[Federal Register Volume 71, Number 247 (Tuesday, December 26, 2006)]
[Proposed Rules]
[Pages 77522-77550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-9825]



[[Page 77521]]

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Part III





Federal Reserve System





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Securities and Exchange Commission





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12 CFR Part 218; 17 CFR Parts 240 and 247



Securities and Exchange Act of 1934--Broker Exemption for Banks; 
Proposed Rules and Notice

  Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / 
Proposed Rules  

[[Page 77522]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 218

[Regulation R; Docket No. R-1274]

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 247

[Release No. 34-54946; File No. S7-22-06]
RIN 3235-AJ74


Definitions of Terms and Exemptions Relating to the ``Broker'' 
Exceptions for Banks

AGENCIES: Board of Governors of the Federal Reserve System (``Board'') 
and Securities and Exchange Commission (``SEC'' or ``Commission'') 
(collectively, the Agencies).

ACTION: Proposed rule.

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SUMMARY: The Board and the Commission jointly are issuing, and 
requesting comment on, proposed rules that would implement certain of 
the exceptions for banks from the definition of the term ``broker'' 
under Section 3(a)(4) of the Securities Exchange Act of 1934 
(``Exchange Act''), as amended by the Gramm-Leach-Bliley Act 
(``GLBA''). The proposed rules would define terms used in these 
statutory exceptions and include certain related exemptions. In 
developing this proposal, the Agencies have consulted with the Office 
of the Comptroller of the Currency (``OCC''), the Federal Deposit 
Insurance Corporation (``FDIC'') and the Office of Thrift Supervision 
(``OTS''). The proposal is intended, among other things, to facilitate 
banks' compliance with the GLBA.

DATES: Comments should be received on or before March 26, 2007.

ADDRESSES:
    Board: You may submit comments, identified by Docket No. R-1274, by 
any of the following methods:
     Board's Web site: http://www.federalreserve.gov. Follow 
the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http//www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments also may be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (C and 20th 
Streets, NW) between 9 a.m. and 5 p.m. on weekdays.
    SEC: 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 S7-22-06 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-22-06. 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, 100 F Street, NE., 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:
    Board: Kieran J. Fallon, Assistant General Counsel, (202) 452-5270, 
Andrew Miller, Counsel, (202) 452-3428, or Andrea Tokheim, Senior 
Attorney, (202) 452-2300, Legal Division, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551. Users of Telecommunication Device for Deaf (TTD) 
only, call (202) 263-4869.
    SEC: Catherine McGuire, Chief Counsel, Linda Stamp Sundberg, Senior 
Special Counsel, Richard C. Strasser, Attorney Fellow, John Fahey, 
Special Counsel, Haimera Workie, Special Counsel, at (202) 551-5550, 
Office of the Chief Counsel, Division of Market Regulation, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction and Background
II. Networking Arrangements
    A. Proposed Definitions Related to the Payment of Referral Fees
    1. Proposal Definition of ``Nominal One-Time Cash Fee of a Fixed 
Dollar Amount''
    2. Proposed Definition of ``Contingent on Whether the Referral 
Results in a Transaction''
    3. Proposed Definition of ``Incentive Compensation''
    B. Proposed Exemption for Payment of More Than a Nominal Fee for 
Referring Institutional Customers and High Net Worth Customers
    1. Definitions of ``Institutional Customer'' and ``High Net 
Worth Customer''
    2. Conditions Relating to Bank Employees
    3. Other Conditions Relating to the Banks
    4. Provisions of Written Agreement
    a. Customer and Employee Qualifications
    b. Suitability or Sophistication Analysis by Broker-Dealer
    c. Notice From Broker-Dealer to Bank Regarding Customer 
Qualification
    5. Referral Fees Permitted under the Exemption
    6. Permissible Bonus Compensation Not Restricted
    C. Scope of Networking Exception and Institutional/High Net 
Worth Exemption
III. Trust and Fiduciary Activities Exception
    A. ``Chiefly Compensated'' Test and Bank-Wide Exemption Based on 
Two-Year Rolling Averages
    B. Proposed Definition of ``Relationship Compensation''
    C. Advertising Restrictions
    D. Proposed Exemptions for Special Accounts, Transferred 
Accounts, and a De Minimis Number of Accounts
IV. Sweep Accounts and Transactions in Money Market Funds
    A. Proposed Sweep Account Definitions
    B. Proposed Exemption Regarding Money Market Fund Transactions
V. Safekeeping and Custody
    A. Overview of Statutory Exception
    B. Proposed Exemption
    1. Employee Benefit Plan Accounts and Individual Retirement or 
Similar Accounts
    a. Employee Compensation Restriction
    b. Advertisements and Sales Literature
    c. Other Conditions
    d. Non-Fiduciary and Non-Custodial Administrators or 
Recordkeepers
    2. Accommodation Transactions
    a. Accommodation Basis
    b. Employee Compensation Restriction
    c. Bank Fees
    d. Advertising and Sales Literature
    e. Investment Advice or Recommendations
    f. Other Conditions
    3. Evasion
VI. Other Proposed Exemptions

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    A. Proposed Exemption for Regulation S Transactions With Non-
U.S. Persons
    B. Proposed Securities Lending Exemption
    C. Proposed Exemption for the Way in Which Banks Effect 
Transactions in Investment Company Securities
    D. Proposed Temporary and Permanent Exemption for Contracts 
Entered Into by Banks From Being Considered Void or Voidable
    E. Extension of Time and Transition Period
VII. Withdrawal of Proposed Regulation B and Removal of Exchange Act 
Rules 3a4-2 -- 3a4-6, and 3b-17
VIII. Administrative Law Matters
    A. Paperwork Reduction Act Analysis
    B. Consideration of Benefits and Costs
    C. Consideration of Burden on Competition, and on Promotion of 
Efficiency, Competition, and Capital Formation
    D. Consideration of Impact on the Economy
    E. Initial Regulatory Flexibility Analysis
    F. Plain Language
IX. Statutory Authority
X. Text of Proposed Rules and Rule Amendments

I. Introduction and Background

    The GLBA amended several federal statutes governing the activities 
and supervision of banks, bank holding companies, and their 
affiliates.\1\ Among other things, it lowered barriers between the 
banking and securities industries erected by the Banking Act of 1933 
(``Glass-Steagall Act'').\2\ It also altered the way in which the 
supervisory responsibilities over the banking, securities, and 
insurance industries are allocated among financial regulators. Among 
other things, the GLBA repealed most of the separation of investment 
and commercial banking imposed by the Glass-Steagall Act. The GLBA also 
revised the provisions of the Exchange Act that had completely excluded 
banks from broker-dealer registration requirements.
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    \1\ Pub. L. 106-102, 113 Stat. 1338 (1999).
    \2\ Pub. L. 73-66, ch. 89, 48 Stat. 162 (1933) (as codified in 
various Sections of 12 U.S.C.).
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    In enacting the GLBA, Congress adopted functional regulation for 
bank securities activities, with certain exceptions from Commission 
oversight for specified securities activities. With respect to the 
definition of ``broker,'' the Exchange Act, as amended by the GLBA, 
provides eleven specific exceptions for banks.\3\ Each of these 
exceptions permits a bank to act as an agent with respect to specified 
securities products or in transactions that meet specific statutory 
conditions.
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    \3\ 15 U.S.C. 78c(a)(4).
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    In particular, Section 3(a)(4)(B) of the Exchange Act provides 
conditional exceptions from the definition of broker for banks that 
engage in certain securities activities in connection with third-party 
brokerage arrangements; \4\ trust and fiduciary activities; \5\ 
permissible securities transactions; \6\ certain stock purchase plans; 
\7\ sweep accounts; \8\ affiliate transactions; \9\ private securities 
offerings; \10\ safekeeping and custody activities; \11\ identified 
banking products; \12\ municipal securities; \13\ and a de minimis 
number of other securities transactions.\14\
    On October 13, 2006, President Bush signed into law the ``Financial 
Services Regulatory Relief Act of 2006 (``Regulatory Relief Act'').'' 
\15\ Among other things, the Regulatory Relief Act requires that the 
SEC and the Board jointly adopt a single set of rules to implement the 
bank broker exceptions in Section 3(a)(4) of the Exchange Act.\16\ It 
also requires that not later than 180 days after the date of enactment 
of the Regulatory Relief Act, the SEC and the Board jointly issue a 
single set of proposed rules to implement these exceptions.
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    \4\ Exchange Act Section 3(a)(4)(B)(i). This exception permits 
banks to enter into third-party brokerage, or ``networking'' 
arrangements with brokers under specific conditions.
    \5\ Exchange Act Section 3(a)(4)(B)(ii). This exception permits 
banks to effect transactions as trustees or fiduciaries for 
securities customers under specific conditions.
    \6\ Exchange Act Section 3(a)(4)(B)(iii). This exception permits 
banks to buy and sell commercial paper, bankers' acceptances, 
commercial bills, exempted securities, certain Canadian government 
obligations, and Brady bonds.
    \7\ Exchange Act Section 3(a)(4)(B)(iv). This exception permits 
banks, as part of their transfer agency activities, to effect 
transactions for certain issuer plans.
    \8\ Exchange Act Section 3(a)(4)(B)(v). This exception permits 
banks to sweep funds into no-load money market funds.
    \9\ Exchange Act Section 3(a)(4)(B)(vi). This exception permits 
banks to effect transactions for affiliates, other than broker-
dealers.
    \10\ Exchange Act Section 3(a)(4)(B)(vii). This exception 
permits certain banks to effect transactions in certain privately 
placed securities, under certain conditions.
    \11\ Exchange Act Section 3(a)(4)(B)(viii). This exception 
permits banks to engage in certain enumerated safekeeping or custody 
activities, including stock lending as custodian.
    \12\ Exchange Act Section 3(a)(4)(B)(ix). This exception permits 
banks to buy and sell certain ``identified banking products,'' as 
defined in Section 206 of the GLBA.
    \13\ Exchange Act Section 3(a)(4)(B)(x). This exception permits 
banks to effect transactions in municipal securities.
    \14\ Exchange Act Section 3(a)(4)(B)(xi). This exception permits 
banks to effect up to 500 transactions in securities in any calendar 
year in addition to transactions referred to in the other 
exceptions.
    \15\ Pub. L. 109-351, 120 Stat. 1966 (2006).
    \16\ See Exchange Act Section 3(a)(4)(F), as added by Section 
101 of the Regulatory Relief Act. The Regulatory Relief Act also 
requires that the Board and SEC consult with, and seek the 
concurrence of, the OCC, FDIC and OTS prior to jointly adopting 
final rules. As noted above, the Board and the SEC also have 
consulted extensively with the OCC, FDIC and OTS in developing these 
joint proposed rules.
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    Section 401 of the Regulatory Relief Act also amended the 
definition of ``bank'' in Section 3(a)(6) of the Exchange Act to 
include any Federal savings association or other savings association 
the deposits of which are insured by the FDIC. Accordingly, as used in 
this proposal, the term ``bank'' includes any savings association that 
qualifies as a ``bank'' under Section 3(a)(6) of the Exchange Act, as 
amended.
    In accordance with these statutory provisions, the SEC and Board 
are jointly requesting comment on proposed rules to implement the 
broker exceptions for banks relating to third-party networking 
arrangements, trust and fiduciary activities, sweep activities, and 
safekeeping and custody activities.\17\ The proposed rules include 
certain exemptions related to these activities, as well as exemptions 
related to foreign securities transactions, securities lending 
transactions conducted in an agency capacity, the execution of 
transactions involving mutual fund shares, the potential liability of 
banks under Section 29 of the Exchange Act, and the date on which the 
GLB Act's ``broker'' exceptions for banks will go into effect.\18\ The 
proposed rules are designed to accommodate the business practices of 
banks and protect investors.
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    \17\ See 15 U.S.C. 78c(a)(4)(B)(i), (ii), (v) and (viii).
    \18\ Employees of a bank that operates in accordance with the 
exceptions in Section 3(a)(4)(B) of the Exchange Act and, where 
applicable, the proposed rules also shall not be required to 
register as a ``broker'' to the extent that the employees'' 
activities are covered by the relevant exception or rule.
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    Any additions or changes to these rules that may be appropriate to 
implement Section 3(a)(4)(B) of the Exchange Act will be adopted 
jointly by the SEC and Board in accordance with the consultation 
provisions in Section 101(b) of the Regulatory Relief Act. Identical 
sets of the final rules will be published by the SEC in Title 17 of the 
Code of Federal Regulations and by the Board in Title 12 of the Code of 
Federal Regulations.
    In developing this proposal, the Agencies considered, among other 
things, the language and legislative history of the ``broker'' 
exceptions for banks adopted in the GLBA, the rules previously issued 
or proposed by the Commission relating to these exceptions and the 
comments received in connection with those prior rulemakings. The 
Agencies request comment on all aspects of these proposals as well as 
on the specific provisions and issues identified below.

[[Page 77524]]

In addition, the Agencies request comment on whether it would be useful 
or appropriate for the Agencies to adopt rules implementing the other 
bank ``broker'' exceptions in Section 3(a)(4)(B) of the Exchange Act 
that are not addressed in this proposal. If any rules (including 
exemptions) related to these other exceptions are adopted in the 
future, they would be adopted jointly by the SEC and Board.
    As required by the GLBA, the Board, OCC, FDIC, and OTS 
(collectively, the Banking Agencies) will develop, and request public 
comment on, recordkeeping rules for banks that operate under the 
``broker'' exceptions in Section 3(a)(4) of the Exchange Act.\19\ These 
rules, which will be developed in consultation with the SEC, will 
establish recordkeeping requirements to enable banks to demonstrate 
compliance with the terms of the statutory exceptions and the final 
rules ultimately jointly adopted and that are designed to facilitate 
compliance with the statutory exceptions and those rules.
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    \19\ See 12 U.S.C. 1828(t)(1).
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II. Networking Arrangements

    The third-party brokerage (``networking'') exception in Exchange 
Act Section 3(a)(4)(B)(i) permits a bank to avoid being considered a 
broker if, under certain conditions, it enters into a contractual or 
other written arrangement with a registered broker-dealer under which 
the broker-dealer offers brokerage services to bank customers 
(``networking arrangement'').\20\ The networking exception does not 
address the type or amount of compensation that a bank may receive from 
its broker-dealer partner under a networking arrangement. However, the 
networking exception generally provides that a bank may not pay its 
unregistered employees \21\ incentive compensation for referring a 
customer to the broker-dealer or for any securities transaction 
conducted by the customer at the broker-dealer. Nevertheless, the 
statutory exception does permit a bank employee to receive a ``nominal 
one-time cash fee of a fixed dollar amount'' for referring bank 
customers to the broker-dealer if payment of the referral fee is not 
``contingent on whether the referral results in a transaction.'' \22\ 
Congress included the limitation on incentive compensation to reduce 
securities sales practice concerns regarding unregistered bank 
employees.\23\
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    \20\ 15 U.S.C. 78c(a)(4)(B)(i).
    \21\ An unregistered bank employee is an employee that is not an 
associated person of a broker or dealer and is not qualified 
pursuant to the rules of a self-regulatory organization.
    \22\ 15 U.S.C. 78c(a)(4)(B)(i)(VI).
    \23\ See H.R. Rep. No. 106-74, pt. 3, at 163 (1999) (``[T]he 
conditions contained in the networking exception * * * restrict the 
securities activities of unregistered bank personnel to reduce sales 
practice concerns.'').
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A. Proposed Definitions Related to the Payment of Referral Fees

    The proposed rules define certain terms used in the networking 
exception in the Exchange Act related to referral fees and terms used 
in these proposed definitions. The proposed rules also provide an 
exemption from certain of the requirements in the networking exception 
with respect to payment for referrals of certain institutional 
customers and high net worth customers.
1. Proposed Definition of ``Nominal One-Time Cash Fee of a Fixed Dollar 
Amount''
    Under the proposal, the term ``nominal one-time cash fee of a fixed 
dollar amount'' would be defined as a cash payment for a referral in an 
amount that meets any one of three alternative standards.\24\ The 
Agencies believe that these alternatives provide useful and appropriate 
flexibility to banks of all sizes and locations to use different 
business models and to take into account economic differences around 
the country in assessing whether a cash referral fee paid in a 
particular instance is a ``nominal'' amount for purposes of the 
networking exception. The three alternatives are consistent with the 
statutory ``nominal'' fee requirement because the amount of 
compensation permitted under each of the three formulations would be 
small in relation to the employee's overall compensation and therefore 
unlikely to create undue incentives for bank employees to pre-sell 
securities to bank customers.
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    \24\ Proposed Exchange Act Rule 700(c).
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    Under the first alternative, a referral fee would be considered 
nominal if it did not exceed either twice the average of the minimum 
and maximum hourly wage established by the bank for the current or 
prior year for the job family that includes the relevant employee, or 
1/1000th of the average of the minimum and maximum annual base salary 
established by the bank for the current or prior year for the job 
family that includes the relevant employee.\25\ The proposed rules 
define a ``job family'' for these purposes as a group of jobs or 
positions involving similar responsibilities, or requiring similar 
skills, education or training, that a bank, or a separate unit, branch 
or department of a bank, has established and uses in the ordinary 
course of its business to distinguish among its employees for purposes 
of hiring, promotion, and compensation.\26\ Depending on a bank's 
internal employee classification system, examples of a job family may 
include tellers, loan officers, or branch managers. A bank should not 
deviate from its ordinary classification of jobs for purposes of 
determining whether a referral fee would be considered nominal under 
this standard.
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    \25\ Proposed Exchange Act Rule 700(c)(1).
    \26\ Proposed Exchange Act Rule 700(d).
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    Under the second alternative, a referral fee would be considered 
``nominal'' if it did not exceed twice the employee's actual base 
hourly wage.\27\ Thus, unlike the first option, this alternative is 
based on the actual hourly base wage of the employee receiving the 
referral fee.
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    \27\ Proposed Exchange Act Rule 700(c)(2).
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    Under the third alternative, a referral fee would be considered 
``nominal'' for purposes of the networking exception if the payment did 
not exceed twenty-five dollars ($25).\28\ This dollar amount would be 
adjusted for inflation on April 1, 2012, and every five years 
thereafter, to reflect any changes in the value of the Employment Cost 
Index For Wages and Salaries, Private Industry Workers (or any 
successor index thereto), as published by the Bureau of Labor 
Statistics, from December 31, 2006.\29\ The Agencies selected this 
index because it is a widely used and broad indicator of increases in 
the wages of private industry workers, which includes bank employees.
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    \28\ Proposed Exchange Act Rule 700(c)(3).
    \29\ Each adjustment would be rounded to the nearest multiple of 
$1. Proposed Exchange Act Rule 700(f).
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    A bank employee may receive a referral fee under the networking 
exception and Proposed Exchange Act Rule 700 for each referral made to 
a broker-dealer, including separate referrals of the same individual or 
entity. Referral fees paid under the networking exception must be paid 
in cash and fixed. The networking exception and the proposed rules do 
not permit a bank to pay referral fees in non-cash forms, such as 
vacation packages, stock grants, annual leave, or consumer goods.\30\ 
We request comments on whether these alternatives provide banks 
sufficient flexibility to pay nominal referral fees without creating 
inappropriate incentives.
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    \30\ See Exchange Act Section 3(a)(4)(B)(i)(VI), permitting 
payment of a ``nominal one-time cash fee.''

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[[Page 77525]]

2. Proposed Definition of ``Contingent on Whether the Referral Results 
in a Transaction''
    Under the statutory networking exception, a nominal fee paid to an 
unregistered bank employee for referring a customer to a broker or 
dealer may not be contingent on whether the referral results in a 
transaction. The objective is to reward bank employees for furthering 
the relationship with the broker without creating concerns about the 
securities sales practices of unregistered bank employees. Under the 
proposal, a fee would be considered ``contingent on whether the 
referral results in a transaction'' if payment of the fee is dependent 
on whether the referral results in a purchase or sale of a security; 
whether an account is opened with a broker or dealer; whether the 
referral results in a transaction involving a particular type of 
security; or whether the referral results in multiple securities 
transactions.\31\ The proposed rules, however, also recognize that a 
referral fee may be contingent on whether a customer (1) contacts or 
keeps an appointment with a broker or dealer as a result of the 
referral; or (2) meets any objective, base-line qualification criteria 
established by the bank or broker or dealer for customer referrals, 
including such criteria as minimum assets, net worth, income, or 
marginal federal or state income tax rate, or any requirement for 
citizenship or residency that the broker or dealer, or the bank, may 
have established generally for referrals for securities brokerage 
accounts.\32\
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    \31\ Proposed Exchange Act Rule 700(a). ``Referral'' would be 
defined to mean the action taken by a bank employee to direct a 
customer of the bank to a broker or dealer for the purchase or sale 
of securities for the customer's account. Proposed Exchange Act Rule 
700(e).
    \32\ Proposed Exchange Act Rule 700(a).
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3. Proposed Definition of ``Incentive Compensation''
    As noted above, the networking exception prohibits unregistered 
employees of a bank that refer customers to a broker or dealer under 
the exception from receiving ``incentive compensation'' for the 
referral or any securities transaction conducted by the customer at the 
broker-dealer other than a nominal, non-contingent referral fee. To 
provide banks and their employees additional guidance in this area, 
Proposed Rule 700(b) defines ``incentive compensation'' as compensation 
that is intended to encourage a bank employee to refer potential 
customers to a broker or dealer or give a bank employee an interest in 
the success of a securities transaction at a broker or dealer.\33\
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    \33\ Proposed Exchange Act Rule 700(b).
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    The proposed ``incentive compensation'' definition excludes certain 
types of bonus compensation. The purpose of the exclusions is to 
recognize that certain types of bonuses are not likely to give 
unregistered employees a promotional interest in the brokerage services 
offered by the broker-dealers with which the bank networks and to avoid 
affecting bonus plans of banks generally. The proposal excludes 
compensation paid by a bank under a bonus or similar plan that is paid 
on a discretionary basis and based on multiple factors or variables. 
These factors or variables must include significant factors or 
variables that are not related to securities transactions at the broker 
or dealer.\34\ In addition, a referral made by the employee to a broker 
or dealer may not be a factor or variable in determining the employee's 
compensation under the plan and the employee's compensation under the 
plan may not be determined by reference to referrals made by any other 
person.\35\
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    \34\ Proposed Exchange Act Rule 700(b)(1)(ii)(A). A non-
securities factor or variable would be considered ``significant'' 
under this proposed provision if it plays a non-trivial role in 
determining an employee's compensation under the bonus or similar 
plan. Moreover, a bank would not be in compliance with this proposed 
provision to the extent that it established or maintained a ``sham'' 
non-securities factor or variable in its bonus or similar plan for 
the purpose of evading this proposed restriction.
    \35\ Proposed Exchange Act Rule 700(b)(1)(ii)(C) and (D). The 
requirement that an employee's compensation not be based on ``a 
referral'' made by the employee or another person also means that 
the employee's compensation under the bonus or similar plan may not 
vary based on the number of securities referrals made by the 
employee or another person to a broker or dealer.
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    In addition, the proposed rule provides that the definition of 
incentive compensation shall not be construed to prevent a bank from 
compensating an officer, director or employee on the basis of any 
measure of the overall profitability of (1) the bank, either on a 
stand-alone or consolidated basis; (2) any of the bank's affiliates 
(other than a broker or dealer) or operating units; or (3) a broker or 
dealer if such profitability is only one of multiple factors or 
variables used to determine the compensation of the officer, director, 
or employee and those factors or variables include significant factors 
or variables that are not related to the profitability of the broker or 
dealer.\36\ Under this definition, banks would be permitted to take 
account of the full range of business for high net worth or 
institutional customers that an employee has brought to the bank and 
its partner broker-dealers. Comment is solicited on whether existing 
bank bonus programs would fit, or could be easily adjusted to fit, 
within the proposed exclusions from the definition of incentive 
compensation discussed in this Section.
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    \36\ Proposed Exchange Act Rule 700(b)(2).
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B. Proposed Exemption for Payment of More Than a Nominal Fee for 
Referring Institutional Customers and High Net Worth Customers

    The proposal also includes a conditional exemption that would 
permit a bank to pay an employee a contingent referral fee of more than 
a nominal amount for referring to a broker or dealer an institutional 
customer or high net worth customer with which the bank has a 
contractual or other written networking arrangement.\37\ Banks that pay 
their employees only nominal, non-contingent fees in accordance with 
Proposed Rule 700 for referring customers--including institutional or 
high net worth customers--to a broker or dealer would not need to rely 
on this exemption for these purposes.
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    \37\ Proposed Exchange Act Rule 701.
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    The purpose of the proposed exemption and its conditions is to 
recognize that sizable institutions and high net worth individuals, 
when provided appropriate information, are more likely to be able to 
understand and evaluate the relationship between the bank and its 
employees and its broker-dealer partner and any resulting securities 
transaction with the broker-dealer. To take advantage of the proposed 
exemption, the bank must comply with the conditions in the proposed 
exemption as well as the terms and conditions in the statutory 
networking exception (other than the compensation restrictions in 
Section 3(a)(4)(B)(i)(VI) of the Exchange Act's networking exception). 
The conditions in the proposed exemption are designed, among other 
things, to help ensure that institutional and high net worth customers 
receive appropriate investor protections and have the information to 
understand the financial interest of the bank employee so they can make 
informed choices. The following summarizes the conditions included in 
the proposed exemption.
1. Definitions of ``Institutional Customer'' and ``High Net Worth 
Customer''
    The proposed exemption defines an ``institutional customer'' to 
mean any corporation, partnership, limited liability company, trust, or 
other non-

[[Page 77526]]

natural person that has at least $10 million in investments or $40 
million in assets. A non-natural person also may qualify as an 
``institutional customer'' with respect to a referral if the customer 
has $25 million in assets and the bank employee refers the customer to 
the broker or dealer for investment banking services.\38\ The lower 
asset threshold for referrals for investment banking services is 
designed to permit banks to facilitate access to capital markets by 
referring smaller businesses to broker-dealers. ``High net worth 
customer'' is defined to mean any natural person who, either 
individually or jointly with his or her spouse, has at least $5 million 
in net worth excluding the primary residence and associated liabilities 
of the person and, if applicable, his or her spouse.
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    \38\ Proposed Exchange Act Rule 701(d)(2). ``Investment banking 
services'' are defined to include, without limitation; acting as an 
underwriter in an offering for an issuer, acting as a financial 
adviser in a merger, acquisition, tender-offer or similar 
transaction, providing venture capital, equity lines of credit, 
private investment-private equity transactions or similar 
investments, serving as placement agent for an issuer, and engaging 
in similar activities. Id. at 701(d)(3). When used in this proposal, 
the term ``include, without limitation'' means a non-exhaustive 
list. This usage is not intended to suggest that the term 
``including'' as used in the Exchange Act and the rules under that 
Act means an exhaustive list. The use of the term ``including, but 
not limited to'' in Exchange Act Rules 10b-10 and 15b7-1 is also not 
intended to create a negative implication regarding the use of 
``including'' without the term ``but not limited to'' in other 
Exchange Act rules. See Exchange Act Release No. 49879, 69 FR 39682 
(June 30, 2004), at footnote 76.
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    The dollar amount threshold for both institutional customers and 
high net worth customers would be adjusted for inflation on April 1, 
2012, and every five years thereafter, to reflect changes in the value 
of the Personal Consumption Expenditures Chain-Type Price Index, as 
published by the Department of Commerce, from December 21, 2006. The 
Agencies selected this index because it is a widely used and broad 
indicator of inflation in the U.S. economy.
    A bank would be required to determine that a non-natural person 
referred to a broker or dealer under the exemption is an institutional 
customer before the referral fee is paid to the bank employee. In the 
case of a customer that is a natural person, the bank, prior to or at 
the time of any referral, would be required either to (1) determine 
that the customer is a high net worth customer; or (2) obtain a signed 
acknowledgment from the customer that the customer meets the standards 
to be considered a high net worth customer. The purpose of this 
condition is to provide the bank with a reasonable basis to believe the 
person meets the requirements of the exemption.\39\
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    \39\ Proposed Exchange Act Rule 701(a)(2)(ii). As discussed 
below (see infra at II.B.4.), the written agreement between the bank 
and the broker or dealer also must require the broker or dealer to 
determine whether a customer meets these qualification standards 
before the referral fee is paid to the bank employee.
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2. Conditions Relating to Bank Employees
    For a bank employee to receive a contingent or greater-than-nominal 
referral fee under the proposed exemption, the bank employee must meet 
other conditions designed to help ensure that the referral occurs in 
the ordinary course of the unregistered bank employee's activities and 
that the employee has not previously been disqualified under the 
Exchange Act. In particular, the bank employee--
     May not be qualified or otherwise required to be qualified 
pursuant to the rules of a self-regulatory organization (``SRO''); \40\
---------------------------------------------------------------------------

    \40\ Proposed Exchange Act Rule 701(a)(1)(i)(A).
---------------------------------------------------------------------------

     Must be predominantly engaged in banking activities other 
than making referrals to a broker-dealer; \41\
---------------------------------------------------------------------------

    \41\ Proposed Exchange Act Rule 701(a)(1)(i)(B).
---------------------------------------------------------------------------

     Must not be subject to a ``statutory disqualification'' as 
that term is defined in Section 3(a)(39) of the Exchange Act (other 
than subparagraph (E) of that Section); \42\ and
---------------------------------------------------------------------------

    \42\ Proposed Exchange Act Rule 701(a)(1)(i)(C).
---------------------------------------------------------------------------

     Must encounter the ``high net worth customer'' or 
``institutional customer'' in the ordinary course of the bank 
employee's assigned duties for the bank.\43\
---------------------------------------------------------------------------

    \43\ Proposed Exchange Act Rule 701(a)(1)(ii).
---------------------------------------------------------------------------

3. Other Conditions Relating to the Banks
    The proposed exemption also would require that the bank provide the 
high net worth customer or institutional customer being referred to the 
bank's broker-dealer partner certain written disclosures about the 
employee's interest in the referral prior to or at the time of the 
referral.\44\ These disclosures would have to clearly and conspicuously 
disclose (1) the name of the broker or dealer; and (2) that the bank 
employee participates in an incentive compensation program under which 
the employee may receive a fee of more than a nominal amount for 
referring the customer to the broker or dealer and that payment of the 
fee may be contingent on whether the referral results in a transaction 
with the broker or dealer.\45\
---------------------------------------------------------------------------

    \44\ Proposed Exchange Act Rule 701(a)(2)(i).
    \45\ Proposed Exchange Act Rule 701(b).
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    In addition, to allow verification before the referral fee is paid 
to the bank employee, the bank would be required to provide the broker 
or dealer the name of the employee and such other identifying 
information that may be necessary for the broker or dealer to determine 
whether the bank employee is associated with a broker or dealer or is 
subject to statutory disqualification (as defined in Section 3(a)(39) 
of the Exchange Act, other than subparagraph (E)).\46\
---------------------------------------------------------------------------

    \46\ Proposed Exchange Act Rule 701(a)(2)(iii).
---------------------------------------------------------------------------

    The proposed exemption also provides that a bank that acts in good 
faith and that has reasonable policies and procedures in place to 
comply with the requirements of the proposed exemption would not be 
considered a ``broker'' under Section 3(a)(4) of the Exchange Act 
solely because the bank fails, in a particular instance, to determine 
that a customer is an institutional or high net worth customer, provide 
the customer the required disclosures, or provide the broker or dealer 
the required information concerning the bank employee receiving the 
referral fee within the time periods prescribed. If the bank is seeking 
to comply and takes reasonable and prompt steps to remedy the error, 
such as by promptly making the required determination or promptly 
providing the broker or dealer the required information, the bank 
should not lose the exemption from registration in these circumstances. 
Similarly, to promote compliance with the terms of the exemption, the 
bank must make reasonable efforts to reclaim the portion of the 
referral fee paid to the bank employee for a referral that does not, 
following any required remedial actions, meet the requirements of the 
exemption and that exceeds the amount the bank otherwise would be 
permitted to pay under the statutory networking exception and proposed 
Exchange Act Rule 700.\47\
---------------------------------------------------------------------------

    \47\ Proposed Exchange Act Rule 701(a)(2)(iv).
---------------------------------------------------------------------------

4. Provisions of Written Agreement
    The proposed exemption also would require that the bank and its 
broker-dealer partner include certain provisions in their written 
agreement that obligate the bank or the broker or dealer to take 
certain actions. These provisions are designed to help ensure that 
banks and broker-dealers operate within the terms of the exemption and 
provide appropriate protections to customers referred under the 
exemption. Banks, brokers and dealers are expected to comply with the 
terms of their written networking agreements.

[[Page 77527]]

If a broker or dealer or bank does not comply with the terms of the 
agreement, however, the bank would not become a ``broker'' under 
Section 3(a)(4) of the Exchange Act or lose its ability to operate 
under the proposed exemption.\48\ A bank should not be required to 
register as a result of the actions of the broker or dealer.
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    \48\ The Commission anticipates that it will be necessary for 
either NASD or the Commission to adopt a rule requiring broker-
dealers to comply with the written agreements discussed in this 
Section.
---------------------------------------------------------------------------

a. Customer and Employee Qualifications
    First, the proposed exemption provides that the written agreement 
between the bank and the broker or dealer must provide for the bank and 
the broker-dealer to determine, before a referral fee is paid to a bank 
employee under the exemption, that the employee is not subject to 
statutory disqualification, as that term is defined in Section 3(a)(39) 
of the Exchange Act (other than subparagraph (E) of that Section). In 
addition, as noted above, the written agreement must provide for the 
broker-dealer to determine, before the referral fee is paid, that the 
customer being referred is an institutional or high net worth 
customer.\49\
---------------------------------------------------------------------------

    \49\ Proposed Exchange Act Rule 701(a)(3)(i).
---------------------------------------------------------------------------

b. Suitability or Sophistication Analysis by Broker-Dealer
    As a method of providing additional investor protections, the 
proposed exemption requires that the written agreement between the bank 
and broker or dealer must provide for the broker or dealer to perform a 
suitability or sophistication analysis of a securities transaction or 
the customer being referred, respectively. The type and timing of the 
analysis needed to be conducted by the broker or dealer depends on 
whether the referral fee is contingent on the completion of a 
securities transaction at the broker or dealer.
    For contingent fees, the written agreement between the bank and the 
broker-dealer must provide for the broker or dealer to conduct a 
suitability analysis of any securities transaction that triggers any 
portion of the contingency fee in accordance with the rules of the 
broker's or dealer's applicable SRO as if the broker or dealer had 
recommended the securities transaction.\50\ This analysis must be 
performed by the broker or dealer before each securities transaction on 
which the referral fee is contingent is conducted.
---------------------------------------------------------------------------

    \50\ Proposed Exchange Act Rule 701(a)(3)(ii)(A). Because the 
proposed exemption provides for a broker or dealer to conduct its 
suitability analysis in accordance with the rules of its applicable 
SRO, the broker or dealer may follow and take advantage of any 
applicable SRO rules or interpretations that allow the broker or 
dealer to make an alternative suitability evaluation. See, e.g., 
NASD IM-2310-3 (discussing a member's suitability obligations with 
respect to certain institutional investors).
---------------------------------------------------------------------------

    For a non-contingent referral fee, the written agreement must 
provide for the broker or dealer to conduct, before the referral fee is 
paid, either (1) a ``sophistication'' analysis of the customer being 
referred; or (2) a suitability analysis with respect to all securities 
transactions requested by the customer contemporaneously with the 
referral. Under the ``sophistication'' analysis option, the broker or 
dealer would be required to determine that the customer has the 
capability to evaluate investment risk and make independent decisions, 
and determine that the customer is exercising independent judgment 
based on the customer's own independent assessment of the opportunities 
and risks presented by a potential investment, market factors, and 
other investment considerations.\51\ This ``sophistication'' analysis 
is based on elements of NASD IM-2310-3 (Suitability Obligations to 
Institutional Customers).
---------------------------------------------------------------------------

    \51\ Proposed Exchange Act Rule 701(a)(3)(ii)(B)(1).
---------------------------------------------------------------------------

    Alternatively, the broker or dealer could perform a suitability 
analysis of all securities transactions requested by the customer 
contemporaneously with the referral in accordance with the rules of the 
broker's or dealer's applicable SRO as if the broker or dealer had 
recommended the securities transaction.\52\ Thus, the proposed 
exemption gives a broker or dealer the flexibility to perform a 
suitability analysis in connection with all referrals made under the 
exemption (regardless of whether the referral fee is contingent or not) 
if the broker or dealer determines that such an approach is appropriate 
for business reasons.
c. Notice From Broker-Dealer to Bank Regarding Customer Qualification
---------------------------------------------------------------------------

    \52\ Proposed Exchange Act Rule 701(a)(3)(ii)(B)(2).
---------------------------------------------------------------------------

    Under the proposed exemption, the written agreement between the 
bank and the broker-dealer would also be required to provide that the 
broker-dealer must promptly inform the bank if the broker-dealer 
determines that (1) the customer referred to the broker-dealer is not a 
``high net worth customer'' or an ``institutional customer,'' as 
applicable; (2) the bank employee receiving the referral fee is subject 
to statutory disqualification, as that term is defined in Section 
3(a)(39) of the Exchange Act, except subparagraph (E) of that Section; 
or (3) the customer or the securities transaction(s) to be conducted by 
the customer do not meet the applicable standard set forth in the 
suitability or sophistication determination Section above.\53\ The 
notice will help banks monitor their compliance with the exemption and 
take remedial action when necessary.
---------------------------------------------------------------------------

    \53\ Proposed Exchange Act Rule 701(a)(3)(iii).
---------------------------------------------------------------------------

5. Referral Fees Permitted under the Exemption
    If the foregoing conditions are met, the proposed exemption would 
allow a bank employee to receive a referral fee for referring an 
institutional or high net worth customer to a broker or dealer that is 
greater than a ``nominal'' amount and that is contingent on whether the 
referral results in a transaction at the broker or dealer. The 
exemption places certain limits on how such a referral fee may be 
structured to reduce the potential ``salesman's stake'' of the bank 
employee in securities transactions conducted at the broker-dealer. 
Specifically, the exemption provides that the referral fee may be a 
dollar amount based on a fixed percentage of the revenues received by 
the broker or dealer for investment banking services provided to the 
customer.\54\
---------------------------------------------------------------------------

    \54\ Proposed Exchange Act Rule 701(d)(4)(ii).
---------------------------------------------------------------------------

    Alternatively, the referral fee may be a predetermined dollar 
amount, or a dollar amount determined in accordance with a 
predetermined formula, so long as the amount does not vary based on (1) 
the revenue generated by, or the profitability of, securities 
transactions conducted by the customer with the broker or dealer; (2) 
the quantity, price, or identity of securities purchased or sold over 
time by the customer with the broker or dealer; or (3) the number of 
customer referrals made.\55\ For these purposes, ``predetermined'' 
means established or fixed before the referral is made.
---------------------------------------------------------------------------

    \55\ Proposed Exchange Act Rule 701(d)(4)(i).
---------------------------------------------------------------------------

    As the exemption provides, these restrictions do not prevent a 
referral fee from being paid in multiple installments or from being 
based on a fixed percentage of the total dollar amount of assets placed 
in an account with the broker or dealer. Additionally, these 
restrictions do not prevent a referral fee from being based on the 
total dollar amount of assets maintained by the customer with the 
broker or dealer, or from being contingent on whether the customer 
opens an account with the broker or dealer or executes one or more 
transactions in the account during the initial phases of the account. A 
bank employee also may receive a permissible referral fee for each 
referral

[[Page 77528]]

made under the exemption. We request comment on all aspects of the 
definition of a referral fee.
6. Permissible Bonus Compensation Not Restricted
    The proposed exemption for high net worth and institutional 
customers expressly provides that nothing in the exemption would 
prevent or prohibit a bank from paying, or a bank employee from 
receiving, any type of compensation under a bonus or similar plan that 
would not be considered incentive compensation under paragraph (b)(1), 
or that is described in paragraph (b)(2), of proposed Exchange Act Rule 
700 (implementing the networking exception).\56\ As explained above, 
these types of bonus arrangements do not tend to create the kind of 
financial incentives for bank employees that the statute was designed 
to address.
---------------------------------------------------------------------------

    \56\ Proposed Exchange Act Rule 701(c).
---------------------------------------------------------------------------

C. Scope of Networking Exception and Institutional/High Net Worth 
Exemption

    Nothing in the statutory networking exception or the proposed rules 
limits or restricts the ability of a bank employee to refer customers 
to other departments or divisions of the bank itself, including, for 
example, the bank's trust, fiduciary or custodial department. Likewise, 
the networking exception and the proposed rules do not apply to 
referrals of retail, institutional or high net worth customers to a 
broker or dealer or other third party solely for transactions not 
involving securities, such as loans, futures contracts (other than a 
security future), foreign currency, or over-the-counter commodities.

III. Trust and Fiduciary Activities Exception

    Section 3(a)(4)(B)(ii) of the Exchange Act (the ``trust and 
fiduciary exception'') permits a bank, under certain conditions, to 
effect securities transactions in a trustee or fiduciary capacity 
without being registered as a broker.\57\ Under this exception from the 
definition of ``broker,'' a bank must effect such transactions in its 
trust department, or other department that is regularly examined by 
bank examiners for compliance with fiduciary principles and 
standards.\58\ The bank also must be ``chiefly compensated'' for such 
transactions, consistent with fiduciary principles and standards, on 
the basis of: (1) An administration or annual fee; (2) a percentage of 
assets under management; (3) a flat or capped per order processing fee 
that does not exceed the cost the bank incurs in executing such 
securities transactions; or (4) any combination of such fees.\59\ These 
fees are referred to as ``relationship compensation'' in the proposed 
rules.
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78c(a)(4)(B)(ii).
    \58\ Id. The Agencies will rely on the appropriate Federal 
banking agency for a bank to determine whether the bank's activities 
are conducted in the bank's trust department or other department 
regularly examined by the agency's examiners for compliance with 
fiduciary principles and standards.
    \59\ 15 U.S.C. 78c(a)(4)(B)(ii)(I).
---------------------------------------------------------------------------

    Banks relying on this exception may not publicly solicit brokerage 
business, other than by advertising that they effect transactions in 
securities in conjunction with advertising their other trust 
activities.\60\ In addition, a bank that effects a transaction in the 
United States of a publicly traded security under the exception must 
execute the transaction in accordance with Exchange Act section 
3(a)(4)(C).\61\
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 78c(a)(4)(B)(ii)(II).
    \61\ 15 U.S.C. 78c(a)(4)(C).
---------------------------------------------------------------------------

    This section requires that the bank direct the trade to a 
registered broker-dealer for execution, effect the trade through a 
cross trade or substantially similar trade either within the bank or 
between the bank and an affiliated fiduciary that is not in 
contravention of fiduciary principles established under applicable 
federal or state law, or effect the trade in some other manner that the 
Commission permits.\62\ The purpose of the rules in this area is to 
explain the Agencies' interpretation of certain terms and concepts used 
in the statute and to implement the exception. The trust and fiduciary 
exception recognizes the traditional securities role banks have 
performed for trust and fiduciary customers and includes conditions to 
help ensure that a bank does not operate a securities broker in the 
trust department.
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78c(a)(4)(C)(i)-(iii). As discussed below (see 
infra at VI.C.), the Agencies are proposing to adopt a rule that 
would permit banks to effect trades in investment company securities 
through the National Securities Clearing Corporation's Mutual Fund 
Services (``Fund/SERV'') or directly with the investment company's 
transfer agent. Trades effected by a bank in accordance with the 
proposed Fund/SERV rule would be conducted in accordance with 
section 3(a)(4)(C) of the Exchange Act.
---------------------------------------------------------------------------

A. ``Chiefly Compensated'' Test and Bank-Wide Exemption Based on Two-
Year Rolling Averages

    The proposed rules provide that a bank meets the ``chiefly 
compensated'' condition in the trust and fiduciary exception if the 
``relationship-total compensation percentage'' for each trust or 
fiduciary account of the bank is greater than 50 percent.\63\ The 
``relationship-total compensation percentage'' for a trust or fiduciary 
account would be calculated by (1) dividing the relationship 
compensation attributable to the account during each of the immediately 
preceding two years by the total compensation attributable to the 
account during the relevant year; (2) translating the quotient obtained 
for each of the two years into a percentage; and (3) then averaging the 
percentages obtained for each of the two immediately preceding 
years.\64\ Under the proposal, a ``trust or fiduciary account'' means 
an account for which the bank acts in a trustee or fiduciary capacity 
as defined in section 3(a)(4)(D) of the Exchange Act.\65\
---------------------------------------------------------------------------

    \63\ Proposed Exchange Act Rule 721(a)(1).
    \64\ The rule provides for this process to be accomplished by 
calculating the ``yearly compensation percentage'' and the 
``relationship-total compensation percentage'' for the account. 
Proposed Exchange Act Rule 721(a)(2) and (3).
    \65\ Proposed Exchange Act Rule 721(a)(5). The definition of 
``fiduciary capacity'' included in section 3(a)(4)(D) of the 
Exchange Act is based on the definition of that term in part 9 of 
the OCC's regulations, which relates to the trust and fiduciary 
activities of national banks, in effect at the time of enactment of 
the GLB Act.
---------------------------------------------------------------------------

    The proposed rules also include an exemption that would permit a 
bank to follow an alternate test to the account-by-account approach to 
the ``chiefly compensated'' condition. Under this exemption, the bank 
may calculate the compensation it receives from all of its trust and 
fiduciary accounts on a bank-wide basis. The alternative is designed to 
simplify compliance, alleviate concerns about inadvertent 
noncompliance, and reduce the costs and disruptions banks likely would 
incur under the account-by-account approach.
    To use this bank-wide methodology, the bank would have to meet two 
conditions. First, the bank would have to comply with the conditions in 
the trust and fiduciary exception (other than the compensation test in 
Section 3(a)(4)(B)(ii)(I)) and comply with Section 3(a)(4)(C) (relating 
to trade execution) of the Exchange Act.\66\ In addition, the 
``aggregate relationship-total compensation percentage'' for the bank's 
trust and fiduciary business as a whole would have to be at least 70 
percent.\67\ We chose this percentage to ensure that a bank's trust 
department is not unduly dependent on non-relationship compensation 
from securities transactions. We invite comments generally on the 
appropriateness of the proposed exemption as well as this percentage

[[Page 77529]]

and the other specific terms of the exemption.
---------------------------------------------------------------------------

    \66\ Proposed Exchange Act Rule 722(a)(1).
    \67\ Proposed Exchange Act Rule 722(a)(2).
---------------------------------------------------------------------------

    The ``aggregate relationship-total compensation percentage'' of a 
bank operating under the bank-wide approach would be calculated in a 
similar manner as the ``relationship-total compensation percentage'' of 
an account under the account-by-account, except that the calculations 
would be based on the aggregate relationship compensation and total 
compensation received by the bank from all of its trust and fiduciary 
accounts during each of the two immediately preceding years. That is, 
it would be determined by (1) dividing the relationship compensation 
attributable to the bank's trust and fiduciary business as a whole 
during each of the immediately preceding two years by the total 
compensation attributable to the bank's trust and fiduciary business as 
a whole during the relevant year; (2) translating the quotient obtained 
for each of the two years into a percentage; and (3) then averaging the 
percentages obtained for each of the two immediately preceding 
years.\68\
---------------------------------------------------------------------------

    \68\ As a technical matter, the rule provides for this process 
to be accomplished by calculating the ``yearly bank-wide 
compensation percentage'' and the ``aggregate relationship-total 
compensation percentage'' for the bank's trust and fiduciary 
business as a whole. Proposed Exchange Act Rule 722(b) and (c).
---------------------------------------------------------------------------

    Under either the account-by-account or bank-wide approach, a bank 
would have the flexibility to elect to use a calendar year or the 
bank's fiscal year for purposes of complying with these compensation 
provisions.\69\ In addition, whether a bank decides to use the account-
by-account approach or the bank-wide approach, the bank's compliance 
with the relevant compensation restriction would be based on a two-year 
rolling average of the compensation attributable to the trust or 
fiduciary account or the bank's trust or fiduciary business, 
respectively. This is to allow for short-term fluctuations that 
otherwise could lead a bank to fall out of compliance with the 
exception or exemption from year to year.
---------------------------------------------------------------------------

    \69\ Proposed Exchange Act Rule 721(a)(6).
---------------------------------------------------------------------------

B. Proposed Definition of ``Relationship Compensation'

    Both the account-by-account and bank-wide approaches discussed 
above are based in part on the relationship compensation attributable 
to one or more of a bank's trust or fiduciary accounts. The proposal 
defines the term ``relationship compensation'' to mean any compensation 
a bank receives that consists of (1) an administration fee; (2) an 
annual fee (payable on a monthly, quarterly or other basis); (3) a fee 
based on a percentage of assets under management; (4) a flat or capped 
per order processing fee, paid by or on behalf of a customer or 
beneficiary, that is equal to not more than the cost incurred by the 
bank in connection with executing securities transactions for trust or 
fiduciary accounts; or (5) any combination of these fees.\70\ These 
types of compensation are identified in the statute.
---------------------------------------------------------------------------

    \70\ Proposed Exchange Act Rule 721(a)(4).
---------------------------------------------------------------------------

    The proposed rules also provide examples of fees that would be 
considered an administration fee or a fee based on a percentage of 
assets under management for these purposes. Specifically, the rule 
provides that a fee based on a percentage of assets under management 
(an ``AUM fee'') includes, without limitation--
     A fee paid by an investment company pursuant to a plan 
under 17 CFR 270.12b-1. Although Rule 12b-1 fees are related to mutual 
funds, we believe they should be viewed as relationship compensation 
because they are paid on an assets under management basis, rather than 
on a transactional basis; \71\
---------------------------------------------------------------------------

    \71\ Proposed Exchange Act Rule 721(a)(4)(iii)(A).
---------------------------------------------------------------------------

     A fee paid by an investment company for personal service 
or the maintenance of shareholder accounts; \72\ and
---------------------------------------------------------------------------

    \72\ Proposed Exchange Act Rule 721(a)(4)(iii)(B).
---------------------------------------------------------------------------

     A fee paid by an investment company based on a percentage 
of assets under management for any of the following services: (1) 
Providing transfer agent or sub-transfer agent services for the 
beneficial owners of investment company shares; (2) aggregating and 
processing purchase and redemption orders for investment company 
shares; (3) providing the beneficial owners with account statements 
showing their purchases, sales, and positions in the investment 
company; (4) processing dividend payments to the account for the 
investment company; (5) providing sub-accounting services to the 
investment company for shares held beneficially in the account; (6) 
forwarding communications from the investment company to the beneficial 
owners, including proxies, shareholder reports, dividend and tax 
notices, and updated prospectuses; or (7) receiving, tabulating, and 
transmitting proxies executed by the beneficial owners of investment 
company shares in the account.\73\
---------------------------------------------------------------------------

    \73\ Proposed Exchange Act Rule 721(a)(4)(iii)(C).
---------------------------------------------------------------------------

    In addition, the rule provides that the term ``administration fee'' 
includes, without limitation--
     A fee paid for personal services, tax preparation, or real 
estate settlement services; and
     A fee paid by an investment company for personal service, 
the maintenance of shareholder accounts or the types of sub-transfer 
agent or other services described above.\74\
---------------------------------------------------------------------------

    \74\ Proposed Exchange Act Rule 721(a)(4)(i). To the extent 
these fees are paid by an investment company based on a percentage 
of assets under management, these fees would be a permissible AUM 
fee.
---------------------------------------------------------------------------

    The examples of an administration fee and an asset under management 
fee included in the proposed rules are provided only for illustrative 
purposes. Other types of fees or fees for other types of services could 
be an administration fee or an AUM fee. In addition, an administration 
fee, annual fee or AUM fee attributable to a trust or fiduciary account 
is considered relationship compensation regardless of what entity or 
person pays the fee, and regardless of whether the fee is related to 
only securities assets, to a combination of securities and non-
securities assets, or to only non-securities assets. These fees are 
part of the compensation for acting as a trustee or fiduciary.
    Under the proposal, relationship compensation also would include a 
flat or capped per order processing fee, paid by (or on behalf of) a 
customer or beneficiary, that is equal to not more than the cost 
incurred by the bank in connection with executing securities 
transactions for trust or fiduciary accounts.\75\ If a bank seeks to 
include within this per order processing fee any fixed or variable 
processing costs incurred by the bank beyond those charged by the 
executing broker or dealer, the bank should maintain appropriate 
policies and procedures governing the allocation of these costs to the 
orders processed for trust or fiduciary customers.\76\ This should help

[[Page 77530]]

ensure that profits derived from per trade charges are not masked as 
costs of processing the trades.
---------------------------------------------------------------------------

    \75\ Proposed Exchange Act Rule 721(a)(4)(iv).
    \76\ A bank effecting transactions for trust or fiduciary 
customers through its trust or fiduciary departments may use other 
divisions or departments of the bank, or other affiliated or 
unaffiliated third parties, to handle aspects of these transactions. 
The bank must continue to act in a trustee or fiduciary capacity 
with respect to the account and, accordingly, should exercise 
appropriate diligence in selecting persons to provide services to 
the bank's trust or fiduciary customers and in overseeing the 
services provided in accordance with the bank's fiduciary 
obligations. No party, other than the bank (including, without 
limitation, a transfer agent or investment adviser), working in 
conjunction with the bank may rely on the bank's exception or 
exemption from ``broker'' status. To the extent that any such third 
party performs activities that would make that entity a broker under 
Section 3(a)(4) of the Exchange Act that entity would be required to 
register as a broker (in the absence of an applicable exemption or 
regulatory relief) notwithstanding any written or unwritten 
agreement the third party may have with the bank.
---------------------------------------------------------------------------

C. Advertising Restrictions

    Section 3(a)(4)(B)(ii)(II) of the Exchange Act addresses 
advertisements and the proposed rules explain the Agencies' 
understanding of the terms used in the statute. The proposed rules 
provide that a bank complies with the advertising restriction if 
advertisements by or on behalf of the bank do not advertise that the 
bank provides securities brokerage services for trust or fiduciary 
accounts except as part of advertising the bank's broader trust or 
fiduciary services, and do not advertise the securities brokerage 
services provided by the bank to trust or fiduciary accounts more 
prominently than the other aspects of the trust or fiduciary services 
provided to such accounts.\77\
---------------------------------------------------------------------------

    \77\ Proposed Exchange Act Rule 721(b).
---------------------------------------------------------------------------

    An ``advertisement'' for these purposes means any material that is 
published or used in any electronic or other public media, including 
any Web site, newspaper, magazine or other periodical, radio, 
television, telephone or tape recording, videotape display, signs or 
billboards, motion pictures, blast e-mail, or telephone directories 
(other than routine listings).\78\ Other types of material or 
information that is not distributed through public media would not be 
considered an advertisement. In addition, in considering whether an 
advertisement advertises the securities brokerage services provided to 
trust or fiduciary customers more prominently than the bank's other 
trust or fiduciary services, the nature, context and prominence of the 
information presented--and not simply the length of text or information 
devoted to a particular subject'should be considered.
---------------------------------------------------------------------------

    \78\ Proposed Exchange Act Rule 721(b)(2) (referencing Proposed 
Exchange Act Rule 760(g)(2)).
---------------------------------------------------------------------------

D. Proposed Exemptions for Special Accounts, Transferred Accounts, and 
a De Minimis Number of Accounts

    The proposed rules also would permit a bank to exclude certain 
types of accounts for purposes of determining its compliance with the 
account-by-account or bank-wide compensation tests discussed above. 
These exclusions are intended to reduce administrative burdens and 
facilitate compliance in connection with accounts that do not present a 
pronounced risk that a bank is operating a securities broker within the 
trust department. We solicit comment on these exclusions and their 
specific proposed terms.
    Under the proposal, a bank could, in determining its compliance 
with either the account-by-account or bank-wide compensation tests, 
exclude any trust or fiduciary account that had been open for a period 
of less than 3 months during the relevant year.\79\ The proposal would 
also permit a bank to exclude, for purposes of determining its 
compliance with either of these compensation tests, any trust or 
fiduciary account that the bank acquired from another person as part of 
a merger, consolidation, acquisition, purchase of assets or similar 
transaction by the bank for 12 months after the date the bank acquired 
the account from the other person.\80\ Of course, in excluding such 
accounts, the bank would have to exclude all compensation it receives 
from such accounts from the relationship compensation to total 
compensation comparison. This approach would allow a bank to bring into 
compliance a group of acquired accounts.
---------------------------------------------------------------------------

    \79\ Proposed Exchange Act Rule 723(a).
    \80\ Proposed Exchange Act Rule 723(b).
---------------------------------------------------------------------------

    Two additional exemptions would be provided for banks using the 
account-by-account approach. Specifically, a bank that uses the 
account-by-account approach would not be considered a broker for 
purposes of Section 3(a)(4) of the Exchange Act solely because a 
particular trust or fiduciary account does not meet the ``chiefly 
compensated'' test if, within 3 months of the end of the year in which 
the account fails to meet such standard, the bank transfers the account 
or the securities held by or on behalf of the account to a registered 
broker-dealer or another unaffiliated entity (such as an unaffiliated 
bank) that is not required to be registered as a broker or dealer.\81\
---------------------------------------------------------------------------

    \81\ Proposed Exchange Act Rule 723(c).
---------------------------------------------------------------------------

    Moreover, a bank using the account-by-account approach could 
exclude a small number of trust or fiduciary accounts not exceeding the 
lesser of (1) 1 percent of the total number of trust or fiduciary 
accounts held by the bank provided that if the number so obtained is 
less than 1, the amount would be rounded up to 1; or (2) 500.\82\ To 
rely on this exemption with respect to an account, the bank must not 
have relied on this exemption for such account during the immediately 
preceding year.\83\ In addition, the bank would be required to maintain 
records demonstrating that the securities transactions conducted by or 
on behalf of the excluded account were undertaken by the bank in the 
exercise of its trust or fiduciary responsibilities with respect to the 
account.\84\
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    \82\ Proposed Exchange Act Rule 723(d).
    \83\ Proposed Exchange Act Rule 723(d)(3).
    \84\ Proposed Exchange Act Rule 723(d)(1).
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IV. Sweep Accounts and Transactions in Money Market Funds

    Exchange Act Section 3(a)(4)(B)(v) excepts a bank from the 
definition of ``broker'' to the extent it ``effects transactions as 
part of a program for the investment or re-investment of deposit funds 
into any no-load, open-end management investment company registered 
under the Investment Company Act that holds itself out as a money 
market fund.''\85\
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    \85\ See Exchange Act Section 3(a)(4)(B)(v).
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A. Proposed Sweep Account Definitions

    To provide banks with guidance on the sweep accounts exception, the 
proposal defines various terms under the exception. One key term is 
``no-load.'' Under the proposal, no-load, in the context of an 
investment company or the securities it issues, means that the 
securities are part of a class or series in which a bank effects 
transactions that is not subject to a sales charge or a deferred sales 
charge. In addition, total charges against net assets of that class or 
series of securities for sales or sales promotion expenses, personal 
service, or the maintenance of shareholder accounts may not exceed 
0.0025 of average net assets annually.\86\
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    \86\ Proposed Exchange Act Rule 740(c).
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    Consistent with NASD rules,\87\ under the proposed no-load 
definition, charges for the following would not be considered charges 
against net assets of a class or series of an investment company's 
securities for sales or sales promotion expenses, personal service, or 
the maintenance of shareholder accounts:
---------------------------------------------------------------------------

    \87\ See NASD Rule 2830.
---------------------------------------------------------------------------

    (1) Providing transfer agent or sub-transfer agent services for 
beneficial owners of investment company shares;
    (2) Aggregating and processing purchase and redemption orders for 
investment company shares;
    (3) Providing beneficial owners with account statements showing 
their purchases, sales, and positions in the investment company;
    (4) Processing dividend payments for the investment company;
    (5) Providing sub-accounting services to the investment company for 
shares held beneficially;
    (6) Forwarding communications from the investment company to the

[[Page 77531]]

beneficial owners, including proxies, shareholder reports, dividend and 
tax notices, and updated prospectuses; or
    (7) Receiving, tabulating, and transmitting proxies executed by 
beneficial owners of investment company shares.\88\
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    \88\ Proposed Exchange Act Rule 740(c)(2).
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B. Proposed Exemption Regarding Money Market Fund Transactions

    The proposal also includes a new exemption that would permit banks, 
without registering as a broker, to effect transactions on behalf of a 
customer in securities issued by a money market fund under certain 
conditions.\89\ This proposed exemption recognizes that banks have long 
offered sweeps and other services that invest customer funds in money 
market funds that do not qualify as no-load funds under Commission and 
NASD rules. In particular, to qualify for the proposed exemption from 
broker registration, the bank would be required to provide the 
customer, directly or indirectly, any other product or service, the 
provision of which would not, in and of itself, require the bank to 
register as a broker or dealer under Section 15(a) of the Exchange 
Act.\90\ In addition, the class or series of money market fund 
securities that the bank provides the customer either would have to be 
no-load, or, if it is not no-load, the bank could not characterize or 
refer to the class or series of securities as no-load. For securities 
that are not no-load, the bank would be required to provide the 
customer, not later than at the time the customer authorizes the bank 
to effect the transactions, a prospectus for the securities.\91\
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    \89\ Proposed Exchange Act Rule 741.
    \90\ Proposed Exchange Act Rule 741(a)(1).
    \91\ Proposed Exchange Act Rule 741(a)(2)(ii)(A).
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V. Safekeeping and Custody

A. Overview of Statutory Exception

    Section 3(a)(4)(B)(viii) of the Exchange Act provides banks with an 
exception from the ``broker'' definition for certain bank custody and 
safekeeping activities (``custody and safekeeping exception''). In 
particular, this provision allows a bank to perform the following 
activities if performed as part of its customary banking activities 
without registering as a ``broker'':
     Providing safekeeping or custody services with respect to 
securities, including the exercise of warrants and other rights on 
behalf of customers;
     Facilitating the transfer of funds or securities, as a 
custodian or a clearing agency, in connection with the clearance and 
settlement of its customers' transactions in securities;
     Effecting securities lending or borrowing transactions 
with or on behalf of customers as part of the above-described custodial 
services or investing cash collateral pledged in connection with such 
transactions;
     Holding securities pledged by a customer to another person 
or securities subject to purchase or resale agreements involving a 
customer, or facilitating the pledging or transfer of such securities 
by book entry or as otherwise provided under applicable law, if the 
bank maintains records separately identifying the securities and the 
customer; and
     Serving as a custodian or provider of other related 
administrative services to any individual retirement account, pension, 
retirement, profit sharing, bonus, thrift savings, incentive, or other 
similar benefit plan.\92\
---------------------------------------------------------------------------

    \92\ 15 U.S.C. 78c(a)(4)(B)(viii).
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B. Proposed Exemption

    The proposed rules contain an exemption that allows banks, subject 
to certain conditions, to accept orders for securities transactions 
from employee benefit plan accounts and individual retirement and 
similar accounts for which the bank acts as a custodian.\93\ In 
addition, the exemption allows banks, subject to certain conditions, to 
accept orders for securities transactions on an accommodation basis 
from other types of custodial accounts.\94\ These proposed exemptions 
are intended to allow a bank to perform the types of securities order-
taking activities at times conducted in a custody department subject to 
conditions and limitations to protect investors and prevent a bank from 
using the exemptions to operate a securities broker in the bank.
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    \93\ Proposed Exchange Act Rule 760(a).
    \94\ Proposed Exchange Act Rule 760(b).
---------------------------------------------------------------------------

    The Agencies seek comment on all aspects of the proposed 
exemptions, including the conditions they contain. The proposed rules 
do not contain other rules to implement the custody and safekeeping 
exception. The Agencies request comment on whether other rules in this 
area are appropriate or needed.
    A bank would have no need to rely on the custody exemption to the 
extent the bank conducts other custodial activities permitted by 
Section 3(a)(4)(B)(viii) (e.g., exercising warrants or other rights 
with respect to securities or effecting securities lending or borrowing 
transactions on behalf of custodial customers) or another of the 
proposed rules (e.g., proposed Exchange Act Rule 772, which permits 
banks to effect securities lending or borrowing transactions on behalf 
of certain non-custodial customers). In addition, a bank would not have 
to rely on the proposed exemption to the extent the bank holds 
securities in custody for a customer and provides clearance and 
settlement services to the account in connection with such securities, 
but the bank does not accept orders for securities transactions for the 
account or engage in other activities with respect to the account that 
would require the bank to be registered as a broker. The following 
discusses the scope and terms of the proposed custody exemption.
1. Employee Benefit Plan Accounts and Individual Retirement or Similar 
Accounts
    Under the proposed exemption, a bank would not be considered a 
broker for purposes of Section 3(a)(4) of the Exchange Act to the 
extent that, as part of its customary banking activities, the bank 
accepts orders to effect transactions in securities in an ``employee 
benefit plan account'' \95\ or an ``individual retirement account or 
similar account'' \96\ for which the bank acts as a custodian if the 
bank complies with the following.
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    \95\ ``Employee benefit plan account'' would mean a pension 
plan, retirement plan, profit sharing plan, bonus plan, thrift 
savings plan, incentive plan, or other similar plan, including, 
without limitation, an employer-sponsored plan qualified under 
Section 401(a) of the Internal Revenue Code (26 U.S.C. 401(a)), a 
governmental or other plan described in Section 457 of the Internal 
Revenue Code (26 U.S.C. 457), a tax-deferred plan described in 
Section 403(b) of the Internal Revenue Code (26 U.S.C. 403(b)), a 
church plan, governmental, multiemployer or other plan described in 
Section 414(d), (e) or (f) of the Internal Revenue Code (26 U.S.C. 
414(d), (e) or (f)), an incentive stock option plan described in 
Section 422 of the Internal Revenue Code (26 U.S.C. 422); a 
Voluntary Employee Beneficiary Association Plan described in Section 
501(c)(9) of the Internal Revenue Code (26 U.S.C. 501(c)(9)), a non-
qualified deferred compensation plan (including a rabbi or secular 
trust), a supplemental or mirror plan, and a supplemental 
unemployment benefit plan.
    \96\ ``Individual retirement account or similar account'' would 
mean an individual retirement account as defined in Section 408 of 
the Internal Revenue Code (26 U.S.C. 408), Roth IRA as defined in 
Section 408A of the Internal Revenue Code (26 U.S.C. 408A), health 
savings account as defined in Section 223(d) of the Internal Revenue 
Code (26 U.S.C. 223(d)), Archer medical savings accounts as defined 
in Section 220(d) of the Internal Revenue Code (26 U.S.C. 220(d)), 
Coverdell education savings account as defined in Section 530 of the 
Internal Revenue Code (26 U.S.C. 530), or other similar account.
---------------------------------------------------------------------------

a. Employee Compensation Restriction
    The proposed custody exemption provides that, if a bank accepts 
securities orders for an employee benefit plan or individual retirement 
or similar account under the exemption, then no bank employee may 
receive compensation (including a fee paid

[[Page 77532]]

pursuant to a 12b-1 plan) from the bank, the executing broker or 
dealer, or any other person that is based on (1) whether a securities 
transaction is executed for the account; or (2) the quantity, price, or 
identity of the securities purchased or sold by the account.\97\ These 
proposed restrictions, which we believe are consistent with banking 
practices, are intended to reduce the financial incentives a bank 
employee might have to encourage a customer to submit securities orders 
to the bank and use a custody account as the functional equivalent of a 
securities brokerage account. They do not prohibit a bank employee from 
receiving compensation that is based on whether a customer establishes 
a custodial account with the bank, or that is based on the total amount 
of assets in a custodial account at account opening or at any other 
time.
---------------------------------------------------------------------------

    \97\ Proposed Exchange Act Rule 760(c).
---------------------------------------------------------------------------

    The proposed custody exemption also expressly provides that these 
employee compensation restrictions do not prevent a bank employee from 
receiving payments under a bonus or similar plan that would be 
permissible under proposed Exchange Act Rule 700(b)(1) of the 
networking rules as if a referral had been made, or any profitability-
based compensation described in proposed Exchange Act Rule 700(b)(2) of 
the networking rules. In addition, because these restrictions relate to 
securities transactions conducted in the relevant custody account, they 
would not prevent a bank employee from receiving a referral fee for 
referring the customer to a broker or dealer to engage in securities 
transactions at the broker-dealer that are unrelated to the custody 
account in accordance with the networking exception or the 
institutional customer and high net worth customer exemption (proposed 
Exchange Act Rule 701) for networking arrangements.
b. Advertisements and Sales Literature
    The proposed custody exemption provides that a bank relying on the 
exemption may not advertise that it accepts orders for securities 
transactions for employee benefit plan accounts or individual 
retirement accounts or similar accounts for which the bank acts as 
custodian, except as part of advertising the other custodial or 
safekeeping services the bank provides to these accounts. In addition, 
the bank may not advertise that such accounts are securities brokerage 
accounts or that the bank's safekeeping and custody services substitute 
for a securities brokerage account.\98\ With respect only to individual 
retirement or similar accounts, advertisements and sales literature 
issued by or on behalf of the bank may not describe the securities 
order-taking services provided by the bank to these accounts more 
prominently than the other aspects of the custody or safekeeping 
services the bank provides.\99\ The purpose of these restrictions is 
similar to the purpose of the advertising rules in the trust and 
fiduciary exception.
---------------------------------------------------------------------------

    \98\ Proposed Exchange Act Rule 760(a)(2)(i) and (ii). As 
discussed above, the proposed rules define the term 
``advertisement'' to mean material that is published or used in any 
electronic or other public media, including any Web site, newspaper, 
magazine or other periodical, radio, television, telephone or tape 
recording, videotape display, signs or billboards, motion pictures, 
or telephone directories (other than routine listings). Proposed 
Exchange Act Rule 760(g)(2).
    \99\ Proposed Exchange Act Rule 760(a)(3). ``Sales literature'' 
would mean any written or electronic communication, other than an 
advertisement, that is generally distributed or made generally 
available to customers of the bank or the public, including 
circulars, form letters, brochures, telemarketing scripts, seminar 
texts, published articles, and press releases concerning the bank's 
products or services. Proposed Exchange Act Rule 760(g)(5).
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c. Other Conditions
    The proposed custody exemption provides that a bank may accept 
orders for a securities transaction for an employee benefit plan 
account or an individual retirement account or similar account only if 
(1) the bank does not act in a trustee or fiduciary capacity (as 
defined in Section 3(a)(4)(D) of the Exchange Act) with respect to that 
account; (2) the bank complies with Section 3(a)(4)(C) of the Exchange 
Act in handling any order for a securities transaction for the 
account;\100\ and (3) the bank complies with Section 
3(a)(4)(B)(viii)(II) of the Exchange Act relating to carrying broker 
activities.\101\
---------------------------------------------------------------------------

    \100\ 15 U.S.C. 78c(a)(4)(C). This provision provides that, to 
meet one of the exceptions from the ``broker'' definition under the 
Exchange Act one of three conditions with respect to transactions 
effected under the applicable Section must be satisfied. In 
particular, the bank must direct such trade to a registered broker-
dealer for execution. In the alternative, the trade must be a cross 
trade or other substantially similar trade of a security that is 
made by the bank or between the bank and an affiliated fiduciary and 
is not in contravention of fiduciary principles established under 
applicable Federal or State law. Alternatively, the trade must be 
conducted in some other manner permitted under rules, regulations, 
or orders as the Commission may prescribe or issue.
    \101\ 15 U.S.C. 78c(a)(4)(B)(viii)(II). This provision prohibits 
a custodian bank from acting as a carrying broker (as such term, and 
different formulations thereof, are used in Exchange Act Section 
15(c)(3) and the rules and regulations under that Section) for any 
broker or dealer, unless such carrying broker activities are engaged 
in with respect to government securities.
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d. Non-Fiduciary and Non-Custodial Administrators or Recordkeepers
    The proposed exemption also would allow a bank that acts as a non-
fiduciary and non-custodial administrator or recordkeeper for an 
employee benefit plan to accept securities orders for the plan if the 
bank and the custodian bank comply with all the conditions discussed in 
Sections V.B.1.a, b and c above and, in addition, the administrator/
recordkeeper bank does not execute a cross-trade with or for the 
employee benefit plan or net orders for securities for the plan, other 
than orders for shares of open-end investment companies not traded on 
an exchange.\102\ Executing cross-trades involves setting prices for 
securities transactions. The Agencies request comment on whether these 
conditions are consistent with the existing practices of banks acting 
as non-fiduciary and non-custodial administrators or recordkeepers.
---------------------------------------------------------------------------

    \102\ Proposed Exchange Act Rule 760(e).
---------------------------------------------------------------------------

2. Accommodation Transactions
    Besides accepting securities orders for employee benefit plan and 
individual retirement and similar custodial accounts, banks also accept 
securities orders for other custodial accounts as an accommodation to 
the customer. The proposed custody exemption allows banks to continue 
to provide these order-taking services to other custodial accounts, 
subject to certain conditions designed to help ensure that these 
services continue to be provided only as an accommodation to customers 
and that a bank does not operate a securities broker out of its custody 
department. These conditions are discussed below.
a. Accommodation Basis
    The proposed custody exemption expressly provides that a bank may 
accept securities orders for other custodial accounts only as an 
accommodation to the customer.\103\ The Banking Agencies will develop 
guidance to assist Banking Agency examiners in reviewing, as part of 
the agencies' ongoing supervisory and examination process, the order-
taking services provided to other custodial accounts. This guidance 
will describe the types of policies, procedures and systems that a bank 
should have in place to help ensure that the bank accepts securities 
orders for other custodial accounts only as an accommodation to the 
customer and in a manner consistent with both the terms

[[Page 77533]]

and purposes of the custody exemption and the GLB Act.
---------------------------------------------------------------------------

    \103\ Proposed Exchange Rule Act 760(b)(1).
---------------------------------------------------------------------------

b. Employee Compensation Restriction
    In order for a bank to rely on the custody exemption to accept 
orders for custodial accounts on an accommodation basis, the bank must 
comply with the employee compensation restrictions described above in 
Section B.1.a that apply with respect to employee benefit plans and 
individual retirement and similar accounts.\104\
---------------------------------------------------------------------------

    \104\ Proposed Exchange Act Rule 760(b)(2) and (c).
---------------------------------------------------------------------------

c. Bank Fees
    The proposed exemption also expressly limits the types of fees a 
bank that accepts accommodation orders for an account may charge for 
effecting securities transactions for the account. Specifically, any 
fee charged or received by the bank for effecting a securities 
transaction for the account may not vary based on (1) whether the bank 
accepted the order for the transaction; or (2) the quantity or price of 
the securities to be bought or sold.\105\ These restrictions do not 
prevent a bank from charging or receiving a fee that is based on the 
type of security purchased or sold by the account (e.g., a foreign 
security), provided the fee complies with the conditions set forth in 
the proposed exemption.
---------------------------------------------------------------------------

    \105\ Proposed Exchange Act Rule 760(b)(3).
---------------------------------------------------------------------------

d. Advertising and Sales Literature Restrictions
    Under the proposed exemption, the bank's advertisements may not 
state that the bank accepts orders for securities transactions for a 
custodial account (other than an employee benefit plan or individual 
retirement account or similar account). In addition, the bank's sales 
literature (1) may state that the bank accepts securities orders for 
such an account only as part of describing the other custodial or 
safekeeping services the bank provides to the account; and (2) may not 
describe the securities order-taking services provided to such an 
account more prominently than the other aspects of the custody or 
safekeeping services provided by the bank to the account.\106\
---------------------------------------------------------------------------

    \106\ Proposed Exchange Act Rule 760(b)(4) and (5).
---------------------------------------------------------------------------

e. Investment Advice or Recommendations
    Under the proposed exemption, a bank that accepts securities orders 
for a custodial account on an accommodation basis would not be 
permitted to provide investment advice or research concerning 
securities to the account, make recommendations concerning securities 
to the account, or otherwise solicit securities transactions from the 
account. These restrictions would not, however, prohibit the bank from 
advertising its custodial services and disseminating sales literature 
that comply with the restrictions in the proposed exemption. These 
restrictions also would not prevent a bank employee from responding to 
customer inquiries regarding the bank's safekeeping and custody 
services by providing advertisements or sales literature describing the 
safekeeping, custody and related services the bank offers (provided 
those advertisement and sales literature comply with the restrictions 
in the proposed exemption), a prospectus prepared by a registered 
investment company, sales literature prepared by a registered 
investment company or by the broker or dealer that is the principal 
underwriter of the registered investment company pertaining to the 
registered investment company's products, or information based on any 
of those materials. Moreover, the proposed exemption allows a bank's 
employees to respond to customer inquiries concerning the bank's 
safekeeping, custodial or other services, such as inquiries concerning 
the customer's account or the availability of sweep or other services, 
so long as the bank does not provide investment advice or research 
concerning securities to the account or make a recommendation to the 
account concerning securities.
    The limitations and restrictions discussed in this part V.B.2, 
including those relating to investment advice and recommendations, 
relate only to those custodial accounts for which the bank accepts 
securities orders on an accommodation basis. Thus, for example, these 
limitations would not apply to (1) an employee benefit plan account or 
an individual retirement account or similar account; or (2) a trust or 
fiduciary account maintained by a customer with a bank even if that 
customer also maintains a custodial account with the bank. Similarly, 
the custody exemption does not prohibit a bank from cross-marketing the 
other products or services of the bank, including trust or fiduciary 
services, to its custodial customers.
f. Other Conditions
    In addition to these conditions, a bank that accepts securities 
orders as an accommodation to a custodial account must comply with the 
conditions described in Section V.B.1.c. Thus, the bank may not rely on 
this proposed exemption to accept accommodation orders for a custodial 
account if the bank is acting in a trustee or fiduciary capacity (as 
defined in Section 3(a)(4)(D) of the Exchange Act) with respect to that 
account. In addition, the bank must comply with Section 3(a)(4)(C) of 
the Exchange Act in handling any order for a securities transaction for 
the account and with Section 3(a)(4)(B)(viii)(II) concerning carrying 
broker activities.\107\ The reason for these additional conditions is 
to reinstate the statutory requirements for executing transactions and 
for the bank to refrain from acting as a carrying broker. In addition, 
a condition is added that makes it clear that a bank may not use this 
exemption to avoid the conditions applicable to a trust or fiduciary 
account when it is acting in a trustee or fiduciary capacity with 
respect to that account.
---------------------------------------------------------------------------

    \107\ Proposed Exchange Act Rule 760(d).
---------------------------------------------------------------------------

3. Evasion
    As the proposed rules provide, to prevent evasions of the custody 
exemption, the Agencies will consider both the form and substance of 
the relevant account(s), transaction(s) and activities (including 
advertising activities) in considering whether a bank meets the terms 
of the exemption.\108\ As part of the regular examination process, the 
Banking Agencies will monitor the securities transactions in custodial 
accounts. If the appropriate Banking Agency were to find that a bank is 
evading the terms of the custody exemption to run a brokerage business 
out of its custody department, the agency would take appropriate action 
to address the problem.
---------------------------------------------------------------------------

    \108\ Proposed Exchange Act Rule 760(e).
---------------------------------------------------------------------------

VI. Other Proposed Exemptions

    The proposal also includes certain other exemptions relating to the 
securities ``broker'' activities of banks. These are discussed below.

A. Proposed Exemption for Regulation S Transactions With Non-U.S. 
Persons

    Persons that conduct a broker or dealer business while located in 
the United States must register as broker-dealers (absent an exception 
or exemption), even if they direct all of their selling efforts 
offshore.\109\ A bank industry group requested an exemption from 
broker-dealer registration requirements to permit banks to sell to non-
U.S. persons securities that are covered by Regulation S, the safe 
harbor from U.S. securities registration

[[Page 77534]]

requirements.\110\ The group also requested that the exemption extend 
to the resale of Regulation S securities held by non-U.S. persons to 
other non-U.S. persons in transactions pursuant to Regulation S.
---------------------------------------------------------------------------

    \109\ Exchange Act Release No. 27017 (July 11, 1989), 54 FR 
30013.
    \110\ Letter dated May 27, 2004, from Lawrence R. Uhlick, 
Executive Director & General Counsel, Institute of International 
Bankers to Catherine McGuire, Chief Counsel, Division of Market 
Regulation, Commission. Regulation S specifies the requirements for 
an offer or sale of securities to be deemed to occur outside the 
United States and therefore not subject to the registration 
requirements of Section 5 of the Securities Act. Regulation S 
permits the sale of newly issued off-shore securities and re-sales 
of off-shore securities from a non-U.S. person to a non-U.S. person. 
17 CFR 230.901, et seq. The letter also requests a separate 
exemption from Section 3(b)(5) of the Exchange Act for riskless 
principal transactions, which are treated as a ``dealer'' (and not a 
``broker'') activity under the Exchange Act. The Commission will 
solicit comments on that proposed rule in a separate contemporaneous 
release.
---------------------------------------------------------------------------

    Non-U.S. persons typically will not rely on the protections of the 
U.S. securities laws when purchasing Regulation S securities from U.S. 
banks.\111\ Non-U.S. persons usually can purchase the same securities 
from banks located outside of the United States and would not have the 
protections of U.S. law when purchasing these securities offshore. The 
proposal therefore would exempt a bank from the definition of 
``broker'' under Section 3(a)(4) of the Exchange Act, to the extent 
that, as agent, the bank effects one of three types of transactions. In 
particular, the proposed exemption would apply if the bank effects a 
sale in compliance with the requirements of 17 CFR 230.903 of an 
``eligible security'' to a ``purchaser'' who is outside of the United 
States within the meaning of 17 CFR 230.903.
---------------------------------------------------------------------------

    \111\ Although no rules have been adopted, the exemption 
provided by Exchange Act Section 30(b), pertaining to foreign 
securities, has been held unavailable if the United States is used 
as a base for securities fraud perpetuated on foreigners. See Arthur 
Lipper Corp. v. SEC, 547 F.2d 171 (2d Cir. 1976); see also Exchange 
Act Release No. 27017 supra note 110.
---------------------------------------------------------------------------

    The proposed exemption would also be available if the bank effects 
a resale of an ``eligible security'' after its initial sale with a 
reasonable belief that the ``eligible security'' was initially sold 
outside of the United States within the meaning of and in compliance 
with the requirements of 17 CFR 230.903, by or on behalf of a person 
who is not a U.S. person under 17 CFR 230.902(k) to a ``purchaser'' who 
is outside the United States within the meaning of 17 CFR 230.903 or a 
registered broker-dealer. Under this provision of the proposal, if the 
sale is made prior to the expiration of the distribution compliance 
period specified in 17 CFR 230.903(b)(2) or (b)(3), the sale would have 
to be made in compliance with the requirements of 17 CFR 230.904.
    Moreover, the proposed Regulation S exemption would apply if the 
bank effects a resale of an ``eligible security'' after its initial 
sale outside of the United States within the meaning of and in 
compliance with the requirements of 17 CFR 230.903, by or on behalf of 
a registered broker-dealer to a ``purchaser'' who is outside the United 
States within the meaning of 17 CFR 230.903. Under this proposed 
provision, if the sale is made prior to the expiration of the 
distribution compliance period specified in 17 CFR 230.903(b)(2) or 
(b)(3), the sale would have to be made in compliance with the 
requirements of 17 CFR 230.904.\112\ We invite comment on whether U.S. 
broker-dealer registration should be required for these transactions.
---------------------------------------------------------------------------

    \112\ Under the proposal, ``eligible security'' would mean a 
security that: (1) is not being sold from the inventory of the bank 
or an affiliate of the bank; and (2) is not being underwritten by 
the bank or an affiliate of the bank on a firm-commitment basis, 
unless the bank acquired the security from an unaffiliated 
``distributor'' that did not purchase the security from the bank or 
an affiliate of the bank. ``Distributor'' under the proposal would 
have the same meaning as in 17 CFR 230.902(d). ``Purchaser'' under 
the proposal would mean a person who purchases an ``eligible 
security'' and who is not a U.S. person under 17 CFR 230.902(k).
---------------------------------------------------------------------------

B. Proposed Securities Lending Exemption

    Another exemption in the proposal addresses certain securities 
lending activities conducted as agent. Under the proposal, a bank would 
be exempt from the definition of ``broker'' under Section 3(a)(4) of 
the Exchange Act, to the extent that, as an agent, it engages in or 
effects ``securities lending transactions'' and any ``securities 
lending services'' in connection with such transactions, with or on 
behalf of a person the bank reasonably believes to be (1) a qualified 
investor as defined in Section 3(a)(54)(A) of the Exchange Act; \113\ 
or (2) any employee benefit plan that owns and invests on a 
discretionary basis, not less than $25,000,000 in investments.\114\ We 
understand that the primary role of banks in securities lending 
transactions, whether operating with or without custody of the 
securities, is to act in an agency capacity. A non-custodial securities 
lending arrangement permits a customer to divide custody and securities 
lending management between two expert entities.
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    \113\ 15 U.S.C. 78c(a)(54)(A).
    \114\ Proposed Exchange Act Rule 772. Under the proposal, 
``securities lending transaction'' would mean a transaction in which 
the owner of a security lends the security temporarily to another 
party pursuant to a written securities lending agreement under which 
the lender retains the economic interests of an owner of such 
securities, and has the right to terminate the transaction and to 
recall the loaned securities on terms agreed by the parties. Under 
the proposal, ``securities lending services'' would mean: (1) 
Selecting and negotiating with a borrower and executing, or 
directing the execution of the loan with the borrower; (2) 
receiving, delivering, or directing the receipt or delivery of 
loaned securities; (3) receiving, delivering, or directing the 
receipt or delivery of collateral; (4) providing mark-to-market, 
corporate action, recordkeeping or other services incidental to the 
administration of the securities lending transaction; (5) investing, 
or directing the investment of, cash collateral; or (6) indemnifying 
the lender of securities with respect to various matters.
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    The proposed exemption would reinstate, without modification, an 
exemption from the definition of ``broker'' under Section 3(a)(4) of 
the Exchange Act that the Commission adopted in the release 
implementing the GLBA bank exceptions from the definition of 
``dealer.'' This exemption, would become void under the Regulatory 
Relief Act once the Agencies adopt a single set of final ``broker'' 
rules.\115\ This exemption allows banks to engage in securities lending 
transactions as agent when they either do not have custody of the 
securities or have custody for less than the entire period of the stock 
loan. The exemption would permit banks to continue these activities 
without disruption. As discussed in an accompanying release, the 
Commission proposes to re-adopt, without modification, the ``dealer'' 
portions of Exchange Act Rule 15a-11 that relate to, among other 
things, conduit lending transactions.\116\
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    \115\ See 17 CFR 240.15a-11. See also Exchange Act Release No. 
49879 (June 17, 2004), 69 FR 39682 (June 30, 2004). A bank that acts 
as custodian with respect to securities may effect securities 
lending transactions (and provide related securities lending 
services) with respect to such securities as agent under the 
statutory custody and safekeeping exception.
    \116\ The Commission does not propose to modify or re-adopt the 
other portions of the ``dealer'' rules adopted for banks under the 
GLBA, including the exemption that permits banks to engage in 
riskless principal transactions subject to certain conditions. See 
17 CFR 240.3a5-1.
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C. Proposed Exemption for the Way in Which Banks Effect Transactions in 
Investment Company Securities

    The proposal also includes an exemption for the way in which banks 
may effect transactions in investment company securities. Under the 
proposal, a bank that meets the conditions for an exception or 
exemption from the definition of ``broker'' except for the condition in 
Section 3(a)(4)(C)(i) of the Exchange Act,\117\ which requires banks, 
under certain circumstances, to direct securities transactions to a 
registered broker-dealer for execution, is exempt from such condition 
to the extent that the bank effects transactions in

[[Page 77535]]

securities issued by an open-end company that is neither traded on a 
national securities exchange nor through the facilities of a national 
securities association or an interdealer quotation system if certain 
conditions are met. In particular, the proposed exemption would allow a 
bank to effect such transactions through the National Securities 
Clearing Corporation's Mutual Fund Services (Fund/SERV) or directly 
with a transfer agent acting for the open-end company. Under the 
proposed exemption, the securities would have to be distributed by a 
registered broker-dealer, or, in the alternative, the sales charge for 
the transaction would have to be no more than the amount a registered 
broker-dealer could charge pursuant to the rules of a registered 
securities association adopted pursuant to Section 22(b)(1) of the 
Investment Company Act.\118\
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    \117\ 15 U.S.C. 78c(a)(4)(C)Ii).
    \118\ 15 U.S.C. 80a-22(b)(1). Under the proposal ``interdealer 
quotation system'' would have the same meaning as in 17 CFR 
240.15c2-11. ``Open-end company'' would have the same meaning as in 
17 CFR 247.740.
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D. Proposed Temporary and Permanent Exemption for Contracts Entered 
Into by Banks From Being Considered Void or Voidable

    Other proposed exemptions would address inadvertent failures by 
banks that could trigger rescission of contracts between a bank and a 
customer under Section 29(b) of the Exchange Act for a transition 
period.\119\ Under the first proposed exemption, no contract entered 
into before 18 months after the effective date of the proposed 
exemption would be void or considered voidable by reason of Section 29 
of the Exchange Act because any bank that is a party to the contract 
violated the registration requirements of Section 15(a) of the Exchange 
Act, any other applicable provision of that Act, or the rules and 
regulations adopted under the Exchange Act based solely on the bank's 
status as a broker when the contract was created.\120\
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    \119\ 15 U.S.C. 78cc(b). Exchange Act Section 29(b) provides, in 
pertinent part, that every contract made in violation of the 
Exchange Act or of any rule or regulation adopted under the Exchange 
Act (with certain exceptions) shall be void.
    \120\ Proposed Exchange Act Rule 780.
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    Under the second proposed exemption, no contract entered into would 
be void or considered voidable by reason of Section 29(b) of the 
Exchange Act without a time limit. This exemption would provide relief 
to a bank that violated the registration requirements of Section 15(a) 
of the Exchange Act or the rules and regulations adopted thereunder 
based solely on the bank's status as a broker when a contract was 
created if two conditions are met (1) at the time the contract was 
created, the bank acted in good faith and had reasonable policies and 
procedures in place to comply with Section 3(a)(4)(B) of the Exchange 
Act, and the rules and regulations, thereunder; and (2) any violation 
of the registration requirements by the bank did not result in any 
significant harm, financial loss or cost to the person seeking to void 
the contract. This exemption is provided because a bank that is acting 
in good faith and has reasonable policies and procedures in effect at 
the time a securities contract is created should not be subject to 
rescission claims as a result of an inadvertent failure to comply with 
the requirements under Section 3(c)(4) of the Exchange Act if customers 
are not significantly harmed.

E. Extension of Time and Transition Period

    The proposal also would extend the time that banks would have to 
come into compliance with the Exchange Act provisions relating to the 
definition of ``broker.'' Under the proposed exemption, a bank would be 
exempt from the definition of ``broker'' under Section 3(a)(4) of 
Exchange Act until the first day of its first fiscal year commencing 
after June 30, 2008.

VII. Withdrawal of Proposed Regulation B and Removal of Exchange Act 
Rules 3a4-2--3a4-6, and 3b-17

    Under the Regulatory Relief Act, a final single set of rules or 
regulations jointly adopted by the Board and Commission in accordance 
with that Act shall supersede any other proposed or final rule issued 
by the Commission on or after the date of enactment of Section 201 of 
the GLBA with regard to the definition of ``broker'' under Exchange Act 
Section 3(a)(4).\121\ Moreover, the new law states that ``[n]o such 
other rule, whether or not issued in final form, shall have any force 
or effect on or after that date of enactment.''
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    \121\ President Clinton signed the GLBA into law on November 12, 
1999.
---------------------------------------------------------------------------

    In 2001, the Commission adopted Interim Rules discussing the way in 
which the Commission would interpret the GLBA.\122\ The rules that 
address the definition of ``broker'' under Section 3(a)(4) of the 
Exchange Act (and applicable exemptions) are Exchange Act Rules 3a4-2 
through 3a4-6 and Rule 3b-17.\123\ In 2004, the Commission proposed to 
revise and restructure the ``broker'' provisions of the Interim Rules 
and codify them in a new regulation, proposed Regulation B, which 
consists of proposed new Exchange Act Rules 710 through 781.\124\ By 
operation of the Regulatory Relief Act, the joint adoption of new final 
rules will supersede Exchange Act Rules 3a4-2 through 3a4-6, 3b-17, and 
proposed Rules 710 through 781. Any discussion or interpretation of 
these prior rules in their accompanying releases would not apply to the 
single set of rules adopted by the Agencies.
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    \122\ Exchange Act Release No. 44291 (May 11, 2001), 66 FR 27760 
(May 18, 2001).
    \123\ 17 CFR 240.3a4-2 through 3a4-6 and 17 CFR 240.3b-17.
    \124\ 17 CFR 242.710 through 781. See Exchange Act Release No. 
49879 (June 17, 2004), 69 FR 39682 (June 30, 2004).
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VIII.Administrative Law Matters

A. Paperwork Reduction Act Analysis

    Certain provisions of proposed Exchange Act Rules 701, 723, and 
741, contain ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995.\125\ The Commission has 
submitted these information collections to the Office of Management and 
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 
CFR 1320.11. The Board has reviewed the proposed rules under authority 
delegated by OMB.\126\
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    \125\ 44 U.S.C. 3501, et seq.
    \126\ 5 CFR 1320.16; Appendix A.1.
---------------------------------------------------------------------------

    The collections of information under proposed Exchange Act Rules 
701, 723, and 741 are new. The title for the new collection of 
information under proposed Exchange Act Rule 701 is ``Rule 701: 
Exemption from the definition of `broker' for certain institutional 
referrals.'' The title for the new collection of information under 
proposed Exchange Act Rule 723 is ``Rule 723: Exemptions for special 
accounts, transferred accounts, and a de minimis number of accounts.'' 
The title for the new collection of information under proposed Exchange 
Act Rule 741 is ``Rule 741: Exemption for banks effecting transactions 
in money market funds.'' OMB has not yet assigned a control number to 
the new collections of information contained in proposed Exchange Act 
Rules 701, 723, and 741. 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.\127\
---------------------------------------------------------------------------

    \127\ 44 U.S.C. 3512.
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1. Proposed Exchange Act Rule 701
    Proposed Exchange Act Rule 701 would provide a conditional 
exemption

[[Page 77536]]

from the requirements under the networking exception under the Exchange 
Act. This proposed exemption would permit bank employees to receive 
payment of more than a nominal fee for referring institutional 
customers and high net worth customers to a broker or dealer and would 
permit such payments to be contingent on whether the customer effects a 
securities transaction with the broker or dealer.
a. Collection of Information
    Proposed Exchange Act Rules 701(a)(2)(i) and (b) would require 
banks that wish to utilize the exemption provided in this proposed rule 
to make certain disclosures to high net worth or institutional 
customers. Specifically, these banks would need to clearly and 
conspicuously disclose (1) the name of the broker or dealer; and (2) 
that the bank employee participates in an incentive compensation 
program under which the bank employee may receive a fee of more than a 
nominal amount for referring the customer to the broker or dealer and 
payment of this fee may be contingent on whether the referral results 
in a transaction with the broker or dealer.\128\
---------------------------------------------------------------------------

    \128\ See proposed Exchange Act Rules 701(a)(2)(i) and (b).
---------------------------------------------------------------------------

    In addition, one of the conditions of the exemption is that the 
broker or dealer and the bank need to have a contractual or other 
written arrangement containing certain elements, including notification 
and information requirements.\129\ Proposed Exchange Act Rule 
701(a)(3)(iii) requires a broker or dealer to notify its bank partner 
if the broker or dealer determines that (1) the customer referred under 
the exemption is not a high net worth or institutional customer, as 
applicable; (2) the bank employee making the referral is subject to 
statutory disqualification (as defined in Section 3(a)(39) of the 
Exchange Act); \130\ or (3) the customer or the securities 
transaction(s) to be conducted by the customer do not meet the 
applicable suitability or sophistication determination standards set 
forth in the rule.\131\ Similarly, the bank would be required to 
provide its broker or dealer partner with the name of the bank employee 
receiving the referral fee and certain other identifying 
information.\132\
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    \129\ See proposed Exchange Act Rules 701(a) and (a)(3).
    \130\ This proposed requirement would not apply to subparagraph 
(E) of Section 3(a)(39) of the Exchange Act (15 U.S.C. 78c(a)(39)).
    \131\ See proposed Exchange Act Rule 701(a)(3)(iii).
    \132\ See proposed Exchange Act Rule 701(a)(2)(iii).
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b. Proposed Use of Information
    The purpose of the collection of information in proposed Exchange 
Act Rules 701(a)(2)(i) and (b) is to provide a customer of a bank 
relying on the exemption with information to assist the customer in 
identifying and assessing any conflict of interest on the part of the 
bank employee making a referral to a broker or dealer. The collection 
of information in proposed Exchange Act Rules 701(a)(2)(iii) and 
(a)(3)(iii) is designed to help a bank determine whether it is acting 
in compliance with the proposed exemption.
c. Respondents
    The proposed collection of information in proposed Exchange Act 
Rule 701 would apply to banks that wish to utilize the exemption 
provided in this proposed rule and broker-dealers with which those 
banks enter into networking arrangements.
d. Reporting and Recordkeeping Burden
    The Agencies estimate that approximately 1,000 banks annually would 
use the exemption in proposed Exchange Act Rule 701 and each bank would 
on average make the required referral fee disclosures to 200 customers 
annually and provide one notice annually to its broker or dealer 
partner regarding the name of a bank employee and other identifying 
information. The Agencies also estimate that broker-dealers would, on 
average, notify each of the 1,000 banks approximately two times 
annually about a determination regarding a customer's high net worth or 
institutional status or suitability or sophistication standing as well 
as a bank employee's statutory disqualification status.
    Based on these estimates, the Agencies anticipate that proposed 
Exchange Act Rule 701 would result in approximately 200,000 disclosures 
to customers, 1,000 notices to brokers or dealers, and 2,000 notices to 
banks per year. The Agencies further estimate (based on the level of 
difficulty and complexity of the applicable activities) that a bank 
would spend approximately 5 minutes per customer to comply with the 
disclosure requirement and 15 minutes per notice to a broker or dealer. 
The Agencies also estimate that a broker or dealer would spend 
approximately 15 minutes per notice to a bank. Thus, the estimated 
total annual reporting and recordkeeping burden for these requirements 
in proposed Exchange Act Rule 701 are 16,917 hours for banks and 500 
hours for brokers or dealers. We solicit comment on this point as well 
as on the validity of all of our estimates and statements in this 
Section.
e. Collection of Information Is Mandatory
    This collection of information would be mandatory for banks relying 
on proposed Exchange Act Rule 701 and their broker-dealer partners.
f. Confidentiality
    A bank relying on the exemption provided in proposed Exchange Act 
Rule 701 would be required to provide certain referral fee disclosures 
to its customers as required by this proposed rule. Banks relying on 
the exemption provided in proposed Exchange Act Rule 701 would be also 
be required to enter into agreements with a broker or dealer obligating 
the broker or dealer to notify the bank upon becoming aware of certain 
information with respect to the customer, the bank employee, or the 
nature of the securities transaction. Similarly, a bank would be 
required to notify a broker or dealer about the name of the bank 
employee receiving a referral fee and certain other identifying 
information.
g. Record Retention Period
    Proposed Exchange Act Rule 701 would not include a specific record 
retention requirement. Banks, however, would be required to retain the 
records in compliance with any existing or future recordkeeping 
requirements established by the Banking Agencies.
2. Proposed Exchange Act Rule 723
a. Collection of Information
    Proposed Exchange Act Rule 723(d)(1) would require a bank that 
desires to exclude a trust or fiduciary account in determining its 
compliance with the chiefly compensated test, pursuant to a de minimis 
exclusion,\133\ to maintain records demonstrating that the securities 
transactions conducted by or on behalf of the account were undertaken 
by the bank in the exercise of its trust or fiduciary responsibilities 
with respect to the account.\134\
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    \133\ See proposed Exchange Act Rule 723(d)(2), which would 
require that the total number of accounts excluded by the bank, 
under the exclusion from the chiefly compensated test in proposed 
Rule 721(a)(1), do not exceed the lesser of 1 percent of the total 
number of trust or fiduciary accounts held by the bank (if the 
number so obtained is less than 1, the amount would be rounded up to 
1) or 500.
    \134\ See proposed Exchange Act Rule 723(d)(1).
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b. Proposed Use of Information
    The collection of information in proposed Exchange Act Rule 723 is 
designed to help ensure that a bank relying on the de minimis exclusion

[[Page 77537]]

would be able to demonstrate that it was acting in a trust or fiduciary 
capacity with respect to an account excluded from the chiefly 
compensated test in proposed Rule 721(a)(1).
c. Respondents
    The proposed collection of information in Exchange Act Rule 723 
would apply to banks relying on the de minimis exclusion from the 
chiefly compensated test.
d. Reporting and Recordkeeping Burden
    Because the Agencies expect a small number of banks would use the 
account-by-account approach in monitoring their compensation, the 
Agencies estimate that approximately 50 banks annually would use the de 
minimis exclusion in proposed Exchange Act Rule 723 and each such bank 
would, on average, need to maintain records with respect to 10 trust or 
fiduciary accounts annually conducted in the exercise of the banks' 
trust or fiduciary responsibilities. Therefore, the Agencies estimate 
that proposed Exchange Act Rule 723 would result in approximately 500 
accounts annually for which records are required to be maintained. The 
Agencies anticipate that these records would consist of records that 
are generally created as part of the securities transaction and the 
account relationship and minimal additional time would be required in 
maintaining these records. Based on this analysis, the Agencies 
estimate that a bank would spend approximately 15 minutes per account 
to comply with the record maintenance requirement of proposed Exchange 
Act Rule 723. Thus, the estimated total annual reporting and 
recordkeeping burden for proposed Exchange Act Rule 723 is 125 hours. 
We solicit comment on this point as well as on the validity of all of 
our estimates and statements in this Section.
e. Collection of Information Is Mandatory
    This collection of information would be mandatory for banks 
desiring to rely on de minimis exclusion contained in proposed Exchange 
Act Rule 723.
f. Confidentiality
    Proposed Exchange Act Rule 723 does not address or restrict the 
confidentiality of the documentation prepared by banks under the rule. 
Accordingly, banks would have to make the information available to 
regulatory authorities or other persons to the extent otherwise 
provided by law.
g. Record Retention Period
    Proposed Exchange Act Rule 723 would include a requirement to 
maintain records related to certain securities transactions. Banks 
would be required to retain these records in compliance with any 
existing or future recordkeeping requirements established by the 
Banking Agencies.
3. Proposed Exchange Act Rule 741
a. Collection of Information
    Proposed Exchange Act Rule 741(a)(2)(ii)(A) would require a bank 
relying on this proposed exemption (i.e., the exemption from the 
definition of the term ``broker'' under Section 3(a)(4) of the Exchange 
Act for effecting transactions on behalf of a customer in securities 
issued by a money market fund) to provide customers with a prospectus 
of the money market fund securities, not later than the time the 
customer authorizes the bank to effect the transaction in such 
securities, if they are not no-load.
b. Proposed Use of Information
    The purpose of the collection of information in proposed Exchange 
Act Rule 741 is to help ensure that a customer of a bank relying on the 
exemption would have sufficient information upon which to make an 
informed investment decision, in particular, regarding the fees the 
customer would pay with respect to the securities.
c. Respondents
    The proposed collection of information in Exchange Act Rule 741 
would apply to banks relying on the exemption provided in the proposed 
rule.
d. Reporting and Recordkeeping Burden
    The Agencies believe that banks generally sweep or invest their 
customer funds into no-load money market funds. Accordingly, the 
Agencies estimate that approximately 500 banks annually would use the 
exemption in proposed Exchange Act Rule 741 and each bank, on average, 
would deliver the prospectus required by the proposed rule to 
approximately 1,000 customers annually. Therefore, the Agencies 
estimate that proposed Exchange Act Rule 741 would result in 
approximately 500,000 disclosures per year. The Agencies estimate 
further that a bank would spend approximately 5 minutes per response to 
comply with the delivery requirement of proposed Exchange Act Rule 741. 
Thus, the estimated total annual reporting and recordkeeping burden for 
proposed Exchange Act Rule 741 is 41,667 hours. We solicit comment on 
this point as well as on the validity of all of our estimates and 
statements in this Section.
e. Collection of Information Is Mandatory
    This collection of information would be mandatory for banks relying 
on the proposed exemption.
f. Confidentiality
    The collection of information delivered pursuant to proposed 
Exchange Act Rule 741 would be provided by banks relying on the 
exemption in this rule to customers that are engaging in transactions 
in securities issued by a money market fund that is not a no-load fund.
g. Record Retention Period
    Proposed Exchange Act Rule 741 would not include a record retention 
requirement.
4. Request for Comment
    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Agencies solicit comments 
to:
    (1) Evaluate whether the proposed collections of information are 
necessary for the proper performance of the functions of the Agencies, 
including whether the information would have practical utility;
    (2) Evaluate the accuracy of the Agencies' estimates of the burden 
of the proposed collections of information and provide the Agencies 
with data on proposed Exchange Act Rules 701, 723, and 741;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collections of information on those 
required to respond, including through the use of automated collection 
techniques or other forms of information technology.
    In addition to the general solicitation of comments above regarding 
the collections of information contained in the proposed rules, the 
Agencies also solicit comments regarding how many banks would rely on 
the exemptions provided in proposed Exchange Act Rules 701, 723, and 
741, and whether banks relying on such exemptions would be able to use 
existing systems, programs, and procedures to comply with the 
collections of information requirements contained in the proposed 
rules.
    Persons desiring to submit comments on the collection of 
information requirements should direct them in the manner discussed 
below. The Agencies propose that the information collections

[[Page 77538]]

and burden estimates discussed above will be associated with the Board 
for banks and with the Commission for brokers or dealers.
    Commission. Comments should be directed to the Office of Management 
and Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and should send a copy of their comments to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090, and refer to File No. S7-22-06. OMB is 
required to make a decision concerning the collection of information 
between 30 and 60 days after publication of this release in the Federal 
Register. Therefore, comments to OMB are best assured of having full 
effect if OMB receives them within 30 days of this publication. 
Requests for materials submitted to OMB by the Agencies with regard to 
this collection of information should be in writing, refer to File No. 
S7-22-06, and be submitted to the Securities and Exchange Commission, 
Records Management, Office of Filings and Information Services, 100 F 
Street, NE, Washington, DC 20549.
    Board. You may submit comments, identified by the Docket number, by 
any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments on the http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include docket 
number in the subject line of the message.
     FAX: 202-452-3819 or 202-452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW) between 9 a.m. and 5 p.m. on weekdays.

B. Consideration of Benefits and Costs

1. Introduction
    Prior to enactment of the GLBA, banks were exempted from the 
definition of ``broker'' in Section 3(a)(4) of the Exchange Act. 
Therefore, notwithstanding the fact that banks may have conducted 
activities that would have brought them within the scope of the broker 
definition, they were not required by the Exchange Act to register as 
such. The GLBA replaced banks' historic exemption from the definition 
of ``broker'' with eleven exceptions.\135\
---------------------------------------------------------------------------

    \135\ See Exchange Act Section 3(a)(4)(B)(i) `` (xi).
---------------------------------------------------------------------------

    While banks' efforts to comply with the GLBA and the exemptions we 
propose would result in certain costs, the Agencies have sought to 
minimize these burdens to the extent possible consistent with the 
language and purposes of the GLBA. For example, the Agencies are 
proposing exemptions and interpretations which should provide banks 
with increased options and flexibility and help to reduce overall 
costs.
2. Discussion of Proposed Interpretations and Exemptions
    The potential benefits and costs of the principal exemptions and 
interpretations in the proposal are discussed below.
a. Networking Exception
    Exchange Act Section 3(a)(4)(B)(i) excepts banks from the 
definition of ``broker'' if they enter into a contractual or other 
written arrangement with a registered broker-dealer under which the 
broker-dealer offers brokerage services to bank customers. This 
networking exception is subject to several conditions. The Section also 
prohibits banks from paying unregistered bank employees--such as 
tellers, loan officers, and private bankers--``incentive compensation'' 
for any brokerage transaction, except that bank employees may receive a 
``nominal'' referral fee for referring bank customers to their broker-
dealer networking partners.\136\
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    \136\ Exchange Act Section 3(a)(4)(B)(i)(VI) limits such 
referral fees to a ``nominal one-time cash fee of a fixed dollar 
amount'' and requires that the payment of the fees not be contingent 
on whether the referral results in a transaction.
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    Under the proposal, a ``nominal'' referral fee would be defined as 
a fee that does not exceed any of the following standards (1) twice the 
average of the minimum and maximum hourly wage established by the bank 
for the current or prior year for the job family that includes the 
employee or 1/1000th of the average of the minimum and maximum annual 
base salary established by the bank for the current or prior year for 
the job family that includes the employee; (2) twice the employee's 
actual base hourly wage; or (3) twenty-five dollars ($25), as adjusted 
for inflation pursuant to proposed Exchange Act Rule 700(f).
    The Agencies believe these alternatives should provide banks 
appropriate flexibility while being consistent with the statute. For 
example, some banks, and particularly small banks, may find it most 
useful to establish a flat fee or inflation-adjusted fee for securities 
referrals as this method is easy to understand and requires no 
complicated calculations. In addition, permitting banks to pay referral 
fees based on either an employee's base hourly rate of pay or the 
average rate of pay for a job family would give banks objective and 
easily calculable approaches to paying their employees referrals while 
remaining consistent with the requirements of the GLBA that such fees 
be ``nominal'' in relation to the overall compensation of the referring 
employees. While some start-up costs may be incurred by banks in the 
process of developing a fee structure in line with the requirements of 
the GLBA, the ability to choose among alternative methods (as reflected 
in proposed rules) should enable banks to minimize their overall costs 
based on their individual referral programs and cost structures.
    In light of the statutory provision allowing banks to pay a 
``nominal one-time cash fee,'' the proposal requires that all referral 
fees paid under the exception be paid in cash. The Agencies request 
comment on whether existing bank securities referral programs would be 
able to operate, or could easily be adjusted to operate, in accordance 
with the terms of proposed Exchange Act Rule 700.
    The proposed rules also include a conditional exemption that would 
permit a bank to pay an employee a contingent referral fee of more than 
a nominal amount for referring an institutional customer or high net 
worth customer to a broker or dealer with which the bank has a 
contractual or other written networking arrangement.
    This exemption would provide a benefit to banks by expanding the 
types of referrals fees that banks could utilize with respect to 
institutional customers and high net worth customers. However, there 
likely would be costs associated with complying with the conditions in 
the proposed exemption (such as the requirement for banks to make 
certain disclosures to high net worth or institutional customers and 
the

[[Page 77539]]

requirement for broker-dealers to make certain determinations and 
provide certain notifications to banks)\137\ as well as the other terms 
and conditions in the statutory networking exception. However, these 
costs would be either a result of the statutory requirements or costs 
voluntarily incurred by banks because they want to take advantage of 
the proposed exemption.
---------------------------------------------------------------------------

    \137\ Proposed Exchange Act Rules 701(a)(2)(i), 701(a)(3)(iii), 
and 701(b).
---------------------------------------------------------------------------

    Proposed Exchange Act Rule 700 also contains a definition of 
``incentive compensation'' and excludes from this definition 
compensation paid by a bank under a bonus or similar plan that meets 
certain criteria. The bonus or similar program must be paid on a 
discretionary basis and based on multiple factors or variables. These 
factors or variables must include significant factors or variables that 
would not be related to securities transactions at the broker or 
dealer. Moreover, a referral made by the employee could not be a factor 
or variable in determining the employee's compensation under the plan 
and the employee's compensation under the plan could not be determined 
by reference to referrals made by any other person.
    We request comments generally on the costs and benefits associated 
with the proposed provisions regarding the networking exception and the 
related exemption. We also invite banks to provide information, 
including data, to assist us in further evaluating the costs and 
benefits associated with the proposed provisions. We invite banks to 
include estimates of their start-up costs for updating their systems, 
and their annual ongoing costs for complying with the proposed changes 
discussed above. We invite commenters to provide us with data to assist 
in further evaluating these proposed rules. For example, we request 
comment on whether the proposed provisions relating to bonus and 
similar plans would be consistent with current compensation and bonus 
arrangements and any costs or burdens that would be incurred to bring 
existing plans into compliance with the provisions. We also request 
comment on any other costs banks would likely need to incur as a result 
of the proposal, and ask that commenters provide us with data to 
support their views.
b. Trust and Fiduciary Activities Exception
    Exchange Act Section 3(a)(4)(B)(ii) permits a bank, under certain 
conditions, to effect transactions in a trustee or fiduciary capacity 
in its trust department or other department that is regularly examined 
by bank examiners for fiduciary principles and standards without 
registering as a broker. To qualify for the trust and fiduciary 
activities exception, Exchange Act Section 3(a)(4)(B)(ii) requires that 
the bank be ``chiefly compensated'' for such transactions on the basis 
of the types of fees specified in the GLBA and comply with certain 
advertising restrictions set forth in the statute.
    The Agencies believe that the proposed rules dealing with the trust 
and fiduciary activities exception should provide a number of benefits 
to banks and their customers without imposing significant costs on 
either group.\138\ The proposed provisions regarding the ``chiefly 
compensated'' condition and related exemptions, while imposing some 
costs related to systems necessary to perform the calculations and 
track compensation, should reduce banks' compliance costs and make the 
trust and fiduciary activities exception more useful. For example, the 
proposed rules would permit a bank to follow an alternate test to the 
account-by-account approach to the ``chiefly compensated'' condition. 
Under this proposed exemption, a bank could calculate the compensation 
it receives from all of its trust and fiduciary accounts on a bank-wide 
basis, subject to certain conditions.\139\ This proposed alternative 
should provide banks with a potentially less costly approach for 
determining compliance with the trust and fiduciary activities 
exception. Similarly, the Agencies' proposal to provide exemptions from 
the ``chiefly compensated'' condition for certain short-term accounts, 
accounts acquired as part of a business combination or asset 
acquisition, accounts transferred to a broker or dealer or other 
unaffiliated entity, and a de minimis number of accounts should also 
reduce banks' compliance costs by facilitating banks' ability to comply 
with the ``chiefly compensated'' condition.\140\ While compliance with 
the conditions in these proposed exemptions would likely result in some 
costs, such as the recordkeeping requirement associated with the de 
minimis exclusion, these costs would likely be more than justified by 
the benefits associated with the exemptions given that banks could 
individually determine whether they wish to utilize the exemptions.
---------------------------------------------------------------------------

    \138\ The trust and fiduciary exception is addressed in proposed 
Exchange Act Rules 721-723.
    \139\ See proposed Exchange Act Rule 722.
    \140\ See proposed Exchange Act Rule 723.
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    As previously noted, banks are likely to incur some costs to comply 
with the GLBA. The proposed rules, however, include a number of 
exemptions which should help to reduce overall costs. As a result, the 
Agencies do not believe that banks would incur significant additional 
costs to comply with the liberalized exemptions proposed in Exchange 
Act Rules 722 through 723 or the definitional guidance proposed in 
Exchange Act Rule 721.
    We solicit comment on the costs and benefits, if any, banks expect 
to incur in complying with the ``chiefly compensated'' condition in the 
statute and the proposed rules. In particular, we would like 
information on the start-up and annual ongoing costs to update systems 
to track compensation under the account-by-account approach and under 
the proposed bank-wide approach. We also solicit comments on the costs 
and burdens associated with the advertising provisions of proposed 
Exchange Act Rule 721(b), which would apply to banks operating under 
both the account-by-account and bank-wide tests.
c. Sweep Accounts and Transactions in Money Market Funds
    Section 3(a)(4)(B)(v) of the Exchange Act provides banks with an 
exception from the definition of ``broker'' to the extent it effects 
transactions as part of a program for the investment or re-investment 
of deposit funds into any no-load, open-end management investment 
company registered under the Investment Company Act that holds itself 
out as a money market fund. The proposed rules provide guidance, 
consistent with NASD rules,\141\ regarding the definition of ``no-
load'' as used in the exception. This guidance should benefit banks by 
clarifying the types of charges that are permissible and by providing 
greater legal certainty.
---------------------------------------------------------------------------

    \141\ See NASD Rule 2830.
---------------------------------------------------------------------------

    The proposed rules also contain an exemption that would permit 
banks to effect transactions on behalf of a customer in securities 
issued by a money market fund, subject to certain conditions.\142\ 
While compliance with the conditions associated with this proposed 
exemption, such as the prospectus delivery requirement in certain 
circumstances, could require banks to incur some costs, these costs are 
likely to be more than justified by the investor protection benefits 
enjoyed by the banks' customers and the enhanced flexibility granted 
banks by the exemption. Furthermore, because banks would be able to 
freely determine whether to incur these costs, the exemption should 
provide a net benefit

[[Page 77540]]

for banks that wish to utilize the exemption. We solicit comment on the 
costs and benefits, if any, banks expect to incur in complying with the 
conditions in this proposed rule.
---------------------------------------------------------------------------

    \142\ See proposed Exchange Act Rule 741.
---------------------------------------------------------------------------

d. Safekeeping and Custody Exception
    Section 3(a)(4)(B)(viii) of the Exchange Act provides banks with an 
exception from the definition of ``broker'' for certain bank custody 
and safekeeping activities. The proposed rules contain an exemption 
that would permit banks, subject to certain conditions, to accept 
orders to effect transactions in securities for accounts for which the 
bank acts as a custodian. Specifically, this proposed custody exemption 
(proposed Exchange Act Rule 760) would allow banks, subject to certain 
conditions, to accept orders for securities transactions from employee 
benefit plan accounts and individual retirement and similar accounts 
for which the bank acts as a custodian. In addition, the exemption 
allows banks, subject to certain conditions, to accept orders for 
securities transactions on an accommodation basis from other types of 
custodial accounts. This proposal would allow banks to accept orders 
from custody accounts while imposing conditions designed to prevent a 
bank from operating a securities broker out of its custody department.
    The exemption should benefit banks by permitting certain order-
taking activities for securities transactions. While banks may incur 
some costs in complying with the conditions contained in the exemption, 
such as developing systems for making determinations regarding 
compliance with advertising and compensation restrictions, the Agencies 
believe the conditions contained in the rules are consistent with the 
practices of banks and any costs would only be imposed on banks that 
choose to utilize the exemption.
    We solicit comment on any costs and benefits banks expect to incur 
in complying with the conditions in the proposed exemption.
e. Other Proposed Changes
    We are proposing certain special purpose exemptions. Specifically, 
we are proposing an exemption that would permit banks to effect 
transactions pursuant to Regulation S with non-U.S. persons.\143\ 
Another proposed exemption also would, under certain conditions, allow 
a bank to effect transactions in investment company securities through 
Fund/SERV or directly with a transfer agent acting for an open-end 
company.\144\ In addition, we are proposing an exemption that would 
permit banks, as an agent, to effect securities lending transactions 
(and engage in related securities lending services) for securities that 
they do not hold in custody with or on behalf of a person the bank 
reasonably believes is a qualified investor (as defined in Section 
3(a)(54)(A) of the Exchange Act) or any employee benefit plan that owns 
and invests on a discretionary basis at least $25 million in 
investments.\145\ Furthermore, we are proposing to extend the exemption 
from rescission liability under Exchange Act Section 29 to contracts 
entered into by banks acting in a broker capacity until a date that 
would be 18 months after the effective date of the final rule.\146\ 
This proposed exemption also would, under certain circumstances, 
provide protections from rescission liability under Exchange Act 
Section 29 resulting solely from a bank's status as a broker, if the 
bank has acted in good faith, adopted reasonable policies and 
procedures, and any violation of broker registration requirements did 
not result in significant harm or financial loss to the person seeking 
to void the contract.\147\ Finally, we are proposing a temporary 
general exemption from the definition of ``broker'' under Section 
3(a)(4) of the Exchange Act until the first day of a bank's first 
fiscal year commencing after June 30, 2008.\148\
---------------------------------------------------------------------------

    \143\ See proposed Exchange Act Rule 771.
    \144\ See proposed Exchange Act Rule 775.
    \145\ See proposed Exchange Act Rule 772.
    \146\ See proposed Exchange Act Rule 780.
    \147\ Id.
    \148\ See proposed Exchange Act Rule 781.
---------------------------------------------------------------------------

    The Agencies believe these proposed changes could offer a number of 
benefits to banks and their customers. In particular, the proposed 
Regulation S exemption could help to ensure that U.S. banks that effect 
transactions in Regulation S securities with non-U.S. customers would 
be more competitive with foreign banks or other entities that offer 
those services. The proposed exemption from rescission liability under 
Exchange Act Section 29 should also provide banks some legal certainty, 
both temporarily and on a permanent basis, as they conduct their 
securities activities. The proposed exemption related to securities 
lending services should enable banks to engage in the types of services 
which they currently engage thereby minimizing compliance costs, while 
providing the banks' customers with continuity of service. The 
temporary general exemption from the definition of ``broker'' should 
also be of benefit to banks by providing them with an adequate period 
of time to transition to the requirements under the proposed rules.
    We estimate that the costs of these proposed exemptions would be 
minimal and would be justified by the benefits the proposed exemptions 
would offer. For example, the Regulation S exemption could impose 
certain costs on banks that are designed to ensure that they remain in 
compliance with the conditions under the exemption. In particular, the 
proposed exemption would require banks to incur certain administrative 
costs so that the proposed exemption is used only for ``eligible 
securities'' and for a purchaser who is outside of the United States 
within the meaning of Section 903 of Regulation S. Nevertheless, the 
proposed exemption is an accommodation to banks that wish to effect 
transactions in Regulation S securities and, as a result, the 
compliance costs would only be imposed on those banks that believe that 
it is in their best business interests to take advantage of the 
proposed exemption. We request comment on whether banks would incur any 
costs related to this proposed exemption.
    Given that Exchange Act Section 29 is rarely used as a remedy, we 
do not anticipate that this proposed exemption would impose significant 
costs on the industry or on investors. We request comment on whether 
any bank would incur any costs or would benefit as a result of this 
proposed exemption. We also request comment on whether banks would 
incur any costs or benefits in association with the proposed exemptions 
concerning securities lending services and effecting transactions in 
investment company securities. Please provide any supporting data with 
respect to any costs or benefits. We would also welcome comments on the 
usefulness of the temporary general exemption from the definition of 
``broker'' under Section 3(a)(4) of the Exchange Act.

C. Consideration of Burden on Competition, and on Promotion of 
Efficiency, Competition, and Capital Formation

    Exchange Act Section 3(f) requires the Commission, whenever it 
engages in rulemaking and is required to consider or determine if an 
action is necessary or appropriate in the public interest, to consider 
whether the action will promote efficiency, competition, and capital 
formation.\149\ Exchange Act Section 23(a)(2) requires the Commission, 
in adopting rules under that Act, to consider the impact that any

[[Page 77541]]

such rule would have on competition. This Section also prohibits the 
Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.\150\
---------------------------------------------------------------------------

    \149\ 15 U.S.C. 78c(f).
    \150\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Agencies have designed the proposed interpretations, 
definitions, and exemptions to minimize any burden on competition. 
Indeed, the Agencies believe that by providing legal certainty to banks 
that conduct securities activities, by clarifying the GLBA 
requirements, and by exempting a number of activities from those 
requirements, the proposed rules should allow banks to continue to 
conduct securities activities they already conduct consistent with the 
GLBA. As a result, the Agencies believe that the proposed rules would 
permit banks to continue to compete with broker-dealers in providing a 
wide range of financial services, which should preserve competition and 
help to keep transaction costs low for investors and for companies.
    The proposed rules define terms in the statutory exceptions to the 
definition of broker added to the Exchange Act by Congress in the GLBA, 
and provide guidance to banks as to the appropriate scope of those 
exceptions. In addition, the proposed rules contain a number of 
exemptions that should provide banks flexibility in conducting their 
securities activities, which should further promote competition and 
reduce costs.
    The Commission is, however, interested in receiving comments 
regarding the effect of the proposed rules on efficiency, competition, 
and capital formation.
1. General Costs
    Based on the burden hours discussed in the Paperwork Reduction Act 
Analysis Section the Agencies expect the ongoing requirements of the 
proposed rules to result in a total of 58,709 annual burden hours for 
banks and 500 annual burden hours for broker-dealers, for a grand total 
of 59,209 annual burden hours.\151\ The Agencies estimate that the 
hourly costs for these burden hours will be approximately $68 per 
hour.\152\ Therefore, the annual total costs would be approximately 
$4,026,212.
---------------------------------------------------------------------------

    \151\ See infra at VIII.A.1.d., VIII.A.2.d., and VIII.A.3.d.
    \152\ $68/hour figure for a clerk (e.g. compliance clerk) is 
from the SIA Report on Office Salaries in the Securities Industry 
2005, modified to account for an 1800-hour work-year and multiplied 
by 2.93 to account for bonuses, firm size, employee benefits and 
overhead.
---------------------------------------------------------------------------

    In addition to the costs associated with burden hours discussed in 
the Paperwork Reduction Act Analysis Section, the Agencies expect that 
many banks also could incur start-up costs for legal and other 
professional services.\153\ Many banks would utilize their in-house 
counsel, accountants, compliance officers, and programmers in an effort 
to achieve compliance with the proposed rules. Industry sources 
indicate the following hourly labor costs: Attorneys--$324 per hour, 
intermediate accountants--$162 per hour, compliance manager--$205 per 
hour, and senior programmer--$268.\154\ Taking an average of these 
professional costs, the Agencies estimate a general hourly in-house 
labor cost of $240 per hour for professional services.
---------------------------------------------------------------------------

    \153\ For example, banks may incur start-up costs in the process 
of reviewing or developing their networking arrangements in line 
with the requirements of the proposed rules. See infra at 
VIII.B.2.a. In addition, there would likely be costs for developing 
systems for making determinations regarding compliance with 
advertising and compensation restrictions pursuant to the proposed 
rules regarding safekeeping and custody. See infra at VIII.B.2.d.
    \154\ The hourly figures for an attorney, intermediate account, 
and compliance manager is from the SIA Report on Management & 
Professional Earnings in the Securities Industry 2005, modified to 
account for an 1800-hour work-year and multiplied by 5.35 to account 
for bonuses, firm size, employee benefits and overhead.
---------------------------------------------------------------------------

    Based on our expectation that most start-up costs would involve 
bringing systems into compliance and that many banks would be able to 
do so either using existing systems or by slightly modifying existing 
systems, the Agencies estimate that the proposed rules would require 
banks to utilize an average of 30 hours of professional services. The 
Agencies expect that most banks affected by the proposed rules would 
either use in-house counsel or employees resulting in an average total 
cost of $7,200 per affected bank.\155\ The Agencies estimate that the 
proposed rules would apply to approximately 9,475 banks and 
approximately 25 percent of these banks would incur more than a de 
minimis cost. Using these values, the Agencies estimate total start-up 
costs of $17,055,000 (9,475 x .25 x $7,200). As previously discussed 
the Agencies have sought to minimize these costs to the extent possible 
consistent with the language and purposes of the GLBA.
---------------------------------------------------------------------------

    \155\ Some banks may choose to utilize outside counsel, either 
exclusively or as a supplement to in-house resources. The Agencies 
estimate these costs as being similar to the in-house costs 
(Industry sources indicate the following hourly costs for hiring 
external workers: Attorneys--$400, accountant--$250, auditor--$250, 
and programmer--$160.).
---------------------------------------------------------------------------

    Based on these estimates, the total costs for the first year would 
be approximately $21,081,212 ($17,055,000 + $4,026,212). The Agencies 
request comment on these cost estimates or any other applicable costs.
2. General Benefits
    The Agencies believe that the proposed rules would provide greater 
legal certainty for banks in connection with their determination of 
whether they meet the terms and conditions for an exception to the 
definition of broker under the Exchange Act as well as provide 
additional relief through the proposed exemptions. Without the proposed 
rules, banks could have difficulty planning their businesses and 
determining whether their operations are in compliance with the GLBA. 
This, in turn, could hamper their business. The Agencies anticipate 
these benefits would prove to be useful to banks and provide saving in 
legal fees. Specifically, difficulties in interpreting the GBLA, absent 
any regulatory guidance, could result in the need for greater input 
from outside counsel. Based on the number of interactive issues raised 
by the GBLA, the Agencies estimate that absent any regulatory guidance, 
banks on average would use the services of outside counsel for 
approximately 25 more hours for the initial year and 5 more hours per 
year thereafter, than with the existence of the proposed rules. 
Industry sources indicate that the hourly costs for hiring outside 
counsel is approximately $400 per hour. The proposed rules would 
therefore result in an average total cost savings of approximately 
$10,000 per affected bank per year during the initial year and $2,000 
per affected bank per year thereafter. The Agencies estimate that the 
proposed rules would apply to approximately 9,475 banks and 
approximately 25 percent of these banks would enjoy more than a de 
minimis cost savings benefit. Using these values, the Agencies estimate 
a total cost savings of $23,687,500 (9,475 x .25 x $10,000) for the 
initial year and $4,737,500 (9,475 x 0.25 x $2,000) per year 
thereafter. The Agencies request comment on these benefits or any other 
applicable benefit.
3. Request for Comments
    The Agencies request comment on the costs and benefits of the 
proposed rules, and ask commenters to provide supporting empirical data 
for any positions advanced. Commenters should address in particular 
whether any of the new rules would generate the

[[Page 77542]]

anticipated benefits or impose any costs on investors, banks, customers 
of banks, registered broker-dealers or other market participants. As 
always, commenters are specifically invited to share quantifiable costs 
and benefits.

D. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \156\ the Agencies must advise the Office 
of Management and Budget as to whether the proposed rules constitute a 
``major'' rule. Under SBREFA, a rule is considered ``major'' where, if 
adopted, it results or is likely to result in:
---------------------------------------------------------------------------

    \156\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified 
in various Sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 
601).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     A significant adverse effect on competition, investment, 
or innovation.
    If a rule is ``major,'' its effectiveness will generally be delayed 
for 60 days pending Congressional review. The Agencies do not believe 
that the proposed rules, in their current form, would constitute a 
major rule. We request comment on the potential impact of the proposed 
rules on the economy on an annual basis. Commenters are requested to 
provide empirical data and other factual support for their views to the 
extent possible.

E. Initial Regulatory Flexibility Analysis

    The Agencies have prepared an Initial Regulatory Flexibility 
Analysis (``IRFA''), in accordance with the provisions of the 
Regulatory Flexibility Act (``RFA''),\157\ regarding the proposed 
rules.
---------------------------------------------------------------------------

    \157\ 5 U.S.C. 603.
---------------------------------------------------------------------------

1. Reasons for the Proposed Action
    Section 201 of the GLBA amended the definition of ``broker'' in 
Section 3(a)(4) of the Exchange Act to replace a blanket exemption from 
that term for ``banks,'' as defined in Section 3(a)(6) of the Exchange 
Act. Congress replaced this blanket exemption with eleven specific 
exceptions for securities activities conducted by banks.\158\ On 
October 13, 2006, President Bush signed into law the Regulatory Relief 
Act.\159\ Section 101 of that Act, among other things, requires the 
Agencies jointly to issue a single set of proposed rules implementing 
the bank broker exceptions in Section 3(a)(4) of the Exchange Act 
within 180 days of the date of enactment of the Regulatory Relief 
Act.\160\ These rules are being proposed by the Agencies to fulfill 
this requirement. The proposed rules are designed generally to provide 
guidance on GLBA exceptions from the definition of broker in Exchange 
Act Section 3(a)(4) and to provide conditional exemptions from the 
broker definition consistent with the purposes of the Exchange Act and 
the GLBA.
---------------------------------------------------------------------------

    \158\ 15 U.S.C. 78c(a)(4).
    \159\ Pub. L. 109-351, 120 Stat. 1966 (2006).
    \160\ See Exchange Act Section 3(a)(4)(F), as added by Section 
101 of the Regulatory Relief Act. The Regulatory Relief Act also 
requires that the Board and SEC consult with, and seek the 
concurrence of, the OCC, FDIC and OTS prior to jointly adopting 
final rules. As noted above, the Board and the SEC also have 
consulted extensively with the OCC, FDIC and OTS in developing these 
joint proposed rules.
---------------------------------------------------------------------------

2. Objectives
    The proposed rules would provide guidance to the industry with 
respect to the GLBA requirements. The proposal also provides certain 
conditional exemptions from the broker definition to allow banks to 
perform certain securities activities. The Supplementary Information 
Section above contains more detailed information on the objectives of 
the proposed rules.
3. Legal Basis
    Pursuant to Section 101 of the Regulatory Relief Act, the Agencies 
are issuing the proposed rules for comment. In addition, pursuant to 
the Exchange Act and, particularly, the Sections 3(b), 15, 23(a), and 
36 thereof, the Commission is issuing the proposed rules for 
comment.\161\
---------------------------------------------------------------------------

    \161\ 15 U.S.C. 78c(b), 78o, 78w(a), and 78mm.
---------------------------------------------------------------------------

4. Small Entities Subject to the Rule
    The proposed rule would apply to ``banks,'' which is defined in 
Section 3(a)(6) of the Exchange Act to include banking institutions 
organized in the United States, including members of the Federal 
Reserve System, Federal savings associations, as defined in Section 
2(5) of the Home Owners' Loan Act, and other commercial banks, savings 
associations, and nondepository trust companies that are organized 
under the laws of a state or the United States and subject to 
supervision and examination by state or federal authorities having 
supervision over banks and savings associations.\162\ Congress did not 
exempt small entity banks from the application of the GLBA. Moreover, 
because the proposed rules are intended to provide guidance to and 
exemptions for all banks that are subject to the GBLA, the Agencies 
determined that it would not be appropriate or necessary to exempt 
small entity banks from the operation of the proposed rules Therefore, 
the proposed rules generally apply to all banks, including banks that 
would be considered small entities (i.e., banks with total assets of 
$165 million or less) for purposes of the RFA.\163\
---------------------------------------------------------------------------

    \162\ See 15 U.S.C. 78c(a)(6); Pub. L. 109-351, 120 Stat. 1966 
(2006).
    \163\ Small Business Administration regulations define ``small 
entities'' to include banks and savings associations with total 
assets of $165 million or less. 13 CFR 121.201.
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    The Agencies estimate that the proposed rules would apply to 
approximately 9,475 banks, approximately 5,816 of which could be 
considered small banks with assets of $165 million or less. We do not 
anticipate any significant costs to small entity banks as a result of 
the proposed rules.
5. Reporting, Recordkeeping and Other Compliance Requirements
    The proposed rules would not impose any significant reporting, 
recordkeeping, or other compliance requirements on banks that are small 
entities.\164\
---------------------------------------------------------------------------

    \164\ The Agencies' estimates related to recordkeeping and 
disclosure are detailed in the ``Paperwork Reduction Act Analysis'' 
Section of this Release.
---------------------------------------------------------------------------

    Nevertheless, the Agencies request comment on the costs of 
compliance with any recordkeeping, reporting, or other requirements 
under the proposed rules. The Agencies also request comment on any 
anticipated ongoing costs associated with complying with the proposed 
rules.\165\ Commenters should provide detailed estimates of these 
costs.
---------------------------------------------------------------------------

    \165\ The Agencies' estimates of the costs and benefits of the 
proposed rule amendments are detailed in the ``Consideration of 
Costs and Benefits'' Section of this release.
---------------------------------------------------------------------------

6. Duplicative, Overlapping, or Conflicting Federal Rules
    The Agencies believe that there are no rules that duplicate, 
overlap, or conflict with the proposed rules.
7. Significant Alternatives
    Pursuant to Section 3(a) of the RFA,\166\ the Agencies must 
consider the following types of alternatives (1) the establishment of 
differing compliance or reporting requirements or timetables that take 
into account the resources available to small entities; (2) the 
clarification, consolidation, or simplification of compliance and 
reporting requirements under the proposed rule for small entities; (3) 
the use of performance rather than design standards; and (4) an 
exemption from

[[Page 77543]]

coverage of the proposed rules, or any part thereof, for small 
entities.
---------------------------------------------------------------------------

    \166\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    As discussed above, the GLBA does not exempt small entity banks 
from the Exchange Act broker registration requirements and because the 
proposed rules are intended to provide guidance to, and exemptions for, 
all banks that are subject to the GLBA, the Agencies determined that it 
would not be appropriate or necessary to exempt small entity banks from 
the operation of the proposed rules. Moreover, providing one or more 
special exemptions for small banks could place broker-dealers, 
including small broker-dealers, or larger banks at a competitive 
disadvantage versus small banks.
    The proposed rules are intended to clarify and simplify compliance 
with the GLBA by providing guidance with respect to exceptions and by 
providing additional exemptions. As such, the proposed rules should 
facilitate compliance by banks of all sizes, including small entity 
banks.
    The Agencies do not believe that it is necessary to consider 
whether small entity banks should be permitted to use performance 
rather than design standards to comply with the proposed rules because 
the proposed rules already use performance standards. Moreover, the 
proposed rules do not dictate for entities of any size any particular 
design standards (e.g., technology) that must be employed to achieve 
the objectives of the proposed rules.
8. Request for Comments
    The Agencies encourage written comments on matters discussed in the 
IRFA. In particular, the Agencies request comments on (1) the number of 
small entities that would be affected by the proposed rules; (2) the 
nature of any impact the proposed rules would have on small entities 
and empirical data supporting the extent of the impact; and (3) how to 
quantify the number of small entities that would be affected by and/or 
how to quantify the impact of the proposed rules. Such comments will be 
considered in the preparation of the Final Regulatory Flexibility 
Analysis, if the proposed rules are adopted, and will be placed in the 
same public file as comments on the proposal itself. Persons wishing to 
submit written comments should refer to the instructions for submitting 
comments in the front of this release.

F. Plain Language

    Section 722 of the GLBA (12 U.S.C. 4809) requires the Board to use 
plain language in all proposed and final rules published by the Board 
after January 1, 2000. The Board has sought to present the proposed 
rules, to the maximum extent possible, in a simple and straightforward 
manner. The Board invites comments on whether there are additional 
steps that could be taken to make the proposed rules easier to 
understand.

IX. Statutory Authority

    Pursuant to authority set forth in the Exchange Act and 
particularly Sections 3(a)(4), 3(b), 15, 17, 23(a), and 36 thereof (15 
U.S.C. 78c(a)(4), 78c(b), 78o, 78q, 78w(a), and 78mm, respectively) the 
Commission proposes to repeal by operation of statute current Rules 
3a4-2, 3a4-3, 3a4-4, 3a4-5, 3a4-6, and 3b-17 (Sec. Sec.  240.3a4-2, 
240.3a4-3, 240.3a4-4, 240.3a4-5, 240.3a4-6, and 240.3b-17, 
respectively). The Commission is proposing to repeal Exchange Act Rules 
15a-7 and 15a-8 (Sec.  240.15a-7 and Sec.  240.15a-8, respectively). 
The Commission, jointly with the Board of Governors of the Federal 
Reserve System, is also proposing new Rules 700, 701, 721, 722, 723, 
740, 741, 760, 771, 772, 775, 780, and 781 under the Exchange Act 
(Sec. Sec.  247.700, 247.701, 247.721, 247.722, 247.723, 247.740, 
247.741, 247.760, 247.771, 247.772, 247.775, 247.780, and 247.881, 
respectively).

X. Text of Proposed Rules and Rule Amendments

List of Subjects

12 CFR Part 218

    Banks, Brokers, Securities.

17 CFR Part 240

    Broker-dealers, Reporting and recordkeeping requirements, 
Securities.

17 CFR Part 247

    Banks, Brokers, Securities.

Federal Reserve System

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend Title 12, Chapter II of the Code of Federal Regulations by adding 
a new Part 218 as set forth under Common Rules at the end of this 
document:

PART 218--EXCEPTIONS FOR BANKS FROM THE DEFINITION OF BROKER IN THE 
SECURITIES EXCHANGE ACT OF 1934 (REGULATION R)

Sec.
218.100 Definition.
218.700 Defined terms relating to the networking exception from the 
definition of ``broker.''
218.701 Exemption from the definition of ``broker'' for certain 
institutional referrals.
218.721 Defined terms relating to the trust and fiduciary activities 
exception from the definition of ``broker.''
218.722 Exemption allowing banks to calculate trust and fiduciary 
compensation on a bank-wide basis.
218.723 Exemptions for special accounts, transferred accounts, and a 
de minimis number of accounts.
218.740 Defined terms relating to the sweep accounts exception from 
the definition of ``broker.''
218.741 Exemption for banks effecting transactions in money market 
funds.
218.760 Exemption from definition of ``broker'' for banks accepting 
orders to effect transactions in securities from or on behalf of 
custody accounts.
218.771 Exemption from the definition of ``broker'' for banks 
effecting transactions in securities issued pursuant to Regulation 
S.
218.772 Exemption from the definition of ``broker'' for banks 
engaging in securities lending transactions.
218.775 Exemption from the definition of ``broker'' for the way 
banks effect excepted or exempted transactions in investment company 
securities.
218.780 Exemption for banks from liability under section 29 of the 
Securities Exchange Act of 1934.
218.781 Exemption from the definition of ``broker'' for banks for a 
limited period of time.

    Authority: 15 U.S.C. 78c(a)(4)(F).

Securities and Exchange Commission

Authority and Issuance

    For the reasons set forth in the preamble, the Commission proposes 
to amend title 17, chapter II of the Code of Federal Regulations as 
follows:

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

    1. The authority citation for part 240 continues to read, in part, 
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, 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.


Sec. Sec.  240.3a4-2 through 240.3a4-6, 240.3b-17, 240.15a-7, and 
240.15a-8  [Removed and Reserved]

    2. Sections 240.3a4-2 through 240.3a4-6, 240.3b-17, 240.15a-7, and 
240.15a-8 are removed and reserved.
    3. Part 247 is added as set forth under Common Rules at the end of 
this document:

[[Page 77544]]

PART 247--REGULATION R--EXEMPTIONS AND DEFINITIONS RELATED TO THE 
EXCEPTIONS FOR BANKS FROM THE DEFINITION OF BROKER

Sec.
247.100 Definition.
247.700 Defined terms relating to the networking exception from the 
definition of ``broker.''
247.701 Exemption from the definition of ``broker'' for certain 
institutional referrals.
247.721 Defined terms relating to the trust and fiduciary activities 
exception from the definition of ``broker.''
247.722 Exemption allowing banks to calculate trust and fiduciary 
compensation on a bank-wide basis.
247.723 Exemptions for special accounts, transferred accounts, and a 
de minimis number of accounts.
247.740 Defined terms relating to the sweep accounts exception from 
the definition of ``broker.''
247.741 Exemption for banks effecting transactions in money market 
funds.
247.760 Exemption from definition of ``broker'' for banks accepting 
orders to effect transactions in securities from or on behalf of 
custody accounts.
247.771 Exemption from the definition of ``broker'' for banks 
effecting transactions in securities issued pursuant to Regulation 
S.
247.772 Exemption from the definition of ``broker'' for banks 
engaging in securities lending transactions.
247.775 Exemption from the definition of ``broker'' for the way 
banks effect excepted or exempted transactions in investment company 
securities.
247.780 Exemption for banks from liability under section 29 of the 
Securities Exchange Act of 1934.
247.781 Exemption from the definition of ``broker'' for banks for a 
limited period of time.

    Authority: 15 U.S.C. 78c, 78o, 78q, 78w, and 78mm.

Common Rules

    The common rules that are proposed to be adopted by the Board as 
part 218 of title 12, chapter II of the Code of Federal Regulations and 
by the Commission as part 247 of title 17, chapter II of the Code of 
Federal Regulations follow:


Sec.  ----.100  Definition.

    For purposes of this part the following definition shall apply: Act 
means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).


Sec.  ----.700  Defined terms relating to the networking exception from 
the definition of ``broker.''

    When used with respect to the Third Party Brokerage Arrangements 
(``Networking'') Exception from the definition of the term ``broker'' 
in section 3(a)(4)(B)(i) of the Act (15 U.S.C. 78c(a)(4)(B)(i)) in the 
context of transactions with a customer, the following terms shall have 
the meaning provided:
    (a) Contingent on whether the referral results in a transaction 
means dependent on whether the referral results in a purchase or sale 
of a security; whether an account is opened with a broker or dealer; 
whether the referral results in a transaction involving a particular 
type of security; or whether it results in multiple securities 
transactions; provided, however, that a referral fee may be contingent 
on whether a customer:
    (1) Contacts or keeps an appointment with a broker or dealer as a 
result of the referral; or
    (2) Meets any objective, base-line qualification criteria 
established by the bank or broker or dealer for customer referrals, 
including such criteria as minimum assets, net worth, income, or 
marginal federal or state income tax rate, or any requirement for 
citizenship or residency that the broker or dealer, or the bank, may 
have established generally for referrals for securities brokerage 
accounts.
    (b)(1) Incentive compensation means compensation that is intended 
to encourage a bank employee to refer potential customers to a broker 
or dealer or give a bank employee an interest in the success of a 
securities transaction at a broker or dealer. The term does not include 
compensation paid by a bank under a bonus or similar plan that is:
    (i) Paid on a discretionary basis; and
    (ii) Based on multiple factors or variables and:
    (A) Those factors or variables include significant factors or 
variables that are not related to securities transactions at the broker 
or dealer;
    (B) A referral made by the employee is not a factor or variable in 
determining the employee's compensation under the plan; and
    (C) The employee's compensation under the plan is not determined by 
reference to referrals made by any other person.
    (2) Nothing in this paragraph (b) shall be construed to prevent a 
bank from compensating an officer, director or employee on the basis of 
any measure of the overall profitability of:
    (i) The bank, either on a stand-alone or consolidated basis;
    (ii) Any of the bank's affiliates (other than a broker or dealer) 
or operating units; or
    (iii) A broker or dealer if:
    (A) Such profitability is only one of multiple factors or variables 
used to determine the compensation of the officer, director or 
employee; and
    (B) The factors or variables used to determine the compensation of 
the officer, director or employee include significant factors or 
variables that are not related to the profitability of the broker or 
dealer.
    (c) Nominal one-time cash fee of a fixed dollar amount means a cash 
payment for a referral in an amount that meets any of the following 
standards:
    (1) The payment does not exceed:
    (i) Twice the average of the minimum and maximum hourly wage 
established by the bank for the current or prior year for the job 
family that includes the employee; or
    (ii) 1/1000th of the average of the minimum and maximum annual base 
salary established by the bank for the current or prior year for the 
job family that includes the employee; or
    (2) The payment does not exceed twice the employee's actual base 
hourly wage; or
    (3) The payment does not exceed twenty-five dollars ($25), as 
adjusted in accordance with paragraph (f) of this section.
    (d) Job family means a group of jobs or positions involving similar 
responsibilities, or requiring similar skills, education or training, 
that a bank, or a separate unit, branch or department of a bank, has 
established and uses in the ordinary course of its business to 
distinguish among its employees for purposes of hiring, promotion, and 
compensation.
    (e) Referral means the action taken by a bank employee to direct a 
customer of the bank to a broker or dealer for the purchase or sale of 
securities for the customer's account.
    (f) Inflation adjustment--(1) In general. On April 1, 2012, and on 
the 1st day of each subsequent 5-year period, the dollar amount 
referred to in paragraph (c)(3) of this section shall be adjusted by:
    (i) Dividing the annual value of the Employment Cost Index For 
Wages and Salaries, Private Industry Workers (or any successor index 
thereto), as published by the Bureau of Labor Statistics, for the 
calendar year preceding the calendar year in which the adjustment is 
being made by the annual value of such index (or successor) for the 
calendar year ending December 31, 2006; and
    (ii) Multiplying the dollar amount by the quotient obtained in 
paragraph (f)(1)(i) of this section.
    (2) Rounding. If the adjusted dollar amount determined under 
paragraph (f)(1) of this section for any period is not a multiple of 
$1, the amount so

[[Page 77545]]

determined shall be rounded to the nearest multiple of $1.


Sec.  ----.701  Exemption from the definition of ``broker'' for certain 
institutional referrals.

    (a) General. A bank that meets the requirements for the exception 
from the definition of ``broker'' under section 3(a)(4)(B)(i) of the 
Act (15 U.S.C. 78c(a)(4)(B)(i)), other than section 3(a)(4)(B)(i)(VI) 
of the Act (15 U.S.C. 78c(a)(4)(B)(i)(VI)), is exempt from the 
conditions of section 3(a)(4)(B)(i)(VI) of the Act solely to the extent 
that a bank employee receives a referral fee for referring a high net 
worth customer or institutional customer to a broker or dealer with 
which the bank has a contractual or other written arrangement of the 
type specified in section 3(a)(4)(B)(i) of the Act, if:
    (1) Bank employee. (i) The bank employee is:
    (A) Not qualified or otherwise required to be qualified pursuant to 
the rules of a self-regulatory organization;
    (B) Predominantly engaged in banking activities, other than making 
referrals to a broker or dealer; and
    (C) Not subject to statutory disqualification, as that term is 
defined in section 3(a)(39) of the Act (15 U.S.C. 78c(a)(39)), except 
subparagraph (E) of that section; and
    (ii) The high net worth customer or institutional customer is 
encountered by the bank employee in the ordinary course of the 
employee's assigned duties for the bank.
    (2) Bank determinations and obligations. (i) Disclosures. Prior to 
or at the time of the referral, the bank provides the customer with the 
information set forth in paragraph (b) of this section.
    (ii) Customer qualification. (A) In the case of a customer that is 
a not a natural person, the bank determines, before the referral fee is 
paid to the bank employee, that the customer is an institutional 
customer.
    (B) In the case of a customer that is a natural person, the bank, 
prior to or at the time of the referral, either:
    (1) Determines that the customer is a high net worth customer; or
    (2) Obtains a signed acknowledgment from the customer that the 
customer meets the standards to be considered a high net worth 
customer.
    (iii) Employee qualification information. Before the referral fee 
is paid to the bank employee, the bank provides the broker or dealer 
the name of the employee and such other identifying information that 
may be necessary for the broker or dealer to determine whether the bank 
employee is associated with a broker or dealer or is subject to 
statutory disqualification, as that term is defined in section 3(a)(39) 
of the Act (15 U.S.C. 78c(a)(39)), except subparagraph (E) of that 
section.
    (iv) Good faith compliance and corrections. A bank that acts in 
good faith and that has reasonable policies and procedures in place to 
comply with the requirements of this section shall not be considered a 
``broker'' under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) 
solely because the bank fails to comply with the provisions of this 
paragraph (a)(2) with respect to a particular customer if the bank:
    (A) Takes reasonable and prompt steps to remedy the error (such as, 
for example, by promptly making the required determination or promptly 
providing the broker or dealer the required information); and
    (B) Makes reasonable efforts to reclaim the portion of the referral 
fee paid to the bank employee for the referral that does not, following 
any required remedial action, meet the requirements of this section and 
that exceeds the amount otherwise permitted under section 
3(a)(4)(B)(i)(VI) of the Act (15 U.S.C. 78c(a)(4)(B)(i)(VI)) and Sec.  
----.700.
    (3) Provisions of written agreement. The written agreement between 
the bank and the broker or dealer provides for the following:
    (i) Customer and employee qualifications. Before the referral fee 
is paid to the bank employee:
    (A) The bank and broker or dealer must determine that the bank 
employee is not subject to statutory disqualification, as that term is 
defined in section 3(a)(39) of the Act (15 U.S.C. 78c(a)(39)), except 
subparagraph (E) of that section; and
    (B) The broker or dealer must determine that the customer is a high 
net worth customer or an institutional customer.
    (ii) Suitability or sophistication determination by broker or 
dealer--(A) Contingent referral fees. In any case in which payment of 
the referral fee is contingent on completion of a securities 
transaction at the broker or dealer, the broker or dealer must, before 
such securities transaction is conducted, perform a suitability 
analysis of the securities transaction in accordance with the rules of 
the broker or dealer's applicable self-regulatory organization as if 
the broker or dealer had recommended the securities transaction.
    (B) Non-contingent referral fees. In any case in which payment of 
the referral fee is not contingent on the completion of a securities 
transaction at the broker or dealer, the broker or dealer must, before 
the referral fee is paid, either:
    (1) Determine that the customer:
    (i) Has the capability to evaluate investment risk and make 
independent decisions; and
    (ii) Is exercising independent judgment based on the customer's own 
independent assessment of the opportunities and risks presented by a 
potential investment, market factors and other investment 
considerations; or
    (2) Perform a suitability analysis of all securities transactions 
requested by the customer contemporaneously with the referral in 
accordance with the rules of the broker or dealer's applicable self-
regulatory organization as if the broker or dealer had recommended the 
securities transaction.
    (iii) Notice. The broker or dealer must promptly inform the bank if 
the broker or dealer determines that:
    (A) The customer is not a high net worth customer or institutional 
customer, as applicable;
    (B) The bank employee is subject to statutory disqualification, as 
that term is defined in section 3(a)(39) of the Act (15 U.S.C. 
78c(a)(39)), except subparagraph (E) of that section; or
    (C) The customer or the securities transaction(s) to be conducted 
by the customer do not meet the applicable standard set forth in 
paragraph (a)(3)(ii) of this section.
    (b) Required disclosures. The information provided to the high net 
worth customer or institutional customer pursuant to paragraph 
(a)(2)(i) of this section shall clearly and conspicuously disclose:
    (1) The name of the broker or dealer; and
    (2) That the bank employee participates in an incentive 
compensation program under which the bank employee may receive a fee of 
more than a nominal amount for referring the customer to the broker or 
dealer and payment of this fee may be contingent on whether the 
referral results in a transaction with the broker or dealer.
    (c) Receipt of other compensation. Nothing in this section prevents 
or prohibits a bank from paying or a bank employee from receiving any 
type of compensation that would not be considered incentive 
compensation under Sec.  ----.700(b)(1) or that is described in Sec.  
----.700(b)(2).
    (d) Definitions. When used in this section:
    (1) High net worth customer means any natural person who, either 
individually or jointly with his or her spouse, has at least $5 million 
in net worth excluding the primary residence

[[Page 77546]]

and associated liabilities of the person and, if applicable, his or her 
spouse. In determining whether any person is a high net worth customer, 
there may be included in the assets of such person assets held 
individually and fifty percent of any assets held jointly with such 
person's spouse and any assets in which such person shares with such 
person's spouse a community property or similar shared ownership 
interest. In determining whether spouses acting jointly are high net 
worth customers, there may be included in the amount of each spouse's 
assets any assets of the other spouse (whether or not such assets are 
held jointly).
    (2) Institutional customer means any corporation, partnership, 
limited liability company, trust or other non-natural person that has 
at least:
    (i) $10 million in investments; or
    (ii) $40 million in assets; or
    (iii) $25 million in assets if the bank employee refers the 
customer to the broker or dealer for investment banking services.
    (3) Investment banking services includes, without limitation, 
acting as an underwriter in an offering for an issuer; acting as a 
financial adviser in a merger, acquisition, tender-offer or similar 
transaction; providing venture capital, equity lines of credit, private 
investment-private equity transactions or similar investments; serving 
as placement agent for an issuer; and engaging in similar activities.
    (4) Referral fee means a fee (paid in one or more installments) for 
the referral of a customer to a broker or dealer that is:
    (i) A predetermined dollar amount, or a dollar amount determined in 
accordance with a predetermined formula (such as a fixed percentage of 
the dollar amount of total assets placed in an account with the broker 
or dealer), that does not vary based on:
    (A) The revenue generated by or the profitability of securities 
transactions conducted by the customer with the broker or dealer; or
    (B) The quantity, price, or identity of securities transactions 
conducted over time by the customer with the broker or dealer; or
    (C) The number of customer referrals made; or
    (ii) A dollar amount based on a fixed percentage of the revenues 
received by the broker or dealer for investment banking services 
provided to the customer.
    (e) Inflation adjustments--(1) In general. On April 1, 2012, and on 
the 1st day of each subsequent 5-year period, each dollar amount in 
paragraphs (d)(1) and (d)(2) of this section shall be adjusted by:
    (i) Dividing the annual value of the Personal Consumption 
Expenditures Chain-Type Price Index (or any successor index thereto), 
as published by the Department of Commerce, for the calendar year 
preceding the calendar year in which the adjustment is being made by 
the annual value of such index (or successor) for the calendar year 
ending December 31, 2006; and
    (ii) Multiplying the dollar amount by the quotient obtained in 
paragraph (e)(1)(i) of this section.
    (2) Rounding. If the adjusted dollar amount determined under 
paragraph (e)(1) of this section for any period is not a multiple of 
$100,000, the amount so determined shall be rounded to the nearest 
multiple of $100,000.


Sec.  ----.721  Defined terms relating to the trust and fiduciary 
activities exception from the definition of ``broker.''

    (a) Defined terms for chiefly compensated test. For purposes of 
this part and section 3(a)(4)(B)(ii) of the Act (15 U.S.C. 
78c(a)(4)(B)(ii)), the following terms shall have the meaning provided:
    (1) Chiefly compensated--account-by-account test. Chiefly 
compensated shall mean the relationship-total compensation percentage 
for each trust or fiduciary account of the bank is greater than 50 
percent.
    (2) The relationship-total compensation percentage for a trust or 
fiduciary account shall be the mean of the yearly compensation 
percentage for the account for the immediately preceding year and the 
yearly compensation percentage for the account for the year immediately 
preceding that year.
    (3) The yearly compensation percentage for a trust or fiduciary 
account shall be equal to the relationship compensation attributable to 
the trust or fiduciary account during the year divided by the total 
compensation attributable to the trust or fiduciary account during that 
year, with the quotient expressed as a percentage.
    (4) Relationship compensation means any compensation a bank 
receives that consists of:
    (i) An administration fee, including, without limitation, a fee 
paid for personal services, tax preparation, or real estate settlement 
services, or a fee paid by an investment company for personal service, 
the maintenance of shareholder accounts or any service described in 
paragraph (a)(4)(iii)(C) of this section;
    (ii) An annual fee (payable on a monthly, quarterly or other 
basis);
    (iii) A fee based on a percentage of assets under management, 
including, without limitation:
    (A) A fee paid by an investment company pursuant to a plan under 17 
CFR 270.12b-1;
    (B) A fee paid by an investment company for personal service or the 
maintenance of shareholder accounts; or
    (C) A fee paid by an investment company based on a percentage of 
assets under management for any of the following services:
    (1) Providing transfer agent or sub-transfer agent services for 
beneficial owners of investment company shares;
    (2) Aggregating and processing purchase and redemption orders for 
investment company shares;
    (3) Providing beneficial owners with account statements showing 
their purchases, sales, and positions in the investment company;
    (4) Processing dividend payments for the investment company;
    (5) Providing sub-accounting services to the investment company for 
shares held beneficially;
    (6) Forwarding communications from the investment company to the 
beneficial owners, including proxies, shareholder reports, dividend and 
tax notices, and updated prospectuses; or
    (7) Receiving, tabulating, and transmitting proxies executed by 
beneficial owners of investment company shares;
    (iv) A flat or capped per order processing fee, paid by or on 
behalf of a customer or beneficiary, that is equal to not more than the 
cost incurred by the bank in connection with executing securities 
transactions for trust or fiduciary accounts; or
    (v) Any combination of such fees.
    (5) Trust or fiduciary account means an account for which the bank 
acts in a trustee or fiduciary capacity as defined in section 
3(a)(4)(D) of the Act (15 U.S.C. 78c(a)(4)(D)).
    (6) Year means a calendar year, or fiscal year consistently used by 
the bank for recordkeeping and reporting purposes.
    (b) Advertising restrictions.
    (1) In general. A bank complies with the advertising restriction in 
section 3(a)(4)(B)(ii)(II) of the Act (15 U.S.C. 78c(a)(4)(B)(ii)(II)) 
if advertisements by or on behalf of the bank do not advertise:
    (i) That the bank provides securities brokerage services for trust 
or fiduciary accounts except as part of advertising the bank's broader 
trust or fiduciary services; and
    (ii) The securities brokerage services provided by the bank to 
trust or fiduciary accounts more prominently

[[Page 77547]]

than the other aspects of the trust or fiduciary services provided to 
such accounts.
    (2) Advertisement. For purposes of this section, the term 
advertisement has the same meaning as in Sec.  ----.760(g)(2).


Sec.  ----.722  Exemption allowing banks to calculate trust and 
fiduciary compensation on a bank-wide basis.

    (a) General. A bank is exempt from meeting the ``chiefly 
compensated'' condition in section 3(a)(4)(B)(ii)(I) of the Act (15 
U.S.C. 78c(a)(4)(B)(ii)(I)) to the extent that it effects transactions 
in securities for any account in a trustee or fiduciary capacity within 
the scope of section 3(a)(4)(D) of the Act (15 U.S.C. 78c(a)(4)(D)) if:
    (1) The bank meets the other conditions for the exception from the 
definition of the term ``broker'' under sections 3(a)(4)(B)(ii) and 
3(a)(4)(C) of the Act (15 U.S.C. 78c(a)(4)(B)(ii) and 15 U.S.C. 
78c(a)(4)(C)); and
    (2) The aggregate relationship-total compensation percentage for 
the bank's trust and fiduciary business is at least 70 percent.
    (b) Aggregate relationship-total compensation percentage. For 
purposes of this section, the aggregate relationship-total compensation 
percentage for a bank's trust and fiduciary business shall be the mean 
of the bank's yearly bank-wide compensation percentage for the 
immediately preceding year and the bank's yearly bank-wide compensation 
percentage for the year immediately preceding that year.
    (c) Yearly bank-wide compensation percentage. For purposes of this 
section, a bank's yearly bank-wide compensation percentage for a year 
shall equal the relationship compensation attributable to the bank's 
trust and fiduciary business as a whole during the year divided by the 
total compensation attributable to the bank's trust and fiduciary 
business as a whole during that year, with the quotient expressed as a 
percentage.


Sec.  ----.723  Exemptions for special accounts, transferred accounts, 
and a de minimis number of accounts.

    (a) Short-term accounts. A bank may, in determining its compliance 
with the chiefly compensated test in Sec.  ----.721(a)(1) and Sec.  --
--.722(a)(2), exclude any trust or fiduciary account that had been open 
for a period of less than 3 months during the relevant year.
    (b) Accounts acquired as part of a business combination or asset 
acquisition. For purposes of determining compliance with the chiefly 
compensated test in Sec.  ----.721(a)(1) or Sec.  ----.722(a)(2), any 
trust or fiduciary account that a bank acquired from another person as 
part of a merger, consolidation, acquisition, purchase of assets or 
similar transaction may be excluded by the bank for 12 months after the 
date the bank acquired the account from the other person.
    (c) Accounts transferred to a broker or dealer or other 
unaffiliated entity. Notwithstanding section 3(a)(4)(B)(ii)(I) of the 
Act (15 U.S.C. 78c(a)(4)(B)(ii)(I)) and Sec.  ----.721(a)(1), a bank 
shall not be considered a broker for purposes of section 3(a)(4) of the 
Act (15 U.S.C. 78c(a)(4)) solely because a trust or fiduciary account 
does not meet the chiefly compensated standard in Sec.  ----.721(a)(1) 
if, within 3 months of the end of the year in which the account fails 
to meet such standard, the bank transfers the account or the securities 
held by or on behalf of the account to a broker or dealer registered 
under section 15 of the Act (15 U.S.C. 78o) or another entity that is 
not an affiliate of the bank and is not required to be registered as a 
broker or dealer.
    (d) De minimis exclusion. A bank may, in determining its compliance 
with the chiefly compensated test in Sec.  ----.721(a)(1), exclude a 
trust or fiduciary account if:
    (1) The bank maintains records demonstrating that the securities 
transactions conducted by or on behalf of the account were undertaken 
by the bank in the exercise of its trust or fiduciary responsibilities 
with respect to the account;
    (2) The total number of accounts excluded by the bank under this 
paragraph (d) does not exceed the lesser of:
    (i) 1 percent of the total number of trust or fiduciary accounts 
held by the bank, provided that if the number so obtained is less than 
1, the amount shall be rounded up to 1; or
    (ii) 500; and
    (3) The bank did not rely on this paragraph (d) with respect to 
such account during the immediately preceding year.


Sec.  ----.740  Defined terms relating to the sweep accounts exception 
from the definition of ``broker.''

    For purposes of section 3(a)(4)(B)(v) of the Act (15 U.S.C. 
78c(a)(4)(B)(v)), the following terms shall have the meaning provided:
    (a) Deferred sales load has the same meaning as in 17 CFR 270.6c-
10.
    (b) Money market fund means an open-end company registered under 
the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) that is 
regulated as a money market fund pursuant to 17 CFR 270.2a-7.
    (c)(1) No-load, in the context of an investment company or the 
securities issued by an investment company, means, for securities of 
the class or series in which a bank effects transactions, that:
    (i) That class or series is not subject to a sales load or a 
deferred sales load; and
    (ii) Total charges against net assets of that class or series of 
the investment company's securities for sales or sales promotion 
expenses, for personal service, or for the maintenance of shareholder 
accounts do not exceed 0.25 of 1% of average net assets annually.
    (2) For purposes of this definition, charges for the following will 
not be considered charges against net assets of a class or series of an 
investment company's securities for sales or sales promotion expenses, 
for personal service, or for the maintenance of shareholder accounts:
    (i) Providing transfer agent or sub-transfer agent services for 
beneficial owners of investment company shares;
    (ii) Aggregating and processing purchase and redemption orders for 
investment company shares;
    (iii) Providing beneficial owners with account statements showing 
their purchases, sales, and positions in the investment company;
    (iv) Processing dividend payments for the investment company;
    (v) Providing sub-accounting services to the investment company for 
shares held beneficially;
    (vi) Forwarding communications from the investment company to the 
beneficial owners, including proxies, shareholder reports, dividend and 
tax notices, and updated prospectuses; or
    (vii) Receiving, tabulating, and transmitting proxies executed by 
beneficial owners of investment company shares.
    (d) Open-end company has the same meaning as in section 5(a)(1) of 
the Investment Company Act of 1940 (15 U.S.C. 80a-5(a)(1)).
    (e) Sales load has the same meaning as in section 2(a)(35) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(35)).


Sec.  ----.741  Exemption for banks effecting transactions in money 
market funds.

    (a) A bank is exempt from the definition of the term ``broker'' 
under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) to the extent 
that it effects transactions on behalf of a customer in securities 
issued by a money market fund, provided that:
    (1) The bank provides the customer, directly or indirectly, any 
other product

[[Page 77548]]

or service, the provision of which would not, in and of itself, require 
the bank to register as a broker or dealer under section 15(a) of the 
Act (15 U.S.C. 78o(a)); and
    (2)(i) The class or series of securities is no-load; or
    (ii) If the class or series of securities is not no-load, (A) The 
bank provides the customer, not later than at the time the customer 
authorizes the bank to effect the transactions, a prospectus for the 
securities; and
    (B) The bank does not characterize or refer to the class or series 
of securities as no-load.
    (b) Definitions. For purposes of this section:
    (1) Money market fund has the same meaning as in Sec.  ----.740(b).
    (2) No-load has the same meaning as in Sec.  ----.740(c).


Sec.  ----.760  Exemption from definition of ``broker'' for banks 
accepting orders to effect transactions in securities from or on behalf 
of custody accounts.

    (a) Employee benefit plan accounts and individual retirement 
accounts or similar accounts. A bank is exempt from the definition of 
the term ``broker'' under section 3(a)(4) of the Act (15 U.S.C. 
78c(a)(4)) to the extent that, as part of its customary banking 
activities, the bank accepts orders to effect transactions in 
securities for an employee benefit plan account or an individual 
retirement account or similar account for which the bank acts as a 
custodian if:
    (1) Employee compensation restriction. The bank complies with the 
employee compensation restrictions in paragraph (c) of this section;
    (2) Advertisements. Advertisements by or on behalf of the bank do 
not:
    (i) Advertise that the bank accepts orders for securities 
transactions for employee benefit plan accounts or individual 
retirement accounts or similar accounts, except as part of advertising 
the other custodial or safekeeping services the bank provides to these 
accounts; or
    (ii) Advertise that such accounts are securities brokerage accounts 
or that the bank's safekeeping and custody services substitute for a 
securities brokerage account; and
    (3) Advertisements and sales literature for individual retirement 
or similar accounts. Advertisements and sales literature issued by or 
on behalf of the bank do not describe the securities order-taking 
services provided by the bank to individual retirement or similar 
accounts more prominently than the other aspects of the custody or 
safekeeping services provided by the bank to these accounts.
    (b) Accommodation trades for other custodial accounts. A bank is 
exempt from the definition of the term ``broker'' under section 3(a)(4) 
of the Act (15 U.S.C. 78c(a)(4)) to the extent that, as part of its 
customary banking activities, the bank accepts orders to effect 
transactions in securities for an account for which the bank acts as 
custodian other than an employee benefit plan account or an individual 
retirement account or similar account if:
    (1) Accommodation. The bank accepts orders to effect transactions 
in securities for the account only as an accommodation to the customer;
    (2) Employee compensation restriction. The bank complies with the 
employee compensation restrictions in paragraph (c) of this section;
    (3) Bank fees. Any fee charged or received by the bank for 
effecting a securities transaction for the account does not vary based 
on:
    (i) Whether the bank accepted the order for the transaction; or
    (ii) The quantity or price of the securities to be bought or sold;
    (4) Advertisements. Advertisements by or on behalf of the bank do 
not state that the bank accepts orders for securities transactions for 
the account;
    (5) Sales literature. Sales literature issued by or on behalf of 
the bank:
    (i) Does not state that the bank accepts orders for securities 
transactions for the account except as part of describing the other 
custodial or safekeeping services the bank provides to the account; and
    (ii) Does not describe the securities order-taking services 
provided to the account more prominently than the other aspects of the 
custody or safekeeping services provided by the bank to the account; 
and
    (6) Investment advice and recommendations. The bank does not 
provide investment advice or research concerning securities to the 
account, make recommendations to the account concerning securities or 
otherwise solicit securities transactions from the account; provided, 
however, that nothing in this paragraph (b)(6) shall prevent a bank 
from:
    (i) Publishing, using or disseminating advertisements and sales 
literature in accordance with paragraphs (b)(4) and (b)(5) of this 
section; and
    (ii) Responding to customer inquiries regarding the bank's 
safekeeping and custody services by providing:
    (A) Advertisements or sales literature consistent with the 
provisions of paragraphs (b)(4) and (b)(5) of this section describing 
the safekeeping, custody and related services that the bank offers;
    (B) A prospectus prepared by a registered investment company, or 
sales literature prepared by a registered investment company or by the 
broker or dealer that is the principal underwriter of the registered 
investment company pertaining to the registered investment company's 
products;
    (C) Information based on the materials described in paragraphs 
(b)(6)(ii)(A) and (B) of this section; or
    (iii) Responding to inquiries regarding the bank's safekeeping, 
custody or other services, such as inquiries concerning the customer's 
account or the availability of sweep or other services, so long as the 
bank does not provide investment advice or research concerning 
securities to the account or make a recommendation to the account 
concerning securities.
    (c) Employee compensation restriction. A bank may accept orders 
pursuant to this section for a securities transaction for an account 
described in paragraph (a) or (b) of this section only if no bank 
employee receives compensation, including a fee paid pursuant to a plan 
under 17 CFR 270.12b-1, from the bank, the executing broker or dealer, 
or any other person that is based on whether a securities transaction 
is executed for the account or that is based on the quantity, price, or 
identity of securities purchased or sold by such account, provided that 
nothing in this paragraph shall prohibit a bank employee from receiving 
compensation that would not be considered incentive compensation under 
Sec.  ----.700(b)(1) as if a referral had been made by the bank 
employee, or any compensation described in Sec.  ----.700(b)(2).
    (d) Other conditions. A bank may accept orders for a securities 
transaction for an account for which the bank acts as a custodian under 
this section only if the bank:
    (1) Does not act in a trustee or fiduciary capacity (as defined in 
section 3(a)(4)(D) of the Act (15 U.S.C. 78c(a)(4)(D)) with respect to 
the account;
    (2) Complies with section 3(a)(4)(C) of the Act (15 U.S.C. 
78c(a)(4)(C)) in handling any order for a securities transaction for 
the account; and
    (3) Complies with section 3(a)(4)(B)(viii)(II) of the Act (15 
U.S.C. 78c(a)(4)(B)(viii)(II)) regarding carrying broker activities.
    (e) Non-fiduciary administrators and recordkeepers. A bank that 
acts as a non-fiduciary and non-custodial administrator or recordkeeper 
for an employee benefit plan for which another bank acts as custodian 
may rely

[[Page 77549]]

on the exemption provided in this section if:
    (1) Both the custodian bank and the administrator or recordkeeper 
bank meet the requirements of this section; and
    (2) The administrator or recordkeeper bank does not execute a 
cross-trade with or for the employee benefit plan or net orders for 
securities for the plan, other than orders for shares of open-end 
investment companies not traded on an exchange.
    (f) Evasions. In considering whether a bank meets the terms of this 
section, both the form and substance of the relevant account(s), 
transaction(s) and activities (including advertising activities) of the 
bank will be considered in order to prevent evasions of the 
requirements of this section.
    (g) Definitions. When used in this section:
    (1) Account for which the bank acts as a custodian means an account 
that is:
    (i) An employee benefit plan account for which the bank acts as a 
custodian;
    (ii) An individual retirement account or similar account for which 
the bank acts as a custodian; or
    (iii) An account established by a written agreement between the 
bank and the customer that sets forth the terms that will govern the 
fees payable to, and rights and obligations of, the bank regarding the 
safekeeping or custody of securities.
    (2) Advertisement means any material that is published or used in 
any electronic or other public media, including any Web site, 
newspaper, magazine or other periodical, radio, television, telephone 
or tape recording, videotape display, signs or billboards, motion 
pictures, or telephone directories (other than routine listings).
    (3) Employee benefit plan account means a pension plan, retirement 
plan, profit sharing plan, bonus plan, thrift savings plan, incentive 
plan, or other similar plan, including, without limitation, an 
employer-sponsored plan qualified under section 401(a) of the Internal 
Revenue Code (26 U.S.C. 401(a)), a governmental or other plan described 
in section 457 of the Internal Revenue Code (26 U.S.C. 457), a tax-
deferred plan described in section 403(b) of the Internal Revenue Code 
(26 U.S.C. 403(b)), a church plan, governmental, multiemployer or other 
plan described in section 414(d), (e) or (f) of the Internal Revenue 
Code (26 U.S.C. 414(d), (e) or (f)), an incentive stock option plan 
described in section 422 of the Internal Revenue Code (26 U.S.C. 422); 
a Voluntary Employee Beneficiary Association Plan described in section 
501(c)(9) of the Internal Revenue Code (26 U.S.C. 501(c)(9)), a non-
qualified deferred compensation plan (including a rabbi or secular 
trust), a supplemental or mirror plan, and a supplemental unemployment 
benefit plan.
    (4) Individual retirement account or similar account means an 
individual retirement account as defined in section 408 of the Internal 
Revenue Code (26 U.S.C. 408), Roth IRA as defined in section 408A of 
the Internal Revenue Code (26 U.S.C. 408A), health savings account as 
defined in section 223(d) of the Internal Revenue Code (26 U.S.C. 
223(d)), Archer medical savings account as defined in section 220(d) of 
the Internal Revenue Code (26 U.S.C. 220(d)), Coverdell education 
savings account as defined in section 530 of the Internal Revenue Code 
(26 U.S.C. 530), or other similar account.
    (5) Sales literature means any written or electronic communication, 
other than an advertisement, that is generally distributed or made 
generally available to customers of the bank or the public, including 
circulars, form letters, brochures, telemarketing scripts, seminar 
texts, published articles, and press releases concerning the bank's 
products or services.
    (6) Principal underwriter has the same meaning as in section 
2(a)(29) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(29)).


Sec.  ----.771  Exemption from the definition of ``broker'' for banks 
effecting transactions in securities issued pursuant to Regulation S.

    (a) A bank is exempt from the definition of the term ``broker'' 
under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)), to the extent 
that, as agent, the bank:
    (1) Effects a sale in compliance with the requirements of 17 CFR 
230.903 of an eligible security to a purchaser who is outside of the 
United States within the meaning of 17 CFR 230.903;
    (2) Effects a resale of an eligible security after its initial sale 
with a reasonable belief that the eligible security was initially sold 
outside of the United States within the meaning of and in compliance 
with the requirements of 17 CFR 230.903, by or on behalf of a person 
who is not a U.S. person under 17 CFR 230.902(k) to a purchaser who is 
outside the United States within the meaning of 17 CFR 230.903 or a 
registered broker or dealer, provided that if the sale is made prior to 
the expiration of the distribution compliance period specified in 17 
CFR 230.903(b)(2) or (b)(3), the sale is made in compliance with the 
requirements of 17 CFR 230.904; or
    (3) Effects a resale of an eligible security after its initial sale 
outside of the United States within the meaning of and in compliance 
with the requirements of 17 CFR 230.903, by or on behalf of a 
registered broker or dealer to a purchaser who is outside the United 
States within the meaning of 17 CFR 230.903, provided that if the sale 
is made prior to the expiration of the distribution compliance period 
specified in 17 CFR 230.903(b)(2) or (b)(3), the sale is made in 
compliance with the requirements of 17 CFR 230.904.
    (b) Definitions. For purposes of this section:
    (1) Distributor has the same meaning as in 17 CFR 230.902(d).
    (2) Eligible security means a security that:
    (i) Is not being sold from the inventory of the bank or an 
affiliate of the bank; and
    (ii) Is not being underwritten by the bank or an affiliate of the 
bank on a firm-commitment basis, unless the bank acquired the security 
from an unaffiliated distributor that did not purchase the security 
from the bank or an affiliate of the bank.
    (3) Purchaser means a person who purchases an eligible security and 
who is not a U.S. person under 17 CFR 230.902(k).


Sec.  ----.772  Exemption from the definition of ``broker'' for banks 
engaging in securities lending transactions.

    (a) A bank is exempt from the definition of the term ``broker'' 
under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)), to the extent 
that, as an agent, it engages in or effects securities lending 
transactions, and any securities lending services in connection with 
such transactions, with or on behalf of a person the bank reasonably 
believes to be:
    (1) A qualified investor as defined in section 3(a)(54)(A) of the 
Act (15 U.S.C. 78c(a)(54)(A)); or
    (2) Any employee benefit plan that owns and invests on a 
discretionary basis, not less than $25,000,000 in investments.
    (b) Securities lending transaction means a transaction in which the 
owner of a security lends the security temporarily to another party 
pursuant to a written securities lending agreement under which the 
lender retains the economic interests of an owner of such securities, 
and has the right to terminate the transaction and to recall the loaned 
securities on terms agreed by the parties.
    (c) Securities lending services means:

[[Page 77550]]

    (1) Selecting and negotiating with a borrower and executing, or 
directing the execution of the loan with the borrower;
    (2) Receiving, delivering, or directing the receipt or delivery of 
loaned securities;
    (3) Receiving, delivering, or directing the receipt or delivery of 
collateral;
    (4) Providing mark-to-market, corporate action, recordkeeping or 
other services incidental to the administration of the securities 
lending transaction;
    (5) Investing, or directing the investment of, cash collateral; or
    (6) Indemnifying the lender of securities with respect to various 
matters.


Sec.  ----.775  Exemption from the definition of ``broker'' for the way 
banks effect excepted or exempted transactions in investment company 
securities.

    (a) A bank that meets the conditions for an exception or exemption 
from the definition of the term ``broker'' except for the condition in 
section 3(a)(4)(C)(i) of the Act (15 U.S.C. 78c(a)(4)(C)(i)), is exempt 
from such condition to the extent that it effects transactions in 
securities issued by an open-end company that is neither traded on a 
national securities exchange nor through the facilities of a national 
securities association or an interdealer quotation system, provided 
that:
    (1) Such transactions are effected through the National Securities 
Clearing Corporation's Mutual Fund Services or directly with a transfer 
agent acting for the open-end company; and
    (2) The securities are distributed by a registered broker or 
dealer, or the sales charge is no more than the amount a registered 
broker or dealer may charge pursuant to the rules of a securities 
association registered under section 15A of the Act (15 U.S.C. 78o-3) 
adopted pursuant to section 22(b)(1) of the Investment Company Act of 
1940 (15 U.S.C. 80a-22(b)(1)).
    (b) Definitions. For purposes of this section:
    (1) Interdealer quotation system has the same meaning as in 17 CFR 
240.15c2-11.
    (2) Open-end company has the same meaning as in Sec.  ----.740.


Sec.  .----780  Exemption for banks from liability under section 29 of 
the Securities Exchange Act of 1934.

    (a) No contract entered into before [date 18 months after effective 
date of the final rule], shall be void or considered voidable by reason 
of section 29(b) of the Act (15 U.S.C. 78cc(b)) because any bank that 
is a party to the contract violated the registration requirements of 
section 15(a) of the Act (15 U.S.C. 78o(a)), any other applicable 
provision of the Act, or the rules and regulations thereunder based 
solely on the bank's status as a broker when the contract was created.
    (b) No contract shall be void or considered voidable by reason of 
section 29(b) of the Act (15 U.S.C. 78cc(b)) because any bank that is a 
party to the contract violated the registration requirements of section 
15(a) of the Act (15 U.S.C. 78o(a)) or the rules and regulations 
thereunder based solely on the bank's status as a broker when the 
contract was created, if:
    (1) At the time the contract was created, the bank acted in good 
faith and had reasonable policies and procedures in place to comply 
with section 3(a)(4)(B) of the Act (15 U.S.C. 78c(a)(4)(B)) and the 
rules and regulations thereunder; and
    (2) At the time the contract was created, any violation of the 
registration requirements of section 15(a) of the Act by the bank did 
not result in any significant harm or financial loss or cost to the 
person seeking to void the contract.


Sec.  ----.781  Exemption from the definition of ``broker'' for banks 
for a limited period of time.

    A bank is exempt from the definition of the term ``broker'' under 
section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) until the first day of 
its first fiscal year commencing after June 30, 2008.

    By order of the Board of Governors of the Federal Reserve 
System, December 18, 2006.
Jennifer J. Johnson,
Secretary of the Board.
    Dated: December 18, 2006.

    By the Securities and Exchange Commission.
Nancy M. Morris,
Secretary.
[FR Doc. 06-9825 Filed 12-22-06; 8:45 am]
BILLING CODE 6210-01-P; 8011-01-P