The Federal Reserve Board and the SEC, in coordination with other federal banking agencies, issued final rules under Regulation R to implement statutory exce…

       Conforming Version (To Conform to Release Published in the Federal Register)  
          
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. 34-56501; 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:  Final rule. 
SUMMARY:  The Board and the Commission jointly are adopting a single set of final 
rules that 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 rules define terms used in 
these statutory exceptions and include certain related exemptions.  In developing these 
rules, the Agencies have consulted with, and sought the concurrence of, the Office of the 
Comptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation 
(“FDIC”) and the Office of Thrift Supervision (“OTS”), and have taken into 
consideration all comments received on the proposed rules issued in December 2006.  
 
1

The rules are intended, among other things, to facilitate banks’ compliance with the 
Exchange Act and the GLBA.  
DATES:   
Effective Dates:  Parts 12 CFR 218 and 17 CFR 247 are added effective September 28, 
2007.  12 CFR 218.781 and 17 CFR 247.781 (collectively “Rule 781”) are effective on 
September 28, 2007.  12 CFR 218.100 through 218.780 and 17 CFR 247.100 through 
247.780 are effective [INSERT 60 DAYS FROM DATE OF PUBLICATION IN THE 
FEDERAL REGISTER].  Amendments affecting Part 240 of Title 17 are effective 
[INSERT 60 DAYS FROM DATE OF PUBLICATION IN THE FEDERAL 
REGISTER]. 
Compliance Date:  Pursuant to Rule 781, banks are exempt from complying with the 
rules and the “broker” exceptions in Section 3(a)(4)(B) of the Exchange Act until the first 
day of their first fiscal year that commences after September 30, 2008. 
FOR FURTHER INFORMATION CONTACT: 
BOARD: Kieran J. Fallon, Assistant General Counsel, (202) 452-5270, Andrea 
Tokheim, Counsel, (202) 452-2300, or Brian Knestout, Attorney, (202) 452-2249, Legal 
Division, Board of Governors of the Federal Reserve System, 20
th
 Street and Constitution 
Avenue, NW, Washington, DC 20551. Users of Telecommunication Device for Deaf 
(TDD) only, call (202) 263-4869.  
SEC:  Catherine McGuire, Chief Counsel, Linda Stamp Sundberg, Senior Special 
Counsel, Joshua Kans, Senior Special Counsel, John J. Fahey, Branch Chief, or Elizabeth 
MacDonald, Special Counsel, at (202) 551-5550, Office of the Chief Counsel, Division 
 
2

of Market Regulation, Securities and Exchange Commission, 100 F Street, NE, 
Washington, DC 20549. 
SUPPLEMENTARY INFORMATION: 
Table of Contents 
I.          Introduction                    
 
A.        Background        
 
B. Overview of Comments 
 
C.   Final Rules and Related Matters 
 
II.        Networking        Arrangements        
 A. Overview of Proposed Rules and Comments 
 
 B. Rule 700:  Definition of Terms Used in Networking Exception 
 
  1. Definition of “Nominal One-Time Cash Fee of a Fixed   
                                    Dollar            Amount”                        
 
                        2.            Definition            of            “Referral”            
  
3. Definition of “Contingent on Whether the Referral Results in a 
Transaction” 
 
4. Definition of “Incentive Compensation” 
 
a.   Exception for Discretionary, Multi-Factor Bonus Plans 
 
b.   Safe Harbor for Plans Based on Overall Profitability or 
Revenue 
  
C. Rule 701:  Exemption for Referrals Involving Institutional Customers and 
High Net Worth Customers 
   
                        1.            Definitions            of            “Institutional Customer” and “High Net Worth  
                                    Customer”                        
 
  2. Determining that a Customer Meets the Relevant Thresholds 
 
  3. Conditions Relating to Disclosures 
 
3

 
                        4.            Suitability            or            Sophistication Analysis by Broker-Dealer 
 
  5. Conditions Relating to Bank Employees 
 
  6.   Good Faith Compliance and Corrections by Banks 
 
  7. Referral Fees Permitted under the Exemption 
 
                        8.            Permissible            Bonus            Compensation Not Restricted 
  
III. Trust and Fiduciary Activities  
 A. Trust and Fiduciary Exception and Proposed Rules 
 
            B.            Joint            Final            Rules            
 
1.   “Chiefly   Compensated”   Test   and Bank-Wide Exemption Based on 
Two-Year Rolling Averages 
 
2.   “Relationship   Compensation”   
 
3.   Excluded   Compensation   
 
4.   Trust or Fiduciary Accounts 
  
5.   Exemptions for Special Accounts, Foreign Branches, Transferred 
Accounts, and a De Minimis Number of Accounts 
 
6.   Advertising   Restrictions   
 
IV. Sweep Accounts and Transactions in Money Market Funds 
 A. Rule 740:  Definition of Terms Used in Sweep Exception 
 B. Exemption Regarding Money Market Fund Transactions 
V. Safekeeping and Custody 
            A.            Background            
 B. Rule 760:  Custody Exemption  
1.   Order-Taking for Employee Benefit Plan Accounts and Individual 
Retirement or Similar Accounts 
 
 
4

   a.  Employee Compensation Restrictions 
 
   b.  Advertisements and Sales Literature 
 
                                    c.                        Other            Conditions            
 
  2.  Order-Taking as an Accommodation for Other Types of Accounts 
 
                                    a.                        Accommodation            Basis            
 
   b.  Employee Compensation Restrictions 
 
   c.  Limitations on Bank Fees 
 
   d.  Advertising and Sales Literature Restrictions 
 
   e.  Investment Advice or Recommendations 
 
3.   Other Conditions Applicable to Order-Taking for All Custody 
Accounts 
 
 a.  Directed Trustees 
 
 b.  Broker Execution Requirement 
 
 c.  Carrying Broker Provisions  
 
4.   Custodians,   Subcustodians,   and Administrators/Recordkeepers 
 
   a.  “Account for which a bank acts as a custodian” 
 
                                    b.                        Administrators/Recordkeepers and Subcustodians 
 
                        5.                        Evasions                        
 
VI.       Other       Exemptions       
A. Exemption for Regulation S Transactions with Non-U.S. Persons and 
Broker-Dealers 
  
B. Exemption for Non-Custodial Securities Lending Transactions 
 
C. Exemption for Banks Effecting Certain Excepted or Exempted 
Transactions in Investment Company Securities and Variable Insurance 
Products 
 
 
5

D.  Exemption for Certain Transactions involving a Company’s Securities for 
its Employee Benefit Plans and Participants 
 
E. Temporary and Permanent Exemption for Contracts Entered Into by 
Banks from Being Considered Void or Voidable 
 
 F. Extension of Time and Transition Period 
 
VII. Finding that the Exemptions are Appropriate and in the Public Interest and 
Consistent with the Protection of Investors 
 
VIII.    Withdrawal of Proposed Regulation B and Removal of Exchange Act   
 Rules 3a4-2 – 3a4-6, and 3b-17 
 
IX. 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. Regulatory Flexibility Analysis 
 
F.         Plain         Language         
 
X.        Statutory        Authority        
 
XI. Text of Rules and Rule Amendment 
 
I.         Introduction                  
A.        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 
                                                 
1
  Pub. L. No. 106-102, 113 Stat. 1338 (1999). 
 
6

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. 
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 GLBA amended the Exchange 
Act to provide eleven specific exceptions for banks.
3 
  Each of these exceptions permits a 
bank to act as a broker or agent in securities transactions that meet specific statutory 
conditions. 
In particular, Section 3(a)(4)(B) of the Exchange Act as amended by the GLBA 
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 
                                                 
2
  Pub. L. No. 73-66, ch. 89, 48 Stat. 162 (1933) (as codified in various Sections of 
12 U.S.C.). 
3
  15 U.S.C. 78c(a)(4). 
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. 
 
7

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
 
                                                                                                                                                
In October 2006, the Financial Services Regulatory Relief Act of 2006 
(“Regulatory Relief Act”) became effective.
15
  Among other things, the Regulatory 
Relief Act requires that the SEC and the Board jointly adopt a single set of rules to 
 
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. No. 109-351, 120 Stat. 1966 (2006). 
 
8

implement the bank broker exceptions in Section 3(a)(4) of the Exchange Act.
16
  In 
addition, it required that the Agencies issue a single set of proposed rules to implem
these exceptions not later than 180 days after enactment of the Regulatory Relief Act 
(April 1
ent 
1, 2007). 
                                                
In December 2006, the Agencies jointly issued, and requested public comment on, 
a single set of 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 included 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, and the potential liability of banks under 
Section 29 of the Exchange Act.  In developing the proposed rules, 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 requested comment on all aspects of the proposed rules.  In 
addition, the Agencies requested 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 were not addressed in the proposal. 
B. Overview of Comments 
 
16
  See Exchange Act Section 3(a)(4)(F), as added by Section 101 of the Regulatory 
Relief Act.    
17
  See 71 FR 77522, December 26, 2006. 
 
9

The Agencies received comments from 58 organizations and individuals on the 
proposed rules.  Commenters included 22 trade associations, 20 banking organizations, 
7 other organizations in the financial services industry, 3 community and nonprofit 
groups, two credit unions, one state government, one self-regulatory organization, one 
association of state securities administrators, and one individual.   Many commenters 
supported the proposed rules as a general matter.  For example, commenters asserted that 
the proposed rules would provide banks considerable flexibility in providing securities 
services to their customers, would avoid disrupting bank activities and customer 
relationships, or were a significant improvement over earlier proposals.
18
  In addition, 
many commenters supported the general approaches (including related exemptions) taken 
by the proposed rules to implement the networking, trust and fiduciary, sweep, and 
safekeeping and custody exceptions.  Several commenters, however, contended that the 
proposed rules did not adequately protect investors, and particularly retail investors.
19
  
Some of these commenters argued that that the Agencies should withdraw the proposed 
rules and issue new rules based on those issued in 2001
20
 or 2004.
21
   
Most commenters also recommended that the Agencies modify specific 
provisions of the proposed rules to, among other things, reduce administrative burden, 
                                                
 
18
  See, e.g., Citigroup Letter, Independent Community Bankers Ass’n (“ICBA”) 
Letter, American Bankers Ass’n (“ABA”) Letter, JPMorgan Chase & Co. (“JP 
Morgan”) Letter, Financial Services Roundtable (“Roundtable”) Letter. 
19
  See, e.g., Massachusetts Securities Division Letter, Pace Investors Rights Project 
(“Pace Project”) Letter, Boyd Financial Letter. 
20
  Exchange Act Release No. 44291 (May 11, 2001), 66 FR 27760 (May 18, 2001). 
21
  Exchange Act Release No. 49879 (June 17, 2004), 69 FR 39682 (June 30, 2004).  
See
, e.g., North American Securities Administrators Association (“NASAA”) 
Letter.  
 
10

better protect bank customers or investors, or clarify the scope or effect of the rules.  The 
comments received on the proposed rules are discussed in greater detail in the following 
sections of this Supplementary Information. 
C.   Final Rules and Related Matters 
 After carefully considering the comments, the Agencies have adopted final rules 
to implement the broker exceptions for banks relating to third-party networking 
arrangements, trust and fiduciary activities, sweep activities, and custody and safekeeping 
activities.
22
  The Board and SEC have consulted extensively with, and sought the 
concurrence of, the OCC, FDIC and OTS in developing these final rules.  
Like the proposal, the final 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 other 
than through a broker-dealer, 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.   
As discussed in the following sections, the Agencies have modified the rules in 
numerous respects in light of the comments received.  These changes include, among 
other things, modifications to the examples of “relationship compensation” in Rule 721 to 
clarify the scope of the term for purposes of the rules relating to trust and fiduciary 
activities; the custody exemption in Rule 760 to permit banks acting as a directed trustee 
                                                
 
22
  Commenters generally did not request that that the Agencies adopt rules to 
implement the other broker exceptions for banks at this time or stated that no 
additional guidance was needed at this time with respect to these exceptions.  See
 
ABA Letter. 
 
11

to accept orders under the exemption; and Rule 781 to extend the compliance date for a 
bank until the first day of its first fiscal year commencing after September 30, 2008.  The 
Agencies also have adopted new exemptions relating to trust or fiduciary accounts held in 
a foreign branch of a bank,
23
 and to permit a bank to effect, under certain conditions and 
without using a broker-dealer, transactions in a fiduciary or custodial capacity for an 
employee benefit plan in the stock of the plan’s sponsor.
24
  
 The final rules are designed to accommodate the business practices of banks and 
protect investors.  If more than one broker exception or exemption is available to a bank 
under the statute or rules for a securities transaction, the bank may choose the exception 
or exemption on which it relies to effect the transaction without registering as a broker-
dealer.  For example, if the bank effects a transaction in a security sold in an offshore 
transaction for a custody account that is permissible under either the Regulation S 
exemption in Rule 771 or the custody exemption in Rule 760, the bank may choose 
which exemption to rely on and comply with in effecting the transaction.  Similarly, if a 
bank effects no more than 500 securities transactions as agent for its customers in a 
calendar year, the bank may rely on the de minimis exception in Section 3(a)(4)(B)(xi) of 
the Exchange Act in lieu of any other available exception or exemption for such 
transactions. The bank, of course, must comply with all of the requirements contained in 
the exception or exemption on which it relies.
25
   
                                                
 
23
  See Rule 723(c). 
24
  See Rule 776.  
25
  An employee of a bank that operates in accordance with the exceptions in 
Section 3(a)(4)(B) of the Exchange Act and, where applicable, the rules is not 
required to register as a “broker” to the extent that the employee’s activities are 
covered by the relevant exception or rule. 
 
12

 Section 401 of the Regulatory Relief Act 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 the final rules, the term “bank” includes any savings association that qualifies as a 
“bank” under Section 3(a)(6) of the Exchange Act, as amended.
26
    
Identical sets of the final rules are being adopted by the Board and SEC and will 
be published by the Board in Title 12 of the Code of Federal Regulations and by the SEC 
in Title 17 of the Code of Federal Regulations.
27
  Pursuant to the Regulatory Relief Act, 
this single set of final rules supersedes any and all other proposed or final rules issued by 
the Commission on or after the date of enactment of the GLBA with regard to the 
definition of “broker” under Section 3(a)(4) of the Exchange Act.
28
   
                                                 
26
  Several commenters asked the Agencies, or the Commission independently, to 
adopt rules that would extend to federal or state-chartered credit unions some or 
all of the “broker” exceptions or exemptions provided banks under Section 
3(a)(4)(B) of the Exchange Act or the final rules.  See
, e.g., Credit Union Nat’l 
Ass’n Letter, Nat’l Ass’n of Credit Union Service Organizations Letter, Nat’l 
Ass’n of Fed. Credit Unions Letter, Navy Fed. Credit Union Letter, and XCU 
Corp. Letter.  While the GLBA’s “bank” exceptions do not by their terms apply to 
credit unions, these requests are under consideration by the Commission, which is 
the agency with authority to address these matters.  The Commission notes the 
existence of SEC staff positions with regard to networking relationships between 
a credit union and a broker-dealer and is not addressing this issue at this time.  
See
, e.g., Chubb Securities Corp., 1993 SEC No-Act. LEXIS 1204 (Nov. 24, 
1993). 
27
  The final rules adopted by the Board and the SEC within their respective titles of 
the Code of Federal Regulation (12 CFR Part 218 for the Board and 17 CFR Part 
247 for the SEC) are identically numbered from § ___.100 to § ___.781.  For ease 
of reference, the single set of final rules adopted by each Agency are referred to in 
this release as Rule ___, excluding title and part designations.  A similar format is 
used to refer to the single set of proposed rules issued by the Agencies. 
28
  Pub. L. No. 109-351, § 101(a)(3), 120 Stat. 1966, 1968 (2006). 
 
13

 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.  In addition, if any rules (including exemptions) are proposed or adopted in the 
future related to the other bank “broker” exceptions in Section 3(a)(4)(B) of the 
Exchange Act that are not addressed in the final rules now being adopted by the SEC and 
the Board, they would be proposed and adopted jointly by the SEC and Board.
29
 
 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.
30
   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 and will be designed to facilitate compliance 
with the statutory exceptions and the rules.  
                                                
 
29
  A few commenters requested that the Commission delegate authority to act on 
future exemptive requests from banks to the Director of its Division of Market 
Regulation.  See
 America Community Bankers Ass’n (“ACB”) Letter, Roma 
Bank Letter.  Because particular banks may have individual situations that may be 
appropriate for additional relief, the Commission delegated authority to the 
Director of the Division of Market Regulation to consider, on a case-by-case 
basis, individual requests for exemptive relief from banks.  To facilitate the 
processing of these requests, the Commission delegated this exemptive authority 
within its Rules of Organization and Program Management in Rule 30-3(a)(70) 
(17 CFR 200.30-3(a)(70)).  The Commission continues to expect the staff to 
submit novel and complex requests for exemptions to the Commission.   
30
  See 12 U.S.C. 1828(t)(1). 
 
14

Several commenters urged the Agencies also to cooperate in providing 
interpretations or guidance (such as staff no-action letters) concerning the final rules or 
the broker exceptions for banks in Section 3(a)(4)(B) of the Exchange Act or in taking 
enforcement action to enforce compliance with these rules or exceptions.
31
  In addition, a 
number of commenters urged the Agencies to work with the Financial Industry 
Regulatory Authority (“FINRA”)
32
 to modify promptly its Rule 3040 as it applies to 
persons that are employees of both a bank and a broker-dealer (so-called “dual 
employees”).
33
   
In light of the joint nature of the final rules and the Agencies’ joint rule-writing 
authority for the bank broker exceptions in Section 3(a)(4)(B),
34
 the Agencies will jointly 
issue any interpretations and responses to requests for no-action letters or other 
                                                 
31
  See, e.g., ABA Letter, Clearing House Ass’n Letter, Citigroup Letter, The PNC 
Financial Services Group, Inc. (“PNC”) Letter.  One commenter, however, 
expressed concern that coordination among the Agencies might result in slower 
responses to requests for guidance.  See
 American Bar Ass’n Section of Business 
Law Letter (“Business Law Section Letter”). 
32
  On July 26, 2007, the Commission approved a proposed rule change filed by 
NASD to amend NASD’s Certificate of Incorporation to reflect its name change 
to Financial Industry Regulatory Authority Inc., or FINRA, in connection with the 
consolidation of member firm regulatory functions of NASD and NYSE 
Regulation, Inc.  See
 Securities Exchange Act Release No. 56146 (July 26, 2007).  
FINRA’s Rules currently consist of the rules adopted by the NASD and effective 
on the date of the consolidation (which include NASD Rule 3040), as well as 
certain rules of the NYSE that FINRA has incorporated into its own rules. 
33
  See, e.g., ABA Letter , Clearing House Ass’n Letter, Harris Bank Letter, HSBC 
Bank, N.A. (“HSBC Bank”) Letter, HSBC Securities (USA) Inc. (“HSBC 
Securities”) Letter, Roundtable Letter.  These commenters asserted that it was 
important for the requested modifications to FINRA’s Rule 3040 to be made prior 
to the date on which banks would first have to comply with the new “broker” 
exceptions in the GLBA. 
34
  Rapaport v. U.S. Department of Treasury, 59 F. 3d 212, 216-217 (D.C. Cir. 
1995), cert.
 denied 116 S.Ct. 775 (1996). 
 
15

interpretive guidance concerning the scope or terms of the exceptions and rules, and will 
consult and, to the extent appropriate, coordinate with each other and the appropriate 
federal banking agency for a bank concerning any formal enforcement actions proposed 
to be taken against a bank for violations of the exceptions or rules.   
The Agencies already consult with and coordinate with each other and the other 
federal banking agencies in a variety of areas, and the Agencies and the other federal 
banking agencies are in the process of supplementing their existing policies and 
procedures to facilitate coordination with respect to the broker exceptions and rules.   
Banks or others that seek an interpretation of, or a no-action letter or other staff guidance 
concerning, the rules or the exceptions should submit their request to both Agencies.  The 
Agencies also expect to continue their dialogue with FINRA concerning potential 
modifications to that authority’s Rule 3040. 
II.        Networking        Arrangements        
 
The third-party brokerage exception (“networking exception”) in Section 
3(a)(4)(B)(i) of the Exchange Act 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.
35
  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 provides that a bank may not pay its 
unregistered employees
36
 incentive compensation for brokerage transactions.  
                                                
 
35
  15 U.S.C. 78c(a)(4)(B)(i). 
36
  An unregistered bank employee is an employee that is not registered or approved, 
or otherwise required to be registered or approved, in accordance with the 
 
16

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.”
37
  Congress included this general prohibition on, and limited exception to, 
incentive compensation to reduce concerns regarding the securities sales practice of 
unregistered bank employees. 
A. Overview of Proposed Rules and Comments 
Proposed Rule 700 defined certain key terms related to referral fees and incentive 
compensation used in the networking exception.  For example, the proposed rule 
provided that a referral fee would be considered “nominal” if it met any of four standards 
included in the rule.  The proposed rule also defined when a referral fee would be 
“contingent on whether a referral results in a transaction,” what constitutes “incentive 
compensation,” and what types of bank bonus plans would not be considered incentive 
compensation under the networking exception.  Proposed Rule 701 included an 
exemption that permitted bank employees, subject to certain conditions, to receive 
higher-than-nominal, contingent referral fees for referring institutional customers and 
high net worth customers to a broker-dealer. 
Many commenters supported the general approach of Proposed Rules 700 and 
701, including the range of alternatives provided for determining if a referral fee is 
nominal and the adoption of an exemption for referrals involving high net worth or 
                                                                                                                                                
 
qualification standards established by the rules of any self-regulatory 
organization. 
37
  15 U.S.C. 78c(a)(4)(B)(i)(VI).  
 
17

institutional customers.
38
  Some commenters, however. suggested that the proposed rules 
would harm investors by giving bank employees undue incentives to direct 
unsophisticated customers into potentially unsuitable investment products.
39
 
B. Rule 700:  Definition of Terms Used in Networking Exception 
1. Definition of “Nominal One-Time Cash Fee of a Fixed   
            Dollar            Amount”            
 
 Proposed Rule 700 defined the term “nominal one-time cash fee of a fixed dollar 
amount” to mean a cash payment for a referral in an amount that meets any one of four 
alternative standards:  the first based on twice the average hourly base wage established 
by the bank for the employee’s job family; the second based on 1/1000th of the average 
annual base salary established by the bank for the employee’s job family;
 
the third based 
on twice the employee’s actual base hourly wage; and the fourth based on a specified 
dollar amount ($25), indexed for inflation.
40
 
 Many commenters generally supported the flexibility that this range of 
alternatives would afford in determining whether a referral fee is “nominal.”
41
  Some 
commenters expressed concern that the proposed rule placed greater limits on permissible 
payments under networking arrangements than exist currently under applicable federal 
banking agency guidance or questioned the need for a definition of “nominal” to be 
                                                
 
38
  See, e.g. ABA Letter, Roundtable Letter, Citigroup Letter, Union Bank of 
California (“Union Bank”) Letter. 
39
  See, e.g., Pace Project Letter.     
40
  Proposed Rule 700(c). 
41
  See, e.g., Roundtable Letter, ACB Letter. 
 
18

established by rule at all.
42
  A few commenters contended that the specific dollar amount 
in the proposed rule ($25) was too low.
43
  A number of commenters, however, believed 
that the alternatives would result in the payment of fees that are higher than nominal and 
would create incentives for bank employees to make securities referrals even when not 
appropriate for the customer.  These commenters questioned, for example, whether twice 
an employee’s hourly wage was truly nominal and whether the Agencies had sufficient 
basis for selecting that measure of “nominal.”
44
      
 After carefully reviewing the comments, the Agencies have determined to adopt 
the “nominal” definition substantially as proposed.  Including a definition of “nominal” 
in the rule will provide banks with certainty as to the Agencies’ interpretation of that 
standard and should facilitate compliance.  The Agencies believe that each of the 
alternatives for defining “nominal” is consistent with the statutory networking exception, 
which provides that a bank employee may receive compensation for each referral if the 
compensation for that referral is “nominal” and meets the other requirements of the 
statute.  Under each of the alternatives established, the amount of compensation a bank 
employee may receive for each referral will be small in relation to the employee’s overall 
compensation and therefore unlikely to create undue incentives for the bank employee to 
engage in activities, such as “pre-selling” specific securities to the customer involved in 
                                                
 
42
  See, e.g., Bank Insurance & Securities Ass’n (“BISA”) Letter, Wisconsin Bankers 
Ass’n (“WBA”) Letter. 
43
  See, e.g., Clearing House Ass’n Letter and ICBA Letter. 
44
  See, e.g., Boyd Financial Letter, NASAA Letter, Pace Project Letter, and 
University of Cincinnati Corp. Law Ctr. Letter.  
 
19

violation of the networking exception,
45
 which would raise sales practice concerns.  As 
discussed below, the multiple alternatives are designed to provide flexibility for banks of 
all sizes and locations to use different business models and to take into account economic 
differences around the country and among their employees in assessing how best to 
structure their program(s) for paying “nominal” cash referral fees under the networking 
exception.  The alternatives also were designed to allow for roughly equivalent treatment 
of bank employees at different base or hourly compensation levels within a bank. 
 Rule 700(c) provides that a referral fee paid to any bank employee will be 
considered “nominal” if it does not exceed $25.
46
  This dollar amount will 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.
47
  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.  Available data indicate that the $25 amount is consistent with the level 
of referral fees generally paid to tellers and other bank employees engaged in making 
referrals of retail customers under existing Banking Agency guidance, which also 
includes a “nominal” standard.
48
 
                                                
 
45
  See Exchange Act Section 3(a)(4)(B)(i)(V). 
46
  Rule 700(c)(3). 
47
  Each adjustment would be rounded to the nearest multiple of $1.  Rule 700(f). 
48
  See ABA Securities Ass’n., 2003/2004 National Survey of Bank Retail 
Investment Services, Vol. I, at 60 (survey data demonstrate that 20 percent of 
banks pay retail referral fees of $20 or more); Banking Agencies’ Interagency 
Statement on Retail Sales of Nondeposit Investment Products (Feb. 15, 1994). 
 
20

 As under the proposal, a referral fee also will be considered “nominal” under 
Rule 700(c) if the payment does not exceed (1) twice the employee’s actual base hourly 
wage; (2) 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 
(3) 1/1000
th
 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.
49
   
 In developing these alternatives to the fixed $25 fee, the Agencies considered data 
on the average hourly wages of bank tellers, which are the class of bank employees most 
typically engaged in making referrals of retail customers.  These data indicate that the 
national mean hourly wage in 2005 for tellers was $10.59.
50
  Accordingly, the 
$25 amount is slightly more than twice the national mean hourly wage for tellers in 2005, 
and slightly more than 1/1000
th
 of the annualized salary of an employee that makes 
$12.50 per hour (or $25 every two hours) based on a 40 hour work week.
51
  Thus, the 
alternatives based on twice the employee’s hourly base wage or 1/1000
th
 of the 
employee’s base annual salary, at current pay rates, are designed to allow bank 
employees to receive referral fees that are roughly equivalent to those that may be 
received by bank tellers under the flat dollar option. 
 The options based on the employee’s job family use these same measurements but 
allow comparisons to the average of the minimum and maximum hourly base wage or 
                                                
 
49
  Rule 700(c)(1) and (2). 
50
  Occupational Employment and Wages, May 2005, (Tellers), U.S. Department of 
Labor, Bureau of Statistics. 
51
  Specifically, twice the hourly wage for an employee who earns an annual base 
salary of $25,000 (1,000 x $25) would be $24.04, based on a 40 hour per week (or 
1080 hours per year) work schedule.  
 
21

base salary of the employee’s job family.  These options are designed to reduce 
administrative burden while also ensuring that referral fees remain nominal in amount.  
To provide comparability between the alternative based on an employee’s actual 
compensation and those based on the compensation established for the employee’s job 
family, the Agencies have modified the final rule to provide that a referral fee also will be 
considered nominal if it does not exceed 1/1000
th
 of the employee’s actual base annual 
salary.
52
  Under the final rules, a bank may use a different “nominal” methodology in its 
different business lines or operating units and may alter the methodology it uses within a 
given year. 
 One commenter suggested that the term “job family” was ambiguous and could 
allow banks to include all employees in a single job family, which would result in 
payments to employees with salaries at the lower end of the job family that may be well 
in excess of twice their hourly wage.
53
  Rule 700 defines a “job family” 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 establishe
and uses in the ordinary course of its business to distinguish among its employees for 
purposes of hiring, promotion, and compensation.
 
d 
                                                
54
  The requirements that a job family 
include jobs or positions with similar responsibilities, or that require similar skills, 
education and training, and be used by the bank in the ordinary course of its business for 
hiring, promotion and compensation purposes are designed to prevent a bank from 
 
52
  Rule 700(c)(2). 
53
   See Pace Project Letter. 
54
  Proposed Rule 700(d). 
 
22

establishing special job family classifications to evade the “nominal” standard.  A bank 
may not deviate from its ordinary classification of jobs for purposes of determining 
whether a referral fee is nominal under this standard, and the Banking Agencies will 
monitor the job family classifications used by banks for “nominal” determination as part 
of the risk-focused examination process.  Depending on a bank’s internal employee 
classification system, examples of a job family may include tellers, loan officers, or 
branch managers.  The Agencies note, moreover, that other provisions of the networking 
exception also provide significant protection to customers.  For example, the networking 
exception provides that unregistered bank employees may perform only clerical or 
ministerial functions in connection with brokerage transactions.
55
  Accordingly, bank 
employees referring a customer to a broker-dealer under the exception may not provide 
investment advice concerning securities or make specific securities recommendations to 
the customer.
56
   
 A few commenters suggested that, by defining “nominal” by reference to hourly 
wages and annual base salary, the rule treats unfairly employees who receive a 
considerable portion of their compensation through bonuses tied to sales of non-securities 
products.
57
  Because the five alternatives included in the final rule are based on a set 
dollar amount or the hourly wage or annual base salary established by a bank for the 
                                                 
55
  See 15 U.S.C. 78c(a)(4)(B)(i)(V).   
56
  A bank employee, however, may describe in general terms the types of 
investment vehicles available from the bank and the broker-dealer under the 
arrangement.  See
 id. 
57
  See, e.g., ABA Letter, BISA Letter, Clearing House Ass’n Letter, Harris Bank 
Letter, Roundtable Letter, PNC Letter, U.S. Trust Company, N.A. (“U.S. Trust”) 
Letter, and WBA Letter. 
 
23

employee or the employee’s job family, the alternatives help ensure that a referral fee 
will be nominal in relation to the employee’s compensation in the year it is paid.  
Bonuses, however, typically are discretionary, vary significantly from year-to-year and, 
as noted by commenters, may constitute a significant portion of the compensation of 
certain types of bank employees in particular years.  Permitting referral fees to be based 
in part on the size of a bonus paid in a previous year (or projected to be paid in the 
current year) could allow bank employees to receive a referral fee that is not nominal in 
relation to the employee’s compensation, or the average compensation paid to employees 
within the relevant job family, in the year in which the fee is paid and, thus, could 
increase the potential for sales practice concerns.   
 Commenters also asserted that more than one employee should be able to receive 
a fee for a single referral and also requested clarification as to whether officers and 
directors of a bank may receive referral fees under the exception.
58
  The Agencies believe 
that the networking exception permits a bank employee who personally participated in a 
referral to receive a referral fee for the referral.
59
  Accordingly, the Agencies have 
modified Rule 700(c) to clarify this position.  Thus, for example, a supervisory employee 
may receive a separate, nominal one-time cash fee for a referral made by another 
individual supervised by the employee only if the supervisory employee personally 
participated in the referral.  A supervisory employee may not, however, receive a referral 
fee merely for supervising the employee making the referral or administering the referral 
                                                
 
58
  See, e.g., Consumer Bankers Ass’n (“CBA”) Letter, BISA Letter. 
59
  See Section 3(a)(4)(B)(i)(VI) of the Exchange Act (permitting “the bank 
employee [to] receive compensation for the referral of any customer” in 
accordance with the exception). 
 
24

process.  An officer or director of a bank who makes or personally participates in making 
a referral may receive a nominal fee for the referral as a bank employee. 
The proposed rule permitted a nominal referral fee to be paid only in cash.  Many 
commenters requested that banks be given the flexibility to pay referral fees in non-cash 
forms.
60
  The terms of the networking exception, however, provide for a “nominal,  
one-time cash fee of a fixed dollar amount”
 61
 and, accordingly, the final rule continues to 
require that referral fees paid under the exception be paid in cash.  A bank, therefore, may 
not pay referral fees in non-cash forms, such as vacation packages, stock grants, annual 
leave, or consumer goods.  The final rules do not, however, prevent a bank from paying 
an employee on a quarterly or more frequent periodic basis the total amount of nominal, 
fixed cash fees the employee earned during the period.  For example, if a bank employee 
is entitled to receive a $25 referral fee for each securities referral and the employee 
makes three qualifying referrals in a given quarter, the bank may pay the employee $75 at 
the end of the quarter instead of three individual payments of $25.  A bank also may use a 
“points” system to keep track of the number of qualifying securities referrals made by the 
employee during a quarterly or more frequent period and the total amount of nominal, 
fixed cash fees that the employee is entitled to receive at the end of the period.  In all 
cases, however, points must translate into cash payments on a uniform basis and the cash 
amount that an employee will receive for a qualifying securities referral (e.g
., twice the 
employee’s actual base hourly wage) must be fixed before the referral is made and may 
                                                 
60
  See, e.g., ABA Letter, BISA Letter, Clearing House Ass’n Letter, and JPMorgan 
Letter. 
61
  See Exchange Act Section 3(a)(4)(B)(i)(VI).  
 
25

not be contingent or vary based on whether an employee makes a specified number or 
type of securities referrals during a quarterly or more frequent period.
62
 
2. Definition of “Referral” 
The statutory networking exception permits bank employees to receive a nominal 
one-time cash fee of a fixed dollar amount for the “referral” of a customer to a broker-
dealer.  Rule 700(e) defines a referral as an action taken by one or more bank employees 
to direct a customer of the bank to a broker-dealer for the purchase or sale of securities 
for the customer’s account.
63
  For purposes of the networking exception and Rules 700 
and 701, the term “customer” includes both existing and potential customers of the bank. 
As proposed, a bank employee may receive a referral fee under the networking 
exception and Rule 700 for each referral made to a broker-dealer, including separate 
referrals of the same individual or entity.  In addition, nothing in the statutory networking 
exception or the final 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 rules do not apply to referrals of retail, institutional or high net worth customers to a 
broker-dealer or other third party solely for transactions not involving securities, such as 
                                                
 
62
  The exception and the final rules also do not prohibit a bank from providing its 
employees non-cash items, such as pizza or coffee mugs, in connection with 
programs to familiarize bank employees with new types of investment vehicles 
offered by the bank or the broker-dealer through the arrangement, provided that 
the programs or items given to employees do not reward or compensate an 
employee for making a referral to a broker-dealer.  Thus, for example, a “pizza 
party” that is made available only to those employees that have made one or more 
referrals to a broker-dealer would not be permissible. 
63
  Rule 700(e). 
 
26

loans, futures contracts (other than a security future), foreign currency, or over-the-
counter commodities, or solely for transactions in securities (such as U.S. Government 
obligations) that would not require the other party to register under section 15 of the 
Exchange Act.
64
   
 3. 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-dealer may not be contingent on 
whether the referral results in a transaction.  This limitation is designed to allow banks to 
reward bank employees for introducing customers to a broker-dealer without giving 
unregistered bank employees a direct financial interest in any resulting securities 
transaction at the broker-dealer.   
The final rule, like the proposed rule, provides that a referral fee will 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-dealer; whether the referral results in a 
transaction involving a particular type of security; or whether the referral results in 
multiple securities transactions.
65
  The final rule expressly provides that a referral fee 
may be contingent on whether a customer (1) contacts or keeps an appointment with a 
broker-dealer as a result of the referral; or (2) meets any objective, base-line qualification 
                                                 
64
  A bank that acts as a government securities broker (as defined in Section 3(a)(43) 
of the Exchange Act) is not exempt from and must comply with the notification 
and other applicable requirements of section 15C of the Exchange Act. 
65
  Rule 700(a).  
 
27

criteria established by the bank or broker-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-dealer, or the bank, 
may have established generally for referrals for securities brokerage accounts.
66
  A bank 
or broker-dealer may establish and use different objective, base-line qualification criteria 
(including citizenship or residency requirements) for different classes of customers or for 
different business lines, divisions or units of the bank or broker-dealer. 
Commenters generally supported these permissible contingencies.  Some 
commenters contended that the rule also should allow payment of a nominal referral fee 
to be contingent on other events, such as the opening of an account at the broker-dealer or 
on the opening of an account that may be used to conduct only securities transactions that 
the bank itself could effect without registering as a broker under the exceptions for banks 
in Sections 3(a)(4)(B) of the Exchange Act.
67
  Opening a securities account at the broker-
dealer, however, is a necessary first step to executing securities transactions and one that 
a customer is unlikely to take unless the customer anticipates engaging in securities 
transactions with the broker-dealer.  In light of this close link between opening an 
account and executing securities transactions, the Agencies have not modified the rule as 
requested and the final rule continues to provide that payment of a referral fee may not be 
contingent on whether the customer opens an account (other than the types of accounts 
described in Part B.2 supra
.) at the broker-dealer.  Other contingencies not specified in 
                                                
 
66
  Rule 700(a). 
67
  See, e.g., BISA Letter, Clearing House Ass’n Letter, and U.S. Trust Letter. 
 
28

the rule may be permissible if they are not based on whether the referral results in a 
securities transaction at the broker-dealer. 
In addition, the “broker” exceptions in Sections 3(a)(4)(B) of the Exchange Act 
are available only to banks.  Accordingly, a referral to a broker-dealer for a securities 
transaction within the scope of section 15 of the Exchange Act still involves a “broker” 
transaction at the broker-dealer even if a bank could conduct the transaction itself without 
registering as a broker, and a referral fee may not be contingent on the occurrence of such 
a transaction (or the opening of an account to engage in such transactions).
68
 
  4. Definition of “Incentive Compensation” 
The networking exception prohibits an unregistered employee of a bank that 
refers a customer to a broker-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) defined 
“incentive compensation” as compensation that is intended to encourage a bank 
employee to refer potential customers to a broker-dealer or give a bank employee an 
interest in the success of a securities transaction at a broker-dealer.   
The proposed rule also excluded certain types of bonus compensation from the 
definition of “incentive compensation.”  Proposed Rule 700(b)(1) excluded compensation 
paid by a bank under a bonus or similar plan if such compensation is paid on a 
discretionary basis; based on multiple factors or variables; such factors or variables 
include significant factors or variables that are not related to securities transactions at the 
                                                
 
68
  For similar reasons, a referral to a broker-dealer for such a transaction is a 
“referral” for purposes of the networking exception and Rule 700. 
 
29

broker-dealer; and a referral made by the employee or any other person is not a factor or 
variable in determining the employee’s compensation under the plan.  
 In addition, Proposed Rule 700(b)(2) provided that the definition of incentive 
compensation did not prevent a bank from compensating its employees 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-dealer) or 
operating units; or (3) a broker-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-dealer.  The Agencies specifically requested comment on 
whether existing bank bonus programs would fit, or could easily be adjusted to fit, within 
these proposed exclusions. 
 Many commenters indicated that the proposed bonus provisions worked well and 
would not interfere with bank bonus plans generally.  One commenter, however, opposed 
the proposed bonus provisions arguing that permitting bonuses to be based even in part 
on revenues generated by activity conducted at a broker-dealer would encourage bank 
employees to make referrals regardless of the appropriateness of the referral in order to 
increase their compensation under the bonus plan.
69
  In addition, a number of 
commenters, requested that the Agencies either confirm that bonus programs structured 
in particular ways identified by the commenter would not fall within the definition of 
“incentive compensation” or modify the terms of the exclusions to encompass plans with 
these features.  For example, several commenters asked the Agencies to confirm that the 
                                                
 
69
  See NASAA Letter. 
 
30

rules would not prohibit a bank from basing an employee’s bonus on the assets, revenues 
or profits brought to the bank and its partner broker-dealer by that employee.  Other 
commenters asked that the Agencies provide that all “traditional” bank bonus programs 
are protected under the rule. 
A number of commenters also raised specific issues with one or more aspects of 
the exception in Rule 700(b)(1) for discretionary, multi-factor bonus plans or the safe 
harbor in Rule 700(b)(2) for plans based on overall profitability.  For example,
 
some 
commenters requested clarification of the “discretionary” requirement in paragraph (b)(1) 
and asserted that a bonus plan should be considered “discretionary” if employees do not 
have an enforceable right to compensation under the plan until it is paid.
 70
  One 
commenter also argued that Proposed Rule 700(b)(1) should not prohibit the number of 
referrals made by an employee from playing a role in the employee’s compensation under 
a bonus plan.
71
   
Several commenters also asserted that the safe harbor in paragraph (b)(2) should 
be clarified or expanded to cover bonus programs based on any measure of the financial 
performance, and not just the “overall profitability,” of a bank, affiliate, operating unit or 
broker-dealer.
72
  Commenters indicated that bank bonus programs may be based on a 
wide variety of measures or metrics related to the operations or performance of the bank, 
an affiliate or operating unit.
73
  Some commenters also requested that the safe harbor be 
                                                
 
70
  See, e.g., U.S. Trust Letter and Union Bank Letter. 
71
  See TD Banknorth, N.A. (“TD Banknorth”) Letter. 
72
  See, e.g., ABA Letter, Clearing House Ass’n Letter. 
73
  See, e.g., Clearing House Ass’n Letter, Harris Bank Letter, U.S. Trust Letter. 
 
31

revised to clarify that a bonus program may be based on the overall profitability of an 
operating unit of an affiliate of a bank (other than a broker-dealer), or be expanded to 
allow bonus programs to be based on the financial performance of a branch, division, or 
geographical or operational unit of a broker-dealer.
74
   
 The purpose of the exception and exclusion in paragraph (b) is to recognize that 
certain types of bonus plans are not likely to give unregistered bank 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.  As described 
below, the Agencies have made several revisions to the exception and exclusion to help 
clarify the types of bonus plans that fall outside of the scope of “incentive compensation” 
and to ensure that excepted or excluded plans are not likely to give bank employees an 
impermissible promotional interest in the broker-dealer’s activities.  These exceptions 
and exclusions are crafted to accommodate existing types of bank bonus programs in 
general.  Nevertheless, a plan’s longevity or the number of banks that utilize similar plans 
are not factors in determining whether a plan constitutes “incentive compensation” under 
this definition.  Accordingly, banks that have networking arrangements with a broker-
dealer should review their existing bonus programs in light of the standards set forth in 
the rule to evaluate whether they may constitute impermissible incentive compensation. 
a. Exception for Discretionary, Multi-Factor Bonus Plans 
 Under Rule 700(b)(1) of the final rules, compensation paid by a bank under a 
bonus or similar plan is specifically excepted from “incentive compensation” if it is paid 
on a discretionary basis and based on multiple factors or variables, provided that (1) those 
                                                
 
74
  See, e.g., ABA Letter, Clearing House Ass’n Letter, HSBC Bank Letter, PNC 
Letter, and Union Bank Letter. 
 
32

factors or variables include multiple, significant factors or variables that are not related to 
securities transactions at the broker-dealer; (2) a referral made by the employee is not a 
factor or variable in determining the employee’s compensation under the plan; and (3) the 
employee’s compensation under the plan is not determined by reference to referrals made 
by any other person.
75
  The Agencies have modified the rule to make clear that, to be 
excluded under Rule 700(b)(1), a multi-factor plan must include multiple
, significant 
factors or variables that are not related to securities transactions at the broker-dealer.
76
  
The proposed rule already required that there be “significant factors or variables” and the 
addition of “multiple” highlights the plural nature of these terms. 
 Each factor or variable unrelated to securities transactions at the broker-dealer 
will be considered “significant” for purpose of Rule 700(b) if it plays a material role in 
determining an employee’s compensation under the bonus or similar plan, i
.e., the 
amount of the employee’s bonus could be reduced or increased by a material amount 
based on the non-securities factor or variable.  This clarification will give banks greater 
certainty and will allow them to more readily identify the types of factors or variables not 
related to securities transactions that must be included within a discretionary, multi-factor 
bonus plan under paragraph (b)(1) of the Rule.  Thus, under paragraph (b)(1), a bank’s 
bonus program may take account of the full range of banking, securities or other business 
of one or more customers brought to the bank and its partner broker-dealer by an 
                                                
 
75
  Rule 700(b)(1).  The requirement that an employee’s compensation not be based 
on a “referral” made by the employee or another person means that the 
employee’s compensation under the bonus or similar plan may not vary based on 
the fact that the employee or other person made a referral to a broker-dealer or the 
number of securities referrals made by the employee or other person to a broker-
dealer.  
76
  A similar change has been made to the corresponding language in Rule 700(b)(2). 
 
33

employee so long as the bonus is paid on a discretionary basis, the banking and other 
factors or variables not related to securities transactions at the broker-dealer are 
significant factors or variables under the bonus program, and a referral or number of 
referrals made by the employee or others is not a factor or variable under the program.  In 
this way, the rule is designed to accommodate discretionary bank bonus programs that are 
based on general measures of the business or performance of a bank or a particular 
customer, branch or other unit of the bank, that are not
 based on referrals made by one or 
more bank employees and that include some inputs based on securities transactions at a 
broker-dealer as well as multiple significant factors or variables that are unrelated to 
securities transactions at the broker-dealer. 
 A bank may not establish or maintain one or more “sham” non-securities factors 
or variables in its bonus or similar plan for the purpose of evading the restrictions in Rule 
700(b) and the Banking Agencies will continue to review the bonus and similar plans of 
banks participating in networking arrangements as part of the risk-focused supervisory 
process.  In considering if a bonus program at a bank contains sufficient banking or other 
factors unrelated to securities transactions at a broker-dealer, the agencies will consider, 
among other things, whether such factors or variables relate to banking or other non-
broker-dealer business(es) actually being conducted by the bank or its employees, the 
resources devoted by the bank to such business(es), and whether such business(es) 
materially contributes to the payments made under the plan over time.  It is not expected 
that the actual payments made under a bank’s bonus or similar plan would, over time, be 
based predominantly on securities transactions conducted at a broker-dealer.  If such a 
 
34

situation were to occur, the bank would be expected to make appropriate modifications to 
its bonus or similar plan going forward. 
A bonus or similar plan will be considered “discretionary” under the final rule if 
the amount an employee may receive under the plan is not fixed in advance and the 
employee does not have an enforceable right to payments under the plan until the amount 
of any payments are established and declared by the bank.  A plan may, however, include 
targets or metrics that must be met in order for any bonus to be paid, provided the plan is 
otherwise a “discretionary” plan. 
The Agencies have not modified the rule to allow a bonus plan to be based on the 
fact of a referral or the number of referrals made by one or more bank employees.  The 
Agencies believe that doing so would allow a direct linkage between a referral and an 
employee’s bonus compensation and be contrary to the purposes of the exception.   
b. Safe Harbor for Plans Based on Overall Profitability or Revenue 
 The safe harbor provisions of Rule 700(b)(2) are designed to allow banks to avoid 
having to analyze whether a particular bonus program meets the requirements of the 
exception in paragraph (b)(1) in circumstances where the general structure of the program 
clearly reduces the potential for sales practice concerns in connection with a referral to a 
broker-dealer.  The Agencies have made several changes to the safe harbor to address the 
issues raised by commenters and to ensure that the safe harbor achieves its purpose.  In 
particular, the Agencies have modified paragraph (b)(2) of the rule to cover any bonus or 
similar plan that is based on the overall profitability or revenue of: 
(i) The bank, either on a stand-alone or consolidated basis; 
 
35

(ii) Any affiliate of the bank (other than a broker-dealer), or any operating unit of 
the bank or an affiliate (other than a broker-dealer), if the affiliate or operating 
unit does not over time predominately engage in the business of making referrals 
to a broker-dealer; or 
(iii) A broker-dealer if: 
(A) Such measure of overall profitability or revenue is only one of multiple 
factors or variables used to determine the compensation of the officer, director or 
employee;   
(B) The factors or variables used to determine the compensation of the officer, 
director or employee include multiple significant factors or variables that are not 
related to the profitability or revenue of the broker-dealer;  
(C) A referral made by the employee is not a factor or variable in determining the 
employee’s compensation under the plan; and 
(D) The employee’s compensation under the plan is not determined by reference 
to referrals made by any other person. 
When a bonus program is based on the overall profitability of a bank, an affiliate 
of a bank (other than a broker-dealer), or an operating unit of the bank or an affiliate 
(other than a broker-dealer), any relationship between a referral made by an employee 
and the amount of payments that the employee may receive under the plan are likely to be 
attenuated.  In these circumstances, for example, any potential connection between the 
revenue received by a bank from its partner broker-dealer as a result of a referral and the 
payments made to the referring bank employee under the plan likely would be tenuous 
and largely speculative given the number of other employees, business and actions that 
 
36

contribute to the overall profitability of the bank, affiliate or most operating units.  The 
Agencies believe this attenuation effectively addresses any potential that payments under 
the plan would give an employee an undue promotional interest in any securities 
transactions that may occur at the broker-dealer as a result of a referral.  A bonus plan 
based on the overall revenue
 of a bank or qualifying affiliate or operating unit would be 
similarly attenuated and, for this reason, the Agencies have modified the safe harbor to 
cover plans based on either the “overall profitability or revenue” of a bank or a qualifying 
affiliate or operating unit.  This would include plans based on an entity’s earnings per 
share or stock price, both of which are directly related to the entity’s overall profitability 
or revenue.  Because other, more granular measures of the financial performance of a 
bank, affiliate or operating unit could create an unduly close connection between the 
employee’s expected payment under the bonus plan and referrals made to the broker-
dealer or the securities transactions that result from those referrals, the rules provide for 
plans structured in more granular ways to be analyzed under the multi-factor, 
discretionary criteria in Rule 700(b)(1). 
The potential connection between a referral made by a bank employee and the 
payments made to the employee under a bonus plan may be particularly strong if 
payments under the plan are based on the profitability or revenue of (i) the partner 
broker-dealer itself or a specific branch or operating unit of the broker-dealer (such as the 
branch or operating unit responsible for handling customers referred by the bank), or 
(ii) an operating unit of the bank or a non-broker-dealer affiliate that is predominantly 
engaged over time in referring customers to the broker-dealer.  To address the potential 
for improper incentives in these situations, the Agencies have modified 
 
37

Rule 700(b)(2)(iii) to allow a bonus program to be based on the overall profitability or 
revenue of a broker-dealer only if the program meets the conditions specified in (A)-(D) 
above.  These conditions are similar to those that would apply to a discretionary bonus or 
similar plan under paragraph (b)(1) and are designed to ensure that the profitability or 
revenue of the broker-dealer is only one of multiple significant factors or variables in 
determining the employee’s compensation and that a referral or number of referrals made 
by the employee is not a factor or variable under the program.
77
  Like the proposal, the 
safe harbor in paragraph (b)(2) is not available to bonus plans based on the profitability 
or revenue of a particular branch, division or operating unit of the partner broker-dealer.   
 In addition, the Agencies have modified paragraph (b)(2)(ii) of the rule to exclude 
bonus plans based on the profitability or revenue of an operating unit of a bank or non-
broker-dealer affiliate that over time predominantly engages in the business of making 
referrals to a broker-dealer.  This exclusion is intended to prevent a bank from basing a 
bonus plan on the overall profitability or revenue of a bank unit that is focused solely or 
predominately on making referrals to a broker-dealer.  This restriction, however, is not 
intended to prevent a bonus plan from being based on the overall profitability or revenue 
of a bank unit, such as a call center, that in fact markets, sells or supports a range of bank 
products in addition to making referrals to a broker-dealer and which is not, over time, 
predominantly engaged in the business of making referrals to a broker-dealer. 
C. Rule 701:  Exemption for Referrals Involving Institutional Customers and High 
Net Worth Customers 
 
                                                
 
77
  As with a multi-factor bonus plan under paragraph (b)(1) of the Rule, a non-
securities factor or variable will be considered “significant” under paragraph 
(b)(2)(iii) if it plays a material role in determining an employee's compensation 
under the bonus or similar plan. 
 
38

 The proposed rules included an exemption that would permit a bank, subject to 
certain conditions, 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-dealer with which the bank has a contractual or other written networking 
arrangement.
78
  Among the conditions included in the proposed rule were conditions 
that— 
• Established the financial thresholds at which a customer would be considered an 
“institutional customer” or “high net worth customer”; 
• Limited the types of bank employees that may receive a higher-than-nominal 
referral fee under the exemption and the manner in which these fees may be 
structured;
79
  
• Required the bank to provide certain disclosures to the customer regarding the 
referral arrangement;
80
 and 
• Required that the agreement between the bank and the broker-dealer include 
certain provisions, including a provision obligating the broker-dealer to perform a 
suitability analysis of certain securities transactions that may result from the 
referral or a sophistication analysis of the customer referred.
81
   
                                                
 
78
  Proposed Rule 701. 
79
  See Proposed Rule 701(a)(1) and (d)(4). 
80
  See id. at 701(a)(2)(i). 
81
  See id. at 701(a)(3)(ii). 
 
39

Many commenters supported providing an exemption for referrals involving 
sophisticated individuals and entities.
82
  These commenters, for example, asserted that 
the exemption was appropriate in light of the required sophistication of the custom
involved.
er 
                                                
83
  Other commenters, however, argued that providing an exemption to the 
“nominal” requirement would not be in the interest of investors or the public.  These 
commenters asserted that the exemption as proposed would allow bank employees to 
have a significant salesman’s stake in securities transactions and encourage bank 
employees to act as finders or salespeople for a broker-dealer.
84
 
 Many commenters, including a number that supported the exemption, also asked 
that the Agencies modify the exemption to, among other things, lower or alter the 
thresholds at which a person would be considered an “institutional customer” or “high net 
worth customer” under the rule; eliminate the provisions of the rule requiring the broker-
dealer to perform a suitability or sophistication analysis in connection with a referral; or 
eliminate the limitations on the manner in which a higher-than-nominal referral fee may 
be structured.  In addition, many commenters requested that the Agencies modify the rule 
in several respects to reduce administrative burden and complexity.  For example, several 
commenters asked that the Agencies provide a bank and its partner broker-dealer greater 
flexibility to assign between themselves the responsibility for fulfilling the disclosure and 
other obligations included in the rule. 
 
82
  See, e.g., BISA Letter, CBA Letter, Citigroup Letter, ICBA Letter, Roundtable 
Letter, Securities Industry and Futures Markets Ass’n (“SIFMA”) Letter, State 
Street Corp. Letter, U.S. Trust Letter, Union Bank Letter. 
83
  See CBA Letter. 
84
  See, e.g., Massachusetts Securities Division Letter, NASAA Letter. 
 
40

After carefully considering the comments, the Agencies have decided to retain the 
exemption.  The Agencies continue to believe that it is appropriate to provide an 
exemption from the nominal and contingency limitations in the networking exception for 
referrals that both involve institutions and individuals that meet certain financial criteria 
and that occur under other conditions designed for investor protection.  When provided 
appropriate information, such institutions and individuals are more likely to be able to 
understand and evaluate the relationship between a bank and its employees and the 
bank’s broker-dealer partner and the impact of that relationship on any resulting 
securities transaction with the broker-dealer.  The conditions in the final exemption are 
designed to help ensure that, among other things, institutional and high net worth 
customers, as defined in the rule, receive appropriate investor protections and information 
that enables the customer to understand the financial interest of the bank employee so the 
customer can make informed choices.  Moreover, as the exemption itself provides, a bank 
operating under the exemption also must comply with 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), including the terms and 
conditions that require the disclosure of the uninsured nature of securities and that limit 
the role that a bank employee may have in a brokerage transaction.
85
  These conditions 
provide additional protections to institutional and high net worth customers that may be 
referred to a broker-dealer under Rule 701. 
The Agencies have modified the final rule in several respects to, among other 
things, provide banks and broker-dealers greater flexibility in complying with the rule’s 
                                                
 
85
  See Exchange Act Section 3(a)(4)(B)(i)(V) and (IX). 
 
41

disclosure requirements and to make the exemption more workable in practice.  In light 
of the protections retained in the rule, the Agencies also have modified the thresholds at 
which a non-natural person will be considered an “institutional customer” for purposes of 
the rule.  These modifications are discussed further below.   
Banks that pay their employees only nominal, non-contingent fees in accordance 
with Rule 700 for referring customers—including institutional or high net worth 
customers—to a broker-dealer do not need to rely on, or comply with, the exemption 
provided in Rule 701.  As under the proposal, the final rule requires that the written 
agreement between a bank operating under the exemption and its partner broker-dealer 
include terms that obligate the broker-dealer to take certain actions.  Banks and broker-
dealers are expected to comply with the terms of their written networking arrangements.   
If a bank or broker-dealer 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.   
 1.  Definitions of “Institutional Customer” and “High Net Worth   
                        Customer”            
 
 Proposed Rule 701(d)(2) defined an “institutional customer” to mean any 
corporation, partnership, limited liability company, trust, or other non-natural person that 
has at least $10 million in investments or
 $40 million in assets.  Under the proposal, a 
non-natural person also would 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-dealer for investment banking services.  Proposed Rule 701(d)(1) 
defined a “high net worth customer” 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 
 
42

primary residence and associated liabilities of the person and, if applicable, his or her 
spouse.  Proposed Rule 701 also included provisions governing the allocation of assets 
held by a natural person jointly with his or her spouse and provided for the dollar 
thresholds in the rule to be adjusted for inflation every five years.  
A number of commenters argued that the proposed dollar thresholds for both 
types of customers were too high in light of the nature of the transactions involved and 
the other requirements of the exemption.
86
  Commenters asserted that customers with 
lower levels of net worth, assets or investments are sophisticated enough to understand 
and evaluate the implications of a higher-than-nominal or contingent referral fee.  
Commenters suggested a wide variety of alternative thresholds, with many 
recommending that the Agencies use an existing standard established under the federal 
securities laws for assessing a customer’s investment sophistication.  For example, 
commenters recommended that the Agencies use the “accredited investor” definition in 
the Commission’s Regulation D, or the definition of that term proposed for use in 
connection with investments in certain private investment vehicles, for purposes of 
defining an institutional or high net worth customer;
87
 treat all corporate and non-natural 
persons as an institutional customer; consider all persons advised by a bank or a 
registered investment adviser to be sophisticated; or lower the asset threshold for 
municipalities or charitable organizations.
88
   Several commenters also asked that the 
                                                 
86
  See, e.g., HSBC Bank Letter, U.S. Trust Letter, SIFMA Letter, Roundtable Letter. 
87
  See 17 CFR 230.501(a)(3), (5) and (6); Securities Act Rel. No. 33-8766, 72 FR 
400, Jan. 4, 2007. 
88
  See, e.g., ABA Letter, Clearing House Ass’n Letter, State Street Corp. Letter. 
 
43

Agencies allow banks to use a business customer’s revenues for purposes of determining 
if the customer is an institutional customer.   
After carefully reviewing the comments, the Agencies have modified the 
definition of an “institutional customer” in the final rule to mean any corporation, 
partnership, limited liability company, trust, or other non-natural person that has, or is 
controlled by a non-natural person that has, at least:  (i) $10 million in investments; or 
(ii) $20 million in revenues; or (iii) $15 million in revenues if the bank employee refers 
the customer to the broker-dealer for investment banking services.
89
  When converted to 
an equivalent asset number, the $20 million and $15 million revenue thresholds in the 
final rule are somewhat lower than $40 million and $25 million asset thresholds in the 
proposed rule.
90
  The Agencies believe that these lower thresholds are appropriate for 
corporate and other non-natural customers in light of the other protections retained in the 
final rule, including the provisions requiring a suitability or sophistication determination, 
and the greater internal and external resources that business entities typically have as 
compared to individuals.  The Agencies have modified the thresholds to be based on 
                                                
 
89
  Rule 701(d)(2). 
90
  To develop comparable asset and revenue thresholds for an institutional customer, 
the Agencies used a dataset composed of all publicly traded, U.S.-incorporated, 
non-financial companies with a market capitalization of greater than $0 and for 
which asset and sales data were available in the 2005 CompuStat Universe of 
North American companies published by Standard & Poor’s Corporation.  For 
more information on the CompuStat Universe, see
 
http://www2.standardandpoors.com/spf/pdf/products/Compustat2006.pdf.  A 
company with $40 million in assets and a company with $25 million in assets 
would rank at approximately the 27.5
th
 percentile and the 21.9
th
 percentile, 
respectively, of all companies within this dataset when ranked according to assets.  
When the companies within this dataset are ranked according to sales, the 
companies at approximately the 27.5
th
 percentile and the 21.9
th
 percentile have 
approximately $27.7 million and $15.7 million in sales.   
 
44

revenues (rather than assets) to eliminate the potential for borrowings to influence the 
status of a corporate customer and to promote the equivalent treatment of non-financial 
companies and financial companies.  In addition, the Agencies have amended the rule to 
provide that a company controlled by an institutional customer will itself be considered 
an institutional customer.  A company controlled by another company should generally 
have access to the resources and sophistication of the controlling company. 
The lower revenue threshold for referrals involving investment banking services 
is designed to facilitate access to the capital markets by smaller companies.  Like the 
proposal, the final rule defines “investment banking services” 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.
91
 The phrase “other similar services” would include, for example, acting as an 
underwriter in a secondary offering of securities and acting as a financial adviser in a 
divestiture.  These examples are not exhaustive and are provided solely for illustrative 
purpose
                                                
s.
92
 
 
91
  See Rule 701(d)(3).    
92
  When used in this rule, 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. 
 
45

The final rule continues to define a “high net worth customer” as a natural person 
who, either individually or 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.  In response to comments,
93
 the Agencies have modified this defini
to include any revocable, inter vivos or living trust the settlor of which is a natural pe
who, either individually or jointly with his or her spouse, meets the $5 million in net 
tion 
rson 
worth t
 the 
est.
94
  This change is designed to reflect the fact that otherwise sophisticated 
individuals may hold assets through such trusts for estate planning or other purposes.  
The Agencies believe that customers that meet the net worth, investment and 
revenue thresholds included in the final rule should have the ability to understand and 
evaluate the financial interest of the bank employee making a referral to a broker-dealer 
under the exemption.  In developing these thresholds, the Agencies took into account
limited nature of activities covered by the exemption (i
.e., a referral by a bank employee 
to a broker-dealer).  The Agencies have not modified the rule, as requested by s
commenters, to treat any person advised by a bank or a registered investment adviser as 
an institutional or high net worth customer.  The existence of such an advisory 
relationship generally is not, by itself, sufficien
ome 
t to establish the financial sophistication 
of an in
                                                
dividual or corporate entity for purposes of the other similar standards in or 
developed under the federal securities laws.
95
  
 
93
  See ABA Letter, PNC Letter, Roundtable Letter. 
94
  Rule 701(d)(1)(i)(B). 
95
  See, e.g., 15 U.S.C. 80a-2(a)(51), 78c(a)(54); 17 CFR 230.501(a).   
 
46

For purposes of determining whether a natural person meets the $5 million net 
worth test, the assets of a person include: (1) any assets held individually; (2) if the 
person is acting jointly with his or her spouse, any assets of the person’s spouse (whethe
or not such assets are held jointly); and (3) if the person is not acting jointly with his or 
her spouse, 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
similar shared ownership interest.  These rules are designed to ensure that the full amo
of jointly own
r 
 or 
unt 
ed assets are not considered in cases where one spouse acts independently 
of the o
 and high 
s 
rsonal Consumption Expenditures 
rom 
Decem
                                                
ther in contacting a broker-dealer.
96
  The Agencies have re-formatted these 
allocation provisions in the final rule to make them easier to understand and promote 
compliance. 
As in the proposal, the dollar threshold for both institutional customers
net worth customers will be adjusted for inflation on April 1, 2012, and every five year
thereafter, to reflect changes in the value of the Pe
Chain-Type Price Index, as published by the Department of Commerce, f
ber 21, 2006.  The Agencies selected this index because it is a widely used and 
broad indicator of inflation in the U.S. economy. 
2. Determining that a Customer Meets the Relevant Thresholds 
 
96
  One commenter asserted that the Agencies should allow a person to include assets 
that the person holds jointly with someone other than a spouse, such as a relative 
or domestic partner, for purposes of calculating whether the person meets the net 
worth threshold.  See
 Roundtable Letter.  The Agencies have not modified the 
rule in this manner to keep the scope of individuals whose assets may be 
considered in determining whether a natural person has the appropriate level of 
financial sophistication consistent with the standards used in determining whether 
a natural person is an accredited investor under the Commission’s Regulation D.  
See
 17 CFR 230.501(a). 
 
47

The proposal required the bank to determine that the customer being 
the standards to be a high net worth or institutional customer either (i) before the refe
fee was paid to the bank employee, in the case of a non-natural person, or (ii) prior to or 
at the time of the referral, in the case of a natural person.
referred met 
rral 
en 
 met the standards to be a high net worth customer or institutional 
custom
97
  In making these 
determinations for a natural person, the proposed rule allowed the bank to rely on a 
signed acknowledgment from the person that he or she met the standards to be a high net 
worth customer.
98
  The proposed rule also required that the written agreement betwe
the bank and the broker-dealer provide for the broker-dealer to (i) determine that the 
customer being referred
er before the referral fee was paid,
99
 and (ii) promptly inform the bank if the 
broker-dealer determined that a customer referred under the exemption did not meet the 
applicable standard.
100
 
Commenters argued that either the bank or the broker-dealer, but not both, should 
be required to make these customer eligibility determinations and that the bank and th
broker-dealer should be permitted to allocate responsibility for these determinations 
e 
between themselves.
101
  In addition, several commenters contended that a bank should be 
                                                 
97
  Proposed Rule 701(a)(2)(ii). 
98
  Proposed Rule 701(a)(2)(ii)(B)(2). 
99
  Proposed Rule 701(a)(3)(i). 
100
  Proposed Rule 701(a)(3)(iii)(A). 
101
  See, e.g., BISA Letter, Clearing House Ass’n Letter, Citigroup Letter, and SIFMA 
Letter.  Some commenters, for example, suggested that requiring bank employees 
to make these determinations might require the employee to go beyond the limited 
role a bank employee is permitted to play in a brokerage transaction under the 
statute.  See
, e.g., BISA Letter, ABA Letter. 
 
 
48

allowed to make the eligibility determinations for both high net worth customers and 
institutional customers before the referral fee is paid or before a securities transac
effected at the broker-dealer.
tion is 
menters also asserted that banks and broker-
dealers
stomer is 
, 
e 
, the 
 to determine that a natural person is a high net 
worth c an 
                                                
102
  A few com
 should be permitted to rely on a signed acknowledgement from either an 
institutional or high net worth customer.
103
 
The status of the referred customer as a high net worth or institutional cu
a fundamental aspect of the exemption and the final rule continues to provide for both the 
bank and the broker-dealer to determine that the customer meets the necessary 
qualification criteria to provide added assurance that these criteria are met.
104
  In 
addition, less information typically is in the public domain concerning the financial 
resources of an individual than of a corporation or other business entity and, accordingly
there is a greater likelihood that a bank employee—without further investigation—will b
able to preliminarily identify corporate or other business customers that are likely to 
satisfy the rule’s eligibility criteria than in the case of individuals.  For these reasons
final rule continues to provide for the bank
ustomer before a referral is made and before the employee potentially develops
expectation of a higher-than-nominal fee. 
 
102
  See, e.g., ABA Letter, BISA Letter, Clearing House Ass’n Letter, HSBC Bank 
Letter, and PNC Letter. 
103
  See, e.g., Citigroup Letter, SIFMA Letter.  
104
  See Rule 701(a)(2)(ii) and (3)(ii)(B).  The final rule also continues to provide for 
the written agreement between the bank and the broker-dealer to require the 
broker-dealer to inform the bank if the broker-dealer determines that a referred 
customer does not meet the relevant eligibility thresholds.  See Rule 
701(a)(3)(v)(A). 
 
49

The Agencies, however, have modified the final rule to make it more flexible 
while retaining its underlying purpose by providing that a bank or a broker-dealer 
satisfies its customer eligibility requirements if the bank or broker-dealer “has a 
reasonable basis to believe that the customer” is an institutional customer or high 
worth customer before the time specified in the rule.
net 
 
 
ely, and the bank employee making the referral or the broker-dealer employee 
dealinge information that would cause the 
employ
mer 
ritten 
the 
customer received appropriate information concerning the relationship between the bank 
                                                
105
  A bank or broker-dealer would 
have a “reasonable basis to believe” that a customer is a high net worth customer or
institutional customer if, for example, the bank or broker-dealer obtains a signed 
acknowledgment from the customer (or, in the case of an institutional customer, from an
appropriate representative of the customer) that the customer meets the applicable 
standards to be considered a high net worth customer or an institutional customer, 
respectiv
 with the referred customer does not hav
ee to believe that the information provided by the customer (or representative) is 
false.     
3.  Conditions Relating to Disclosures 
The proposed exemption required that the bank provide a high net worth custo
or institutional customer being referred to the bank’s broker-dealer partner certain w
disclosures about the bank employee’s potential interest in the referral prior to or at the 
time of the referral.
106
  Commenters generally believed that providing these types of 
disclosures to a high net worth or institutional customer would help ensure that 
 
105
  Rule 701(a)(2)(ii). 
106
  Proposed Rule 701(a)(2)(i).   
 
50

and the broker-dealer,
107
 although a few questioned whether sophisticated customers 
required any disclosures at all or suggested that more simplified disclosures be 
permitted.
108
  A number of commenters also asserted that the requirement that the bank 
provide these disclosures “prior to or at the time of the referral” was impractical or 
burdensome.
109
  Commenters instead asserted that the rule should allow the disclosures to 
be provided before the referral fee is paid or before a securities transaction is effected at 
ee 
dealer and that payment of this fee may be contingent on whether the referral results in a 
                                                
the broker-dealer, or allow the bank and the broker-dealer to determine which entity 
would make the disclosures.
110
   
 The final rule continues to require that a high net worth or institutional customer 
referred to a broker-dealer under the exception receive disclosures that clearly and 
conspicuously disclose (i) the name of the broker-dealer; and (ii) that the bank employ
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-
 
107
  See, e.g., ABA Letter, JP Morgan Letter, Roundtable Letter, BISA Letter. 
108
  See, e.g., Bank of America Corp. (“BofA”) Letter and WBA Letter.    
For example, som
109
  e commenters noted that some referrals may occur only by 
telephone or asserted that it may be unclear to an employee when a referral 
110
  
actually occurs. 
See, e.g., ABA Letter, BISA Letter, Clearing House Ass’n Letter, HSBC Bank 
Letter, and WBA Letter.  In addition, some commenters contended that banks 
should be required to provide similar conflict-of-interest disclosures to custome
referred to a broker-dealer under the statutory networking exception.  
rs 
See
, e.g., 
Boyd Financial Letter, Pace Project Letter, University of Cincinatti Corp. Law 
Center Letter.  The statutory networking exception itself sets certain disclosures
that the bank or broker-deale
 
r must provide a customer in situations where the 
bank employee making the referral may receive only a “nominal” referral fee.  
(a)(4)(i)(IX).  
 
15 U.S.C. 78c
 
51

transaction with the broker-dealer.
111
  This requirement ensures that high net worth or 
institutional customers receive notice of the financial interest the referring employee may 
have in
le 
ore 
two 
e 
 the transaction so they can make informed choices.   
In light of the comments, the Agencies have modified the provisions of the ru
governing how and when these disclosures must be provided to make the rule m
workable and less burdensome while also requiring that customers receive the 
information in time to make informed choices.  Specifically, the final rule provides 
options for providing the required disclosures.  Under the first option, as under th
proposal, the bank must provide the high net worth or institutional customer the 
disclosures in
 writing prior to or at the time of the referral.
112
  The second option allow
the bank to provide the disclosure to the customer 
s 
orally prior to or at the time of the 
referral.  However, if the bank provides the customer the required disclosures only orall
then either (i) the bank must provide the disclosure to the customer in writing within 3 
business days of the date of the referral; or (ii) the broker-dealer must be obligated, under
the terms of its written agreement with the bank, to provide the disclosures in writing to 
the customer.
y, 
 
, 
an order for a securities transaction with the broker-dealer as a result of the referral (if the 
                                                
113
  If the broker-dealer is responsible for providing the written disclosures
then it must provide the disclosures to the customer prior to or at the time the customer 
begins the process of opening an account at the broker-dealer (if the customer does not 
already have an account with the broker-dealer) or prior to the time the customer places 
 
111
  Rule 701(b). 
112
  Rule 700(a)(2)(i). 
113
  Rule 701(a)(2)(i) and (a)(3)(i). 
 
52

customer already has an account at the broker-dealer).
114
  In this way, the rule provides a 
mechanism for customers to receive the disclosures in writing when they initially are 
provided only orally.  Whether provided orally or in writing, the required disclosures will 
be considered to have been made in a clear and conspicuous manner if they are provided 
in a manner designed to call attention to the nature and significance of the information.   
4.  Suitability or Sophistication Analysis by Broker-Dealer 
The proposed exemption required that the written agreement between the bank 
and the broker-dealer provide for the broker-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-
dealer depended on whether the referral fee was contingent on the completion of a 
securities transaction at the broker-dealer.
115
  The proposed rule also required that the 
written agreement between the bank and its partner broker-dealer obligate the broker-
dealer to inform the bank if it determined that a customer referred under the exemption, 
or a transaction to be conducted by the customer, did not meet the relevant suitability or 
sophistication standard.
116
 
 Several commenters objected to this suitability/sophistication requirement arguing 
that the broker-dealer should be required to conduct a suitability/sophistication analysis 
only when such an analysis would otherwise be required under the rules of the broker-
                                                 
114
  Rule 701(a)(3)(i).  As a general matter, a customer begins the account-opening 
process when the customer fills out the appropriate forms provided by the broker-
dealer to establish an account. 
115
  Proposed Rule 701(a)(3)(ii). 
116
  Proposed Rule 701(a)(3)(iii)(C). 
 
53

dealer’s self-regulatory organization (“SRO”) (i.e., in those cases where the broker-dealer 
makes a recommendation to the customer concerning securities).
117
  Commenters also 
argued that the suitability/sophistication requirement was unworkable or unnecessary 
given that the transaction may involve only a referral (without a securities transaction 
occurring) of a sophisticated customer.
118
  In addition, some commenters expressed 
concern that the proposed standards would increase the potential liability of broker-
dealers or delay the ability of a broker-dealer to respond to a customer’s instructions.  
After carefully considering the comments, the Agencies have retained the 
requirement that the parties’ written agreement provide for the broker-dealer to perform a 
suitability analysis when a referral fee is contingent on a transaction and a suitability or 
sophistication analysis for other referrals.  These requirements provide additional investor 
protections in those circumstances where the bank employee making the referral may 
receive a higher-than-nominal referral fee.  The suitability and sophistication standards 
included in the final rule are based on the standards that broker-dealers currently must 
apply and use under applicable SRO rules and, thus, should be familiar to those broker-
dealers that partner with banks operating under the exemption.
119
  In addition, the 
                                                
 
117
  See, e.g., ABA Letter, Clearing House Ass’n Letter, Citigroup Letter, and PNC 
Letter.  See also FINRA Rule 2310 and FINRA IM-2310-3 (discussing suitability 
obligations of member broker-dealers).  One commenter also asserted that any 
expansion of a broker-dealer’s suitability obligations should be processed and 
approved through the normal market regulation and SRO process.  See
 SIFMA 
Letter. 
118
  See, e.g., Clearing House Ass’n Letter, SIFMA Letter.  Commenters also asserted 
that a broker-dealer may not be able to perform the proposed “sophistication” 
analysis if the customer does not open an account or refuses to provide the broker-
dealer the information necessary to perform the analysis. 
119
  One commenter expressed concern that the suitability/sophistication requirements 
of the rule may discourage low-cost, execution-only brokers from establishing 
 
54

exemption gives a broker-dealer the flexibility to perform a suitability analysis, if one is 
otherwise required by the rule, in connection with all referrals made under the exemption 
if the broker-dealer determines that such an approach is appropriate for business, 
compliance or other reasons. 
 Specifically, for contingent referral fees payable under the exemption, the written 
agreement between the bank and the broker-dealer must provide for the broker-dealer to 
conduct a suitability analysis of each securities transaction that triggers any portion of the 
contingency fee in accordance with the rules of the broker-dealer’s applicable SRO as if 
the broker-dealer had recommended the securities transaction.
120
  This analysis must be 
performed by the broker-dealer before each securities transaction on which the referral 
fee is contingent is conducted.   
 For non-contingent referral fees payable under the exemption, the written 
agreement must provide for the broker-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 
                                                                                                                                                
 
relationships with banks under the exemption.  See
 Business Law Section Letter. 
The Agencies are mindful of the need to keep appropriate investment options, 
including low-cost options, available to investors.  However, given the cost 
structure of low-cost brokers, the Agencies expect that few such brokers would 
participate in referral arrangements under the exemption that provides for higher-
than-nominal referral fees.  Broker-dealers that do not wish to become obligated 
to perform the suitability/sophistication analyzes required by the rule also may 
continue to establish and maintain networking arrangements pursuant to the 
statutory networking exception. 
120
  Rule 701(a)(3)(ii)(A).  Because the exemption provides for a broker-dealer to 
conduct its suitability analysis in accordance with the rules of its applicable SRO, 
the broker-dealer may follow and take advantage of any applicable SRO rules or 
interpretations that allow the broker-dealer to make an alternative suitability 
evaluation.  See
, e.g., FINRA IM-2310-3 (discussing a member’s suitability 
obligations with respect to certain institutional investors). 
 
55

contemporaneously with the referral in accordance with the rules of the broker-dealer’s 
applicable SRO as if the broker-dealer had recommended the securities transaction.
121
  
Under the sophistication analysis option, the broker-dealer must 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.
122
  This 
sophistication analysis is based on elements of FINRA IM-2310-3 (Suitability 
Obligations to Institutional Customers).  
 The Agencies have modified the final rule to provide for the broker-dealer to 
notify the customer, rather than the bank, if the broker-dealer determines that a high net 
worth or institutional customer, or a securities transaction to be conducted by such a 
customer, does not meet the applicable sophistication or suitability standard.
123
  
Providing such notification to the customer should assist the customer in deciding 
whether or not to conduct the transaction.  
5. Conditions Relating to Bank Employees 
Paragraph (b)(1) of the Proposed Rule included certain limitations on the types of 
bank employees that may receive a higher-than-nominal referral fee under the rule.  In 
particular, the Proposed Rule provided that the bank employee: be predominantly 
engaged in banking activities, other than making referrals to a broker-dealer; encounter 
                                                
 
121
  Rule 701(a)(3)(iii)(B). 
122
  Rule 701(a)(3)(ii)(B)(1). 
123
  Rule 701(a)(3)(iv). 
 
56

the high net worth or institutional customer in the ordinary course of the employee’s 
assigned business for the bank; not be qualified or required to be qualified under the rules 
of a SRO; and not be subject to statutory disqualification under Section 3(a)(39) of the 
Exchange Act (other than subparagraph (E) of that Section) (“statutory 
disqualification”).
124
   
The proposed exemption also included other provisions related to the SRO and 
statutory disqualification conditions.  First, it required that the written agreement between 
the bank and the broker-dealer must provide for the bank and
 the broker-dealer to 
affirmatively determine, before a referral fee is paid to a bank employee under the 
exemption, that the employee is not subject to statutory disqualification.
125
  Second, it 
required that the bank provide the broker-dealer the name of the employee and such other 
identifying information that may be necessary for the broker-dealer to determine whether 
the bank employee is subject to statutory disqualification or associated with a broker-
dealer.
126
  And third, it required that the parties’ written agreement obligate the broker-
dealer to promptly inform the bank if it determined the bank employee was subject to 
statutory disqualification.
127
   
The final rule retains these provisions with the following modifications.
128
  In 
response to comments,
129
 the Agencies have modified the SRO condition in paragraph 
                                                 
124
  See Proposed Rule 701(a)(1). 
125
  Proposed Rule 701(a)(3)(i)(A). 
126
  Proposed Rule 701(a)(2)(iii). 
127
  Proposed Rule 701(a)(3)(iii)(B). 
128
  See Rule 701(a)(1), (a)(2)(iii), (a)(3)(ii)(A), and (a)(3)(v)(B). 
 
57

(a)(1)(A) of the Rule to provide that the employee receiving the referral fee must not be 
“registered or approved, or otherwise required to be registered or approved, in accordance 
with the qualification standards established by the rules of any self-regulatory 
organization.”  The Agencies have modified the related language in paragraph (a)(2)(iii) 
of the rule in a similar manner. 
Several commenters argued that the requirement that a bank employee encounter 
the high net worth or institutional customer “in the ordinary course of the bank 
employee’s assigned duties” was unnecessary and ambiguous.
130
  The Agencies have 
retained the requirement to help ensure that a bank employee making a referral under the 
rule does so as part of the employee’s duties as a bank employee and not as a sales 
representative of the broker-dealer.  However, the Agencies recognize that in the ordinary 
course of his or her assigned duties for the bank, a bank employee may encounter 
customers or potential customers outside the employee’s regular business hours or at 
locations outside of the bank, such as at social or civic functions or gatherings.  
A number of commenters contended that the bank and the broker-dealer should not 
both be required to verify that the bank employee is not subject to statutory 
disqualification and suggested that the bank and broker-dealer be permitted to allocate 
                                                                                                                                                
 
129
  See Business Law Section Letter. 
130
  See, e.g., ABA Letter, BISA Letter, Clearing House Ass’n Letter, Comerica Bank 
Letter, and U.S. Trust Letter.  For example, some asserted that bank employees 
may be expected to identify and develop client relationships at social or other 
events and expressed concern that the language might prevent a bank employee 
from receiving a referral fee for institutional or high net worth customers 
encountered in these ways.   
 
58

this responsibility between themselves.
131
  The Agencies have modified the rule to 
provide for these determinations to be made by the broker-dealer under the terms of the 
parties’ written agreement.
132
  The Agencies believe that broker-dealers are better suited 
to make this determination given their familiarity with the Exchange Act’s statutory 
disqualification standards, provided that they receive the necessary information 
concerning the employee from the bank.  A broker-dealer fulfills its responsibilities under 
paragraph (a)(3)(ii)(A) of Rule 701 if the broker-dealer determines that a bank employee 
is not subject to statutory disqualification before the employee first receives a referral fee 
under Rule 701 and at least once each year thereafter as long as the employee remains 
eligible to receive referral fees under the rule.   
As a means designed to ensure that the broker-dealer has the appropriate 
information to make these determinations, the rule continues to require that, before a 
higher-than-nominal referral fee is paid to a bank employee under the exemption, the 
bank provide the broker-dealer the name of the employee and such other identifying 
information that the broker-dealer may need to determine whether the employee is 
subject to statutory disqualification.
133
  Once the information for a particular employee is 
conveyed to the broker-dealer, the bank should provide at least annually its broker-dealer 
partner any changes to the identifying information initially provided under paragraph 
(a)(2)(iii) of Rule 701 for an employee who continues to make referrals and receive 
                                                 
131
  See, e.g., ABA Letter, BISA Letter, Clearing House Ass’n Letter, Citigroup 
Letter, PNC Letter, and SIFMA Letter. 
132
  Rule 701(a)(3)(ii)(A). 
133
  Rule 700(a)(2)(iii). 
 
59

referral fees under the exemption so that the broker-dealer may perform its periodic 
review of the employee’s qualifications under paragraph (a)(3)(ii)(A).  
6.  Good Faith Compliance and Corrections by Banks 
As in the proposal, the final exemption 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 exemption will 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-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-dealer the required 
information, the bank will 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 Rule 700.
134
 
A few commenters suggested that the Agencies strike the requirement that the 
bank seek to reclaim the higher-than-nominal portion of a referral fee.  The Agencies 
                                                 
134
  Rule 701(a)(2)(iv). 
 
60

have retained this requirement as it helps provide employees an incentive to comply with 
the rule.
135
  
7. Referral Fees Permitted under the Exemption 
 Proposed Rule 701 placed certain limits on how a higher-than-nominal referral 
fee paid under the exemption may be structured.
136
  Some commenters argued that these 
restrictions are unnecessary in light of the other protections included in the exemption, or 
that the rule should allow a higher-than-nominal referral fee to be based on a percentage 
of any type of securities transaction conducted at a broker-dealer (rather than just 
investment banking transactions).
137
  On the other hand, one commenter asserted that, by 
allowing a referral fee to be based on the total amount of assets maintained in an account 
with the broker-dealer, the rule would provide an incentive for bank employees to 
provide ongoing investment advice to customers.
138
 
 The final rule continues to place limits on the types of referral fees a bank 
employee may receive under the exemption.  These limitations are designed to reduce the 
potential “salesman’s stake” of the bank employee in securities transactions conducted at 
the broker-dealer.  Specifically, the exemption provides that a referral fee paid under the 
                                                
 
135
  One commenter requested that the rule provide a similar safe harbor for broker-
dealers.  See SIFMA Letter.  Any obligations of a broker-dealer that arise by 
reason of Rule 701 run only to its bank partner under the terms of their agreement 
and the Agencies believe the issue of contractual liability between the parties is 
best addressed by the parties themselves.  As stated in the proposal, the 
Commission anticipates that it may be necessary for either FINRA or the 
Commission to propose a rule that would require broker-dealers to comply with 
the written agreements entered into pursuant to Rule 701.   
136
  Proposed Rule 701(d)(4). 
137
  See, e.g., Clearing House Ass’n Letter and JPMorgan Letter.      
138
  See NASAA Letter. 
 
61

exemption may be a dollar amount based on a fixed percentage of the revenues received 
by the broker-dealer for investment banking services provided to the customer.
139
  
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-dealer; (2) the quantity, price, or identity of 
securities purchased or sold over time by the customer with the broker-dealer; or (3) the 
number of customer referrals made.
140
   For these purposes, “predetermined” means 
established or fixed before the referral is made.  The requirement that the amount of the 
referral fee not vary based on the number of customer referrals made does not prohibit an 
employee from receiving a referral fee for each referral made by the employee under the 
exemption. 
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-dealer.  Additionally, these 
restrictions do not prevent a referral fee from being based on a fixed percentage of the 
total dollar amount of assets (including securities and non-securities assets) maintained 
by the customer with the broker-dealer.  Fees structured in this manner and consistent 
with the limitations in paragraph (d)(4)(i) of the Rule do not provide a bank employee an 
incentive to recommend the purchase or sale of particular securities.  In fact, the bank 
                                                
 
139
  Rule 701(d)(4)(ii). 
140
  Rule 701(d)(4)(i).  A referral fee paid under the exemption may be contingent on 
whether the customer opens an account with the broker-dealer or executes one or 
more transactions in the account during the initial phases of the account. 
 
62

employee would have no special incentive to recommend the purchase of any security, as 
the addition of cash or other non-security instruments to the account would count equally 
towards the employee’s compensation as any addition of securities to the account.    
8.         Permissible         Bonus         Compensation Not Restricted 
The exemption for high net worth and institutional customers expressly provides 
that nothing in the exemption prevents or prohibits 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 Rule 700 (implementing the networking exception).
141
  
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. 
III.  Trust and Fiduciary Activities 
 
A.   Trust and Fiduciary Exception and Proposed Rules 
 
 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.
142
  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.
143
  In addition 
the bank must be “chiefly compensated” for such transactions, consistent with fiducia
principles and standards, on the basis of: (1) an administration or annual fee; (2) a 
ry 
                                                
 
141
  Rule 701(c). 
142
  15 U.S.C. 78c(a)(4)(B)(ii). 
143
  Id.  
 
63

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.
144
   
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.
145
  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).
146
  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 in a manner that is not in contravention o
fiduciary principles established under applicable federal or state law, or effect the trade
some other manner that the Commission permits.
f 
 in 
tion 
                                                
147
  The trust and fiduciary excep
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. 
 
144
  15 U.S.C. 78c(a)(4)(B)(ii)(I). 
145
  15 U.S.C. 78c(a)(4)(B)(ii)(II). 
146
  15 U.S.C. 78c(a)(4)(C). 
147
  15 U.S.C. 78c(a)(4)(C)(i) - (iii).  As discussed infra at Part VI.C, the Agencies 
have adopted Rule 775 that permits banks, subject to certain conditions, to effect 
trades in securities issued by an open-end company and certain variable insurance 
contracts without sending the trade to a registered broker-dealer.  Trades effected 
by a bank in accordance with Rule 775 are conducted in accordance with Section 
3(a)(4)(C) of the Exchange Act.   
 
64

The proposed rules provided that a bank would meet the “chiefly compensated” 
condition in the trust and fiduciary exception if the bank’s relationship compensation 
attributable to each trust or fiduciary account exceeded 50 percent of the total 
compensation attributable to the relevant account.
148
  The proposed rules also included an 
exemption that would permit a bank to use a bank-wide approach to the “chiefly 
compensated” condition as an alternative to the account-by-account approach.  A bank 
using this proposed alternative would be able to use the aggregate relationship and total 
compensation that the bank received from its trust and fiduciary business as a whole to 
monitor its compliance with the chiefly compensated test.  The proposed rule allowed a 
bank to use this bank-wide alternative if, among other things, the bank’s aggregate 
relationship compensation attributable to its trust or fiduciary business as a whole equaled 
or exceeded 70 percent of the total compensation attributable to its trust or fiduciary 
business.  This bank-wide alternative was 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. 
The proposal defined the term “relationship compensation” to mean the types of 
trust and fiduciary compensation specifically identified in the trust and fiduciary 
exception.  The proposed rules also provided examples of fees that would be considered 
an administration fee or a fee based on a percentage of assets under management for 
these purposes.  For example, the proposed rules provided that fees paid by an investment 
company pursuant to a plan under 17 CFR 270.12b-1 (“12b-1 fees”) or for personal 
service or the maintenance of shareholder accounts (“service fees”) would be considered 
                                                
 
148
  Proposed Rule 721. 
 
65

relationship compensation under the rules.  The proposed rules also implemented the 
statute’s advertising restriction and provided certain other conditional exemptions.  
B.   Joint Final Rules  
1. “Chiefly Compensated” Test and Bank-Wide Exemption Based on Two- 
                        Year            Rolling            Averages                        
A majority of commenters supported the general approach taken in the proposed 
rules implementing the trust and fiduciary exception, including the proposed bank-wide 
alternative for the chiefly compensated test.  For example, a number of commenters 
stated that the proposed bank-wide approach would provide banks an improved, workable 
and flexible method of complying with the statutory exception.
149
  Some commenters, 
however, opposed either the account-by-account or bank-wide alternative to the “chiefly 
compensated” requirement.  For example, some commenters argued that the account-by-
account approach was inconsistent with the terms and purposes of the trust and fiduciary 
exception.
150
  Another commenter argued that an account-by-account approach to the 
chiefly compensated test is the only way to help ensure that a bank does not operate a 
brokerage business out of its trust or fiduciary departments and, for this reason, 
recommended that the Agencies eliminate the bank-wide alternative.
151
  Some 
commenters also requested that the Agencies lower the 70 percent relationship 
compensation/total compensation percentage required by the bank-wide exemption to 60 
                                                 
149
  See, e.g., ABA Letter, Roundtable Letter, U.S. Trust Letter, WBA Letter. 
150
  See, e.g., Clearing House Ass’n Letter. 
151
  See NASAA Letter. 
 
66

percent or 50 percent to make it more consistent with the percentage required by the 
account-by-account approach.
152
   
After carefully considering the comments, the Agencies have retained the two 
alternative approaches in substantially the same form as proposed.  Specifically, Rule 721 
provides 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.
153
  The “relationship-total compensation 
percentage” for a trust or fiduciary account is 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.
154
   
The final rules (Rule 722) also allow a bank to use a bank-wide approach to the 
“chiefly compensated” condition as an alternative to the account-by-account approach.  
To use this bank-wide methodology, the bank must meet two conditions.  First, the 
“aggregate relationship-total compensation percentage” for the bank’s trust and fiduciary 
business as a whole must be at least 70 percent.
155
  The “aggregate relationship-total 
                                                 
152
  See ACB Letter, CBA Letter. 
153
  Rule 721(a)(1).   
154
  The rule provides for this process to be accomplished by calculating the “yearly 
compensation percentage” and the “relationship-total compensation percentage” 
for the account.  See
 Rule 721(a)(2) and (3).    
155
  Rule 722(a)(2).   
 
67

compensation percentage” of a bank operating under the bank-wide approach is 
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 
its trust and fiduciary business as a whole during each of the two immediately preceding 
years.  In other words, the percentage 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.
156
  Second, the bank must comply with the conditions in the trust and fiduciary 
exception (other than the compensation test in Section 3(a)(4)(B)(ii)(I))
157
 and comply 
with Section 3(a)(4)(C) (relating to trade execution) of the Exchange Act.
158
   
The Agencies believe that providing banks these two alternatives is consistent 
with the purposes of the trust and fiduciary exception.  In this regard, the availability of 
these two alternatives is designed to avoid disrupting the trust and fiduciary operations of 
                                                
 
156
  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.  
See
 Rule 722(b) and (c).    
157
  The Agencies have modified the bank-wide exemption to clarify that these 
conditions include the advertising restrictions contained in the trust and fiduciary 
exception as implemented by Rule 721(b).  See
 Rule 722(a)(1). 
158
  Rule 722(a)(1). 
 
68

banks.  The compensation tests in both the account-by-account and bank-wide 
approaches are designed to ensure that a bank’s trust department is not unduly dependent 
on the types of securities-related compensation not permitted by the statute.  The 70 
percent compensation threshold in the bank-wide exemption is higher than that required 
under the account-by-account approach in order to compensate for the loss of 
particularity when the chiefly compensated test is implemented and monitored on a bank-
wide basis, rather than on an account-by-account basis.  The Agencies note that several 
commenters also asserted that the proposed aggregate relationship compensation-total 
compensation percentage required by the bank-wide alternative (70 percent) would not 
disrupt the trust and fiduciary operations or customer relationships of banks in light of the 
proposal’s definition of “relationship compensation.” 
Some commenters asked that the Agencies modify how the bank-wide exemption 
could be applied in several ways.  For example, some asserted that a bank should be 
allowed to apply the 70 percent compensation threshold separately to each individual 
fiduciary business line, operating unit or geographic region of the bank, rather than only 
on an aggregate bank-wide basis.  Others asked that the Agencies allow a bank to use an 
aggregate compensation approach only for some trust or fiduciary business lines and use 
the account-by-account approach for the bank’s trust or fiduciary accounts in its 
remaining business lines.
159
  In addition, some asked that a bank be permitted to monitor 
compliance with the 70 percent compensation test on a combined basis with its affiliated 
entities engaged in trust or fiduciary activities (such as an affiliated bank or a subsidiary 
                                                
 
159
  See Clearing House Ass’n Letter. 
 
69

or affiliate registered as an investment adviser).
160
  Some commenters also asked the 
Agencies to modify the bank-wide approach to provide for a bank’s relationship 
compensation-total compensation percentage to be calculated based on the compensation 
attributable to all of the bank’s trust and fiduciary accounts rather than the compensation 
from the bank’s “trust and fiduciary business.”
161
   
The Agencies believe that the bank-wide alternative as structured provides banks 
appropriate and adequate flexibility in conducting their trust and fiduciary operations 
while meeting the statute’s goals.  The bank-wide approach is designed to reflect both the 
relationship compensation and total compensation received by a bank through the 
conduct of its full range of trust or fiduciary services, and, thus, allow banks to avoid 
tracking their trust or fiduciary revenue back to one or more specific accounts.  At the 
same time, the use of two uniform methodologies (account-by-account or bank-wide) 
should facilitate the review of bank compliance during the bank supervisory process and 
aid the development of software and related systems by banks and their service providers 
for compliance purposes.  Furthermore, because the broker exceptions for a bank in 
Section 3(a)(4)(B), including the trust and fiduciary exception, apply to each bank 
individually and are not available to a nonbank entity, including a nonbank subsidiary or 
affiliate of a bank, the Agencies have not modified the rules to allow a bank to monitor its 
compliance with the compensation limit in Rule 721 on a combined basis with one or 
more affiliated banks, subsidiaries or affiliates.  The Agencies also do not believe that 
                                                
 
160
  See Citigroup Letter, Clearing House Ass’n Letter, Mellon Bank, N.A. 
(“Mellon”) Letter, PNC Letter, ABA Letter. 
161
  See, e.g., ABA Letter, Joint ABA/ABASA/Clearing House Ass’n Letter of July 
16, 2007, BISA Letter, Clearing House Ass’n Letter, Comerica Bank Letter. 
 
70

requiring banks to monitor their compliance with the 70 percent compensation test on a 
bank-wide basis, rather than on an individual business line or operating unit basis, will 
impose significant additional burdens on banks.
162
 
A bank has the flexibility to elect to use a calendar year or the bank’s fiscal year 
for purposes of complying with the compensation provisions of either the account-by-
account or bank-wide approach.
163
  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 is 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 two-year averaging is designed 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.   
Some commenters asked that the Agencies clarify when a bank must commence 
monitoring its compliance with the two-year rolling compensation test.  As discussed 
infra
 in Part VI.F, a bank must comply with the exceptions in Section 3(a)(4)(B) of the 
Exchange Act and the final rules starting the first day of the bank’s first fiscal year 
commencing after September 30, 2008.  Thus, a bank that operates on a calendar-year 
basis must start monitoring its compliance with the compensation requirements on either 
an account-by-account or bank-wide basis beginning January 1, 2009, and would first 
                                                 
162
  The Agencies note, for example, that a bank that operates under the bank-wide 
approach may use different systems across its trust or fiduciary business lines, 
units or regions to monitor its compensation within those business lines, units or 
regions, provided that such information is then aggregated on a bank-wide basis 
as provided in Rule 722. 
163
  Proposed Rule 721(a)(6). 
 
71

have to meet the applicable compensation restriction after the conclusion of 2010 (based 
on the average of the bank’s year-end compensation ratios for 2009 and 2010).
164
  To 
allow banks sufficient time to obtain and verify the relevant compensation data, the 
Agencies have modified both the account-by-account approach and the bank-wide 
approach to provide banks up to 60 days after the end of a year to calculate their 
compliance with the relevant compensation restriction.
165
  While the rules provide for a 
bank’s compliance with the compensation tests to be determined based solely on 
calculations as of year-end, banks are encouraged to monitor their trust and fiduciary 
compensation on a regular basis as appropriate to identify and address potential 
compliance issues before the end of the relevant two-year period.  
2.         “Relationship         Compensation”         
Both the account-by-account and bank-wide approaches are based on the ratio of 
the relationship compensation attributable to a trust or fiduciary account or a bank’s trust 
and fiduciary business to the total compensation attributable to the account or business.  
The proposal defined the term “relationship compensation” to mean the types of trust and 
fiduciary compensation identified in the statute:  an administration fee; an annual fee 
(payable on a monthly, quarterly or other basis); a fee based on a percentage of assets 
                                                
 
164
  This same schedule also would apply to a bank that operates on an October 1
st
 to 
September 30
th
 fiscal year, but that elects to use the calendar year for purposes of 
monitoring its compliance with the chiefly compensated test.  The Agencies 
believe the delay and phased-in nature of the compensation tests should provide 
banks as a general matter sufficient notice and time to address potential 
compensation issues across the full range of their trust and fiduciary accounts, 
including personal and charitable accounts and estates.  See
 Business Law Section 
Letter. 
165
  See Rule 721(a)(3)(ii) and Rule 722(c)(2). 
 
72

under management; a flat or capped per order processing fee 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 any combination of these fees.
166
  The proposed rules also 
provided examples of fees that would be considered an administration fee or a fee based 
on a percentage of assets under management for these purposes.  For example, the 
proposed rules provided that 12b-1 fees,
167
 service fees,
168
 and fees for certain sub-
transfer agent, sub-accounting or related services
169
 paid by an investment company on 
the basis of assets under management would be considered relationship compensation 
under the rules. 
The Agencies received numerous comments on the definition of relationship 
compensation.  A number of commenters supported the definition including, in particular, 
the examples recognizing 12b-1 and service fees as relationship compensation.  For 
example, some commenters stated that treating these fees as relationship compensation is 
                                                
 
166
  Proposed Rule 721(a)(4). 
167
  Proposed Rule 721(a)(4)(iii)(A). 
168
  Proposed Rule 721(a)(4)(iii)(B). 
169
  See Proposed Rule 721(a)(4)(i) and (iii)(C).  Specifically, these fees, which are 
hereinafter referred to as “sub-transfer agent and related fees” are paid for (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

consistent with the terms and purposes of the trust and fiduciary exception and “critical” 
to ensuring that the rules do not disrupt the trust and fiduciary operations and customer 
relationships of banks.
170
  Other commenters, however, argued that all 12b-1 fees, or the 
portion of such fees paid for distribution expenses, should be excluded from relationship 
compensation.
171
  These commenters asserted that treating 12b-1 fees as relationship 
compensation would allow banks to have a “salesman’s stake” in their customers’ 
securities transactions in contravention of the purposes of the statute, result in the 
disparate treatment of banks and registered investment advisers, and create confusion as 
to how 12b-1 fees should be treated under other aspects of the federal securities laws and 
rules of the NASD (now FINRA).   
In addition, many commenters asked that the Agencies clarify whether additional 
types of fees not mentioned in the proposed rules would qualify as relationship 
compensation.  For example, commenters asked the Agencies to confirm that fees 
separately charged a trust or fiduciary customer for custodial services and fees charged or 
earned in connection with securities lending and borrowing transactions conducted for a 
trust or fiduciary customer are relationship compensation.   
After carefully considering the comments, the Agencies have retained, consistent 
with the statute, the definition of relationship compensation as any compensation that a 
bank receives that is attributable to a trust or fiduciary account and 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 (an “AUM fee”), (4) a flat or 
                                                
 
170
  See Joint ABA/ABASA/Clearing House Ass’n Letter of June 7, 2007. 
171
  See NASD Letter, NASAA Letter. 
 
74

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.
172
   
The final rules also continue to list all 12b-1 fees that are paid on the basis of 
assets under management and attributable to a trust or fiduciary account (under the 
account-by-account test) or the bank’s trust and fiduciary business as a whole (under the 
bank-wide test) as examples of AUM fees that are relationship compensation.  The 
Agencies believe that treating 12b-1 fees in this manner is consistent with both the 
language and purposes of the trust and fiduciary exception.  When paid on the basis of a 
percentage of assets under management these fees fall within the types of fees expressly 
permitted by the trust and fiduciary exception.  12b-1 fees that are paid on the basis of 
assets under management also are distinguishable from the types of non-relationship 
compensation, such as front-end or back-end sales loads
173
 or per-order transaction fees 
that exceed a bank’s costs, that are limited by the statute’s chiefly compensated test.   
Treating 12b-1 fees in this manner also will avoid significant disruptions to the 
trust and fiduciary operations of banks and, when viewed in light of other provisions and 
                                                
 
172
  Rule 721(a)(4).  For banks operating under the bank-wide alternative, fees of 
these types are relationship compensation if they are attributable to the bank’s 
trust or fiduciary business as a whole.  See
 Rule 722(c)(1). 
173
  A front-end sales charge is a charge that is used to finance sales or sales 
promotion expenses and that is included in the public offering price of the shares 
of an investment company.  A deferred sales charge is an amount properly 
chargeable to sales or promotional expenses that is paid by a shareholder of an 
investment company after purchase of the company’s shares but before or upon 
redemption.  See
 FINRA Rule 2830(b)(8)(B) and (c); 17 CFR 270.6c-10. 
 
75

protections, is consistent with investor protection.  Many bank trust and fiduciary 
departments, particularly those that act as a corporate trustee or as a trustee or fiduciary 
for employee benefit plans, receive a significant portion of their trust and fiduciary 
compensation through payments made under a 12b-1 plan.     
Importantly, as provided in the trust and fiduciary exception, all 12b-1 fees 
received by a bank must be consistent with the fiduciary principles and standards 
governing the bank-customer relationship,
174
 and the bank’s compliance with these 
principles and standards will continue to be regularly examined by bank examiners 
during the bank supervisory and examination process.  In addition, the treatment of 12b-1 
fees that are paid on the basis of assets under management and service fees as 
“relationship compensation” for purposes of the trust and fiduciary exception and related 
rules does not affect the treatment of such fees under other provisions of the federal 
securities laws, the federal banking laws, applicable trust or fiduciary principles and 
standards, or the rules of an SRO.  Thus, for example, the treatment of 12b-1 fees that are 
paid on the basis of assets under management and service fees as relationship 
                                                
 
174
  Section 802(f) of the Uniform Trust Code, for example, provides that a trustee 
may receive compensation from an investment company in which the trustee has 
invested trust funds and receipt of such compensation will not be presumed to 
represent a conflict of interest if the investment otherwise complies with the 
jurisdiction’s prudent investor rule.  See
 Uniform Trust Code, § 902(f) and related 
comment (2005).  In addition, a bank’s receipt of 12b-1 fees from an employee 
benefit plan for which the bank acts as a fiduciary is governed by the Employee 
Retirement Income Security Act (“ERISA”) and the regulations and guidance 
issued by the Department of Labor thereunder.  See
 29 U.S.C. 1001 et seq.; DOL 
Advisory Opinion 2003-09A (June 25, 2003) (discussing conditions under which 
a directed trustee may receive 12b-1 fees under ERISA). 
 
76

compensation for purposes of these rules does not alter or affect the treatment of, or 
limitations imposed on, these fees under FINRA Rule 2830.
175
   
In light of the comments received, the Agencies have modified Rule 721 to 
provide additional examples of the types of fees that qualify as relationship compensation 
under the statute and the rules.  For example, the Agencies have modified the rule to 
include, as additional examples of an administration fee, compensation received by a 
bank (1) for disbursing funds from, or for recording payments to, a trust or fiduciary 
account; (2) in connection with securities lending and borrowing transactions conducted 
for a trust or fiduciary account; and (3) for custody services provided to a trust or 
fiduciary account (whether or not separately charged).
176
  In addition, the Agencies have 
included (1) as an example of an annual fee, an annual fee paid for assessing the 
investment performance of a trust or fiduciary account or for reviewing such an account’s 
compliance with applicable investment guidelines or restrictions, and (2) as an example 
of an assets under management fee, a fee based on the financial performance, such as 
capital gains or capital appreciation, of trust or fiduciary assets under management.  The 
Agencies believe the characterization of these fees comports with the manner in which 
                                                
 
175
  The rules also do not alter or affect the ability of a nonbank registered investment 
adviser to receive 12b-1 fees under the federal securities laws or the rules of an 
SRO.  The “broker” exceptions for banks in Section 3(a)(4)(B) of the Exchange 
Act, including the trust and fiduciary exception, are not available to nonbank 
entities such as nonbank investment advisers. 
176
  Rule 721(a)(4)(i)(B), (C) and (D).  Because securities lending/borrowing fees and 
custody fees may be charged on an assets under management basis, the rule also 
provides that these fees are relationship compensation when charged in this 
manner.  Rule 721(a)(4)(iii)(E).  As with other types of relationship 
compensation, the fees that a bank receives for effecting securities 
lending/borrowing transactions for a trust or fiduciary account must be consistent 
with applicable fiduciary principles and standards. 
 
77

banks generally receive compensation for these services.  Several commenters noted that 
banks currently may receive 12b-1 fees, service fees or sub-transfer agent and related fees 
either directly from a mutual fund or from the fund’s distributor, transfer agent, 
administrator or adviser.
177
  In light of these comments, the Agencies have eliminated the 
language in the proposed rules that required that these types of fees be “paid by an 
investment company.” 
The examples of an administration fee, annual fee and an asset under management 
fee included in Rule 721(b) are provided only for illustrative purposes.  Other types of 
fees or fees for other types of services could be an administration fee, annual fee or an 
AUM fee.  In addition, an administration fee, annual fee or assets under management fee 
attributable to a trust or fiduciary account or a bank’s trust or fiduciary business 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.    
Some commenters asserted that a bank should be permitted to include within its 
relationship compensation any per-transaction securities processing fee it charges as a 
directed trustee or in another fiduciary capacity even if the fee exceeds the bank’s costs in 
processing the transaction.
178
  The statute, however, expressly provides that a per-order 
securities processing fee may be counted towards the statute’s chiefly compensated 
                                                
 
177
  See Investment Company Institute (“ICI”) Letter, Federated Investors, Inc. 
(“Federated Investors”) Letter.   
178
  See, e.g., Wells Fargo & Company (“Wells Fargo”) Letter, State Street Corp. 
Letter, Mellon Letter. 
 
78

requirement only if the fee is “equal to not more than the cost incurred by the bank in 
connection with executing securities transactions” for its trust or fiduciary customers.  
For this reason, the Agencies have not modified the rule in the manner requested.   
However, as discussed further in Part V, the Agencies have modified the custody 
exemption (Rule 760) to permit banks that accept securities orders as a directed trustee to 
do so under that exemption in lieu of the trust and fiduciary exception and related rules.  
In addition, as the Agencies explained in the proposal, a per order processing fee included 
in relationship compensation may include the fee charged by the executing broker-dealer 
as well as any additional fixed or variable costs incurred by the bank in processing the 
transaction.  If a bank includes any such additional fixed or variable costs in the per order 
processing fees it includes in its relationship compensation, the bank should maintain 
appropriate policies and procedures governing the allocation of these costs to the orders 
processed for trust or fiduciary customers.  This should help ensure that profits derived 
from per trade charges are not masked as costs of processing the trades and thereby 
included in relationship compensation. 
3.  Excluded Compensation 
A number of commenters asserted that the revenues derived from securities 
transactions conducted by a bank for a trust or fiduciary customer under a different
 
exception or exemption (such as the exemption provided in Rule 771 for transactions in 
Regulation S securities) should be excluded from the account-by-account or bank-wide 
compensation test completely.
179
  Others asked that certain other types of fees, such as 
internal credits from other areas of the bank, credits received from broker-dealers for 
                                                
 
179
  See, e.g., Institute of Int’l Bankers (“IIB”) Letter, Clearing House Ass’n Letter.  
 
79

brokerage or research services in accordance with Section 28(e) of the Exchange Act, or 
revenues earned from providing trust or fiduciary services to mutual funds, be excluded 
from the chiefly compensated calculation as well.   
As discussed in Part I.C supra, if more than one “broker” exception or exemption 
is available for a securities transaction effected by a bank for a customer, the bank may 
choose the exception or exemption on which it relies in effecting the transaction.  In light 
of the comments received, the Agencies have modified Rules 721 and 722 to explicitly 
provide that, if a bank effects a securities transaction for a trust or fiduciary customer in 
accordance with the terms of an exception or exemption other than Rule 721 or Rule 722, 
the bank may, at its election, exclude the revenues associated with those transactions 
from the applicable relationship-total compensation calculation in Rule 721 or Rule 
722.
180
  As the rules provide, if a bank elects to exclude the revenues associated with 
transactions conducted under another exception or exemption, the bank must exclude 
such revenue from both
 the bank’s relationship compensation (if the compensation would 
otherwise qualify as relationship compensation) and total compensation.  Of course, the 
bank also must comply with the conditions applicable to the other available exception or 
exemption on which the bank chooses to rely.
181
 
                                                
 
180
  Rule 721(b) and Rule 722(d). 
181
  Some commenters asserted that a bank should be allowed to include in its 
relationship compensation all
 of the revenue from securities transactions 
conducted for a trust or fiduciary account under another exception or exemption, 
regardless of whether that revenue otherwise qualifies as relationship 
compensation.  The Agencies have not amended the rule in this manner as it is 
inconsistent with the terms of the trust and fiduciary exception which sets forth 
the types of fees that are included in relationship compensation. 
 
80

In addition, compensation that is not derived from the provision of trust or 
fiduciary services should not be included in a bank’s relationship or total compensation 
under either the account-by-account or bank-wide alternative.  Such compensation 
includes, for example, (1) revenue earned by a trust or fiduciary department from 
providing back-office services to an affiliated or unaffiliated party,
182
 (2) revenue from 
the sale of an office or assets of the trust department, or from the provision on a stand-
alone basis of other services (such as custody services or the sale of portfolio 
management software to a third party that independently operates and uses the software 
in connection with its own business) that do not involve trust or fiduciary services as 
defined in section 3(a)(4)(D) of the Act; and (3) internal payments or credits allocated to 
a bank’s trust or fiduciary department or unit from another department or unit of the bank 
for deposits and other similar services not involving a security.  Credits received by a 
bank from a broker-dealer for brokerage and research services provided by a broker-
dealer in accordance with section 28(e) of the Act (15 U.S.C. 78bb(e)) and the 
regulations issued thereunder also should be excluded from the compensation tests.  The 
Agencies do not believe these credits constitute compensation to the bank for purposes of 
the exception and rules because these credits must be reasonable in relation to the value 
of the brokerage and research provided by the broker-dealer in connection with the 
bank’s exercise of investment discretion for its fiduciary accounts. 
4. Trust or Fiduciary Accounts 
                                                
 
182
  On the other hand, the revenue derived from providing fiduciary services to 
investment companies or companies affiliated with the bank should be included in 
the relevant chiefly compensated calculation. 
 
81

 The final rules, like the proposal, define a trust or fiduciary account as an account 
for which the bank acts in a trustee or “fiduciary capacity” as that term is defined in 
Section 3(a)(4)(D) of the Exchange Act.
183
   This definition is based on the definition of 
“fiduciary capacity” 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.   
 Section 3(a)(4)(D) identifies a number of particular situations where a bank serves 
in a fiduciary capacity.
184
  The definition also provides that a bank acts in a “fiduciary 
capacity” if it acts “in any other similar capacity” to those specifically identified.  
Accordingly, the scope of the term “fiduciary capacity” is not fixed in time. 
The Agencies recognize, moreover, that different nomenclature may be used to 
identify a fiduciary capacity in the relevant governing documents or state laws.  For 
example, the Uniform Probate Code uses the term “Personal representative” and similar 
successor titles in place of the terms “executor” or “administrator” to identify the 
representative of a decedent; the Uniform Custodial Trust Act uses the terms 
“Conservator” and “Custodial trustee” to refer to persons that act as a fiduciary for 
another person who has become incapacitated; and the Uniform Transfers to Minors Act 
uses both the terms “Conservator” and “Custodian” to refer to fiduciaries that act on 
behalf of a minor.
185
   
                                                
 
183
  Rule 721(a)(5).    
184
  Section 3(a)(4)(D) of the Exchange Act provides that a bank acts in a “fiduciary 
capacity” if, among other situations, the bank has investment discretion on behalf 
of another.  Thus, for example, if a bank has investment discretion over an escrow 
account on behalf of another, the bank would be acting in a “fiduciary capacity” 
with respect to the account.   
185
  The text of and additional information on these Uniform Codes and Acts, which 
are developed under the auspices of the National Conference of Commissioners of 
 
82

 Some commenters asked whether a bank that engages in trust or fiduciary 
activities may conduct securities transactions under the trust and fiduciary exception and 
related rules even if the bank does not maintain a separate trust department or has not had 
to obtain formal trust powers from its appropriate federal banking agency.
186
  The trust 
and fiduciary exception and related rules do not require that a bank effecting securities 
transactions for a customer in a trust or fiduciary capacity do so through a separate trust 
department or have obtained formal trust powers from its appropriate federal banking 
agency.  However, securities transactions conducted for a trust or fiduciary customer 
under the exception and related rules must be effected in a department of the bank “that is 
regularly examined for compliance with fiduciary principles and standards” by the bank’s 
appropriate federal or state banking supervisor.
187
  As stated in the proposal, the 
                                                                                                                                                
 
Uniform State Laws (“NCCUSL”), may be found on NCCUSL’s website at 
http://www.nccusl.org. 
186
  See, e.g., ACB Letter, Roundtable Letter.  Federal savings associations, for 
example, are not required to obtain approval from their appropriate federal 
banking agency to act as a trustee for an individual retirement account under 
section 408(a) of the Internal Revenue Code.  See
 12 CFR 550.580. 
187
  15 U.S.C. 78c(a)(4)(B)(ii); Rule 722(a)(1).  A bank effecting transactions for trust 
or fiduciary customers through a department examined for compliance with trust 
or fiduciary principles 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.   
 
83

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 stan
 
dards.
188
 
                                                
5. Exemptions for Special Accounts, Foreign Branches, Transferred 
Accounts, and a De Minimis Number of Accounts 
  
The Agencies also proposed a rule (Proposed Rule 723) that 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.  As proposed, Rule 723 allowed a 
bank, in calculating its compensation under either approach, to exclude compensation 
received from any trust or fiduciary account open only for a short period of time (less 
than 3 months) or acquired within the past 12 months as part of a merger or similar 
transaction.  In addition, the Proposed Rule allowed a bank using the account-by-account 
approach, subject to certain conditions, to (1) exclude the lesser of 1 percent or 500 of its 
trust or fiduciary accounts in a year from the chiefly compensated test, and (2) transfer 
any trust or fiduciary account ultimately determined to be non-conforming to a registered 
broker-dealer or an unaffiliated entity exempt from registration within 3 months of the 
end of the relevant year.   
Commenters generally favored these exemptions.  One commenter, however, 
argued that these exemptions should be eliminated because they would allow banks to 
 
188
  The OTS, for example, is in the process of revising its examination procedures to 
provide for the regular examination of individual retirement accounts held by a 
federal savings association as trustee for compliance with fiduciary principles and 
standards. 
 
84

manipulate the chiefly compensated test.
189
  Several commenters also requested that the 
Agencies adopt an additional exemption permitting banks to exclude trust and fiduciary 
accounts held at a foreign branch of a bank from the chiefly compensated tests.
190
  These 
commenters contended that few, if any, of the trust and fiduciary accounts of a foreign 
branch (other than an offshore “shell” branch servicing U.S. branches of the bank) likely 
are to be held by or on behalf of a U.S. person and, accordingly, the costs of applying the 
chiefly compensated test to the foreign branches of a U.S. bank would significantly 
outweigh any potential benefits to U.S. persons.  After carefully considering these 
comments, the Agencies have adopted, without change, the exemptions included in 
Proposed Rule 723.  In addition, the Agencies have adopted a new conditional exemption 
(Rule 723(c)) for trust and fiduciary accounts held at a foreign branch of a bank. 
Rule 723(a) permits a bank that uses either the account-by-account or bank-wide 
compensation test to exclude any trust or fiduciary account that was open for a period of 
less than 3 months during the relevant year.
191
  Rule 723(b) permits a bank to exclude, 
for purposes of determining its compliance with either compensation test, any trust 
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.
or 
                                                
192
  A bank 
that elects to use Rule 723(a) or (b) for one or more accounts must exclude both the 
 
189
  NASAA Letter. 
190
  See ABA Letter, Clearing House Ass’n Letter, Joint ABA/ABASA/Clearing 
House Ass’n Letter of July 16, 2007. 
191
  Rule 723(a). 
192
  Rule 723(b). 
 
85

relationship compensation and total compensation attributable to such accounts for 
purposes of the applicable compensation test.   
Rule 723(c) provides a new exemption under which a bank using the bank-wide 
approach may exclude for purposes of the chiefly compensated test the trust or fiduciary 
accounts held at a “non-shell” foreign branch of the bank, provided that the bank has 
reasonable cause to believe that the trust or fiduciary accounts of the foreign branch held 
by or for the benefit of a U.S. person constitute less than 10 percent of the total trust or 
fiduciary accounts of the foreign branch.
193
  The rule provides that a bank will be deemed 
to have reasonable cause to believe that less than 10 percent of the total number of trust 
or fiduciary accounts of the foreign branch are held by or for the benefit of a U.S. person 
if the principal mailing address for the accountholder(s) and beneficiary(ies) of the 
account is not in the United States, or the records of the foreign branch indicate that the 
accountholder(s) and beneficiary(ies) of the account is not a U.S. person as defined in 17 
CFR 230.902(k). 
The rule defines a “non-shell foreign branch” of a bank to mean a branch of the 
bank that is located outside the United States and provides banking services to residents 
of the foreign jurisdiction in which the branch is located, and for which the decisions 
relating to day-to-day operations and business of the branch are not made by an office of 
the bank located in the United States.
194
  The Agencies believe this exemption provides 
                                                
 
193
  The Agencies expect that few, if any banks, that use the account-by-account 
approach to the chiefly compensated test will have foreign branches engaged in 
trust or fiduciary services and, accordingly, have limited the exemption to banks 
that use the bank-wide approach. 
194
  This definition is designed to exclude branches that are established in certain 
offshore jurisdictions primarily to provide services to U.S. customers and, for this 
reason, are managed on a day-to-day basis from the United States. 
 
86

appropriate relief to banks with respect to foreign branches where the records of the bank 
indicate that it is not significantly engaged in providing trust or fiduciary services to U.S. 
customers.   
Rule 723(e) permits a bank using the account-by-account approach to exclude, for 
purposes of the chiefly compensated test, the lesser of (1) 1 percent of the total number of 
trust or fiduciary accounts held by the bank; or (2) 500 accounts.
195
  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.
196
  In addition, the bank must 
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.
197
   
The Agencies believe these exclusions reduce administrative burdens and 
facilitate compliance.  A bank, consistent with its fiduciary duties, may need to conduct a 
higher level of securities transactions for a trust or fiduciary account at certain times, 
such as shortly after the account is established or acquired from another person or shortly 
before the account is closed.
198
  The exclusions in Rule 723(a), (b) and (d) are designed 
                                                 
195
  Rule 723(d).  Under the rule, if a bank has less than 100 trust or fiduciary 
accounts in the aggregate, the bank may exclude 1 account under the exemption in 
any given year.   
196
  Rule 723(d)(3).  
197
  Rule 723(d)(1). 
198
  For example, after a trust or fiduciary account is acquired or established, the bank 
may need to conduct a number of securities transactions to invest or rebalance the 
account’s holdings in accordance with the terms of the agreement establishing the 
account or, in cases where the bank has investment discretion, to implement the 
bank’s investment strategy for the account. 
 
87

to help prevent such short-term fluctuations in the amount of securities transaction
conducted for a trust or fiduciary account from distorting, or causing a bank to fail, the 
relevant compensation test.  At the same time, these exclusions promote compliance by 
requiring that the bank bring the relevant accounts into compliance within a short and 
prescribed period of time.  For this reason, the Agencies do not believe it would be 
appropriate to expand the Rule 723(d) to allow a bank to exclude an account from the 
chiefly compensated test in consecutive years as requested by some commenters.  Some 
commenters also asked the Agencies to raise the 500 account maximum in Rule 723(d) to 
avoid discriminating against large banks.
s 
                                                
199
  The Agencies expect that most banks that 
have more than 50,000 trust and fiduciary accounts, and thus would be subject to the 500 
account cap in Rule 723(d), will operate under the bank-wide test and for this reason have 
not made the requested change.  
 Rule 723(c) also provides that a bank that uses the account-by-account approach 
will 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-dealer.
200
 
  
 
 
199
  See, e.g., ACB Letter; Clearing House Ass’n Letter. 
200
  Rule 723(c). 
 
88

6.         Advertising         Restrictions         
 Proposed Rule 721(b) implemented the advertising restrictions in 
Section 3(a)(4)(B)(ii)(II) of the Act applicable to banks conducting securities transactions 
under the trust and fiduciary exception.  No commenters opposed the advertising 
restrictions of the rule and the Agencies have adopted these restrictions as proposed.  The 
final rules provide that a bank complies with the advertising restriction applicable under 
either Rule 721 or 722 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.
201
 
 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).
202
  Other types of material or information that is not distributed 
through public media, such as mailings or e-mails to a bank’s own customers, are not 
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 
                                                
 
201
  Rule 721(b). 
202
  Rule 721(b)(2) (referencing Rule 760(g)(2)). 
 
89

prominence of the information presented—and not simply the length of text or 
information devoted to a particular subject—should be considered.    
IV. Sweep Accounts and Transactions in Money Market Funds 
Exchange Act Section 3(a)(4)(B)(v) (“sweep exception”) 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.”
203
  To provide banks with guidance on the sweep exception, 
Proposed Rule 740 defined several terms used in the exception, including the terms 
“money market fund” and “no-load.”
204
  The Agencies also requested comment on a 
separate exemption (Proposed Rule 741) that would permit banks, without registering as 
a broker, to effect transactions in securities issued by a money market fund on behalf of a 
customer in a broader set of circumstances, subject to certain conditions.
205
   
Most commenters that addressed Proposed Rules 740 and 741 supported the rules 
and Rule 741 in particular.
206
   One commenter objected to the exemption in Rule 741 on 
the basis that it would permit banks to effect transactions in money market funds that did 
not meet the “no-load” requirements of the sweep exception.
207
  Another commenter 
                                                
 
203
  See Exchange Act Section 3(a)(4)(B)(v) (15 U.S.C. 78c(a)(4)(B)(v)).     
204
  Proposed Rule 740(b) and (c). 
205
  Proposed Rule 741. 
206
  See, e.g., Federated Investors Letter, ICBA Letter, Clearing House Ass’n Letter, 
ABA Letter.   
207
  See, e.g., NASAA Letter. 
 
90

asked that the Agencies clarify whether a bank may effect transactions under the rules for 
deposits held by another bank. 
A. Rule 740: Definition of Terms Used in Sweep Exception 
As under the proposal, the final rule defines a “money market fund” for purposes 
of the sweep exception to mean an open-end investment 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.
208
  In addition, consistent with FINRA rules, 
the final rule provides that a class or series of securities of an investment company will be 
considered “no-load” if (1) the class or series is not subject to a sales charge or a deferred 
sales charge; and (2) total charges against net assets of the class or series of securities for 
sales or sales promotion expenses, personal service, or the maintenance of shareholder 
accounts do not exceed 0.0025 of average net assets annually.
209
  A bank may effect 
                                                 
208
  Rule 740(b).  One commenter requested that Rule 740(b) be modified to allow 
banks to sweep deposits into an unregistered investment company that operates 
pursuant to Rule 12d1-1 under the Investment Company Act (17 CFR 270.12d1-
1).  See
 State Street Corp. Letter.  The statutory sweep exception, however, 
provides only for deposit funds to be swept into an investment company 
“registered under the Investment Company Act of 1940.”   Exchange Act Section 
3(a)(4)(B)(v). 
209
  See Rule 740(c); FINRA Rule 2830.  Consistent with FINRA Rule 2830, charges 
for the following are 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: (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, 
 
91

transactions under the sweep exception and Rule 740 as part of a program to sweep 
deposit funds of, or collected by, another bank into a no-load money market fund in 
accordance with the exception and the Rule.  
B. Exemption Regarding Money Market Fund Transactions 
After carefully considering the comments, the Agencies have adopted Rule 741, 
which permits 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.
210
   To 
qualify for this exemption, the bank must provide the customer, directly or indirectly, 
some other product or service, the provision of which would not, in and of itself, require 
the bank to register as a broker-dealer under Section 15(a) of the Exchange Act.
211
  
Examples of other products or services that may be a qualifying “other” product or 
service include an escrow, trust, fiduciary or custody account, a deposit account or a loan 
or other extension of credit.  The Agencies have modified the rule to also permit a bank 
to effect transactions under the exemption on behalf of another bank as part of a program 
for the investment or reinvestment of the deposit funds of, or collected by, the other 
bank.
212
  This change is designed to allow banks to provide sweep services to other banks 
under the exemption, as they may do under the sweep exception itself. 
The final exemption continues to allow banks to effect transactions only in 
securities of a registered money market fund.  In addition, the rule continues to provide 
                                                                                                                                                
 
and transmitting proxies executed by beneficial owners of investment company 
shares. 
 
210
  Rule 741. 
211
  Rule 741(a)(1)(A). 
212
  Rule 741(a)(1)(B). 
 
92

that, if the class or series of money market fund securities is not no-load (as defined in 
Rule 740), the bank may not characterize or refer to the class or series of securities as no-
load and the bank must provide the customer, not later than at the time the customer 
authorizes the bank to effect the transactions, a prospectus for the securities.
213
  The 
Agencies believe these conditions and limitations provide bank customers adequate 
protections in light of the limited nature of the transactions permitted under the 
exemption.
214
   In addition, the 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 FINRA rules.  
V. Safekeeping and Custody  
A.        Background                
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 
                                                
 
213
  Rule 741(a)(2)(ii).  If a bank relies on the exemption to sweep the deposits of 
another bank into a money market fund that is not “no-load,” then neither the 
deposit-holding bank nor the sweeping bank may characterize the fund as a “no-
load” fund, and either the deposit-taking bank or the sweeping bank must provide 
the customer with a prospectus for the fund within the time prescribed by the rule.   
See
 Rule 741(a)(2)(ii)(A) and (B). 
214
  Some commenters requested that the prospectus-delivery requirement be 
eliminated or modified so that delivery is required before a transaction is effected 
rather than before the customer authorizes the transaction. See
, e.g., ABA Letter, 
Clearing House Ass’n Letter, and HSBC Bank Letter.  The final rule retains this 
requirement to ensure that a customer receives notice that its funds are to be 
invested in a fund that is not “no-load” before the customer authorizes the 
transaction(s).  If a customer’s funds are invested in a no-load fund and the bank 
is authorized, under the terms of its agreement with the customer to alter the 
specific fund into which the customer’s balances are invested, the bank should 
provide the customer a prospectus for any money market fund that is not a “no-
load” fund prior to the date on which the bank first invests the customer’s 
balances in the fund.       
 
 
93

and safekeeping exception”).  In particular, this exception allows a bank to perform the 
following activities 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.
215
 
The proposed rules included an exemption to 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 
                                                
 
215
   15 U.S.C. 78c(a)(4)(B)(viii). 
 
94

custodian.
216
  In addition, the proposed exemption allowed banks, subject to certain 
conditions, to accept orders for securities transactions on an accommodation basis from 
other types of custody accounts.
217
 
Some commenters contended that an exemption for custodial order-taking activity 
is unnecessary because, they argued, order-taking activity is permitted directly under the 
statutory exception.
218
   Other commenters stated that the exemption was important 
because it would allow banks to continue to provide order-taking services to employee 
benefit plans and individual retirement accounts and similar accounts, or that the 
restrictions in the exemption were reasonable.
219
   Another commenter, however, 
objected to the proposed exemption arguing that permitting custodial banks to take or
for securities is inconsistent with functional regulation.
ders 
0
   
                                                
22
B. Rule 760: Custody Exemption  
After carefully considering the comments, the Agencies have adopted Rule 760.  
The Agencies have crafted the exemption to allow banks to continue to accept securities 
orders in a custodial capacity and to permit bank customers to take advantage of those 
order-taking services subject to important conditions designed to limit the scope of the 
activity and provide appropriate investor protections.  In this way, the Agencies believe 
the exemption is consistent with functional regulation and the purposes of the GLBA.   
 
216
  Proposed Rule 760(a). 
217
  Proposed Rule 760(b). 
218
   See, e.g., Union Bank Letter, Harris Bank Letter, Clearing House Ass’n Letter, 
ABA Letter. 
219
  See, e.g., The Charles Schwab Corp. (“Schwab”) Letter, ICBA Letter. 
220
   See NASAA Letter. 
 
95

Rule 760 and the other final rules do not implement the statutory custody and 
safekeeping exception.
221
  A bank does not need to rely on the custody exemption in Rule 
760 to the extent the bank conducts other custodial activities permitted by Section 
3(a)(4)(B)(viii)(I)(aa)-(ee) (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 final rules (e.g.
, Rule 772, which permits banks to effect 
securities lending or borrowing transactions on behalf of certain non-custodial 
customers).
222
  In addition, a bank would not have to rely on Rule 760 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 custody exemption. 
                                                
 
221
  The Agencies asked for comment on whether the Agencies should adopt rules to 
implement the statutory custody and safekeeping exception.  No commenters 
requested that the Agencies do so at this time.  
222
  One commenter asserted that a bank would not “accept” a securities order if it 
received the order from a custodial customer and at the customer’s request 
transmitted the order to a broker-dealer selected by the customer.  See
 Union 
Bank Letter.  Such activities, however, constitute “accepting” a securities order 
for purposes of Rule 760 and a bank engaged in such activities for a custodial 
customer must comply with Rule 760 unless some other exception or exemption 
is available for the transaction (e
.g., Section 3(a)(4)(B)(x) of the Act if the 
transaction involves municipal securities).    
 
96

1. Order-Taking for Employee Benefit Plan Accounts and Individual 
Retirement or Similar Accounts 
We are adopting, largely as proposed, the sections of Rule 760 providing that a 
bank will not be considered a broker 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” or an “individual retirement account or similar account” for which 
the bank acts as a custodian.
223
  The rule defines an “employee benefit plan account” as a 
pension plan, retirement plan, profit sharing plan, bonus plan, thrift savings plan, 
incentive plan, or other similar plan, and provides a number of non-exclusive examples of 
plans that meet this definition.
224
  The rule defines an “individual retirement account or 
similar account” to mean an individual retirement account as defined in Section 408 of 
the Internal Revenue Code (26 U.S.C. 408), a Roth IRA as defined in Section 408A of 
the Internal Revenue Code (26 U.S.C. 408A), a health savings account as defined in 
Section 223(d) of the Internal Revenue Code (26 U.S.C. 223(d)), an Archer medical 
savings account as defined in Section 220(d) of the Internal Revenue Code (26 U.S.C. 
                                                
 
223
   See Rule 760(a).   
224
   Rule 760(h)(4). The rule provides that the term “employee benefit plan account” 
includes, 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.   
 
97

220(d)), a Coverdell education savings account as defined in Section 530 of the Internal 
Revenue Code (26 U.S.C. 530), or other similar account.
225
 
A number of commenters supported these definitions of “employee benefit plan 
account” and “individual retirement account or similar account.”
226
  The Agencies note 
that both definitions, by their terms, encompass “other similar” plans or accounts.  So, for 
example, similar plans or accounts, such as “lifetime savings accounts,” that are 
established under the Internal Revenue Code in the future would be employee benefit 
plan accounts or individual retirement accounts or similar accounts for purposes of the 
rule.  In addition, the term “employee benefit plan account” includes a non-U.S. plan that 
meets the definition of an employee benefit plan account. 
Under the final rules, a bank relying on the employee benefit plan and individual 
retirement and similar account provisions must comply with the advertising and sales 
literature limitations in paragraphs (a)(2) and (3), the employee compensation limitations 
in paragraph (c), and the other conditions in the paragraph (d) of the rule.  These 
conditions are discussed below.   
Some commenters asked that the Agencies permit a bank to accept securities 
orders for other types of accounts that may involve custody of securities, such as 
accounts for which the bank acts as escrow agent, issuing and paying agent, tender agent, 
or disbursement agent, subject to the conditions applicable to employee benefit plan 
accounts and individual retirement and similar accounts, rather than the expanded set of 
conditions applicable to accommodation orders accepted for other types of custody 
                                                
 
225
   Rule 760(h)(5).   
226
  See, e.g., ABA Letter, Clearing House Ass’n Letter, WBA Letter. 
 
98

accounts.  The provisions in Rule 760(a) for employee benefit plan accounts and 
individual retirement and similar accounts are designed to reflect the extent and manner 
in which banks provide order-taking services for these types of accounts.  In addition, 
these provisions take account of the special mention of these accounts in the custody and 
safekeeping exception
227
 and the additional protections to which these accounts typically 
are subject under the ERISA, the Internal Revenue Code, and other applicable law.  For 
these reasons, the Agencies have not expanded Rule 760(a) to cover accounts other than 
employee benefit plan accounts and individual retirement and other similar accounts.  
Banks may continue to accept orders from other types of accounts for which the bank 
acts as a custodian under the accommodation provisions of the rule.  
a. Employee Compensation Restrictions 
We are adopting the employee compensation restrictions in Rule 760(c) as 
proposed.  These restrictions apply when a bank, acting in a custodial capacity, accepts a 
securities order for an employee benefit plan account or an individual retirement account 
or similar account under paragraph (a) of the rule, and when a bank accepts a securities 
order for another type of custodial account under paragraph (b) of the rule.  Under these 
restrictions, if a bank accepts securities orders pursuant to Rule 760, then no employee of 
the bank may receive compensation (including a fee paid pursuant to a 12b–1 plan) from 
the bank, the executing broker-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.   These restrictions are designed to be 
consistent with banking practices and reduce the financial incentives a bank employee 
                                                
 
227
  See Section 3(a)(4)(B)(viii)(I)(ee) of the Exchange Act. 
 
99

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.  
Only a few commenters addressed the employee compensation restrictions of the 
rule.  For example, one commenter asserted that the rule should permit a bank to 
compensate its employees based on the potential revenues associated with a custodial 
account, including revenues received from processing securities transactions or from a 
mutual fund in which the account is invested.
228
  In addition, a commenter expressed 
concern that the restrictions would prohibit employees from receiving bonuses based on 
the total revenues derived from the custodial accounts for which the employee is 
responsible.   
As the Agencies noted in the proposal, the employee compensation restrictions in 
Rule 760(c) 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.  
Moreover the rule expressly provides that the employee compensation restrictions do not 
prevent a bank employee from receiving payments under a bonus or similar plan that are 
permissible under the exception in Rule 700(b)(1) as if a referral had been made by the 
bank employee, or from receiving any compensation described in Rule 700(b)(2) of the 
networking rules.
229
   
                                                 
228
  See, e.g., Wells Fargo Letter. 
229
  Because the employee compensation 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- 
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 
 
100

Thus, for example, the rule does prohibit a bank from directly passing on to an 
employee a portion or percentage of the 12b-1 fees received by the bank from a custody 
account’s investment in a mutual fund, or a portion of a fee that is charged only when, or 
that varies based on whether, a securities transaction is executed for the account.  A bank 
employee may receive payments under a bonus or similar plan rule that includes within 
its allocation pool the revenues generated by one or more custodial accounts if the plan 
meets the criteria for a discretionary, multi-factor bonus program in Rule 700(b)(1), or 
the bonus program is based on the overall profitability or revenues of the bank, an 
affiliate, or operating unit and the program complies with the requirements of the safe 
harbor in Rule 700(b)(2).   If a bank’s compensation practices are inconsistent with these 
limitations, the bank may not rely on the exemption to take securities orders in a custodial 
capacity. 
b. Advertisements and Sales Literature 
As under the proposed rule, final Rule 760(a)(2) 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.
230
  The bank also may not 
advertise that such accounts are securities brokerage accounts or that the bank’s 
                                                                                                                                                
 
institutional customer and high net worth customer exemption (Rule 701) for 
networking arrangements. 
230
   Rule 760(h)(2) defines an “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). 
 
101

safekeeping and custody services substitute for a securities brokerage account.
231
  
Moreover, advertisements and sales literature for individual retirement or similar 
accounts that are 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.
232
    
One commenter indicated that these advertising restrictions were reasonable.
233
  
Another commenter suggested that these advertising limitations should not apply to 
certain advertisements for which a broker-dealer takes compliance responsibility.
234
  The 
advertising and sales literature restrictions are designed to help prevent a bank from 
operating a brokerage business out of its custody department and, for this reason, apply to 
all advertisements and sales literature issued by or on behalf of a bank, whether or not a 
broker-dealer has some compliance responsibility with respect to the advertisement or 
sales literature.  These limitations would not, however, apply to the advertisements or 
sales literature that a registered broker-dealer may make to inform the public or others 
about the availability of brokerage services from the broker-dealer.  
c.         Other         Conditions         
                                                
 
231
   Rule 760(a)(2)(i) and (ii). 
232
   Rule 760(a)(3).  Rule 760(h)(6) defines “sales literature” to 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. 
233
  See ICBA Letter. 
234
  See UMB Bank, N.A. Letter. 
 
102

A bank that accepts orders for a securities transaction for an employee benefit 
plan account or individual retirement account or similar account also must comply with 
the conditions set forth in paragraph (d) of the Rule.
235
  These conditions are discussed 
below in Part V.B.3. 
236
   
2. Order-Taking as an Accommodation for Other Types of Accounts 
The proposed rule also permitted banks to continue to accept securities orders for 
custodial accounts other than employee benefit plan and individual retirement and similar 
accounts as an accommodation to the customer, 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 as a securities broker out of its custody 
department.  While commenters generally supported permitting banks to accept securities 
orders for other custodial accounts on an accommodation basis, several commenters 
asked the Agencies to modify or clarify the scope or terms of the exemption, including 
the meaning of “accommodation” and the prohibition on providing investment advice, 
research, and recommendations. 
The Agencies are adopting, largely as proposed, the provisions of the rule 
permitting banks to accept orders as an accommodation for these other custodial 
                                                
 
235
  Rule 760(a)(1). 
236
   The Agencies have made a technical change from the proposal to make clear that 
a bank operating under Rule 760(a) must comply with the conditions set forth in 
paragraph (d) as well as with the employee compensation limitations of paragraph 
(c).  See
 Rule 760(a)(1).  This should better clarify banks’ responsibilities under 
these provisions, and the Agencies have made a conforming change to the text of 
Rule 760(b) relating to accommodation trades.   
    
 
103

accounts.
237
  A bank relying on this part of the exemption must comply with the 
conditions discussed below. 
a.  Accommodation Basis 
For the reasons stated in the proposing release, the final rule, like the proposal, 
permits a bank to accept securities orders for other types of custodial accounts only as an 
accommodation to the customer.
238
  Some commenters suggested that the Agencies 
define the term "accommodation" in the rule to mean any trade that is effected solely on 
the request of the customer or on an unsolicited basis.
239
  As noted in the proposal, the 
Banking Agencies will develop guidance to assist Banking Agency examiners in 
reviewing, as part of the agencies’ ongoing risk-focused supervisory and examination 
process, the order-taking services provided to these custodial accounts.  The 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 these custodial accounts 
only as an accommodation to the customer and in a manner consistent with the custody 
exemption.
240
  As part of these reviews, Banking Agency examiners also will, consistent 
with the rule, consider the form and substance of the relevant accounts, transactions, and 
activities to prevent evasions of the requirements of the rule.
241
  The Agencies believe 
this approach, rather than adopting by rule a definition of “accommodation,” is 
                                                
 
237
   Rule 760(b).     
238
   Rule 760(b)(1).   
239
   See Fiserv Trust Company Letter; Ass'n of Colorado Trust Companies Letter. 
240
  See 71 FR at 77532-33. 
241
  See Rule 760(f). 
 
104

appropriate given the disparity in the types, characteristics and uses of other custody 
accounts, the size and operations of banks that provide these services and the manner in 
which they do so.   
b.  Employee Compensation Restrictions   
For the reasons stated in the proposing release, final Rule 760(b)(2) continues to 
provide that a bank that accepts orders for other custody accounts must comply with the 
employee compensation limitations in paragraph (c) of the rule.  These limitations were 
previously discussed in Part V.B.I.a., supra
. 
242
 
c.  Limitations on Bank Fees 
The rule prohibits a bank that accepts accommodation orders for a custody 
account from charging or receiving any fee that varies 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.
243
  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 Rule 760(b)(3).  
Commenters did not raise concerns with these restrictions. 
d.  Advertising and Sales Literature Restrictions 
Under the final rule, 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 
                                                
 
242
   Rule 760(b)(2). 
243
   Rule 760(b)(3).    
 
105

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.
244
   
e.  Investment Advice or Recommendations 
The proposed rule imposed certain restrictions on the ability of a bank to provide 
investment advice or research concerning securities to an account for which it accepts 
accommodations orders, make recommendations concerning securities to the account, or 
otherwise solicit securities transactions from the account.
245
   
Several commenters, expressed concerns with the proposed limitations on 
investment advice, research and recommendations.  For example, commenters expressed 
concern that the restrictions would negatively affect a bank’s ability to cross-market its 
trust, fiduciary or other services to custody customers.
246
  Some expressed concern that 
the limitations would interfere with a bank’s ability to share research with custody 
                                                
 
244
   Rule 760(b)(5).  One commenter urged the Agencies to abandon the prohibitions 
on advertising order-taking as an accommodation to other custodial accounts, 
arguing that the prohibition violates a bank’s constitutional free speech rights.  
See
 CBA Letter.  The Agencies believe these restrictions are appropriate to 
effectuate the purposes of the exemption and have tailored the restrictions to 
comply with the customary practices of banks and minimize potential disruptions.  
The Agencies specifically requested comments on the conditions of the rule, and 
no commenter indicated that the advertising restrictions on accommodation trade 
would materially disrupt their business or operations. 
245
   Rule 760(b)(6).   
246
   See, e.g., Harris Bank Letter; U.S. Trust Letter. 
 
106

customers or make the bank’s views concerning securities or markets available to the 
public through websites, mailings, interviews or other means.
247
   
After carefully considering the comments received, the Agencies believe that no 
change is necessary to accommodate the cross-marketing of other bank services.  
Accordingly, we are adopting the provisions related to investment advice, research and 
recommendations without change.  The Agencies note that the prohibitions do not 
prevent a bank from cross-marketing its trust, fiduciary or other services to its custody 
customers.  A bank’s marketing to custody account customers may – without violating 
the rule’s general prohibition against providing advice, research or recommendations – 
include non-account specific information provided in media such as newsletters and 
websites.  In addition, the advice, research, recommendation and solicitation prohibition 
does not prohibit a bank from providing samples of research, including stock-specific 
research, to custody customers that the bank provides to other persons for marketing 
purposes.  Thus, the Agencies believe that banks will continue to be able to cross-market 
their products and services to their custody customers.  A custody account, however, is 
not a fiduciary account, and a bank operating under Rule 760(b) with respect to a 
custodial account may not provide such samples in such a way or with such a frequency 
as to provide the custody account securities services that only are permissible for a trust 
or fiduciary customer.  The bank, moreover, may not provide personalized investment 
                                                
 
247
   See, e.g., PNC Letter; National City Corp. Letter. 
 
107

advice, research or recommendations regarding particular securities to the custodial 
account for any reason.
248
   
Some commenters questioned whether providing custody customers with a choice 
of investments from which to select would constitute providing investment advice.
249
  
Banks may use menus or other lists to make custodial customers aware of the securities 
available to them through the custodial account.  For example, the restrictions in 
paragraph (b)(6) of the rule do not prevent a bank from providing its customers with an 
online menu of the mutual funds that the customer is able to purchase through the 
custody account.   
The limitations and restrictions in Rule 760(b), 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.   
Commenters asked how the limitations on investment advice and research would 
apply when a customer has both a custody account and a separate trust or fiduciary 
account with a bank, and asked the Agencies to clarify that a bank would not violate the 
restrictions if the bank provides a trust or fiduciary customer with research or advice that 
                                                
 
248
   This would include providing personalized advice, research or recommendations 
concerning securities to the account in an effort to convert the account to another 
type of account, for goodwill or to obtain referrals.   
249
   See Harris Bank Letter; PNC Letter. 
 
108

the customer then uses to make orders through its custody accounts.
250
  Rule 760(b)(6) 
prohibits banks from providing investment advice, research or recommendations 
concerning securities to, or soliciting securities transactions from, a custody account for 
which the bank accepts orders under the accommodation trade authority.  The rule does 
not limit the types of research or other services a bank may provide to a customer’s trust 
or fiduciary account, and the Agencies recognize that a bank may have no control over 
which account the customer uses to place any orders that result from such research or 
other services.   
The final rule, like the proposal, continues to provide that, in order 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.
251
  For 
example, the Agencies will consider the content, format and frequency of any investment 
research provided to an accommodation custodial account in considering if such research 
in purpose or effect evades the restrictions in the rule or provides a custody account 
securities services that only are permissible for a trust or fiduciary customer.  Similarly, a 
bank may not evade the rule’s restrictions by providing an accommodation customer that 
has both a custody account and a trust or fiduciary account with investment advice, 
recommendations or research that is targeted to the securities held in the customer’s 
custody account.  For example, if a customer’s custody account has a large position in a 
particular security and that security is not held in the customer’s trust or fiduciary 
                                                
 
250
   See ABA Letter; Harris Bank Letter. 
251
  Rule 760(e). 
 
109

account, a bank may not routinely provide the customer with research focused on that 
security.  Banks should have and maintain policies and procedures to abide by these 
limitations and bank examiners will review bank compliance with these limits in 
accordance with the risk-based supervisory and examination process, considering both 
the form and substance of the cross-marketing activities in applying the anti-evasion 
provisions of the rule. 
The restrictions in Rule 760(b)(6) do not prohibit the bank from advertising its 
custodial services and disseminating sales literature that meets the conditions in the 
exemption.
252
  These restrictions also will 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 advertisements 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-
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.
253
  The 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 
                                                
 
252
  Rule 760(b)(6)(i). 
253
  Rule 760(b)(6)(ii).  “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)).  Rule 
760(h)(7). 
 
110

as the bank does not provide investment advice or research concerning securities to the 
account or make a recommendation to the account concerning securities.
254
   
3.  Other Conditions Applicable to Order-Taking for All Custody Accounts 
The proposed exemption provided that a bank may accept orders for a securities 
transaction for a custody account under the exemption only if the bank (1) does not act in 
a trustee or fiduciary capacity (as defined in section 3(a)(4)(D) of the Exchange Act) with 
respect to the account; (2) complies with section 3(a)(4)(C) of the Act 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 regarding carrying broker activities. 
a.  Directed Trustees 
Some commenters requested that the Agencies modify the exemption to allow a 
bank that acts as a directed trustee for an account to accept orders and effect transactions 
for the account under the custody exemption in Rule 760 in lieu of relying on the trust 
and fiduciary rules (Rule 721 to 723) for the transaction.
255
  In light of the comments and 
the protections included in Rule 760, the Agencies have modified the final rule to provide 
that a bank that acts as a directed trustee for an account may rely on the custody 
exception to accept orders for, and effect transactions in, securities for the account.
256
  If 
a bank acting as directed trustee relies on the rule to effect transactions for an employee 
                                                
 
254
  Rule 760(b)(6)(iii). 
255
   See Teachers Insurance and Annuity Association of America and College 
Retirement Equities Fund (“TIAA-CREF”) Letter; ACB Letter; Roma Bank 
Letter.  Commenters asserted, for example, that a bank acting as a directed trustee 
provides services that are functionally similar to those provided as a custodian and 
in either case does not have investment discretion with respect to the account. 
256
   See Rule 760(d)(1).  Alternatively, the bank may continue to effect transactions 
for the account under the rules relating to trust or fiduciary accounts. 
 
111

benefit plan account or an individual retirement account or similar account, the bank must 
comply with the conditions in Rule 760(a).  If a bank acting as directed trustee relies on 
the rule to effect transactions for another type of account, the bank must comply with the 
conditions governing accommodation accounts in Rule 760(b).   
The rule defines a directed trustee as “a trustee that does not exercise investment 
discretion with respect to the account.”
257
  The Agencies also have modified the 
definition of “an account for which the bank acts as a custodian” to include an account 
for which a bank acts as a directed trustee.
258
   Although a bank acting as directed trustee 
for an account may effect transactions under the custody exemption, the bank’s trustee 
relationship with the account remains a trust and fiduciary relationship and, as such, the 
bank must continue to comply with applicable fiduciary principles and standards in its 
relationships with the account. 
b. Broker Execution Requirement 
Consistent with the requirements of the custody and safekeeping exception, Rule 
760(d)(2) requires a bank that accepts orders for a custody account under the rule to 
comply with Section 3(a)(4)(C) of the Exchange Act
259
 in handling any order for a 
securities transaction for the account.
260
  Under this provision, (i) the bank must direct 
the trade to a registered broker-dealer for execution, or (ii) the trade must be a cross trade 
or other substantially similar trade of a security that is made by the bank or between the 
                                                
 
257
  Rule 760(h)(3).  
258
   See Rule 760(h)(1).       
259
   15 U.S.C. 78c(a)(4)(C).  
260
   See Rule 760(d)(2). 
 
112

bank and an affiliated fiduciary and is not in contravention of fiduciary principles 
established under applicable Federal or State law, or (iii) the trade must be conducted in 
some other manner permitted under rules, regulations, or orders as the Commission may 
prescribe or issue.        
c. Carrying Broker Provisions  
A number of commenters addressed the proposed provision limiting the 
availability of the custody exemption to banks that comply with Section 
3(a)(4)(B)(viii)(II) of the Exchange Act
261
 relating to carrying broker activities.
262
  Some 
stated that the Agencies should define the term “carrying broker” by rule rather than by 
interpretation.
263
  One commenter requested that we interpret the term based on the view 
that the essence of a carrying broker relationship is "complete dependence" of a broker-
dealer on another entity for back office functions and execution.
264
  Another commenter 
took the position that a custodian bank should not be deemed a carrying broker so long as 
“it is not enabling” broker-dealers to avoid the net capital requirements applicable to 
carrying brokers.
265
  One commenter generally suggested that we either eliminate the 
                                                
 
261
   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-dealer, unless such carrying broker activities are engaged 
in with respect to government securities. 
262
   Rule 760(d)(3).   
263
   See ABA Letter; State Street Corp. Letter; PNC Letter.   
264
   See Clearing House Ass’n Letter.   
265
   See U.S. Trust Letter. 
 
113

carrying broker limitation from the proposed rules, or amend it to avoid affecting the 
ability of banks to undertake traditional banking activities.
266
    
Section 3(a)(4)(B)(viii)(II) of the Exchange Act provides that a bank relying on 
the custody exception may not act as a “carrying broker,” as that term and different 
formulations of the term are used in Section 15(c)(3) of the Act and the underlying rules 
and regulations, for a broker-dealer other than with respect to government securities.  
Section 15(c)(3) of the Act in relevant part requires broker-dealers to comply with the 
Commission’s regulations with respect to financial responsibility and related customer 
protection practices of broker-dealers.
267
  The Commission’s financial responsibility and 
customer protection rules expand on what it means to carry customer securities.
268
  In 
general, broker-dealers establish carrying arrangements in which other broker-dealers 
                                                 
266
   See HSBC Bank Letter.  In addition, a few commenters asserted that the 
description of potential carrying broker activity in prior rulemakings under the 
GLB Act would, if adopted, be highly problematic and disruptive for banks and 
broker-dealers.  See
 Clearing House Ass’n Letter; ABA Letter. 
267
   Exchange Act Section 15(c)(3)(A), 15 U.S.C. 78o(c)(3)(A).   
268
   The Commission’s net capital rule specifies that a broker-dealer shall be deemed 
to carry customer or broker-dealer accounts “if, in connection with its activities as 
a broker or dealer, it receives checks, drafts, or other evidences of indebtedness 
made payable to itself or persons other than the requisite registered broker or 
dealer  carrying the account of a customer, escrow agent, issuer, underwriter, 
sponsor, or other distributor of securities” or “if it does not promptly forward or 
promptly deliver all of the securities of customers or of other brokers or dealers 
received by the firm in connection with its activities as a broker or dealer.”  
Exchange Act Rule 15c3-1(a)(2)(i) 
The Commission’s customer protection rule governing reserves and 
custody of securities defines the term “securities carried for the account of a 
customer” to mean “securities received by or on behalf of a broker or dealer for 
the account of any customer and securities carried long by a broker or dealer for 
the account of any customer,” as well as securities sold to, or bought for, a 
customer by a broker-dealer.  Exchange Act Rule 15c3-3(a)(2).   
 
114

carry their accounts to permit the non-carrying broker-dealer to be subject to lesser 
financial responsibility requirements under the Exchange Act.  A broker-dealer entering 
into such an agreement with a carrying entity that is not a registered broker-dealer, 
however, may not take advantage of those lesser requirements.
269
   
After carefully considering the comments, the Agencies have retained this 
limitation as a condition of the custody exemption without change as it is a term of the 
statutory custody exception.  Banks may look to certain key factors to help distinguish 
permissible custodial activity from impermissible carrying broker activity.  In particular, 
key factors in considering whether the existence of shared customers between a broker-
dealer and a bank may entail impermissible carrying broker activity by the bank are the 
broker-dealer’s own regulatory obligations and whether the broker-dealer either makes 
formal or informal arrangements with the bank or structures its operations or offerings to 
cause the broker-dealer’s customers generally (or one or more broad segments of the 
broker-dealer’s customers) to use the bank’s custody accounts instead of maintaining 
funds and securities in accounts at the broker-dealer (thereby avoiding the broker-dealer’s 
financial and related responsibilities).  The existence of a substantial number of common 
customers between a broker-dealer and a bank’s custody department in the absence of 
                                                
 
269
   Within common securities industry usage, the terms “carrying broker” and 
“clearing broker” are virtually identical and often are used interchangeably.  In 
certain instances, the terms mean a broker that, as part of an arrangement with a 
second broker (an “introducing” or “corresponding” broker), allows the second 
broker to be subject to lesser regulatory requirements (e.g.
, under the net capital 
provisions of Exchange Act Rule 15c3-1 and the customer protection provisions 
of Exchange Act Rule 15c3-3).  Technically, however, a “carrying broker” is a 
broker that holds funds and securities on behalf of customers, whether its own 
customers or customers introduced by another broker-dealer, and a “clearing 
broker” is a member of a registered clearing agency. 
 
115

such an arrangement or structure would not cause the bank to act as a carrying broker for 
the broker-dealer.    
Similarly, a bank may perform or share systems that perform limited back-office 
functions on behalf of a broker-dealer without becoming a carrying broker for the broker-
dealer.  A broker-dealer, for example, may contract with an unregistered party such as a 
bank to send out transaction confirmations on behalf of the broker-dealer or have an 
arrangement with an affiliated bank to provide customers with combined statements, with 
the broker-dealer remaining responsible for the accuracy and completeness of those 
confirmations and the broker-dealer aspects of the statements.  A bank and an affiliated 
broker-dealer also may share or coordinate risk management systems such as, for 
example, those relating to Bank Secrecy Act and anti-money laundering compliance.
270
  
A broker-dealer, however, may not delegate core functions to a bank or other 
unregistered entity or functions that would require an individual to pass a qualification 
examination or register with an SRO.
271
  A broker-dealer also must maintain possession 
or control over the broker-dealer’s proprietary cash or securities and its customers’ cash 
                                                
 
270
  Other examples of current permissible coordination arrangements between banks 
and broker-dealers include legal and compliance functions, accounting and 
finance functions (such as payroll and expense account reporting), information 
technology, operations functions (such as disaster recovery services), and 
administration functions (such as human resources and internal audits).  See
 
NASD Notice to Members 05-48 (July 2005) at 2.
 
271
  NASD Notice to Members 05-48 (July 2005), “Outsourcing,” provides guidance 
to member firms regarding the outsourcing activities and functions that, if 
performed directly by members, would be required to be the subject of a 
supervisory system and written supervisory procedures pursuant to NASD Rule 
3010. 
 
116

or securities in accordance with the Commission’s financial responsibility rules.
272
   Of 
course, a bank may serve as custodian for proprietary or customer cash or securities of 
the broker-dealer and may accept and use in the ordinary course of its banking busines
cash deposited with the bank by the broker-dealer or its
s 
 customers.
273
 
4.         Custodians,         Subcustodians         and Administrators/Recordkeepers 
a.   “Account for which a bank acts as a custodian” 
As a general matter, the exemption in Rule 760 is available only for an “account 
for which the bank acts as a custodian.”  The proposed rule defined this term to mean 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.
274
  As 
discussed in Part V.B.3.a supra
, the Agencies have amended this definition in the final 
rule also to include an account for which a bank acts as a directed trustee. 
A few commenters asked whether a bank performing custodial functions in a non-
trustee and non-fiduciary capacity (such as escrow agent, fiscal agent or paying agent) 
may use the custody exemption even if it is not formally designated as “custodian” by the 
                                                
 
272
  See e.g., Rules 15c3-1 and 15c3-3 [17 CFR 240.15c3-1, 15c3-3].  This is true 
even if the broker-dealer is not “completely dependent” on the bank for all back 
office functions and execution.
 
273
  See Rule 15c3-3(c)(5). 
274
  Proposed Rule 760(g)(1). 
 
117

bank-customer agreement.
275
  Whether a bank serves as custodian for the securities or 
other assets of an account depends on the services the bank provides to the account with 
respect to such securities or assets, not the label used to identify the account or the bank’s 
services in the agreement between the bank and the customer.  Thus, for example, a bank 
that acts as an escrow agent, fiscal agent or paying agent with respect to an account, and 
that provides safekeeping or custody services for the securities or other assets in the 
account, is considered to be a custodian for the account for purpose of the rule regardless 
of whether the account agreement uses the term “custodian” or any other particular 
language.   
b.         Administrators/Recordkeepers and Subcustodians 
The proposed exemption permitted a bank acting as a non-fiduciary and non-
custodial administrator or recordkeeper for an employee benefit plan to accept securities 
orders for the plan on behalf of a custodian bank.
276
  Under the proposed exemption, both 
the administrator/recordkeeper bank and the custodial bank had to comply with the 
requirements relating to employee benefit plan accounts.
277
  In addition, the proposed 
rule prohibited an administrator/recordkeeper bank from executing a cross-trade with or 
for the employee benefit plan or from netting orders for securities for the plan, other th
orders for shares of open-end investment companies not traded on an exchange.
an 
                                                
278
   
 
275
   See Union Bank Letter, Wells Fargo Letter. 
276
   Proposed Rule 760(e).  
277
   Proposed Rule 760(e)(1).     
278
  Proposed Rule 760(e)(2).   
 
118

A few commenters supported these provisions, but opposed the restrictions on 
cross-trading and netting.
279
  One commenter maintained that the 
administrator/recordkeeper provisions should also be available to banks providing 
administrative services to individual retirement accounts.
280
   
Some commenters also questioned whether or how the proposed exemption would 
apply to a bank that acts as a subcustodian for the trust or fiduciary or custody accounts 
of another bank.  For example, some commenters asserted that a bank acting as a 
subcustodian for another bank’s trust or fiduciary accounts should be permitted to accept 
orders for those accounts under the less restrictive conditions in Rule 760(a) regardless of 
the type of accounts actually involved.
281
  Other commenters suggested that a 
subcustodian bank be permitted to effect trades for the accounts of the other bank with a 
direct custodial relationship with the customer under the same rules (e.g.
, trust and 
fiduciary or custody), and subject to the same conditions, that would apply to the other 
bank if it conducted the transactions directly.
282
  Commenters also noted that banks, and 
particularly smaller banks, at times use subcustodian arrangements with other banks to 
provide their customers custodial services more efficiently and at lower cost than they 
may be able to do on their own.   
                                                
 
279
   See ABA Letter; Clearing House Ass’n Letter; CBA Letter.  The commenters 
asserted that the cross-trading and netting restrictions were too restrictive and 
noted that section 3(a)(4)(C) of the Exchange Act permits bank custodians to 
engage in a broader range of cross-trade and netting activities. 
280
   See CBA Letter. 
281
  See, e.g., ABA Letter, CBA Letter, PNC Letter, Schwab Letter. 
282
   See TIAA-CREF Letter.  
 
119

After carefully considering the comments, the Agencies have adopted 
Rule 760(e), which permits 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 a custodian to accept orders for the account under Rule 760.
283
  In addition, the 
Agencies have adopted a new paragraph (f) of the rule that permits a bank that acts as a 
subcustodian for any type of account for which another bank acts as custodian to accept 
orders for the account under Rule 760.  This change was made in response to comments 
that greater flexibility and clarity was needed for banks that use, and banks that provide, 
subcustodial services.  Under these provisions of the final rule, the 
administrator/recordkeeper bank or subcustodian bank, as well as the initial custodian 
bank for the account, must comply with the provisions of Rule 760 applicable to the type 
of account involved (i
.e. employee benefit plan account, individual retirement account or 
similar account, or other types of accounts).
284
   
The final rule generally prohibits a recordkeeper/administrator bank or 
subcustodian bank relying on the exemption from executing a cross-trade or netting 
orders with or for the relevant account.
285
  However, the Agencies have expanded the 
exceptions to this general prohibition in light of the comments received.  In particular, the 
                                                 
283
  The Agencies understand that the type of administrator/recordkeeper 
arrangements described in Rule 760(e) are not typically used with respect to 
accounts other than employee benefit plan accounts and, for this reason, have not 
expanded the paragraph to cover other types of accounts. 
284
  See Rule 760(e)(1) and (f)(1) and (2).  The Agencies made a technical change to 
Rule 760(e) to clarify that the administrator/recordkeeper bank and the custodial 
bank for employee benefit accounts need to comply only with the requirements in 
the rule applicable to employee benefit plan accounts and do not need to comply 
with the conditions applicable to accommodation trades.   
285
  Rule 760(e)(2) and (f)(3). 
 
120

final rule permits the administrator/recordkeeper bank or subcustodian bank to cross or 
net orders for shares of open-end investment companies not traded on an exchange.
286
  In 
addition, the final rule permits the administrator/recordkeeper bank or subcustodian bank 
to cross orders between or net orders for accounts of the custodian bank that contracted 
with the administrator/recordkeeper bank or subcustodian bank for services.
287
  
Permitting this additional type of cross-trade and netting activity is consistent with the 
exceptions to broker execution requirement in section 3(a)(4)(C) of the Exchange Act and 
should allow cost-savings for the customer by eliminating the need for a broker 
intermediary.  At the same time, by prohibiting an administrator/recordkeeper bank or 
subcustodian bank operating under the rule from executing cross-trades or netting orders 
among the accounts of different
 custodian banks to which it provides services will help 
prevent banks from establishing a market for securities under the exemption.  
The Agencies note that these provisions do not apply to a bank that provides 
custody and order-taking services to the trust
 or fiduciary accounts of another bank.  In 
these circumstances, the bank providing custodial services is treated as a custodian, and 
not a subcustodian, for purposes of the rule and may provide order-taking services to the 
account in accordance with the provisions of Rule 760(a) or (b) applicable to the type of 
account involved. 
5. Evasions   
The Agencies are adopting, as proposed, the provision that states the Agencies 
will consider both the form and substance of the relevant accounts, transactions and 
                                                
 
286
   See Rule 760(e)(2)(i) and (f)(3)(i).  
287
   See Rule 760(e)(2)(ii) and (f)(3)(ii). 
 
121

activities (including advertising activities) in considering whether a bank meets the terms 
of the exemption, to prevent evasions of the exemption.
288
  We received no comments on 
this anti-evasion provision.  As part of the regular risk-focused 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. 
VI.       Other       Exemptions       
 The Agencies also are adopting certain other exemptions relating to the securities 
“broker” activities of banks.  These are discussed below.   
A.  Exemption for Regulation S Transactions with Non-U.S. Persons and Broker-
Dealers 
 
We are adopting Rule 771 of Regulation R to exempt banks from the definition of 
“broker” under the Exchange Act for certain agency transactions involving Regulation S 
securities.
289
  As with Rule 3a5-2 under the Exchange Act, which the Commission 
                                                
 
288
   Rule 760(g).    
289
  The Commission’s Regulation S (17 CFR 230.901 et seq.) provides that offers 
and sales of securities conducted in accordance with the terms of the regulation 
will be not be deemed to constitute an offer, offer to sell, sale or offer to buy 
within the United States for purposes of the securities registration requirements of 
Section 5 of the Securities Act.  See
 17 CFR 230.901.  Specifically, Rule 903 of 
Regulation S provides that an offer or sale of securities by the issuer, a distributor, 
or an affiliate or a person acting on their behalf shall be deemed to occur outside 
the U.S. within the meaning of Rule 901 if the offer or sale is made in an offshore 
transaction (as defined in Rule 901), and no directed selling efforts are made in 
the U.S. by the issuer, a distributor, affiliate, or person acting on their behalf.  
Other conditions may also apply depending on the place of incorporation and 
reporting status of the issuer, and the amount of U.S. market interest in the 
securities.  
 
122

separately is adopting to permit banks to engage in certain Regulation S transactions on a 
riskless principal basis without being “dealers,” Rule 771 recognizes that non-U.S. 
persons located outside the United States generally will not rely on the protections of the 
U.S. securities laws when purchasing Regulation S securities from U.S. banks, and that 
those persons may purchase the same securities from foreign banks located outside the 
U.S. without subjecting the foreign bank to U.S. broker-dealer registration.   
Commenters generally supported the proposal while suggesting certain 
modifications and clarifications.
290
  For example, commenters requested that the 
Agencies clarify that the exemption is available to banks both during and after any 
applicable distribution compliance period for the securities required by Regulation S, and 
allow banks to conduct resales of eligible securities for either non-U.S. persons or 
registered broker-dealers if the bank has a reasonable belief that the securities were 
initially sold in compliance with Regulation S.
291
  In addition, some commenters argued 
                                                                                                                                                
 
Rule 904 of Regulation S provides that an offer or sale of securities by any 
person other than the issuer, a distributor, an affiliate (except an officer or director 
who is an affiliate solely by virtue of that position) or person acting on their 
behalf will be deemed to occur outside the U.S. within the meaning of Rule 901 if 
the offer or sale is made in an offshore transaction (as defined in Rule 901), and 
no directed selling efforts are made in the U.S. by the seller, an affiliate or person 
acting on their behalf.  Additional conditions apply in the case of resales of 
certain types of securities by dealers and persons receiving selling concessions, 
and in the case of resales by certain affiliates of the issuer or a distributor.   
290
   See IIB Letter; ABA Letter; Clearing House Ass’n Letter.     
291
   See IIB Letter; Clearing House Ass’n Letter.  Rules 903(b)(2) and (b)(3) of 
Regulation S subject Category 2 securities and Category 3 debt securities to a 40-
day distribution compliance period, and subject Category 3 equity securities to a 
one-year distribution compliance period, during which certain restrictions apply to 
offers or sales of the securities in order to preserve the foreign nature of the 
transactions.  Under Rule 903 of Regulation S, Category 1 encompasses certain 
securities: (i) issued by a foreign issuer, for which there is no substantial U.S. 
market interest, (ii) that are offered and sold in an overseas directed offering, (iii) 
 
123

that the exemption should not require a bank to comply with the resale restrictions in 
Rule 904 of Regulation S if the bank effects a resale of an eligible security in accordance 
with Rule 903 of Regulation S prior to the end of any applicable distribution compliance 
period for the security.
292
  Commenters also urged the Agencies to make the proposed 
“broker” exemption in Regulation R and the “dealer” exemption proposed by the 
Commission as consistent as possible and to make both exemptions as consistent as 
possible with Regulation S.  
The Agencies have modified the rule in several respects in light of the comments, 
to enhance its clarity and to better conform it to Regulation S.  The final rule, like the 
proposed rule, continues to have three parts.  The first part permits a bank to effect a sale 
of an eligible security in compliance with the requirements of Rule 903 of Regulation S 
to a purchaser who is not in the United States.
293
  The term “purchaser” is defined to 
mean a person who purchases an eligible security and who is not a U.S. person under 
Rule 902(k) of Regulation S.
294
   
                                                                                                                                                
 
that are backed by the full faith and credit of a foreign government, or (iv) that are 
offered and sold to employees of the issuer or its affiliates pursuant to certain 
foreign employee benefit plans.  Category 2 encompasses securities, not eligible 
for Category 1, that are equity securities of a reporting foreign issuer, or debt 
securities of a reporting issuer or of a non-reporting foreign issuer.  Category 3 
applies to all offerings of securities that do not fall within Category 1 or 2.   
292
   See IIB Letter.  
293
   Rule 771(a)(1). 
294
  Rule 771(b)(3).  Rule 902(k) of Regulation S defines the term “U.S. person” to 
mean:  (i) any natural person resident in the U.S.; (ii) any partnership or 
corporation organized or incorporated under the laws of the U.S.; (iii) any estate 
of which any executor or administrator is a U.S. person; (iv) any trust of which 
any trustee is a U.S. person; (v) any agency or branch of a foreign entity located 
in the U.S.; (vi) any non-discretionary account or similar account (other than an 
estate or trust) held by a dealer or other fiduciary for the benefit or account of a 
 
124

The second part permits a bank to effect, by or on behalf of a person who is not a 
U.S. person under Rule 902(k) of Regulation S, a resale of an eligible security after its 
initial sale to a purchaser who is not in the United States or to a registered broker-
dealer.
295
  To take advantage of this second exemption, the bank (1) must have a 
reasonable belief that the eligible security was initially sold outside of the United States 
within the meaning of and in compliance with Rule 903 of Regulation S, and (2) if the 
resale is made prior to any applicable distribution compliance period specified in Rules 
903(b)(2) or (b)(3) of Regulation S, the resale must be made in compliance with the 
requirements of Rule 904 of Regulation S.
296
   
The third part of the exemption permits a bank to effect, by or on behalf of a 
registered broker-dealer, a resale of an eligible security after its initial sale to a purchaser 
who is not in the United States.
297
  As under the second part, the bank must have a 
reasonable belief that the eligible security was initially sold outside of the United States 
within the meaning of and in compliance with Rule 903 of Regulation S and, if the resale 
is made prior to the expiration of any applicable distribution compliance period in Rules 
903(b)(2) or (b)(3) of Regulation S, the bank must effect the resale in compliance with 
                                                                                                                                                
 
U.S. person; and (vii) any discretionary account or similar account (other than an 
estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if 
an individual) resident in the U.S., and (viii) any partnership or corporation if (A) 
organized or incorporated under the laws of any foreign jurisdiction, and (B) 
formed by a U.S. person principally for the purpose of investing in securities not 
registered under the Act, unless it is organized or incorporated, and owned, by 
accredited investors (as defined in Rule 501(a) under the Securities Act) who are 
not natural persons, estates or trusts. 
295
   Rule 771(a)(2). 
296
  Rule 771(a)(2). 
297
   Rule 771(a)(3). 
 
125

the requirements of Rule 904 of Regulation S.  The proposed rule would have allowed a 
bank to rely on a reasonable belief that the security was sold in compliance with 
Regulation S only when it purchases a security from a non-U.S. person but not when it 
purchases a security from a broker-dealer.  In light of comments received, the reasonable 
belief standard is also available under the final rule for a bank’s transactions with a 
broker-dealer because the process of determining whether a security initially was issued 
in compliance with Regulation S should be similar whether the purchase is from a broker-
dealer or a non-U.S. person.
298
  As the rule makes clear, a bank effecting a resale of an 
eligible security under the exemption must effect the transaction in accordance with the 
conditions of Rule 904 if the transaction occurs during, but not after, any applicable 
distribution compliance period for the security under Rule 903(b)(2) or (b)(3) of 
Regulation S.   
The final rule continues to require, however, that any sale effected under 
paragraph (b)(1) of the Rule, or resale effected under paragraphs (b)(2) or (b)(3) of the 
Rule (other than one to a registered broker-dealer), be to a “purchaser who is not in the 
United States.”  This is true even if the applicable distribution compliance period for the 
overseas offering of the security under Regulation S has expired.  Consistent with 
Regulation S, which permits the offshore resale of securities, the purpose of the 
exemption in Rule 771 is to permit U.S. banks to sell Regulation S securities to 
customers outside the United States.  It does not permit banks to sell those securities 
domestically (other than to a registered broker-dealer).
299
     
                                                
 
298
  See IIB Letter and Clearing House Ass’n Letter. 
299
  The Agencies recognize that the “offshore transaction” condition in Rules 903 
and 904 of Regulation S also require that the offer not be made to a person in the 
 
126

For purposes of the exemption, an “eligible security” means any security other 
than a security that is being sold from the inventory of the bank or an affiliate of the bank 
or that is 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.
300
  Commenters requested 
that the Agencies clarify that the definition of “eligible security” would not prohibit a 
bank from effecting transactions under the exemption in securities that have been issued 
by the bank or an affiliate.
301
  A security that is issued by a bank or an affiliate of a bank, 
such as a structured note or share in a pooled investment vehicle, may be an eligible 
security if it otherwise meets the terms of paragraph (b)(2) of Rule 771.  
B. Exemption for Non-Custodial Securities Lending Transactions  
 The Agencies are adopting, as proposed, Rule 772 of Regulation R to provide 
banks engaged in certain securities lending transactions with a conditional exemption 
from the definition of “broker.”  The exemption allows a bank to engage in securities 
lending transactions as agent in circumstances where the bank does not have custody of 
the securities or has custody of such securities for less than the entire period of the 
                                                                                                                                                
 
United States.  See
 17 CFR 230.902(h), 230.903(a)(1) and 230.904(a)(1).  For this 
reason, one commenter stated that the rule simply should refer to sales to a 
“purchaser,” rather than to a purchaser who is outside the United States.  See
 IIB 
Letter.   The Agencies have retained the “purchaser who is not in the United 
States” language in the final rule, even for those transactions that must be 
conducted in accordance with Rule 903 or 904 of Regulation S, to highlight and 
reaffirm that these transactions must be with persons outside the United States.    
300
  Rule 771(b)(1).  For purposes of the rule, the term “distributor” has the same 
meaning as in Rule 902(k) of Regulation S (17 CFR 230.902(k)). 
301
   See IIB Letter, ABA Letter.    
 
127

transaction.  This exemption reinstates, without modification, an exemption that the 
Commission adopted previously.
302
   
Most commenters that addressed the exemption supported its adoption.
303
  One 
commenter opposed the exemption, arguing that securities lending and borrowing 
transactions should be conducted only by broker-dealers or, alternatively, banks 
providing such services should be subject to additional disclosure and customer approval 
requirements.
304
  The Agencies continue to believe that the exemption is appropriate and 
necessary.  The exemption enables sizable and sophisticated customers to divide custody 
and securities lending management between two expert entities when the customer 
decides such actions are in the customer’s interest, and permits banks to continue to 
provide the types of non-custodial securities lending services that they currently provide 
without disruption.  The Agencies note, moreover, that the statutory custody and 
safekeeping exception permits banks to effect securities lending transactions (and provide 
related securities lending services) when the bank has custody of the securities.  A bank 
                                                
 
302
   See Exchange Act Release No. 47364 (Feb. 13, 2003), 68 FR 8686 (Feb. 24, 
2003) (adopting Exchange Act Rule 15a-11 to provide an exemption from the 
definitions of both “broker” and “dealer” for banks engaging in securities lending 
transactions).  The broker provisions of the Rule 15a–11 exemption, which never 
became operable due to the temporary exemption applicable to all bank broker 
activities, will become void under the Regulatory Relief Act with the Agencies’ 
adoption of a single set of final “broker” rules.  See 
Pub. L. No.109-351, § 
101(a)(3), 120 Stat. 1968 (1999).  In light of this, the Commission separately has 
amended Rule 15a-11 to remove the “broker” aspects of that rule. As discussed in 
the accompanying release, the Commission is re-adopting, without modification, 
the “dealer” portions of Rule 15a-11, as Exchange Act Rule 3a5-3.  See
 Exchange 
Act Release No. 56502 (Sept. 24, 2007).    
303
  See, e.g., State Street Corp. Letter, PNC Letter, Mellon Letter, and ABA Letter. 
304
  See NASAA Letter. 
 
128

need not rely on the exemption in Rule 772 to engage in securities lending transactions 
when acting in this capacity. 
 Rule 772 provides that a bank is exempt from the broker definition to the extent 
that, as agent, it engages in or effects certain “securities lending transactions”
305
 and 
“securities lending services”
306
 in connection with such transactions.
307
  The exemption 
applies only to securities lending activities with or on behalf of a person that the bank 
reasonably believes to be:  (1) a qualified investor as defined in Section 3(a)(54)(A) of 
the Exchange Act;
308
 or (2) any employee benefit plan that owns and invests, on a 
discretionary basis, not less than $25 million in investments.   One commenter requested 
that the Agencies modify the rule to allow banks to engage in securities lending 
transactions under the exemption as agent for institutional customers that have less than 
$25 million in investments.
309
  We have not amended the investment requirements, 
                                                 
305
   Rule 772(b) defines the term “securities lending transaction” to 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. 
306
   Rule 772(c) defines the term “securities lending services” to 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. 
307
   Rule 772(a).   
308
  15 U.S.C. 78c(a)(54)(A).  In part, this definition encompasses corporations and 
partnerships with at least $25 million in investments.   
309
   See Union Bank Letter.   
 
129

however, as we believe they are consistent with the nature of customers that utilize banks 
for non-custodial securities lending transactions.
310
   
 Another commenter suggested that the Agencies exempt banks involved, as agent, 
in securities repurchase and reverse repurchase transactions in non-exempt securities 
from the “broker” definition, stating that repurchase and reverse repurchase activities are 
functionally equivalent to securities lending.
311
  As discussed in the accompanying 
release, moreover, a number of commenters also requested that banks be exempted from 
the “dealer” definition for repurchase and reverse repurchase agreement activities 
involving non-exempt securities they undertake in a principal capacity.
312
  The Agencies 
have not acted on these requests at this time because we believe additional information 
from banks and other interested parties would be helpful in understanding the issues 
raised by these requests.  For this reason, we invite comment on the following matters, as 
well as any other matters that interested parties believe may be relevant to the Agencies’ 
consideration of the issues posed by the requests:  (1) the nature, structure (including 
term and type of security involved), and purpose of repurchase and reverse repurchase 
agreements currently conducted with respect to non-exempt securities; (2) the types of 
customers and financial institutions currently involved in repurchase and reverse 
                                                
 
310
   See, e.g. Letter from Edward J. Rosen, Cleary, Gottlieb, Stein & Hamilton, to 
Annette Nazareth, Director, Division of Market Regulation, Commission, dated 
Oct. 9, 2002 (requesting that the exemption encompass banks’ securities lending 
activity involving any entity that owns and invests on a discretionary basis at least 
$25 million in investments).   
311
   See Clearing House Ass’n Letter.  Banks are permitted by statutory exception to 
engage in repurchase and reverse repurchase activities with respect to exempt 
securities such as government securities.  Exchange Act Section 3(a)(5)(C)(i)(II).   
312
   See Exchange Act Release No. 56502 (Sept. 24, 2007).  
 
130

repurchase agreements with respect to non-exempt securities; (3) the extent to and 
manner in which banks currently engage, as agent or principal, in repurchase and reverse 
repurchase agreements with respect to non-exempt securities; (4) recent developments or 
trends in the market for repurchase and reverse repurchase agreements with respect to 
non-exempt securities; (5) any material similarities or differences in the use, structure, 
customer base, or legal, regulatory, tax or accounting treatment of repurchase and reverse 
repurchase agreements with respect to non-exempt securities, on the one hand, and 
repurchase or reverse repurchase agreements with respect to exempt securities or 
securities lending transactions involving exempt or non-exempt securities.  The 
information we receive through this process should help inform any future actions the 
Agencies may take in this area.  
C. Exemption for Banks Effecting Certain Excepted or Exempted Transactions in 
Investment Company Securities and Variable Insurance Products 
 
 The Agencies are adopting Rule 775 of Regulation R to allow banks to take 
advantage of certain exceptions and exemptions to the broker definition for transactions 
involving mutual funds, variable annuity contracts and variable life insurance policies 
without having to comply with the broker-execution requirement of Exchange Act 
Section 3(a)(4)(C)(i).
313
  The rule as proposed permitted banks to effect transactions in 
                                                
 
313
   As discussed above, Section 3(a)(4)(C) generally provides that a bank effecting a 
transaction in any “publicly traded security” in the United States under the trust 
and fiduciary, stock purchase plan, or custody and safekeeping exception must 
direct the resulting trade to a broker-dealer for execution unless the trade is a 
cross trade or similar trade or the trade otherwise is permitted by Commission 
rule, regulation or order.  15 U.S.C. 78c(a)(4)(C). Rule 760, the exemption for 
order-taking by banks acting as custodians, also requires banks to comply with 
Section 3(a)(4)(C).  See
 Rule 760(d)(2). 
 
131

open-end mutual funds through the National Securities Clearing Corporation (“NSCC”) 
or the fund’s transfer agent, rather than through a broker-dealer.   
A number of commenters stated, however, that the exemption should be 
broadened to also encompass variable annuities and variable life insurance, with some 
commenters noting that only variable annuities and mutual funds are permissible 
investments for 403(b) plans.
314
  Commenters noted that transactions in variable annuity 
and variable life products typically are effected directly with the relevant insurance 
company.
315
   
In light of these comments, the Agencies have expanded the rule to cover 
transactions involving variable annuities and variable life insurance policies, as well as 
transactions involving mutual funds.  Applying the exemption to transactions in variable 
insurance products, as well as to transactions involving mutual funds, will avoid needless 
disruptions and costs with respect to banks’ transactions with customers in which 
interposing an executing broker-dealer would be inefficient, inconsistent with market 
practice and unnecessary for investor protection.   
Specifically, Rule 775 as modified is available for transactions involving 
securities issued by an open-end company, as defined by Section 5(a)(1) of the 
Investment Company Act,
316
 that is registered under that Act,
 317
 as well as variable 
                                                
 
314
   See ABA Letter; TIAA-CREF Letter; American Council of Life Insurers Letters 
of March 26 (“ACLI March 26 Letter”) and August 2, 2007, Roundtable Letter, 
Business Law Section Letter, The Depository Trust & Clearing Corp. (“DTCC”) 
Letter.     
315
   See ACLI March 26 Letter, DTCC Letter.  
316
   Rule 775(b)(1).  We note that banks may effect transactions in securities that meet 
the conditions to be an “exempted security” under Exchange Act Section 
3(a)(12)(A)(iv) without complying with the exemption provided by Rule 775.  
 
132

insurance contracts funded by any separate account, as defined by Section 2(a)(37) of the 
Investment Company Act, that is registered under that Act.  To take advantage of the 
exemption, the security must not be traded on a national securities exchange or traded 
through the facilities of a national securities association or an interdealer quotation 
system.
318
  In addition, the securities must be distributed by a registered broker-dealer, or 
the sales charge must be no more than the amount permissible for a security sold by a 
registered broker-dealer pursuant to any applicable rules of a registered securities 
association.
319
  Finally, the transaction must be effected through the NSCC, or directly 
with a transfer agent or with an insurance company or a separate account that is excluded 
from the definition of transfer agent in Section 3(a)(25) of the Exchange Act.
320
   
D. Exemption for Certain Transactions involving a Company’s Securities for its 
Employee Benefit Plans and Participants 
 
 In response to issues raised by a commenter, the Agencies are adopting an 
additional exemption (Rule 776) to permit banks that rely on certain exceptions and 
                                                                                                                                                
 
Exchange Act Section 3(a)(4)(B)(iii)(II) permits banks to effect transactions 
involving “exempted securities” without registering as a broker and without 
effecting the transaction through a registered broker-dealer.   
317
   Rule 775(b)(2).     
318
   Rule 775(a)(1).   
319
   Rule 775(a)(2).  FINRA currently is the only registered securities association.  
FINRA Rule 2830 limits the sales charges associated with open-end mutual funds.  
Currently, there are no FINRA rules limiting the sales charges associated with the 
insurance securities subject to Rule 775.  Therefore currently, in all cases, these 
insurance securities would satisfy the condition under Rule 775(a)(2) that the 
sales charge be no more than the amount permissible under applicable registered 
securities association rules.
 
320
   Rule 775(a)(3).   
 
133

exemptions to effect certain transactions involving the securities of a company for the 
company’s employee benefit plans and participants without complying with the broker-
execution requirements of Exchange Act Section 3(a)(4)(C)(i).
321
  The commenter stated 
that banks that act as trustee or custodian for the defined benefit or defined contribution 
plans of a company at times effect in-kind contributions, purchases and sales, and 
distribution transactions for the plan involving the securities of the company without the 
involvement of a broker-dealer.  The commenter indicated that these transactions are 
effected through the company’s transfer agent and that no commission is charged in 
connection with the transaction.
322
 
 In light of these comments, Rule 776 permits a bank utilizing particular 
exceptions and exemptions to effect a transaction in the securities of a company to do so 
directly with a transfer agent acting for the company, subject to four conditions.  First, no 
commission may be charged with respect to the transaction.
323
  Second, the transaction 
must be conducted solely for the benefit of an employee benefit plan.
324
  Third, the 
security must be obtained directly from the company or an employee benefit plan of the 
                                                
 
321
  See note 313 supra for a listing of the relevant exceptions and exemptions.      
322
   See The Northern Trust Company Letter.  The commenter further stated that 
ERISA effectively prohibits a commission from being charged in connection with 
in-kind contributions by a company of its stock to the company’s benefit plans 
and direct purchases and sales by the company of its stock with the company’s 
plans.  
323
   Rule 776(a)(1).  
324
   Rule 776(a)(2).  For these purposes, an “employee benefit plan” is defined to 
mean any pension plan, retirement plan, profit sharing plan, bonus plan, thrift 
savings plan, incentive plan, or other similar plan.  Rule 776(b). 
 
134

company.
325
  And fourth, the security must be transferred only to the company or an 
employee benefit plan of the company.
326
 Securities obtained from, or transferred to, a 
participant in an employee benefit plan on behalf of the plan are considered to be 
obtained from, or transferred to, the plan. 
 We are adopting this rule because we believe that requiring banks to send these 
types of transactions to a broker-dealer for execution – as would be required to comply 
with Section 3(a)(4)(C)(i) of the Exchange Act – at times would preclude plans from 
engaging in these transactions, would disrupt existing practices and otherwise would 
introduce cost and complexity to those transactions without materially promoting 
functional regulation and investor protection.
327
   
                                                 
325
   Rule 776(a)(3). 
326
   Rule 776(d). 
327
   The commenter also stated that banks acting as trustees and custodians at times 
directly effect transactions with and for different employee benefit plans involved 
in a corporate spin-off transaction with respect to company stock of both 
companies involved in the spin-off transaction.  See
 Northern Trust letter.  We 
understand that the same bank typically is the trustee or custodian for the different 
plans in such transactions and conducts such transactions through cross-trades 
within the bank.  Accordingly, no additional exemption is required for these 
transactions.    
 
 
135

E. Temporary and Permanent Exemption for Contracts Entered Into by Banks from 
Being Considered Void or Voidable 
 
 The Agencies are adopting as proposed Rule 780, which grants one temporary 
and one permanent exemption from section 29(b) of the Exchange Act, which addresses 
inadvertent failures by banks that could trigger rescission of contracts between a bank 
and a customer.
328
  Under the temporary exemption, no contract entered into before 
18 months after the effective date of the 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.
329
 
Under the permanent exemption, no contract entered into is void or considered 
voidable by reason of Section 29(b) 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 or the rules and regulations adopted thereunder based solely on the bank’s status as a 
broker when the contract was created if two conditions are met.  First, at the time the 
contract was created, the bank must have 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.  Second, any violation of the registration requirements 
by the bank must not have resulted in any significant harm, financial loss or cost to the 
                                                
 
328
  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. 
329
  Rule 780(a). 
 
136

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.  One commenter supported the 
exemptions,
330
 and no commenters objected to their adoption. 
F. Extension of Time and Transition Period 
 
 The Agencies are further extending the time that banks have to come into 
compliance with the Exchange Act provisions relating to the definition of “broker.”  
Under the final rule, a bank is exempt from the definition of “broker” under Section 
3(a)(4) of the Exchange Act until the first day of its first fiscal year commencing after 
September 30, 2008.  This is an additional calendar quarter beyond the date (June 30, 
2008) provided in the proposed rule.  A bank that has a fiscal year based on the calendar 
year, for example, must comply with the new exceptions for banks and these rules 
beginning on January 1, 2009.  Some commenters noted that banks and broker-dealers 
would need sufficient time to make the changes necessary to come into compliance with 
the statute and these rules.
331
  The Agencies believe that the extension granted by the 
rule, which is a minimum of one year, should provide banks a reasonable period of time 
to come into compliance with these provisions. 
 The Administrative Procedure Act ("APA") permits an agency to issue a rule 
without delaying its effective date for 30 days from the date of publication if, among 
                                                
 
330
  ICBA Letter. 
331
  See, e.g., HSBC Securities Letter. 
 
137

other reasons, the rule is a substantive rule which grants or recognizes an exemption or 
relieves a restriction, or if the agency finds good cause and publishes its finding with the 
rule.
332
  The Agencies find that this Rule 781 grants or recognizes an exemption or 
relieves a restriction and also that there is good cause for adopting Rule 781 without a 
delayed effective date because it is in the public interest that banks not unnecessarily 
incur costs to comply with the statutory exceptions and related rules before such 
exceptions and rules would become effective in accordance with Rule 781.
333
   
                                                
 
332
   The APA provides that publication of a substantive rule must be made not less 
than 30 days prior to its effective date, except "(1) a substantive rule which grants 
or recognizes an exemption or relieves a restriction; (2) interpretive rules and 
statements of policy; or (3) otherwise provided by the agency for good cause 
found and published with the rule." 5 U.S.C. 553(d). 
333
  This finding also satisfies the requirements of 5 U.S.C. Section 808(2), which 
allows a rule to become effective immediately notwithstanding the requirements 
of 5 U.S.C. Section 801 if an agency “for good cause finds that notice and public 
procedure thereon are impracticable, unnecessary, or contrary to the public 
interest.” 
 
138

VII.     Finding that the Exemptions are Appropriate in the Public Interest and 
Consistent with the Protection of Investors 
 
 Section 36(a)(1) of the Exchange Act generally provides that the Commission 
may conditionally or unconditionally exempt any person or class of persons from any 
provision of the Exchange Act to the extent that an exemption is necessary or appropriate 
in the public interest and consistent with the protection of investors.
334
  Taken as a whole, 
the exemptions will implement the bank broker provisions of the GLBA while providing 
banks with flexibility to structure their business models under conditions designed to 
preserve key investor protections, and therefore, as discussed above more fully, are 
appropriate in the public interest and consistent with the protection of investors. 
 
VIII.   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).
335
  Moreover, the 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.” 
                                                
In 2001, the Commission adopted Interim Rules discussing the way in which the 
Commission would interpret the GLBA.
336
  The rules that address the definition of 
“broker” under Section 3(a)(4) of the Exchange Act (and applicable exemptions) are 
 
334
  15 U.S.C. 78mm(a)(1). 
335
  President Clinton signed the GLBA into law on November 12, 1999. 
336
  Exchange Act Release No. 44291 (May 11, 2001), 66 FR 27760 (May 18, 2001). 
 
139

Exchange Act Rules 3a4-2 through 3a4-6 and Rule 3b-17.
337
  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 would consist of proposed new 
Exchange Act Rules 710 through 781.
338
  By operation of the Regulatory Relief Act, the 
joint adoption of these final rules by the Board and the Commission supersedes 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 does not 
apply to this single set of rules adopted by the Agencies.     
IX. Administrative Law Matters 
 
A. Paperwork Reduction Act Analysis 
Certain provisions of Rules 701, 723, and 741, contain “collection of information” 
requirements within the meaning of the Paperwork Reduction Act of 1995.
339
  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 rules under authority delegated by OMB.
340
 
The collections of information under Rules 701, 723, and 741 are new.  The 
Commission’s title for the new collection of information under Rule 701 is “Rule 701: 
Exemption from the definition of ‘broker’ for certain institutional referrals.”  The 
Commission’s title for the new collection of information under Rule 723 is “Rule 723: 
                                                
 
337
  17 CFR 240.3a4-2 through 3a4-6 and 17 CFR 240.3b-17. 
338
  17 CFR 242.710 through 781.  See Exchange Act Release No. 49879 (June 17, 
2004), 69 FR 39682 (June 30, 2004). 
339 
 44 U.S.C. 3501, et seq. 
340 
 5 CFR 1320.16; Appendix A.1. 
 
140

Exemptions for special accounts, foreign branches, transferred accounts, and a de 
minimis number of accounts.”  The Commission’s title for the new collection of 
information under Rule 741 is “Rule 741: Exemption for banks effecting transactions in 
money market funds.”   The Commission’s OMB control number for the three rules is 
3235-0624.  The Board’s title for the new collection of information under Rules 701, 723, 
and 741 is “Recordkeeping and Disclosure Requirements Associated with Regulation R” 
(FR 4025).  The Board’s OMB control number will be 7100-0316.  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.
341
  We received no comments on the 
paperwork reduction analysis in the proposal.   
1.         Rule         701         
Rule 701 provides a conditional exemption from the requirements under the 
networking exception under the Exchange Act.  This exemption permits bank employees 
to receive payment of more than a nominal amount for referring institutional customers 
and high net worth customers to a broker-dealer and permits such payments to be 
contingent on whether the customer effects a securities transaction with the broker-dealer. 
a. Collection of Information 
Rules 701(a)(2)(i), (a)(3)(i) and (b) require banks or their broker-dealer partners 
that utilize the exemption provided in this rule to make certain disclosures to high net 
worth or institutional customers.  Specifically, these disclosures must clearly and 
conspicuously disclose (1) the name of the broker-dealer; and (2) that the bank employee 
participates in an incentive compensation program under which the bank employee may 
                                                
 
341
  44 U.S.C. 3512. 
 
141

receive a fee of more than a nominal amount for referring the customer to the broker-
dealer and payment of this fee may be contingent on whether the referral results in a 
transaction with the broker-dealer.
342
  These requirements were modified from the 
proposal to permit timely oral disclosure of this information, followed by written 
disclosure, to better accommodate the variety of circumstances in which referrals may 
occur.   
In addition, one of the conditions of the exemption is that the broker-dealer and 
the bank need to have a contractual or other written arrangement containing certain 
elements, including notification and information requirements.
343
  Rule 701(a)(3)(v) 
requires the written agreement to obligate a broker-dealer to notify its bank partner if the 
broker-dealer determines that (1) the customer referred under the exemption is not a high 
net worth or institutional customer, as applicable; or (2) the bank employee making the 
referral is subject to statutory disqualification (as defined in Section 3(a)(39) of the 
Exchange Act).
344
  In addition, Rule 701(a)(3)(iv) requires the written agreement to 
obligate the broker-dealer to notify the customer if the securities transaction(s) to be 
conducted by the customer or the customer do not meet the applicable suitability or 
sophistication determination standards set forth in the rule.
345
  Similarly, the bank is 
                                                
 
342 
 See Rules 701(a)(2)(i), (a)(3)(i) and (b). 
343 
 See Rule 701(a) and (a)(3). 
344
   See Rule 701(a)(3)(v).  The latter requirement does not apply to subparagraph (E) 
of Section 3(a)(39) of the Exchange Act ((15 U.S.C. 78c(a)(39)). 
345
  See Rule 701(a)(3)(iv). 
 
142

required to provide its broker-dealer partner with the name of the bank employee 
receiving the referral fee and certain other identifying information.
346
 
b. Use of Information 
The purpose of the collection of information in Rules 701(a)(2)(i), (a)(3)(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-dealer and for which the bank employee may 
receive a higher-than-nominal and/or contingent referral fee.  The collection of 
information in Rule 701(a)(2)(iii) and (a)(3)(v) is designed to help a bank determine 
whether it is acting in compliance with the exemption.  The collection of information in 
Rule 701(a)(3)(iv) is designed to provide the customer with information that may be 
helpful to the customer in deciding whether to engage in a securities transaction with the 
broker-dealer. 
c.         Respondents         
The collections of information in Rule 701 will apply to banks that wish to utilize 
the exemption provided in this rule and broker-dealers with which those banks enter into 
networking arrangements. 
d.         Disclosure         Burden         
The Agencies estimate that approximately 1,000 banks annually will use the 
exemption in Rule 701 and that each bank, individually or working with its partner 
broker-dealer, will on average make the required referral fee disclosures to 200 customers 
annually.  In addition, we estimate that each bank will provide one notice annually to its 
                                                
 
346
  See Rule 701(a)(2)(iii). 
 
143

broker-dealer partner regarding names and other identifying information about bank 
employees.  The Agencies also estimate that broker-dealers will, on average, notify each 
of the 1,000 banks approximately twice a year about a determination regarding a 
customer’s high net worth or institutional status as well as a bank employee’s statutory 
disqualification status.  The Agencies further estimate that each broker-dealer will notify 
three customers of each partner bank per year concerning transaction suitability or the 
customer’s financial sophistication.  
Based on these estimates, the Agencies anticipate that Rule 701 will result in 
approximately 200,000 disclosures to customers, 1,000 notices to broker-dealers about 
bank employees, 2,000 notices to banks about customer status, and 3,000 notices to 
customers per year about suitability or sophistication.  The Agencies further estimate 
(based on the level of difficulty and complexity of the applicable activities) that a bank or 
broker-dealer will spend approximately 5 minutes per customer to comply with the 
disclosure requirement, and that a bank will spend approximately 15 minutes per notice 
to a broker-dealer.  The Agencies also estimate that a broker-dealer will spend 
approximately 15 minutes per notice to a bank or customer.  Thus, the estimated total 
annual disclosure burden for these requirements in Rule 701 are approximately 8,583 
hours for banks and approximately 9,583 hours for broker-dealers.
347
  
e. Collection of Information Is Mandatory 
This collection of information is mandatory for banks relying on Rule 701 and 
their broker-dealer partners. 
                                                
 
347
   Because banks and broker-dealers will share the disclosure obligation under the 
final rule, these estimates attribute 50 percent of that disclosure burden to banks 
and 50 percent to broker-dealers. 
 
144

f.          Confidentiality          
A bank relying on the exemption provided in Rule 701 or its partner broker-dealer 
is required to provide certain referral fee disclosures to the customers referred by the 
bank under this rule.  Banks relying on the exemption provided in Rule 701 are required 
also to enter into agreements with a broker-dealer obligating the broker-dealer to notify 
the bank upon becoming aware of certain information with respect to the customer or the 
bank employee, and to notify the customer upon becoming aware of certain information 
concerning the customer or the nature of a securities transaction.
348
  Similarly, a bank is 
required to notify a broker-dealer about the name of the bank employee receiving a 
referral fee and certain other identifying information. 
g. Record Retention Period  
Rule 701 does not include a specific record retention requirement.  Banks, 
however, are required to retain the records in compliance with any existing or future 
recordkeeping or disclosure requirements established by the Banking Agencies.  Broker-
dealers are also required to retain records in compliance with existing or future 
recordkeeping or disclosure requirements established by the Commission or any self-
regulatory organization.   
2.  Rule 723 
a. Collection of Information 
Rule 723(e)(1) requires 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 
                                                
 
348
  These requirements are discussed in more detail in section 1.d (Rule 701, 
Disclosure Burden), supra
.  
 
145

exclusion,
349
 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.
350
 
b. Use of Information 
The collection of information in Rule 723 is designed to help ensure that a bank 
relying on the de minimis exclusion is 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 Rule 721(a)(1). 
c.         Respondents         
The collection of information in Rule 723 will apply to banks relying on the de 
minimis exclusion from the chiefly compensated test. 
d.         Recordkeeping         Burden         
Because the Agencies expect a small number of banks may use the account-by-
account approach in monitoring their compliance with the chiefly compensated test, the 
Agencies estimate that approximately 50 banks annually will use the de minimis 
exclusion in Rule 723 and each such bank will, 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 Rule 723 will 
result in approximately 500 accounts annually for which records are required to be 
                                                
 
349
 
 See Rule 723(e)(2), which requires that the total number of accounts excluded by 
the bank, under the exclusion from the chiefly compensated test in 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 
will be rounded up to 1) or 500. 
350
  See Rule 723(e)(1). 
 
146

maintained.  The Agencies anticipate that these records will consist of records that are 
generally created as part of the securities transaction and the account relationship and 
minimal additional time will be required in maintaining these records.  Based on this 
analysis, the Agencies estimate that a bank will spend approximately 15 minutes per 
account to comply with the record maintenance requirement of Rule 723.  Thus, the 
estimated total annual recordkeeping burden for Rule 723 is 125 hours.     
e. Collection of Information Is Mandatory 
This collection of information is mandatory for banks desiring to rely on de 
minimis exclusion contained in Rule 723. 
f.          Confidentiality          
Rule 723 does not address or restrict the confidentiality of the documentation 
prepared by banks under the rule.  Accordingly, banks will have to make the information 
available to regulatory authorities or other persons to the extent otherwise provided by 
law.  
g. Record Retention Period 
Rule 723 will include a requirement to maintain records related to certain 
securities transactions.  Banks will be required to retain these records in compliance with 
any existing or future recordkeeping requirements established by the Banking Agencies. 
3.         Rule         741         
a. Collection of Information 
Rule 741(a)(2)(ii)(A) requires a bank relying on this 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 
 
147

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.  In situations where a bank effects transactions under 
the exemption as part of a program for the investment or reinvestment of deposits funds 
of, or collected by, another bank, the rule permits either the effecting bank or deposit-
taking bank to provide the customer a prospectus for the money market fund securities.  
b. Use of Information 
The purpose of the collection of information in Rule 741 is to help ensure that a 
customer of a bank whose funds or deposits are invested into a money market fund that is 
not a no-load fund under the exemption will have sufficient information upon which to 
make an informed investment decision, in particular, regarding the fees the customer will 
pay with respect to the securities. 
c.         Respondents         
The collection of information in Rule 741 applies to banks that directly or 
indirectly rely on the exemption provided in the rule in the manner described above. 
d.         Disclosure         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 will use the exemption in Rule 741 and each bank (or 
its partner bank), on average, will deliver the prospectus required by the rule to 
approximately 1,000 customers annually.  Therefore, the Agencies estimate that Rule 741 
will result in approximately 500,000 disclosures per year.  The Agencies estimate further 
that a bank will spend approximately 5 minutes per response to comply with the delivery 
 
148

requirement of Rule 741.  Thus, the estimated total annual disclosure burden for Rule 741 
is 41,667 hours.     
e. Collection of Information Is Mandatory 
This collection of information is mandatory for banks relying on the exemption. 
f.          Confidentiality          
The collection of information delivered pursuant to Rule 741 must be provided by 
banks relying on the exemption in this rule (or in the case of programs involving deposits 
of another bank, the other bank) 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 
Rule 741 does not include a record retention requirement. 
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 will 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.
351
 
While banks’ efforts to comply with the GLBA and the exemptions will 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 
                                                
 
351
  See Exchange Act Section 3(a)(4)(B)(i) – (xi). 
 
149

adopting exemptions and interpretations that are expected to provide banks with 
increased options and flexibility and help to reduce overall costs.  Some commenters 
noted that the rules as proposed will give banks flexibility in structuring their operations, 
and one bank trade association stated that small banks will be able to comply with the 
proposed rules without significantly altering their activities.
352
  Two commenters stated 
that the Agencies had underestimated the costs associated with coming into compliance 
with Regulation R and also provided estimates of ongoing compliance costs.
353
   
2. Discussion of Rule Interpretations and Exemptions 
The benefits and costs of the principal exemptions and interpretations in the rules 
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.
354
 
                                                
 
352
  See Citigroup Letter, ACB Letter, ICBA Letter. 
353
  See Fiserv Letter, Colorado Trust Letter.   
354 
 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. 
 
150

Under the rule, a “nominal” referral fee is 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 1/1000
th
 of 
the employee’s actual annual base salary; or (3) twenty-five dollars ($25), as adjusted for 
inflation pursuant to Rule 700(f).   
The Agencies believe these alternatives likely will 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 or annual rate of pay or the average hourly or annual 
rate of pay for a job family gives 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 the rules) is expected to enable banks 
to minimize their overall costs based on their individual referral programs and cost 
 
151

structures.  Several commenters supported these alternatives, or stated that the rules 
implementing the networking exception as a whole struck an appropriate balance.
355
 
In light of the statutory provision allowing banks to pay a “nominal one-time cash 
fee,” the rule requires that all referral fees paid under the exception be paid in cash.  At 
the same time, the Agencies have clarified that banks have the flexibility to use cash-
equivalent points, paid no less often than quarterly, in paying nominal referral fees under 
the exception.   
Rule 700(b) 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 multiple, 
significant factors or variables that are not related to securities transactions at the broker-
dealer.  Moreover, a referral made by the employee 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.  Rule 700(b) also provides a conditional safe harbor from the definition 
of “incentive compensation” for certain bonus or similar plans that are based on any 
measure of the overall profitability of a bank; an affiliate of a bank (other than a broker-
dealer); an operating unit of a bank or of an affiliate of a bank (other than a broker-
dealer); or a broker-dealer (if the bonus plan meets certain criteria designed to ensure, 
among other things, that the plan includes other factors or variables).  The final definition 
                                                
 
355
  See ABA Letter, Roundtable Letter, ACB Letter. 
 
152

has been revised from the proposal to give banks more flexibility in using their existing 
bonus plans within the framework required by the GLBA.    
The rules also include a conditional exemption to 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-dealer with which the bank 
has a contractual or other written networking arrangement.  This exemption provides a 
benefit to banks by expanding the types of referral fees that banks may utilize with 
respect to institutional customers and high net worth customers.  A number of 
commenters supported granting an exemption for such referrals.
356
  There likely will be 
costs associated with complying with the conditions in the exemption (such as the 
requirement for banks to make certain disclosures to high net worth or institutional 
customers and the requirement for broker-dealers to make certain determinations and 
provide certain notifications to banks or a customer)
357
 as well as the other terms and 
conditions in the statutory networking exception.  These costs, however, will be either a 
result of the statutory requirements or costs voluntarily incurred by banks because they 
want to take advantage of the exemption. 
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 compliance with fiduciary 
principles and standards without registering as a broker.  To qualify for the trust and 
                                                
 
356
  See State Street Letter, SIMFA Letter, U.S. Trust Letter, BISA Letter. 
357
  Rule 701(a)(2)(i), (a)(3)(iii)-(v), and 701(b). 
 
153

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 rules dealing with the trust and fiduciary activities 
exception will provide a number of benefits to banks and their customers without 
imposing significant costs on either group.
358
  The provisions regarding the “chiefly 
compensated” condition and related exemptions, while imposing some costs related to 
systems necessary to perform the calculations and track compensation, are expected to 
reduce banks’ compliance costs and make the trust and fiduciary activities exception 
more useful.  For example, the rules permit a bank to follow an alternate test to the 
account-by-account approach to the “chiefly compensated” condition.  Under this 
exemption, a bank may calculate the compensation it receives from its trust and fiduciary 
business as a whole on a bank-wide basis, subject to certain conditions.
359
  This 
alternative is designed to provide banks with a potentially less costly approach for 
determining compliance with the trust and fiduciary activities exception.  Some 
commenters noted that this alternative approach was workable.
360
  Similarly, the 
Agencies’ exemptions from the “chiefly compensated” condition for certain short-term 
accounts, accounts acquired as part of a business combination or asset acquisition, 
accounts held at a non-shell foreign branch, accounts transferred to a broker-dealer or 
other unaffiliated entity, and a de minimis number of accounts are expected also to 
                                                
 
358
  The trust and fiduciary exception is addressed in Rules 721-723. 
359 
 See Rule 722. 
360
   See e.g., ABA Letter, WBA Letter, U.S. Trust Letter, PNC Letter. 
 
154

reduce banks’ compliance costs by facilitating banks’ ability to comply with the “chiefly 
compensated” condition.
361
  While compliance with the conditions in these exemptions 
likely will result in some costs, such as the recordkeeping requirement associated with the 
de minimis exclusion, these costs are likely more than justified by the benefits associated 
with the exemptions given that banks could individually determine whether they wish to 
utilize the exemptions. 
As previously noted, banks are likely to incur some costs to comply with the 
GLBA.  The rules, however, include a number of exemptions which are intended to help 
to reduce overall costs.  As a result, the Agencies do not believe that banks will incur 
significant additional costs to comply with the liberalized exemptions of Rules 722 
through 723 or the definitional guidance of Rule 721.  
c. Sweep Accounts and Transactions in Money Market Funds 
Section 3(a)(4)(B)(v) of the Exchange Act provides a bank 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 for a customer or on behalf of 
another bank 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 
rules provide guidance, consistent with FINRA rules,
362
 regarding the definition of “no-
load” as used in the exception.  This guidance likely will benefit banks by clarifying the 
types of charges that are permissible and by providing greater legal certainty.   
                                                
 
361
  See Rule 723. 
362
  See FINRA Rule 2830. 
 
155

The rules also contain an exemption that permits banks to effect transactions on 
behalf of a customer, or for the deposit funds of another bank, in securities issued by a 
money market fund, subject to certain conditions.
363
  While compliance with the 
conditions associated with this exemption, such as the prospectus delivery requirement in 
certain circumstances, may 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 are free to determine whether to incur these costs, the exemption is expected to 
provide a net benefit for banks that wish to utilize the exemption.    
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 
rules contain an exemption that permits a bank, subject to certain conditions, to accept 
orders to effect transactions in securities for accounts for which the bank acts as a 
custodian (including an account for which a bank acts as directed trustee), or, in some 
cases, for which the bank acts as a subcustodian or a non-fiduciary administrator or 
recordkeeper.  Specifically, this custody exemption (Rule 760) 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.  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 exemption allows banks to accept orders from custody accounts 
                                                
 
363 
 See Rule 741. 
 
156

while imposing conditions designed to prevent a bank from operating a brokerage 
business out of its custody department.   
The exemption is designed to 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 will only be imposed on banks that choose to utilize the exemption. 
e.         Other         Rules         
The Agencies are also adopting certain special purpose exemptions.  Specifically, 
we are adopting an exemption that permits banks to effect transactions in Regulation S 
securities with non-U.S. persons or registered broker-dealers.
364
  Another exemption also 
allows, under certain conditions, a bank to effect transactions in investment company 
securities and variable life insurance and variable annuities through the National 
Securities Clearing Corporation or directly with a transfer agent or insurance company or 
separate account that is excluded from the definition of transfer agent, instead of through 
a broker-dealer.
365
  In addition, an exemption permits banks that rely on certain 
exceptions and exemptions to effect certain transactions involving the securities of a 
company for the company’s employee benefit plans and participants through the National 
Securities Clearing Corporation or directly with a transfer agent or insurance company or 
separate account that is excluded from the definition of transfer agent, instead of through 
                                                
 
364
  See Rule 771. 
365
  See Rule 775. 
 
157

a broker-dealer.  An additional exemption permits a bank, as 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.
366
  We also are extending 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 is 18 months after the effective date of the final rule.
367
  This exemption 
also provides, under certain circumstances, 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.
368
  Finally, we are issuing 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 September 30, 2008.
369
 
The Agencies believe these provisions offer a number of benefits to banks and 
their customers.  In particular, the Regulation S exemption helps ensure that U.S. banks 
that effect transactions in Regulation S securities with non-U.S. customers will be more 
competitive with foreign banks or other entities that offer those services without being 
                                                
 
366
  See Rule 772. 
367
  See Rule 780. 
368
  Id. 
369
  See Rule 781. 
 
158

registered as broker-dealers.  The exemption from rescission liability under Exchange Act 
Section 29 also provides banks some legal certainty, both temporarily and on a permanent 
basis, as they conduct their securities activities.  The exemption related to securities 
lending services enables banks to engage in the types of services in 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” 
also benefits banks by providing them with an adequate period of time to transition to the 
requirements under the statute and the rules. 
The Agencies estimate that the costs of these exemptions will be minimal and are 
justified by the benefits the exemptions offer.  For example, the Regulation S exemption 
may impose certain costs on banks that are designed to ensure that they remain in 
compliance with the conditions under the exemption.  In particular, the exemption 
permits banks to rely on the exemption only for transactions in “eligible securities” and 
with either broker-dealers or purchasers who are not U.S. persons within the meaning of 
Section 903 of Regulation S.  Banks may incur certain administrative costs to ensure that 
a transaction meets these requirements.  Nevertheless, the exemption is an 
accommodation to banks that wish to effect transactions in Regulation S securities and, as 
a result, the compliance costs will be imposed only on those banks that believe that it is in 
their best business interests to take advantage of the exemption. 
Given that Exchange Act Section 29 is rarely used as a remedy, we do not 
anticipate that this exemption will impose significant costs on the industry or on 
investors.   
3.  General Costs and Benefits  
 
159

Based on the burden hours discussed in the Paperwork Reduction Act Analysis 
section, supra, the Agencies expect the ongoing requirements of the rules to result in a 
total of 50,375 annual burden hours for banks and 9583 annual burden hours for broker-
dealers, for a grand total of 59,958 annual burden hours.
370
  The Agencies estimate that 
the hourly costs for these burden hours will be approximately $68 per hour.
371
  Therefore, 
the annual total costs will be approximately $4,077,144. 
In addition to the costs associated with burden hours discussed in the Paperwork 
Reduction Act Analysis section, supra
, the Agencies expect that many banks also could 
incur start-up costs for legal and other professional services.
372
  Many banks will utilize 
their in-house counsel, accountants, compliance officers, and programmers in an effort to 
achieve compliance with the 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.
373
  Taking an average of these 
                                                 
370
  See infra at VIII.A.1.d., VIII.A.2.d., and VIII.A.3.d. 
371
  $68/hour figure for a clerk (e.g.  compliance clerk) is from the Securities Industry 
Association (now SIFMA) 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.  
372
  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 
rules.  See
 supra at VIII.B.2.a.  In addition, there likely will be costs for 
developing systems for making determinations regarding compliance with 
advertising and compensation restrictions pursuant to the rules regarding 
safekeeping and custody.  See
 supra at VIII.B.2.d.   
373
   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. 
 
160

professional costs, the Agencies estimate a general hourly in-house labor cost of $240 per 
hour for professional services.   
Based on our expectation that most start-up costs will involve bringing systems 
into compliance and that many banks will be able to do so either using existing systems 
or by slightly modifying existing systems, the Agencies estimate that the rules will 
require banks to utilize an average of 30 hours of professional services.  The Agencies 
expect that most banks affected by the rules will either use in-house counsel or 
employees resulting in an average total cost of $7,200 per affected bank.
374
  The Agencies 
estimate that the rules will apply to approximately 9,475 banks and approximately 25 
percent of these banks will 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.   
Two commenters stated that the Agencies’ estimates of hourly rates in the 
proposal were fair, but that the estimates of the time requirements were too low.  These 
commenters estimated startup costs of between $43,000 and $55,000.
375
  In addition, 
these commenters estimated ongoing costs to be between $60,000 and $95,000 per year.  
Based on these commenters’ estimates, startup costs would range from $101.9 million 
(9475 banks x 0.25 affected x $43,000) to $130.3 million (9475 x 0.25 x $55,000), and a 
                                                
 
374
  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.). 
375
  See Fiserv Letter, Colorado Trust Letter.   
 
161

range of annual ongoing costs of $142.1 million (9475 x 0.25 x $60,000) to $225 million 
(9475 x 0.25 x $95,000).  The Agencies, however, believe that these cost estimates are 
not representative of the costs for the majority of banks affected by Regulation R.  The 
Agencies received approximately 60 comments, primarily from banks and banking 
industry groups, and the comments generally were favorable.  Only these two 
commenters stated that the Agencies had underestimated start-up and continuing 
compliance costs.  The Agencies therefore believe that the estimates in the proposal 
reflect the costs that the majority of the banks affected by the rules are likely, on average, 
to incur, and are appropriately used to estimate the overall compliance costs of 
Regulation R. 
The Agencies believe that the rules will 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 exemptions.  Without the rules, banks may 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 will be useful to banks in a number of ways.     
The Agencies expect that one component of the benefits to banks will be savings 
in legal fees, given that 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 interpretive issues raised by the GBLA, the Agencies estimate that, absent any 
regulatory guidance, banks on average will use the services of outside counsel for 
approximately 25 more hours for the initial year and 5 more hours per year thereafter, 
 
162

than with the existence of the rules.  Industry sources indicate that the hourly costs for 
hiring outside counsel are approximately $400 per hour.  The rules will 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 rules will apply to approximately 9,475 banks and approximately 25 percent of 
these banks will enjoy more than a de minimis cost savings benefit.  Using these values, 
the Agencies estimate a cost savings related to reduced legal fees of $23,687,500 (9,475 
X 0.25 X $10,000) for the initial year and $4,737,500 (9,475 X 0.25 X $2,000) per year 
thereafter.   
The Agencies believe that the benefits of Regulation R justify the costs.  
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.
376
  Exchange Act Section 23(a)(2) requires the 
Commission, in adopting rules under that Act, to consider the impact that any such rule 
will have on competition.  This Section also prohibits the Commission from adopting any 
rule that will impose a burden on competition not necessary or appropriate in furtherance 
of the purposes of the Exchange Act.
377
  
The Agencies have designed the interpretations, definitions, and exemptions to 
minimize any burden on competition.  Indeed, the Agencies believe that by providing 
                                                
 
376
  15 U.S.C. 78c(f). 
377
  15 U.S.C. 78w(a)(2). 
 
163

legal certainty to banks that conduct securities activities, by clarifying the GLBA 
requirements, and by exempting a number of activities from those requirements, the rules 
allow banks to continue to conduct securities activities consistent with the GLBA.   
The 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 rules contain a number of 
exemptions that provide banks flexibility in conducting their securities activities, which 
will promote competition and reduce costs. 
D. Final Regulatory Flexibility Analysis 
The Agencies have prepared a Final Regulatory Flexibility Analysis (“FRFA”), in 
accordance with the provisions of the Regulatory Flexibility Act (“RFA”),
378
 regarding 
the rules.  
1. Reasons for the 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.
379
  On October 13, 
2006, President Bush signed into law the Regulatory Relief Act.
380
  Section 101 of that 
Act, among other things, requires the Agencies jointly to issue a single set of rules 
                                                
 
378
  5 U.S.C. 604. 
379
  15 U.S.C. 78c(a)(4). 
380
  Pub. L. No. 109-351, 120 Stat. 1966 (2006). 
 
164

implementing the bank broker exceptions in Section 3(a)(4) of the Exchange Act.
381
  
These rules are being adopted by the Agencies to fulfill this requirement.  The rules are 
designed generally to provide guidance on the GLBA’s bank 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. 
2.         Objectives         
The rules provide guidance to the industry with respect to the GLBA 
requirements.  The rules also provide certain conditional exemptions from the broker 
definition to allow banks to perform certain securities activities.  The Supplementary 
Information section, supra
, contains more detailed information on the objectives of the 
rules.   
3.         Legal         Basis         
Pursuant to Section 101 of the Regulatory Relief Act, the Agencies are issuing the 
rules.   
4. Small Entities Subject to the Rule 
The rules 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 
                                                
 
381
  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 
rules. 
 
165

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.
382
  Congress did not exempt small entity 
banks from the application of the GLBA.  Moreover, because the 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 rules.  The 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.
383
    The Agencies, however, have adopted several 
interpretations or exceptions that likely will be particularly useful for small banks such 
as, for example, the fixed inflation-adjusted dollar alternative to the “nominal” 
requirement in the networking exception and the exception in Rule 723 from the chiefly 
compensated test for a de minimis number of trust or fiduciary accounts.  
 The Agencies estimate that the rules will apply to approximately 9,475 banks, 
approximately 5,816 of which could be considered small banks with assets of $165 
million or less.  Moreover, we do not anticipate any significant costs to small entity banks 
as a result of the rules.  We note that a trade association whose membership consists 
primarily of small banking organizations indicated that small banks would be able to 
comply with the rules as proposed without significantly altering their activities.
384
 
                                                
 
382
  See 15 U.S.C. 78c(a)(6); Pub. L. No. 109-351, 120 Stat. 1966 (2006). 
383
  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.   
384
  See ICBA Letter. 
 
166

5.         Reporting,         Recordkeeping         and         Other Compliance Requirements 
The rules will not impose any significant reporting, recordkeeping, or other 
compliance requirements on banks that are small entities.
385
 
6.         Duplicative,         Overlapping,         or Conflicting Federal Rules 
The Agencies believe that no other rules duplicate, overlap, or conflict with the 
final rules. 
7.         Significant         Alternatives         
Pursuant to Section 3(a) of the RFA,
386
 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 rule for small entities; (3) the use of performance rather than 
design standards; and (4) an exemption from coverage of the rules, or any part thereof, 
for small entities. 
As discussed above, the GLBA does not exempt small entity banks from the 
Exchange Act broker registration requirements and because the rules are intended to 
provide guidance to, and exemptions for, all banks that are subject to the GLBA and are 
designed to accommodate the business practices of all banks (including small entity 
banks), the Agencies determined that it would not be appropriate or necessary to exempt 
small entity banks from the operation of the rules.  Moreover, providing one or more 
                                                
 
385
  The Agencies’ estimates related to recordkeeping and disclosure are detailed in 
the “Paperwork Reduction Act Analysis” Section of this Release. 
386
  5 U.S.C. 604(a). 
 
167

special exemptions for small banks could place broker-dealers, including small broker-
dealers, or larger banks at a competitive disadvantage versus small banks. 
The 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 rules are expected to 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 rules because the rules already use performance standards.  Moreover, the 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 rules. 
E.  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 believes the rules, to the maximum extent possible, are presented in a simple 
and straightforward manner.   
 
X.        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 is repealing by operation of statute 
current Rules 3a4-2, 3a4-3, 3a4-4, 3a4-5, 3a4-6, and 3b-17 (§§ 240.3a4-2, 240.3a4-3, 
240.3a4-4, 240.3a4-5, 240.3a4-6, and 240.3b-17, respectively).   The Commission is 
repealing Exchange Act Rules 15a-7 and 15a-8 (§ 240.15a-7 and §240.15a-8, 
 
168

respectively).  The Commission, jointly with the Board of Governors of the Federal 
Reserve System, is also adopting new Rules 700, 701, 721, 722, 723, 740, 741, 760, 771, 
772, 775, 776, 780, and 781 under the Exchange Act (§§ 247.700, 247.701, 247.721, 
247.722, 247.723, 247.740, 247.741, 247.760, 247.771, 247.772, 247.775, 247.776, 
247.780, and 247.881, respectively). 
XI. Text of Rules and Rule Amendment 
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 amends 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. 
 
169

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 banks effecting certain 
excepted or exempted transactions in investment company securities.  
218.776 Exemption from the definition of “broker” for banks effecting certain 
excepted or exempted transactions in a company’s securities for its 
employee benefit plans.  
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 amends Title 17, 
Chapter II of the Code of Federal Regulations as follows: 
 
170

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. 
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: 
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.” 
 
171

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 banks effecting certain 
excepted or exempted transactions in investment company securities.  
247.776 Exemption from the definition of “broker” for banks effecting certain 
excepted or exempted transactions in a company’s securities for its 
employee benefit plans.  
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 adopted by the Commission as Part 247 of Title 17, 
Chapter II of the Code of Federal Regulations and by the Board as Part 218 of Title 12, 
Chapter II of the Code of Federal Regulations follow: 
  
§ ___.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
.). 
 
§ ___.700 Defined terms relating to the networking exception from the 
definition of “broker.” 
 
 
172

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 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: 
 
173

(A) Those factors or variables include multiple 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 under a bonus or similar plan on the basis 
of any measure of the overall profitability or revenue of: 
(i) The bank, either on a stand-alone or consolidated basis; 
(ii) Any affiliate of the bank (other than a broker or dealer), or any operating unit 
of the bank or an affiliate (other than a broker or dealer), if the affiliate or operating unit 
does not over time predominately engage in the business of making referrals to a broker 
or dealer; or 
(iii) A broker or dealer if: 
(A) Such measure of overall profitability or revenue is only one of multiple 
factors or variables used to determine the compensation of the officer, director or 
employee;   
(B) The factors or variables used to determine the compensation of the officer, 
director or employee include multiple significant factors or variables that are not related 
to the profitability or revenue of the broker or dealer;  
 
174

(C) A referral made by the employee is not a factor or variable in determining the 
employee’s compensation under the plan; and 
(D) The employee’s compensation under the plan is not determined by reference 
to referrals made by any other person. 
(c) Nominal one-time cash fee of a fixed dollar amount
 means a cash payment for 
a referral, to a bank employee who was personally involved in referring the customer to 
the broker or dealer, 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 1/1000
th
 of the employee’s actual annual base salary; 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. 
 
175

(e) Referral means the action taken by one or more bank employees 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 1
st
 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 determined shall be 
rounded to the nearest multiple of $1. 
 
§ ___.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 
 
176

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 registered or approved, or otherwise required to be registered or 
approved, in accordance with the qualification standards established by the rules of any 
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.  The bank provides the high net worth customer or institutional 
customer the information set forth in paragraph (b) of this section 
(A) In writing prior to or at the time of the referral; or 
(B) Orally prior to or at the time of the referral and 
(1
) The bank provides such information to the customer in writing within 
3 business days of the date on which the bank employee refers the customer to the broker 
or dealer; or 
 
177

(2) The written agreement between the bank and the broker or dealer provides for 
the broker or dealer to provide such information to the customer in writing in accordance 
with paragraph (a)(3)(i) of this section. 
(ii) Customer qualification.  (A) In the case of a customer that is a not a natural 
person, the bank has a reasonable basis to believe that the customer is an institutional 
customer before the referral fee is paid to the bank employee. 
(B) In the case of a customer that is a natural person, the bank has a reasonable 
basis to believe that the customer is a high net worth customer prior to or at the time of 
the referral. 
            (iii)            Employee qualification information
. Before a referral fee is paid to a bank 
employee under this section, 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 registered or approved, or otherwise 
required to be registered or approved, in accordance with the qualification standards 
established by the rules of any self-regulatory organization 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: 
 
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 (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 § ___.700. 
(3) Provisions of written agreement
. The written agreement between the bank and 
the broker or dealer shall require that: 
(i) Broker-dealer written disclosures
.  If, pursuant to paragraph (a)(2)(i)(B)(2) of 
this section, the broker or dealer is to provide the customer in writing the disclosures set 
forth in paragraph (b) of this section, the broker or dealer provides such information to 
the customer in writing: 
(A) Prior to or at the time the customer begins the process of opening an account 
at the broker or dealer, if the customer does not have an account with the broker or 
dealer; or 
(B) Prior to the time the customer places an order for a securities transaction with 
the broker or dealer as a result of the referral, if the customer already has an account at 
the broker or dealer. 
(ii) Customer and employee qualifications
.  Before the referral fee is paid to the 
bank employee:  
 
179

(A) The broker or dealer 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 has a reasonable basis to believe that the customer is a 
high net worth customer or an institutional customer. 
(iii) 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, 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, 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 
 
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or dealer’s applicable self-regulatory organization as if the broker or dealer had 
recommended the securities transaction. 
(iv) Notice to the customer.  The broker or dealer inform the customer if the 
broker or dealer determines that the customer or the securities transaction(s) to be 
conducted by the customer does not meet the applicable standard set forth in paragraph 
(a)(3)(iii) of this section. 
(v) Notice to the bank
.  The broker or dealer 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; or 
(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.  
            (b)            Required disclosures
.  The disclosures provided to the high net worth 
customer or institutional customer pursuant to paragraphs (a)(2)(i) or (a)(3)(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 
 
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would not be considered incentive compensation under § ___.700(b)(1) or that is 
described in § ___.700(b)(2). 
(d)  Definitions.  When used in this section: 
(1) High net worth customer. 
(i) General
.  High net worth customer means: 
(A) 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; and 
(B) Any revocable, inter vivos or living trust the settlor of which is a natural 
person who, either individually or jointly with his or her spouse, meets the net worth 
standard set forth in paragraph (d)(1)(i)(A) of this section. 
(ii) Individual and spousal assets
.  In determining whether any person is a high net 
worth customer, there may be included in the assets of such person  
(A) Any assets held individually; 
(B) If the person is acting jointly with his or her spouse, any assets of the person’s 
spouse (whether or not such assets are held jointly); and 
(C) If the person is not acting jointly with his or her spouse, 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.   
(2) Institutional customer
 means any corporation, partnership, limited liability 
company, trust or other non-natural person that has, or is controlled by a non-natural 
person that has, at least: 
 
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(i) $10 million in investments; or  
 
(ii) $20 million in revenues; or 
(iii) $15 million in revenues 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
.   
 
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(1) In general.  On April 1, 2012, and on the 1
st
 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. 
§ ___.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 
 
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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 
(i) 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; and  
(ii) Calculated within 60 days of the end of the year. 
(4) Relationship compensation means any compensation a bank receives 
attributable to a trust or fiduciary account that consists of: 
(i) An administration fee, including, without limitation, a fee paid— 
(A) For personal services, tax preparation, or real estate settlement services; 
(B) For disbursing funds from, or for recording receipt of payments to, a trust or 
fiduciary account; 
(C) In connection with securities lending or borrowing transactions; 
(D) For custody services; or 
(E) In connection with an investment in shares of 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), including, 
without limitation, a fee paid for assessing investment performance or for reviewing 
compliance with applicable investment guidelines or restrictions; 
 
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(iii) A fee based on a percentage of assets under management, including, without 
limitation, a fee paid 
(A) Pursuant to a plan under § 270.12b-1;  
(B) In connection with an investment in shares of an investment company for 
personal service or the maintenance of shareholder accounts; 
(C) Based on a percentage of assets under management for any of the following 
services— 
(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;   
 
186

(D) Based on the financial performance of the assets in an account; or 
(E) For the types of services described in paragraph (a)(4)(i)(C) or (D) of this 
section if paid based on a percentage of assets under management;  
(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. 
 (6) 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)). 
(7) Year
 means a calendar year, or fiscal year consistently used by the bank for 
recordkeeping and reporting purposes. 
(b) Revenues derived from transactions conducted under other exceptions or 
exemptions.  For purposes of calculating the yearly compensation percentage for a trust 
or fiduciary account, a bank may at its election exclude the compensation associated with 
any securities transaction conducted in accordance with the exceptions in section 
3(a)(4)(B)(i) or sections 3(a)(4)(B)(iii) – (xi) of the Act (15 U.S.C. 78c(a)(4)(B)(i) or 
78c(a)(4)(B)(iii)-(xi)) and the rules issued thereunder, including any exemption related to 
such exceptions jointly adopted by the Commission and the Board, provided
 that if the 
bank elects to exclude such compensation, the bank must exclude the compensation from 
both the relationship compensation (if applicable) and total compensation for the account.   
(c) Advertising restrictions
.   
 
187

(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 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 § ___.760(g)(2).  
§ ___.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)), including the advertising restrictions in 
section 3(a)(4)(B)(ii)(II) of the Act (15 U.S.C. 78c(a)(4)(B)(ii)(II) as implemented by 
§ ___.721(c); and 
 
188

(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 be 
(1) Equal to 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; and 
(2) Calculated within 60 days of the end of the year. 
(d) Revenues derived from transactions conducted under other exceptions or 
exemptions.  For purposes of calculating the yearly compensation percentage for a trust 
or fiduciary account, a bank may at its election exclude the compensation associated with 
any securities transaction conducted in accordance with the exceptions in section 
3(a)(4)(B)(i) or sections 3(a)(4)(B)(iii) – (xi) of the Act (15 U.S.C. 78c(a)(4)(B)(i) or 
78c(a)(4)(B)(iii)-(xi)) and the rules issued thereunder, including any exemption related to 
such sections jointly adopted by the Commission and the Board, provided
 that if the bank 
 
189

elects to exclude such compensation, the bank must exclude the compensation from both 
the relationship compensation (if applicable) and total compensation of the bank. 
 
190

§ ___.723 Exemptions for special accounts, transferred accounts, foreign 
branches and a de minimis number of accounts. 
            (a)            Short-term accounts
.  A bank may, in determining its compliance with the 
chiefly compensated test in § ___.721(a)(1) or § ___.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 § ___.721(a)(1) 
or § ___.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)            Non-shell foreign branches
.   
(1) Exemption.  For purposes of determining compliance with the chiefly 
compensated test in § ___.722(a)(2), a bank may exclude the trust or fiduciary accounts
 
held at a non-shell foreign branch of the bank if the bank has reasonable cause to believe 
that trust or fiduciary accounts of the foreign branch held by or for the benefit of a U.S. 
person as defined in 17 CFR 230.902(k) constitute less than 10 percent of the total 
number of trust or fiduciary accounts of the foreign branch. 
(2) Rules of construction.  Solely for purposes of this paragraph (c), a bank will 
be deemed to have reasonable cause to believe that a trust or fiduciary account of a 
foreign branch of the bank is not held by or for the benefit of a U.S. person if 
 
191

(i) The principal mailing address maintained and used by the foreign branch for 
the accountholder(s) and beneficiary(ies) of the account is not in the United States; or 
(ii) The records of the foreign branch indicate that the accountholder(s) and 
beneficiary(ies) of the account is not a U.S. person as defined in 17 CFR 230.902(k).   
(3) Non-shell foreign branch
.  Solely for purposes of this paragraph (c), a non-
shell foreign branch of a bank means a branch of the bank  
(i) That is located outside the United States and provides banking services to 
residents of the foreign jurisdiction in which the branch is located; and 
(ii) For which the decisions relating to day-to-day operations and business of the 
branch are made at that branch and are not made by an office of the bank located in the 
United States. 
            (d)            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 
§ ___.721(a)(1) of this part, a bank operating under §___.721(a)(1) 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 § ___.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. 
 
192

            (e)            De minimis exclusion.  A bank may, in determining its compliance with the 
chiefly compensated test in § ___.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. 
§ ___.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. 
 
193

(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; 
 
194

(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)). 
 
§ ___.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 either 
(A) Provides 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 Act (15 U.S.C. 78o(a)); or 
(B) Effects the transactions on behalf of another bank as part of a program for the 
investment or reinvestment of deposit funds of, or collected by, the other bank; 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 
 
195

(A) The bank or, if applicable, the other bank described in paragraph (a)(1)(B) of 
this section provides the customer, not later than at the time the customer authorizes the 
securities transactions, a prospectus for the securities; and 
(B) The bank and, if applicable, the other bank described in paragraph (a)(1)(B) 
of this section do 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 § ___.740(b). 
(2) No-load has the same meaning as in § ___.740(c). 
 
§ ___.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 and additional conditions
. The bank 
complies with the employee compensation restrictions in paragraph (c) of this section and 
the other conditions in paragraph (d) 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 
 
196

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 
accounts 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 and additional conditions
. The bank 
complies with the employee compensation restrictions in paragraph (c) of this section and 
the other conditions in paragraph (d) of this section;  
 
197

(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:  
 
198

(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 § 
 
199

___.700(b)(1) as if a referral had been made by the bank employee, or any compensation 
described in § ___.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, other than as a directed 
trustee;  
(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 
account for which another bank acts as custodian may rely on the exemption provided in 
this section if:  
  (1) Both the custodian bank and the administrator or recordkeeper bank comply 
with paragraphs (a), (c) and (d) of this section; and  
  (2) The administrator or recordkeeper bank does not execute a cross-trade with or 
for the employee benefit plan account or net orders for securities for the employee benefit 
plan account, other than:   
  (i) Crossing or netting orders for shares of open-end investment companies not 
traded on an exchange, or 
 
200

  (ii) Crossing orders between or netting orders for accounts of the custodian bank 
that contracted with the administrator or recordkeeper bank for services.  
(f) Subcustodians. A bank that acts as a subcustodian for an account for which 
another bank acts as custodian may rely on the exemptions provided in this section if:  
  (1) For employee benefit plan accounts and individual retirement accounts or 
similar accounts, both the custodian bank and the subcustodian bank meet the 
requirements of paragraphs (a), (c) and (d) of this section; 
  (2)  For other custodial accounts, both the custodian bank and the subcustodian 
bank meet the requirements of paragraphs (b), (c) and (d) of this section; and 
  (3) The subcustodian bank does not execute a cross-trade with or for the account 
or net orders for securities for the account, other than: 
  (i) Crossing or netting orders for shares of open-end investment companies not 
traded on an exchange, or  
  (ii) Crossing orders between or netting orders for accounts of the custodian bank. 
(g) 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.  
(h) 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;  
 
201

(ii) An individual retirement account or similar account for which the bank acts as 
a custodian; 
(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; or  
(iv) An account for which the bank acts as a directed trustee. 
(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) Directed trustee
 means a trustee that does not exercise investment discretion 
with respect to the account. 
(4) 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 
 
202

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.  
(5) 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.  
(6) 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.  
(7) 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)).  
§ ___.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: 
 
203

(1) Effects a sale in compliance with the requirements of 17 CFR 230.903 of an 
eligible security to a purchaser who is not in the United States;  
(2) Effects, by or on behalf of a person who is not a U.S. person under 
17 CFR 230.902(k), 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 to a purchaser 
who is not in the United States or a registered broker or dealer, provided that if the resale 
is made prior to the expiration of any applicable distribution compliance period specified 
in 17 CFR 230.903(b)(2) or (b)(3), the resale is made in compliance with the 
requirements of 17 CFR 230.904; or 
(3) Effects, by or on behalf of a registered broker or dealer, 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 to a purchaser who is not in the United States, provided 
that if the resale is made prior to the expiration of any applicable distribution compliance 
period specified in 17 CFR 230.903(b)(2) or (b)(3), the resale 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 
 
204

(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). 
§  ___.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: 
(1) Selecting and negotiating with a borrower and executing, or directing the 
execution of the loan with the borrower; 
 
205

(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. 
§  ___.775 Exemption from the definition of “broker” for banks effecting certain 
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 a 
transaction in a covered security
, if:  
(1) Any such security is neither traded on a national securities exchange nor 
through the facilities of a national securities association or an interdealer quotation 
system; 
(2) The security is distributed by a registered broker or dealer, or the sales charge 
is no more than the amount permissible for a security sold by a registered broker or dealer 
pursuant to any applicable rules adopted pursuant to section 22(b)(1) of the Investment 
Company Act of 1940 (15 U.S.C. 80a-22(b)(1)) by a securities association registered 
under section 15A of the Act (15 U.S.C. 78o-3); and 
(3) Any such transaction is effected: 
(i) Through the National Securities Clearing Corporation; or 
 
206

(ii) Directly with a transfer agent or with an insurance company or separate 
account that is excluded from the definition of transfer agent in Section 3(a)(25) of the 
Act.   
(b) Definitions.  For purposes of this section: 
(1) Covered security
 means: 
(i) Any security issued by an open-end company, as defined by section 5(a)(1) of 
the Investment Company Act (15 U.S.C. 80a5(a)(1)), that is registered under that Act; 
and 
(ii)  Any variable insurance contract funded by a separate account, as defined by 
section 2(a)(37) of the Investment Company Act (15 U.S.C. 80a-2(a)(37)), that is 
registered under that Act.  
(2) Interdealer quotation system
 has the same meaning as in 17 CFR 240.15c2-11. 
(3) Insurance company has the same meaning as in 15 U.S.C. 77b(a)(13). 
 
§  ___.776 Exemption from the definition of “broker” for banks effecting certain 
excepted or exempted transactions in a company’s securities for its 
employee benefit plans.  
 
(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 a 
transaction in the securities of a company directly with a transfer agent acting for the 
company that issued the security, if:  
(1) No commission is charged with respect to the transaction; 
 
207

(2) The transaction is conducted by the bank solely for the benefit of an employee 
benefit plan account;  
(3) Any such security is obtained directly from: 
(i) The company; or 
(ii) An employee benefit plan of the company; and 
(4) Any such security is transferred only to: 
(i) The company; or 
(ii) An employee benefit plan of the company.  
(b) For purposes of this section, the term employee benefit plan account
 has the 
same meaning as in § ___.760(h)(4). 
§  ___.780  Exemption for banks from liability under section 29 of the Securities 
Exchange Act of 1934. 
 
(a)  No contract entered into before March 31, 2009, 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: 
 
208

 
209
(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. 
 
§  ___.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 
September 30, 2008. 
By order of the Board of Governors of the Federal Reserve System, September 
24, 2007. 
 
 
Jennifer J. Johnson, 
Secretary of the Board. 
 
 
By the Securities and Exchange Commission 
 
 
 
Nancy M. Morris 
Secretary 
 
Dated: September 24, 2007 

Conforming Version (To Conform to Release Published in the Federal Register)  
          
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. 34-56501; 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:  Final rule. 

SUMMARY:  The Board and the Commission jointly are adopting a single set of final 

rules that 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 rules define terms used in 

these statutory exceptions and include certain related exemptions.  In developing these 

rules, the Agencies have consulted with, and sought the concurrence of, the Office of the 

Comptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation 

(“FDIC”) and the Office of Thrift Supervision (“OTS”), and have taken into 

consideration all comments received on the proposed rules issued in December 2006.  

 1



The rules are intended, among other things, to facilitate banks’ compliance with the 

Exchange Act and the GLBA.  

DATES:   

Effective Dates:  Parts 12 CFR 218 and 17 CFR 247 are added effective September 28, 

2007.  12 CFR 218.781 and 17 CFR 247.781 (collectively “Rule 781”) are effective on 

September 28, 2007.  12 CFR 218.100 through 218.780 and 17 CFR 247.100 through 

247.780 are effective [INSERT 60 DAYS FROM DATE OF PUBLICATION IN THE 

FEDERAL REGISTER].  Amendments affecting Part 240 of Title 17 are effective 

[INSERT 60 DAYS FROM DATE OF PUBLICATION IN THE FEDERAL 

REGISTER]. 

Compliance Date:  Pursuant to Rule 781, banks are exempt from complying with the 

rules and the “broker” exceptions in Section 3(a)(4)(B) of the Exchange Act until the first 

day of their first fiscal year that commences after September 30, 2008. 

FOR FURTHER INFORMATION CONTACT: 

BOARD: Kieran J. Fallon, Assistant General Counsel, (202) 452-5270, Andrea 

Tokheim, Counsel, (202) 452-2300, or Brian Knestout, Attorney, (202) 452-2249, 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 

(TDD) only, call (202) 263-4869.  

SEC:  Catherine McGuire, Chief Counsel, Linda Stamp Sundberg, Senior Special 

Counsel, Joshua Kans, Senior Special Counsel, John J. Fahey, Branch Chief, or Elizabeth 

MacDonald, Special Counsel, at (202) 551-5550, Office of the Chief Counsel, Division 

 2



of Market Regulation, Securities and Exchange Commission, 100 F Street, NE, 

Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction  
 

A. Background 
 
B. Overview of Comments 
 
C.   Final Rules and Related Matters 
 

II. Networking Arrangements 

 A. Overview of Proposed Rules and Comments 
 
 B. Rule 700:  Definition of Terms Used in Networking Exception 
 
  1. Definition of “Nominal One-Time Cash Fee of a Fixed   
   Dollar Amount”  
 
  2. Definition of “Referral” 
  

3. Definition of “Contingent on Whether the Referral Results in a 
Transaction” 

 
4. Definition of “Incentive Compensation” 
 

a.   Exception for Discretionary, Multi-Factor Bonus Plans 
 
b.   Safe Harbor for Plans Based on Overall Profitability or 

Revenue 
  

C. Rule 701:  Exemption for Referrals Involving Institutional Customers and 
High Net Worth Customers 

   
  1. Definitions of “Institutional Customer” and “High Net Worth  
   Customer”  
 
  2. Determining that a Customer Meets the Relevant Thresholds 
 
  3. Conditions Relating to Disclosures 

 3



 
  4. Suitability or Sophistication Analysis by Broker-Dealer 
 
  5. Conditions Relating to Bank Employees 
 
  6.   Good Faith Compliance and Corrections by Banks 
 
  7. Referral Fees Permitted under the Exemption 
 
  8. Permissible Bonus Compensation Not Restricted 
  
III. Trust and Fiduciary Activities  

 A. Trust and Fiduciary Exception and Proposed Rules 
 
 B. Joint Final Rules 
 

1. “Chiefly Compensated” Test and Bank-Wide Exemption Based on 
Two-Year Rolling Averages 

 
2. “Relationship Compensation” 

 
3. Excluded Compensation 

 
4. Trust or Fiduciary Accounts 

  
5. Exemptions for Special Accounts, Foreign Branches, Transferred 

Accounts, and a De Minimis Number of Accounts 
 

6. Advertising Restrictions 
 
IV. Sweep Accounts and Transactions in Money Market Funds 

 A. Rule 740:  Definition of Terms Used in Sweep Exception 

 B. Exemption Regarding Money Market Fund Transactions 

V. Safekeeping and Custody 

 A. Background 

 B. Rule 760:  Custody Exemption  

1.   Order-Taking for Employee Benefit Plan Accounts and Individual 
Retirement or Similar Accounts 

 

 4



   a.  Employee Compensation Restrictions 
 
   b.  Advertisements and Sales Literature 
 
   c.  Other Conditions 
 
  2.  Order-Taking as an Accommodation for Other Types of Accounts 
 
   a.  Accommodation Basis 
 
   b.  Employee Compensation Restrictions 
 
   c.  Limitations on Bank Fees 
 
   d.  Advertising and Sales Literature Restrictions 
 
   e.  Investment Advice or Recommendations 
 

3.   Other Conditions Applicable to Order-Taking for All Custody 
Accounts 

 
 a.  Directed Trustees 
 
 b.  Broker Execution Requirement 
 
 c.  Carrying Broker Provisions  

 
4. Custodians, Subcustodians, and Administrators/Recordkeepers 

 
   a.  “Account for which a bank acts as a custodian” 
 
   b.  Administrators/Recordkeepers and Subcustodians 
 
 5. Evasions 
 
VI. Other Exemptions 

A. Exemption for Regulation S Transactions with Non-U.S. Persons and 
Broker-Dealers 

  
B. Exemption for Non-Custodial Securities Lending Transactions 
 
C. Exemption for Banks Effecting Certain Excepted or Exempted 

Transactions in Investment Company Securities and Variable Insurance 
Products 

 

 5



D.  Exemption for Certain Transactions involving a Company’s Securities for 
its Employee Benefit Plans and Participants 

 
E. Temporary and Permanent Exemption for Contracts Entered Into by 

Banks from Being Considered Void or Voidable 
 
 F. Extension of Time and Transition Period 
 
VII. Finding that the Exemptions are Appropriate and in the Public Interest and 

Consistent with the Protection of Investors 
 
VIII. Withdrawal of Proposed Regulation B and Removal of Exchange Act   
 Rules 3a4-2 – 3a4-6, and 3b-17 
 
IX. 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. Regulatory Flexibility Analysis 
 
F. Plain Language 

 
X. Statutory Authority 
 
XI. Text of Rules and Rule Amendment 
 
I. Introduction  

A. 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 

                                                 
1  Pub. L. No. 106-102, 113 Stat. 1338 (1999). 

 6



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. 

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 GLBA amended the Exchange 

Act to provide eleven specific exceptions for banks.3   Each of these exceptions permits a 

bank to act as a broker or agent in securities transactions that meet specific statutory 

conditions. 

In particular, Section 3(a)(4)(B) of the Exchange Act as amended by the GLBA 

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 

                                                 
2  Pub. L. No. 73-66, ch. 89, 48 Stat. 162 (1933) (as codified in various Sections of 

12 U.S.C.). 

3  15 U.S.C. 78c(a)(4). 

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. 

 7



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 

                                                                                                                                                

In October 2006, the Financial Services Regulatory Relief Act of 2006 

(“Regulatory Relief Act”) became effective.15  Among other things, the Regulatory 

Relief Act requires that the SEC and the Board jointly adopt a single set of rules to 

 
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. No. 109-351, 120 Stat. 1966 (2006). 

 8



implement the bank broker exceptions in Section 3(a)(4) of the Exchange Act.16  In 

addition, it required that the Agencies issue a single set of proposed rules to implem

these exceptions not later than 180 days after enactment of the Regulatory Relief Act 

(April 1

ent 

1, 2007). 

                                                

In December 2006, the Agencies jointly issued, and requested public comment on, 

a single set of 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 included 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, and the potential liability of banks under 

Section 29 of the Exchange Act.  In developing the proposed rules, 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 requested comment on all aspects of the proposed rules.  In 

addition, the Agencies requested 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 were not addressed in the proposal. 

B. Overview of Comments 
 

16  See Exchange Act Section 3(a)(4)(F), as added by Section 101 of the Regulatory 
Relief Act.    

17  See 71 FR 77522, December 26, 2006. 

 9



The Agencies received comments from 58 organizations and individuals on the 

proposed rules.  Commenters included 22 trade associations, 20 banking organizations, 

7 other organizations in the financial services industry, 3 community and nonprofit 

groups, two credit unions, one state government, one self-regulatory organization, one 

association of state securities administrators, and one individual.   Many commenters 

supported the proposed rules as a general matter.  For example, commenters asserted that 

the proposed rules would provide banks considerable flexibility in providing securities 

services to their customers, would avoid disrupting bank activities and customer 

relationships, or were a significant improvement over earlier proposals.18  In addition, 

many commenters supported the general approaches (including related exemptions) taken 

by the proposed rules to implement the networking, trust and fiduciary, sweep, and 

safekeeping and custody exceptions.  Several commenters, however, contended that the 

proposed rules did not adequately protect investors, and particularly retail investors.19  

Some of these commenters argued that that the Agencies should withdraw the proposed 

rules and issue new rules based on those issued in 200120 or 2004.21   

Most commenters also recommended that the Agencies modify specific 

provisions of the proposed rules to, among other things, reduce administrative burden, 

                                                 
18  See, e.g., Citigroup Letter, Independent Community Bankers Ass’n (“ICBA”) 

Letter, American Bankers Ass’n (“ABA”) Letter, JPMorgan Chase & Co. (“JP 
Morgan”) Letter, Financial Services Roundtable (“Roundtable”) Letter. 

19  See, e.g., Massachusetts Securities Division Letter, Pace Investors Rights Project 
(“Pace Project”) Letter, Boyd Financial Letter. 

20  Exchange Act Release No. 44291 (May 11, 2001), 66 FR 27760 (May 18, 2001). 

21  Exchange Act Release No. 49879 (June 17, 2004), 69 FR 39682 (June 30, 2004).  
See, e.g., North American Securities Administrators Association (“NASAA”) 
Letter.  

 10



better protect bank customers or investors, or clarify the scope or effect of the rules.  The 

comments received on the proposed rules are discussed in greater detail in the following 

sections of this Supplementary Information. 

C.   Final Rules and Related Matters 

 After carefully considering the comments, the Agencies have adopted final rules 

to implement the broker exceptions for banks relating to third-party networking 

arrangements, trust and fiduciary activities, sweep activities, and custody and safekeeping 

activities.22  The Board and SEC have consulted extensively with, and sought the 

concurrence of, the OCC, FDIC and OTS in developing these final rules.  

Like the proposal, the final 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 other 

than through a broker-dealer, 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.   

As discussed in the following sections, the Agencies have modified the rules in 

numerous respects in light of the comments received.  These changes include, among 

other things, modifications to the examples of “relationship compensation” in Rule 721 to 

clarify the scope of the term for purposes of the rules relating to trust and fiduciary 

activities; the custody exemption in Rule 760 to permit banks acting as a directed trustee 

                                                 
22  Commenters generally did not request that that the Agencies adopt rules to 

implement the other broker exceptions for banks at this time or stated that no 
additional guidance was needed at this time with respect to these exceptions.  See 
ABA Letter. 

 11



to accept orders under the exemption; and Rule 781 to extend the compliance date for a 

bank until the first day of its first fiscal year commencing after September 30, 2008.  The 

Agencies also have adopted new exemptions relating to trust or fiduciary accounts held in 

a foreign branch of a bank,23 and to permit a bank to effect, under certain conditions and 

without using a broker-dealer, transactions in a fiduciary or custodial capacity for an 

employee benefit plan in the stock of the plan’s sponsor.24  

 The final rules are designed to accommodate the business practices of banks and 

protect investors.  If more than one broker exception or exemption is available to a bank 

under the statute or rules for a securities transaction, the bank may choose the exception 

or exemption on which it relies to effect the transaction without registering as a broker-

dealer.  For example, if the bank effects a transaction in a security sold in an offshore 

transaction for a custody account that is permissible under either the Regulation S 

exemption in Rule 771 or the custody exemption in Rule 760, the bank may choose 

which exemption to rely on and comply with in effecting the transaction.  Similarly, if a 

bank effects no more than 500 securities transactions as agent for its customers in a 

calendar year, the bank may rely on the de minimis exception in Section 3(a)(4)(B)(xi) of 

the Exchange Act in lieu of any other available exception or exemption for such 

transactions. The bank, of course, must comply with all of the requirements contained in 

the exception or exemption on which it relies.25   

                                                 
23  See Rule 723(c). 

24  See Rule 776.  

25  An employee of a bank that operates in accordance with the exceptions in 
Section 3(a)(4)(B) of the Exchange Act and, where applicable, the rules is not 
required to register as a “broker” to the extent that the employee’s activities are 
covered by the relevant exception or rule. 

 12



 Section 401 of the Regulatory Relief Act 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 the final rules, the term “bank” includes any savings association that qualifies as a 

“bank” under Section 3(a)(6) of the Exchange Act, as amended.26    

Identical sets of the final rules are being adopted by the Board and SEC and will 

be published by the Board in Title 12 of the Code of Federal Regulations and by the SEC 

in Title 17 of the Code of Federal Regulations.27  Pursuant to the Regulatory Relief Act, 

this single set of final rules supersedes any and all other proposed or final rules issued by 

the Commission on or after the date of enactment of the GLBA with regard to the 

definition of “broker” under Section 3(a)(4) of the Exchange Act.28   

                                                 
26  Several commenters asked the Agencies, or the Commission independently, to 

adopt rules that would extend to federal or state-chartered credit unions some or 
all of the “broker” exceptions or exemptions provided banks under Section 
3(a)(4)(B) of the Exchange Act or the final rules.  See, e.g., Credit Union Nat’l 
Ass’n Letter, Nat’l Ass’n of Credit Union Service Organizations Letter, Nat’l 
Ass’n of Fed. Credit Unions Letter, Navy Fed. Credit Union Letter, and XCU 
Corp. Letter.  While the GLBA’s “bank” exceptions do not by their terms apply to 
credit unions, these requests are under consideration by the Commission, which is 
the agency with authority to address these matters.  The Commission notes the 
existence of SEC staff positions with regard to networking relationships between 
a credit union and a broker-dealer and is not addressing this issue at this time.  
See, e.g., Chubb Securities Corp., 1993 SEC No-Act. LEXIS 1204 (Nov. 24, 
1993). 

27  The final rules adopted by the Board and the SEC within their respective titles of 
the Code of Federal Regulation (12 CFR Part 218 for the Board and 17 CFR Part 
247 for the SEC) are identically numbered from § ___.100 to § ___.781.  For ease 
of reference, the single set of final rules adopted by each Agency are referred to in 
this release as Rule ___, excluding title and part designations.  A similar format is 
used to refer to the single set of proposed rules issued by the Agencies. 

28  Pub. L. No. 109-351, § 101(a)(3), 120 Stat. 1966, 1968 (2006). 

 13



 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.  In addition, if any rules (including exemptions) are proposed or adopted in the 

future related to the other bank “broker” exceptions in Section 3(a)(4)(B) of the 

Exchange Act that are not addressed in the final rules now being adopted by the SEC and 

the Board, they would be proposed and adopted jointly by the SEC and Board.29 

 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.30   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 and will be designed to facilitate compliance 

with the statutory exceptions and the rules.  

                                                 
29  A few commenters requested that the Commission delegate authority to act on 

future exemptive requests from banks to the Director of its Division of Market 
Regulation.  See America Community Bankers Ass’n (“ACB”) Letter, Roma 
Bank Letter.  Because particular banks may have individual situations that may be 
appropriate for additional relief, the Commission delegated authority to the 
Director of the Division of Market Regulation to consider, on a case-by-case 
basis, individual requests for exemptive relief from banks.  To facilitate the 
processing of these requests, the Commission delegated this exemptive authority 
within its Rules of Organization and Program Management in Rule 30-3(a)(70) 
(17 CFR 200.30-3(a)(70)).  The Commission continues to expect the staff to 
submit novel and complex requests for exemptions to the Commission.   

30  See 12 U.S.C. 1828(t)(1). 

 14



Several commenters urged the Agencies also to cooperate in providing 

interpretations or guidance (such as staff no-action letters) concerning the final rules or 

the broker exceptions for banks in Section 3(a)(4)(B) of the Exchange Act or in taking 

enforcement action to enforce compliance with these rules or exceptions.31  In addition, a 

number of commenters urged the Agencies to work with the Financial Industry 

Regulatory Authority (“FINRA”)32 to modify promptly its Rule 3040 as it applies to 

persons that are employees of both a bank and a broker-dealer (so-called “dual 

employees”).33   

In light of the joint nature of the final rules and the Agencies’ joint rule-writing 

authority for the bank broker exceptions in Section 3(a)(4)(B),34 the Agencies will jointly 

issue any interpretations and responses to requests for no-action letters or other 

                                                 
31  See, e.g., ABA Letter, Clearing House Ass’n Letter, Citigroup Letter, The PNC 

Financial Services Group, Inc. (“PNC”) Letter.  One commenter, however, 
expressed concern that coordination among the Agencies might result in slower 
responses to requests for guidance.  See American Bar Ass’n Section of Business 
Law Letter (“Business Law Section Letter”). 

32  On July 26, 2007, the Commission approved a proposed rule change filed by 
NASD to amend NASD’s Certificate of Incorporation to reflect its name change 
to Financial Industry Regulatory Authority Inc., or FINRA, in connection with the 
consolidation of member firm regulatory functions of NASD and NYSE 
Regulation, Inc.  See Securities Exchange Act Release No. 56146 (July 26, 2007).  
FINRA’s Rules currently consist of the rules adopted by the NASD and effective 
on the date of the consolidation (which include NASD Rule 3040), as well as 
certain rules of the NYSE that FINRA has incorporated into its own rules. 

33  See, e.g., ABA Letter , Clearing House Ass’n Letter, Harris Bank Letter, HSBC 
Bank, N.A. (“HSBC Bank”) Letter, HSBC Securities (USA) Inc. (“HSBC 
Securities”) Letter, Roundtable Letter.  These commenters asserted that it was 
important for the requested modifications to FINRA’s Rule 3040 to be made prior 
to the date on which banks would first have to comply with the new “broker” 
exceptions in the GLBA. 

34  Rapaport v. U.S. Department of Treasury, 59 F. 3d 212, 216-217 (D.C. Cir. 
1995), cert. denied 116 S.Ct. 775 (1996). 

 15



interpretive guidance concerning the scope or terms of the exceptions and rules, and will 

consult and, to the extent appropriate, coordinate with each other and the appropriate 

federal banking agency for a bank concerning any formal enforcement actions proposed 

to be taken against a bank for violations of the exceptions or rules.   

The Agencies already consult with and coordinate with each other and the other 

federal banking agencies in a variety of areas, and the Agencies and the other federal 

banking agencies are in the process of supplementing their existing policies and 

procedures to facilitate coordination with respect to the broker exceptions and rules.   

Banks or others that seek an interpretation of, or a no-action letter or other staff guidance 

concerning, the rules or the exceptions should submit their request to both Agencies.  The 

Agencies also expect to continue their dialogue with FINRA concerning potential 

modifications to that authority’s Rule 3040. 

II. Networking Arrangements 
 

The third-party brokerage exception (“networking exception”) in Section 

3(a)(4)(B)(i) of the Exchange Act 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.35  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 provides that a bank may not pay its 

unregistered employees36 incentive compensation for brokerage transactions.  

                                                 
35  15 U.S.C. 78c(a)(4)(B)(i). 

36  An unregistered bank employee is an employee that is not registered or approved, 
or otherwise required to be registered or approved, in accordance with the 

 16



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.”37  Congress included this general prohibition on, and limited exception to, 

incentive compensation to reduce concerns regarding the securities sales practice of 

unregistered bank employees. 

A. Overview of Proposed Rules and Comments 

Proposed Rule 700 defined certain key terms related to referral fees and incentive 

compensation used in the networking exception.  For example, the proposed rule 

provided that a referral fee would be considered “nominal” if it met any of four standards 

included in the rule.  The proposed rule also defined when a referral fee would be 

“contingent on whether a referral results in a transaction,” what constitutes “incentive 

compensation,” and what types of bank bonus plans would not be considered incentive 

compensation under the networking exception.  Proposed Rule 701 included an 

exemption that permitted bank employees, subject to certain conditions, to receive 

higher-than-nominal, contingent referral fees for referring institutional customers and 

high net worth customers to a broker-dealer. 

Many commenters supported the general approach of Proposed Rules 700 and 

701, including the range of alternatives provided for determining if a referral fee is 

nominal and the adoption of an exemption for referrals involving high net worth or 

                                                                                                                                                 
qualification standards established by the rules of any self-regulatory 
organization. 

37  15 U.S.C. 78c(a)(4)(B)(i)(VI).  

 17



institutional customers.38  Some commenters, however. suggested that the proposed rules 

would harm investors by giving bank employees undue incentives to direct 

unsophisticated customers into potentially unsuitable investment products.39 

B. Rule 700:  Definition of Terms Used in Networking Exception 

1. Definition of “Nominal One-Time Cash Fee of a Fixed   
 Dollar Amount” 
 

 Proposed Rule 700 defined the term “nominal one-time cash fee of a fixed dollar 

amount” to mean a cash payment for a referral in an amount that meets any one of four 

alternative standards:  the first based on twice the average hourly base wage established 

by the bank for the employee’s job family; the second based on 1/1000th of the average 

annual base salary established by the bank for the employee’s job family; the third based 

on twice the employee’s actual base hourly wage; and the fourth based on a specified 

dollar amount ($25), indexed for inflation.40 

 Many commenters generally supported the flexibility that this range of 

alternatives would afford in determining whether a referral fee is “nominal.”41  Some 

commenters expressed concern that the proposed rule placed greater limits on permissible 

payments under networking arrangements than exist currently under applicable federal 

banking agency guidance or questioned the need for a definition of “nominal” to be 

                                                 
38  See, e.g. ABA Letter, Roundtable Letter, Citigroup Letter, Union Bank of 

California (“Union Bank”) Letter. 

39  See, e.g., Pace Project Letter.     

40  Proposed Rule 700(c). 

41  See, e.g., Roundtable Letter, ACB Letter. 

 18



established by rule at all.42  A few commenters contended that the specific dollar amount 

in the proposed rule ($25) was too low.43  A number of commenters, however, believed 

that the alternatives would result in the payment of fees that are higher than nominal and 

would create incentives for bank employees to make securities referrals even when not 

appropriate for the customer.  These commenters questioned, for example, whether twice 

an employee’s hourly wage was truly nominal and whether the Agencies had sufficient 

basis for selecting that measure of “nominal.”44      

 After carefully reviewing the comments, the Agencies have determined to adopt 

the “nominal” definition substantially as proposed.  Including a definition of “nominal” 

in the rule will provide banks with certainty as to the Agencies’ interpretation of that 

standard and should facilitate compliance.  The Agencies believe that each of the 

alternatives for defining “nominal” is consistent with the statutory networking exception, 

which provides that a bank employee may receive compensation for each referral if the 

compensation for that referral is “nominal” and meets the other requirements of the 

statute.  Under each of the alternatives established, the amount of compensation a bank 

employee may receive for each referral will be small in relation to the employee’s overall 

compensation and therefore unlikely to create undue incentives for the bank employee to 

engage in activities, such as “pre-selling” specific securities to the customer involved in 

                                                 
42  See, e.g., Bank Insurance & Securities Ass’n (“BISA”) Letter, Wisconsin Bankers 

Ass’n (“WBA”) Letter. 

43  See, e.g., Clearing House Ass’n Letter and ICBA Letter. 

44  See, e.g., Boyd Financial Letter, NASAA Letter, Pace Project Letter, and 
University of Cincinnati Corp. Law Ctr. Letter.  

 19



violation of the networking exception,45 which would raise sales practice concerns.  As 

discussed below, the multiple alternatives are designed to provide flexibility for banks of 

all sizes and locations to use different business models and to take into account economic 

differences around the country and among their employees in assessing how best to 

structure their program(s) for paying “nominal” cash referral fees under the networking 

exception.  The alternatives also were designed to allow for roughly equivalent treatment 

of bank employees at different base or hourly compensation levels within a bank. 

 Rule 700(c) provides that a referral fee paid to any bank employee will be 

considered “nominal” if it does not exceed $25.46  This dollar amount will 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, 2006.47  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.  Available data indicate that the $25 amount is consistent with the level 

of referral fees generally paid to tellers and other bank employees engaged in making 

referrals of retail customers under existing Banking Agency guidance, which also 

includes a “nominal” standard.48 

                                                 
45  See Exchange Act Section 3(a)(4)(B)(i)(V). 

46  Rule 700(c)(3). 

47  Each adjustment would be rounded to the nearest multiple of $1.  Rule 700(f). 
48  See ABA Securities Ass’n., 2003/2004 National Survey of Bank Retail 

Investment Services, Vol. I, at 60 (survey data demonstrate that 20 percent of 
banks pay retail referral fees of $20 or more); Banking Agencies’ Interagency 
Statement on Retail Sales of Nondeposit Investment Products (Feb. 15, 1994). 

 20As under the proposal, a referral fee also will be considered “nominal” under 

Rule 700(c) if the payment does not exceed (1) twice the employee’s actual base hourly 

wage; (2) 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 

(3) 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.49   

 In developing these alternatives to the fixed $25 fee, the Agencies considered data 

on the average hourly wages of bank tellers, which are the class of bank employees most 

typically engaged in making referrals of retail customers.  These data indicate that the 

national mean hourly wage in 2005 for tellers was $10.59.50  Accordingly, the 

$25 amount is slightly more than twice the national mean hourly wage for tellers in 2005, 

and slightly more than 1/1000th of the annualized salary of an employee that makes 

$12.50 per hour (or $25 every two hours) based on a 40 hour work week.51  Thus, the 

alternatives based on twice the employee’s hourly base wage or 1/1000th of the 

employee’s base annual salary, at current pay rates, are designed to allow bank 

employees to receive referral fees that are roughly equivalent to those that may be 

received by bank tellers under the flat dollar option. 

 The options based on the employee’s job family use these same measurements but 

allow comparisons to the average of the minimum and maximum hourly base wage or 
                                                 
49  Rule 700(c)(1) and (2). 

50  Occupational Employment and Wages, May 2005, (Tellers), U.S. Department of 
Labor, Bureau of Statistics. 

51  Specifically, twice the hourly wage for an employee who earns an annual base 
salary of $25,000 (1,000 x $25) would be $24.04, based on a 40 hour per week (or 
1080 hours per year) work schedule.  

 21



base salary of the employee’s job family.  These options are designed to reduce 

administrative burden while also ensuring that referral fees remain nominal in amount.  

To provide comparability between the alternative based on an employee’s actual 

compensation and those based on the compensation established for the employee’s job 

family, the Agencies have modified the final rule to provide that a referral fee also will be 

considered nominal if it does not exceed 1/1000th of the employee’s actual base annual 

salary.52  Under the final rules, a bank may use a different “nominal” methodology in its 

different business lines or operating units and may alter the methodology it uses within a 

given year. 

 One commenter suggested that the term “job family” was ambiguous and could 

allow banks to include all employees in a single job family, which would result in 

payments to employees with salaries at the lower end of the job family that may be well 

in excess of twice their hourly wage.53  Rule 700 defines a “job family” 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 establishe

and uses in the ordinary course of its business to distinguish among its employees for 

purposes of hiring, promotion, and compensation.

 

d 

                                                

54  The requirements that a job family 

include jobs or positions with similar responsibilities, or that require similar skills, 

education and training, and be used by the bank in the ordinary course of its business for 

hiring, promotion and compensation purposes are designed to prevent a bank from 

 
52  Rule 700(c)(2). 

53   See Pace Project Letter. 

54  Proposed Rule 700(d). 

 22



establishing special job family classifications to evade the “nominal” standard.  A bank 

may not deviate from its ordinary classification of jobs for purposes of determining 

whether a referral fee is nominal under this standard, and the Banking Agencies will 

monitor the job family classifications used by banks for “nominal” determination as part 

of the risk-focused examination process.  Depending on a bank’s internal employee 

classification system, examples of a job family may include tellers, loan officers, or 

branch managers.  The Agencies note, moreover, that other provisions of the networking 

exception also provide significant protection to customers.  For example, the networking 

exception provides that unregistered bank employees may perform only clerical or 

ministerial functions in connection with brokerage transactions.55  Accordingly, bank 

employees referring a customer to a broker-dealer under the exception may not provide 

investment advice concerning securities or make specific securities recommendations to 

the customer.56   

 A few commenters suggested that, by defining “nominal” by reference to hourly 

wages and annual base salary, the rule treats unfairly employees who receive a 

considerable portion of their compensation through bonuses tied to sales of non-securities 

products.57  Because the five alternatives included in the final rule are based on a set 

dollar amount or the hourly wage or annual base salary established by a bank for the 

                                                 
55  See 15 U.S.C. 78c(a)(4)(B)(i)(V).   

56  A bank employee, however, may describe in general terms the types of 
investment vehicles available from the bank and the broker-dealer under the 
arrangement.  See id. 

57  See, e.g., ABA Letter, BISA Letter, Clearing House Ass’n Letter, Harris Bank 
Letter, Roundtable Letter, PNC Letter, U.S. Trust Company, N.A. (“U.S. Trust”) 
Letter, and WBA Letter. 

 23



employee or the employee’s job family, the alternatives help ensure that a referral fee 

will be nominal in relation to the employee’s compensation in the year it is paid.  

Bonuses, however, typically are discretionary, vary significantly from year-to-year and, 

as noted by commenters, may constitute a significant portion of the compensation of 

certain types of bank employees in particular years.  Permitting referral fees to be based 

in part on the size of a bonus paid in a previous year (or projected to be paid in the 

current year) could allow bank employees to receive a referral fee that is not nominal in 

relation to the employee’s compensation, or the average compensation paid to employees 

within the relevant job family, in the year in which the fee is paid and, thus, could 

increase the potential for sales practice concerns.   

 Commenters also asserted that more than one employee should be able to receive 

a fee for a single referral and also requested clarification as to whether officers and 

directors of a bank may receive referral fees under the exception.58  The Agencies believe 

that the networking exception permits a bank employee who personally participated in a 

referral to receive a referral fee for the referral.59  Accordingly, the Agencies have 

modified Rule 700(c) to clarify this position.  Thus, for example, a supervisory employee 

may receive a separate, nominal one-time cash fee for a referral made by another 

individual supervised by the employee only if the supervisory employee personally 

participated in the referral.  A supervisory employee may not, however, receive a referral 

fee merely for supervising the employee making the referral or administering the referral 

                                                 
58  See, e.g., Consumer Bankers Ass’n (“CBA”) Letter, BISA Letter. 

59  See Section 3(a)(4)(B)(i)(VI) of the Exchange Act (permitting “the bank 
employee [to] receive compensation for the referral of any customer” in 
accordance with the exception). 

 24



process.  An officer or director of a bank who makes or personally participates in making 

a referral may receive a nominal fee for the referral as a bank employee. 

The proposed rule permitted a nominal referral fee to be paid only in cash.  Many 

commenters requested that banks be given the flexibility to pay referral fees in non-cash 

forms.60  The terms of the networking exception, however, provide for a “nominal,  

one-time cash fee of a fixed dollar amount” 61 and, accordingly, the final rule continues to 

require that referral fees paid under the exception be paid in cash.  A bank, therefore, may 

not pay referral fees in non-cash forms, such as vacation packages, stock grants, annual 

leave, or consumer goods.  The final rules do not, however, prevent a bank from paying 

an employee on a quarterly or more frequent periodic basis the total amount of nominal, 

fixed cash fees the employee earned during the period.  For example, if a bank employee 

is entitled to receive a $25 referral fee for each securities referral and the employee 

makes three qualifying referrals in a given quarter, the bank may pay the employee $75 at 

the end of the quarter instead of three individual payments of $25.  A bank also may use a 

“points” system to keep track of the number of qualifying securities referrals made by the 

employee during a quarterly or more frequent period and the total amount of nominal, 

fixed cash fees that the employee is entitled to receive at the end of the period.  In all 

cases, however, points must translate into cash payments on a uniform basis and the cash 

amount that an employee will receive for a qualifying securities referral (e.g., twice the 

employee’s actual base hourly wage) must be fixed before the referral is made and may 

                                                 
60  See, e.g., ABA Letter, BISA Letter, Clearing House Ass’n Letter, and JPMorgan 

Letter. 

61  See Exchange Act Section 3(a)(4)(B)(i)(VI).  

 25



not be contingent or vary based on whether an employee makes a specified number or 

type of securities referrals during a quarterly or more frequent period.62 

2. Definition of “Referral” 

The statutory networking exception permits bank employees to receive a nominal 

one-time cash fee of a fixed dollar amount for the “referral” of a customer to a broker-

dealer.  Rule 700(e) defines a referral as an action taken by one or more bank employees 

to direct a customer of the bank to a broker-dealer for the purchase or sale of securities 

for the customer’s account.63  For purposes of the networking exception and Rules 700 

and 701, the term “customer” includes both existing and potential customers of the bank. 

As proposed, a bank employee may receive a referral fee under the networking 

exception and Rule 700 for each referral made to a broker-dealer, including separate 

referrals of the same individual or entity.  In addition, nothing in the statutory networking 

exception or the final 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 rules do not apply to referrals of retail, institutional or high net worth customers to a 

broker-dealer or other third party solely for transactions not involving securities, such as 

                                                 
62  The exception and the final rules also do not prohibit a bank from providing its 

employees non-cash items, such as pizza or coffee mugs, in connection with 
programs to familiarize bank employees with new types of investment vehicles 
offered by the bank or the broker-dealer through the arrangement, provided that 
the programs or items given to employees do not reward or compensate an 
employee for making a referral to a broker-dealer.  Thus, for example, a “pizza 
party” that is made available only to those employees that have made one or more 
referrals to a broker-dealer would not be permissible. 

63  Rule 700(e). 

 26



loans, futures contracts (other than a security future), foreign currency, or over-the-

counter commodities, or solely for transactions in securities (such as U.S. Government 

obligations) that would not require the other party to register under section 15 of the 

Exchange Act.64   

 3. 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-dealer may not be contingent on 

whether the referral results in a transaction.  This limitation is designed to allow banks to 

reward bank employees for introducing customers to a broker-dealer without giving 

unregistered bank employees a direct financial interest in any resulting securities 

transaction at the broker-dealer.   

The final rule, like the proposed rule, provides that a referral fee will 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-dealer; whether the referral results in a 

transaction involving a particular type of security; or whether the referral results in 

multiple securities transactions.65  The final rule expressly provides that a referral fee 

may be contingent on whether a customer (1) contacts or keeps an appointment with a 

broker-dealer as a result of the referral; or (2) meets any objective, base-line qualification 

                                                 
64  A bank that acts as a government securities broker (as defined in Section 3(a)(43) 

of the Exchange Act) is not exempt from and must comply with the notification 
and other applicable requirements of section 15C of the Exchange Act. 

65  Rule 700(a).  

 27



criteria established by the bank or broker-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-dealer, or the bank, 

may have established generally for referrals for securities brokerage accounts.66  A bank 

or broker-dealer may establish and use different objective, base-line qualification criteria 

(including citizenship or residency requirements) for different classes of customers or for 

different business lines, divisions or units of the bank or broker-dealer. 

Commenters generally supported these permissible contingencies.  Some 

commenters contended that the rule also should allow payment of a nominal referral fee 

to be contingent on other events, such as the opening of an account at the broker-dealer or 

on the opening of an account that may be used to conduct only securities transactions that 

the bank itself could effect without registering as a broker under the exceptions for banks 

in Sections 3(a)(4)(B) of the Exchange Act.67  Opening a securities account at the broker-

dealer, however, is a necessary first step to executing securities transactions and one that 

a customer is unlikely to take unless the customer anticipates engaging in securities 

transactions with the broker-dealer.  In light of this close link between opening an 

account and executing securities transactions, the Agencies have not modified the rule as 

requested and the final rule continues to provide that payment of a referral fee may not be 

contingent on whether the customer opens an account (other than the types of accounts 

described in Part B.2 supra.) at the broker-dealer.  Other contingencies not specified in 

                                                 
66  Rule 700(a). 

67  See, e.g., BISA Letter, Clearing House Ass’n Letter, and U.S. Trust Letter. 

 28



the rule may be permissible if they are not based on whether the referral results in a 

securities transaction at the broker-dealer. 

In addition, the “broker” exceptions in Sections 3(a)(4)(B) of the Exchange Act 

are available only to banks.  Accordingly, a referral to a broker-dealer for a securities 

transaction within the scope of section 15 of the Exchange Act still involves a “broker” 

transaction at the broker-dealer even if a bank could conduct the transaction itself without 

registering as a broker, and a referral fee may not be contingent on the occurrence of such 

a transaction (or the opening of an account to engage in such transactions).68 

  4. Definition of “Incentive Compensation” 

The networking exception prohibits an unregistered employee of a bank that 

refers a customer to a broker-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) defined 

“incentive compensation” as compensation that is intended to encourage a bank 

employee to refer potential customers to a broker-dealer or give a bank employee an 

interest in the success of a securities transaction at a broker-dealer.   

The proposed rule also excluded certain types of bonus compensation from the 

definition of “incentive compensation.”  Proposed Rule 700(b)(1) excluded compensation 

paid by a bank under a bonus or similar plan if such compensation is paid on a 

discretionary basis; based on multiple factors or variables; such factors or variables 

include significant factors or variables that are not related to securities transactions at the 
                                                 
68  For similar reasons, a referral to a broker-dealer for such a transaction is a 

“referral” for purposes of the networking exception and Rule 700. 

 29



broker-dealer; and a referral made by the employee or any other person is not a factor or 

variable in determining the employee’s compensation under the plan.  

 In addition, Proposed Rule 700(b)(2) provided that the definition of incentive 

compensation did not prevent a bank from compensating its employees 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-dealer) or 

operating units; or (3) a broker-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-dealer.  The Agencies specifically requested comment on 

whether existing bank bonus programs would fit, or could easily be adjusted to fit, within 

these proposed exclusions. 

 Many commenters indicated that the proposed bonus provisions worked well and 

would not interfere with bank bonus plans generally.  One commenter, however, opposed 

the proposed bonus provisions arguing that permitting bonuses to be based even in part 

on revenues generated by activity conducted at a broker-dealer would encourage bank 

employees to make referrals regardless of the appropriateness of the referral in order to 

increase their compensation under the bonus plan.69  In addition, a number of 

commenters, requested that the Agencies either confirm that bonus programs structured 

in particular ways identified by the commenter would not fall within the definition of 

“incentive compensation” or modify the terms of the exclusions to encompass plans with 

these features.  For example, several commenters asked the Agencies to confirm that the 

                                                 
69  See NASAA Letter. 

 30



rules would not prohibit a bank from basing an employee’s bonus on the assets, revenues 

or profits brought to the bank and its partner broker-dealer by that employee.  Other 

commenters asked that the Agencies provide that all “traditional” bank bonus programs 

are protected under the rule. 

A number of commenters also raised specific issues with one or more aspects of 

the exception in Rule 700(b)(1) for discretionary, multi-factor bonus plans or the safe 

harbor in Rule 700(b)(2) for plans based on overall profitability.  For example, some 

commenters requested clarification of the “discretionary” requirement in paragraph (b)(1) 

and asserted that a bonus plan should be considered “discretionary” if employees do not 

have an enforceable right to compensation under the plan until it is paid. 70  One 

commenter also argued that Proposed Rule 700(b)(1) should not prohibit the number of 

referrals made by an employee from playing a role in the employee’s compensation under 

a bonus plan.71   

Several commenters also asserted that the safe harbor in paragraph (b)(2) should 

be clarified or expanded to cover bonus programs based on any measure of the financial 

performance, and not just the “overall profitability,” of a bank, affiliate, operating unit or 

broker-dealer.72  Commenters indicated that bank bonus programs may be based on a 

wide variety of measures or metrics related to the operations or performance of the bank, 

an affiliate or operating unit.73  Some commenters also requested that the safe harbor be 

                                                 
70  See, e.g., U.S. Trust Letter and Union Bank Letter. 

71  See TD Banknorth, N.A. (“TD Banknorth”) Letter. 

72  See, e.g., ABA Letter, Clearing House Ass’n Letter. 

73  See, e.g., Clearing House Ass’n Letter, Harris Bank Letter, U.S. Trust Letter. 

 31



revised to clarify that a bonus program may be based on the overall profitability of an 

operating unit of an affiliate of a bank (other than a broker-dealer), or be expanded to 

allow bonus programs to be based on the financial performance of a branch, division, or 

geographical or operational unit of a broker-dealer.74   

 The purpose of the exception and exclusion in paragraph (b) is to recognize that 

certain types of bonus plans are not likely to give unregistered bank 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.  As described 

below, the Agencies have made several revisions to the exception and exclusion to help 

clarify the types of bonus plans that fall outside of the scope of “incentive compensation” 

and to ensure that excepted or excluded plans are not likely to give bank employees an 

impermissible promotional interest in the broker-dealer’s activities.  These exceptions 

and exclusions are crafted to accommodate existing types of bank bonus programs in 

general.  Nevertheless, a plan’s longevity or the number of banks that utilize similar plans 

are not factors in determining whether a plan constitutes “incentive compensation” under 

this definition.  Accordingly, banks that have networking arrangements with a broker-

dealer should review their existing bonus programs in light of the standards set forth in 

the rule to evaluate whether they may constitute impermissible incentive compensation. 

a. Exception for Discretionary, Multi-Factor Bonus Plans 

 Under Rule 700(b)(1) of the final rules, compensation paid by a bank under a 

bonus or similar plan is specifically excepted from “incentive compensation” if it is paid 

on a discretionary basis and based on multiple factors or variables, provided that (1) those 
                                                 
74  See, e.g., ABA Letter, Clearing House Ass’n Letter, HSBC Bank Letter, PNC 

Letter, and Union Bank Letter. 

 32



factors or variables include multiple, significant factors or variables that are not related to 

securities transactions at the broker-dealer; (2) a referral made by the employee is not a 

factor or variable in determining the employee’s compensation under the plan; and (3) the 

employee’s compensation under the plan is not determined by reference to referrals made 

by any other person.75  The Agencies have modified the rule to make clear that, to be 

excluded under Rule 700(b)(1), a multi-factor plan must include multiple, significant 

factors or variables that are not related to securities transactions at the broker-dealer.76  

The proposed rule already required that there be “significant factors or variables” and the 

addition of “multiple” highlights the plural nature of these terms. 

 Each factor or variable unrelated to securities transactions at the broker-dealer 

will be considered “significant” for purpose of Rule 700(b) if it plays a material role in 

determining an employee’s compensation under the bonus or similar plan, i.e., the 

amount of the employee’s bonus could be reduced or increased by a material amount 

based on the non-securities factor or variable.  This clarification will give banks greater 

certainty and will allow them to more readily identify the types of factors or variables not 

related to securities transactions that must be included within a discretionary, multi-factor 

bonus plan under paragraph (b)(1) of the Rule.  Thus, under paragraph (b)(1), a bank’s 

bonus program may take account of the full range of banking, securities or other business 

of one or more customers brought to the bank and its partner broker-dealer by an 
                                                 
75  Rule 700(b)(1).  The requirement that an employee’s compensation not be based 

on a “referral” made by the employee or another person means that the 
employee’s compensation under the bonus or similar plan may not vary based on 
the fact that the employee or other person made a referral to a broker-dealer or the 
number of securities referrals made by the employee or other person to a broker-
dealer.  

76  A similar change has been made to the corresponding language in Rule 700(b)(2). 

 33



employee so long as the bonus is paid on a discretionary basis, the banking and other 

factors or variables not related to securities transactions at the broker-dealer are 

significant factors or variables under the bonus program, and a referral or number of 

referrals made by the employee or others is not a factor or variable under the program.  In 

this way, the rule is designed to accommodate discretionary bank bonus programs that are 

based on general measures of the business or performance of a bank or a particular 

customer, branch or other unit of the bank, that are not based on referrals made by one or 

more bank employees and that include some inputs based on securities transactions at a 

broker-dealer as well as multiple significant factors or variables that are unrelated to 

securities transactions at the broker-dealer. 

 A bank may not establish or maintain one or more “sham” non-securities factors 

or variables in its bonus or similar plan for the purpose of evading the restrictions in Rule 

700(b) and the Banking Agencies will continue to review the bonus and similar plans of 

banks participating in networking arrangements as part of the risk-focused supervisory 

process.  In considering if a bonus program at a bank contains sufficient banking or other 

factors unrelated to securities transactions at a broker-dealer, the agencies will consider, 

among other things, whether such factors or variables relate to banking or other non-

broker-dealer business(es) actually being conducted by the bank or its employees, the 

resources devoted by the bank to such business(es), and whether such business(es) 

materially contributes to the payments made under the plan over time.  It is not expected 

that the actual payments made under a bank’s bonus or similar plan would, over time, be 

based predominantly on securities transactions conducted at a broker-dealer.  If such a 

 34



situation were to occur, the bank would be expected to make appropriate modifications to 

its bonus or similar plan going forward. 

A bonus or similar plan will be considered “discretionary” under the final rule if 

the amount an employee may receive under the plan is not fixed in advance and the 

employee does not have an enforceable right to payments under the plan until the amount 

of any payments are established and declared by the bank.  A plan may, however, include 

targets or metrics that must be met in order for any bonus to be paid, provided the plan is 

otherwise a “discretionary” plan. 

The Agencies have not modified the rule to allow a bonus plan to be based on the 

fact of a referral or the number of referrals made by one or more bank employees.  The 

Agencies believe that doing so would allow a direct linkage between a referral and an 

employee’s bonus compensation and be contrary to the purposes of the exception.   

b. Safe Harbor for Plans Based on Overall Profitability or Revenue 

 The safe harbor provisions of Rule 700(b)(2) are designed to allow banks to avoid 

having to analyze whether a particular bonus program meets the requirements of the 

exception in paragraph (b)(1) in circumstances where the general structure of the program 

clearly reduces the potential for sales practice concerns in connection with a referral to a 

broker-dealer.  The Agencies have made several changes to the safe harbor to address the 

issues raised by commenters and to ensure that the safe harbor achieves its purpose.  In 

particular, the Agencies have modified paragraph (b)(2) of the rule to cover any bonus or 

similar plan that is based on the overall profitability or revenue of: 

(i) The bank, either on a stand-alone or consolidated basis; 

 35



(ii) Any affiliate of the bank (other than a broker-dealer), or any operating unit of 

the bank or an affiliate (other than a broker-dealer), if the affiliate or operating 

unit does not over time predominately engage in the business of making referrals 

to a broker-dealer; or 

(iii) A broker-dealer if: 

(A) Such measure of overall profitability or revenue is only one of multiple 

factors or variables used to determine the compensation of the officer, director or 

employee;   

(B) The factors or variables used to determine the compensation of the officer, 

director or employee include multiple significant factors or variables that are not 

related to the profitability or revenue of the broker-dealer;  

(C) A referral made by the employee is not a factor or variable in determining the 

employee’s compensation under the plan; and 

(D) The employee’s compensation under the plan is not determined by reference 

to referrals made by any other person. 

When a bonus program is based on the overall profitability of a bank, an affiliate 

of a bank (other than a broker-dealer), or an operating unit of the bank or an affiliate 

(other than a broker-dealer), any relationship between a referral made by an employee 

and the amount of payments that the employee may receive under the plan are likely to be 

attenuated.  In these circumstances, for example, any potential connection between the 

revenue received by a bank from its partner broker-dealer as a result of a referral and the 

payments made to the referring bank employee under the plan likely would be tenuous 

and largely speculative given the number of other employees, business and actions that 

 36



contribute to the overall profitability of the bank, affiliate or most operating units.  The 

Agencies believe this attenuation effectively addresses any potential that payments under 

the plan would give an employee an undue promotional interest in any securities 

transactions that may occur at the broker-dealer as a result of a referral.  A bonus plan 

based on the overall revenue of a bank or qualifying affiliate or operating unit would be 

similarly attenuated and, for this reason, the Agencies have modified the safe harbor to 

cover plans based on either the “overall profitability or revenue” of a bank or a qualifying 

affiliate or operating unit.  This would include plans based on an entity’s earnings per 

share or stock price, both of which are directly related to the entity’s overall profitability 

or revenue.  Because other, more granular measures of the financial performance of a 

bank, affiliate or operating unit could create an unduly close connection between the 

employee’s expected payment under the bonus plan and referrals made to the broker-

dealer or the securities transactions that result from those referrals, the rules provide for 

plans structured in more granular ways to be analyzed under the multi-factor, 

discretionary criteria in Rule 700(b)(1). 

The potential connection between a referral made by a bank employee and the 

payments made to the employee under a bonus plan may be particularly strong if 

payments under the plan are based on the profitability or revenue of (i) the partner 

broker-dealer itself or a specific branch or operating unit of the broker-dealer (such as the 

branch or operating unit responsible for handling customers referred by the bank), or 

(ii) an operating unit of the bank or a non-broker-dealer affiliate that is predominantly 

engaged over time in referring customers to the broker-dealer.  To address the potential 

for improper incentives in these situations, the Agencies have modified 

 37



Rule 700(b)(2)(iii) to allow a bonus program to be based on the overall profitability or 

revenue of a broker-dealer only if the program meets the conditions specified in (A)-(D) 

above.  These conditions are similar to those that would apply to a discretionary bonus or 

similar plan under paragraph (b)(1) and are designed to ensure that the profitability or 

revenue of the broker-dealer is only one of multiple significant factors or variables in 

determining the employee’s compensation and that a referral or number of referrals made 

by the employee is not a factor or variable under the program.77  Like the proposal, the 

safe harbor in paragraph (b)(2) is not available to bonus plans based on the profitability 

or revenue of a particular branch, division or operating unit of the partner broker-dealer.   

 In addition, the Agencies have modified paragraph (b)(2)(ii) of the rule to exclude 

bonus plans based on the profitability or revenue of an operating unit of a bank or non-

broker-dealer affiliate that over time predominantly engages in the business of making 

referrals to a broker-dealer.  This exclusion is intended to prevent a bank from basing a 

bonus plan on the overall profitability or revenue of a bank unit that is focused solely or 

predominately on making referrals to a broker-dealer.  This restriction, however, is not 

intended to prevent a bonus plan from being based on the overall profitability or revenue 

of a bank unit, such as a call center, that in fact markets, sells or supports a range of bank 

products in addition to making referrals to a broker-dealer and which is not, over time, 

predominantly engaged in the business of making referrals to a broker-dealer. 

C. Rule 701:  Exemption for Referrals Involving Institutional Customers and High 
Net Worth Customers 

 
                                                 
77  As with a multi-factor bonus plan under paragraph (b)(1) of the Rule, a non-

securities factor or variable will be considered “significant” under paragraph 
(b)(2)(iii) if it plays a material role in determining an employee's compensation 
under the bonus or similar plan. 

 38



 The proposed rules included an exemption that would permit a bank, subject to 

certain conditions, 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-dealer with which the bank has a contractual or other written networking 

arrangement.78  Among the conditions included in the proposed rule were conditions 

that— 

• Established the financial thresholds at which a customer would be considered an 

“institutional customer” or “high net worth customer”; 

• Limited the types of bank employees that may receive a higher-than-nominal 

referral fee under the exemption and the manner in which these fees may be 

structured;79  

• Required the bank to provide certain disclosures to the customer regarding the 

referral arrangement;80 and 

• Required that the agreement between the bank and the broker-dealer include 

certain provisions, including a provision obligating the broker-dealer to perform a 

suitability analysis of certain securities transactions that may result from the 

referral or a sophistication analysis of the customer referred.81   

                                                 
78  Proposed Rule 701. 

79  See Proposed Rule 701(a)(1) and (d)(4). 

80  See id. at 701(a)(2)(i). 

81  See id. at 701(a)(3)(ii). 

 39



Many commenters supported providing an exemption for referrals involving 

sophisticated individuals and entities.82  These commenters, for example, asserted that 

the exemption was appropriate in light of the required sophistication of the custom

involved.

er 

                                                

83  Other commenters, however, argued that providing an exemption to the 

“nominal” requirement would not be in the interest of investors or the public.  These 

commenters asserted that the exemption as proposed would allow bank employees to 

have a significant salesman’s stake in securities transactions and encourage bank 

employees to act as finders or salespeople for a broker-dealer.84 

 Many commenters, including a number that supported the exemption, also asked 

that the Agencies modify the exemption to, among other things, lower or alter the 

thresholds at which a person would be considered an “institutional customer” or “high net 

worth customer” under the rule; eliminate the provisions of the rule requiring the broker-

dealer to perform a suitability or sophistication analysis in connection with a referral; or 

eliminate the limitations on the manner in which a higher-than-nominal referral fee may 

be structured.  In addition, many commenters requested that the Agencies modify the rule 

in several respects to reduce administrative burden and complexity.  For example, several 

commenters asked that the Agencies provide a bank and its partner broker-dealer greater 

flexibility to assign between themselves the responsibility for fulfilling the disclosure and 

other obligations included in the rule. 

 
82  See, e.g., BISA Letter, CBA Letter, Citigroup Letter, ICBA Letter, Roundtable 

Letter, Securities Industry and Futures Markets Ass’n (“SIFMA”) Letter, State 
Street Corp. Letter, U.S. Trust Letter, Union Bank Letter. 

83  See CBA Letter. 

84  See, e.g., Massachusetts Securities Division Letter, NASAA Letter. 

 40After carefully considering the comments, the Agencies have decided to retain the 

exemption.  The Agencies continue to believe that it is appropriate to provide an 

exemption from the nominal and contingency limitations in the networking exception for 

referrals that both involve institutions and individuals that meet certain financial criteria 

and that occur under other conditions designed for investor protection.  When provided 

appropriate information, such institutions and individuals are more likely to be able to 

understand and evaluate the relationship between a bank and its employees and the 

bank’s broker-dealer partner and the impact of that relationship on any resulting 

securities transaction with the broker-dealer.  The conditions in the final exemption are 

designed to help ensure that, among other things, institutional and high net worth 

customers, as defined in the rule, receive appropriate investor protections and information 

that enables the customer to understand the financial interest of the bank employee so the 

customer can make informed choices.  Moreover, as the exemption itself provides, a bank 

operating under the exemption also must comply with 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), including the terms and 

conditions that require the disclosure of the uninsured nature of securities and that limit 

the role that a bank employee may have in a brokerage transaction.85  These conditions 

provide additional protections to institutional and high net worth customers that may be 

referred to a broker-dealer under Rule 701. 

The Agencies have modified the final rule in several respects to, among other 

things, provide banks and broker-dealers greater flexibility in complying with the rule’s 

                                                 
85  See Exchange Act Section 3(a)(4)(B)(i)(V) and (IX). 

 41



disclosure requirements and to make the exemption more workable in practice.  In light 

of the protections retained in the rule, the Agencies also have modified the thresholds at 

which a non-natural person will be considered an “institutional customer” for purposes of 

the rule.  These modifications are discussed further below.   

Banks that pay their employees only nominal, non-contingent fees in accordance 

with Rule 700 for referring customers—including institutional or high net worth 

customers—to a broker-dealer do not need to rely on, or comply with, the exemption 

provided in Rule 701.  As under the proposal, the final rule requires that the written 

agreement between a bank operating under the exemption and its partner broker-dealer 

include terms that obligate the broker-dealer to take certain actions.  Banks and broker-

dealers are expected to comply with the terms of their written networking arrangements.   

If a bank or broker-dealer 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.   

 1.  Definitions of “Institutional Customer” and “High Net Worth   
  Customer” 
 
 Proposed Rule 701(d)(2) defined an “institutional customer” to mean any 

corporation, partnership, limited liability company, trust, or other non-natural person that 

has at least $10 million in investments or $40 million in assets.  Under the proposal, a 

non-natural person also would 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-dealer for investment banking services.  Proposed Rule 701(d)(1) 

defined a “high net worth customer” 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 

 42



primary residence and associated liabilities of the person and, if applicable, his or her 

spouse.  Proposed Rule 701 also included provisions governing the allocation of assets 

held by a natural person jointly with his or her spouse and provided for the dollar 

thresholds in the rule to be adjusted for inflation every five years.  

A number of commenters argued that the proposed dollar thresholds for both 

types of customers were too high in light of the nature of the transactions involved and 

the other requirements of the exemption.86  Commenters asserted that customers with 

lower levels of net worth, assets or investments are sophisticated enough to understand 

and evaluate the implications of a higher-than-nominal or contingent referral fee.  

Commenters suggested a wide variety of alternative thresholds, with many 

recommending that the Agencies use an existing standard established under the federal 

securities laws for assessing a customer’s investment sophistication.  For example, 

commenters recommended that the Agencies use the “accredited investor” definition in 

the Commission’s Regulation D, or the definition of that term proposed for use in 

connection with investments in certain private investment vehicles, for purposes of 

defining an institutional or high net worth customer;87 treat all corporate and non-natural 

persons as an institutional customer; consider all persons advised by a bank or a 

registered investment adviser to be sophisticated; or lower the asset threshold for 

municipalities or charitable organizations.88   Several commenters also asked that the 

                                                 
86  See, e.g., HSBC Bank Letter, U.S. Trust Letter, SIFMA Letter, Roundtable Letter. 

87  See 17 CFR 230.501(a)(3), (5) and (6); Securities Act Rel. No. 33-8766, 72 FR 
400, Jan. 4, 2007. 

88  See, e.g., ABA Letter, Clearing House Ass’n Letter, State Street Corp. Letter. 

 43



Agencies allow banks to use a business customer’s revenues for purposes of determining 

if the customer is an institutional customer.   

After carefully reviewing the comments, the Agencies have modified the 

definition of an “institutional customer” in the final rule to mean any corporation, 

partnership, limited liability company, trust, or other non-natural person that has, or is 

controlled by a non-natural person that has, at least:  (i) $10 million in investments; or 

(ii) $20 million in revenues; or (iii) $15 million in revenues if the bank employee refers 

the customer to the broker-dealer for investment banking services.89  When converted to 

an equivalent asset number, the $20 million and $15 million revenue thresholds in the 

final rule are somewhat lower than $40 million and $25 million asset thresholds in the 

proposed rule.90  The Agencies believe that these lower thresholds are appropriate for 

corporate and other non-natural customers in light of the other protections retained in the 

final rule, including the provisions requiring a suitability or sophistication determination, 

and the greater internal and external resources that business entities typically have as 

compared to individuals.  The Agencies have modified the thresholds to be based on 

                                                 
89  Rule 701(d)(2). 

90  To develop comparable asset and revenue thresholds for an institutional customer, 
the Agencies used a dataset composed of all publicly traded, U.S.-incorporated, 
non-financial companies with a market capitalization of greater than $0 and for 
which asset and sales data were available in the 2005 CompuStat Universe of 
North American companies published by Standard & Poor’s Corporation.  For 
more information on the CompuStat Universe, see 
http://www2.standardandpoors.com/spf/pdf/products/Compustat2006.pdf.  A 
company with $40 million in assets and a company with $25 million in assets 
would rank at approximately the 27.5th percentile and the 21.9th percentile, 
respectively, of all companies within this dataset when ranked according to assets.  
When the companies within this dataset are ranked according to sales, the 
companies at approximately the 27.5th percentile and the 21.9th percentile have 
approximately $27.7 million and $15.7 million in sales.   

 44



revenues (rather than assets) to eliminate the potential for borrowings to influence the 

status of a corporate customer and to promote the equivalent treatment of non-financial 

companies and financial companies.  In addition, the Agencies have amended the rule to 

provide that a company controlled by an institutional customer will itself be considered 

an institutional customer.  A company controlled by another company should generally 

have access to the resources and sophistication of the controlling company. 

The lower revenue threshold for referrals involving investment banking services 

is designed to facilitate access to the capital markets by smaller companies.  Like the 

proposal, the final rule defines “investment banking services” 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.91 The phrase “other similar services” would include, for example, acting as an 

underwriter in a secondary offering of securities and acting as a financial adviser in a 

divestiture.  These examples are not exhaustive and are provided solely for illustrative 

purpose

                                                

s.92 

 
91  See Rule 701(d)(3).    

92  When used in this rule, 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. 

 45



The final rule continues to define a “high net worth customer” as a natural person 

who, either individually or 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.  In response to comments,93 the Agencies have modified this defini

to include any revocable, inter vivos or living trust the settlor of which is a natural pe

who, either individually or jointly with his or her spouse, meets the $5 million in net 

tion 

rson 

worth t

 the 

est.94  This change is designed to reflect the fact that otherwise sophisticated 

individuals may hold assets through such trusts for estate planning or other purposes.  

The Agencies believe that customers that meet the net worth, investment and 

revenue thresholds included in the final rule should have the ability to understand and 

evaluate the financial interest of the bank employee making a referral to a broker-dealer 

under the exemption.  In developing these thresholds, the Agencies took into account

limited nature of activities covered by the exemption (i.e., a referral by a bank employee 

to a broker-dealer).  The Agencies have not modified the rule, as requested by s

commenters, to treat any person advised by a bank or a registered investment adviser as 

an institutional or high net worth customer.  The existence of such an advisory 

relationship generally is not, by itself, sufficien

ome 

t to establish the financial sophistication 

of an in

                                                

dividual or corporate entity for purposes of the other similar standards in or 

developed under the federal securities laws.95  

 
93  See ABA Letter, PNC Letter, Roundtable Letter. 

94  Rule 701(d)(1)(i)(B). 

95  See, e.g., 15 U.S.C. 80a-2(a)(51), 78c(a)(54); 17 CFR 230.501(a).   

 46



For purposes of determining whether a natural person meets the $5 million net 

worth test, the assets of a person include: (1) any assets held individually; (2) if the 

person is acting jointly with his or her spouse, any assets of the person’s spouse (whethe

or not such assets are held jointly); and (3) if the person is not acting jointly with his or 

her spouse, 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

similar shared ownership interest.  These rules are designed to ensure that the full amo

of jointly own

r 

 or 

unt 

ed assets are not considered in cases where one spouse acts independently 

of the o

 and high 

s 

rsonal Consumption Expenditures 

rom 

Decem

                                                

ther in contacting a broker-dealer.96  The Agencies have re-formatted these 

allocation provisions in the final rule to make them easier to understand and promote 

compliance. 

As in the proposal, the dollar threshold for both institutional customers

net worth customers will be adjusted for inflation on April 1, 2012, and every five year

thereafter, to reflect changes in the value of the Pe

Chain-Type Price Index, as published by the Department of Commerce, f

ber 21, 2006.  The Agencies selected this index because it is a widely used and 

broad indicator of inflation in the U.S. economy. 

2. Determining that a Customer Meets the Relevant Thresholds 

 
96  One commenter asserted that the Agencies should allow a person to include assets 

that the person holds jointly with someone other than a spouse, such as a relative 
or domestic partner, for purposes of calculating whether the person meets the net 
worth threshold.  See Roundtable Letter.  The Agencies have not modified the 
rule in this manner to keep the scope of individuals whose assets may be 
considered in determining whether a natural person has the appropriate level of 
financial sophistication consistent with the standards used in determining whether 
a natural person is an accredited investor under the Commission’s Regulation D.  
See 17 CFR 230.501(a). 

 47



The proposal required the bank to determine that the customer being 

the standards to be a high net worth or institutional customer either (i) before the refe

fee was paid to the bank employee, in the case of a non-natural person, or (ii) prior to or 

at the time of the referral, in the case of a natural person.

referred met 

rral 

en 

 met the standards to be a high net worth customer or institutional 

custom

97  In making these 

determinations for a natural person, the proposed rule allowed the bank to rely on a 

signed acknowledgment from the person that he or she met the standards to be a high net 

worth customer.98  The proposed rule also required that the written agreement betwe

the bank and the broker-dealer provide for the broker-dealer to (i) determine that the 

customer being referred

er before the referral fee was paid,99 and (ii) promptly inform the bank if the 

broker-dealer determined that a customer referred under the exemption did not meet the 

applicable standard.100 

Commenters argued that either the bank or the broker-dealer, but not both, should 

be required to make these customer eligibility determinations and that the bank and th

broker-dealer should be permitted to allocate responsibility for these determinations 

e 

between themselves.101  In addition, several commenters contended that a bank should be 

                                                 
97  Proposed Rule 701(a)(2)(ii). 

98  Proposed Rule 701(a)(2)(ii)(B)(2). 

99  Proposed Rule 701(a)(3)(i). 

100  Proposed Rule 701(a)(3)(iii)(A). 

101  See, e.g., BISA Letter, Clearing House Ass’n Letter, Citigroup Letter, and SIFMA 
Letter.  Some commenters, for example, suggested that requiring bank employees 
to make these determinations might require the employee to go beyond the limited 
role a bank employee is permitted to play in a brokerage transaction under the 
statute.  See, e.g., BISA Letter, ABA Letter. 

 

 48



allowed to make the eligibility determinations for both high net worth customers and 

institutional customers before the referral fee is paid or before a securities transac

effected at the broker-dealer.

tion is 

menters also asserted that banks and broker-

dealers

stomer is 

, 

e 

, the 

 to determine that a natural person is a high net 

worth c  an 

                                                

102  A few com

 should be permitted to rely on a signed acknowledgement from either an 

institutional or high net worth customer.103 

The status of the referred customer as a high net worth or institutional cu

a fundamental aspect of the exemption and the final rule continues to provide for both the 

bank and the broker-dealer to determine that the customer meets the necessary 

qualification criteria to provide added assurance that these criteria are met.104  In 

addition, less information typically is in the public domain concerning the financial 

resources of an individual than of a corporation or other business entity and, accordingly

there is a greater likelihood that a bank employee—without further investigation—will b

able to preliminarily identify corporate or other business customers that are likely to 

satisfy the rule’s eligibility criteria than in the case of individuals.  For these reasons

final rule continues to provide for the bank

ustomer before a referral is made and before the employee potentially develops

expectation of a higher-than-nominal fee. 

 
102  See, e.g., ABA Letter, BISA Letter, Clearing House Ass’n Letter, HSBC Bank 

Letter, and PNC Letter. 

103  See, e.g., Citigroup Letter, SIFMA Letter.  

104  See Rule 701(a)(2)(ii) and (3)(ii)(B).  The final rule also continues to provide for 
the written agreement between the bank and the broker-dealer to require the 
broker-dealer to inform the bank if the broker-dealer determines that a referred 
customer does not meet the relevant eligibility thresholds.  See Rule 
701(a)(3)(v)(A). 

 49



The Agencies, however, have modified the final rule to make it more flexible 

while retaining its underlying purpose by providing that a bank or a broker-dealer 

satisfies its customer eligibility requirements if the bank or broker-dealer “has a 

reasonable basis to believe that the customer” is an institutional customer or high 

worth customer before the time specified in the rule.

net 

 

 

ely, and the bank employee making the referral or the broker-dealer employee 

dealing e information that would cause the 

employ

mer 

ritten 

the 

customer received appropriate information concerning the relationship between the bank 

                                                

105  A bank or broker-dealer would 

have a “reasonable basis to believe” that a customer is a high net worth customer or

institutional customer if, for example, the bank or broker-dealer obtains a signed 

acknowledgment from the customer (or, in the case of an institutional customer, from an

appropriate representative of the customer) that the customer meets the applicable 

standards to be considered a high net worth customer or an institutional customer, 

respectiv

 with the referred customer does not hav

ee to believe that the information provided by the customer (or representative) is 

false.     

3.  Conditions Relating to Disclosures 

The proposed exemption required that the bank provide a high net worth custo

or institutional customer being referred to the bank’s broker-dealer partner certain w

disclosures about the bank employee’s potential interest in the referral prior to or at the 

time of the referral.106  Commenters generally believed that providing these types of 

disclosures to a high net worth or institutional customer would help ensure that 

 
105  Rule 701(a)(2)(ii). 

106  Proposed Rule 701(a)(2)(i).   

 50



and the broker-dealer,107 although a few questioned whether sophisticated customers 

required any disclosures at all or suggested that more simplified disclosures be 

permitted.108  A number of commenters also asserted that the requirement that the bank 

provide these disclosures “prior to or at the time of the referral” was impractical or 

burdensome.109  Commenters instead asserted that the rule should allow the disclosures to 

be provided before the referral fee is paid or before a securities transaction is effected at 

ee 

dealer and that payment of this fee may be contingent on whether the referral results in a 

                                                

the broker-dealer, or allow the bank and the broker-dealer to determine which entity 

would make the disclosures.110   

 The final rule continues to require that a high net worth or institutional customer 

referred to a broker-dealer under the exception receive disclosures that clearly and 

conspicuously disclose (i) the name of the broker-dealer; and (ii) that the bank employ

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-

 
107  See, e.g., ABA Letter, JP Morgan Letter, Roundtable Letter, BISA Letter. 

108  See, e.g., Bank of America Corp. (“BofA”) Letter and WBA Letter.    

For example, som109  e commenters noted that some referrals may occur only by 
telephone or asserted that it may be unclear to an employee when a referral 

110  

actually occurs. 

See, e.g., ABA Letter, BISA Letter, Clearing House Ass’n Letter, HSBC Bank 
Letter, and WBA Letter.  In addition, some commenters contended that banks 
should be required to provide similar conflict-of-interest disclosures to custome
referred to a broker-dealer under the statutory networking exception.  

rs 
See, e.g., 

Boyd Financial Letter, Pace Project Letter, University of Cincinatti Corp. Law 
Center Letter.  The statutory networking exception itself sets certain disclosures
that the bank or broker-deale

 
r must provide a customer in situations where the 

bank employee making the referral may receive only a “nominal” referral fee.  
(a)(4)(i)(IX).  

 
15 U.S.C. 78c

 51



transaction with the broker-dealer.111  This requirement ensures that high net worth or 

institutional customers receive notice of the financial interest the referring employee may 

have in

le 

ore 

two 

e 

 the transaction so they can make informed choices.   

In light of the comments, the Agencies have modified the provisions of the ru

governing how and when these disclosures must be provided to make the rule m

workable and less burdensome while also requiring that customers receive the 

information in time to make informed choices.  Specifically, the final rule provides 

options for providing the required disclosures.  Under the first option, as under th

proposal, the bank must provide the high net worth or institutional customer the 

disclosures in writing prior to or at the time of the referral.112  The second option allow

the bank to provide the disclosure to the customer 

s 

orally prior to or at the time of the 

referral.  However, if the bank provides the customer the required disclosures only orall

then either (i) the bank must provide the disclosure to the customer in writing within 3 

business days of the date of the referral; or (ii) the broker-dealer must be obligated, under

the terms of its written agreement with the bank, to provide the disclosures in writing to 

the customer.

y, 

 

, 

an order for a securities transaction with the broker-dealer as a result of the referral (if the 

                                                

113  If the broker-dealer is responsible for providing the written disclosures

then it must provide the disclosures to the customer prior to or at the time the customer 

begins the process of opening an account at the broker-dealer (if the customer does not 

already have an account with the broker-dealer) or prior to the time the customer places 

 
111  Rule 701(b). 

112  Rule 700(a)(2)(i). 

113  Rule 701(a)(2)(i) and (a)(3)(i). 

 52



customer already has an account at the broker-dealer).114  In this way, the rule provides a 

mechanism for customers to receive the disclosures in writing when they initially are 

provided only orally.  Whether provided orally or in writing, the required disclosures will 

be considered to have been made in a clear and conspicuous manner if they are provided 

in a manner designed to call attention to the nature and significance of the information.   

4.  Suitability or Sophistication Analysis by Broker-Dealer 

The proposed exemption required that the written agreement between the bank 

and the broker-dealer provide for the broker-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-

dealer depended on whether the referral fee was contingent on the completion of a 

securities transaction at the broker-dealer.115  The proposed rule also required that the 

written agreement between the bank and its partner broker-dealer obligate the broker-

dealer to inform the bank if it determined that a customer referred under the exemption, 

or a transaction to be conducted by the customer, did not meet the relevant suitability or 

sophistication standard.116 

 Several commenters objected to this suitability/sophistication requirement arguing 

that the broker-dealer should be required to conduct a suitability/sophistication analysis 

only when such an analysis would otherwise be required under the rules of the broker-

                                                 
114  Rule 701(a)(3)(i).  As a general matter, a customer begins the account-opening 

process when the customer fills out the appropriate forms provided by the broker-
dealer to establish an account. 

115  Proposed Rule 701(a)(3)(ii). 

116  Proposed Rule 701(a)(3)(iii)(C). 

 53



dealer’s self-regulatory organization (“SRO”) (i.e., in those cases where the broker-dealer 

makes a recommendation to the customer concerning securities).117  Commenters also 

argued that the suitability/sophistication requirement was unworkable or unnecessary 

given that the transaction may involve only a referral (without a securities transaction 

occurring) of a sophisticated customer.118  In addition, some commenters expressed 

concern that the proposed standards would increase the potential liability of broker-

dealers or delay the ability of a broker-dealer to respond to a customer’s instructions.  

After carefully considering the comments, the Agencies have retained the 

requirement that the parties’ written agreement provide for the broker-dealer to perform a 

suitability analysis when a referral fee is contingent on a transaction and a suitability or 

sophistication analysis for other referrals.  These requirements provide additional investor 

protections in those circumstances where the bank employee making the referral may 

receive a higher-than-nominal referral fee.  The suitability and sophistication standards 

included in the final rule are based on the standards that broker-dealers currently must 

apply and use under applicable SRO rules and, thus, should be familiar to those broker-

dealers that partner with banks operating under the exemption.119  In addition, the 

                                                 
117  See, e.g., ABA Letter, Clearing House Ass’n Letter, Citigroup Letter, and PNC 

Letter.  See also FINRA Rule 2310 and FINRA IM-2310-3 (discussing suitability 
obligations of member broker-dealers).  One commenter also asserted that any 
expansion of a broker-dealer’s suitability obligations should be processed and 
approved through the normal market regulation and SRO process.  See SIFMA 
Letter. 

118  See, e.g., Clearing House Ass’n Letter, SIFMA Letter.  Commenters also asserted 
that a broker-dealer may not be able to perform the proposed “sophistication” 
analysis if the customer does not open an account or refuses to provide the broker-
dealer the information necessary to perform the analysis. 

119  One commenter expressed concern that the suitability/sophistication requirements 
of the rule may discourage low-cost, execution-only brokers from establishing 

 54



exemption gives a broker-dealer the flexibility to perform a suitability analysis, if one is 

otherwise required by the rule, in connection with all referrals made under the exemption 

if the broker-dealer determines that such an approach is appropriate for business, 

compliance or other reasons. 

 Specifically, for contingent referral fees payable under the exemption, the written 

agreement between the bank and the broker-dealer must provide for the broker-dealer to 

conduct a suitability analysis of each securities transaction that triggers any portion of the 

contingency fee in accordance with the rules of the broker-dealer’s applicable SRO as if 

the broker-dealer had recommended the securities transaction.120  This analysis must be 

performed by the broker-dealer before each securities transaction on which the referral 

fee is contingent is conducted.   

 For non-contingent referral fees payable under the exemption, the written 

agreement must provide for the broker-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 
                                                                                                                                                 

relationships with banks under the exemption.  See Business Law Section Letter. 
The Agencies are mindful of the need to keep appropriate investment options, 
including low-cost options, available to investors.  However, given the cost 
structure of low-cost brokers, the Agencies expect that few such brokers would 
participate in referral arrangements under the exemption that provides for higher-
than-nominal referral fees.  Broker-dealers that do not wish to become obligated 
to perform the suitability/sophistication analyzes required by the rule also may 
continue to establish and maintain networking arrangements pursuant to the 
statutory networking exception. 

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

 55



contemporaneously with the referral in accordance with the rules of the broker-dealer’s 

applicable SRO as if the broker-dealer had recommended the securities transaction.121  

Under the sophistication analysis option, the broker-dealer must 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.122  This 

sophistication analysis is based on elements of FINRA IM-2310-3 (Suitability 

Obligations to Institutional Customers).  

 The Agencies have modified the final rule to provide for the broker-dealer to 

notify the customer, rather than the bank, if the broker-dealer determines that a high net 

worth or institutional customer, or a securities transaction to be conducted by such a 

customer, does not meet the applicable sophistication or suitability standard.123  

Providing such notification to the customer should assist the customer in deciding 

whether or not to conduct the transaction.  

5. Conditions Relating to Bank Employees 

Paragraph (b)(1) of the Proposed Rule included certain limitations on the types of 

bank employees that may receive a higher-than-nominal referral fee under the rule.  In 

particular, the Proposed Rule provided that the bank employee: be predominantly 

engaged in banking activities, other than making referrals to a broker-dealer; encounter 

                                                 
121  Rule 701(a)(3)(iii)(B). 

122  Rule 701(a)(3)(ii)(B)(1). 

123  Rule 701(a)(3)(iv). 

 56



the high net worth or institutional customer in the ordinary course of the employee’s 

assigned business for the bank; not be qualified or required to be qualified under the rules 

of a SRO; and not be subject to statutory disqualification under Section 3(a)(39) of the 

Exchange Act (other than subparagraph (E) of that Section) (“statutory 

disqualification”).124   

The proposed exemption also included other provisions related to the SRO and 

statutory disqualification conditions.  First, it required that the written agreement between 

the bank and the broker-dealer must provide for the bank and the broker-dealer to 

affirmatively determine, before a referral fee is paid to a bank employee under the 

exemption, that the employee is not subject to statutory disqualification.125  Second, it 

required that the bank provide the broker-dealer the name of the employee and such other 

identifying information that may be necessary for the broker-dealer to determine whether 

the bank employee is subject to statutory disqualification or associated with a broker-

dealer.126  And third, it required that the parties’ written agreement obligate the broker-

dealer to promptly inform the bank if it determined the bank employee was subject to 

statutory disqualification.127   

The final rule retains these provisions with the following modifications.128  In 

response to comments,129 the Agencies have modified the SRO condition in paragraph 

                                                 
124  See Proposed Rule 701(a)(1). 

125  Proposed Rule 701(a)(3)(i)(A). 

126  Proposed Rule 701(a)(2)(iii). 

127  Proposed Rule 701(a)(3)(iii)(B). 

128  See Rule 701(a)(1), (a)(2)(iii), (a)(3)(ii)(A), and (a)(3)(v)(B). 

 57



(a)(1)(A) of the Rule to provide that the employee receiving the referral fee must not be 

“registered or approved, or otherwise required to be registered or approved, in accordance 

with the qualification standards established by the rules of any self-regulatory 

organization.”  The Agencies have modified the related language in paragraph (a)(2)(iii) 

of the rule in a similar manner. 

Several commenters argued that the requirement that a bank employee encounter 

the high net worth or institutional customer “in the ordinary course of the bank 

employee’s assigned duties” was unnecessary and ambiguous.130  The Agencies have 

retained the requirement to help ensure that a bank employee making a referral under the 

rule does so as part of the employee’s duties as a bank employee and not as a sales 

representative of the broker-dealer.  However, the Agencies recognize that in the ordinary 

course of his or her assigned duties for the bank, a bank employee may encounter 

customers or potential customers outside the employee’s regular business hours or at 

locations outside of the bank, such as at social or civic functions or gatherings.  

A number of commenters contended that the bank and the broker-dealer should not 

both be required to verify that the bank employee is not subject to statutory 

disqualification and suggested that the bank and broker-dealer be permitted to allocate 

                                                                                                                                                 
129  See Business Law Section Letter. 

130  See, e.g., ABA Letter, BISA Letter, Clearing House Ass’n Letter, Comerica Bank 
Letter, and U.S. Trust Letter.  For example, some asserted that bank employees 
may be expected to identify and develop client relationships at social or other 
events and expressed concern that the language might prevent a bank employee 
from receiving a referral fee for institutional or high net worth customers 
encountered in these ways.   

 58



this responsibility between themselves.131  The Agencies have modified the rule to 

provide for these determinations to be made by the broker-dealer under the terms of the 

parties’ written agreement.132  The Agencies believe that broker-dealers are better suited 

to make this determination given their familiarity with the Exchange Act’s statutory 

disqualification standards, provided that they receive the necessary information 

concerning the employee from the bank.  A broker-dealer fulfills its responsibilities under 

paragraph (a)(3)(ii)(A) of Rule 701 if the broker-dealer determines that a bank employee 

is not subject to statutory disqualification before the employee first receives a referral fee 

under Rule 701 and at least once each year thereafter as long as the employee remains 

eligible to receive referral fees under the rule.   

As a means designed to ensure that the broker-dealer has the appropriate 

information to make these determinations, the rule continues to require that, before a 

higher-than-nominal referral fee is paid to a bank employee under the exemption, the 

bank provide the broker-dealer the name of the employee and such other identifying 

information that the broker-dealer may need to determine whether the employee is 

subject to statutory disqualification.133  Once the information for a particular employee is 

conveyed to the broker-dealer, the bank should provide at least annually its broker-dealer 

partner any changes to the identifying information initially provided under paragraph 

(a)(2)(iii) of Rule 701 for an employee who continues to make referrals and receive 

                                                 
131  See, e.g., ABA Letter, BISA Letter, Clearing House Ass’n Letter, Citigroup 

Letter, PNC Letter, and SIFMA Letter. 

132  Rule 701(a)(3)(ii)(A). 

133  Rule 700(a)(2)(iii). 

 59



referral fees under the exemption so that the broker-dealer may perform its periodic 

review of the employee’s qualifications under paragraph (a)(3)(ii)(A).  

6.  Good Faith Compliance and Corrections by Banks 

As in the proposal, the final exemption 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 exemption will 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-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-dealer the required 

information, the bank will 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 Rule 700.134 

A few commenters suggested that the Agencies strike the requirement that the 

bank seek to reclaim the higher-than-nominal portion of a referral fee.  The Agencies 

                                                 
134  Rule 701(a)(2)(iv). 

 60have retained this requirement as it helps provide employees an incentive to comply with 

the rule.135  

7. Referral Fees Permitted under the Exemption 

 Proposed Rule 701 placed certain limits on how a higher-than-nominal referral 

fee paid under the exemption may be structured.136  Some commenters argued that these 

restrictions are unnecessary in light of the other protections included in the exemption, or 

that the rule should allow a higher-than-nominal referral fee to be based on a percentage 

of any type of securities transaction conducted at a broker-dealer (rather than just 

investment banking transactions).137  On the other hand, one commenter asserted that, by 

allowing a referral fee to be based on the total amount of assets maintained in an account 

with the broker-dealer, the rule would provide an incentive for bank employees to 

provide ongoing investment advice to customers.138 

 The final rule continues to place limits on the types of referral fees a bank 

employee may receive under the exemption.  These limitations are designed to reduce the 

potential “salesman’s stake” of the bank employee in securities transactions conducted at 

the broker-dealer.  Specifically, the exemption provides that a referral fee paid under the 

                                                 
135  One commenter requested that the rule provide a similar safe harbor for broker-

dealers.  See SIFMA Letter.  Any obligations of a broker-dealer that arise by 
reason of Rule 701 run only to its bank partner under the terms of their agreement 
and the Agencies believe the issue of contractual liability between the parties is 
best addressed by the parties themselves.  As stated in the proposal, the 
Commission anticipates that it may be necessary for either FINRA or the 
Commission to propose a rule that would require broker-dealers to comply with 
the written agreements entered into pursuant to Rule 701.   

136  Proposed Rule 701(d)(4). 

137  See, e.g., Clearing House Ass’n Letter and JPMorgan Letter.      

138  See NASAA Letter. 

 61



exemption may be a dollar amount based on a fixed percentage of the revenues received 

by the broker-dealer for investment banking services provided to the customer.139  

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-dealer; (2) the quantity, price, or identity of 

securities purchased or sold over time by the customer with the broker-dealer; or (3) the 

number of customer referrals made.140   For these purposes, “predetermined” means 

established or fixed before the referral is made.  The requirement that the amount of the 

referral fee not vary based on the number of customer referrals made does not prohibit an 

employee from receiving a referral fee for each referral made by the employee under the 

exemption. 

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-dealer.  Additionally, these 

restrictions do not prevent a referral fee from being based on a fixed percentage of the 

total dollar amount of assets (including securities and non-securities assets) maintained 

by the customer with the broker-dealer.  Fees structured in this manner and consistent 

with the limitations in paragraph (d)(4)(i) of the Rule do not provide a bank employee an 

incentive to recommend the purchase or sale of particular securities.  In fact, the bank 

                                                 
139  Rule 701(d)(4)(ii). 

140  Rule 701(d)(4)(i).  A referral fee paid under the exemption may be contingent on 
whether the customer opens an account with the broker-dealer or executes one or 
more transactions in the account during the initial phases of the account. 

 62



employee would have no special incentive to recommend the purchase of any security, as 

the addition of cash or other non-security instruments to the account would count equally 

towards the employee’s compensation as any addition of securities to the account.    

8. Permissible Bonus Compensation Not Restricted 

The exemption for high net worth and institutional customers expressly provides 

that nothing in the exemption prevents or prohibits 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 Rule 700 (implementing the networking exception).141  

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. 

III.  Trust and Fiduciary Activities 
 
A.   Trust and Fiduciary Exception and Proposed Rules 
 
 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.142  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.143  In addition 

the bank must be “chiefly compensated” for such transactions, consistent with fiducia

principles and standards, on the basis of: (1) an administration or annual fee; (2) a 

ry 

                                                 
141  Rule 701(c). 

142  15 U.S.C. 78c(a)(4)(B)(ii). 

143  Id.  

 63



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.144   

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.145  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).146  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 in a manner that is not in contravention o

fiduciary principles established under applicable federal or state law, or effect the trade

some other manner that the Commission permits.

f 

 in 

tion 

                                                

147  The trust and fiduciary excep

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. 

 
144  15 U.S.C. 78c(a)(4)(B)(ii)(I). 

145  15 U.S.C. 78c(a)(4)(B)(ii)(II). 

146  15 U.S.C. 78c(a)(4)(C). 

147  15 U.S.C. 78c(a)(4)(C)(i) - (iii).  As discussed infra at Part VI.C, the Agencies 
have adopted Rule 775 that permits banks, subject to certain conditions, to effect 
trades in securities issued by an open-end company and certain variable insurance 
contracts without sending the trade to a registered broker-dealer.  Trades effected 
by a bank in accordance with Rule 775 are conducted in accordance with Section 
3(a)(4)(C) of the Exchange Act.   

 64



The proposed rules provided that a bank would meet the “chiefly compensated” 

condition in the trust and fiduciary exception if the bank’s relationship compensation 

attributable to each trust or fiduciary account exceeded 50 percent of the total 

compensation attributable to the relevant account.148  The proposed rules also included an 

exemption that would permit a bank to use a bank-wide approach to the “chiefly 

compensated” condition as an alternative to the account-by-account approach.  A bank 

using this proposed alternative would be able to use the aggregate relationship and total 

compensation that the bank received from its trust and fiduciary business as a whole to 

monitor its compliance with the chiefly compensated test.  The proposed rule allowed a 

bank to use this bank-wide alternative if, among other things, the bank’s aggregate 

relationship compensation attributable to its trust or fiduciary business as a whole equaled 

or exceeded 70 percent of the total compensation attributable to its trust or fiduciary 

business.  This bank-wide alternative was 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. 

The proposal defined the term “relationship compensation” to mean the types of 

trust and fiduciary compensation specifically identified in the trust and fiduciary 

exception.  The proposed rules also provided examples of fees that would be considered 

an administration fee or a fee based on a percentage of assets under management for 

these purposes.  For example, the proposed rules provided that fees paid by an investment 

company pursuant to a plan under 17 CFR 270.12b-1 (“12b-1 fees”) or for personal 

service or the maintenance of shareholder accounts (“service fees”) would be considered 

                                                 
148  Proposed Rule 721. 

 65



relationship compensation under the rules.  The proposed rules also implemented the 

statute’s advertising restriction and provided certain other conditional exemptions.  

B.   Joint Final Rules  

1. “Chiefly Compensated” Test and Bank-Wide Exemption Based on Two- 
  Year Rolling Averages  

A majority of commenters supported the general approach taken in the proposed 

rules implementing the trust and fiduciary exception, including the proposed bank-wide 

alternative for the chiefly compensated test.  For example, a number of commenters 

stated that the proposed bank-wide approach would provide banks an improved, workable 

and flexible method of complying with the statutory exception.149  Some commenters, 

however, opposed either the account-by-account or bank-wide alternative to the “chiefly 

compensated” requirement.  For example, some commenters argued that the account-by-

account approach was inconsistent with the terms and purposes of the trust and fiduciary 

exception.150  Another commenter argued that an account-by-account approach to the 

chiefly compensated test is the only way to help ensure that a bank does not operate a 

brokerage business out of its trust or fiduciary departments and, for this reason, 

recommended that the Agencies eliminate the bank-wide alternative.151  Some 

commenters also requested that the Agencies lower the 70 percent relationship 

compensation/total compensation percentage required by the bank-wide exemption to 60 

                                                 
149  See, e.g., ABA Letter, Roundtable Letter, U.S. Trust Letter, WBA Letter. 

150  See, e.g., Clearing House Ass’n Letter. 

151  See NASAA Letter. 

 66



percent or 50 percent to make it more consistent with the percentage required by the 

account-by-account approach.152   

After carefully considering the comments, the Agencies have retained the two 

alternative approaches in substantially the same form as proposed.  Specifically, Rule 721 

provides 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.153  The “relationship-total compensation 

percentage” for a trust or fiduciary account is 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.154   

The final rules (Rule 722) also allow a bank to use a bank-wide approach to the 

“chiefly compensated” condition as an alternative to the account-by-account approach.  

To use this bank-wide methodology, the bank must meet two conditions.  First, the 

“aggregate relationship-total compensation percentage” for the bank’s trust and fiduciary 

business as a whole must be at least 70 percent.155  The “aggregate relationship-total 

                                                 
152  See ACB Letter, CBA Letter. 

153  Rule 721(a)(1).   

154  The rule provides for this process to be accomplished by calculating the “yearly 
compensation percentage” and the “relationship-total compensation percentage” 
for the account.  See Rule 721(a)(2) and (3).    

155  Rule 722(a)(2).   

 67



compensation percentage” of a bank operating under the bank-wide approach is 

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 

its trust and fiduciary business as a whole during each of the two immediately preceding 

years.  In other words, the percentage 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.156  Second, the bank must comply with the conditions in the trust and fiduciary 

exception (other than the compensation test in Section 3(a)(4)(B)(ii)(I))157 and comply 

with Section 3(a)(4)(C) (relating to trade execution) of the Exchange Act.158   

The Agencies believe that providing banks these two alternatives is consistent 

with the purposes of the trust and fiduciary exception.  In this regard, the availability of 

these two alternatives is designed to avoid disrupting the trust and fiduciary operations of 

                                                 
156  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.  
See Rule 722(b) and (c).    

157  The Agencies have modified the bank-wide exemption to clarify that these 
conditions include the advertising restrictions contained in the trust and fiduciary 
exception as implemented by Rule 721(b).  See Rule 722(a)(1). 

158  Rule 722(a)(1). 

 68



banks.  The compensation tests in both the account-by-account and bank-wide 

approaches are designed to ensure that a bank’s trust department is not unduly dependent 

on the types of securities-related compensation not permitted by the statute.  The 70 

percent compensation threshold in the bank-wide exemption is higher than that required 

under the account-by-account approach in order to compensate for the loss of 

particularity when the chiefly compensated test is implemented and monitored on a bank-

wide basis, rather than on an account-by-account basis.  The Agencies note that several 

commenters also asserted that the proposed aggregate relationship compensation-total 

compensation percentage required by the bank-wide alternative (70 percent) would not 

disrupt the trust and fiduciary operations or customer relationships of banks in light of the 

proposal’s definition of “relationship compensation.” 

Some commenters asked that the Agencies modify how the bank-wide exemption 

could be applied in several ways.  For example, some asserted that a bank should be 

allowed to apply the 70 percent compensation threshold separately to each individual 

fiduciary business line, operating unit or geographic region of the bank, rather than only 

on an aggregate bank-wide basis.  Others asked that the Agencies allow a bank to use an 

aggregate compensation approach only for some trust or fiduciary business lines and use 

the account-by-account approach for the bank’s trust or fiduciary accounts in its 

remaining business lines.159  In addition, some asked that a bank be permitted to monitor 

compliance with the 70 percent compensation test on a combined basis with its affiliated 

entities engaged in trust or fiduciary activities (such as an affiliated bank or a subsidiary 

                                                 
159  See Clearing House Ass’n Letter. 

 69



or affiliate registered as an investment adviser).160  Some commenters also asked the 

Agencies to modify the bank-wide approach to provide for a bank’s relationship 

compensation-total compensation percentage to be calculated based on the compensation 

attributable to all of the bank’s trust and fiduciary accounts rather than the compensation 

from the bank’s “trust and fiduciary business.”161   

The Agencies believe that the bank-wide alternative as structured provides banks 

appropriate and adequate flexibility in conducting their trust and fiduciary operations 

while meeting the statute’s goals.  The bank-wide approach is designed to reflect both the 

relationship compensation and total compensation received by a bank through the 

conduct of its full range of trust or fiduciary services, and, thus, allow banks to avoid 

tracking their trust or fiduciary revenue back to one or more specific accounts.  At the 

same time, the use of two uniform methodologies (account-by-account or bank-wide) 

should facilitate the review of bank compliance during the bank supervisory process and 

aid the development of software and related systems by banks and their service providers 

for compliance purposes.  Furthermore, because the broker exceptions for a bank in 

Section 3(a)(4)(B), including the trust and fiduciary exception, apply to each bank 

individually and are not available to a nonbank entity, including a nonbank subsidiary or 

affiliate of a bank, the Agencies have not modified the rules to allow a bank to monitor its 

compliance with the compensation limit in Rule 721 on a combined basis with one or 

more affiliated banks, subsidiaries or affiliates.  The Agencies also do not believe that 

                                                 
160  See Citigroup Letter, Clearing House Ass’n Letter, Mellon Bank, N.A. 

(“Mellon”) Letter, PNC Letter, ABA Letter. 

161  See, e.g., ABA Letter, Joint ABA/ABASA/Clearing House Ass’n Letter of July 
16, 2007, BISA Letter, Clearing House Ass’n Letter, Comerica Bank Letter. 

 70



requiring banks to monitor their compliance with the 70 percent compensation test on a 

bank-wide basis, rather than on an individual business line or operating unit basis, will 

impose significant additional burdens on banks.162 

A bank has the flexibility to elect to use a calendar year or the bank’s fiscal year 

for purposes of complying with the compensation provisions of either the account-by-

account or bank-wide approach.163  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 is 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 two-year averaging is designed 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.   

Some commenters asked that the Agencies clarify when a bank must commence 

monitoring its compliance with the two-year rolling compensation test.  As discussed 

infra in Part VI.F, a bank must comply with the exceptions in Section 3(a)(4)(B) of the 

Exchange Act and the final rules starting the first day of the bank’s first fiscal year 

commencing after September 30, 2008.  Thus, a bank that operates on a calendar-year 

basis must start monitoring its compliance with the compensation requirements on either 

an account-by-account or bank-wide basis beginning January 1, 2009, and would first 
                                                 
162  The Agencies note, for example, that a bank that operates under the bank-wide 

approach may use different systems across its trust or fiduciary business lines, 
units or regions to monitor its compensation within those business lines, units or 
regions, provided that such information is then aggregated on a bank-wide basis 
as provided in Rule 722. 

163  Proposed Rule 721(a)(6). 

 71



have to meet the applicable compensation restriction after the conclusion of 2010 (based 

on the average of the bank’s year-end compensation ratios for 2009 and 2010).164  To 

allow banks sufficient time to obtain and verify the relevant compensation data, the 

Agencies have modified both the account-by-account approach and the bank-wide 

approach to provide banks up to 60 days after the end of a year to calculate their 

compliance with the relevant compensation restriction.165  While the rules provide for a 

bank’s compliance with the compensation tests to be determined based solely on 

calculations as of year-end, banks are encouraged to monitor their trust and fiduciary 

compensation on a regular basis as appropriate to identify and address potential 

compliance issues before the end of the relevant two-year period.  

2. “Relationship Compensation” 

Both the account-by-account and bank-wide approaches are based on the ratio of 

the relationship compensation attributable to a trust or fiduciary account or a bank’s trust 

and fiduciary business to the total compensation attributable to the account or business.  

The proposal defined the term “relationship compensation” to mean the types of trust and 

fiduciary compensation identified in the statute:  an administration fee; an annual fee 

(payable on a monthly, quarterly or other basis); a fee based on a percentage of assets 

                                                 
164  This same schedule also would apply to a bank that operates on an October 1st to 

September 30th fiscal year, but that elects to use the calendar year for purposes of 
monitoring its compliance with the chiefly compensated test.  The Agencies 
believe the delay and phased-in nature of the compensation tests should provide 
banks as a general matter sufficient notice and time to address potential 
compensation issues across the full range of their trust and fiduciary accounts, 
including personal and charitable accounts and estates.  See Business Law Section 
Letter. 

165  See Rule 721(a)(3)(ii) and Rule 722(c)(2). 

 72



under management; a flat or capped per order processing fee 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 any combination of these fees.166  The proposed rules also 

provided examples of fees that would be considered an administration fee or a fee based 

on a percentage of assets under management for these purposes.  For example, the 

proposed rules provided that 12b-1 fees,167 service fees,168 and fees for certain sub-

transfer agent, sub-accounting or related services169 paid by an investment company on 

the basis of assets under management would be considered relationship compensation 

under the rules. 

The Agencies received numerous comments on the definition of relationship 

compensation.  A number of commenters supported the definition including, in particular, 

the examples recognizing 12b-1 and service fees as relationship compensation.  For 

example, some commenters stated that treating these fees as relationship compensation is 

                                                 
166  Proposed Rule 721(a)(4). 

167  Proposed Rule 721(a)(4)(iii)(A). 

168  Proposed Rule 721(a)(4)(iii)(B). 

169  See Proposed Rule 721(a)(4)(i) and (iii)(C).  Specifically, these fees, which are 
hereinafter referred to as “sub-transfer agent and related fees” are paid for (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



consistent with the terms and purposes of the trust and fiduciary exception and “critical” 

to ensuring that the rules do not disrupt the trust and fiduciary operations and customer 

relationships of banks.170  Other commenters, however, argued that all 12b-1 fees, or the 

portion of such fees paid for distribution expenses, should be excluded from relationship 

compensation.171  These commenters asserted that treating 12b-1 fees as relationship 

compensation would allow banks to have a “salesman’s stake” in their customers’ 

securities transactions in contravention of the purposes of the statute, result in the 

disparate treatment of banks and registered investment advisers, and create confusion as 

to how 12b-1 fees should be treated under other aspects of the federal securities laws and 

rules of the NASD (now FINRA).   

In addition, many commenters asked that the Agencies clarify whether additional 

types of fees not mentioned in the proposed rules would qualify as relationship 

compensation.  For example, commenters asked the Agencies to confirm that fees 

separately charged a trust or fiduciary customer for custodial services and fees charged or 

earned in connection with securities lending and borrowing transactions conducted for a 

trust or fiduciary customer are relationship compensation.   

After carefully considering the comments, the Agencies have retained, consistent 

with the statute, the definition of relationship compensation as any compensation that a 

bank receives that is attributable to a trust or fiduciary account and 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 (an “AUM fee”), (4) a flat or 
                                                 
170  See Joint ABA/ABASA/Clearing House Ass’n Letter of June 7, 2007. 

171  See NASD Letter, NASAA Letter. 

 74



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.172   

The final rules also continue to list all 12b-1 fees that are paid on the basis of 

assets under management and attributable to a trust or fiduciary account (under the 

account-by-account test) or the bank’s trust and fiduciary business as a whole (under the 

bank-wide test) as examples of AUM fees that are relationship compensation.  The 

Agencies believe that treating 12b-1 fees in this manner is consistent with both the 

language and purposes of the trust and fiduciary exception.  When paid on the basis of a 

percentage of assets under management these fees fall within the types of fees expressly 

permitted by the trust and fiduciary exception.  12b-1 fees that are paid on the basis of 

assets under management also are distinguishable from the types of non-relationship 

compensation, such as front-end or back-end sales loads173 or per-order transaction fees 

that exceed a bank’s costs, that are limited by the statute’s chiefly compensated test.   

Treating 12b-1 fees in this manner also will avoid significant disruptions to the 

trust and fiduciary operations of banks and, when viewed in light of other provisions and 

                                                 
172  Rule 721(a)(4).  For banks operating under the bank-wide alternative, fees of 

these types are relationship compensation if they are attributable to the bank’s 
trust or fiduciary business as a whole.  See Rule 722(c)(1). 

173  A front-end sales charge is a charge that is used to finance sales or sales 
promotion expenses and that is included in the public offering price of the shares 
of an investment company.  A deferred sales charge is an amount properly 
chargeable to sales or promotional expenses that is paid by a shareholder of an 
investment company after purchase of the company’s shares but before or upon 
redemption.  See FINRA Rule 2830(b)(8)(B) and (c); 17 CFR 270.6c-10. 

 75



protections, is consistent with investor protection.  Many bank trust and fiduciary 

departments, particularly those that act as a corporate trustee or as a trustee or fiduciary 

for employee benefit plans, receive a significant portion of their trust and fiduciary 

compensation through payments made under a 12b-1 plan.     

Importantly, as provided in the trust and fiduciary exception, all 12b-1 fees 

received by a bank must be consistent with the fiduciary principles and standards 

governing the bank-customer relationship,174 and the bank’s compliance with these 

principles and standards will continue to be regularly examined by bank examiners 

during the bank supervisory and examination process.  In addition, the treatment of 12b-1 

fees that are paid on the basis of assets under management and service fees as 

“relationship compensation” for purposes of the trust and fiduciary exception and related 

rules does not affect the treatment of such fees under other provisions of the federal 

securities laws, the federal banking laws, applicable trust or fiduciary principles and 

standards, or the rules of an SRO.  Thus, for example, the treatment of 12b-1 fees that are 

paid on the basis of assets under management and service fees as relationship 

                                                 
174  Section 802(f) of the Uniform Trust Code, for example, provides that a trustee 

may receive compensation from an investment company in which the trustee has 
invested trust funds and receipt of such compensation will not be presumed to 
represent a conflict of interest if the investment otherwise complies with the 
jurisdiction’s prudent investor rule.  See Uniform Trust Code, § 902(f) and related 
comment (2005).  In addition, a bank’s receipt of 12b-1 fees from an employee 
benefit plan for which the bank acts as a fiduciary is governed by the Employee 
Retirement Income Security Act (“ERISA”) and the regulations and guidance 
issued by the Department of Labor thereunder.  See 29 U.S.C. 1001 et seq.; DOL 
Advisory Opinion 2003-09A (June 25, 2003) (discussing conditions under which 
a directed trustee may receive 12b-1 fees under ERISA). 

 76



compensation for purposes of these rules does not alter or affect the treatment of, or 

limitations imposed on, these fees under FINRA Rule 2830.175   

In light of the comments received, the Agencies have modified Rule 721 to 

provide additional examples of the types of fees that qualify as relationship compensation 

under the statute and the rules.  For example, the Agencies have modified the rule to 

include, as additional examples of an administration fee, compensation received by a 

bank (1) for disbursing funds from, or for recording payments to, a trust or fiduciary 

account; (2) in connection with securities lending and borrowing transactions conducted 

for a trust or fiduciary account; and (3) for custody services provided to a trust or 

fiduciary account (whether or not separately charged).176  In addition, the Agencies have 

included (1) as an example of an annual fee, an annual fee paid for assessing the 

investment performance of a trust or fiduciary account or for reviewing such an account’s 

compliance with applicable investment guidelines or restrictions, and (2) as an example 

of an assets under management fee, a fee based on the financial performance, such as 

capital gains or capital appreciation, of trust or fiduciary assets under management.  The 

Agencies believe the characterization of these fees comports with the manner in which 

                                                 
175  The rules also do not alter or affect the ability of a nonbank registered investment 

adviser to receive 12b-1 fees under the federal securities laws or the rules of an 
SRO.  The “broker” exceptions for banks in Section 3(a)(4)(B) of the Exchange 
Act, including the trust and fiduciary exception, are not available to nonbank 
entities such as nonbank investment advisers. 

176  Rule 721(a)(4)(i)(B), (C) and (D).  Because securities lending/borrowing fees and 
custody fees may be charged on an assets under management basis, the rule also 
provides that these fees are relationship compensation when charged in this 
manner.  Rule 721(a)(4)(iii)(E).  As with other types of relationship 
compensation, the fees that a bank receives for effecting securities 
lending/borrowing transactions for a trust or fiduciary account must be consistent 
with applicable fiduciary principles and standards. 

 77



banks generally receive compensation for these services.  Several commenters noted that 

banks currently may receive 12b-1 fees, service fees or sub-transfer agent and related fees 

either directly from a mutual fund or from the fund’s distributor, transfer agent, 

administrator or adviser.177  In light of these comments, the Agencies have eliminated the 

language in the proposed rules that required that these types of fees be “paid by an 

investment company.” 

The examples of an administration fee, annual fee and an asset under management 

fee included in Rule 721(b) are provided only for illustrative purposes.  Other types of 

fees or fees for other types of services could be an administration fee, annual fee or an 

AUM fee.  In addition, an administration fee, annual fee or assets under management fee 

attributable to a trust or fiduciary account or a bank’s trust or fiduciary business 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.    

Some commenters asserted that a bank should be permitted to include within its 

relationship compensation any per-transaction securities processing fee it charges as a 

directed trustee or in another fiduciary capacity even if the fee exceeds the bank’s costs in 

processing the transaction.178  The statute, however, expressly provides that a per-order 

securities processing fee may be counted towards the statute’s chiefly compensated 

                                                 
177  See Investment Company Institute (“ICI”) Letter, Federated Investors, Inc. 

(“Federated Investors”) Letter.   

178  See, e.g., Wells Fargo & Company (“Wells Fargo”) Letter, State Street Corp. 
Letter, Mellon Letter. 

 78



requirement only if the fee is “equal to not more than the cost incurred by the bank in 

connection with executing securities transactions” for its trust or fiduciary customers.  

For this reason, the Agencies have not modified the rule in the manner requested.   

However, as discussed further in Part V, the Agencies have modified the custody 

exemption (Rule 760) to permit banks that accept securities orders as a directed trustee to 

do so under that exemption in lieu of the trust and fiduciary exception and related rules.  

In addition, as the Agencies explained in the proposal, a per order processing fee included 

in relationship compensation may include the fee charged by the executing broker-dealer 

as well as any additional fixed or variable costs incurred by the bank in processing the 

transaction.  If a bank includes any such additional fixed or variable costs in the per order 

processing fees it includes in its relationship compensation, the bank should maintain 

appropriate policies and procedures governing the allocation of these costs to the orders 

processed for trust or fiduciary customers.  This should help ensure that profits derived 

from per trade charges are not masked as costs of processing the trades and thereby 

included in relationship compensation. 

3.  Excluded Compensation 

A number of commenters asserted that the revenues derived from securities 

transactions conducted by a bank for a trust or fiduciary customer under a different 

exception or exemption (such as the exemption provided in Rule 771 for transactions in 

Regulation S securities) should be excluded from the account-by-account or bank-wide 

compensation test completely.179  Others asked that certain other types of fees, such as 

internal credits from other areas of the bank, credits received from broker-dealers for 

                                                 
179  See, e.g., Institute of Int’l Bankers (“IIB”) Letter, Clearing House Ass’n Letter.  

 79



brokerage or research services in accordance with Section 28(e) of the Exchange Act, or 

revenues earned from providing trust or fiduciary services to mutual funds, be excluded 

from the chiefly compensated calculation as well.   

As discussed in Part I.C supra, if more than one “broker” exception or exemption 

is available for a securities transaction effected by a bank for a customer, the bank may 

choose the exception or exemption on which it relies in effecting the transaction.  In light 

of the comments received, the Agencies have modified Rules 721 and 722 to explicitly 

provide that, if a bank effects a securities transaction for a trust or fiduciary customer in 

accordance with the terms of an exception or exemption other than Rule 721 or Rule 722, 

the bank may, at its election, exclude the revenues associated with those transactions 

from the applicable relationship-total compensation calculation in Rule 721 or Rule 

722.180  As the rules provide, if a bank elects to exclude the revenues associated with 

transactions conducted under another exception or exemption, the bank must exclude 

such revenue from both the bank’s relationship compensation (if the compensation would 

otherwise qualify as relationship compensation) and total compensation.  Of course, the 

bank also must comply with the conditions applicable to the other available exception or 

exemption on which the bank chooses to rely.181 

                                                 
180  Rule 721(b) and Rule 722(d). 

181  Some commenters asserted that a bank should be allowed to include in its 
relationship compensation all of the revenue from securities transactions 
conducted for a trust or fiduciary account under another exception or exemption, 
regardless of whether that revenue otherwise qualifies as relationship 
compensation.  The Agencies have not amended the rule in this manner as it is 
inconsistent with the terms of the trust and fiduciary exception which sets forth 
the types of fees that are included in relationship compensation. 

 80In addition, compensation that is not derived from the provision of trust or 

fiduciary services should not be included in a bank’s relationship or total compensation 

under either the account-by-account or bank-wide alternative.  Such compensation 

includes, for example, (1) revenue earned by a trust or fiduciary department from 

providing back-office services to an affiliated or unaffiliated party,182 (2) revenue from 

the sale of an office or assets of the trust department, or from the provision on a stand-

alone basis of other services (such as custody services or the sale of portfolio 

management software to a third party that independently operates and uses the software 

in connection with its own business) that do not involve trust or fiduciary services as 

defined in section 3(a)(4)(D) of the Act; and (3) internal payments or credits allocated to 

a bank’s trust or fiduciary department or unit from another department or unit of the bank 

for deposits and other similar services not involving a security.  Credits received by a 

bank from a broker-dealer for brokerage and research services provided by a broker-

dealer in accordance with section 28(e) of the Act (15 U.S.C. 78bb(e)) and the 

regulations issued thereunder also should be excluded from the compensation tests.  The 

Agencies do not believe these credits constitute compensation to the bank for purposes of 

the exception and rules because these credits must be reasonable in relation to the value 

of the brokerage and research provided by the broker-dealer in connection with the 

bank’s exercise of investment discretion for its fiduciary accounts. 

4. Trust or Fiduciary Accounts 

                                                 
182  On the other hand, the revenue derived from providing fiduciary services to 

investment companies or companies affiliated with the bank should be included in 
the relevant chiefly compensated calculation. 

 81



 The final rules, like the proposal, define a trust or fiduciary account as an account 

for which the bank acts in a trustee or “fiduciary capacity” as that term is defined in 

Section 3(a)(4)(D) of the Exchange Act.183   This definition is based on the definition of 

“fiduciary capacity” 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.   

 Section 3(a)(4)(D) identifies a number of particular situations where a bank serves 

in a fiduciary capacity.184  The definition also provides that a bank acts in a “fiduciary 

capacity” if it acts “in any other similar capacity” to those specifically identified.  

Accordingly, the scope of the term “fiduciary capacity” is not fixed in time. 

The Agencies recognize, moreover, that different nomenclature may be used to 

identify a fiduciary capacity in the relevant governing documents or state laws.  For 

example, the Uniform Probate Code uses the term “Personal representative” and similar 

successor titles in place of the terms “executor” or “administrator” to identify the 

representative of a decedent; the Uniform Custodial Trust Act uses the terms 

“Conservator” and “Custodial trustee” to refer to persons that act as a fiduciary for 

another person who has become incapacitated; and the Uniform Transfers to Minors Act 

uses both the terms “Conservator” and “Custodian” to refer to fiduciaries that act on 

behalf of a minor.185   

                                                 
183  Rule 721(a)(5).    

184  Section 3(a)(4)(D) of the Exchange Act provides that a bank acts in a “fiduciary 
capacity” if, among other situations, the bank has investment discretion on behalf 
of another.  Thus, for example, if a bank has investment discretion over an escrow 
account on behalf of another, the bank would be acting in a “fiduciary capacity” 
with respect to the account.   

185  The text of and additional information on these Uniform Codes and Acts, which 
are developed under the auspices of the National Conference of Commissioners of 

 82



 Some commenters asked whether a bank that engages in trust or fiduciary 

activities may conduct securities transactions under the trust and fiduciary exception and 

related rules even if the bank does not maintain a separate trust department or has not had 

to obtain formal trust powers from its appropriate federal banking agency.186  The trust 

and fiduciary exception and related rules do not require that a bank effecting securities 

transactions for a customer in a trust or fiduciary capacity do so through a separate trust 

department or have obtained formal trust powers from its appropriate federal banking 

agency.  However, securities transactions conducted for a trust or fiduciary customer 

under the exception and related rules must be effected in a department of the bank “that is 

regularly examined for compliance with fiduciary principles and standards” by the bank’s 

appropriate federal or state banking supervisor.187  As stated in the proposal, the 

                                                                                                                                                 
Uniform State Laws (“NCCUSL”), may be found on NCCUSL’s website at 
http://www.nccusl.org. 

186  See, e.g., ACB Letter, Roundtable Letter.  Federal savings associations, for 
example, are not required to obtain approval from their appropriate federal 
banking agency to act as a trustee for an individual retirement account under 
section 408(a) of the Internal Revenue Code.  See 12 CFR 550.580. 

187  15 U.S.C. 78c(a)(4)(B)(ii); Rule 722(a)(1).  A bank effecting transactions for trust 
or fiduciary customers through a department examined for compliance with trust 
or fiduciary principles 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.   

 83



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 stan

 

dards.188 

                                                

5. Exemptions for Special Accounts, Foreign Branches, Transferred 
Accounts, and a De Minimis Number of Accounts 

  
The Agencies also proposed a rule (Proposed Rule 723) that 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.  As proposed, Rule 723 allowed a 

bank, in calculating its compensation under either approach, to exclude compensation 

received from any trust or fiduciary account open only for a short period of time (less 

than 3 months) or acquired within the past 12 months as part of a merger or similar 

transaction.  In addition, the Proposed Rule allowed a bank using the account-by-account 

approach, subject to certain conditions, to (1) exclude the lesser of 1 percent or 500 of its 

trust or fiduciary accounts in a year from the chiefly compensated test, and (2) transfer 

any trust or fiduciary account ultimately determined to be non-conforming to a registered 

broker-dealer or an unaffiliated entity exempt from registration within 3 months of the 

end of the relevant year.   

Commenters generally favored these exemptions.  One commenter, however, 

argued that these exemptions should be eliminated because they would allow banks to 

 
188  The OTS, for example, is in the process of revising its examination procedures to 

provide for the regular examination of individual retirement accounts held by a 
federal savings association as trustee for compliance with fiduciary principles and 
standards. 

 84



manipulate the chiefly compensated test.189  Several commenters also requested that the 

Agencies adopt an additional exemption permitting banks to exclude trust and fiduciary 

accounts held at a foreign branch of a bank from the chiefly compensated tests.190  These 

commenters contended that few, if any, of the trust and fiduciary accounts of a foreign 

branch (other than an offshore “shell” branch servicing U.S. branches of the bank) likely 

are to be held by or on behalf of a U.S. person and, accordingly, the costs of applying the 

chiefly compensated test to the foreign branches of a U.S. bank would significantly 

outweigh any potential benefits to U.S. persons.  After carefully considering these 

comments, the Agencies have adopted, without change, the exemptions included in 

Proposed Rule 723.  In addition, the Agencies have adopted a new conditional exemption 

(Rule 723(c)) for trust and fiduciary accounts held at a foreign branch of a bank. 

Rule 723(a) permits a bank that uses either the account-by-account or bank-wide 

compensation test to exclude any trust or fiduciary account that was open for a period of 

less than 3 months during the relevant year.191  Rule 723(b) permits a bank to exclude, 

for purposes of determining its compliance with either compensation test, any trust 

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.

or 

                                                

192  A bank 

that elects to use Rule 723(a) or (b) for one or more accounts must exclude both the 

 
189  NASAA Letter. 

190  See ABA Letter, Clearing House Ass’n Letter, Joint ABA/ABASA/Clearing 
House Ass’n Letter of July 16, 2007. 

191  Rule 723(a). 

192  Rule 723(b). 

 85



relationship compensation and total compensation attributable to such accounts for 

purposes of the applicable compensation test.   

Rule 723(c) provides a new exemption under which a bank using the bank-wide 

approach may exclude for purposes of the chiefly compensated test the trust or fiduciary 

accounts held at a “non-shell” foreign branch of the bank, provided that the bank has 

reasonable cause to believe that the trust or fiduciary accounts of the foreign branch held 

by or for the benefit of a U.S. person constitute less than 10 percent of the total trust or 

fiduciary accounts of the foreign branch.193  The rule provides that a bank will be deemed 

to have reasonable cause to believe that less than 10 percent of the total number of trust 

or fiduciary accounts of the foreign branch are held by or for the benefit of a U.S. person 

if the principal mailing address for the accountholder(s) and beneficiary(ies) of the 

account is not in the United States, or the records of the foreign branch indicate that the 

accountholder(s) and beneficiary(ies) of the account is not a U.S. person as defined in 17 

CFR 230.902(k). 

The rule defines a “non-shell foreign branch” of a bank to mean a branch of the 

bank that is located outside the United States and provides banking services to residents 

of the foreign jurisdiction in which the branch is located, and for which the decisions 

relating to day-to-day operations and business of the branch are not made by an office of 

the bank located in the United States.194  The Agencies believe this exemption provides 

                                                 
193  The Agencies expect that few, if any banks, that use the account-by-account 

approach to the chiefly compensated test will have foreign branches engaged in 
trust or fiduciary services and, accordingly, have limited the exemption to banks 
that use the bank-wide approach. 

194  This definition is designed to exclude branches that are established in certain 
offshore jurisdictions primarily to provide services to U.S. customers and, for this 
reason, are managed on a day-to-day basis from the United States. 

 86



appropriate relief to banks with respect to foreign branches where the records of the bank 

indicate that it is not significantly engaged in providing trust or fiduciary services to U.S. 

customers.   

Rule 723(e) permits a bank using the account-by-account approach to exclude, for 

purposes of the chiefly compensated test, the lesser of (1) 1 percent of the total number of 

trust or fiduciary accounts held by the bank; or (2) 500 accounts.195  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.196  In addition, the bank must 

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.197   

The Agencies believe these exclusions reduce administrative burdens and 

facilitate compliance.  A bank, consistent with its fiduciary duties, may need to conduct a 

higher level of securities transactions for a trust or fiduciary account at certain times, 

such as shortly after the account is established or acquired from another person or shortly 

before the account is closed.198  The exclusions in Rule 723(a), (b) and (d) are designed 

                                                 
195  Rule 723(d).  Under the rule, if a bank has less than 100 trust or fiduciary 

accounts in the aggregate, the bank may exclude 1 account under the exemption in 
any given year.   

196  Rule 723(d)(3).  

197  Rule 723(d)(1). 

198  For example, after a trust or fiduciary account is acquired or established, the bank 
may need to conduct a number of securities transactions to invest or rebalance the 
account’s holdings in accordance with the terms of the agreement establishing the 
account or, in cases where the bank has investment discretion, to implement the 
bank’s investment strategy for the account. 

 87



to help prevent such short-term fluctuations in the amount of securities transaction

conducted for a trust or fiduciary account from distorting, or causing a bank to fail, the 

relevant compensation test.  At the same time, these exclusions promote compliance by 

requiring that the bank bring the relevant accounts into compliance within a short and 

prescribed period of time.  For this reason, the Agencies do not believe it would be 

appropriate to expand the Rule 723(d) to allow a bank to exclude an account from the 

chiefly compensated test in consecutive years as requested by some commenters.  Some 

commenters also asked the Agencies to raise the 500 account maximum in Rule 723(d) to 

avoid discriminating against large banks.

s 

                                                

199  The Agencies expect that most banks that 

have more than 50,000 trust and fiduciary accounts, and thus would be subject to the 500 

account cap in Rule 723(d), will operate under the bank-wide test and for this reason have 

not made the requested change.  

 Rule 723(c) also provides that a bank that uses the account-by-account approach 

will 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-dealer.200 

  

 
 

199  See, e.g., ACB Letter; Clearing House Ass’n Letter. 

200  Rule 723(c). 

 88



6. Advertising Restrictions 

 Proposed Rule 721(b) implemented the advertising restrictions in 

Section 3(a)(4)(B)(ii)(II) of the Act applicable to banks conducting securities transactions 

under the trust and fiduciary exception.  No commenters opposed the advertising 

restrictions of the rule and the Agencies have adopted these restrictions as proposed.  The 

final rules provide that a bank complies with the advertising restriction applicable under 

either Rule 721 or 722 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.201 

 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).202  Other types of material or information that is not distributed 

through public media, such as mailings or e-mails to a bank’s own customers, are not 

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 

                                                 
201  Rule 721(b). 

202  Rule 721(b)(2) (referencing Rule 760(g)(2)). 

 89



prominence of the information presented—and not simply the length of text or 

information devoted to a particular subject—should be considered.    

IV. Sweep Accounts and Transactions in Money Market Funds 

Exchange Act Section 3(a)(4)(B)(v) (“sweep exception”) 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.”203  To provide banks with guidance on the sweep exception, 

Proposed Rule 740 defined several terms used in the exception, including the terms 

“money market fund” and “no-load.”204  The Agencies also requested comment on a 

separate exemption (Proposed Rule 741) that would permit banks, without registering as 

a broker, to effect transactions in securities issued by a money market fund on behalf of a 

customer in a broader set of circumstances, subject to certain conditions.205   

Most commenters that addressed Proposed Rules 740 and 741 supported the rules 

and Rule 741 in particular.206   One commenter objected to the exemption in Rule 741 on 

the basis that it would permit banks to effect transactions in money market funds that did 

not meet the “no-load” requirements of the sweep exception.207  Another commenter 

                                                 
203  See Exchange Act Section 3(a)(4)(B)(v) (15 U.S.C. 78c(a)(4)(B)(v)).     

204  Proposed Rule 740(b) and (c). 

205  Proposed Rule 741. 

206  See, e.g., Federated Investors Letter, ICBA Letter, Clearing House Ass’n Letter, 
ABA Letter.   

207  See, e.g., NASAA Letter. 

 90



asked that the Agencies clarify whether a bank may effect transactions under the rules for 

deposits held by another bank. 

A. Rule 740: Definition of Terms Used in Sweep Exception 

As under the proposal, the final rule defines a “money market fund” for purposes 

of the sweep exception to mean an open-end investment 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-7.208  In addition, consistent with FINRA rules, 

the final rule provides that a class or series of securities of an investment company will be 

considered “no-load” if (1) the class or series is not subject to a sales charge or a deferred 

sales charge; and (2) total charges against net assets of the class or series of securities for 

sales or sales promotion expenses, personal service, or the maintenance of shareholder 

accounts do not exceed 0.0025 of average net assets annually.209  A bank may effect 

                                                 
208  Rule 740(b).  One commenter requested that Rule 740(b) be modified to allow 

banks to sweep deposits into an unregistered investment company that operates 
pursuant to Rule 12d1-1 under the Investment Company Act (17 CFR 270.12d1-
1).  See State Street Corp. Letter.  The statutory sweep exception, however, 
provides only for deposit funds to be swept into an investment company 
“registered under the Investment Company Act of 1940.”   Exchange Act Section 
3(a)(4)(B)(v). 

209  See Rule 740(c); FINRA Rule 2830.  Consistent with FINRA Rule 2830, charges 
for the following are 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: (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, 

 91



transactions under the sweep exception and Rule 740 as part of a program to sweep 

deposit funds of, or collected by, another bank into a no-load money market fund in 

accordance with the exception and the Rule.  

B. Exemption Regarding Money Market Fund Transactions 

After carefully considering the comments, the Agencies have adopted Rule 741, 

which permits 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.210   To 

qualify for this exemption, the bank must provide the customer, directly or indirectly, 

some other product or service, the provision of which would not, in and of itself, require 

the bank to register as a broker-dealer under Section 15(a) of the Exchange Act.211  

Examples of other products or services that may be a qualifying “other” product or 

service include an escrow, trust, fiduciary or custody account, a deposit account or a loan 

or other extension of credit.  The Agencies have modified the rule to also permit a bank 

to effect transactions under the exemption on behalf of another bank as part of a program 

for the investment or reinvestment of the deposit funds of, or collected by, the other 

bank.212  This change is designed to allow banks to provide sweep services to other banks 

under the exemption, as they may do under the sweep exception itself. 

The final exemption continues to allow banks to effect transactions only in 

securities of a registered money market fund.  In addition, the rule continues to provide 
                                                                                                                                                 

and transmitting proxies executed by beneficial owners of investment company 
shares. 
 

210  Rule 741. 

211  Rule 741(a)(1)(A). 

212  Rule 741(a)(1)(B). 

 92



that, if the class or series of money market fund securities is not no-load (as defined in 

Rule 740), the bank may not characterize or refer to the class or series of securities as no-

load and the bank must provide the customer, not later than at the time the customer 

authorizes the bank to effect the transactions, a prospectus for the securities.213  The 

Agencies believe these conditions and limitations provide bank customers adequate 

protections in light of the limited nature of the transactions permitted under the 

exemption.214   In addition, the 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 FINRA rules.  

V. Safekeeping and Custody  

A. Background  

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 
                                                 
213  Rule 741(a)(2)(ii).  If a bank relies on the exemption to sweep the deposits of 

another bank into a money market fund that is not “no-load,” then neither the 
deposit-holding bank nor the sweeping bank may characterize the fund as a “no-
load” fund, and either the deposit-taking bank or the sweeping bank must provide 
the customer with a prospectus for the fund within the time prescribed by the rule.   
See Rule 741(a)(2)(ii)(A) and (B). 

214  Some commenters requested that the prospectus-delivery requirement be 
eliminated or modified so that delivery is required before a transaction is effected 
rather than before the customer authorizes the transaction. See, e.g., ABA Letter, 
Clearing House Ass’n Letter, and HSBC Bank Letter.  The final rule retains this 
requirement to ensure that a customer receives notice that its funds are to be 
invested in a fund that is not “no-load” before the customer authorizes the 
transaction(s).  If a customer’s funds are invested in a no-load fund and the bank 
is authorized, under the terms of its agreement with the customer to alter the 
specific fund into which the customer’s balances are invested, the bank should 
provide the customer a prospectus for any money market fund that is not a “no-
load” fund prior to the date on which the bank first invests the customer’s 
balances in the fund.       

 

 93



and safekeeping exception”).  In particular, this exception allows a bank to perform the 

following activities 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.215 

The proposed rules included an exemption to 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 

                                                 
215   15 U.S.C. 78c(a)(4)(B)(viii). 

 94



custodian.216  In addition, the proposed exemption allowed banks, subject to certain 

conditions, to accept orders for securities transactions on an accommodation basis from 

other types of custody accounts.217 

Some commenters contended that an exemption for custodial order-taking activity 

is unnecessary because, they argued, order-taking activity is permitted directly under the 

statutory exception.218   Other commenters stated that the exemption was important 

because it would allow banks to continue to provide order-taking services to employee 

benefit plans and individual retirement accounts and similar accounts, or that the 

restrictions in the exemption were reasonable.219   Another commenter, however, 

objected to the proposed exemption arguing that permitting custodial banks to take or

for securities is inconsistent with functional regulation.

ders 

0   

                                                

22

B. Rule 760: Custody Exemption  

After carefully considering the comments, the Agencies have adopted Rule 760.  

The Agencies have crafted the exemption to allow banks to continue to accept securities 

orders in a custodial capacity and to permit bank customers to take advantage of those 

order-taking services subject to important conditions designed to limit the scope of the 

activity and provide appropriate investor protections.  In this way, the Agencies believe 

the exemption is consistent with functional regulation and the purposes of the GLBA.   
 

216  Proposed Rule 760(a). 

217  Proposed Rule 760(b). 

218   See, e.g., Union Bank Letter, Harris Bank Letter, Clearing House Ass’n Letter, 
ABA Letter. 

219  See, e.g., The Charles Schwab Corp. (“Schwab”) Letter, ICBA Letter. 

220   See NASAA Letter. 

 95



Rule 760 and the other final rules do not implement the statutory custody and 

safekeeping exception.221  A bank does not need to rely on the custody exemption in Rule 

760 to the extent the bank conducts other custodial activities permitted by Section 

3(a)(4)(B)(viii)(I)(aa)-(ee) (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 final rules (e.g., Rule 772, which permits banks to effect 

securities lending or borrowing transactions on behalf of certain non-custodial 

customers).222  In addition, a bank would not have to rely on Rule 760 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 custody exemption. 

                                                 
221  The Agencies asked for comment on whether the Agencies should adopt rules to 

implement the statutory custody and safekeeping exception.  No commenters 
requested that the Agencies do so at this time.  

222  One commenter asserted that a bank would not “accept” a securities order if it 
received the order from a custodial customer and at the customer’s request 
transmitted the order to a broker-dealer selected by the customer.  See Union 
Bank Letter.  Such activities, however, constitute “accepting” a securities order 
for purposes of Rule 760 and a bank engaged in such activities for a custodial 
customer must comply with Rule 760 unless some other exception or exemption 
is available for the transaction (e.g., Section 3(a)(4)(B)(x) of the Act if the 
transaction involves municipal securities).    

 96



1. Order-Taking for Employee Benefit Plan Accounts and Individual 

Retirement or Similar Accounts 

We are adopting, largely as proposed, the sections of Rule 760 providing that a 

bank will not be considered a broker 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” or an “individual retirement account or similar account” for which 

the bank acts as a custodian.223  The rule defines an “employee benefit plan account” as a 

pension plan, retirement plan, profit sharing plan, bonus plan, thrift savings plan, 

incentive plan, or other similar plan, and provides a number of non-exclusive examples of 

plans that meet this definition.224  The rule defines an “individual retirement account or 

similar account” to mean an individual retirement account as defined in Section 408 of 

the Internal Revenue Code (26 U.S.C. 408), a Roth IRA as defined in Section 408A of 

the Internal Revenue Code (26 U.S.C. 408A), a health savings account as defined in 

Section 223(d) of the Internal Revenue Code (26 U.S.C. 223(d)), an Archer medical 

savings account as defined in Section 220(d) of the Internal Revenue Code (26 U.S.C. 

                                                 
223   See Rule 760(a).   

224   Rule 760(h)(4). The rule provides that the term “employee benefit plan account” 
includes, 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.   

 97



220(d)), a Coverdell education savings account as defined in Section 530 of the Internal 

Revenue Code (26 U.S.C. 530), or other similar account.225 

A number of commenters supported these definitions of “employee benefit plan 

account” and “individual retirement account or similar account.”226  The Agencies note 

that both definitions, by their terms, encompass “other similar” plans or accounts.  So, for 

example, similar plans or accounts, such as “lifetime savings accounts,” that are 

established under the Internal Revenue Code in the future would be employee benefit 

plan accounts or individual retirement accounts or similar accounts for purposes of the 

rule.  In addition, the term “employee benefit plan account” includes a non-U.S. plan that 

meets the definition of an employee benefit plan account. 

Under the final rules, a bank relying on the employee benefit plan and individual 

retirement and similar account provisions must comply with the advertising and sales 

literature limitations in paragraphs (a)(2) and (3), the employee compensation limitations 

in paragraph (c), and the other conditions in the paragraph (d) of the rule.  These 

conditions are discussed below.   

Some commenters asked that the Agencies permit a bank to accept securities 

orders for other types of accounts that may involve custody of securities, such as 

accounts for which the bank acts as escrow agent, issuing and paying agent, tender agent, 

or disbursement agent, subject to the conditions applicable to employee benefit plan 

accounts and individual retirement and similar accounts, rather than the expanded set of 

conditions applicable to accommodation orders accepted for other types of custody 

                                                 
225   Rule 760(h)(5).   

226  See, e.g., ABA Letter, Clearing House Ass’n Letter, WBA Letter. 

 98



accounts.  The provisions in Rule 760(a) for employee benefit plan accounts and 

individual retirement and similar accounts are designed to reflect the extent and manner 

in which banks provide order-taking services for these types of accounts.  In addition, 

these provisions take account of the special mention of these accounts in the custody and 

safekeeping exception227 and the additional protections to which these accounts typically 

are subject under the ERISA, the Internal Revenue Code, and other applicable law.  For 

these reasons, the Agencies have not expanded Rule 760(a) to cover accounts other than 

employee benefit plan accounts and individual retirement and other similar accounts.  

Banks may continue to accept orders from other types of accounts for which the bank 

acts as a custodian under the accommodation provisions of the rule.  

a. Employee Compensation Restrictions 

We are adopting the employee compensation restrictions in Rule 760(c) as 

proposed.  These restrictions apply when a bank, acting in a custodial capacity, accepts a 

securities order for an employee benefit plan account or an individual retirement account 

or similar account under paragraph (a) of the rule, and when a bank accepts a securities 

order for another type of custodial account under paragraph (b) of the rule.  Under these 

restrictions, if a bank accepts securities orders pursuant to Rule 760, then no employee of 

the bank may receive compensation (including a fee paid pursuant to a 12b–1 plan) from 

the bank, the executing broker-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.   These restrictions are designed to be 

consistent with banking practices and reduce the financial incentives a bank employee 

                                                 
227  See Section 3(a)(4)(B)(viii)(I)(ee) of the Exchange Act. 

 99



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.  

Only a few commenters addressed the employee compensation restrictions of the 

rule.  For example, one commenter asserted that the rule should permit a bank to 

compensate its employees based on the potential revenues associated with a custodial 

account, including revenues received from processing securities transactions or from a 

mutual fund in which the account is invested.228  In addition, a commenter expressed 

concern that the restrictions would prohibit employees from receiving bonuses based on 

the total revenues derived from the custodial accounts for which the employee is 

responsible.   

As the Agencies noted in the proposal, the employee compensation restrictions in 

Rule 760(c) 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.  

Moreover the rule expressly provides that the employee compensation restrictions do not 

prevent a bank employee from receiving payments under a bonus or similar plan that are 

permissible under the exception in Rule 700(b)(1) as if a referral had been made by the 

bank employee, or from receiving any compensation described in Rule 700(b)(2) of the 

networking rules.229   

                                                 
228  See, e.g., Wells Fargo Letter. 

229  Because the employee compensation 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- 
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 

 100Thus, for example, the rule does prohibit a bank from directly passing on to an 

employee a portion or percentage of the 12b-1 fees received by the bank from a custody 

account’s investment in a mutual fund, or a portion of a fee that is charged only when, or 

that varies based on whether, a securities transaction is executed for the account.  A bank 

employee may receive payments under a bonus or similar plan rule that includes within 

its allocation pool the revenues generated by one or more custodial accounts if the plan 

meets the criteria for a discretionary, multi-factor bonus program in Rule 700(b)(1), or 

the bonus program is based on the overall profitability or revenues of the bank, an 

affiliate, or operating unit and the program complies with the requirements of the safe 

harbor in Rule 700(b)(2).   If a bank’s compensation practices are inconsistent with these 

limitations, the bank may not rely on the exemption to take securities orders in a custodial 

capacity. 

b. Advertisements and Sales Literature 

As under the proposed rule, final Rule 760(a)(2) 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.230  The bank also may not 

advertise that such accounts are securities brokerage accounts or that the bank’s 

                                                                                                                                                 
institutional customer and high net worth customer exemption (Rule 701) for 
networking arrangements. 

230   Rule 760(h)(2) defines an “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). 

 101



safekeeping and custody services substitute for a securities brokerage account.231  

Moreover, advertisements and sales literature for individual retirement or similar 

accounts that are 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.232    

One commenter indicated that these advertising restrictions were reasonable.233  

Another commenter suggested that these advertising limitations should not apply to 

certain advertisements for which a broker-dealer takes compliance responsibility.234  The 

advertising and sales literature restrictions are designed to help prevent a bank from 

operating a brokerage business out of its custody department and, for this reason, apply to 

all advertisements and sales literature issued by or on behalf of a bank, whether or not a 

broker-dealer has some compliance responsibility with respect to the advertisement or 

sales literature.  These limitations would not, however, apply to the advertisements or 

sales literature that a registered broker-dealer may make to inform the public or others 

about the availability of brokerage services from the broker-dealer.  

c. Other Conditions 

                                                 
231   Rule 760(a)(2)(i) and (ii). 

232   Rule 760(a)(3).  Rule 760(h)(6) defines “sales literature” to 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. 

233  See ICBA Letter. 

234  See UMB Bank, N.A. Letter. 

 102



A bank that accepts orders for a securities transaction for an employee benefit 

plan account or individual retirement account or similar account also must comply with 

the conditions set forth in paragraph (d) of the Rule.235  These conditions are discussed 

below in Part V.B.3. 236   

2. Order-Taking as an Accommodation for Other Types of Accounts 

The proposed rule also permitted banks to continue to accept securities orders for 

custodial accounts other than employee benefit plan and individual retirement and similar 

accounts as an accommodation to the customer, 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 as a securities broker out of its custody 

department.  While commenters generally supported permitting banks to accept securities 

orders for other custodial accounts on an accommodation basis, several commenters 

asked the Agencies to modify or clarify the scope or terms of the exemption, including 

the meaning of “accommodation” and the prohibition on providing investment advice, 

research, and recommendations. 

The Agencies are adopting, largely as proposed, the provisions of the rule 

permitting banks to accept orders as an accommodation for these other custodial 

                                                 
235  Rule 760(a)(1). 

236   The Agencies have made a technical change from the proposal to make clear that 
a bank operating under Rule 760(a) must comply with the conditions set forth in 
paragraph (d) as well as with the employee compensation limitations of paragraph 
(c).  See Rule 760(a)(1).  This should better clarify banks’ responsibilities under 
these provisions, and the Agencies have made a conforming change to the text of 
Rule 760(b) relating to accommodation trades.   

    

 103



accounts.237  A bank relying on this part of the exemption must comply with the 

conditions discussed below. 

a.  Accommodation Basis 

For the reasons stated in the proposing release, the final rule, like the proposal, 

permits a bank to accept securities orders for other types of custodial accounts only as an 

accommodation to the customer.238  Some commenters suggested that the Agencies 

define the term "accommodation" in the rule to mean any trade that is effected solely on 

the request of the customer or on an unsolicited basis.239  As noted in the proposal, the 

Banking Agencies will develop guidance to assist Banking Agency examiners in 

reviewing, as part of the agencies’ ongoing risk-focused supervisory and examination 

process, the order-taking services provided to these custodial accounts.  The 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 these custodial accounts 

only as an accommodation to the customer and in a manner consistent with the custody 

exemption.240  As part of these reviews, Banking Agency examiners also will, consistent 

with the rule, consider the form and substance of the relevant accounts, transactions, and 

activities to prevent evasions of the requirements of the rule.241  The Agencies believe 

this approach, rather than adopting by rule a definition of “accommodation,” is 

                                                 
237   Rule 760(b).     

238   Rule 760(b)(1).   

239   See Fiserv Trust Company Letter; Ass'n of Colorado Trust Companies Letter. 

240  See 71 FR at 77532-33. 

241  See Rule 760(f). 

 104



appropriate given the disparity in the types, characteristics and uses of other custody 

accounts, the size and operations of banks that provide these services and the manner in 

which they do so.   

b.  Employee Compensation Restrictions   

For the reasons stated in the proposing release, final Rule 760(b)(2) continues to 

provide that a bank that accepts orders for other custody accounts must comply with the 

employee compensation limitations in paragraph (c) of the rule.  These limitations were 

previously discussed in Part V.B.I.a., supra. 242 

c.  Limitations on Bank Fees 

The rule prohibits a bank that accepts accommodation orders for a custody 

account from charging or receiving any fee that varies 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.243  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 Rule 760(b)(3).  

Commenters did not raise concerns with these restrictions. 

d.  Advertising and Sales Literature Restrictions 

Under the final rule, 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 

                                                 
242   Rule 760(b)(2). 

243   Rule 760(b)(3).    

 105



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.244   

e.  Investment Advice or Recommendations 

The proposed rule imposed certain restrictions on the ability of a bank to provide 

investment advice or research concerning securities to an account for which it accepts 

accommodations orders, make recommendations concerning securities to the account, or 

otherwise solicit securities transactions from the account.245   

Several commenters, expressed concerns with the proposed limitations on 

investment advice, research and recommendations.  For example, commenters expressed 

concern that the restrictions would negatively affect a bank’s ability to cross-market its 

trust, fiduciary or other services to custody customers.246  Some expressed concern that 

the limitations would interfere with a bank’s ability to share research with custody 

                                                 
244   Rule 760(b)(5).  One commenter urged the Agencies to abandon the prohibitions 

on advertising order-taking as an accommodation to other custodial accounts, 
arguing that the prohibition violates a bank’s constitutional free speech rights.  
See CBA Letter.  The Agencies believe these restrictions are appropriate to 
effectuate the purposes of the exemption and have tailored the restrictions to 
comply with the customary practices of banks and minimize potential disruptions.  
The Agencies specifically requested comments on the conditions of the rule, and 
no commenter indicated that the advertising restrictions on accommodation trade 
would materially disrupt their business or operations. 

245   Rule 760(b)(6).   

246   See, e.g., Harris Bank Letter; U.S. Trust Letter. 

 106



customers or make the bank’s views concerning securities or markets available to the 

public through websites, mailings, interviews or other means.247   

After carefully considering the comments received, the Agencies believe that no 

change is necessary to accommodate the cross-marketing of other bank services.  

Accordingly, we are adopting the provisions related to investment advice, research and 

recommendations without change.  The Agencies note that the prohibitions do not 

prevent a bank from cross-marketing its trust, fiduciary or other services to its custody 

customers.  A bank’s marketing to custody account customers may – without violating 

the rule’s general prohibition against providing advice, research or recommendations – 

include non-account specific information provided in media such as newsletters and 

websites.  In addition, the advice, research, recommendation and solicitation prohibition 

does not prohibit a bank from providing samples of research, including stock-specific 

research, to custody customers that the bank provides to other persons for marketing 

purposes.  Thus, the Agencies believe that banks will continue to be able to cross-market 

their products and services to their custody customers.  A custody account, however, is 

not a fiduciary account, and a bank operating under Rule 760(b) with respect to a 

custodial account may not provide such samples in such a way or with such a frequency 

as to provide the custody account securities services that only are permissible for a trust 

or fiduciary customer.  The bank, moreover, may not provide personalized investment 

                                                 
247   See, e.g., PNC Letter; National City Corp. Letter. 

 107



advice, research or recommendations regarding particular securities to the custodial 

account for any reason.248   

Some commenters questioned whether providing custody customers with a choice 

of investments from which to select would constitute providing investment advice.249  

Banks may use menus or other lists to make custodial customers aware of the securities 

available to them through the custodial account.  For example, the restrictions in 

paragraph (b)(6) of the rule do not prevent a bank from providing its customers with an 

online menu of the mutual funds that the customer is able to purchase through the 

custody account.   

The limitations and restrictions in Rule 760(b), 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.   

Commenters asked how the limitations on investment advice and research would 

apply when a customer has both a custody account and a separate trust or fiduciary 

account with a bank, and asked the Agencies to clarify that a bank would not violate the 

restrictions if the bank provides a trust or fiduciary customer with research or advice that 

                                                 
248   This would include providing personalized advice, research or recommendations 

concerning securities to the account in an effort to convert the account to another 
type of account, for goodwill or to obtain referrals.   

249   See Harris Bank Letter; PNC Letter. 

 108



the customer then uses to make orders through its custody accounts.250  Rule 760(b)(6) 

prohibits banks from providing investment advice, research or recommendations 

concerning securities to, or soliciting securities transactions from, a custody account for 

which the bank accepts orders under the accommodation trade authority.  The rule does 

not limit the types of research or other services a bank may provide to a customer’s trust 

or fiduciary account, and the Agencies recognize that a bank may have no control over 

which account the customer uses to place any orders that result from such research or 

other services.   

The final rule, like the proposal, continues to provide that, in order 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.251  For 

example, the Agencies will consider the content, format and frequency of any investment 

research provided to an accommodation custodial account in considering if such research 

in purpose or effect evades the restrictions in the rule or provides a custody account 

securities services that only are permissible for a trust or fiduciary customer.  Similarly, a 

bank may not evade the rule’s restrictions by providing an accommodation customer that 

has both a custody account and a trust or fiduciary account with investment advice, 

recommendations or research that is targeted to the securities held in the customer’s 

custody account.  For example, if a customer’s custody account has a large position in a 

particular security and that security is not held in the customer’s trust or fiduciary 

                                                 
250   See ABA Letter; Harris Bank Letter. 

251  Rule 760(e). 

 109



account, a bank may not routinely provide the customer with research focused on that 

security.  Banks should have and maintain policies and procedures to abide by these 

limitations and bank examiners will review bank compliance with these limits in 

accordance with the risk-based supervisory and examination process, considering both 

the form and substance of the cross-marketing activities in applying the anti-evasion 

provisions of the rule. 

The restrictions in Rule 760(b)(6) do not prohibit the bank from advertising its 

custodial services and disseminating sales literature that meets the conditions in the 

exemption.252  These restrictions also will 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 advertisements 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-

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.253  The 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 

                                                 
252  Rule 760(b)(6)(i). 

253  Rule 760(b)(6)(ii).  “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)).  Rule 
760(h)(7). 

 110



as the bank does not provide investment advice or research concerning securities to the 

account or make a recommendation to the account concerning securities.254   

3.  Other Conditions Applicable to Order-Taking for All Custody Accounts 

The proposed exemption provided that a bank may accept orders for a securities 

transaction for a custody account under the exemption only if the bank (1) does not act in 

a trustee or fiduciary capacity (as defined in section 3(a)(4)(D) of the Exchange Act) with 

respect to the account; (2) complies with section 3(a)(4)(C) of the Act 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 regarding carrying broker activities. 

a.  Directed Trustees 

Some commenters requested that the Agencies modify the exemption to allow a 

bank that acts as a directed trustee for an account to accept orders and effect transactions 

for the account under the custody exemption in Rule 760 in lieu of relying on the trust 

and fiduciary rules (Rule 721 to 723) for the transaction.255  In light of the comments and 

the protections included in Rule 760, the Agencies have modified the final rule to provide 

that a bank that acts as a directed trustee for an account may rely on the custody 

exception to accept orders for, and effect transactions in, securities for the account.256  If 

a bank acting as directed trustee relies on the rule to effect transactions for an employee 
                                                 
254  Rule 760(b)(6)(iii). 

255   See Teachers Insurance and Annuity Association of America and College 
Retirement Equities Fund (“TIAA-CREF”) Letter; ACB Letter; Roma Bank 
Letter.  Commenters asserted, for example, that a bank acting as a directed trustee 
provides services that are functionally similar to those provided as a custodian and 
in either case does not have investment discretion with respect to the account. 

256   See Rule 760(d)(1).  Alternatively, the bank may continue to effect transactions 
for the account under the rules relating to trust or fiduciary accounts. 

 111



benefit plan account or an individual retirement account or similar account, the bank must 

comply with the conditions in Rule 760(a).  If a bank acting as directed trustee relies on 

the rule to effect transactions for another type of account, the bank must comply with the 

conditions governing accommodation accounts in Rule 760(b).   

The rule defines a directed trustee as “a trustee that does not exercise investment 

discretion with respect to the account.”257  The Agencies also have modified the 

definition of “an account for which the bank acts as a custodian” to include an account 

for which a bank acts as a directed trustee.258   Although a bank acting as directed trustee 

for an account may effect transactions under the custody exemption, the bank’s trustee 

relationship with the account remains a trust and fiduciary relationship and, as such, the 

bank must continue to comply with applicable fiduciary principles and standards in its 

relationships with the account. 

b. Broker Execution Requirement 

Consistent with the requirements of the custody and safekeeping exception, Rule 

760(d)(2) requires a bank that accepts orders for a custody account under the rule to 

comply with Section 3(a)(4)(C) of the Exchange Act259 in handling any order for a 

securities transaction for the account.260  Under this provision, (i) the bank must direct 

the trade to a registered broker-dealer for execution, or (ii) the trade must be a cross trade 

or other substantially similar trade of a security that is made by the bank or between the 

                                                 
257  Rule 760(h)(3).  

258   See Rule 760(h)(1).       

259   15 U.S.C. 78c(a)(4)(C).  

260   See Rule 760(d)(2). 

 112



bank and an affiliated fiduciary and is not in contravention of fiduciary principles 

established under applicable Federal or State law, or (iii) the trade must be conducted in 

some other manner permitted under rules, regulations, or orders as the Commission may 

prescribe or issue.      

c. Carrying Broker Provisions  

A number of commenters addressed the proposed provision limiting the 

availability of the custody exemption to banks that comply with Section 

3(a)(4)(B)(viii)(II) of the Exchange Act261 relating to carrying broker activities.262  Some 

stated that the Agencies should define the term “carrying broker” by rule rather than by 

interpretation.263  One commenter requested that we interpret the term based on the view 

that the essence of a carrying broker relationship is "complete dependence" of a broker-

dealer on another entity for back office functions and execution.264  Another commenter 

took the position that a custodian bank should not be deemed a carrying broker so long as 

“it is not enabling” broker-dealers to avoid the net capital requirements applicable to 

carrying brokers.265  One commenter generally suggested that we either eliminate the 

                                                 
261   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-dealer, unless such carrying broker activities are engaged 
in with respect to government securities. 

262   Rule 760(d)(3).   

263   See ABA Letter; State Street Corp. Letter; PNC Letter.   

264   See Clearing House Ass’n Letter.   

265   See U.S. Trust Letter. 

 113



carrying broker limitation from the proposed rules, or amend it to avoid affecting the 

ability of banks to undertake traditional banking activities.266    

Section 3(a)(4)(B)(viii)(II) of the Exchange Act provides that a bank relying on 

the custody exception may not act as a “carrying broker,” as that term and different 

formulations of the term are used in Section 15(c)(3) of the Act and the underlying rules 

and regulations, for a broker-dealer other than with respect to government securities.  

Section 15(c)(3) of the Act in relevant part requires broker-dealers to comply with the 

Commission’s regulations with respect to financial responsibility and related customer 

protection practices of broker-dealers.267  The Commission’s financial responsibility and 

customer protection rules expand on what it means to carry customer securities.268  In 

general, broker-dealers establish carrying arrangements in which other broker-dealers 

                                                 
266   See HSBC Bank Letter.  In addition, a few commenters asserted that the 

description of potential carrying broker activity in prior rulemakings under the 
GLB Act would, if adopted, be highly problematic and disruptive for banks and 
broker-dealers.  See Clearing House Ass’n Letter; ABA Letter. 

267   Exchange Act Section 15(c)(3)(A), 15 U.S.C. 78o(c)(3)(A).   

268   The Commission’s net capital rule specifies that a broker-dealer shall be deemed 
to carry customer or broker-dealer accounts “if, in connection with its activities as 
a broker or dealer, it receives checks, drafts, or other evidences of indebtedness 
made payable to itself or persons other than the requisite registered broker or 
dealer  carrying the account of a customer, escrow agent, issuer, underwriter, 
sponsor, or other distributor of securities” or “if it does not promptly forward or 
promptly deliver all of the securities of customers or of other brokers or dealers 
received by the firm in connection with its activities as a broker or dealer.”  
Exchange Act Rule 15c3-1(a)(2)(i) 

The Commission’s customer protection rule governing reserves and 
custody of securities defines the term “securities carried for the account of a 
customer” to mean “securities received by or on behalf of a broker or dealer for 
the account of any customer and securities carried long by a broker or dealer for 
the account of any customer,” as well as securities sold to, or bought for, a 
customer by a broker-dealer.  Exchange Act Rule 15c3-3(a)(2).   

 114



carry their accounts to permit the non-carrying broker-dealer to be subject to lesser 

financial responsibility requirements under the Exchange Act.  A broker-dealer entering 

into such an agreement with a carrying entity that is not a registered broker-dealer, 

however, may not take advantage of those lesser requirements.269   

After carefully considering the comments, the Agencies have retained this 

limitation as a condition of the custody exemption without change as it is a term of the 

statutory custody exception.  Banks may look to certain key factors to help distinguish 

permissible custodial activity from impermissible carrying broker activity.  In particular, 

key factors in considering whether the existence of shared customers between a broker-

dealer and a bank may entail impermissible carrying broker activity by the bank are the 

broker-dealer’s own regulatory obligations and whether the broker-dealer either makes 

formal or informal arrangements with the bank or structures its operations or offerings to 

cause the broker-dealer’s customers generally (or one or more broad segments of the 

broker-dealer’s customers) to use the bank’s custody accounts instead of maintaining 

funds and securities in accounts at the broker-dealer (thereby avoiding the broker-dealer’s 

financial and related responsibilities).  The existence of a substantial number of common 

customers between a broker-dealer and a bank’s custody department in the absence of 

                                                 
269   Within common securities industry usage, the terms “carrying broker” and 

“clearing broker” are virtually identical and often are used interchangeably.  In 
certain instances, the terms mean a broker that, as part of an arrangement with a 
second broker (an “introducing” or “corresponding” broker), allows the second 
broker to be subject to lesser regulatory requirements (e.g., under the net capital 
provisions of Exchange Act Rule 15c3-1 and the customer protection provisions 
of Exchange Act Rule 15c3-3).  Technically, however, a “carrying broker” is a 
broker that holds funds and securities on behalf of customers, whether its own 
customers or customers introduced by another broker-dealer, and a “clearing 
broker” is a member of a registered clearing agency. 

 115



such an arrangement or structure would not cause the bank to act as a carrying broker for 

the broker-dealer.    

Similarly, a bank may perform or share systems that perform limited back-office 

functions on behalf of a broker-dealer without becoming a carrying broker for the broker-

dealer.  A broker-dealer, for example, may contract with an unregistered party such as a 

bank to send out transaction confirmations on behalf of the broker-dealer or have an 

arrangement with an affiliated bank to provide customers with combined statements, with 

the broker-dealer remaining responsible for the accuracy and completeness of those 

confirmations and the broker-dealer aspects of the statements.  A bank and an affiliated 

broker-dealer also may share or coordinate risk management systems such as, for 

example, those relating to Bank Secrecy Act and anti-money laundering compliance.270  

A broker-dealer, however, may not delegate core functions to a bank or other 

unregistered entity or functions that would require an individual to pass a qualification 

examination or register with an SRO.271  A broker-dealer also must maintain possession 

or control over the broker-dealer’s proprietary cash or securities and its customers’ cash 

                                                 
270  Other examples of current permissible coordination arrangements between banks 

and broker-dealers include legal and compliance functions, accounting and 
finance functions (such as payroll and expense account reporting), information 
technology, operations functions (such as disaster recovery services), and 
administration functions (such as human resources and internal audits).  See 
NASD Notice to Members 05-48 (July 2005) at 2. 

271  NASD Notice to Members 05-48 (July 2005), “Outsourcing,” provides guidance 
to member firms regarding the outsourcing activities and functions that, if 
performed directly by members, would be required to be the subject of a 
supervisory system and written supervisory procedures pursuant to NASD Rule 
3010. 

 116



or securities in accordance with the Commission’s financial responsibility rules.272   Of 

course, a bank may serve as custodian for proprietary or customer cash or securities of 

the broker-dealer and may accept and use in the ordinary course of its banking busines

cash deposited with the bank by the broker-dealer or its

s 

 customers.273 

4. Custodians, Subcustodians and Administrators/Recordkeepers 

a.   “Account for which a bank acts as a custodian” 

As a general matter, the exemption in Rule 760 is available only for an “account 

for which the bank acts as a custodian.”  The proposed rule defined this term to mean 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.274  As 

discussed in Part V.B.3.a supra, the Agencies have amended this definition in the final 

rule also to include an account for which a bank acts as a directed trustee. 

A few commenters asked whether a bank performing custodial functions in a non-

trustee and non-fiduciary capacity (such as escrow agent, fiscal agent or paying agent) 

may use the custody exemption even if it is not formally designated as “custodian” by the 

                                                 
272  See e.g., Rules 15c3-1 and 15c3-3 [17 CFR 240.15c3-1, 15c3-3].  This is true 

even if the broker-dealer is not “completely dependent” on the bank for all back 
office functions and execution. 

273  See Rule 15c3-3(c)(5). 

274  Proposed Rule 760(g)(1). 

 117



bank-customer agreement.275  Whether a bank serves as custodian for the securities or 

other assets of an account depends on the services the bank provides to the account with 

respect to such securities or assets, not the label used to identify the account or the bank’s 

services in the agreement between the bank and the customer.  Thus, for example, a bank 

that acts as an escrow agent, fiscal agent or paying agent with respect to an account, and 

that provides safekeeping or custody services for the securities or other assets in the 

account, is considered to be a custodian for the account for purpose of the rule regardless 

of whether the account agreement uses the term “custodian” or any other particular 

language.   

b. Administrators/Recordkeepers and Subcustodians 

The proposed exemption permitted a bank acting as a non-fiduciary and non-

custodial administrator or recordkeeper for an employee benefit plan to accept securities 

orders for the plan on behalf of a custodian bank.276  Under the proposed exemption, both 

the administrator/recordkeeper bank and the custodial bank had to comply with the 

requirements relating to employee benefit plan accounts.277  In addition, the proposed 

rule prohibited an administrator/recordkeeper bank from executing a cross-trade with or 

for the employee benefit plan or from netting orders for securities for the plan, other th

orders for shares of open-end investment companies not traded on an exchange.

an 

                                                

278   

 
275   See Union Bank Letter, Wells Fargo Letter. 

276   Proposed Rule 760(e).  

277   Proposed Rule 760(e)(1).     

278  Proposed Rule 760(e)(2).   

 118



A few commenters supported these provisions, but opposed the restrictions on 

cross-trading and netting.279  One commenter maintained that the 

administrator/recordkeeper provisions should also be available to banks providing 

administrative services to individual retirement accounts.280   

Some commenters also questioned whether or how the proposed exemption would 

apply to a bank that acts as a subcustodian for the trust or fiduciary or custody accounts 

of another bank.  For example, some commenters asserted that a bank acting as a 

subcustodian for another bank’s trust or fiduciary accounts should be permitted to accept 

orders for those accounts under the less restrictive conditions in Rule 760(a) regardless of 

the type of accounts actually involved.281  Other commenters suggested that a 

subcustodian bank be permitted to effect trades for the accounts of the other bank with a 

direct custodial relationship with the customer under the same rules (e.g., trust and 

fiduciary or custody), and subject to the same conditions, that would apply to the other 

bank if it conducted the transactions directly.282  Commenters also noted that banks, and 

particularly smaller banks, at times use subcustodian arrangements with other banks to 

provide their customers custodial services more efficiently and at lower cost than they 

may be able to do on their own.   

                                                 
279   See ABA Letter; Clearing House Ass’n Letter; CBA Letter.  The commenters 

asserted that the cross-trading and netting restrictions were too restrictive and 
noted that section 3(a)(4)(C) of the Exchange Act permits bank custodians to 
engage in a broader range of cross-trade and netting activities. 

280   See CBA Letter. 

281  See, e.g., ABA Letter, CBA Letter, PNC Letter, Schwab Letter. 

282   See TIAA-CREF Letter.  

 119



After carefully considering the comments, the Agencies have adopted 

Rule 760(e), which permits 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 a custodian to accept orders for the account under Rule 760.283  In addition, the 

Agencies have adopted a new paragraph (f) of the rule that permits a bank that acts as a 

subcustodian for any type of account for which another bank acts as custodian to accept 

orders for the account under Rule 760.  This change was made in response to comments 

that greater flexibility and clarity was needed for banks that use, and banks that provide, 

subcustodial services.  Under these provisions of the final rule, the 

administrator/recordkeeper bank or subcustodian bank, as well as the initial custodian 

bank for the account, must comply with the provisions of Rule 760 applicable to the type 

of account involved (i.e. employee benefit plan account, individual retirement account or 

similar account, or other types of accounts).284   

The final rule generally prohibits a recordkeeper/administrator bank or 

subcustodian bank relying on the exemption from executing a cross-trade or netting 

orders with or for the relevant account.285  However, the Agencies have expanded the 

exceptions to this general prohibition in light of the comments received.  In particular, the 
                                                 
283  The Agencies understand that the type of administrator/recordkeeper 

arrangements described in Rule 760(e) are not typically used with respect to 
accounts other than employee benefit plan accounts and, for this reason, have not 
expanded the paragraph to cover other types of accounts. 

284  See Rule 760(e)(1) and (f)(1) and (2).  The Agencies made a technical change to 
Rule 760(e) to clarify that the administrator/recordkeeper bank and the custodial 
bank for employee benefit accounts need to comply only with the requirements in 
the rule applicable to employee benefit plan accounts and do not need to comply 
with the conditions applicable to accommodation trades.   

285  Rule 760(e)(2) and (f)(3). 

 120final rule permits the administrator/recordkeeper bank or subcustodian bank to cross or 

net orders for shares of open-end investment companies not traded on an exchange.286  In 

addition, the final rule permits the administrator/recordkeeper bank or subcustodian bank 

to cross orders between or net orders for accounts of the custodian bank that contracted 

with the administrator/recordkeeper bank or subcustodian bank for services.287  

Permitting this additional type of cross-trade and netting activity is consistent with the 

exceptions to broker execution requirement in section 3(a)(4)(C) of the Exchange Act and 

should allow cost-savings for the customer by eliminating the need for a broker 

intermediary.  At the same time, by prohibiting an administrator/recordkeeper bank or 

subcustodian bank operating under the rule from executing cross-trades or netting orders 

among the accounts of different custodian banks to which it provides services will help 

prevent banks from establishing a market for securities under the exemption.  

The Agencies note that these provisions do not apply to a bank that provides 

custody and order-taking services to the trust or fiduciary accounts of another bank.  In 

these circumstances, the bank providing custodial services is treated as a custodian, and 

not a subcustodian, for purposes of the rule and may provide order-taking services to the 

account in accordance with the provisions of Rule 760(a) or (b) applicable to the type of 

account involved. 

5. Evasions   

The Agencies are adopting, as proposed, the provision that states the Agencies 

will consider both the form and substance of the relevant accounts, transactions and 
                                                 
286   See Rule 760(e)(2)(i) and (f)(3)(i).  

287   See Rule 760(e)(2)(ii) and (f)(3)(ii). 

 121



activities (including advertising activities) in considering whether a bank meets the terms 

of the exemption, to prevent evasions of the exemption.288  We received no comments on 

this anti-evasion provision.  As part of the regular risk-focused 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. 

VI. Other Exemptions 

 The Agencies also are adopting certain other exemptions relating to the securities 

“broker” activities of banks.  These are discussed below.   

A.  Exemption for Regulation S Transactions with Non-U.S. Persons and Broker-
Dealers 

 
We are adopting Rule 771 of Regulation R to exempt banks from the definition of 

“broker” under the Exchange Act for certain agency transactions involving Regulation S 

securities.289  As with Rule 3a5-2 under the Exchange Act, which the Commission 

                                                 
288   Rule 760(g).    

289  The Commission’s Regulation S (17 CFR 230.901 et seq.) provides that offers 
and sales of securities conducted in accordance with the terms of the regulation 
will be not be deemed to constitute an offer, offer to sell, sale or offer to buy 
within the United States for purposes of the securities registration requirements of 
Section 5 of the Securities Act.  See 17 CFR 230.901.  Specifically, Rule 903 of 
Regulation S provides that an offer or sale of securities by the issuer, a distributor, 
or an affiliate or a person acting on their behalf shall be deemed to occur outside 
the U.S. within the meaning of Rule 901 if the offer or sale is made in an offshore 
transaction (as defined in Rule 901), and no directed selling efforts are made in 
the U.S. by the issuer, a distributor, affiliate, or person acting on their behalf.  
Other conditions may also apply depending on the place of incorporation and 
reporting status of the issuer, and the amount of U.S. market interest in the 
securities.  

 122



separately is adopting to permit banks to engage in certain Regulation S transactions on a 

riskless principal basis without being “dealers,” Rule 771 recognizes that non-U.S. 

persons located outside the United States generally will not rely on the protections of the 

U.S. securities laws when purchasing Regulation S securities from U.S. banks, and that 

those persons may purchase the same securities from foreign banks located outside the 

U.S. without subjecting the foreign bank to U.S. broker-dealer registration.   

Commenters generally supported the proposal while suggesting certain 

modifications and clarifications.290  For example, commenters requested that the 

Agencies clarify that the exemption is available to banks both during and after any 

applicable distribution compliance period for the securities required by Regulation S, and 

allow banks to conduct resales of eligible securities for either non-U.S. persons or 

registered broker-dealers if the bank has a reasonable belief that the securities were 

initially sold in compliance with Regulation S.291  In addition, some commenters argued 

                                                                                                                                                 
Rule 904 of Regulation S provides that an offer or sale of securities by any 

person other than the issuer, a distributor, an affiliate (except an officer or director 
who is an affiliate solely by virtue of that position) or person acting on their 
behalf will be deemed to occur outside the U.S. within the meaning of Rule 901 if 
the offer or sale is made in an offshore transaction (as defined in Rule 901), and 
no directed selling efforts are made in the U.S. by the seller, an affiliate or person 
acting on their behalf.  Additional conditions apply in the case of resales of 
certain types of securities by dealers and persons receiving selling concessions, 
and in the case of resales by certain affiliates of the issuer or a distributor.   

290   See IIB Letter; ABA Letter; Clearing House Ass’n Letter.     

291   See IIB Letter; Clearing House Ass’n Letter.  Rules 903(b)(2) and (b)(3) of 
Regulation S subject Category 2 securities and Category 3 debt securities to a 40-
day distribution compliance period, and subject Category 3 equity securities to a 
one-year distribution compliance period, during which certain restrictions apply to 
offers or sales of the securities in order to preserve the foreign nature of the 
transactions.  Under Rule 903 of Regulation S, Category 1 encompasses certain 
securities: (i) issued by a foreign issuer, for which there is no substantial U.S. 
market interest, (ii) that are offered and sold in an overseas directed offering, (iii) 

 123

http://www.law.uc.edu/CCL/33ActRls/rule901.html


that the exemption should not require a bank to comply with the resale restrictions in 

Rule 904 of Regulation S if the bank effects a resale of an eligible security in accordance 

with Rule 903 of Regulation S prior to the end of any applicable distribution compliance 

period for the security.292  Commenters also urged the Agencies to make the proposed 

“broker” exemption in Regulation R and the “dealer” exemption proposed by the 

Commission as consistent as possible and to make both exemptions as consistent as 

possible with Regulation S.  

The Agencies have modified the rule in several respects in light of the comments, 

to enhance its clarity and to better conform it to Regulation S.  The final rule, like the 

proposed rule, continues to have three parts.  The first part permits a bank to effect a sale 

of an eligible security in compliance with the requirements of Rule 903 of Regulation S 

to a purchaser who is not in the United States.293  The term “purchaser” is defined to 

mean a person who purchases an eligible security and who is not a U.S. person under 

Rule 902(k) of Regulation S.294   

                                                                                                                                                 
that are backed by the full faith and credit of a foreign government, or (iv) that are 
offered and sold to employees of the issuer or its affiliates pursuant to certain 
foreign employee benefit plans.  Category 2 encompasses securities, not eligible 
for Category 1, that are equity securities of a reporting foreign issuer, or debt 
securities of a reporting issuer or of a non-reporting foreign issuer.  Category 3 
applies to all offerings of securities that do not fall within Category 1 or 2.   

292   See IIB Letter.  

293   Rule 771(a)(1). 

294  Rule 771(b)(3).  Rule 902(k) of Regulation S defines the term “U.S. person” to 
mean:  (i) any natural person resident in the U.S.; (ii) any partnership or 
corporation organized or incorporated under the laws of the U.S.; (iii) any estate 
of which any executor or administrator is a U.S. person; (iv) any trust of which 
any trustee is a U.S. person; (v) any agency or branch of a foreign entity located 
in the U.S.; (vi) any non-discretionary account or similar account (other than an 
estate or trust) held by a dealer or other fiduciary for the benefit or account of a 

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The second part permits a bank to effect, by or on behalf of a person who is not a 

U.S. person under Rule 902(k) of Regulation S, a resale of an eligible security after its 

initial sale to a purchaser who is not in the United States or to a registered broker-

dealer.295  To take advantage of this second exemption, the bank (1) must have a 

reasonable belief that the eligible security was initially sold outside of the United States 

within the meaning of and in compliance with Rule 903 of Regulation S, and (2) if the 

resale is made prior to any applicable distribution compliance period specified in Rules 

903(b)(2) or (b)(3) of Regulation S, the resale must be made in compliance with the 

requirements of Rule 904 of Regulation S.296   

The third part of the exemption permits a bank to effect, by or on behalf of a 

registered broker-dealer, a resale of an eligible security after its initial sale to a purchaser 

who is not in the United States.297  As under the second part, the bank must have a 

reasonable belief that the eligible security was initially sold outside of the United States 

within the meaning of and in compliance with Rule 903 of Regulation S and, if the resale 

is made prior to the expiration of any applicable distribution compliance period in Rules 

903(b)(2) or (b)(3) of Regulation S, the bank must effect the resale in compliance with 

                                                                                                                                                 
U.S. person; and (vii) any discretionary account or similar account (other than an 
estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if 
an individual) resident in the U.S., and (viii) any partnership or corporation if (A) 
organized or incorporated under the laws of any foreign jurisdiction, and (B) 
formed by a U.S. person principally for the purpose of investing in securities not 
registered under the Act, unless it is organized or incorporated, and owned, by 
accredited investors (as defined in Rule 501(a) under the Securities Act) who are 
not natural persons, estates or trusts. 

295   Rule 771(a)(2). 

296  Rule 771(a)(2). 

297   Rule 771(a)(3). 

 125



the requirements of Rule 904 of Regulation S.  The proposed rule would have allowed a 

bank to rely on a reasonable belief that the security was sold in compliance with 

Regulation S only when it purchases a security from a non-U.S. person but not when it 

purchases a security from a broker-dealer.  In light of comments received, the reasonable 

belief standard is also available under the final rule for a bank’s transactions with a 

broker-dealer because the process of determining whether a security initially was issued 

in compliance with Regulation S should be similar whether the purchase is from a broker-

dealer or a non-U.S. person.298  As the rule makes clear, a bank effecting a resale of an 

eligible security under the exemption must effect the transaction in accordance with the 

conditions of Rule 904 if the transaction occurs during, but not after, any applicable 

distribution compliance period for the security under Rule 903(b)(2) or (b)(3) of 

Regulation S.   

The final rule continues to require, however, that any sale effected under 

paragraph (b)(1) of the Rule, or resale effected under paragraphs (b)(2) or (b)(3) of the 

Rule (other than one to a registered broker-dealer), be to a “purchaser who is not in the 

United States.”  This is true even if the applicable distribution compliance period for the 

overseas offering of the security under Regulation S has expired.  Consistent with 

Regulation S, which permits the offshore resale of securities, the purpose of the 

exemption in Rule 771 is to permit U.S. banks to sell Regulation S securities to 

customers outside the United States.  It does not permit banks to sell those securities 

domestically (other than to a registered broker-dealer).299     

                                                 
298  See IIB Letter and Clearing House Ass’n Letter. 

299  The Agencies recognize that the “offshore transaction” condition in Rules 903 
and 904 of Regulation S also require that the offer not be made to a person in the 

 126



For purposes of the exemption, an “eligible security” means any security other 

than a security that is being sold from the inventory of the bank or an affiliate of the bank 

or that is 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.300  Commenters requested 

that the Agencies clarify that the definition of “eligible security” would not prohibit a 

bank from effecting transactions under the exemption in securities that have been issued 

by the bank or an affiliate.301  A security that is issued by a bank or an affiliate of a bank, 

such as a structured note or share in a pooled investment vehicle, may be an eligible 

security if it otherwise meets the terms of paragraph (b)(2) of Rule 771.  

B. Exemption for Non-Custodial Securities Lending Transactions  

 The Agencies are adopting, as proposed, Rule 772 of Regulation R to provide 

banks engaged in certain securities lending transactions with a conditional exemption 

from the definition of “broker.”  The exemption allows a bank to engage in securities 

lending transactions as agent in circumstances where the bank does not have custody of 

the securities or has custody of such securities for less than the entire period of the 

                                                                                                                                                 
United States.  See 17 CFR 230.902(h), 230.903(a)(1) and 230.904(a)(1).  For this 
reason, one commenter stated that the rule simply should refer to sales to a 
“purchaser,” rather than to a purchaser who is outside the United States.  See IIB 
Letter.   The Agencies have retained the “purchaser who is not in the United 
States” language in the final rule, even for those transactions that must be 
conducted in accordance with Rule 903 or 904 of Regulation S, to highlight and 
reaffirm that these transactions must be with persons outside the United States.    

300  Rule 771(b)(1).  For purposes of the rule, the term “distributor” has the same 
meaning as in Rule 902(k) of Regulation S (17 CFR 230.902(k)). 

301   See IIB Letter, ABA Letter.    

 127



transaction.  This exemption reinstates, without modification, an exemption that the 

Commission adopted previously.302   

Most commenters that addressed the exemption supported its adoption.303  One 

commenter opposed the exemption, arguing that securities lending and borrowing 

transactions should be conducted only by broker-dealers or, alternatively, banks 

providing such services should be subject to additional disclosure and customer approval 

requirements.304  The Agencies continue to believe that the exemption is appropriate and 

necessary.  The exemption enables sizable and sophisticated customers to divide custody 

and securities lending management between two expert entities when the customer 

decides such actions are in the customer’s interest, and permits banks to continue to 

provide the types of non-custodial securities lending services that they currently provide 

without disruption.  The Agencies note, moreover, that the statutory custody and 

safekeeping exception permits banks to effect securities lending transactions (and provide 

related securities lending services) when the bank has custody of the securities.  A bank 

                                                 
302   See Exchange Act Release No. 47364 (Feb. 13, 2003), 68 FR 8686 (Feb. 24, 

2003) (adopting Exchange Act Rule 15a-11 to provide an exemption from the 
definitions of both “broker” and “dealer” for banks engaging in securities lending 
transactions).  The broker provisions of the Rule 15a–11 exemption, which never 
became operable due to the temporary exemption applicable to all bank broker 
activities, will become void under the Regulatory Relief Act with the Agencies’ 
adoption of a single set of final “broker” rules.  See Pub. L. No.109-351, § 
101(a)(3), 120 Stat. 1968 (1999).  In light of this, the Commission separately has 
amended Rule 15a-11 to remove the “broker” aspects of that rule. As discussed in 
the accompanying release, the Commission is re-adopting, without modification, 
the “dealer” portions of Rule 15a-11, as Exchange Act Rule 3a5-3.  See Exchange 
Act Release No. 56502 (Sept. 24, 2007).    

303  See, e.g., State Street Corp. Letter, PNC Letter, Mellon Letter, and ABA Letter. 

304  See NASAA Letter. 

 128



need not rely on the exemption in Rule 772 to engage in securities lending transactions 

when acting in this capacity. 

 Rule 772 provides that a bank is exempt from the broker definition to the extent 

that, as agent, it engages in or effects certain “securities lending transactions”305 and 

“securities lending services”306 in connection with such transactions.307  The exemption 

applies only to securities lending activities with or on behalf of a person that the bank 

reasonably believes to be:  (1) a qualified investor as defined in Section 3(a)(54)(A) of 

the Exchange Act;308 or (2) any employee benefit plan that owns and invests, on a 

discretionary basis, not less than $25 million in investments.   One commenter requested 

that the Agencies modify the rule to allow banks to engage in securities lending 

transactions under the exemption as agent for institutional customers that have less than 

$25 million in investments.309  We have not amended the investment requirements, 

                                                 
305   Rule 772(b) defines the term “securities lending transaction” to 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. 

306   Rule 772(c) defines the term “securities lending services” to 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. 

307   Rule 772(a).   

308  15 U.S.C. 78c(a)(54)(A).  In part, this definition encompasses corporations and 
partnerships with at least $25 million in investments.   

309   See Union Bank Letter.   

 129



however, as we believe they are consistent with the nature of customers that utilize banks 

for non-custodial securities lending transactions.310   

 Another commenter suggested that the Agencies exempt banks involved, as agent, 

in securities repurchase and reverse repurchase transactions in non-exempt securities 

from the “broker” definition, stating that repurchase and reverse repurchase activities are 

functionally equivalent to securities lending.311  As discussed in the accompanying 

release, moreover, a number of commenters also requested that banks be exempted from 

the “dealer” definition for repurchase and reverse repurchase agreement activities 

involving non-exempt securities they undertake in a principal capacity.312  The Agencies 

have not acted on these requests at this time because we believe additional information 

from banks and other interested parties would be helpful in understanding the issues 

raised by these requests.  For this reason, we invite comment on the following matters, as 

well as any other matters that interested parties believe may be relevant to the Agencies’ 

consideration of the issues posed by the requests:  (1) the nature, structure (including 

term and type of security involved), and purpose of repurchase and reverse repurchase 

agreements currently conducted with respect to non-exempt securities; (2) the types of 

customers and financial institutions currently involved in repurchase and reverse 

                                                 
310   See, e.g. Letter from Edward J. Rosen, Cleary, Gottlieb, Stein & Hamilton, to 

Annette Nazareth, Director, Division of Market Regulation, Commission, dated 
Oct. 9, 2002 (requesting that the exemption encompass banks’ securities lending 
activity involving any entity that owns and invests on a discretionary basis at least 
$25 million in investments).   

311   See Clearing House Ass’n Letter.  Banks are permitted by statutory exception to 
engage in repurchase and reverse repurchase activities with respect to exempt 
securities such as government securities.  Exchange Act Section 3(a)(5)(C)(i)(II).   

312   See Exchange Act Release No. 56502 (Sept. 24, 2007).  

 130



repurchase agreements with respect to non-exempt securities; (3) the extent to and 

manner in which banks currently engage, as agent or principal, in repurchase and reverse 

repurchase agreements with respect to non-exempt securities; (4) recent developments or 

trends in the market for repurchase and reverse repurchase agreements with respect to 

non-exempt securities; (5) any material similarities or differences in the use, structure, 

customer base, or legal, regulatory, tax or accounting treatment of repurchase and reverse 

repurchase agreements with respect to non-exempt securities, on the one hand, and 

repurchase or reverse repurchase agreements with respect to exempt securities or 

securities lending transactions involving exempt or non-exempt securities.  The 

information we receive through this process should help inform any future actions the 

Agencies may take in this area.  

C. Exemption for Banks Effecting Certain Excepted or Exempted Transactions in 
Investment Company Securities and Variable Insurance Products 

 
 The Agencies are adopting Rule 775 of Regulation R to allow banks to take 

advantage of certain exceptions and exemptions to the broker definition for transactions 

involving mutual funds, variable annuity contracts and variable life insurance policies 

without having to comply with the broker-execution requirement of Exchange Act 

Section 3(a)(4)(C)(i).313  The rule as proposed permitted banks to effect transactions in 

                                                 
313   As discussed above, Section 3(a)(4)(C) generally provides that a bank effecting a 

transaction in any “publicly traded security” in the United States under the trust 
and fiduciary, stock purchase plan, or custody and safekeeping exception must 
direct the resulting trade to a broker-dealer for execution unless the trade is a 
cross trade or similar trade or the trade otherwise is permitted by Commission 
rule, regulation or order.  15 U.S.C. 78c(a)(4)(C). Rule 760, the exemption for 
order-taking by banks acting as custodians, also requires banks to comply with 
Section 3(a)(4)(C).  See Rule 760(d)(2). 

 131



open-end mutual funds through the National Securities Clearing Corporation (“NSCC”) 

or the fund’s transfer agent, rather than through a broker-dealer.   

A number of commenters stated, however, that the exemption should be 

broadened to also encompass variable annuities and variable life insurance, with some 

commenters noting that only variable annuities and mutual funds are permissible 

investments for 403(b) plans.314  Commenters noted that transactions in variable annuity 

and variable life products typically are effected directly with the relevant insurance 

company.315   

In light of these comments, the Agencies have expanded the rule to cover 

transactions involving variable annuities and variable life insurance policies, as well as 

transactions involving mutual funds.  Applying the exemption to transactions in variable 

insurance products, as well as to transactions involving mutual funds, will avoid needless 

disruptions and costs with respect to banks’ transactions with customers in which 

interposing an executing broker-dealer would be inefficient, inconsistent with market 

practice and unnecessary for investor protection.   

Specifically, Rule 775 as modified is available for transactions involving 

securities issued by an open-end company, as defined by Section 5(a)(1) of the 

Investment Company Act,316 that is registered under that Act, 317 as well as variable 

                                                 
314   See ABA Letter; TIAA-CREF Letter; American Council of Life Insurers Letters 

of March 26 (“ACLI March 26 Letter”) and August 2, 2007, Roundtable Letter, 
Business Law Section Letter, The Depository Trust & Clearing Corp. (“DTCC”) 
Letter.     

315   See ACLI March 26 Letter, DTCC Letter.  

316   Rule 775(b)(1).  We note that banks may effect transactions in securities that meet 
the conditions to be an “exempted security” under Exchange Act Section 
3(a)(12)(A)(iv) without complying with the exemption provided by Rule 775.  

 132



insurance contracts funded by any separate account, as defined by Section 2(a)(37) of the 

Investment Company Act, that is registered under that Act.  To take advantage of the 

exemption, the security must not be traded on a national securities exchange or traded 

through the facilities of a national securities association or an interdealer quotation 

system.318  In addition, the securities must be distributed by a registered broker-dealer, or 

the sales charge must be no more than the amount permissible for a security sold by a 

registered broker-dealer pursuant to any applicable rules of a registered securities 

association.319  Finally, the transaction must be effected through the NSCC, or directly 

with a transfer agent or with an insurance company or a separate account that is excluded 

from the definition of transfer agent in Section 3(a)(25) of the Exchange Act.320   

D. Exemption for Certain Transactions involving a Company’s Securities for its 
Employee Benefit Plans and Participants 

 
 In response to issues raised by a commenter, the Agencies are adopting an 

additional exemption (Rule 776) to permit banks that rely on certain exceptions and 

                                                                                                                                                 
Exchange Act Section 3(a)(4)(B)(iii)(II) permits banks to effect transactions 
involving “exempted securities” without registering as a broker and without 
effecting the transaction through a registered broker-dealer.   

317   Rule 775(b)(2).     

318   Rule 775(a)(1).   

319   Rule 775(a)(2).  FINRA currently is the only registered securities association.  
FINRA Rule 2830 limits the sales charges associated with open-end mutual funds.  
Currently, there are no FINRA rules limiting the sales charges associated with the 
insurance securities subject to Rule 775.  Therefore currently, in all cases, these 
insurance securities would satisfy the condition under Rule 775(a)(2) that the 
sales charge be no more than the amount permissible under applicable registered 
securities association rules. 

320   Rule 775(a)(3).   

 133



exemptions to effect certain transactions involving the securities of a company for the 

company’s employee benefit plans and participants without complying with the broker-

execution requirements of Exchange Act Section 3(a)(4)(C)(i).321  The commenter stated 

that banks that act as trustee or custodian for the defined benefit or defined contribution 

plans of a company at times effect in-kind contributions, purchases and sales, and 

distribution transactions for the plan involving the securities of the company without the 

involvement of a broker-dealer.  The commenter indicated that these transactions are 

effected through the company’s transfer agent and that no commission is charged in 

connection with the transaction.322 

 In light of these comments, Rule 776 permits a bank utilizing particular 

exceptions and exemptions to effect a transaction in the securities of a company to do so 

directly with a transfer agent acting for the company, subject to four conditions.  First, no 

commission may be charged with respect to the transaction.323  Second, the transaction 

must be conducted solely for the benefit of an employee benefit plan.324  Third, the 

security must be obtained directly from the company or an employee benefit plan of the 

                                                 
321  See note 313 supra for a listing of the relevant exceptions and exemptions.      

322   See The Northern Trust Company Letter.  The commenter further stated that 
ERISA effectively prohibits a commission from being charged in connection with 
in-kind contributions by a company of its stock to the company’s benefit plans 
and direct purchases and sales by the company of its stock with the company’s 
plans.  

323   Rule 776(a)(1).  

324   Rule 776(a)(2).  For these purposes, an “employee benefit plan” is defined to 
mean any pension plan, retirement plan, profit sharing plan, bonus plan, thrift 
savings plan, incentive plan, or other similar plan.  Rule 776(b). 

 134



company.325  And fourth, the security must be transferred only to the company or an 

employee benefit plan of the company.326 Securities obtained from, or transferred to, a 

participant in an employee benefit plan on behalf of the plan are considered to be 

obtained from, or transferred to, the plan. 

 We are adopting this rule because we believe that requiring banks to send these 

types of transactions to a broker-dealer for execution – as would be required to comply 

with Section 3(a)(4)(C)(i) of the Exchange Act – at times would preclude plans from 

engaging in these transactions, would disrupt existing practices and otherwise would 

introduce cost and complexity to those transactions without materially promoting 

functional regulation and investor protection.327   

                                                 
325   Rule 776(a)(3). 

326   Rule 776(d). 

327   The commenter also stated that banks acting as trustees and custodians at times 
directly effect transactions with and for different employee benefit plans involved 
in a corporate spin-off transaction with respect to company stock of both 
companies involved in the spin-off transaction.  See Northern Trust letter.  We 
understand that the same bank typically is the trustee or custodian for the different 
plans in such transactions and conducts such transactions through cross-trades 
within the bank.  Accordingly, no additional exemption is required for these 
transactions.    

 

 135



E. Temporary and Permanent Exemption for Contracts Entered Into by Banks from 
Being Considered Void or Voidable 

 
 The Agencies are adopting as proposed Rule 780, which grants one temporary 

and one permanent exemption from section 29(b) of the Exchange Act, which addresses 

inadvertent failures by banks that could trigger rescission of contracts between a bank 

and a customer.328  Under the temporary exemption, no contract entered into before 

18 months after the effective date of the 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.329 

Under the permanent exemption, no contract entered into is void or considered 

voidable by reason of Section 29(b) 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 or the rules and regulations adopted thereunder based solely on the bank’s status as a 

broker when the contract was created if two conditions are met.  First, at the time the 

contract was created, the bank must have 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.  Second, any violation of the registration requirements 

by the bank must not have resulted in any significant harm, financial loss or cost to the 
                                                 
328  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. 

329  Rule 780(a). 

 136



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.  One commenter supported the 

exemptions,330 and no commenters objected to their adoption. 

F. Extension of Time and Transition Period 
 
 The Agencies are further extending the time that banks have to come into 

compliance with the Exchange Act provisions relating to the definition of “broker.”  

Under the final rule, a bank is exempt from the definition of “broker” under Section 

3(a)(4) of the Exchange Act until the first day of its first fiscal year commencing after 

September 30, 2008.  This is an additional calendar quarter beyond the date (June 30, 

2008) provided in the proposed rule.  A bank that has a fiscal year based on the calendar 

year, for example, must comply with the new exceptions for banks and these rules 

beginning on January 1, 2009.  Some commenters noted that banks and broker-dealers 

would need sufficient time to make the changes necessary to come into compliance with 

the statute and these rules.331  The Agencies believe that the extension granted by the 

rule, which is a minimum of one year, should provide banks a reasonable period of time 

to come into compliance with these provisions. 

 The Administrative Procedure Act ("APA") permits an agency to issue a rule 

without delaying its effective date for 30 days from the date of publication if, among 

                                                 
330  ICBA Letter. 

331  See, e.g., HSBC Securities Letter. 

 137



other reasons, the rule is a substantive rule which grants or recognizes an exemption or 

relieves a restriction, or if the agency finds good cause and publishes its finding with the 

rule.332  The Agencies find that this Rule 781 grants or recognizes an exemption or 

relieves a restriction and also that there is good cause for adopting Rule 781 without a 

delayed effective date because it is in the public interest that banks not unnecessarily 

incur costs to comply with the statutory exceptions and related rules before such 

exceptions and rules would become effective in accordance with Rule 781.333   

                                                 
332   The APA provides that publication of a substantive rule must be made not less 

than 30 days prior to its effective date, except "(1) a substantive rule which grants 
or recognizes an exemption or relieves a restriction; (2) interpretive rules and 
statements of policy; or (3) otherwise provided by the agency for good cause 
found and published with the rule." 5 U.S.C. 553(d). 

333  This finding also satisfies the requirements of 5 U.S.C. Section 808(2), which 
allows a rule to become effective immediately notwithstanding the requirements 
of 5 U.S.C. Section 801 if an agency “for good cause finds that notice and public 
procedure thereon are impracticable, unnecessary, or contrary to the public 
interest.” 

 138



VII. Finding that the Exemptions are Appropriate in the Public Interest and 
Consistent with the Protection of Investors 

 
 Section 36(a)(1) of the Exchange Act generally provides that the Commission 

may conditionally or unconditionally exempt any person or class of persons from any 

provision of the Exchange Act to the extent that an exemption is necessary or appropriate 

in the public interest and consistent with the protection of investors.334  Taken as a whole, 

the exemptions will implement the bank broker provisions of the GLBA while providing 

banks with flexibility to structure their business models under conditions designed to 

preserve key investor protections, and therefore, as discussed above more fully, are 

appropriate in the public interest and consistent with the protection of investors. 

 
VIII. 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).335  Moreover, the 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.” 

                                                

In 2001, the Commission adopted Interim Rules discussing the way in which the 

Commission would interpret the GLBA.336  The rules that address the definition of 

“broker” under Section 3(a)(4) of the Exchange Act (and applicable exemptions) are 
 

334  15 U.S.C. 78mm(a)(1). 

335  President Clinton signed the GLBA into law on November 12, 1999. 

336  Exchange Act Release No. 44291 (May 11, 2001), 66 FR 27760 (May 18, 2001). 

 139



Exchange Act Rules 3a4-2 through 3a4-6 and Rule 3b-17.337  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 would consist of proposed new 

Exchange Act Rules 710 through 781.338  By operation of the Regulatory Relief Act, the 

joint adoption of these final rules by the Board and the Commission supersedes 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 does not 

apply to this single set of rules adopted by the Agencies.     

IX. Administrative Law Matters 
 

A. Paperwork Reduction Act Analysis 

Certain provisions of Rules 701, 723, and 741, contain “collection of information” 

requirements within the meaning of the Paperwork Reduction Act of 1995.339  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 rules under authority delegated by OMB.340 

The collections of information under Rules 701, 723, and 741 are new.  The 

Commission’s title for the new collection of information under Rule 701 is “Rule 701: 

Exemption from the definition of ‘broker’ for certain institutional referrals.”  The 

Commission’s title for the new collection of information under Rule 723 is “Rule 723: 

                                                 
337  17 CFR 240.3a4-2 through 3a4-6 and 17 CFR 240.3b-17. 

338  17 CFR 242.710 through 781.  See Exchange Act Release No. 49879 (June 17, 
2004), 69 FR 39682 (June 30, 2004). 

339  44 U.S.C. 3501, et seq. 

340  5 CFR 1320.16; Appendix A.1. 

 140Exemptions for special accounts, foreign branches, transferred accounts, and a de 

minimis number of accounts.”  The Commission’s title for the new collection of 

information under Rule 741 is “Rule 741: Exemption for banks effecting transactions in 

money market funds.”   The Commission’s OMB control number for the three rules is 

3235-0624.  The Board’s title for the new collection of information under Rules 701, 723, 

and 741 is “Recordkeeping and Disclosure Requirements Associated with Regulation R” 

(FR 4025).  The Board’s OMB control number will be 7100-0316.  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.341  We received no comments on the 

paperwork reduction analysis in the proposal.   

1. Rule 701 

Rule 701 provides a conditional exemption from the requirements under the 

networking exception under the Exchange Act.  This exemption permits bank employees 

to receive payment of more than a nominal amount for referring institutional customers 

and high net worth customers to a broker-dealer and permits such payments to be 

contingent on whether the customer effects a securities transaction with the broker-dealer. 

a. Collection of Information 

Rules 701(a)(2)(i), (a)(3)(i) and (b) require banks or their broker-dealer partners 

that utilize the exemption provided in this rule to make certain disclosures to high net 

worth or institutional customers.  Specifically, these disclosures must clearly and 

conspicuously disclose (1) the name of the broker-dealer; and (2) that the bank employee 

participates in an incentive compensation program under which the bank employee may 

                                                 
341  44 U.S.C. 3512. 

 141



receive a fee of more than a nominal amount for referring the customer to the broker-

dealer and payment of this fee may be contingent on whether the referral results in a 

transaction with the broker-dealer.342  These requirements were modified from the 

proposal to permit timely oral disclosure of this information, followed by written 

disclosure, to better accommodate the variety of circumstances in which referrals may 

occur.   

In addition, one of the conditions of the exemption is that the broker-dealer and 

the bank need to have a contractual or other written arrangement containing certain 

elements, including notification and information requirements.343  Rule 701(a)(3)(v) 

requires the written agreement to obligate a broker-dealer to notify its bank partner if the 

broker-dealer determines that (1) the customer referred under the exemption is not a high 

net worth or institutional customer, as applicable; or (2) the bank employee making the 

referral is subject to statutory disqualification (as defined in Section 3(a)(39) of the 

Exchange Act).344  In addition, Rule 701(a)(3)(iv) requires the written agreement to 

obligate the broker-dealer to notify the customer if the securities transaction(s) to be 

conducted by the customer or the customer do not meet the applicable suitability or 

sophistication determination standards set forth in the rule.345  Similarly, the bank is 

                                                 
342  See Rules 701(a)(2)(i), (a)(3)(i) and (b). 

343  See Rule 701(a) and (a)(3). 

344   See Rule 701(a)(3)(v).  The latter requirement does not apply to subparagraph (E) 
of Section 3(a)(39) of the Exchange Act ((15 U.S.C. 78c(a)(39)). 

345  See Rule 701(a)(3)(iv). 

 142



required to provide its broker-dealer partner with the name of the bank employee 

receiving the referral fee and certain other identifying information.346 

b. Use of Information 

The purpose of the collection of information in Rules 701(a)(2)(i), (a)(3)(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-dealer and for which the bank employee may 

receive a higher-than-nominal and/or contingent referral fee.  The collection of 

information in Rule 701(a)(2)(iii) and (a)(3)(v) is designed to help a bank determine 

whether it is acting in compliance with the exemption.  The collection of information in 

Rule 701(a)(3)(iv) is designed to provide the customer with information that may be 

helpful to the customer in deciding whether to engage in a securities transaction with the 

broker-dealer. 

c. Respondents 

The collections of information in Rule 701 will apply to banks that wish to utilize 

the exemption provided in this rule and broker-dealers with which those banks enter into 

networking arrangements. 

d. Disclosure Burden 

The Agencies estimate that approximately 1,000 banks annually will use the 

exemption in Rule 701 and that each bank, individually or working with its partner 

broker-dealer, will on average make the required referral fee disclosures to 200 customers 

annually.  In addition, we estimate that each bank will provide one notice annually to its 

                                                 
346  See Rule 701(a)(2)(iii). 

 143



broker-dealer partner regarding names and other identifying information about bank 

employees.  The Agencies also estimate that broker-dealers will, on average, notify each 

of the 1,000 banks approximately twice a year about a determination regarding a 

customer’s high net worth or institutional status as well as a bank employee’s statutory 

disqualification status.  The Agencies further estimate that each broker-dealer will notify 

three customers of each partner bank per year concerning transaction suitability or the 

customer’s financial sophistication.  

Based on these estimates, the Agencies anticipate that Rule 701 will result in 

approximately 200,000 disclosures to customers, 1,000 notices to broker-dealers about 

bank employees, 2,000 notices to banks about customer status, and 3,000 notices to 

customers per year about suitability or sophistication.  The Agencies further estimate 

(based on the level of difficulty and complexity of the applicable activities) that a bank or 

broker-dealer will spend approximately 5 minutes per customer to comply with the 

disclosure requirement, and that a bank will spend approximately 15 minutes per notice 

to a broker-dealer.  The Agencies also estimate that a broker-dealer will spend 

approximately 15 minutes per notice to a bank or customer.  Thus, the estimated total 

annual disclosure burden for these requirements in Rule 701 are approximately 8,583 

hours for banks and approximately 9,583 hours for broker-dealers.347  

e. Collection of Information Is Mandatory 

This collection of information is mandatory for banks relying on Rule 701 and 

their broker-dealer partners. 
                                                 
347   Because banks and broker-dealers will share the disclosure obligation under the 

final rule, these estimates attribute 50 percent of that disclosure burden to banks 
and 50 percent to broker-dealers. 

 144



f. Confidentiality 

A bank relying on the exemption provided in Rule 701 or its partner broker-dealer 

is required to provide certain referral fee disclosures to the customers referred by the 

bank under this rule.  Banks relying on the exemption provided in Rule 701 are required 

also to enter into agreements with a broker-dealer obligating the broker-dealer to notify 

the bank upon becoming aware of certain information with respect to the customer or the 

bank employee, and to notify the customer upon becoming aware of certain information 

concerning the customer or the nature of a securities transaction.348  Similarly, a bank is 

required to notify a broker-dealer about the name of the bank employee receiving a 

referral fee and certain other identifying information. 

g. Record Retention Period  

Rule 701 does not include a specific record retention requirement.  Banks, 

however, are required to retain the records in compliance with any existing or future 

recordkeeping or disclosure requirements established by the Banking Agencies.  Broker-

dealers are also required to retain records in compliance with existing or future 

recordkeeping or disclosure requirements established by the Commission or any self-

regulatory organization.   

2.  Rule 723 

a. Collection of Information 

Rule 723(e)(1) requires 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 

                                                 
348  These requirements are discussed in more detail in section 1.d (Rule 701, 

Disclosure Burden), supra.  

 145



exclusion,349 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.350 

b. Use of Information 

The collection of information in Rule 723 is designed to help ensure that a bank 

relying on the de minimis exclusion is 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 Rule 721(a)(1). 

c. Respondents 

The collection of information in Rule 723 will apply to banks relying on the de 

minimis exclusion from the chiefly compensated test. 

d. Recordkeeping Burden 

Because the Agencies expect a small number of banks may use the account-by-

account approach in monitoring their compliance with the chiefly compensated test, the 

Agencies estimate that approximately 50 banks annually will use the de minimis 

exclusion in Rule 723 and each such bank will, 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 Rule 723 will 

result in approximately 500 accounts annually for which records are required to be 

                                                 
349  See Rule 723(e)(2), which requires that the total number of accounts excluded by 

the bank, under the exclusion from the chiefly compensated test in 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 
will be rounded up to 1) or 500. 

350  See Rule 723(e)(1). 

 146



maintained.  The Agencies anticipate that these records will consist of records that are 

generally created as part of the securities transaction and the account relationship and 

minimal additional time will be required in maintaining these records.  Based on this 

analysis, the Agencies estimate that a bank will spend approximately 15 minutes per 

account to comply with the record maintenance requirement of Rule 723.  Thus, the 

estimated total annual recordkeeping burden for Rule 723 is 125 hours.     

e. Collection of Information Is Mandatory 

This collection of information is mandatory for banks desiring to rely on de 

minimis exclusion contained in Rule 723. 

f. Confidentiality 

Rule 723 does not address or restrict the confidentiality of the documentation 

prepared by banks under the rule.  Accordingly, banks will have to make the information 

available to regulatory authorities or other persons to the extent otherwise provided by 

law.  

g. Record Retention Period 

Rule 723 will include a requirement to maintain records related to certain 

securities transactions.  Banks will be required to retain these records in compliance with 

any existing or future recordkeeping requirements established by the Banking Agencies. 

3. Rule 741 

a. Collection of Information 

Rule 741(a)(2)(ii)(A) requires a bank relying on this 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 

 147



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.  In situations where a bank effects transactions under 

the exemption as part of a program for the investment or reinvestment of deposits funds 

of, or collected by, another bank, the rule permits either the effecting bank or deposit-

taking bank to provide the customer a prospectus for the money market fund securities.  

b. Use of Information 

The purpose of the collection of information in Rule 741 is to help ensure that a 

customer of a bank whose funds or deposits are invested into a money market fund that is 

not a no-load fund under the exemption will have sufficient information upon which to 

make an informed investment decision, in particular, regarding the fees the customer will 

pay with respect to the securities. 

c. Respondents 

The collection of information in Rule 741 applies to banks that directly or 

indirectly rely on the exemption provided in the rule in the manner described above. 

d. Disclosure 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 will use the exemption in Rule 741 and each bank (or 

its partner bank), on average, will deliver the prospectus required by the rule to 

approximately 1,000 customers annually.  Therefore, the Agencies estimate that Rule 741 

will result in approximately 500,000 disclosures per year.  The Agencies estimate further 

that a bank will spend approximately 5 minutes per response to comply with the delivery 

 148



requirement of Rule 741.  Thus, the estimated total annual disclosure burden for Rule 741 

is 41,667 hours.     

e. Collection of Information Is Mandatory 

This collection of information is mandatory for banks relying on the exemption. 

f. Confidentiality 

The collection of information delivered pursuant to Rule 741 must be provided by 

banks relying on the exemption in this rule (or in the case of programs involving deposits 

of another bank, the other bank) 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 

Rule 741 does not include a record retention requirement. 

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 will 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.351 

While banks’ efforts to comply with the GLBA and the exemptions will 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 

                                                 
351  See Exchange Act Section 3(a)(4)(B)(i) – (xi). 

 149



adopting exemptions and interpretations that are expected to provide banks with 

increased options and flexibility and help to reduce overall costs.  Some commenters 

noted that the rules as proposed will give banks flexibility in structuring their operations, 

and one bank trade association stated that small banks will be able to comply with the 

proposed rules without significantly altering their activities.352  Two commenters stated 

that the Agencies had underestimated the costs associated with coming into compliance 

with Regulation R and also provided estimates of ongoing compliance costs.353   

2. Discussion of Rule Interpretations and Exemptions 

The benefits and costs of the principal exemptions and interpretations in the rules 

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.354 

                                                 
352  See Citigroup Letter, ACB Letter, ICBA Letter. 

353  See Fiserv Letter, Colorado Trust Letter.   

354  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. 

 150



Under the rule, a “nominal” referral fee is 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 1/1000th of 

the employee’s actual annual base salary; or (3) twenty-five dollars ($25), as adjusted for 

inflation pursuant to Rule 700(f).   

The Agencies believe these alternatives likely will 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 or annual rate of pay or the average hourly or annual 

rate of pay for a job family gives 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 the rules) is expected to enable banks 

to minimize their overall costs based on their individual referral programs and cost 

 151



structures.  Several commenters supported these alternatives, or stated that the rules 

implementing the networking exception as a whole struck an appropriate balance.355 

In light of the statutory provision allowing banks to pay a “nominal one-time cash 

fee,” the rule requires that all referral fees paid under the exception be paid in cash.  At 

the same time, the Agencies have clarified that banks have the flexibility to use cash-

equivalent points, paid no less often than quarterly, in paying nominal referral fees under 

the exception.   

Rule 700(b) 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 multiple, 

significant factors or variables that are not related to securities transactions at the broker-

dealer.  Moreover, a referral made by the employee 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.  Rule 700(b) also provides a conditional safe harbor from the definition 

of “incentive compensation” for certain bonus or similar plans that are based on any 

measure of the overall profitability of a bank; an affiliate of a bank (other than a broker-

dealer); an operating unit of a bank or of an affiliate of a bank (other than a broker-

dealer); or a broker-dealer (if the bonus plan meets certain criteria designed to ensure, 

among other things, that the plan includes other factors or variables).  The final definition 

                                                 
355  See ABA Letter, Roundtable Letter, ACB Letter. 

 152



has been revised from the proposal to give banks more flexibility in using their existing 

bonus plans within the framework required by the GLBA.    

The rules also include a conditional exemption to 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-dealer with which the bank 

has a contractual or other written networking arrangement.  This exemption provides a 

benefit to banks by expanding the types of referral fees that banks may utilize with 

respect to institutional customers and high net worth customers.  A number of 

commenters supported granting an exemption for such referrals.356  There likely will be 

costs associated with complying with the conditions in the exemption (such as the 

requirement for banks to make certain disclosures to high net worth or institutional 

customers and the requirement for broker-dealers to make certain determinations and 

provide certain notifications to banks or a customer)357 as well as the other terms and 

conditions in the statutory networking exception.  These costs, however, will be either a 

result of the statutory requirements or costs voluntarily incurred by banks because they 

want to take advantage of the exemption. 

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 compliance with fiduciary 

principles and standards without registering as a broker.  To qualify for the trust and 

                                                 
356  See State Street Letter, SIMFA Letter, U.S. Trust Letter, BISA Letter. 

357  Rule 701(a)(2)(i), (a)(3)(iii)-(v), and 701(b). 

 153



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 rules dealing with the trust and fiduciary activities 

exception will provide a number of benefits to banks and their customers without 

imposing significant costs on either group.358  The provisions regarding the “chiefly 

compensated” condition and related exemptions, while imposing some costs related to 

systems necessary to perform the calculations and track compensation, are expected to 

reduce banks’ compliance costs and make the trust and fiduciary activities exception 

more useful.  For example, the rules permit a bank to follow an alternate test to the 

account-by-account approach to the “chiefly compensated” condition.  Under this 

exemption, a bank may calculate the compensation it receives from its trust and fiduciary 

business as a whole on a bank-wide basis, subject to certain conditions.359  This 

alternative is designed to provide banks with a potentially less costly approach for 

determining compliance with the trust and fiduciary activities exception.  Some 

commenters noted that this alternative approach was workable.360  Similarly, the 

Agencies’ exemptions from the “chiefly compensated” condition for certain short-term 

accounts, accounts acquired as part of a business combination or asset acquisition, 

accounts held at a non-shell foreign branch, accounts transferred to a broker-dealer or 

other unaffiliated entity, and a de minimis number of accounts are expected also to 

                                                 
358  The trust and fiduciary exception is addressed in Rules 721-723. 

359  See Rule 722. 

360   See e.g., ABA Letter, WBA Letter, U.S. Trust Letter, PNC Letter. 

 154



reduce banks’ compliance costs by facilitating banks’ ability to comply with the “chiefly 

compensated” condition.361  While compliance with the conditions in these exemptions 

likely will result in some costs, such as the recordkeeping requirement associated with the 

de minimis exclusion, these costs are likely more than justified by the benefits associated 

with the exemptions given that banks could individually determine whether they wish to 

utilize the exemptions. 

As previously noted, banks are likely to incur some costs to comply with the 

GLBA.  The rules, however, include a number of exemptions which are intended to help 

to reduce overall costs.  As a result, the Agencies do not believe that banks will incur 

significant additional costs to comply with the liberalized exemptions of Rules 722 

through 723 or the definitional guidance of Rule 721.  

c. Sweep Accounts and Transactions in Money Market Funds 

Section 3(a)(4)(B)(v) of the Exchange Act provides a bank 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 for a customer or on behalf of 

another bank 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 

rules provide guidance, consistent with FINRA rules,362 regarding the definition of “no-

load” as used in the exception.  This guidance likely will benefit banks by clarifying the 

types of charges that are permissible and by providing greater legal certainty.   

                                                 
361  See Rule 723. 

362  See FINRA Rule 2830. 

 155



The rules also contain an exemption that permits banks to effect transactions on 

behalf of a customer, or for the deposit funds of another bank, in securities issued by a 

money market fund, subject to certain conditions.363  While compliance with the 

conditions associated with this exemption, such as the prospectus delivery requirement in 

certain circumstances, may 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 are free to determine whether to incur these costs, the exemption is expected to 

provide a net benefit for banks that wish to utilize the exemption.    

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 

rules contain an exemption that permits a bank, subject to certain conditions, to accept 

orders to effect transactions in securities for accounts for which the bank acts as a 

custodian (including an account for which a bank acts as directed trustee), or, in some 

cases, for which the bank acts as a subcustodian or a non-fiduciary administrator or 

recordkeeper.  Specifically, this custody exemption (Rule 760) 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.  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 exemption allows banks to accept orders from custody accounts 

                                                 
363  See Rule 741. 

 156



while imposing conditions designed to prevent a bank from operating a brokerage 

business out of its custody department.   

The exemption is designed to 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 will only be imposed on banks that choose to utilize the exemption. 

e. Other Rules 

The Agencies are also adopting certain special purpose exemptions.  Specifically, 

we are adopting an exemption that permits banks to effect transactions in Regulation S 

securities with non-U.S. persons or registered broker-dealers.364  Another exemption also 

allows, under certain conditions, a bank to effect transactions in investment company 

securities and variable life insurance and variable annuities through the National 

Securities Clearing Corporation or directly with a transfer agent or insurance company or 

separate account that is excluded from the definition of transfer agent, instead of through 

a broker-dealer.365  In addition, an exemption permits banks that rely on certain 

exceptions and exemptions to effect certain transactions involving the securities of a 

company for the company’s employee benefit plans and participants through the National 

Securities Clearing Corporation or directly with a transfer agent or insurance company or 

separate account that is excluded from the definition of transfer agent, instead of through 

                                                 
364  See Rule 771. 

365  See Rule 775. 

 157



a broker-dealer.  An additional exemption permits a bank, as 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.366  We also are extending 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 is 18 months after the effective date of the final rule.367  This exemption 

also provides, under certain circumstances, 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.368  Finally, we are issuing 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 September 30, 2008.369 

The Agencies believe these provisions offer a number of benefits to banks and 

their customers.  In particular, the Regulation S exemption helps ensure that U.S. banks 

that effect transactions in Regulation S securities with non-U.S. customers will be more 

competitive with foreign banks or other entities that offer those services without being 

                                                 
366  See Rule 772. 

367  See Rule 780. 

368  Id. 

369  See Rule 781. 

 158



registered as broker-dealers.  The exemption from rescission liability under Exchange Act 

Section 29 also provides banks some legal certainty, both temporarily and on a permanent 

basis, as they conduct their securities activities.  The exemption related to securities 

lending services enables banks to engage in the types of services in 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” 

also benefits banks by providing them with an adequate period of time to transition to the 

requirements under the statute and the rules. 

The Agencies estimate that the costs of these exemptions will be minimal and are 

justified by the benefits the exemptions offer.  For example, the Regulation S exemption 

may impose certain costs on banks that are designed to ensure that they remain in 

compliance with the conditions under the exemption.  In particular, the exemption 

permits banks to rely on the exemption only for transactions in “eligible securities” and 

with either broker-dealers or purchasers who are not U.S. persons within the meaning of 

Section 903 of Regulation S.  Banks may incur certain administrative costs to ensure that 

a transaction meets these requirements.  Nevertheless, the exemption is an 

accommodation to banks that wish to effect transactions in Regulation S securities and, as 

a result, the compliance costs will be imposed only on those banks that believe that it is in 

their best business interests to take advantage of the exemption. 

Given that Exchange Act Section 29 is rarely used as a remedy, we do not 

anticipate that this exemption will impose significant costs on the industry or on 

investors.   

3.  General Costs and Benefits  

 159



Based on the burden hours discussed in the Paperwork Reduction Act Analysis 

section, supra, the Agencies expect the ongoing requirements of the rules to result in a 

total of 50,375 annual burden hours for banks and 9583 annual burden hours for broker-

dealers, for a grand total of 59,958 annual burden hours.370  The Agencies estimate that 

the hourly costs for these burden hours will be approximately $68 per hour.371  Therefore, 

the annual total costs will be approximately $4,077,144. 

In addition to the costs associated with burden hours discussed in the Paperwork 

Reduction Act Analysis section, supra, the Agencies expect that many banks also could 

incur start-up costs for legal and other professional services.372  Many banks will utilize 

their in-house counsel, accountants, compliance officers, and programmers in an effort to 

achieve compliance with the 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 - $268.373  Taking an average of these 

                                                 
370  See infra at VIII.A.1.d., VIII.A.2.d., and VIII.A.3.d. 

371  $68/hour figure for a clerk (e.g.  compliance clerk) is from the Securities Industry 
Association (now SIFMA) 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.  

372  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 
rules.  See supra at VIII.B.2.a.  In addition, there likely will be costs for 
developing systems for making determinations regarding compliance with 
advertising and compensation restrictions pursuant to the rules regarding 
safekeeping and custody.  See supra at VIII.B.2.d.   

373   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. 

 160professional costs, the Agencies estimate a general hourly in-house labor cost of $240 per 

hour for professional services.   

Based on our expectation that most start-up costs will involve bringing systems 

into compliance and that many banks will be able to do so either using existing systems 

or by slightly modifying existing systems, the Agencies estimate that the rules will 

require banks to utilize an average of 30 hours of professional services.  The Agencies 

expect that most banks affected by the rules will either use in-house counsel or 

employees resulting in an average total cost of $7,200 per affected bank.374  The Agencies 

estimate that the rules will apply to approximately 9,475 banks and approximately 25 

percent of these banks will 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.   

Two commenters stated that the Agencies’ estimates of hourly rates in the 

proposal were fair, but that the estimates of the time requirements were too low.  These 

commenters estimated startup costs of between $43,000 and $55,000.375  In addition, 

these commenters estimated ongoing costs to be between $60,000 and $95,000 per year.  

Based on these commenters’ estimates, startup costs would range from $101.9 million 

(9475 banks x 0.25 affected x $43,000) to $130.3 million (9475 x 0.25 x $55,000), and a 

                                                 
374  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.). 

375  See Fiserv Letter, Colorado Trust Letter.   

 161



range of annual ongoing costs of $142.1 million (9475 x 0.25 x $60,000) to $225 million 

(9475 x 0.25 x $95,000).  The Agencies, however, believe that these cost estimates are 

not representative of the costs for the majority of banks affected by Regulation R.  The 

Agencies received approximately 60 comments, primarily from banks and banking 

industry groups, and the comments generally were favorable.  Only these two 

commenters stated that the Agencies had underestimated start-up and continuing 

compliance costs.  The Agencies therefore believe that the estimates in the proposal 

reflect the costs that the majority of the banks affected by the rules are likely, on average, 

to incur, and are appropriately used to estimate the overall compliance costs of 

Regulation R. 

The Agencies believe that the rules will 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 exemptions.  Without the rules, banks may 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 will be useful to banks in a number of ways.     

The Agencies expect that one component of the benefits to banks will be savings 

in legal fees, given that 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 interpretive issues raised by the GBLA, the Agencies estimate that, absent any 

regulatory guidance, banks on average will use the services of outside counsel for 

approximately 25 more hours for the initial year and 5 more hours per year thereafter, 

 162



than with the existence of the rules.  Industry sources indicate that the hourly costs for 

hiring outside counsel are approximately $400 per hour.  The rules will 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 rules will apply to approximately 9,475 banks and approximately 25 percent of 

these banks will enjoy more than a de minimis cost savings benefit.  Using these values, 

the Agencies estimate a cost savings related to reduced legal fees of $23,687,500 (9,475 

X 0.25 X $10,000) for the initial year and $4,737,500 (9,475 X 0.25 X $2,000) per year 

thereafter.   

The Agencies believe that the benefits of Regulation R justify the costs.  

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.376  Exchange Act Section 23(a)(2) requires the 

Commission, in adopting rules under that Act, to consider the impact that any such rule 

will have on competition.  This Section also prohibits the Commission from adopting any 

rule that will impose a burden on competition not necessary or appropriate in furtherance 

of the purposes of the Exchange Act.377  

The Agencies have designed the interpretations, definitions, and exemptions to 

minimize any burden on competition.  Indeed, the Agencies believe that by providing 

                                                 
376  15 U.S.C. 78c(f). 

377  15 U.S.C. 78w(a)(2). 

 163



legal certainty to banks that conduct securities activities, by clarifying the GLBA 

requirements, and by exempting a number of activities from those requirements, the rules 

allow banks to continue to conduct securities activities consistent with the GLBA.   

The 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 rules contain a number of 

exemptions that provide banks flexibility in conducting their securities activities, which 

will promote competition and reduce costs. 

D. Final Regulatory Flexibility Analysis 

The Agencies have prepared a Final Regulatory Flexibility Analysis (“FRFA”), in 

accordance with the provisions of the Regulatory Flexibility Act (“RFA”),378 regarding 

the rules.  

1. Reasons for the 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.379  On October 13, 

2006, President Bush signed into law the Regulatory Relief Act.380  Section 101 of that 

Act, among other things, requires the Agencies jointly to issue a single set of rules 

                                                 
378  5 U.S.C. 604. 

379  15 U.S.C. 78c(a)(4). 

380  Pub. L. No. 109-351, 120 Stat. 1966 (2006). 

 164



implementing the bank broker exceptions in Section 3(a)(4) of the Exchange Act.381  

These rules are being adopted by the Agencies to fulfill this requirement.  The rules are 

designed generally to provide guidance on the GLBA’s bank 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. 

2. Objectives 

The rules provide guidance to the industry with respect to the GLBA 

requirements.  The rules also provide certain conditional exemptions from the broker 

definition to allow banks to perform certain securities activities.  The Supplementary 

Information section, supra, contains more detailed information on the objectives of the 

rules.   

3. Legal Basis 

Pursuant to Section 101 of the Regulatory Relief Act, the Agencies are issuing the 

rules.   

4. Small Entities Subject to the Rule 

The rules 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 
                                                 
381  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 
rules. 

 165



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.382  Congress did not exempt small entity 

banks from the application of the GLBA.  Moreover, because the 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 rules.  The 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.383    The Agencies, however, have adopted several 

interpretations or exceptions that likely will be particularly useful for small banks such 

as, for example, the fixed inflation-adjusted dollar alternative to the “nominal” 

requirement in the networking exception and the exception in Rule 723 from the chiefly 

compensated test for a de minimis number of trust or fiduciary accounts.  

 The Agencies estimate that the rules will apply to approximately 9,475 banks, 

approximately 5,816 of which could be considered small banks with assets of $165 

million or less.  Moreover, we do not anticipate any significant costs to small entity banks 

as a result of the rules.  We note that a trade association whose membership consists 

primarily of small banking organizations indicated that small banks would be able to 

comply with the rules as proposed without significantly altering their activities.384 

                                                 
382  See 15 U.S.C. 78c(a)(6); Pub. L. No. 109-351, 120 Stat. 1966 (2006). 

383  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.   

384  See ICBA Letter. 

 166



5. Reporting, Recordkeeping and Other Compliance Requirements 

The rules will not impose any significant reporting, recordkeeping, or other 

compliance requirements on banks that are small entities.385 

6. Duplicative, Overlapping, or Conflicting Federal Rules 

The Agencies believe that no other rules duplicate, overlap, or conflict with the 

final rules. 

7. Significant Alternatives 

Pursuant to Section 3(a) of the RFA,386 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 rule for small entities; (3) the use of performance rather than 

design standards; and (4) an exemption from coverage of the rules, or any part thereof, 

for small entities. 

As discussed above, the GLBA does not exempt small entity banks from the 

Exchange Act broker registration requirements and because the rules are intended to 

provide guidance to, and exemptions for, all banks that are subject to the GLBA and are 

designed to accommodate the business practices of all banks (including small entity 

banks), the Agencies determined that it would not be appropriate or necessary to exempt 

small entity banks from the operation of the rules.  Moreover, providing one or more 

                                                 
385  The Agencies’ estimates related to recordkeeping and disclosure are detailed in 

the “Paperwork Reduction Act Analysis” Section of this Release. 

386  5 U.S.C. 604(a). 

 167



special exemptions for small banks could place broker-dealers, including small broker-

dealers, or larger banks at a competitive disadvantage versus small banks. 

The 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 rules are expected to 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 rules because the rules already use performance standards.  Moreover, the 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 rules. 

E.  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 believes the rules, to the maximum extent possible, are presented in a simple 

and straightforward manner.   

 
X. 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 is repealing by operation of statute 

current Rules 3a4-2, 3a4-3, 3a4-4, 3a4-5, 3a4-6, and 3b-17 (§§ 240.3a4-2, 240.3a4-3, 

240.3a4-4, 240.3a4-5, 240.3a4-6, and 240.3b-17, respectively).   The Commission is 

repealing Exchange Act Rules 15a-7 and 15a-8 (§ 240.15a-7 and §240.15a-8, 

 168



respectively).  The Commission, jointly with the Board of Governors of the Federal 

Reserve System, is also adopting new Rules 700, 701, 721, 722, 723, 740, 741, 760, 771, 

772, 775, 776, 780, and 781 under the Exchange Act (§§ 247.700, 247.701, 247.721, 

247.722, 247.723, 247.740, 247.741, 247.760, 247.771, 247.772, 247.775, 247.776, 

247.780, and 247.881, respectively). 

XI. Text of Rules and Rule Amendment 

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 amends 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. 

 169



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 banks effecting certain 
excepted or exempted transactions in investment company securities.  

218.776 Exemption from the definition of “broker” for banks effecting certain 
excepted or exempted transactions in a company’s securities for its 
employee benefit plans.  

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 amends Title 17, 

Chapter II of the Code of Federal Regulations as follows: 

 170



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. 

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: 

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.” 

 171



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 banks effecting certain 
excepted or exempted transactions in investment company securities.  

247.776 Exemption from the definition of “broker” for banks effecting certain 
excepted or exempted transactions in a company’s securities for its 
employee benefit plans.  

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 adopted by the Commission as Part 247 of Title 17, 

Chapter II of the Code of Federal Regulations and by the Board as Part 218 of Title 12, 

Chapter II of the Code of Federal Regulations follow: 

  

§ ___.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.). 

 

§ ___.700 Defined terms relating to the networking exception from the 
definition of “broker.” 

 

 172



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 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: 

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(A) Those factors or variables include multiple 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 under a bonus or similar plan on the basis 

of any measure of the overall profitability or revenue of: 

(i) The bank, either on a stand-alone or consolidated basis; 

(ii) Any affiliate of the bank (other than a broker or dealer), or any operating unit 

of the bank or an affiliate (other than a broker or dealer), if the affiliate or operating unit 

does not over time predominately engage in the business of making referrals to a broker 

or dealer; or 

(iii) A broker or dealer if: 

(A) Such measure of overall profitability or revenue is only one of multiple 

factors or variables used to determine the compensation of the officer, director or 

employee;   

(B) The factors or variables used to determine the compensation of the officer, 

director or employee include multiple significant factors or variables that are not related 

to the profitability or revenue of the broker or dealer;  

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(C) A referral made by the employee is not a factor or variable in determining the 

employee’s compensation under the plan; and 

(D) The employee’s compensation under the plan is not determined by reference 

to referrals made by any other person. 

(c) Nominal one-time cash fee of a fixed dollar amount means a cash payment for 

a referral, to a bank employee who was personally involved in referring the customer to 

the broker or dealer, 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 1/1000th of the employee’s actual annual base salary; 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. 

 175



(e) Referral means the action taken by one or more bank employees 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 determined shall be 

rounded to the nearest multiple of $1. 

 
§ ___.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 

 176



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 registered or approved, or otherwise required to be registered or 

approved, in accordance with the qualification standards established by the rules of any 

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.  The bank provides the high net worth customer or institutional 

customer the information set forth in paragraph (b) of this section 

(A) In writing prior to or at the time of the referral; or 

(B) Orally prior to or at the time of the referral and 

(1) The bank provides such information to the customer in writing within 

3 business days of the date on which the bank employee refers the customer to the broker 

or dealer; or 

 177



(2) The written agreement between the bank and the broker or dealer provides for 

the broker or dealer to provide such information to the customer in writing in accordance 

with paragraph (a)(3)(i) of this section. 

(ii) Customer qualification.  (A) In the case of a customer that is a not a natural 

person, the bank has a reasonable basis to believe that the customer is an institutional 

customer before the referral fee is paid to the bank employee. 

(B) In the case of a customer that is a natural person, the bank has a reasonable 

basis to believe that the customer is a high net worth customer prior to or at the time of 

the referral. 

 (iii) Employee qualification information. Before a referral fee is paid to a bank 

employee under this section, 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 registered or approved, or otherwise 

required to be registered or approved, in accordance with the qualification standards 

established by the rules of any self-regulatory organization 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: 

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 (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 § ___.700. 

(3) Provisions of written agreement. The written agreement between the bank and 

the broker or dealer shall require that: 

(i) Broker-dealer written disclosures.  If, pursuant to paragraph (a)(2)(i)(B)(2) of 

this section, the broker or dealer is to provide the customer in writing the disclosures set 

forth in paragraph (b) of this section, the broker or dealer provides such information to 

the customer in writing: 

(A) Prior to or at the time the customer begins the process of opening an account 

at the broker or dealer, if the customer does not have an account with the broker or 

dealer; or 

(B) Prior to the time the customer places an order for a securities transaction with 

the broker or dealer as a result of the referral, if the customer already has an account at 

the broker or dealer. 

(ii) Customer and employee qualifications.  Before the referral fee is paid to the 

bank employee:  

 179



(A) The broker or dealer 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 has a reasonable basis to believe that the customer is a 

high net worth customer or an institutional customer. 

(iii) 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, 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, 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 

 180or dealer’s applicable self-regulatory organization as if the broker or dealer had 

recommended the securities transaction. 

(iv) Notice to the customer.  The broker or dealer inform the customer if the 

broker or dealer determines that the customer or the securities transaction(s) to be 

conducted by the customer does not meet the applicable standard set forth in paragraph 

(a)(3)(iii) of this section. 

(v) Notice to the bank.  The broker or dealer 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; or 

(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.  

 (b) Required disclosures.  The disclosures provided to the high net worth 

customer or institutional customer pursuant to paragraphs (a)(2)(i) or (a)(3)(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 

 181



would not be considered incentive compensation under § ___.700(b)(1) or that is 

described in § ___.700(b)(2). 

(d)  Definitions.  When used in this section: 

(1) High net worth customer. 

(i) General.  High net worth customer means: 

(A) 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; and 

(B) Any revocable, inter vivos or living trust the settlor of which is a natural 

person who, either individually or jointly with his or her spouse, meets the net worth 

standard set forth in paragraph (d)(1)(i)(A) of this section. 

(ii) Individual and spousal assets.  In determining whether any person is a high net 

worth customer, there may be included in the assets of such person  

(A) Any assets held individually; 

(B) If the person is acting jointly with his or her spouse, any assets of the person’s 

spouse (whether or not such assets are held jointly); and 

(C) If the person is not acting jointly with his or her spouse, 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.   

(2) Institutional customer means any corporation, partnership, limited liability 

company, trust or other non-natural person that has, or is controlled by a non-natural 

person that has, at least: 

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(i) $10 million in investments; or  
 
(ii) $20 million in revenues; or 

(iii) $15 million in revenues 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.   

 183



(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. 

§ ___.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 

 184



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 

(i) 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; and  

(ii) Calculated within 60 days of the end of the year. 

(4) Relationship compensation means any compensation a bank receives 

attributable to a trust or fiduciary account that consists of: 

(i) An administration fee, including, without limitation, a fee paid— 

(A) For personal services, tax preparation, or real estate settlement services; 

(B) For disbursing funds from, or for recording receipt of payments to, a trust or 

fiduciary account; 

(C) In connection with securities lending or borrowing transactions; 

(D) For custody services; or 

(E) In connection with an investment in shares of 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), including, 

without limitation, a fee paid for assessing investment performance or for reviewing 

compliance with applicable investment guidelines or restrictions; 

 185



(iii) A fee based on a percentage of assets under management, including, without 

limitation, a fee paid 

(A) Pursuant to a plan under § 270.12b-1;  

(B) In connection with an investment in shares of an investment company for 

personal service or the maintenance of shareholder accounts; 

(C) Based on a percentage of assets under management for any of the following 

services— 

(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;   

 186



(D) Based on the financial performance of the assets in an account; or 

(E) For the types of services described in paragraph (a)(4)(i)(C) or (D) of this 

section if paid based on a percentage of assets under management;  

(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. 

 (6) 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)). 

(7) Year means a calendar year, or fiscal year consistently used by the bank for 

recordkeeping and reporting purposes. 

(b) Revenues derived from transactions conducted under other exceptions or 

exemptions.  For purposes of calculating the yearly compensation percentage for a trust 

or fiduciary account, a bank may at its election exclude the compensation associated with 

any securities transaction conducted in accordance with the exceptions in section 

3(a)(4)(B)(i) or sections 3(a)(4)(B)(iii) – (xi) of the Act (15 U.S.C. 78c(a)(4)(B)(i) or 

78c(a)(4)(B)(iii)-(xi)) and the rules issued thereunder, including any exemption related to 

such exceptions jointly adopted by the Commission and the Board, provided that if the 

bank elects to exclude such compensation, the bank must exclude the compensation from 

both the relationship compensation (if applicable) and total compensation for the account.   

(c) Advertising restrictions.   

 187



(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 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 § ___.760(g)(2).  

§ ___.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)), including the advertising restrictions in 

section 3(a)(4)(B)(ii)(II) of the Act (15 U.S.C. 78c(a)(4)(B)(ii)(II) as implemented by 

§ ___.721(c); and 

 188



(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 be 

(1) Equal to 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; and 

(2) Calculated within 60 days of the end of the year. 

(d) Revenues derived from transactions conducted under other exceptions or 

exemptions.  For purposes of calculating the yearly compensation percentage for a trust 

or fiduciary account, a bank may at its election exclude the compensation associated with 

any securities transaction conducted in accordance with the exceptions in section 

3(a)(4)(B)(i) or sections 3(a)(4)(B)(iii) – (xi) of the Act (15 U.S.C. 78c(a)(4)(B)(i) or 

78c(a)(4)(B)(iii)-(xi)) and the rules issued thereunder, including any exemption related to 

such sections jointly adopted by the Commission and the Board, provided that if the bank 

 189



elects to exclude such compensation, the bank must exclude the compensation from both 

the relationship compensation (if applicable) and total compensation of the bank. 

 190



§ ___.723 Exemptions for special accounts, transferred accounts, foreign 
branches and a de minimis number of accounts. 

 (a) Short-term accounts.  A bank may, in determining its compliance with the 

chiefly compensated test in § ___.721(a)(1) or § ___.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 § ___.721(a)(1) 

or § ___.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) Non-shell foreign branches.   

(1) Exemption.  For purposes of determining compliance with the chiefly 

compensated test in § ___.722(a)(2), a bank may exclude the trust or fiduciary accounts 

held at a non-shell foreign branch of the bank if the bank has reasonable cause to believe 

that trust or fiduciary accounts of the foreign branch held by or for the benefit of a U.S. 

person as defined in 17 CFR 230.902(k) constitute less than 10 percent of the total 

number of trust or fiduciary accounts of the foreign branch. 

(2) Rules of construction.  Solely for purposes of this paragraph (c), a bank will 

be deemed to have reasonable cause to believe that a trust or fiduciary account of a 

foreign branch of the bank is not held by or for the benefit of a U.S. person if 

 191



(i) The principal mailing address maintained and used by the foreign branch for 

the accountholder(s) and beneficiary(ies) of the account is not in the United States; or 

(ii) The records of the foreign branch indicate that the accountholder(s) and 

beneficiary(ies) of the account is not a U.S. person as defined in 17 CFR 230.902(k).   

(3) Non-shell foreign branch.  Solely for purposes of this paragraph (c), a non-

shell foreign branch of a bank means a branch of the bank  

(i) That is located outside the United States and provides banking services to 

residents of the foreign jurisdiction in which the branch is located; and 

(ii) For which the decisions relating to day-to-day operations and business of the 

branch are made at that branch and are not made by an office of the bank located in the 

United States. 

 (d) 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 

§ ___.721(a)(1) of this part, a bank operating under §___.721(a)(1) 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 § ___.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. 

 192



 (e) De minimis exclusion.  A bank may, in determining its compliance with the 

chiefly compensated test in § ___.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. 

§ ___.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. 

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(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; 

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(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)). 

 

§ ___.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 either 

(A) Provides 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 Act (15 U.S.C. 78o(a)); or 

(B) Effects the transactions on behalf of another bank as part of a program for the 

investment or reinvestment of deposit funds of, or collected by, the other bank; 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 

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(A) The bank or, if applicable, the other bank described in paragraph (a)(1)(B) of 

this section provides the customer, not later than at the time the customer authorizes the 

securities transactions, a prospectus for the securities; and 

(B) The bank and, if applicable, the other bank described in paragraph (a)(1)(B) 

of this section do 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 § ___.740(b). 

(2) No-load has the same meaning as in § ___.740(c). 

 

§ ___.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 and additional conditions. The bank 

complies with the employee compensation restrictions in paragraph (c) of this section and 

the other conditions in paragraph (d) 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 

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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 

accounts 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 and additional conditions. The bank 

complies with the employee compensation restrictions in paragraph (c) of this section and 

the other conditions in paragraph (d) of this section;  

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(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:  

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(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 § 

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___.700(b)(1) as if a referral had been made by the bank employee, or any compensation 

described in § ___.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, other than as a directed 

trustee;  

(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 

account for which another bank acts as custodian may rely on the exemption provided in 

this section if:  

  (1) Both the custodian bank and the administrator or recordkeeper bank comply 

with paragraphs (a), (c) and (d) of this section; and  

  (2) The administrator or recordkeeper bank does not execute a cross-trade with or 

for the employee benefit plan account or net orders for securities for the employee benefit 

plan account, other than:   

  (i) Crossing or netting orders for shares of open-end investment companies not 

traded on an exchange, or 

 200(ii) Crossing orders between or netting orders for accounts of the custodian bank 

that contracted with the administrator or recordkeeper bank for services.  

(f) Subcustodians. A bank that acts as a subcustodian for an account for which 

another bank acts as custodian may rely on the exemptions provided in this section if:  

  (1) For employee benefit plan accounts and individual retirement accounts or 

similar accounts, both the custodian bank and the subcustodian bank meet the 

requirements of paragraphs (a), (c) and (d) of this section; 

  (2)  For other custodial accounts, both the custodian bank and the subcustodian 

bank meet the requirements of paragraphs (b), (c) and (d) of this section; and 

  (3) The subcustodian bank does not execute a cross-trade with or for the account 

or net orders for securities for the account, other than: 

  (i) Crossing or netting orders for shares of open-end investment companies not 

traded on an exchange, or  

  (ii) Crossing orders between or netting orders for accounts of the custodian bank. 

(g) 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.  

(h) 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;  

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(ii) An individual retirement account or similar account for which the bank acts as 

a custodian; 

(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; or  

(iv) An account for which the bank acts as a directed trustee. 

(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) Directed trustee means a trustee that does not exercise investment discretion 

with respect to the account. 

(4) 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 

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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.  

(5) 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.  

(6) 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.  

(7) 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)).  

§ ___.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: 

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(1) Effects a sale in compliance with the requirements of 17 CFR 230.903 of an 

eligible security to a purchaser who is not in the United States;  

(2) Effects, by or on behalf of a person who is not a U.S. person under 

17 CFR 230.902(k), 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 to a purchaser 

who is not in the United States or a registered broker or dealer, provided that if the resale 

is made prior to the expiration of any applicable distribution compliance period specified 

in 17 CFR 230.903(b)(2) or (b)(3), the resale is made in compliance with the 

requirements of 17 CFR 230.904; or 

(3) Effects, by or on behalf of a registered broker or dealer, 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 to a purchaser who is not in the United States, provided 

that if the resale is made prior to the expiration of any applicable distribution compliance 

period specified in 17 CFR 230.903(b)(2) or (b)(3), the resale 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 

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(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). 

§  ___.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: 

(1) Selecting and negotiating with a borrower and executing, or directing the 

execution of the loan with the borrower; 

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(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. 

§  ___.775 Exemption from the definition of “broker” for banks effecting certain 
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 a 

transaction in a covered security, if:  

(1) Any such security is neither traded on a national securities exchange nor 

through the facilities of a national securities association or an interdealer quotation 

system; 

(2) The security is distributed by a registered broker or dealer, or the sales charge 

is no more than the amount permissible for a security sold by a registered broker or dealer 

pursuant to any applicable rules adopted pursuant to section 22(b)(1) of the Investment 

Company Act of 1940 (15 U.S.C. 80a-22(b)(1)) by a securities association registered 

under section 15A of the Act (15 U.S.C. 78o-3); and 

(3) Any such transaction is effected: 

(i) Through the National Securities Clearing Corporation; or 

 206



(ii) Directly with a transfer agent or with an insurance company or separate 

account that is excluded from the definition of transfer agent in Section 3(a)(25) of the 

Act.   

(b) Definitions.  For purposes of this section: 

(1) Covered security means: 

(i) Any security issued by an open-end company, as defined by section 5(a)(1) of 

the Investment Company Act (15 U.S.C. 80a5(a)(1)), that is registered under that Act; 

and 

(ii)  Any variable insurance contract funded by a separate account, as defined by 

section 2(a)(37) of the Investment Company Act (15 U.S.C. 80a-2(a)(37)), that is 

registered under that Act.  

(2) Interdealer quotation system has the same meaning as in 17 CFR 240.15c2-11. 

(3) Insurance company has the same meaning as in 15 U.S.C. 77b(a)(13). 

 

§  ___.776 Exemption from the definition of “broker” for banks effecting certain 
excepted or exempted transactions in a company’s securities for its 
employee benefit plans.  

 
(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 a 

transaction in the securities of a company directly with a transfer agent acting for the 

company that issued the security, if:  

(1) No commission is charged with respect to the transaction; 

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(2) The transaction is conducted by the bank solely for the benefit of an employee 

benefit plan account;  

(3) Any such security is obtained directly from: 

(i) The company; or 

(ii) An employee benefit plan of the company; and 

(4) Any such security is transferred only to: 

(i) The company; or 

(ii) An employee benefit plan of the company.  

(b) For purposes of this section, the term employee benefit plan account has the 

same meaning as in § ___.760(h)(4). 

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

 

(a)  No contract entered into before March 31, 2009, 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: 

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 209

(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. 

 

§  ___.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 

September 30, 2008. 

By order of the Board of Governors of the Federal Reserve System, September 
24, 2007. 

 
 
Jennifer J. Johnson, 
Secretary of the Board. 
 
 
By the Securities and Exchange Commission 
 
 
 
Nancy M. Morris 
Secretary 
 
Dated: September 24, 2007