[Federal Register Volume 69, Number 89 (Friday, May 7, 2004)]
[Proposed Rules]
[Pages 25778-25790]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10392]



[[Page 25777]]

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Part IV





Securities and Exchange Commission





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17 CFR Parts 240, 275 and 279



Certain Thrift Institutions Deemed Not To Be Investment Advisers; 
Proposed Rule

  Federal Register / Vol. 69 , No. 89 / Friday, May 7, 2004 / Proposed 
Rules  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 275 and 279

[Release Nos. 34-49639, IA-2232; File No. S7-20-04]
RIN 3235-AI16


Certain Thrift Institutions Deemed Not To Be Investment Advisers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
publishing for comment a new rule under the Investment Advisers Act of 
1940 that would address the application of the Act to certain thrift 
institutions, and a new rule under the Securities Exchange Act of 1934 
addressing thrift institutions' collective trust funds.

DATES: Comments should be received on or before July 9, 2004.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number S7-20-04 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609. All submissions should refer to File Number 
S7-20-04. This file number should be included on the subject line if e-
mail is used. To help us process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for public 
inspection and copying in the Commission's Public Reference Room, 450 
Fifth Street, NW., Washington, DC 20549. All comments received will be 
posted without change; we do not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly.

FOR FURTHER INFORMATION CONTACT: Robert Tuleya, Attorney-Adviser, Jamey 
Basham, Branch Chief, or Jennifer Sawin, Assistant Director, at (202) 
942-0719 or [email protected], Office of Investment Adviser Regulation, 
Division of Investment Management, Securities and Exchange Commission, 
450 Fifth Street, NW., Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Commission is requesting public comment 
on proposed rule 202(a)(11)-2 under the Investment Advisers Act of 1940 
(15 U.S.C. 80b), and on proposed rule 12g-6 under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.).

Table of Contents

Executive Summary

I. Discussion
    A. Thrift Institutions Deemed Not To be Investment Advisers
    1. Eligible Thrift Institutions
    2. Scope of the Rule
    a. Fiduciary Purpose Accounts
    b. Collective Trust Fund Accounts
    B.Thrift Institutions Registered Under the Act
    C. Amendment to Form ADV
    D. Exemption under Securities Exchange Act
    E. Effects on Competition
II. General Request for Comment
III. Cost-Benefit Analysis
IV. Paperwork Reduction Act
V. Regulatory Flexibility Act
VI. Statutory Authority Text of Proposed Rules and Form Amendments

Executive Summary

    The Commission is proposing a new rule under the Investment 
Advisers Act of 1940 (``Advisers Act'' or ``Act'') that would except 
thrifts from the Act when they provide investment advice as part of 
certain trust department fiduciary services. Under the rule, a thrift 
institution would be deemed not to be an investment adviser if its 
investment advisory services are provided solely in its capacity as 
trustee, executor, administrator, or guardian for customer accounts 
created and maintained for a fiduciary purpose, or to its collective 
trust funds excepted from the Investment Company Act of 1940 
(``Investment Company Act''). The Commission is also proposing to 
exempt thrift institutions' collective trust funds from the 
registration and reporting requirements of the Securities Exchange Act 
of 1934 (``Exchange Act'').

I. Discussion

    The Advisers Act regulates the activities of certain ``investment 
advisers,'' defined generally by section 202(a)(11) of the Act as 
persons whose regular business involves providing others with advice 
about securities for compensation.\1\ Under the Act, investment 
advisers are fiduciaries who must fully disclose any material conflict 
that they have with their clients.\2\ Advisers must register with the 
Commission,\3\ provide their clients with an informational brochure,\4\ 
maintain records related to their advisory activities,\5\ and submit to 
periodic examination by our staff.\6\
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    \1\ 15 U.S.C. 80b-2(a)(11). See Applicability of the Investment 
Advisers Act to Financial Planners, Pension Consultants, and Other 
Persons Who Provide Investment Advisory Services as a Component of 
Other Financial Services, Investment Advisers Act Release No. 1092 
(Oct. 8, 1987) (52 FR 38400 (Oct. 16, 1987)) (``Release IA-1092'').
    \2\ See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 
180, 194 (1963) (an investment adviser is a fiduciary who owes his 
clients ``an affirmative duty of `utmost good faith, and full and 
fair' disclosure of all material facts'') (``Capital Gains'').
    \3\ 15 U.S.C. 80b-3. Generally, following the enactment of the 
National Securities Markets Improvement Act of 1996 (``NSMIA'') 
(Pub. L. No. 104-290, 110 Stat. 3428) (1996), only larger advisers 
that have $25 million or more of assets under management, or that 
advise investment companies, register with the Commission. Smaller 
advisers register with state securities authorities under state law. 
See section 203A of the Advisers Act (15 U.S.C. 80b-3a); Rules 
Implementing Amendments to the Investment Advisers Act of 1940, 
Investment Advisers Act Release No. 1633 (May 15, 1997) (62 FR 28112 
(May 22, 1997)).
    \4\ 17 CFR 275.204-3.
    \5\ 15 U.S.C. 80b-4 and 17 CFR 275.204-2.
    \6\ 15 U.S.C. 80b-4.
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    Banks (and bank holding companies) are excepted from the definition 
of investment adviser by section 202(a)(11)(A) of the Act.\7\ The Act, 
however, contains no exception for thrift institutions,\8\ which are 
not ``banks'' as defined by the Act.\9\ As a

[[Page 25779]]

result, a thrift that manages securities portfolios or provides other 
types of investment advisory services for its customers in connection 
with its trust operations is generally subject to the Act.
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    \7\ 15 U.S.C. 80b-2(a)(11)(A). Provisions of the Gramm-Leach-
Bliley Act narrowed this bank exception, so that a bank is an 
``investment adviser'' under the Advisers Act to the extent that it 
advises registered investment companies. Either the bank itself or a 
separately identifiable department or division of the bank must 
register as an investment adviser. The registered adviser is subject 
to all requirements of the Advisers Act. Pub. L. No. 106-102, 113 
Stat. 1338, Sec.  217 (1999) (codified in relevant part at 15 U.S.C. 
80b-2(a)).
    \8\ In this release, the term ``thrift institution'' or 
``thrift'' includes federal savings associations, federal savings 
banks, and state savings associations. See infra note 40.
    \9\ A ``bank'' under section 202(a)(2) of the Advisers Act (15 
U.S.C. 80b-202(a)(2)) includes national banks, members of the 
Federal Reserve System, and other banks and trust companies having 
similar authority to national banks and supervised by state or 
federal banking agencies. We have consistently interpreted ``bank'' 
as not including savings associations, see Status of Savings and 
Loan Associations Under the Federal Securities Laws, Investment 
Company Act Release No. 13666 (Dec. 12, 1983) (48 FR 56061 (Dec. 19, 
1983)) (``Release IC-13666''), and federal thrift regulators have 
acknowledged this interpretation. Fiduciary Powers of Federal 
Savings Associations; Community Reinvestment Act, Office of Thrift 
Supervision Release No. 97-68 (July 14, 1997) (62 FR 39477 (July 23, 
1997)) (``Although banks are exempt from the Investment Advisers 
Act, Federal savings associations are not.'') (``OTS Fiduciary 
Powers Proposing Release'').
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    The absence of a thrift exception in the Advisers Act can, we 
believe, be explained by historical context. When Congress enacted the 
Advisers Act in 1940, federal savings associations, for example, were 
not authorized to provide the types of services that would subject them 
to the Act.\10\ It was not until 1980 that Congress gave federal 
savings associations the authority to provide trust services, including 
the authority to act as an investment adviser.\11\ Today, thrifts may 
be granted trust powers similar to those of national banks.\12\ Such 
thrift trust activities also are subject to similar regulation and 
supervision by the Office of Thrift Supervision (``OTS'').\13\ When 
they serve as trustees, thrifts and banks are both also subject to 
state trust laws.\14\
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    \10\ We use the term ``federal savings association'' to mean any 
federal savings association or federal savings bank chartered under 
section 5 of the Home Owners' Loan Act [12 U.S.C. 1464]. See 12 
U.S.C. 1813(b)(2). See also 12 U.S.C. 1462(5).
    \11\ The Depository Institutions Deregulation and Monetary 
Control Act of 1980 (``Monetary Control Act'') first authorized a 
grant of trust powers to federal savings associations. Pub. L. No. 
96-221, 94 Stat. 132 (1980) (codified in relevant part at 12 U.S.C. 
1464(n)). Specifically, the Monetary Control Act authorized the 
Federal Home Loan Bank Board (``FHLBB''), the predecessor to the 
Office of Thrift Supervision (``OTS''), to grant federal savings 
association charters that included fiduciary powers. Pursuant to 
this authority, the FHLBB issued regulations in December 1980 
governing federal savings associations' fiduciary activities. Trust 
Powers, Federal Home Loan Bank Board Resolution No. 80-738 (Nov. 26, 
1980) [45 FR 82162 (Dec. 15, 1980)]. These rules, which currently 
appear in Title 12, part 550 of the Code of Federal Regulations 
(``Part 550''), have been interpreted to apply to federal savings 
associations' investment advisory services. OTS Fiduciary Powers 
Proposing Release, supra note 9.
    \12\ Compare 12 U.S.C. 92a(a) (authorizing the Office of the 
Comptroller of the Currency (``OCC'') to grant trust powers to 
national banks) with 12 U.S.C. 1464(n) (authorizing the OTS to grant 
trust powers to federal savings associations). See also S. Rep. No. 
96-368, 96th Cong., 2d Sess. 13 (1979), reprinted in 1980 
U.S.C.C.A.N. 236, 248 (stating that the Monetary Control Act permits 
[the OTS] the authority to grant federal savings associations the 
ability to offer trust services on the same basis as national 
banks).
    Several states also have granted trust powers to state-chartered 
savings associations. See 205 Ill. Comp. Stat. Ann. 105/1-6 
(permitting savings and loan associations to exercise all powers 
necessary to qualify as a trustee or custodian); Mich. Comp. Laws 
491.506 (empowering savings associations to exercise trust powers 
upon application to and approval by the supervisor); N.J. Stat. Ann. 
17:12B-48 (granting associations the power to apply to the 
commissioner for permission to act as trustee, executor, 
administrator, guardian); N.Y. Banking Law 380-H (McKinney) 
(authorizing banking board to allow savings and loan associations to 
have fiduciary capacity); Okla. Stat. tit. 18, Sec.  381.54 
(permitting savings and loan associations to have and exercise all 
such powers as conferred on federal savings associations).
    \13\ Federal savings associations providing trust services are 
subject to OTS regulations that require the proper exercise of 
savings association trust powers. See generally 12 CFR 550. In 1997, 
the OTS updated its fiduciary powers rules to conform them more 
closely to the rules issued by the Office of the Comptroller of the 
Currency at 12 CFR part 9. Fiduciary Powers; Community Reinvestment 
Act, Office of Thrift Supervision Release No. 97-129 (Dec. 19, 1997) 
(62 FR 67696 (Dec. 30, 1997)) [``OTS Fiduciary Powers Final Rule'']. 
See also OTS Fiduciary Powers Proposing Release, supra note 9. The 
OCC itself comprehensively revised its rules governing the fiduciary 
powers of national banks in 1996. OTS Fiduciary Powers Proposing 
Release, supra note 9, citing 61 FR 68543 (Dec. 30, 1996). The OTS 
rules adopted in 1997 draw ``extensively on the OCC's final rule and 
the comments the OCC received on its proposed rule.'' OTS Fiduciary 
Powers Proposing Release, supra note 9. Additional amendments made 
to the OTS' fiduciary powers rules in 2002 are also consistent with 
similar amendments adopted by the OCC. Recordkeeping and 
Confirmation Requirements for Securities Transactions; Fiduciary 
Powers of Savings Associations, Office of Thrift Supervision Release 
No. 2002-57 (Dec. 2, 2002) (67 FR 76293 (Dec. 12, 2002)) [``OTS 
Recordkeeping Rules Release''].
    OTS regulations provide that state-chartered savings 
associations should follow the standards for exercise of trust 
powers contained in Part 550. 12 CFR 550.10(b)(1). These regulations 
also state that OTS examinations staff will monitor the fiduciary 
activities of state-chartered savings associations and may restrict 
or prohibit activities that threaten the safety and soundness of a 
state-chartered savings association. 12 CFR 550.10(b)(2).
    \14\ As trustees, thrifts and banks are subject to state trust 
law that governs their conduct and activities. See George Gleason 
Bogert & George Taylor Bogert, The Law of Trusts and Trustees Sec.  
541, at 159 (1993). Some states have codified trust law. E.g., Cal. 
Probate Code 16000-16082 (addressing duties of trustees); Ohio Rev. 
Code Ann. 2109.01-2109.68 (governing fiduciaries); 20 Pa. Cons. 
Stat. Ann. 7131-7136 (powers, duties and liabilities of trustees). 
See also Uniform Trust Code, Article 8 (2000) (amended 2002) (duties 
and powers of trustees). Federal laws and regulations governing bank 
and thrift trust powers refer expressly to state trust law. See 12 
U.S.C. 92a(a) (authorizing the OCC to grant trust powers consistent 
with state trust laws); 12 U.S.C. 1464(n) (authorizing Director of 
the OTS to grant federal savings associations trust powers permitted 
under state law); 12 CFR 550.136 (clarifying the applicability of 
state law to federal savings associations); 12 CFR 550.10(b) 
(``state chartered savings association must conduct its fiduciary 
operations in accordance with applicable State law''). See also 
supra note 13.
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    Recently, both Congress and the Commission have recognized that 
thrift trust powers and activities have converged with those of banks. 
In 1999, in the Gramm-Leach-Bliley Act, Congress amended the definition 
of ``bank'' in the Investment Company Act to include thrifts.\15\ As a 
result, common and collective trust funds sponsored by thrifts are now 
excepted from the definition of ``investment company'' under the 
Investment Company Act, subject to the same limitations and conditions 
as bank common and collective trust funds.\16\ In May of 2001, we 
adopted a new rule exempting thrifts from the definitions of ``broker'' 
and ``dealer'' under the Exchange Act, under the same terms and 
conditions that apply to banks.\17\
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    \15\ Pub. L. No. 106-102, 113 Stat. 1338, section 223 (1999) 
(codified in relevant part at 15 U.S.C. 80a-2(a)(5)). As amended by 
the Gramm-Leach-Bliley Act, section 2(a)(5) of the Investment 
Company Act defines a ``bank'' for purposes of the Investment 
Company Act to include any ``depository institution'' as that term 
is defined in the Federal Deposit Insurance Act. 15 U.S.C. 80a-
2(a)(5). Savings associations are types of ``depository 
institution'' under the Federal Deposit Insurance Act, and are 
therefore ``banks'' for purposes of the Investment Company Act. 12 
U.S.C. 1813(c).
    \16\ The Gramm-Leach-Bliley Act also clarified that the scope of 
the Investment Company Act's bank common trust fund exception is 
limited to common trust funds operated solely as an aid to a bank's 
administration of trust or other accounts maintained for a ``bona 
fide'' fiduciary purpose. See Pub. L. 106-102, 113 Stat. 1338, 
section 221 (1999) (codified in relevant part at 15 U.S.C. 80a-
3(c)(3)). Previously, our staff interpreted the scope of the common 
trust fund exception in the same manner. See infra notes 46 and 53-
56 (discussing the long-standing staff interpretation of the bank 
common trust fund exception).
    \17\ Definition of Terms in and Specific Exemptions for Banks, 
Savings Associations, and Savings Banks Under Sections 3(a)(4) and 
3(a)(5) of the Securities Exchange Act of 1934, Securities Exchange 
Act Release No. 44291 (May 11, 2001) (66 FR 27760 (May 18, 2001)) 
(``Exchange Act Release No. 44291''). Rule 15a-9 gave thrifts the 
same exemptions as banks from the ``broker'' and ``dealer'' 
definitions. 17 CFR 240.15a-9. Rule 15a-7 under the Exchange Act 
gave banks a temporary exemption from complying with changes made by 
the Gramm-Leach-Bliley Act to the Exchange Act's definitions of 
``broker'' and ``dealer.'' 17 CFR 240.15a-7. We have adopted final 
rules defining ``dealer,'' Definition of Terms in and Specific 
Exemptions for Banks, Savings Associations, and Savings Banks under 
Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, 
Exchange Act Release No. 47364 (Feb. 13, 2003), and have extended 
the temporary exemption from the definition of ``broker'' until 
November 11, 2004. Order Extending Temporary Exemption of Banks, 
Savings Associations, and Savings Banks from the Definition of 
``Broker'' Under Section 3(a)(4) of the Securities Exchange Act of 
1934; Notice of Intent to Amend Rules, Securities Exchange Act 
Release No. 47649 (April 8, 2003).
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    Thrift industry participants,\18\ a member of Congress,\19\ and the 
OTS \20\

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have called upon us to re-examine the status of thrifts under the 
Advisers Act. Some of these commenters have argued that, because thrift 
institutions have fiduciary powers similar to those of national banks 
and are similarly regulated, thrifts should be treated similarly to 
banks under the Advisers Act. These commenters have also argued that 
our new rule under the Exchange Act results in thrifts receiving 
different treatment under the Exchange Act than under the Advisers Act. 
Another commentator has suggested that it is inconsistent for a thrift 
to be subject to the Advisers Act when advising its common or 
collective trust funds that are excepted from the definition of 
``investment company'' under the Investment Company Act.\21\
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    \18\ Letter from Patricia R. Hatler, Senior Vice President and 
General Counsel, Office of General Counsel, Nationwide Insurance-
Nationwide Financial, to Jonathan G. Katz, Secretary, U.S. 
Securities and Exchange Commission (July 12, 2001); Letter from 
Diane M. Casey, President and Chief Executive Officer, America's 
Community Bankers, to Paul F. Roye, Director, Division of Investment 
Management, U.S. Securities and Exchange Commission (July 31, 2001). 
These letters are available for inspection and copying in the 
Commission's Public Reference Room, 450 5th Street, NW., Washington, 
DC (File No. S7-20-04).
    \19\ Letter from The Honorable Evan Bayh, United States Senator 
(Indiana), to Arthur Levitt, Chairman, U.S. Securities and Exchange 
Commission (Aug. 18, 2000). This letter is available in File No. S7-
20-04.
    \20\ Letter from Scott L. Albinson, Managing Director, Office of 
Supervision, Office of Thrift Supervision, to Annette L. Nazareth, 
Director, Division of Market Regulation and Paul F. Roye, Director, 
Division of Investment Management, U.S. Securities and Exchange 
Commission (Mar. 30, 2001); Letter from Ellen Seidman, Director, 
Office of Thrift Supervision, to Harvey L. Pitt, Chairman, U.S. 
Securities and Exchange Commission (Dec. 3, 2001). These letters are 
available in File No. S7-20-04.
    \21\ See Barry P. Barbash, ``The Gramm-Leach-Bliley Act of 1999 
and the Investment Management Industry: A Brave New World of 
Regulation,'' Materials for 2000 Mutual Funds and Investment 
Conference (Mar. 26-30, 2000), at XIII-9.
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    On the other hand, two groups of advisers have written us opposing 
expansion of the Advisers Act bank exception to include thrifts.\22\ 
These groups assert that expanded relief would diminish investor 
protection by eliminating important safeguards that the Advisers Act 
provides to advisory clients, would be inconsistent with principles of 
functional regulation, and would create an unfair competitive advantage 
for thrifts that provide the same investment advisory services as other 
money managers and financial planners.\23\
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    \22\ Letter from David G. Tittsworth, Executive Director, 
Investment Counsel Association of America, to Harvey L. Pitt, 
Chairman, U.S. Securities and Exchange Commission (Dec. 27, 2001); 
Letter from Duane R. Thompson, Director of Government Relations, The 
Financial Planning Association, to Laura S. Unger, Acting Chairman, 
U.S. Securities and Exchange Commission (June 8, 2001). These 
letters are available in File No. S7-20-04.
    \23\ Letter from Duane R. Thompson, Director of Government 
Relations, The Financial Planning Association, to The Honorable 
Michael G. Oxley, Chairman, Committee on Financial Services, United 
States House of Representatives, The Honorable John J. LaFalce, 
Ranking Member, Committee on Financial Services, United States House 
of Representatives, The Honorable Spencer Bachus, Chairman, 
Subcommittee on Financial Institutions and Consumer Credit, United 
States House of Representatives, and The Honorable Maxine Waters, 
Ranking Member, Subcommittee on Financial Institutions and Consumer 
Credit, United States House of Representatives (Mar. 28, 2002). This 
letter is available in File No. S7-20-04.
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    In light of the convergence of bank and thrift trust powers and 
regulation, we are proposing a new rule that would provide a limited 
exception from the Advisers Act for thrifts. As described in more 
detail below, proposed new rule 202(a)(11)-2 would except thrift 
institutions from the Advisers Act to the extent they provide 
investment advice in their capacity as trustee, executor, 
administrator, or guardian. Under the proposed rule, the Act would 
continue to apply to a thrift institution to the extent the thrift 
provides other investment advisory services, including advising mutual 
funds, offering managed agency accounts,\24\ or providing ``retail'' 
financial planning services. Thus, thrifts that offer advice only in 
the context of other fiduciary trust services would be excepted from 
the Advisers Act as are banks, while retail advisory services would 
continue to be subject to the federal securities laws much as retail 
brokerage services are.\25\
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    \24\ In a managed agency account, or investment management 
agency account, the thrift does not take legal title to the managed 
assets, as it would if it served as trustee. Instead, the thrift 
institution, like most investment advisers, gives investment advice 
to the owner of the assets, or manages those assets under power of 
attorney granted by the owner. An advisory account may be a managed 
agency account even though the managed assets are held in a trust; 
the trustee hires the investment adviser as agent, and is able to 
receive disclosure and provide client consent when needed.
    \25\ See infra note 31.
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    We are proposing this exception because we believe that the 
Advisers Act was not intended or designed to regulate certain advisory 
services provided only as part of these banking (and now thrift) trust 
services.\26\ With respect to certain thrift trust relationships, the 
Advisers Act cannot be meaningfully applied because it does not work 
well in those situations.\27\ The Advisers Act permits advisory clients 
to protect themselves when their interests conflict with those of their 
investment adviser. The Advisers Act does this by requiring the adviser 
to obtain the client's consent after giving the client full and fair 
disclosure of the conflict.\28\ The Act implicitly presumes that the 
adviser has an identifiable client with identifiable interests, and 
that this client is competent to grant or withhold consent to conflicts 
that arise in the course of an advisory relationship. Thrift trust 
relationships, however, often involve settlors who have died, or 
beneficiaries who are minors or incompetents. Trust instruments may 
impose fiduciary obligations upon the thrift as trustee with respect to 
a number of beneficiaries who could be considered clients under the 
Advisers Act, some of whom may have competing interests, or even be 
unborn.\29\ Trust law, and OTS regulations governing a savings 
association's administration of fiduciary accounts over which the 
savings association exercises investment discretion, address these 
situations in which informed consent alone may not be effective to 
protect the interests of trust grantors and beneficiaries. These laws 
and regulations typically either require transactions presenting 
potential conflicts to be authorized by the trust instrument or impose 
procedural safeguards designed to prevent the conflicts from harming 
the trust.\30\
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    \26\ We propose to adopt the rule pursuant to section 
202(a)(11)(F) of the Act (15 U.S.C. 80b-2(a)(11)(F)), which gives us 
authority to except from the definition of ``investment adviser'' 
(and therefore from all the provisions of the Act) ``such * * * 
persons not within the intent of this paragraph, as the Commission 
may designate by rules and regulations or order.''
    \27\ We are proposing to except thrifts from the Advisers Act in 
circumstances where we believe Congress did not intend the Advisers 
Act to apply and the Act cannot meaningfully be applied. We note 
that these activities are subject to an alternative system of 
regulation under thrift regulation and trust law and subject to 
fiduciary duties imposed by those regulations and laws. See 
generally 12 CFR 550.10-550.620 (outlining standards applicable to 
the fiduciary activities of savings associations); supra notes 13 
and 14. See also OTS Trust and Asset Management Handbook, at 110.1 
(2001) (discussing responsibilities and duties owed by a fiduciary/
trustee) (``OTS Trust Handbook''). We are not, however, suggesting 
that banking or thrift regulation generally provide protections 
equivalent to those afforded by the federal securities laws in other 
circumstances. The protections provided by the securities laws 
remain essential to adequately guard the interests of the investing 
public. See, e.g., Concerning Financial Modernization Legislation: 
Hearings Before the Senate Comm. on Banking, Hous., and Urban 
Affairs, 106th Cong., 1st Sess. (Feb. 24, 1999) (testimony of Arthur 
Levitt, Chairman, U.S. Securities and Exchange Commission). For 
example, the bank trust and fiduciary activities exception to the 
definition of ``broker'' in section 3(a)(4)(B)(II) of the Exchange 
Act makes clear that banks acting as brokers with respect to trust 
and fiduciary accounts by, among other things, being paid as 
brokers, must shift those accounts to a registered broker-dealer.
    \28\ Release IA-1092, supra note 1.
    \29\ For example, a life beneficiary's consent to a trustee's 
investment decision does not relieve the trustee of liability to the 
remainder beneficiaries for any defect in the decision. See, e.g., 
Austin Scott & William Fratcher, The Law of Trusts Sec.  216.2 
(1987).
    \30\ As discussed earlier, under the Advisers Act an adviser 
must disclose to clients all material facts regarding a potential 
conflict of interest ``so that the client can make an informed 
decision as to whether to enter into or continue an advisory 
relationship with the adviser or whether to take some action to 
protect himself against the specific conflict of interest 
involved.'' Release IA-1092, supra note 1. In comparison, the OTS 
has recognized that ``[o]btaining the consent of all the [trust's] 
beneficiaries may be difficult if more than one class of 
remaindermen exist or if the beneficiaries are minors, unborn, or 
otherwise unable to give informed consent. Under applicable state 
law, the savings association may need to have a guardian ad litem 
appointed for minors, the unborn, or the incompetent and obtain an 
order from the appropriate court approving the transaction.'' OTS 
Thrift Bulletin 76-2 (May 15, 2001). Moreover, the OTS has stated, 
``[i]f a savings association pursues an investment for a trust 
account for which it has [investment] discretion that presents a 
conflict of interest, but which applicable law authorizes, the 
trustee has not necessarily complied with the duty of prudence with 
respect to that investment.'' Id. OTS trust activities regulations 
generally prohibit a savings association exercising investment 
discretion over a fiduciary account from lending, selling or 
otherwise transferring fiduciary account assets if the savings 
association has an interest in the transaction. (12 CFR 550.350). 
Similarly, OTS regulations prohibit a savings association from 
investing funds of a discretionary fiduciary account in stock or 
obligations acquired from the savings association or its affiliates. 
(12 CFR 550.330). These regulations contain exceptions for 
transactions authorized by applicable law. However, applicable trust 
law generally contains very few exceptions permitting these types of 
conflict-of-interest transactions. See, e.g., Bogert, supra note 14, 
at Sec.  543; Scott, supra note 14, at Sec. Sec.  170-170.24, 
170.25.

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[[Page 25781]]

    We are not, however, proposing to give thrifts an unlimited 
exception from the Advisers Act. We adopted a broad exemption for 
thrifts under the Exchange Act in light of amendments to that Act that 
require most brokerage activities of banks to be provided through a 
registered broker-dealer.\31\ The Advisers Act contains no similar or 
comparable ``push out'' provision. As a result, a general exception 
from the Advisers Act would except not only thrifts' trust department 
services to fiduciary purpose accounts and collective trust accounts, 
but would also except thrifts' regular (or ``retail'') advisory 
activities, which the Advisers Act and its rules are clearly designed 
to regulate.\32\ Such an exception would be inconsistent with 
functional regulation principles.\33\ A general exception would also 
treat thrifts that provide retail advisory services differently from 
other registered advisers providing the same services, thus creating 
regulatory disparity for the firms and for their clients. Further, a 
general exception could result in many integrated financial services 
firms moving regular advisory activities to their captive thrifts in 
order to escape regulation under the Act.\34\
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    \31\ Exchange Act Release No. 44291, supra note 17, at 27788 
(``Now that the general exception for banks has been replaced * * * 
it seems reasonable to afford savings associations and savings banks 
the same type of exemptions.''). Under this new exemption, thrifts' 
retail brokerage activities will be subject to the same limitations 
as banks'.
    \32\ OTS regulations include these retail activities within the 
OTS definition of ``fiduciary capacities.'' 12 CFR 550.30. The OTS' 
definition establishes the scope of Part 550, which contains the 
OTS' rules governing a thrift's use of powers that the OTS has 
specially authorized the thrift to exercise under section 5(n) of 
the Home Owners' Loan Act (12 U.S.C. 1464(n)) and similar powers 
afforded the thrift under other applicable laws. See 12 CFR 550.20, 
12 CFR 550.130, and 12 CFR 550.580. It is necessary, however, to 
look beyond these designations for purposes of our analysis of 
federal securities law and any exemption for thrifts under the 
Advisers Act.
    \33\ In this Release, we use ``functional regulation'' to mean 
``regulation of the same functions, or activities, by the same 
expert regulator, regardless of the nature of the entity engaging in 
those activities.'' H.R. Rep. No. 106-74, part 3, at 106th Cong., 
1st Sess. at 113-14 (1999). The Commission has consistently and 
strongly supported functional regulation of all participants in the 
securities markets so that the same rules apply to the same 
activities. See Concerning Financial Modernization and H.R. 10, The 
Financial Services Competition Act of 1997: Hearings Before the 
Subcommittee on Financial and Hazardous Materials, of the House of 
Representatives Committee on Commerce, 105th Cong., 1st Sess. (July 
17, 1997) (testimony of Arthur Levitt, Chairman, U.S. Securities and 
Exchange Commission). See also Concerning Financial Services 
Modernization and H.R. 192: Hearings Before the Subcommittee on 
Financial Institutions Supervision, Regulation and Insurance, of the 
House of Representatives Committee on Banking, Finance and Urban 
Affairs, 102nd Cong., 1st Sess. (Feb. 28, 1991) (testimony of 
Richard C. Breeden, Chairman, U.S. Securities and Exchange 
Commission); Concerning H.R. 1505, H.R. 6, and H.R. 15: Hearings 
Before the Subcommittee on Financial Institutions Supervision, 
Regulation and Insurance, of the House of Representatives Committee 
on Banking, Finance and Urban Affairs, 102nd Cong., 1st Sess. (Apr. 
30, 1991) (testimony of Richard C. Breeden, Chairman, U.S. 
Securities and Exchange Commission).
    \34\ As we discuss in section I.E. of this Release below, a 
number of financial services firms already operate subsidiaries with 
thrift charters.
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    Most significantly, a general exception would eliminate important 
investor protections afforded to advisory clients under the Advisers 
Act. For example, investment advisers must provide clients and 
prospective clients with an informational brochure addressing certain 
conflict-of-interest issues and explaining the adviser's business 
practices, fees, investment policies and risks, brokerage practices 
(such as soft dollar usage), and industry affiliations, and must 
disclose their policies on voting proxies.\35\ Investment advisers are 
also restricted with respect to the content of their advertisements and 
the types of advisory fees they charge.\36\ A broad exception would 
eliminate these and other measures under the Advisers Act that 
currently protect thrifts' retail advisory clients.\37\
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    \35\ Rule 204-3 (15 CFR 275.204-3); Electronic Filing by 
Investment Advisers; Proposed Amendments to Form ADV, Investment 
Advisers Act Release No. 1862 (Apr. 5, 2000) (65 FR 20524 (Apr. 17, 
2000)). Investment advisers must also disclose any disciplinary 
history to clients and prospective clients. Rule 206(4)-4 (15 CFR 
275.206(4)-4). Any potential investor with questions about the 
disciplinary history or business of a registered investment advisor 
may access, free of charge, a Web-based database containing such 
information at http://www.adviserinfo.sec.gov.
    \36\ We have adopted a rule prohibiting a number of advertising 
practices. For example, an investment adviser's advertisement may 
not contain past specific investment recommendations unless the 
adviser lists all recommendations made during the previous year. 
Rule 206(4)-1(a)(2) (15 CFR 275.206(4)-1(a)(2)). With respect to 
advisory fees, Congress, out of a concern that performance-based 
fees would encourage undue speculation with client funds, enacted 
section 205 of the Advisers Act (15 U.S.C. 80b-5). Section 205 
generally prohibits advisers from charging fees based on a share of 
the capital gains or capital appreciation of clients' funds.
    \37\ Advisory firm employees may also be subject to certain 
state testing and licensing requirements. An OTS regulation, 
however, asserts that state law regarding registration and 
licensing, apparently including investment adviser licensing 
requirements, is preempted with respect to thrifts' fiduciary 
activities. 12 CFR 550.136. See OTS Recordkeeping Rules Release, 
supra note 13.
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    We discuss the proposed rule and each of its provisions below.

A. Thrift Institutions Deemed Not To Be Investment Advisers

    Proposed rule 202(a)(11)-2(a)(1) would except thrift institutions 
from the Advisers Act to the extent their investment advice is provided 
in their capacity as trustee, executor, administrator, or guardian for 
trusts, estates, guardianships and other accounts created and 
maintained for a fiduciary purpose, and they do not, except in 
connection with the ordinary advertising of their services as trustee, 
executor, administrator, or guardian for these fiduciary purpose 
accounts, hold themselves out generally to the public as providing 
investment advisory services.\38\ Proposed rule 202(a)(11)-2(a)(2) 
would except a thrift institution from the Advisers Act to the extent 
its investment advice is provided to a collective trust fund maintained 
by the thrift institution and excepted from the definition of the term 
``investment company'' under section 3(c)(11) of the Investment Company 
Act.\39\ Thrifts that meet these conditions would be deemed not to be 
investment advisers, and thus not subject to any provisions of the Act.
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    \38\ Proposed 202(a)(11)-2(a)(1).
    \39\ Proposed 202(a)(11)-2(a)(2). The rule would also cover the 
thrift to the extent it advises accounts whose assets are invested 
solely in the thrift's collective trust funds.
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1. Eligible Thrift Institutions
    Proposed rule 202(a)(11)-2 would be available to savings 
associations that have deposits insured by the FDIC.\40\ These 
institutions include federal savings associations, federal savings 
banks, and state-chartered savings associations. Federal savings 
associations and federal savings banks are chartered and regulated by 
the OTS, which also oversees and monitors FDIC-insured state-chartered 
savings associations.\41\ The requirement that the

[[Page 25782]]

thrift be FDIC-insured is designed so that the thrifts relying on the 
rule will be overseen at the federal level.\42\
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    \40\ Proposed rule 202(a)(11)-2(c). In the proposed rule, the 
term ``thrift'' covers ``savings associations'' as they are defined 
in section 3(b)(1) of the Federal Deposit Insurance Act (15 U.S.C. 
1813(b)(1). Thus, ``thrift'' includes any federal savings 
association or federal savings bank chartered under 12 U.S.C. 1464, 
and any state savings association.
    \41\ The Director of the OTS is charged with examination, safe 
and sound operation, and regulation of ``savings associations.'' 12 
U.S.C. 1463(a). For those purposes, ``savings association'' means a 
savings association, as defined in section 3 of the Federal Deposit 
Insurance Act, whose deposits are insured by the FDIC. 12 U.S.C. 
1462(4). As OTS-chartered savings associations, all federal savings 
associations and federal savings banks must be FDIC-insured. See 12 
CFR 543.2(g)(2)(i) and 12 CFR 552.2-1(b)(3)(i).
    \42\ We expect that nearly all state savings associations would 
meet this condition of the proposed rule.
    Proposed rule 202(a)(11)-2 would not be available to thrifts 
operated for the purpose of evading the provisions of the Advisers 
Act. Proposed rule 202(a)(11)-2(c). This limitation is similar to 
section 208(d) of the Act, which makes it unlawful to do indirectly 
what one may not do directly. 15 U.S.C. 80b-8(d).
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    We request comment on the coverage of the proposed rule.
     Are any institutions excluded that should be included? 
Would it be useful to include state savings banks?
     Have we included any institutions that should be excluded?
2. Scope of the Rule
a. Fiduciary Purpose Accounts
    Proposed rule 202(a)(11)-2(a)(1) would except a thrift institution 
from the Advisers Act to the extent it performs advisory services 
solely in its capacity as trustee, executor, administrator, or guardian 
for trusts, estates, guardianships and other accounts created and 
established for a fiduciary purpose (rather than primarily for money 
management), provided the thrift does not hold itself out as providing 
investment advisory services.\43\
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    \43\ Proposed rule 202(a)(11)-2(a)(1).
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    We have drafted these conditions so that only thrift advisory 
activities that are part of certain fiduciary activities, that have 
been provided by banks and are now also offered by thrifts, are 
excepted from the Advisers Act.\44\ We have drawn the conditions from 
the Gramm-Leach-Bliley Act's amendments to the Investment Company Act 
that permit thrifts to operate common trust funds excepted from the 
definition of ``investment company'' under the Investment Company Act 
on the same basis as banks.\45\ The Gramm-Leach-Bliley amendments also 
clarified that the scope of this ``bank common trust fund exception'' 
is limited to common trust funds that are operated solely as an aid to 
a bank's administration of trusts or other accounts maintained for a 
``bona fide'' fiduciary purpose.\46\
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    \44\ The line we would draw in the proposed rule is similar to 
that suggested in an article by a former senior official at the OCC. 
Our proposed rule would except thrift trust department activities 
that the article describes as having ``no real counterpart'' in the 
securities business, while activities that are (or are very similar 
to activities that are) also performed by securities firms would 
remain subject to the Advisers Act. Dean Miller, The Supervision of 
Bank Asset Management Activities, Trusts & Estates, Mar. 1, 2000.
    \45\ See supra notes--and accompanying text.
    \46\ As amended by the Gramm-Leach-Bliley Act, section 3(c)(3) 
excepts from the definition of ``investment company'' any common 
trust fund maintained by a bank exclusively for the collective 
investment of commingled trust assets held by the bank in its 
capacity as trustee, executor, administrator, or guardian ``if--
    (A) such fund is employed by the bank solely as an aid to the 
administration of trusts, estates, or other accounts created and 
maintained for a fiduciary purpose;
    (B) except in connection with the ordinary advertising of the 
bank's fiduciary services, interests in such fund are not--
    (i) advertised; or
    (ii) offered for sale to the general public; and
    (C) fees and expenses charged by such fund are not in 
contravention of fiduciary principles established under applicable 
Federal or State law.'' 15 U.S.C. 80a-3(c)(3).
    Before it was amended by the Gramm-Leach-Bliley Act, section 
3(c)(3) of the Investment Company Act excepted from the definition 
of ``investment company'' any common trust fund maintained by a bank 
exclusively for the collective investment of commingled trust assets 
held by the bank in its capacity as trustee, executor, 
administrator, or guardian. The staff of the Commission has long 
interpreted the scope of this exception to be limited to common 
trust funds that are operated solely as an aid to a bank's 
administration of trusts or other accounts maintained for a ``bona 
fide'' fiduciary purpose, and the staff has issued a number of 
interpretive letters explaining the types of accounts that have, or 
lack, a fiduciary purpose. See infra notes 53-56. Congress amended 
section 3(c)(3) in the Gramm-Leach-Bliley Act to codify this long-
standing position. H.R. Rep. 106-74 (Pt. 3), 106th Cong., 1st Sess. 
182 (1999).
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    Proposed rule 202(a)(11)-2(a)(1) would permit a thrift institution 
to provide advisory services in its capacity as trustee, executor, 
administrator,\47\ or guardian for the customer account receiving the 
advice, without being subject to the Act. \48\ These are the same 
capacities in which a thrift must hold assets to place them in a common 
trust fund that is excepted from the definition of ``investment 
company'' under the Investment Company Act. In each case, the account 
advised by the thrift must be established and maintained for a 
fiduciary purpose.\49\ This is the same requirement that a thrift must 
meet for each customer account included in a common trust fund excepted 
from the Investment Company Act.\50\
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    \47\ The OTS Trust Handbook explains that ``[t]he person or 
entity named to settle an estate by the decedent's will is commonly 
referred to as the `executor' of the decedent's estate. The person 
or entity named to settle an estate where no will exists is commonly 
referred to as the `administrator' of the decedent's estate. 
Financial institutions are often appointed in these capacities.'' 
OTS Trust Handbook, supra note , at 100.2.
    \48\ Thrifts that serve trust accounts solely in other 
capacities would not qualify for the exception. For example, a 
thrift that is not the trustee for a trust, but is engaged by the 
trustee as custodian for the trust, could not also provide 
investment advice to that trust and still rely on the rule.
    \49\ A note to the proposed rule clarifies that the ``fiduciary 
purpose'' requirement applies to each account to which the thrift 
provides investment advisory services, whether that account takes 
the form of a trust, an estate, a guardianship or another type of 
account.
    \50\ Not all trust department accounts, or even all trusts, 
necessarily have a fiduciary purpose. Whether a customer establishes 
a trust, or other account, for a fiduciary purpose depends not only 
on the terms of the trust instrument (or other documents setting up 
the account), but also on other facts and circumstances concerning 
the creation and use of the account. Cf. United Missouri Bank of 
Kansas City, N.A., SEC Staff No-Action Letter (Dec. 31, 1981) 
(citing 26 Fed. Reserve Bull. 394 (1940), in which the Federal 
Reserve Board expressed views that formed the original basis for the 
Investment Company Act common trust fund exception).
---------------------------------------------------------------------------

    To meet the ``fiduciary purpose'' requirement, the customer account 
must be established and maintained for an underlying fiduciary reason. 
A customer account established primarily for money management reasons 
lacks an underlying fiduciary purpose and cannot meet this 
requirement.\51\ Thus, ``fiduciary purpose accounts'' would include 
those established in connection with estate planning, conservatorships 
and guardianships,\52\ and those established for minors under the 
Uniform Gifts to Minors Act (``UGMA'').\53\ Accounts established 
primarily for money management, custodial or administrative purposes, 
e.g., managed agency accounts,\54\ individual retirement account (IRA) 
trusts,\55\ indenture trusts, college

[[Page 25783]]

savings trusts, ERISA trusts, ``rabbi'' trusts, and most revocable 
inter-vivos trusts, would not be included under rule 202(a)(11)-
2(a)(1).\56\
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    \51\ Whether the customer account has a fiduciary purpose is 
distinct from whether the thrift acts in a fiduciary capacity with 
respect to the account. All investment advisers act in a fiduciary 
capacity for their clients and therefore owe fiduciary duties to 
their clients, see Capital Gains, supra note 2, but the fiduciary 
obligations of the adviser do not mean that the client's portfolio 
was established for a fiduciary purpose.
    \52\ Section 3(c)(3) of the Investment Company Act refers to 
``trusts, estates, or other accounts created and maintained for a 
fiduciary purpose'' but does not expressly mention guardianships. 15 
U.S.C. 80a-3(c)(3). To provide further clarification to thrifts, 
proposed rule 202(a)(11)-2(a)(1) specifically refers to 
guardianships.
    \53\ The Commission's staff has provided clarification, through 
no-action letters, as to the fiduciary purposes that qualify an 
account to be pooled under the common trust fund exception in 
section 3(c)(3) of the Investment Company Act. See e.g., Commercial 
Bank, SEC Staff No-Action Letter (Feb. 24, 1988) (traditional estate 
planning); Texas Commerce Bank Nat'l Association, SEC Staff No-
Action Letter (Jan. 26, 1978) (UGMA).
    \54\ A managed agency account would not be included under the 
proposed exception even if the underlying assets are held in a trust 
established for a fiduciary purpose. The thrift, like most other 
investment advisers that manage trusts' assets, would be acting as 
agent rather than as trustee, executor, administrator or guardian.
    \55\ The common trust fund exception in section 3(c)(3) of the 
Investment Company Act is unavailable to common trust funds holding 
IRA assets because such assets are not held ``for a fiduciary 
purpose.'' Exchange Act Release No. 44291, supra note 17, at note 
85. Some banks have suggested to our Division of Investment 
Management that, based on a letter from that Division, their common 
trust funds should be permitted to hold IRA assets and qualify for 
the exception. See Continental Bank, SEC Staff No-Action Letter 
(Sep. 2, 1982). The amendments to section 3(c)(3) effected by the 
Gramm-Leach-Bliley Act, however, codify our longstanding 
interpretation that a bank common trust fund cannot qualify for the 
exception if it holds assets of accounts that lack fiduciary 
purpose, including IRAs. See Concerning H.R. 1505, H.R. 6, and H.R. 
15: Hearings Before the Subcommittee on Financial Institutions 
Supervision, Regulation and Insurance, of the House of 
Representatives Committee on Banking, Finance and Urban Affairs, 
102nd Cong., 1st Sess. (Apr. 30, 1991) (testimony of Richard C. 
Breeden, Chairman, U.S. Securities and Exchange Commission). Cf. 
Santa Barbara Bank & Trust, supra note 46 (stating that the 
Commission and its staff have determined that the exception is not 
available for common trust funds holding assets of IRAs).
    \56\ The staff has issued letters explaining that ``rabbi'' 
trusts are not created for a fiduciary purpose, since they are a 
means for an employer to provide deferred compensation to top 
executives. See e.g., Boatmen's Bancshares, Inc., SEC Staff No-
Action Letter (Aug. 17, 1994). The staff has also issued guidance 
that revocable inter vivos trusts generally do not have a fiduciary 
purpose because grantors of these trusts usually retain so much 
control over the trust that it appears to be merely a vehicle for 
money management. However, a trust that can show that it has a true 
fiduciary purpose can rebut this presumption. See, e.g., First 
Jersey National Bank, SEC Staff No-Action Letter (Nov. 13, 1987); 
Provident National Bank Middle Market Trust Program, SEC Staff No-
Action Letter (Feb. 17, 1982); Genesee Merchants Bank and Trust, SEC 
Staff No-Action Letter (Jan. 8, 1979).
---------------------------------------------------------------------------

    A thrift institution relying on proposed rule 202(a)(11)-2(a)(1) 
could not hold itself out generally to the public as providing 
investment advisory services. Advertising or otherwise holding itself 
out as providing investment advice, portfolio management services, or 
financial planning would not be consistent with the proposed rule's 
requirement that the thrift's advisory services be solely in its 
capacity as trustee, executor, administrator, or guardian. Under the 
proposed rule, however, a thrift institution could publicize its 
investment advisory services in connection with the ordinary 
advertising of its services as trustee, executor, administrator, or 
guardian to fiduciary purpose accounts.\57\
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    \57\ Therefore, except to the extent that a federal thrift 
relying on the proposed rule is advertising the services it provides 
to such fiduciary purpose accounts, it may not publicly represent 
itself as an investment adviser or as providing investment advisory 
services. The proposed limitation on advertising again parallels 
Congress' revisions, in the Gramm-Leach-Bliley Act, to section 
3(c)(3) of the Investment Company Act. See supra note 46.
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    We request comment on the scope of this proposed exception.
     With respect to trust accounts, should we be guided by 
revised section 3(c)(3) of the Investment Company Act? We request that 
commenters disagreeing with our approach provide alternatives.
     Are the rule's limitations clear? If not, we urge 
commenters to suggest additional guidance that we could provide to 
clarify the ``fiduciary purpose'' requirement. We specifically request 
comments on whether there are fiduciary roles that thrifts typically 
play, other than acting as trustee, executor, administrator, or 
guardian, that have no real counterpart in regular investment advisory 
firms, but that would require the thrift to provide investment advisory 
services.
     Should the rule permit thrifts to advise managed agency 
accounts that have a fiduciary purpose without being subject to the 
Act? Trustees of fiduciary purpose accounts often hire a thrift or 
other registered investment adviser, as an agent, to manage the trust's 
assets, and the adviser treats the trustee as its client for purposes 
of disclosure and consent. Should thrifts be exempt with respect to 
fiduciary purpose accounts for which they act as agent, but not as 
trustee, executor, administrator or guardian?
     We also ask that commenters who oppose the exception or 
who believe it to be too broad suggest appropriate means for thrifts to 
comply with the Advisers Act when acting as both adviser and trustee 
for the types of fiduciary accounts that would meet the requirements of 
the proposed rule. For example, to whom should the thrift send its 
informational brochure or other disclosure when it acts as guardian for 
an incompetent, or as trustee under a testamentary trust that benefits 
minor children?
b. Collective Trust Fund Accounts
    Proposed rule 202(a)(11)-2(a)(2) would except a thrift institution 
from the Advisers Act to the extent it provides investment advisory 
services to its collective trust funds that are excepted from the 
definition of ``investment company'' under the Investment Company Act. 
Collective trust funds allow a bank or thrift to manage the assets of 
tax-qualified pension and profit sharing plans on a pooled basis 
without creating an ``investment company.'' \58\ The Investment Company 
Act has excepted banks' collective trust funds from the definition of 
``investment company'' since 1970,\59\ and in the Gramm-Leach-Bliley 
Act Congress extended this exception to collective trust funds 
maintained by thrifts.
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    \58\ Thrift-sponsored collective trust funds are excepted from 
the definition of the term ``investment company'' under section 
3(c)(11) of the Investment Company Act. 15 U.S.C. 80a-3(c)(11).
    \59\ Investment Company Amendments Act of 1970, Pub. L. No. 91-
547, section 3(b)(5), 84 Stat. 1415.
---------------------------------------------------------------------------

    Consistent with Congress' extension of the Investment Company Act 
collective trust fund exception, we are proposing to except thrifts 
from the Advisers Act to the extent they provide investment advice to 
their collective trust funds excepted from the definition of 
``investment company.'' \60\ In addition, our proposed rule would 
except a thrift from the Advisers Act with respect to accounts invested 
solely in one or more of the thrift's sponsored collective trust funds.
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    \60\ We are also proposing a conforming rule under the Exchange 
Act, to exempt thrift-sponsored collective trust funds from the 
requirements of section 12 of that Act. See Section I.D. of this 
Release, infra.
---------------------------------------------------------------------------

     Should we be guided by Congress' decision to exempt 
thrift-sponsored collective trust funds from the Investment Company 
Act?
     Should thrifts also be excepted from the Advisers Act with 
respect to the separate accounts of employee benefit plans whose assets 
are pooled in the collective trust account?

B. Thrift Institutions Registered Under the Act

    Many thrifts may be required to maintain their existing 
registrations as investment advisers under the Act, even if we adopt 
the rule that we are today proposing, because of the scope of their 
advisory business or marketing activities. For these registered 
thrifts, our proposed rule includes a paragraph clarifying that we 
would not necessarily apply the Act to all of the thrift's customer 
relationships. Under the rule, so long as the thrift makes the 
undertaking described below, the Advisers Act would apply to the thrift 
institution only with respect to those customer accounts for which the 
thrift provides advisory services that subject it to the Act.\61\ For 
example, the Advisers Act would apply to the thrift institution when it 
advises managed agency accounts or IRA trusts, but may not apply to the 
same thrift when it serves as trustee to a testamentary trust.
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    \61\ Proposed rule 202(a)(11)-2(b). This is the same approach we 
have taken in applying the Act to firms registered under both the 
Exchange Act (as a broker) and the Advisers Act (as an adviser), and 
that we have proposed to codify in a rule. Certain Broker-Dealers 
Deemed Not To Be Investment Advisers, Advisers Act Release No. 1845 
(Nov. 4, 1999) [64 FR 61226 (Nov 10, 1999)] (``Advisers Act Broker-
Dealer Proposal'').
---------------------------------------------------------------------------

    To qualify for this provision of proposed rule 202(a)(11)-2, a 
thrift

[[Page 25784]]

institution registered with us as an adviser would be required to 
confirm that it will provide us with access to all of its trust 
department records.\62\ Under section 204 of the Advisers Act, all 
records of any investment adviser, including a thrift institution that 
provides advisory services, are already subject to examination by 
Commission representatives.\63\ Continued access to these records will 
permit us to determine whether the thrift institution has defrauded 
advisory clients, for example, by failing to disclose misallocations of 
initial public offerings or other trades in favor of other trust 
department clients.\64\ These records are considered examination 
records, and thus receive the confidentiality available under section 
210(b) of the Advisers Act.\65\
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    \62\ The thrift would effect this through an undertaking in its 
Form ADV (Schedule D, Miscellaneous Section). The undertaking need 
not be complex; it could state simply that the thrift undertakes to 
provide the Commission with access to all trust department records.
    \63\ Section 204 of the Advisers Act (15 U.S.C. 80b-4) applies 
to all investment advisers using interstate commerce in connection 
with their business, other than advisers specifically exempted from 
registration pursuant to section 203(b) (15 U.S.C. 80b-3(b).
    \64\ See In the Matter of F.W. Thompson, Investment Advisers Act 
Release No. 1895, 73 S.E.C. Docket 486 (Sept. 7, 2000) (adviser 
failed to disclose inequitable method of allocating IPO shares, 
which disproportionately favored certain clients to the detriment of 
others); In the Matter of McKenzie Walker Investment Management, 
Inc. and Richard C. McKenzie, Jr., Investment Advisers Act Release 
No. 1571, 62 S.E.C. Docket 1010 (July 16, 1996) (adviser unlawfully 
failed to disclose its practice of favorably allocating IPO and 
other equity trades to performance-fee paying clients over its other 
clients).
    \65\ 15 U.S.C. 80b-10(b).
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C. Amendment To Form ADV

    We are proposing minor amendments to Form ADV and its instructions 
to identify those registered investment advisers that are thrift 
institutions.\66\ Form ADV, the investment adviser registration form, 
currently asks whether the adviser is actively engaged in business as a 
bank.\67\ We propose to amend the Form also to ask whether the adviser 
is actively engaged in business as a thrift institution. We believe 
this information would be necessary to allow us to enforce the 
conditions of proposed rule 202(a)(11)-2(b), if adopted.
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    \66\ 17 CFR 279.1.
    \67\ Item 6.A(6) of Part 1A of Form ADV.
---------------------------------------------------------------------------

D. Exemption Under Securities Exchange Act

    We are proposing new rule 12g-6 under the Exchange Act, to exempt 
thrift-sponsored collective trust funds from the registration and 
reporting requirements of the Exchange Act. As discussed above, the 
Gramm-Leach-Bliley Act amended the Investment Company Act to exempt 
thrift-sponsored common trust funds and thrift-sponsored collective 
trust funds from the definition of ``investment company.'' Like bank 
common trust funds, thrift-sponsored common trust funds are exempt from 
the Exchange Act.\68\ However, the provision exempting bank collective 
trust funds from the Exchange Act does not extend to thrifts.\69\ We 
believe that exempting thrifts' collective trust funds from the 
Exchange Act is consistent with Congress' determination in the Gramm-
Leach-Bliley Act to exempt those collective trust funds from the 
Investment Company Act. We request comment on the scope of this 
proposed exemption.
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    \68\ Section 3(a)(12)(A)(iii) of the Exchange Act [15 U.S.C. 
78c(a)(12)(A)(iii)].
    \69\ Section 3(a)(12)(A)(iv) of the Exchange Act [15 U.S.C. 
78c(a)(12)(A)(iv)].
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E. Effects on Competition

    Based on our general understanding of the types of clients served 
by the trust departments of thrift institutions, we believe the 
proposed rule would have the effect of eliminating certain regulatory 
disparities between banks and thrifts that carry on a fiduciary trust 
business, without creating new regulatory disparities between thrifts 
and regular investment advisory firms. We are requesting comment on our 
understanding of the thrift industry in this regard.
    There are approximately 932 insured savings associations in 
operation. Of these, only 117 savings associations were authorized to 
establish trust departments, and even fewer--98--filed regulatory 
reports indicating that they administer any assets pursuant to their 
trust powers.\70\ We estimate that approximately 34 savings 
associations are registered with us as investment advisers.\71\
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    \70\ These estimates are as of September 30, 2003. We base them 
on our staff's review of data on all U.S. insured depository 
institutions, maintained by the Federal Deposit Insurance 
Corporation (FDIC) and made available at http://www2.fdic.gov/idasp/main (visited Jan. 23, 2004) and http://www2.fdic.gov/sdirpt_Financial.asp (visited Jan. 26, 2004).
    \71\ We base this estimate on our staff's review of our adviser 
registration records to find any of the names of the 117 savings 
associations identified by FDIC data as having trust powers (at 
http://www2.fdic.gov/idasp/main (visited Jan. 23, 2004)). We cannot 
precisely determine the number of thrifts registered with us because 
we do not currently require registered investment advisers to 
indicate on Form ADV whether they possess a thrift charter. We infer 
that the remaining 64 savings associations are not registered with 
us because they are ineligible to do so, as provided by section 
203A(a) of the Advisers Act (15 U.S.C. 80b-3A(a)). Section 203A(a) 
generally prohibits an investment adviser from registering with the 
Commission unless the adviser is providing continuous and regular 
supervisory or management services for at least $25 million of 
client assets or advises a registered investment company.
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    Nineteen of the savings associations registered with us as 
investment advisers are part of national or regional securities or 
insurance firm complexes in which a number of different types of 
regulated firms carry out various roles in order to provide a broad 
selection of financial services and products. With limited exception, 
the savings associations in these large firms do not appear to engage 
in any appreciable lending or deposit-taking.\72\ Eight of these large 
firms appear to use their savings associations predominantly to provide 
services to clients seeking agency accounts or employee benefit trust 
accounts such as IRAs or ERISA plan accounts, which, under the proposed 
rule, would not have a fiduciary purpose.\73\ Eleven of these large 
firms may be using, to varying extents, their savings associations to 
provide fiduciary services to clients in connection with trusts, 
estates, guardianships and other accounts created and maintained for a 
fiduciary purpose.\74\ However, total trust assets reported by the 
former group far exceeds that of the latter.\75\
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    \72\ Our staff reviewed asset and liability data for all 34 
savings associations. The data were reported by these savings 
associations in their September 30, 2003 Thrift Financial Reports 
(TFRs), and summarized at http://www2.fdic.gov/idasp/rpt_financial.asp (visited Jan. 27, 2004). Of the 19 savings 
associations that are part of large firms, 15 reported only nominal 
lending or deposit-taking activity. Three others reported lending 
activity, but only two reported loan assets that exceeded trust 
assets, whereas loan assets for the other one were small in relation 
to its trust assets. The one remaining savings association in the 
group reported no lending activity and deposits equaling 
approximately 11% of trust assets, comprised mainly of uninsured 
jumbo deposits.
    \73\ Our staff reviewed trust department data for all 34 savings 
associations. The data were reported by these savings associations 
in their September 30, 2003 TFRs (available at http://www2.fdic.gov/call_tfr_rpts/?catNumber=74 (visited Jan. 27, 2004)).
    \74\ The TFR contains a separate category for personal trust 
accounts, but it does not require the institution to report 
fiduciary-purpose trust accounts separately from other personal 
trust accounts. For purposes of this analysis, our staff treated all 
managed personal trust accounts as fiduciary accounts, although this 
approach likely overestimates the number of fiduciary accounts. For 
five of these eleven savings associations, the total reported assets 
for managed personal trust accounts was approximately 25% to 45% of 
the total trust assets reported by the savings association, and was 
approximately 50% or more for the other six savings associations in 
this group of eleven. In comparison, the same figures for the group 
of eight large firms that focus primarily on non-fiduciary accounts 
ranged from less than 1% to 16%.
    \75\ The eight large firms that focus primarily on non-fiduciary 
accounts reported trust assets totaling approximately $97.4 billion, 
whereas the eleven firms that provide services to a greater 
proportion of fiduciary accounts reported trust assets totaling only 
$8.5 billion.

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[[Page 25785]]

    The other 15 savings associations registered with us appear to 
function as depository institutions, focused primarily on lending and 
deposit-taking, and are not business units of national or regional 
securities or insurance firms.\76\ Four of these depository-institution 
savings associations appear to use their trust departments 
predominantly to provide services to clients seeking agency accounts 
and employee benefit trust accounts such as IRAs or ERISA plan 
accounts, which, under the proposed rule, would not have a fiduciary 
purpose.\77\ The remaining 11 of these depository-institution savings 
associations may be using, to varying extents, their trust departments 
to provide fiduciary services to clients in connection with trusts, 
estates, guardianships and other accounts created and maintained for a 
fiduciary purpose.\78\ Total trust assets reported by the 11 depository 
institution savings associations providing a greater proportion of 
fiduciary account services far exceed the total trust assets reported 
by the four focusing on non-fiduciary accounts.\79\
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    \76\ One of these depository-institution savings associations 
reports loan assets in excess of $15 billion on its September 30, 
2003 TFR and is part of a world-wide financial holding company. 
Seven others appear to be regional institutions, reporting loan 
assets in the range of approximately $1.4 billion to $10.8 billion 
on their September 30, 2003 TFR. Two others, reporting loan assets 
of approximately $380 million and $140 million respectively, are 
affiliated with regional financial holding companies. The remaining 
five depository-institution savings associations are smaller, 
reporting approximately $78 million to $650 million in loan assets.
    \77\ Each of these four savings associations reported that less 
than 15% of its total trust assets were held in managed personal 
trust accounts.
    \78\ Five of these eleven savings associations each reported 
that approximately 20% to 25% of its total trust assets were held in 
managed personal trust accounts. The remaining six savings 
associations each reported that approximately 35% to 85% of its 
total trust assets were held in managed personal trust accounts.
    \79\ The 11 depository-institution savings associations that 
provide fiduciary accounts reported trust assets totaling 
approximately $13.1 billion, whereas the four depository-institution 
savings associations that focus primarily on non-fiduciary accounts 
reported trust assets totaling approximately $940 million.
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    The above data lead us to infer that, for the savings associations 
registered with us that use a lending and deposit-taking business model 
in competition with banks, the savings associations with the majority 
of the trust business may be holding significant proportions of their 
total trust assets in fiduciary purpose accounts. By excepting thrift 
institutions from the Advisers Act to the extent they provide 
investment advice in their capacity as trustee, executor, 
administrator, or guardian for accounts with an underlying fiduciary 
purpose, proposed rule 202(a)(11)-2 will eliminate an existing 
regulatory disparity between banks and these savings associations. In 
addition, it is our understanding that the category of thrift customer 
relationships that the proposed rule would affect--that is, fiduciary 
purpose trust customers--is not commonly served by regular investment 
advisory firms. Thus, the proposed rule will not create regulatory 
disparities between thrifts and regular investment advisory firms.
    On the other hand, the above data also lead us to infer that the 
vast majority of trust business conducted by all the savings 
associations registered with us is carried on by savings associations 
that are part of securities and insurance firms, that do not use a 
lending and deposit-taking business model in competition with banks, 
and that do not hold significant proportions of their trust assets in 
fiduciary purpose accounts. Thus, a blanket exception for thrifts from 
the Advisers Act would be likely to create a new regulatory disparity 
between the majority of savings associations engaged in significant 
levels of advisory activity and the regular investment advisory firms 
with which they currently compete. Regular investment advisory firms 
would continue to be subject to the investor protection requirements 
under the Advisers Act, whereas savings associations that are part of 
large firms holding the dominant share of trust department assets (as 
discussed above) would be exempted from the same investor protection 
requirements, notwithstanding that they all appear to service the same 
types of clients.\80\
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    \80\ It appears unlikely that our proposed exemption for thrifts 
that hold trust assets in collective trust funds will create any 
competitive disparity for regular investment advisory firms. Our 
staff's review of TFR data shows that, at most, one or two of the 34 
savings associations registered with us may presently be using 
collective trust funds. In addition, few of these thrifts managed 
employee benefit plan assets eligible for inclusion in a collective 
trust fund. Such assets reported by all 34 savings associations 
totaled approximately one percent of the aggregate trust assets 
administered by these savings associations. Only three, smaller 
savings associations out of the 34 registrants reported sizeable 
proportional holdings of these trust assets, in the range of 55%-
65%. Four other savings associations out of the 34 registrants 
reported proportional holdings of these assets in the range of 10% 
to 12%, whereas the remaining 27 reported nothing more than nominal 
holdings.
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    The proposed rule would not alter whatever competitive effects are 
caused by the existing regulatory disparity between savings 
associations that are part of large firms and banks. However, the 
existence and extent of any competitive effects is dependent upon other 
factors as well. For example, there may be few or no competitive 
effects if banks are not presently seeking to provide the same types of 
retail investment advisory services as are being provided by these 
savings associations. Even if banks are providing the same types of 
retail investment advisory services, there may be no competitive 
effects if banks seek to provide these services primarily to their 
depository institution customer base as an accommodation.\81\ This 
issue also raises a question as to whether the existing regulatory 
disparities are truly between banks and thrifts, or can more accurately 
be described as being between banks and the financial services 
complexes of which the thrifts are part.
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    \81\ In addition, any particular bank that also provides 
investment advice to a registered investment company--such as the 
bank's proprietary mutual funds--is now required to register under 
the Advisers Act on account of that activity. See supra note 7.
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    We request comment on the following questions:
     Is our understanding of the nature and scope of investment 
advisory services provided by various types of thrifts correct?
     How many of these thrifts compete with banks for the same 
type of client?
     Do regular investment advisory firms compete, to any 
appreciable degree, with thrifts for fiduciary-purpose trust clients?

II. General Request for Comment

    Any interested persons wishing to submit written comments on the 
proposed rules that are the subject of this release, or to suggest 
additional changes or submit comments on other matters that might have 
an effect on the proposal described above, are requested to do so. 
Commenters suggesting alternative approaches are encouraged to submit 
proposed rule text.
    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Commission also is requesting information regarding 
the potential impact of the proposed rule on the economy on an annual 
basis. Commenters should provide empirical data to support their views.

III. Cost-Benefit Analysis

A. Background

    Under proposed rule 202(a)(11)-2, certain thrifts would be deemed 
not to be ``investment advisers'' as defined in the Advisers Act when 
they render investment advice solely in their capacity as trustee, 
executor,

[[Page 25786]]

administrator, or guardian to customer accounts created and maintained 
for a fiduciary purpose, or when they advise collective trust funds 
they maintain under an exemption from the Investment Company Act.
    The Commission is sensitive to the costs and benefits of its rules. 
We estimate that the proposed amendments may result in benefits to 
certain thrifts in the form of reduced regulatory compliance costs. As 
we discussed above, we estimate that approximately 34 thrifts are 
currently registered with us as investment advisers and incurring 
compliance costs that would be partially reduced by the proposed 
rule.\82\ The extent of these cost reductions would depend on whether 
these thrifts continue using their trust departments primarily to 
provide retail investment advisory services.\83\ Other thrifts that 
wish to begin operating trust departments under a business model that 
focuses exclusively on activities that would be covered by the proposed 
rule would obtain the benefit of complete avoidance of these compliance 
costs. We believe all these benefits can be obtained without imposing 
any significant costs on thrifts or investors.
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    \82\ We estimate that approximately 34 savings associations have 
registered with us as investment advisers, based on our staff's 
review of SEC-registered investment advisers whose names identify 
them as savings associations. See supra note 71.
    \83\ Our staff reviewed data from savings associations that are 
registered with us as investment advisers that they reported in 
their September 30, 2003 Thrift Financial Reports (TFRs). A few of 
the 34 savings associations held all or nearly all their trust 
assets in personal trust accounts, but most of the 34 savings 
associations held most of their trust assets, or significant 
portions of them, in other types of accounts that would not meet the 
requirements of the proposed rule. More than half of the 34 savings 
associations were part of national or regional securities or 
insurance complexes. See supra notes 73, 74, 77, and 78.
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B. Benefits

1. Complete Avoidance of Registration and Compliance Costs
    To the extent their trust department activities fit within the 
activities identified in the proposed rule, thrifts will benefit in the 
form of saved costs they would otherwise expend in connection with 
Advisers Act compliance. Based on our staff's review of regulatory 
reports filed by SEC-registered thrifts describing their trust 
department activities, it appears that few, if any, currently engage 
exclusively in the type of fiduciary-purpose activities that would be 
exempted by proposed rule 202(a)(11)-(2)(a)(1). All but one or two of 
the 34 savings associations currently registered with us as investment 
advisers report to the OTS that some or all of their trust assets are 
held in connection with non-fiduciary agency accounts or non-fiduciary 
employee benefit trust accounts such as IRAs or participant-directed 
401(k) plans.\84\ Thrift institutions operating under proposed rule 
202(a)(11)-2(a)(2) could also save compliance costs associated with 
trust assets they manage for certain employee benefit plans through 
collective trust funds. They could also save the costs of registration 
and reporting required under the Exchange Act for those collective 
trust funds, under our proposed rule 12g-6 under the Exchange Act. 
However, it appears that few, if any, of the 34 currently-registered 
thrifts use collective trust funds. Moreover, few of them manage more 
than a nominal amount of employee benefit plan assets that would be 
eligible for inclusion in a collective trust fund.\85\
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    \84\ See supra notes 73, 74, 77, and 78.
    \85\ Based on our staff's review of September 30, 2003 TFR data, 
employee benefit plan assets that may be eligible for inclusion in a 
collective trust fund totaled less than one percent of the aggregate 
trust assets administered by the 34 savings associations currently 
registered with us. Only three smaller savings associations out of 
the 34 registrants reported sizeable proportional holdings of these 
trust assets, in the range of 55%-65%. Four other savings 
associations out of the 34 registrants reported proportional 
holdings of these assets in the range of 10% to 12%, whereas the 
remaining 27 reported nothing more than nominal holdings. See supra 
note 80.
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    Benefits under proposed rule 202(a)(11)-2(a)(1) and (2) would be 
greater for thrifts that choose to operate their trust departments 
under a business model that focused exclusively on the types of 
accounts excepted under the proposed rule. Based on our staff's 
discussions with thrift industry representatives, we believe certain 
thrifts wish to establish or expand trust department operations using 
this business model, but we do not have sufficient information to 
estimate the number or size of such thrifts. These thrifts would be 
excepted from the requirement to file their registration statement on 
Form ADV and to pay filing fees to the operator of the IARD system that 
range from $800 to $1,100 initially and $400 to $550 annually.\86\ For 
Paperwork Reduction Act (``PRA'') purposes, the Commission further 
estimates that the burden of completing and filing Form ADV for a new 
registrant is approximately 22 hours, and approximately 1.13 additional 
hours each year for annual amendments.\87\ These thrifts would also 
save the cost of staff time expended in responding to questions and 
supplying records requested by our examiners during periodic exams.
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    \86\ Registered advisers with assets under management of more 
than $100 million must pay an initial set-up fee of $1,100 and an 
annual updating fee of $550. Advisers with assets under management 
of $25 million to $100 million must pay an initial set-up fee of 
$800 and an annual updating fee of $400. Other advisers, with assets 
under management of less than $25 million, must pay an initial set-
up fee of $150 and an annual updating fee of $100. See Investment 
Advisers Act Release No. 1888 (July 28, 2000) (65 FR 47807 (Aug. 3, 
2000)) (``Advisers Act Release No. 1888'').
    \87\ The Commission has previously estimated a burden of 
approximately 0.75 hours per adviser per amendment filed on IARD. 
Currently registered advisers are estimated to amend their Form ADV, 
on average, 1.5 times per year. See Advisers Act Release No. 1888.
---------------------------------------------------------------------------

    Additionally, thrifts that operated under a business model that 
focuses exclusively on accounts exempted under the proposed rule would 
save costs associated with establishing and maintaining internal 
procedures and systems for complying with the Advisers Act and the 
rules under the Advisers Act. In connection with adopting our recent 
rules concerning investment adviser compliance programs, we estimated 
for Paperwork Reduction Act purposes that the average annual burden of 
these compliance programs is 80 hours.\88\ However, given the systems 
and records these thrifts would still be required to maintain to comply 
with OTS requirements governing trust department activities, it is 
difficult to estimate whether these thrifts would obtain any marginal 
cost or burden decrease.
---------------------------------------------------------------------------

    \88\ Compliance Programs of Investment Companies and Investment 
Advisers, Investment Advisers Act Release No. 2204 (Dec. 17, 2003) 
[68 FR 74714 (Dec. 24, 2003)].
---------------------------------------------------------------------------

2. Partial Avoidance of Costs
    For most of the 34 thrifts currently registered with us, the 
proposed rule offers benefits in the form of saved compliance costs for 
that portion of their operations that manages trust assets held in 
fiduciary-purpose trust accounts. The proposed rule would include a 
paragraph clarifying that a thrift's obligations under the Advisers Act 
extend only to those customer accounts for which the thrift provides 
advisory services that subject it to the Act.\89\
---------------------------------------------------------------------------

    \89\ Proposed rule 202(a)(11)-2(b). See supra Section I.B. of 
this Release.
---------------------------------------------------------------------------

    Our staff has reviewed the trust department activities of the 
thrifts currently registered with us as investment advisers to identify 
the proportion of assets and accounts that may have lower compliance 
costs because they qualify for the proposed exception. The proportion 
of potentially-exempt assets in each thrift appears to vary across a 
range, from approximately 0.5 to 15 percent for 12

[[Page 25787]]

of the thrifts at the low end, up to 50 to 100 percent for nine thrifts 
at the high end.\90\ For the group, we estimate trust assets that may 
qualify for the fiduciary-purpose exception total approximately $17.5 
billion, or approximately 15% of the $119 billion in total trust assets 
reported by the group.\91\ For the exempt accounts containing these 
assets, these thrifts would save the cost of making client disclosures 
required under the Advisers Act.\92\ These thrifts would also save the 
costs associated with other requirements under the Act and its rules 
relating to matters such as recordkeeping, custody, proxy voting on 
behalf of customers, and the like. While we use the percentage of a 
thrift trust department's assets held in potentially fiduciary-purpose 
accounts to describe, in relative terms, the proportion of these 
thrifts' exempt activities, their relative cost savings would not 
necessarily vary by the same proportions. For a given amount of trust 
assets, a savings association's compliance costs may vary depending on 
the number of clients, their investment objectives, the type and 
turnover rate of the assets, the savings association's other securities 
activities, or even the personal activities of its trust department 
employees.
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    \90\ This information was obtained from data reported by the 34 
savings associations registered with us in their September 30, 2003 
TFRs. See supra notes 73, 74, 75, and 77-79.
    \91\ Id.
    \92\ Investment advisers are required to deliver an information 
brochure to clients and prospective clients under rule 204-3 (17 CFR 
275.204-3), and to make detailed disclosures about the disciplinary 
history of the advisory firm and its supervised persons under rule 
206(4)-4 (17 CFR 275.206(4)-4). The Commission has previously 
estimated that the annual burden of compliance with the brochure 
delivery requirements of rule 204-3 is approximately 694 hours per 
adviser, and that the annual burden of compliance with the 
disclosure requirements of rule 206(4)-4 is 7.5 hours per adviser 
affected by rule 206(4)-4.
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3. Competitive Effect Costs
    The proposed rule would also benefit some of the 34 thrifts 
registered with us by eliminating certain regulatory disparities 
between banks and thrifts that carry on a fiduciary-purpose trust 
business covered by the proposed rule. This benefit is difficult to 
quantify. Other parties interested in this issue have suggested these 
regulatory disparities can be eliminated only by giving thrifts a 
blanket exemption from the Advisers Act.\93\ However, our review of 
registered thrifts shows this is unnecessary and would primarily create 
new regulatory disparities benefiting thrifts competing with other 
securities firms for retail advisory business.
---------------------------------------------------------------------------

    \93\ See supra note and accompanying text.
---------------------------------------------------------------------------

    As discussed above, our staff has reviewed the trust department 
activities of the thrifts currently registered with us as investment 
advisers. Based on this review, we infer that the vast majority of the 
trust activities conducted by thrifts, overall, are conducted by 
thrifts that are part of securities and insurance firms, that do not 
use a lending and deposit-taking business model in competition with 
banks, and that do not hold significant proportions of their trust 
assets in fiduciary purpose accounts. The following table summarizes 
these firms by business model: \94\
---------------------------------------------------------------------------

    \94\ This table summarizes information presented in Section I.E. 
of this Release, supra.

------------------------------------------------------------------------
                                       Aggregate trust
                                       assets held by   Number of thrift
   Category of thrift institution      thrifts in the    institutions in
                                        category (in        category
                                          billions)
------------------------------------------------------------------------
Thrift Arms of Securities or                     $97.4                 8
 Insurance Firms Using Retail
 Advisory Model.....................
Thrift Arms of Securities or                       8.5                11
 Insurance Firms with Significant
 Fiduciary-Purpose Accounts.........
Deposit-and-Lending Thrifts Using                  0.9                 4
 Retail Advisory Model..............
Deposit-and-Lending Thrifts with                  13.1                11
 Significant Fiduciary-Purpose
 Accounts...........................
------------------------------------------------------------------------

    This table shows that 15 of the 34 SEC-registered thrifts engage in 
a deposit-taking and lending business model in competition with banks. 
Eleven of these thrifts that compete with banks may be holding 
significant portions of their trust assets in fiduciary-purpose 
accounts, and the proposed rule would eliminate an existing regulatory 
disparity between these thrifts and banks. However, most of the trust 
business carried on by the 34 SEC-registered thrifts is being conducted 
by 8 thrifts using the retail advisory model that are part of a 
securities or insurance complex. Creating a blanket exception would 
create a new regulatory disparity between these thrifts and the regular 
investment advisory firms with which they currently compete.

C. Costs

    We expect that a thrift relying on the proposed amendments would 
incur only minimal incremental costs. Thrifts that would be required to 
maintain their Advisers Act registration and that could take advantage 
of the rule only with respect to certain accounts would be required to 
confirm, by including an undertaking in their Form ADV (Schedule D), 
that they will make all trust department records available to 
Commission examiners upon request. For PRA purposes, the Commission 
estimates that including this undertaking would impose an annual burden 
of only five minutes per thrift, or less than 10 hours in the 
aggregate.\95\ Thrifts maintaining their registration under the 
Advisers Act would also be required to check a box on their Form ADV to 
indicate that they are actively engaged in business as a thrift 
institution. For PRA purposes, the Commission estimates that completing 
this item on Form ADV would impose an annual burden of only two minutes 
per thrift, or less than four hours in the aggregate.\96\
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    \95\ See infra note 101.
    \96\ See infra note 103.
---------------------------------------------------------------------------

    Costs to customers that receive investment advice from a thrift are 
also expected to be minimal. Customers whose accounts no longer subject 
the thrift to the Advisers Act will not receive the benefits and 
protections of the Act, including the disclosure that the Act requires. 
As discussed earlier, however, the Advisers Act does not work well when 
applied to certain thrift trust department relationships, and thus the 
benefits of the Act in these circumstances may already be minimal. 
Accordingly, we estimate the cost of removing the Act's benefits and 
protections with regard to these accounts would also be minimal, 
although those costs cannot be quantified.\97\
---------------------------------------------------------------------------

    \97\ See supra note 27 and accompanying text.
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     The Commission requests comments on the costs and benefits 
identified in this release, as well as any other cost and benefits that 
may result from the proposal.
     We encourage commenters to identify, discuss, analyze, and 
supply

[[Page 25788]]

empirical data relating to any costs and benefits they discuss.
     How many thrifts would qualify to use the proposed 
exceptions from the Advisers Act or from section 12(g) of the Exchange 
Act, and to what extent?
     Would the incremental costs saved by thrifts that were 
completely excepted from the Advisers Act be more than the cost savings 
for thrifts that remained registered? What would cause the difference, 
and how much would it be?

IV. Paperwork Reduction Act

    The proposed form amendment and certain provisions of the proposed 
rule contain ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 to 
3520), and the Commission has submitted the amendment and proposed rule 
to the Office of Management and Budget (``OMB'') in accordance with 44 
U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collections of 
information are ``Rule 202(a)(11)-2'' and ``Form ADV'' both under the 
Advisers Act. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number.

Rule 202(a)(11)-2

    Certain thrift institutions relying on the proposed rule would be 
deemed not to be ``investment advisers'' as defined in the Advisers 
Act. These thrifts would not be subject to any provision of the 
Advisers Act, including the various registration, disclosure and 
recordkeeping requirements under the Act. These thrifts could continue 
to render investment advice to customer accounts created and maintained 
for a fiduciary purpose if the advice is provided solely in the 
thrift's capacity as trustee, executor, administrator, or guardian for 
that account. For these thrift institutions, the proposed rule would 
serve to eliminate altogether the annual reporting and recordkeeping 
burden under the Advisers Act. As previously discussed, we estimate 
that approximately 34 advisers currently registered with us appear to 
be thrift institutions, but most engage in trust activities that would 
not be covered by the proposed exception.\98\ Each thrift institution 
would need to assess both its current and planned trust department 
business in order to determine whether it would seek to rely on the 
proposed rule to be excluded from the Advisers Act and thus from the 
Act's reporting and recordkeeping requirements. Because the number of 
thrifts that would qualify for the proposed exception will depend on 
the future business decisions of individual thrift institutions, it 
would be speculative to quantify the number of thrifts whose paperwork 
burden will be entirely eliminated as a result of the proposed 
rule.\99\ Comment is requested on the number of thrift institutions 
that would qualify to use the proposed exception from the Advisers Act, 
and on the number of those qualifying thrifts that would elect to use 
it.
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    \98\ See supra note 84.
    \99\ For example, some thrifts may choose to maintain their 
exempt activities within the thrift itself, but to move their non-
exempt advisory business to another affiliate within their financial 
service firm complex.
---------------------------------------------------------------------------

    Thrifts that would be required to maintain their registration under 
the Advisers Act and that elected to rely on the rule with respect to 
certain customer accounts would be required to confirm, in an 
undertaking in their Form ADV (Schedule D), that they will make all 
trust department records available to Commission examiners, upon 
request. This collection of information is necessary to obtain the 
benefit of the proposed rule with regard to these certain accounts. The 
Commission staff will use this collection of information in its 
examination and oversight program.
    The Commission estimates that compliance with the requirement to 
type in this brief undertaking in Form ADV would impose a total annual 
burden of 5 minutes for each thrift registered under the Act and 
relying on the rule to exclude, from the Act, its services to certain 
customer accounts. In addition, data contained on Thrift Financial 
Reports submitted by all savings associations indicate that 
approximately 117 savings associations have been granted trust 
powers.\100\ Based on these data, the Commission estimates that 
approximately 117 thrift institutions could potentially take advantage 
of the proposed rule to exclude, from the scope of the Advisers Act, 
their advisory services to certain customer accounts. Accordingly, the 
total burden hours imposed by proposed rule 202(a)(11)-2 is estimated 
to be 9.75 hours annually.\101\ The Commission believes this 
undertaking will not impose a significant additional recordkeeping 
burden on thrift institutions. The undertaking does not require that 
new or additional records be kept, only that existing records required 
under adviser or thrift regulations be made available.\102\
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    \100\ See supra note 70.
    \101\ 5 minutes x 117 thrifts = 585 minutes = 9.75 hours. 
Because the proposed rule may except some thrifts entirely from the 
definition of ``investment adviser'' (and thus from the paperwork 
burden of the Advisers Act), although all approximately 117 thrift 
institutions that have been granted trust powers could potentially 
take advantage of the proposed rule, it is possible that fewer than 
117 would actually remain subject to the Advisers Act.
    \102\ The OTS requires that records be maintained for fiduciary 
accounts. See 12 CFR 550.410 (requiring thrifts overseen by the OTS 
to keep adequate records for all fiduciary accounts).
---------------------------------------------------------------------------

Form ADV

    Thrifts that would be required to maintain their registration under 
the Advisers Act would also be required to check a box on their Form 
ADV that they are actively engaged in business as a thrift institution. 
This collection of information is mandatory. The Commission staff will 
use this collection of information in its examination and oversight 
program. The Commission estimates that compliance with this requirement 
to check a box on Form ADV would impose a total annual burden of 2 
minutes per thrift responding to the question. As discussed above, the 
Commission estimates that as many as approximately 117 thrift 
institutions may be required to register with us and respond to this 
question. Accordingly, the total annual burden imposed by this 
collection of information is estimated to be 3.9 hours.\103\
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    \103\ 2 minutes x 117 thrifts = 234 minutes = 3.9 hours.
---------------------------------------------------------------------------

    Any information received by the Commission related to the proposed 
rule and form amendment would not be kept confidential. Pursuant to 44 
U.S.C. 3506(c)(2)(B), the Commission solicits comments (i) to evaluate 
whether the proposed collections of information are necessary for the 
proper performance of the functions of the agency, including whether 
the information will have practical utility; (ii) to evaluate the 
accuracy of the agency's estimate of the burden of the proposed 
collections of information; (iii) to enhance the quality, utility, and 
clarity of the information to be collected; and (iv) to minimize the 
burden of these collections of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    Persons desiring to submit comments on these collection of 
information requirements should direct them to the Office of Management 
and Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
D.C. 20503, and also should send a copy of their comments to Jonathan 
G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Stop 6-9, Washington, DC 20549 with

[[Page 25789]]

reference to File No. S7-20-04. OMB is required to make a decision 
concerning the collection of information requirements between 30 and 60 
days after publication. A comment to OMB is best assured of having its 
full effect if OMB receives it within 30 days of publication.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act,\104\ 
the Commission hereby certifies that proposed rule 202(a)(11)-2, 
proposed rule 12g-6, and the proposed amendment to Form ADV would not, 
if adopted, have a significant economic impact on a substantial number 
of small entities. Proposed rule 202(a)(11)-2 and the proposed 
amendment would except savings associations from the Advisers Act when 
they provide investment advice as part of certain trust department 
fiduciary services and revise the investment adviser registration form 
so that registrants could identify themselves as savings associations. 
Based on data reported by all savings associations in their September 
30, 2003 Thrift Financial Reports (TFRs), there are no thrifts that 
meet the definition of a ``small business'' for purposes of the 
Advisers Act.\105\ Proposed rule 12g-6 would exempt collective trust 
funds maintained by savings associations from the registration and 
reporting requirements of the Exchange Act. Based on the same TFR data, 
there are no thrift-managed collective trust funds that meet the 
definition of a ``small business issuer'' for purposes of the Exchange 
Act.\106\ No other entities would incur obligations from or otherwise 
be directly affected by the proposed rules and amendment. Accordingly, 
the Commission certifies that proposed rule 202(a)(11)-2, proposed rule 
12g-6, and the proposed amendment to Form ADV would not have a 
significant economic impact on a substantial number of small entities.
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    \104\ 5 U.S.C. 605(b).
    \105\ Under Commission rules, for the purposes of the Advisers 
Act and the Regulatory Flexibility Act, an investment adviser 
generally is a small entity if it: (i) Has assets under management 
having a total value of less than $25 million; (ii) did not have 
total assets of $5 million or more on the last day of its most 
recent fiscal year; and (iii) does not control, is not controlled 
by, and is not under common control with another investment adviser 
that has assets under management of $25 million or more, or any 
person (other than a natural person) that had $5 million or more on 
the last day of its most recent fiscal year. 17 CFR 275.0-7(a).
    \106\ Under Commission rules, for the purposes of the Exchange 
Act and the Regulatory Flexibility Act, an issuer is generally is a 
small entity if it did not have total assets of $10 million or more 
on the last day of its most recent fiscal year. 17 CFR 240.0-10(a).
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    The Commission requests written comments regarding this 
certification. The Commission requests that commenters describe the 
nature of any impact on small businesses and provide empirical data to 
support the extent of the impact.

VI. Statutory Authority

    We are proposing rule 202(a)(11)-2 pursuant to our authority under 
sections 202(a)(11)(F) and 211(a) of the Advisers Act.\107\ Section 
202(a)(11)(F) gives us authority to except, by rule or order, from the 
statutory definition of ``investment adviser'' persons not within the 
intent of that definition. Section 211(a) gives us authority to 
classify, by rule, persons and matters within our jurisdiction and to 
prescribe different requirements for different classes of persons, as 
necessary or appropriate to the exercise of our authority under the 
Act.
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    \107\ 15 U.S.C. 80b-2(a)(11)(F) and 15 U.S.C. 80b-11(a).
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    We are proposing amendments to Form ADV under section 19(a) of the 
Securities Act of 1933,\108\ sections 23(a) and 28(e)(2) of the 
Securities Exchange Act of 1934,\109\ section 319(a) of the Trust 
Indenture Act of 1939,\110\ section 38(a) of the Investment Company Act 
of 1940,\111\ and sections 203(c)(1), 204, and 211(a) of the Investment 
Advisers Act of 1940.\112\
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    \108\ 15 U.S.C. 77s(a).
    \109\ 15 U.S.C. 78w(a) and 78bb(e)(2).
    \110\ 15 U.S.C. 77sss(a).
    \111\ 15 U.S.C. 78a-37(a).
    \112\ 15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-11(a).
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    We are proposing rule 12g-6 pursuant to our authority under section 
12(h) of the Exchange Act.\113\ Section 12(h) gives us authority to, by 
rules or regulations, exempt any issuer or class of issuers from the 
provisions of section (g) of the Exchange Act, if we find by reason of 
the nature and extent of the activities of the issuer that such action 
is not inconsistent with the public interest or the protection of 
investors. Section 12(h) also gives us authority to classify issuers 
and prescribe requirements appropriate for each such class.
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    \113\ 15 U.S.C. 78l(h).
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Text of Proposed Rules and Form Amendments

List of Subjects

17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 275 and 279

    Investment advisers, Reporting and recordkeeping requirements.

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The general authority citation for Part 240 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *
    2. Section 240.12g-6 is added to read as follows:


Sec.  240.12g-6  Exemption from Section 12(g) for collective trust 
funds.

    An issuer that is a collective trust fund excluded from the 
definition of an investment company under section 3(c)(11) of the 
Investment Company Act of 1940 shall be exempt from the requirement to 
register any class of equity securities pursuant to section 12(g)(1) of 
the Act (15 U.S.C. 78l(g)(1)).

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

    3. The general authority citation for Part 275 continues to read as 
follows:

    Authority: 15 U.S.C. 80b-2(a)(11)(F), 80b-2(a)(17), 80b-3, 80b-
4, 80b-4a, 80b-6(4), 80b-6a, 80b-11, unless otherwise noted.
* * * * *
    4. Section 275.202(a)(11)-2 is added to read as follows:


Sec.  275.202(a)(11)-2  Certain thrift institutions deemed not to be 
investment advisers.

    (a) A thrift institution will be deemed not to be an investment 
adviser if the thrift institution limits its investment advisory 
services to the following:
    (1) Investment advisory services that the thrift institution 
performs solely in its capacity as trustee, executor, administrator, or 
guardian for trusts, estates, guardianships and other accounts created 
and maintained for a fiduciary purpose, provided that the thrift 
institution does not, except in connection with the ordinary 
advertising of its services as trustee, executor, administrator, or 
guardian for such accounts, hold itself out generally to the public as 
providing investment advisory services.
    (2) Investment advisory services for a collective trust fund 
maintained by the

[[Page 25790]]

thrift institution and excluded from the definition of the term 
``investment company'' under section 3(c)(11) of the Investment Company 
Act of 1940, and for accounts the assets of which are invested solely 
in one or more such collective trust funds.

    Note to paragraph (a)(1):  Under paragraph (a)(1), each account 
to which the thrift institution provides investment advisory 
services must be created and maintained for a fiduciary purpose, 
whether that account is a trust, an estate, a guardianship or 
another type of account.

    (b) A thrift institution will not be deemed to be an investment 
adviser with respect to accounts for which it provides investment 
advisory services that do not subject the thrift institution to the 
Act, but only if the thrift institution confirms in an undertaking on 
Schedule D of its Form ADV (17 CFR 279.1) that it will make available 
to Commission examiners, upon request, all trust department records. 
Such records shall be considered examination records under section 
210(b) of the Act (15 U.S.C. 80b-10(b)).
    (c) The term thrift institution means a ``savings association'' as 
that term is defined in sections 3(b)(1) and of the Federal Deposit 
Insurance Act (12 U.S.C. 1813(b)(1)) that has deposits insured by the 
Federal Deposit Insurance Corporation under the Federal Deposit 
Insurance Act (12 U.S.C. 1811), and that is not operated for the 
purpose of evading the provisions of the Investment Advisers Act of 
1940.

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 
1940

    5. The authority citation for Part 279 continues to read as 
follows:

    Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1, 
et seq.

    6. Item 6A of Part 1A of Form ADV (Sec.  279.1) is amended to read 
as follows:
Form ADV
* * * * *
Part 1A
* * * * *
Item 6 Other Business Activities
* * * * *
A. You are actively engaged in business as a (check all that apply):
[squ] (1) Broker-dealer
[squ] (2) Registered representative of a broker-dealer
[squ] (3) Futures commission merchant, commodity pool operator, or 
commodity trading advisor
[squ] (4) Real estate broker, dealer, or agent
[squ] (5) Insurance broker or agent
[squ] (6) Bank (including a separately identifiable department or 
division of a bank) or thrift institution
[squ] (7) Other financial product salesperson (specify): --------------
------

    Note: The text of Form ADV does not and the amendment will not 
appear in the Code of Federal Regulations.

* * * * *

    Dated: April 30, 2004.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-10392 Filed 5-6-04; 8:45 am]
BILLING CODE 8010-01-P