that exists between a brokerage client and a 
brokerage representative and a fiduciary and a beneficiary. I 
had never done that before, but it was interesting to read the 
    The standard to which a bank is held is far higher than 
that which exists between a broker and his customer. When we 
were talking to the staff, the result of which were the three 
exemptions we were granted, I got a sense of how this could go 
wrong. And I'd just like to share that anecdote with you.
    We were talking about entry-level trust accounts, Mr. 
Baker's question earlier, and how that all works. And you come 
in the trust department and there is a variety of options 
available as to how they're going to manage your assets. Common 
trust funds, individual securities, mutual funds, perhaps a 
combination thereof, or one or the other. And the folks from 
the Commission said aha! Just like a Reimbursement Account Plan 
account, which of course in their calculus is a brokerage 
relationship. I said it's not just like a RAP account. I said 
there's this standard to which the bank is held. It's called 
the Uniform Prudent Investor Act, which has been passed in all 
50 States. And that's the standard to which the bank is held in 
managing your wealth. And if there are problems, if the assets 
are mismanaged or a conflict of interest, whatever the case may 
be, as Ed pointed out, there are remedies available in State 
court for misconduct by banks. And those remedies are equally 
if not more severe than anything meted out under the various 
securities laws.
    So the idea that there aren't any protections in place for 
clients of bank trust departments is simply not the case.
    Chairman Bachus. All right. Thank you. There have been some 
comments made about the intent of Congress. I think what we 
intended to do was very clear. I think that we, at least in 
pretty plain language, I thought expressed our intent. But 
perhaps what the Senate language might have is it may be 
tighter drafted and have anticipated something that we didn't 
anticipate. So I think it would be helpful to look at that as 
we move forward.
    But I can tell you that it was the fairly unanimous 
intention of Congress to let trust departments, fiduciary 
relationships and for the oversight of that to remain with the 
banking regulators. And I think we all agree. I think I've 
heard nothing on this panel which--but, you know, obviously 
sometimes you anticipate problems, and those may have been 
addressed in the Senate bill.
    Mr. Higgins, I'm going to quote something you said. You 
said since the SEC first issued the interim final rules in mid-
May, members of the SEC staff have conducted a series of 
meetings with various industry groups in order to get a clearer 
understanding of the difficulties that the industry would 
experience when the interim final rules went into effect.
    I'll ask all of you this. Did the SEC hold meetings with 
you or your groups prior to issuing the final interim rules? 
That would be my first question.
    Mr. Maloney. We had extensive contact with the staff of the 
SEC, Mr. Chairman. And as I mentioned in my earlier remarks, 
all of it was positive.
    To your question, nobody seems to know the answer yet, but 
we hope we can get it. We've undertaken to both the SEC and to 
the Office of the Comptroller of the Currency, we're going to 
have a law firm go in and do a Gramm-Leach-Bliley audit of a 
$3.2 billion national bank trust department that's engaged in 
virtually all of the activities described in Title II, and we 
want to get a sense back of what if any dislocations will be 
caused as a result of what's in the release. I think we all 
need that kind of practical information.
    Chairman Bachus. So there was contact between you and the 
    Mr. Maloney. Yes, sir.
    Chairman Bachus. Prior to issuing the final interim rules?
    Mr. Maloney. Yes.
    Mr. Higgins. Mr. Chairman, I've also learned that members 
of the American Bankers Association staff contacted the SEC 
staff very early on in this process. And once schedules 
permitted, senior staffers met in the fall of last year to 
begin a dialogue.
    Mr. Kurucza. I can also add to that, Mr. Chairman, the Bank 
Securities Association did have meetings with the SEC staff and 
in one case an individual commissioner. And again, I think they 
are to be applauded for that in terms of trying to gather a 
baseline of information. But I'd also state that I think there 
is no substitute for a public comment period in a normal 
rulemaking. Quite frankly, on an informal level, perhaps the 
candor is better than it would be in terms of written comments. 
Perhaps it's not. But again, the Administrative Procedure Act 
does require it, and I think qualitatively that was missing 
from this exercise.
    Chairman Bachus. Right. Many people have pointed out to us 
that the provisions of the Administrative Practice Act 
obviously were not followed.
    Mr. Pollard.
    Mr. Pollard. Yes. Our bank was not contacted. The ICBA 
received minimal contact, and a meeting was discussed, but it 
did not occur prior to the publication of the rule. There has 
been contact since, and that effort has improved.
    Chairman Bachus. One pattern that I sometimes see is that 
the smaller banks are not contacted and do not participate to 
the level that the larger institutions do. And of course, the 
larger institutions have a more effective, well-paid lobby here 
in the city. But that should not account for the lack of an 
invitation to the table.
    My next question, were your concerns addressed in the 
interim final rules? And please limit your remarks. And we'll 
start with Mr. Patterson.
    Mr. Patterson. Well, we participated in conversations with 
the Commission staff through trade associations, in particular, 
the ABA Securities Association. The areas of concern are 
addressed in the rules. But, as you can tell from our testimony 
and our extensive comments, not to our satisfaction.
    Chairman Bachus. Mr. Higgins, were your concerns addressed 
in a constructive way?
    Mr. Higgins. The SEC staffers we met with appeared to 
listen, but I don't think they quite understood exactly how 
mechanically a bank trust department works. And push-out of 
function is push-out of relationships, and that's a very big 
deal for us. We have relationships that are two or three 
trusts, two or three custody accounts, perhaps a family 
foundation, and they may have been with us for 20 years, and 
now we'll have to ask that client who chose us, who chose a 
bank trust department, to leave.
    Chairman Bachus. They listened, but your concerns were 
    Mr. Higgins. To give them credit, I believe they thought 
they were right.
    Chairman Bachus. Thank you.
    Mr. Kurucza.
    Mr. Kurucza. I would add, and let me just single out one 
particular issue that the Bank Securities Association, a number 
of members have been keenly interested in, which has not come 
up as a specific topic, are the sweep accounts. Again, a very 
important product, whether it's for business customers, small 
business customers, whether it's a retail product, whether it's 
used in a trust context, very, very important product Mr. 
Higgins mentioned earlier. What the SEC has done in the interim 
final rules was to adopt from an unrelated disclosure context a 
National Association of Securities Dealers definition of what 
is ``load.'' And again, it's ironic that, as you well know, Mr. 
Chairman, again, the long history of financial modernization, 
that definition has been in here for over 15 years going back 
to legislation, never been changed because of the compromise 
that had been reached on it, and they reached back and decided 
to select this NASD definition.
    You know, we went through all the analysis, we went through 
all the arguments. We discussed in detail the terrible impact 
that this would have. And really, quite frankly, most 
importantly, there was no need for it from an investor 
protection perspective. We're talking about a money market 
fund. While no securities product is risk-free, if there ever 
was one that was risk-free, or relatively risk-free, it's a 
money market fund, largely due to the very stringent and 
effective SEC regulation of money market funds. Nonetheless, 
they chose to do that.
    Two named sponsors of the Gramm-Leach-Bliley Act wrote 
letters on this very point to the SEC, one in the end of 
December from Mr. Leach and one on the Senate side from Mr. 
Gramm indicating their view on this, which was contrary to the 
SEC position. These views were apparently dismissed in the 
interim final rules. So that's a long-winded answer to your 
question, but I guess in terms of the satisfaction point, the 
answer is no.
    Chairman Bachus. Thank you.
    Mr. Maloney. We were satisfied, Mr. Chairman. We put in 
three exemption requests and they in large measure were 
    Chairman Bachus. OK. Thank you.
    Mr. Pollard.
    Mr. Pollard. Really nothing else to add.
    Chairman Bachus. Thank you. I think at this time I want to 
express to you that your message has reached the Hill. We are 
as concerned as you are about these interim final rules. We're 
also concerned about the effect that it's already had on your 
institutions in incurring expenses and reviewing the rules and 
preparing for something that we hope won't happen, but you 
can't simply assume that. So you've already had expenses. Your 
testimony has been helpful. Your representatives I think have 
done an effective job of letting us know where the problems 
    The bank regulators have done an exceptionally good job of 
highlighting the problems with the new rules, and I think the 
Securities and Exchange Commission as a result of that is 
responsive and will be responsive to these concerns. In fact, 
they made a commitment here today to make substantial changes 
to those rules. At least that's what I heard.
    I think it's the wish of the industry, of the Congress, of 
your institutions that the Securities and Exchange Commission 
with the aid and advice of the Federal bank regulators who have 
the experience in this field and with your input that they will 
make the necessary changes. And I'm optimistic that they will.
    No one wants to reopen Gramm-Leach-Bliley. That's not an 
option that we want to pursue unless absolutely our backs are 
to the wall and there's no other option. If that's pursued, it 
will have to be done I think in a bipartisan way with the 
agreement of both Houses to do it in some legislation that is 
not open to amendment with other issues coming in that may be 
problematic, basically an agreed solution that moves by maybe 
consent document, something of that nature.
    This concludes our hearing. I appreciate your testimony.
    Ms. Hart, I will recognize you at this time, the lady from 
Pennsylvania. A very valuable Member of our subcommittee.
    Ms. Hart. Wow. I'm really glad I came now. Thanks for your 
indulgence, Mr. Chairman. As you know, we had a conference and 
I had a lot of conflicts and I really had hoped to be here. One 
thing I want to thank the Chairman for indulging our request 
also to have Mr. Maloney be one of the witnesses today. My 
counsel was here for the testimony, and she just whispered in 
my ear, and I wanted to thank him for taking the time to do 
this. And I understand that you did a nice introduction.
    But I also want to let everybody know, and unfortunately, 
we don't have that many colleagues here, and perhaps I'll send 
a memo around to them, to let them know that obviously we know 
this is an extremely important issue, but that Mr. Maloney has 
been involved for quite a while professionally in working with 
both banking and securities industries and I think as well as 
some other witnesses has been able to shed some light on this 
issue for us so that we kind of push to have it dealt with in a 
reasonable way, to come to a conclusion that isn't going to be 
burdensome for the industry. And I want to thank you, Mr. 
Chairman, for completing the hearing, and I don't have any 
questions for the witnesses.
    Chairman Bachus. Thank you. Ms. Hart said this is hopefully 
the last day of our session, and we're dealing with a very 
important issue that apparently today finally is working itself 
out on the floor. We have various press conferences about it, 
dueling press conferences and the like.
    Mr. Maloney has given some very valuable testimony, and as 
have all you gentlemen. And at this time, the hearing is 
    [Whereupon, at 1:39 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             August 2, 2001