FIRMA National Training ConferenceFIRMA National Training ConferenceWashington, D.C.Washington, D.C.

Regulation BRegulation B

Sally MillerABAsmiller@aba.com(202) 663-5325

Regulation BRegulation B

What is it?What is it?– SEC’s second attempt to write SEC’s second attempt to write

implementing rules for Title II of implementing rules for Title II of GLBAGLBA

BrokerageBrokerage Dealing: effectiveDealing: effective

Title IITitle II

Banks lose their exemption from Banks lose their exemption from broker-dealer registrationbroker-dealer registration

Replaced with 15 exceptions (aka Replaced with 15 exceptions (aka “push-out” provisions)“push-out” provisions)

Effecting transactions in securitieEffecting transactions in securitie– For account of another: brokerFor account of another: broker– For own account: dealerFor own account: dealer

Broker Push-outs (11)Broker Push-outs (11)

NetworkingNetworking Trust/FiduciaryTrust/Fiduciary Permissible Securities TransactionsPermissible Securities Transactions Stock Purchase PlansStock Purchase Plans Sweep AccountsSweep Accounts Affiliate TransactionsAffiliate Transactions Private Securities OfferingsPrivate Securities Offerings Safekeeping and CustodySafekeeping and Custody Indentified Banking ProductsIndentified Banking Products Municipal SecuritiesMunicipal Securities De Minimus ExceptionDe Minimus Exception

Dealer Pushouts (4)Dealer Pushouts (4)

Permissible Securities TransactionsPermissible Securities Transactions

Investment Trustee and Fiduciary Investment Trustee and Fiduciary transactionstransactions

Asset-backed TransactionsAsset-backed Transactions

Identified Banking ProductsIdentified Banking Products

Non-Controversial Non-Controversial Broker ProvisionsBroker Provisions Permissible Securities TransactionsPermissible Securities Transactions

– Commercial paper, bankers, Commercial paper, bankers, acceptances, commercial billsacceptances, commercial bills

– Government securitiesGovernment securities– Common/collective fundsCommon/collective funds– Qualified Canadian GOs and NA Qualified Canadian GOs and NA

develop bank obligationsdevelop bank obligations– Brady billsBrady bills

Stock Purchase PlansStock Purchase Plans

Misnomer: really transfer agent Misnomer: really transfer agent activitiesactivities

Employee benefits, DRIPs, open Employee benefits, DRIPs, open enrollment plansenrollment plans

Numerous conditions!Numerous conditions!

Conditions to Transfer Conditions to Transfer Agency AttitudesAgency Attitudes Bank can’t solicit transactions or Bank can’t solicit transactions or

provide investment advice provide investment advice – Applies to employee benefits, DRIPs, Applies to employee benefits, DRIPs,

open enrollment plansopen enrollment plans– Can deliver written/electronic Can deliver written/electronic

material to investors as permitted material to investors as permitted by SEC at time of GLBA enactment by SEC at time of GLBA enactment or as permitted by SEC in futureor as permitted by SEC in future

Conditions (continued)Conditions (continued)

Cannot net buy & sell orders, Cannot net buy & sell orders, except for odd-lot holders or except for odd-lot holders or plans registered with SECplans registered with SEC– Applies to DRIPs & open enrollment Applies to DRIPs & open enrollment

plansplans

Conditions (continued)Conditions (continued)

Bank must execute brokerage Bank must execute brokerage transactions through a registered transactions through a registered broker-dealer (affiliated or broker-dealer (affiliated or otherwise)otherwise)

Cross-trades permitted if Cross-trades permitted if permitted under ERISA or other permitted under ERISA or other applicable lawapplicable law

Caution!Caution!

SEC working on transfer agent SEC working on transfer agent rulesrules

Affiliate TransactionsAffiliate Transactions

Effects brokerage for affiliated Effects brokerage for affiliated firms, e.g. trust companiesfirms, e.g. trust companies

Condition: affiliate cannot be a Condition: affiliate cannot be a registered broker-dealer or registered broker-dealer or engaged in merchant bankingengaged in merchant banking

Private Securities Private Securities OfferingsOfferings Private placements permissible so Private placements permissible so

long as: long as: – Bank is not engaged in underwriting, Bank is not engaged in underwriting,

dealing or market-making in dealing or market-making in corporate debt or equity; and corporate debt or equity; and

– If a bank is not affiliated with ANY If a bank is not affiliated with ANY broker-dealer, the dollar value of broker-dealer, the dollar value of any single offering is not greater any single offering is not greater than 25% of bank capitalthan 25% of bank capital

Banking ProductsBanking Products

Identified Banking ProductsIdentified Banking Products– Deposits, bankers acceptances, Deposits, bankers acceptances,

letters of credit, loans, debit letters of credit, loans, debit accounts and certain loan accounts and certain loan participantsparticipants

– All sweep agreementsAll sweep agreements equity swaps sold to non-qualified equity swaps sold to non-qualified

investors must be sold through the investors must be sold through the broker-dealerbroker-dealer

Banking Products Banking Products (continued)(continued) Hybrid ProductsHybrid Products

– Not on statutory list of productsNot on statutory list of products– Not registered as a security as of 11/12/99Not registered as a security as of 11/12/99– SEC through SEC through rulemakingrulemaking may determine may determine

whether hybrid product is a securitywhether hybrid product is a security– Board can seek judicial reviewBoard can seek judicial review

Operates as a stayOperates as a stay

– Standard of review – no deference to Standard of review – no deference to either views of the Board or the SECeither views of the Board or the SEC

Municipal SecuritiesMunicipal Securities

De MinimisDe Minimis

Brokers 500 or less transactionsBrokers 500 or less transactions

Employee cannot be a dual Employee cannot be a dual employeeemployee

500 does not include transactions 500 does not include transactions that fall under other exceptionsthat fall under other exceptions

Controversial Controversial Brokerage ProvisionsBrokerage Provisions NetworkingNetworking

– Contract with third party or affiliated Contract with third party or affiliated brokerbroker

– Brokerage offered on or off bank Brokerage offered on or off bank premisespremises

– Broker is clearly identified as performing Broker is clearly identified as performing servicesservices

– Area is clearly marked and, to the extent Area is clearly marked and, to the extent practicable, physically separate from practicable, physically separate from routine deposit-takingroutine deposit-taking

Networking Networking (continued)(continued) Materials used by the bank to Materials used by the bank to

advertise/promote brokerage services advertise/promote brokerage services include services provided by broker and are include services provided by broker and are in compliance with federal securities lawsin compliance with federal securities laws

Bank employees perform only clerical or Bank employees perform only clerical or ministerial functions, including scheduling ministerial functions, including scheduling appointments with brokerappointments with broker– Bank employees may forward customer funds or Bank employees may forward customer funds or

securities and may describe generally products securities and may describe generally products availableavailable

– Significant statutory protectionSignificant statutory protection

Networking Networking (continued)(continued) Compensation – bank employees do Compensation – bank employees do

not receive incentive compensation not receive incentive compensation but can receive compensation for the but can receive compensation for the referral of any customer if the referral of any customer if the compensation is a nominal one-time compensation is a nominal one-time fee of a fixed dollar amount and the fee of a fixed dollar amount and the payment of the fee is not contingent payment of the fee is not contingent on whether a transaction results from on whether a transaction results from the referralthe referral

Networking Networking (continued)(continued) Services provided by broker are Services provided by broker are

fully disclosed to the customerfully disclosed to the customer Bank does not act as carrying Bank does not act as carrying

broker, except for trust and broker, except for trust and custody servicescustody services

Bank or broker provides Bank or broker provides disclosures regarding the lack of disclosures regarding the lack of FDIC insuranceFDIC insurance

Reg B - CompensationReg B - Compensation

Nominal Nominal one-time cash fee of a one-time cash fee of a fixed dollar amount:fixed dollar amount:– Value that does not exceed Value that does not exceed

Employee’s Base Hourly Rate,Employee’s Base Hourly Rate, $25, or$25, or $15 in 1999 dollars, adjusted for CPI$15 in 1999 dollars, adjusted for CPI

Reg B - CompensationReg B - Compensation

Nominal Nominal one-timeone-time cash fee of a cash fee of a fixed dollar amount:fixed dollar amount:– Can only be paid one-time per Can only be paid one-time per

customer referredcustomer referred

Reg B - CompensationReg B - Compensation

Cash/non-cash referral fee together Cash/non-cash referral fee together meet meet nominalnominal conditions set out above conditions set out above and is paid under an incentive and is paid under an incentive program that covers a broad range of program that covers a broad range of products. Programs must be designed products. Programs must be designed to reward activities unrelated to to reward activities unrelated to securities.securities.– Permits cash/non-cash payments:Permits cash/non-cash payments:

Paid in units of value with a readily Paid in units of value with a readily ascertainable cash equivalentascertainable cash equivalent

Networking Networking (continued)(continued)

Nominal one-time cash fee for a fixed dollar Nominal one-time cash fee for a fixed dollar amountamount– Has a set value that a particular employee Has a set value that a particular employee

making a referral would receive for any referral making a referral would receive for any referral to a registered broker that does not vary based to a registered broker that does not vary based on factors such as:on factors such as:

the financial status of a customer the employee refers;the financial status of a customer the employee refers; the identity of the registered broker or dealer to which the identity of the registered broker or dealer to which

the customer is referred; the customer is referred; the number of referrals the employee makes, or the number of referrals the employee makes, or whether the customer expresses an interest in a whether the customer expresses an interest in a

particular type of securities product.particular type of securities product.

Networking Networking (continued)(continued) ReferralReferral

– Action taken by a bank employee to Action taken by a bank employee to direct a customer of the bank to a direct a customer of the bank to a registered broker or dealer for registered broker or dealer for purchase or sale of securities for the purchase or sale of securities for the customer’s account.customer’s account.

Networking ProblemsNetworking Problems

Amount of referral feeAmount of referral fee Application to both retail and Application to both retail and

institutionalinstitutional Bonus Plans: Overall profitability Bonus Plans: Overall profitability

of bankof bank

Trust and Fiduciary Trust and Fiduciary

Bank effects transactions in a trustee or fiduciary Bank effects transactions in a trustee or fiduciary capacitycapacity

In a department that is regularly examined by bank In a department that is regularly examined by bank examiners for compliance with fiduciary principles and examiners for compliance with fiduciary principles and standardsstandards

Is Is chiefly compensatedchiefly compensated on the basis of an administration on the basis of an administration or annual fee (payable on a monthly, quarterly, or other or annual fee (payable on a monthly, quarterly, or other basis), a percentage of assets under management, or a basis), a percentage of assets under management, or a flat or capped per order processing fee equal to not more flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary executing securities transactions for trustee and fiduciary customers, or any combination of such feescustomers, or any combination of such fees

Does not publicly solicit brokerage business, other than Does not publicly solicit brokerage business, other than by advertising that it effects transaction in securities in by advertising that it effects transaction in securities in conjunction with advertising its other trust activitiesconjunction with advertising its other trust activities

US security trades must be executed through broker US security trades must be executed through broker dealer, unless cross-trading permissible.dealer, unless cross-trading permissible.

Chiefly CompensatedChiefly Compensated

Defined as “during the preceding year, the bank Defined as “during the preceding year, the bank received more received more relationshiprelationship compensation than compensation than salessales compensation from compensation from anan account. account.

““Relationship compensation” defined as “any Relationship compensation” defined as “any compensation a bank received directly from a compensation a bank received directly from a customer or beneficiary, or directly from the assets of customer or beneficiary, or directly from the assets of an account that consists solely of an administration or an account that consists solely of an administration or annual fee (payable on a monthly, quarterly, or other annual fee (payable on a monthly, quarterly, or other basis); a fee based on a percentage of assets under basis); a fee based on a percentage of assets under management; a flat or capped per order processing management; a flat or capped per order processing fee equal to not more than the cost incurred by the fee equal to not more than the cost incurred by the bank in connection with executing securities bank in connection with executing securities transactions for trustee and fiduciary customers transactions for trustee and fiduciary customers (defined)”; or any combination of these fees.(defined)”; or any combination of these fees.

Chiefly Compensated Chiefly Compensated (continued) (continued) ““Sales compensation” defined as any fee Sales compensation” defined as any fee

over and above the flat or capped per order over and above the flat or capped per order processing fee; compensation that if paid to a processing fee; compensation that if paid to a broker would be payment for order flow; a broker would be payment for order flow; a finders fee (but not a networking referral fee); finders fee (but not a networking referral fee); fees received from mutual funds with an fees received from mutual funds with an allocation formula; 12b-1 fees with an allocation formula; 12b-1 fees with an allocation formula; fees paid by mutual funds allocation formula; fees paid by mutual funds for personal service or maintenance of for personal service or maintenance of shareholder accounts with an allocation shareholder accounts with an allocation formula.formula.

Chiefly Compensated Chiefly Compensated (continued)(continued) Other compensation:Other compensation:

– Transfer agency or sub-transfer agency; Transfer agency or sub-transfer agency; aggregating and processing purchase and aggregating and processing purchase and redemption orders for mutual fund shares; redemption orders for mutual fund shares; providing beneficial owners with account providing beneficial owners with account statements showing their purchases, sales, and statements showing their purchases, sales, and positions in mutual funds; processing dividend positions in mutual funds; processing dividend payments for mutual funds; providing sub-payments for mutual funds; providing sub-accounting services for mutual fund shares; accounting services for mutual fund shares; forwarding communications from the mutual fund, forwarding communications from the mutual fund, including proxies, shareholder reports, dividend including proxies, shareholder reports, dividend and tax notices, and updated prospectuses, or and tax notices, and updated prospectuses, or receiving, tabulating, and transmitting proxies receiving, tabulating, and transmitting proxies executed. (AKA 7 Dwarfs) executed. (AKA 7 Dwarfs)

Exemptions from Exemptions from “Chiefly compensated” “Chiefly compensated” Existing living, testamentary, or Existing living, testamentary, or

charitable trust accounts charitable trust accounts Line of businessLine of business Account-by-accountAccount-by-account

Existing living, Existing living, testamentary, or charitable testamentary, or charitable trust accountstrust accounts Accounts must be opened or established before Accounts must be opened or established before

7/30/04 (Proposal published on 6/30/04)7/30/04 (Proposal published on 6/30/04) Bank must be serving in a trust or fiduciary capacity Bank must be serving in a trust or fiduciary capacity

(can’t be a custodian other than a custodian under (can’t be a custodian other than a custodian under a uniform gift to minors act)a uniform gift to minors act)

Can’t negotiate with accountholder or beneficiary to Can’t negotiate with accountholder or beneficiary to increase the proportion of sales compensation to increase the proportion of sales compensation to relationship compensation after 7/30/04.relationship compensation after 7/30/04.

Testamentary trusts deemed established as of the Testamentary trusts deemed established as of the date of the will that directed that the trust be date of the will that directed that the trust be established.established.

Must meet all other conditions of the broker Must meet all other conditions of the broker exception.exception.

Line of Business Line of Business Exemption Exemption Line of business defined as “an identifiable department, unit, or Line of business defined as “an identifiable department, unit, or

division of a bank organized and operated on an ongoing basis division of a bank organized and operated on an ongoing basis for business reasons with similar types of accounts for which for business reasons with similar types of accounts for which the bank acts in a similar types of fiduciary capacity.”the bank acts in a similar types of fiduciary capacity.”

Demonstrates that the ratio of sales to relationship Demonstrates that the ratio of sales to relationship compensation was not more than 1:9.compensation was not more than 1:9.

Maintains procedures reasonably designed to ensure that Maintains procedures reasonably designed to ensure that before an account is opened or established, the bank reviews before an account is opened or established, the bank reviews the account to ensure that the bank is likely to receive more the account to ensure that the bank is likely to receive more relationship compensation than sales compensationrelationship compensation than sales compensation

Maintains procedures reasonably designed to ensure that after Maintains procedures reasonably designed to ensure that after opening or establishing an account, at any time the bank opening or establishing an account, at any time the bank individually negotiates with the accountholder or beneficiary to individually negotiates with the accountholder or beneficiary to increase the proportion of sales to relationship compensation, increase the proportion of sales to relationship compensation, the bank reviews the account to ensure that the bank receives the bank reviews the account to ensure that the bank receives more relationship to sales compensationmore relationship to sales compensation

Must meet all the other conditions of the exceptionMust meet all the other conditions of the exception Complicated safe harbor for non-compliance with 1:9 ratio.Complicated safe harbor for non-compliance with 1:9 ratio.

Account-by-Account Account-by-Account Exemption Exemption Complicated safe harbor for non-Complicated safe harbor for non-

compliance with the requirement that compliance with the requirement that relationship compensation outweigh relationship compensation outweigh sales compensation for each account.sales compensation for each account.

Must have procedures in place similar Must have procedures in place similar to those required under the line-of-to those required under the line-of-business exemptionbusiness exemption

Must meet all the other conditions of Must meet all the other conditions of the exceptionthe exception

Exemptions from Exemptions from “chiefly compensated” “chiefly compensated” no help to: no help to: Indenture TrusteesIndenture Trustees Employee Benefit Plans Employee Benefit Plans

Indenture Trustee Indenture Trustee Exemption Exemption Exempt completely from chiefly Exempt completely from chiefly

compensated calculations ifcompensated calculations if– Acting in an indenture trustee capacityActing in an indenture trustee capacity

Not paying agent, fiscal agent, disbursement agent, Not paying agent, fiscal agent, disbursement agent, etc.etc.

– Invests assets in no-load money market Invests assets in no-load money market mutual fundsmutual funds

No-load defined as no front-end or back-end load, No-load defined as no front-end or back-end load, personal or shareholder maintenance charges do personal or shareholder maintenance charges do not exceed 25 bps, personal or shareholder not exceed 25 bps, personal or shareholder maintenance charges does not include fees paid for maintenance charges does not include fees paid for 7 Dwarf services.7 Dwarf services.

Employee Benefit Employee Benefit ExemptionExemption For transactions in mutual fund for qualified plans, or For transactions in mutual fund for qualified plans, or

403(b) or 457 plans and participant-directed brokerage 403(b) or 457 plans and participant-directed brokerage accountsaccounts

Acting in either a fiduciary or custodial capacityActing in either a fiduciary or custodial capacity Offset or credit any compensation it receives from the Offset or credit any compensation it receives from the

fund against fees and expenses that the plan owesfund against fees and expenses that the plan owes Provides clear and conspicuous disclosure the plan Provides clear and conspicuous disclosure the plan

sponsor of all fees and expenses assessed and all sponsor of all fees and expenses assessed and all compensation received from the fundcompensation received from the fund

The brokerage accounts are offered through a The brokerage accounts are offered through a registered broker-dealerregistered broker-dealer

Bank does not pay incentive compensation to the Bank does not pay incentive compensation to the unlicensed individuals that differs based on the value of unlicensed individuals that differs based on the value of the security, the type of security purchase or sold, or the security, the type of security purchase or sold, or the person who exercises control over the assets of the the person who exercises control over the assets of the account. account.

CustodyCustody

Bank, as part of customary banking activities:Bank, as part of customary banking activities: Provides safekeeping or custody services with respect to Provides safekeeping or custody services with respect to

securitiessecurities Facilitates the transfer of funds or securities, as a custodian or Facilitates the transfer of funds or securities, as a custodian or

a clearing agency, in connection with the clearance and a clearing agency, in connection with the clearance and settlement of its customers transactionssettlement of its customers transactions

Effects securities lending or borrowing transactions as part of Effects securities lending or borrowing transactions as part of custodial services, or invests cash collateral pledged in custodial services, or invests cash collateral pledged in connection with such transactionsconnection with such transactions

Holds securities pledged or securities subject to purchase or Holds securities pledged or securities subject to purchase or resale agreements, facilitates the pledging or transfer of such resale agreements, facilitates the pledging or transfer of such securitiessecurities

Serves as custodian or provider of other related administrative Serves as custodian or provider of other related administrative services to any individual retirement account, pension, services to any individual retirement account, pension, retirement, profit sharing, bonus, thrift savings, incentive, or retirement, profit sharing, bonus, thrift savings, incentive, or other similar benefit plan.other similar benefit plan.

All trades of US securities conducted in US must be executed All trades of US securities conducted in US must be executed by a broker, except where cross-trading permitted.by a broker, except where cross-trading permitted.

Order-taking Order-taking

Not permissible exceptNot permissible except– For participant-directed plans under For participant-directed plans under

the employee benefit exemptionthe employee benefit exemption

Order taking Order taking (continued)(continued) For small banks if:For small banks if:

Bank not associated with a broker-dealerBank not associated with a broker-dealer Bank does not publicly solicit securities transactions, except Bank does not publicly solicit securities transactions, except

as permitted under the statuteas permitted under the statute Annual sales compensation for order-taking does not exceed Annual sales compensation for order-taking does not exceed

$100,000 (2004$)$100,000 (2004$) Can use this exemption for fiduciary accounts so long as Can use this exemption for fiduciary accounts so long as

bank does not take use any other chiefly compensated bank does not take use any other chiefly compensated exemption.exemption.

Bank does not pay incentive compensation for any order Bank does not pay incentive compensation for any order taking transactions except as allowed under the networking taking transactions except as allowed under the networking exceptionexception

All trades executed by broker-dealer, except where cross-All trades executed by broker-dealer, except where cross-trading permitted.trading permitted.

Small banks defined as a bank that had less than $500 Small banks defined as a bank that had less than $500 million in assets as of 12/31 for two prior calendar years and million in assets as of 12/31 for two prior calendar years and is not and has not for three prior calendar years been an is not and has not for three prior calendar years been an affiliate of a bank holding company that has more than $1 affiliate of a bank holding company that has more than $1 billion in assets for the two preceding calendar years.billion in assets for the two preceding calendar years.

Order taking Order taking (continued)(continued) PermissiblePermissible

– If the account opened before 7/30/04 orIf the account opened before 7/30/04 or– If the account is opened for a qualified investor.If the account is opened for a qualified investor.

A natural person with a $25 million investment portfolio, a A natural person with a $25 million investment portfolio, a corporation with a $25 million investment portfolio, a corporation with a $25 million investment portfolio, a municipality with a $50 million investment portfolio, any municipality with a $50 million investment portfolio, any trust where a bank or savings association has investment trust where a bank or savings association has investment discretiondiscretion

Can charge a fee for service but the fee cannot vary based Can charge a fee for service but the fee cannot vary based on whether or not the bank accepts the order but can on whether or not the bank accepts the order but can receive 12b-1 and shareholder servicing feesreceive 12b-1 and shareholder servicing fees

Cannot solicit order-taking transactions but can Cannot solicit order-taking transactions but can respond to customer inquiries. In responding to respond to customer inquiries. In responding to these inquiries, type of information disclosed is these inquiries, type of information disclosed is limited. limited.

Sweep AccountsSweep Accounts

Bank effects transactions as part of a program for the Bank effects transactions as part of a program for the investment or reinvestment of deposit funds into any no-investment or reinvestment of deposit funds into any no-load money market fund.load money market fund.

No-load defined as no front-end or back end loads, no No-load defined as no front-end or back end loads, no more than 25 bp for personal services or shareholder more than 25 bp for personal services or shareholder maintenance services, but does not include 7 Dwarfs.maintenance services, but does not include 7 Dwarfs.

Exemption:Exemption:– Prior non-securities qualified investor customer; a person who Prior non-securities qualified investor customer; a person who

directs the purchase of securities from any cash flows that directs the purchase of securities from any cash flows that related to an asset-backed security with a minimum original related to an asset-backed security with a minimum original asset amount of $25 million; orasset amount of $25 million; or

– Bank acting in a trust or fiduciary capacity;Bank acting in a trust or fiduciary capacity;– Bank acting in escrow agent, collateral agent, depository Bank acting in escrow agent, collateral agent, depository

agent, or paying agent capacity and the funds are no-load. If agent, or paying agent capacity and the funds are no-load. If the funds are load and the customer is not a qualified the funds are load and the customer is not a qualified investor, the bank must provide certain disclosures to the investor, the bank must provide certain disclosures to the customer.customer.

No exemption for bank retail sweep accountsNo exemption for bank retail sweep accounts

Savings Associations Savings Associations

Subject to same provisions except Subject to same provisions except no exemptions for order-taking or no exemptions for order-taking or employee benefit plan employee benefit plan transactions.transactions.

Credit UnionsCredit Unions

Subject to same provisions for Subject to same provisions for networking and sweep accounts. networking and sweep accounts.

Dealer ProvisionsDealer Provisions

EffectiveEffective Provide broker exemption when Provide broker exemption when

bank acting as securities lending bank acting as securities lending agent (not in custodial capacity) agent (not in custodial capacity)

Conclusion Conclusion

Stay Tuned!!!! Stay Tuned!!!!