Annette L. Nazareth
Director
Division of Market Regulation
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Bank Broker-Dealer Interim Final Rules; Release No. 34-44291
      66 Federal Register 27760 (May 18, 2001). 

Dear Ms. Nazareth: 

The American Bankers Association ("ABA")[1] and the ABA Securities Association ("ABASA")[2] write this letter to inform you of our associations' strong opposition to the final interim rules recently released by the Securities and Exchange Commission ("SEC").[3]  These rules address the exceptions from broker-dealer registration, more commonly called "the push-out" provisions, contained in Title II of the Gramm-Leach-Bliley Act. 

Our reasons for writing this letter so early in the comment process are twofold:  First, we wish to alert the SEC regarding the intense opposition being expressed by the banking industry concerning the final interim rules.  Second, we wish to meet with the SEC staff to discuss and, hopefully, resolve the serious issues raised by the rules in a timely manner.  Even though public comment is requested, for all practical purposes, the final interim rules will become effective on October 1, 2001.  We, of course, will continue to study the final interim rules and respond with a detailed comment letter by the July 17, 2001 comment due date. 

The industry's opposition to the rules is chiefly grounded upon the belief that, in promulgating the final interim rules, the SEC has ignored the plain meaning of the Gramm-Leach-Bliley Act and its legislative history and, instead, has chosen to interpret the statute too narrowly.  For example, the networking exception is the only push-out provision in which the Congress chose to address employee compensation.  Specifically, it provides that bank employees may not receive incentive compensation for any brokerage transactions but may receive nominal payment for the referral of customers.  In using the term "incentive compensation," the Congress meant to prohibit bank employees from receiving brokerage commissions for securities transactions.  Despite the clear meaning of this language, the SEC, nevertheless, suggests that this language covers and, therefore, prohibits year-end bank bonus programs when securities transactions of a branch, department, or line of business are considered in connection with awarding bonuses to employees. 

Because bonus programs are generally structured on a department -, business line - or company-wide basis, the SEC's guidance raises questions concerning the continued legality of many bank bonus programs.  In this manner, the SEC is exercising jurisdiction over the compensation programs of banks and bank holding companies (entities over which they have no jurisdiction) and potentially requiring complete restructuring of those programs.  The alternative to restructuring, but not our members first choice, would be to register as broker-dealer employees all bank employees covered by these bonus plans.  In this way, bank bonus programs could remain unchanged.    

We would assert that this expansive view of "incentive compensation" – which in the statute only arises in the limited context of the networking exception – does not reflect Congressional intent.  We would also note that it does not reflect the compromises reached by all parties to this historic Act.  

The rules are replete with other examples where the SEC has ignored Congressional directives to the contrary.  For instance, the SEC has asserted that order-taking for custodial accounts including self-directed Individual Retirement Accounts ("IRAs") is not permitted under the custodial exception.  The SEC has also suggested that only certain directed trust arrangements come within the trust and fiduciary exception.  With respect to this last point, the statute defines fiduciary to include all trust arrangements.  No distinction between types of trustee appointments – directed or otherwise – is made.  Yet, conspicuously absent from the SEC's list of permissible directed trust arrangements are personal trusts, charitable foundation trusts, insurance and viatical trusts, and rabbi and secular trusts.  

The banking industry also opposes the final interim rules for the sheer magnitude of the regulatory burdens imposed on banking organizations.  The trust and fiduciary exception, for example, requires that banks be "chiefly compensated" by way of an annual or administrative fee, a fee based on a percentage of assets under management, a flat or capped per order processing fee equal to not more than the cost incurred by the bank in processing the securities transaction or any combination of these fees. 

A simple proposition to discern, one might assume when reading the statute:  non-brokerage commission compensation must outweigh brokerage commission compensation.  Unfortunately, the narrative text of the SEC's release requires 15 pages to explain the requirements of the rule.  Moreover, the SEC has stated that "chiefly compensated" is to be determined annually on an account-by-account basis.  For the banking industry, this would require yearly analyses of fees charged to over 19 million accounts valued at over $22 trillion.  And, finally, where an exception from performing an account-by-account review is provided, it is conditioned on having so many procedures in place that many in the banking industry believe the exception is of little value. 

Given that the final interim rules do not reflect Congressional intent and the regulatory burdens associated with complying with these rules are huge, the banking industry requests that the SEC withdraw the final interim rules and issue a significantly revised proposal.  The banking industry would be happy to work with the SEC to redraft new rules that are not overly complex or burdensome and, most importantly, comport with Congressional intent. 

Should you wish to discuss further matters raised in this letter, please do not hesitate to contact Sarah Miller at 202-663-5325.

Sincerely yours, 
                                                                       

          /s/                                                                      

James D. McLaughlin
Director
Regulatory and Trust Affairs
American Bankers Association

         /s/ 

Beth L. Climo
Executive Director
ABA Securities Association

Cc: Robert L.D. Colby
      Catherine McGuire
      Lourdes Gonzalez