Regulation R OverviewRegulation R OverviewFIRMAFIRMA

Orlando, FLOrlando, FLApril 6-10, 2008April 6-10, 2008

Sally Miller202-663-5325smiller@aba.com

Gramm-Leach-Bliley ActGramm-Leach-Bliley Act

BackgroundBackground

●Enacted 11/12/99Enacted 11/12/99

●Intermediaries ability to offer a full Intermediaries ability to offer a full array of products and services array of products and services through functional regulationthrough functional regulation

●When is a bank functioning as a When is a bank functioning as a broker and subject to SEC broker and subject to SEC jurisdiction?jurisdiction?

Regulation RRegulation R

Finalized on 9/24/07Finalized on 9/24/07 Compliance date: first day of fiscal Compliance date: first day of fiscal

year ending after 9/30/08year ending after 9/30/08 ForthcomingForthcoming

●Record keeping rulesRecord keeping rules

●Examiner guidanceExaminer guidance

●Resolution of Dual EmployeeResolution of Dual Employee

Trust & Fiduciary ExceptionTrust & Fiduciary Exception

A bank acting in a trustee or A bank acting in a trustee or fiduciary capacity will be expected fiduciary capacity will be expected from registration if:from registration if:●Does not publicly solicit brokerage Does not publicly solicit brokerage

businessbusiness●Directs the trades to a registered Directs the trades to a registered

broker-dealerbroker-dealer●Chiefly compensated through Chiefly compensated through

relationship compensationrelationship compensation

Trust & Fiduciary ExceptionTrust & Fiduciary Exception

Applies to personal, institutional (inc. Applies to personal, institutional (inc. retirement), charitable and corporate retirement), charitable and corporate trust accountstrust accounts

Chiefly compensated test – need to Chiefly compensated test – need to build systems to both build systems to both characterizecharacterize and and measuremeasure compensation received on compensation received on trust and fiduciary accounts.trust and fiduciary accounts.

Relationship CompensationRelationship Compensation

AdministrativeAdministrative

Annual feesAnnual fees

Fee based on a % of assets Fee based on a % of assets under management under management

12b-1 fees12b-1 fees

Not Relationship Not Relationship CompensationCompensation

Processing FeesProcessing Fees Soft dollarsSoft dollars Internal paymentsInternal payments Credits for depositsCredits for deposits Sale of portfolio management Sale of portfolio management

softwaresoftware

Trust & Fiduciary ExceptionTrust & Fiduciary Exception

Two ways of measuring:Two ways of measuring:

●Bank-wide basis, then relationship Bank-wide basis, then relationship comp must at least make up 70% of comp must at least make up 70% of total compensationtotal compensation

●Account-by-account, then relationship Account-by-account, then relationship compensation must be greater than compensation must be greater than 50% of total compensation50% of total compensation

Trust & Fiduciary ExceptionTrust & Fiduciary Exception

Calculation to be performed by Calculation to be performed by average preceding two year average preceding two year compensation ratios.compensation ratios.

Impact on compliance date:Impact on compliance date:

●1/1/11 for bank with fiscal year 1/1/11 for bank with fiscal year the same as calendar year.the same as calendar year.

InternationalInternational

Applies to foreign branches Applies to foreign branches managed from USmanaged from US

Exception for foreign branches Exception for foreign branches managed from foreign locations, managed from foreign locations, may require sampling of foreign may require sampling of foreign account addresses to demonstrate account addresses to demonstrate that number of US accounts that number of US accounts managed from foreign branch is managed from foreign branch is minimal.minimal.

Custody AccountsCustody Accounts

Statute protects all custodial Statute protects all custodial accounts and related securities accounts and related securities lending activitieslending activities

But if engaged in order taking, But if engaged in order taking, i.e., taking orders from trustee, i.e., taking orders from trustee, investment adviser, need to investment adviser, need to look at Regulation R.look at Regulation R.

Order-Taking: Rule 760Order-Taking: Rule 760

Order Taking Permissible for:Order Taking Permissible for: Employee Benefit, IRA and Similar Accounts, so Employee Benefit, IRA and Similar Accounts, so

long as:long as:● Bank employees do not receive compensation based Bank employees do not receive compensation based

on any securities transaction that resulted from the on any securities transaction that resulted from the order;order;

● Advertisements do not advertise bank order taking Advertisements do not advertise bank order taking capabilities separate from other custodial services or capabilities separate from other custodial services or that the bank custodial accounts are a substitute for that the bank custodial accounts are a substitute for brokerage accounts;brokerage accounts;

● Advertisements and sales literature for IRAs and other Advertisements and sales literature for IRAs and other similar accounts do not advertise order taking similar accounts do not advertise order taking capabilities more prominently than other custodial capabilities more prominently than other custodial services.services.

Order-Taking As Order-Taking As AccommodationAccommodation

All Other Accounts (Accommodation All Other Accounts (Accommodation Orders), so long as:Orders), so long as:●Bank employee compensation restriction Bank employee compensation restriction

same as above;same as above;

●Fees charged for providing services same as Fees charged for providing services same as if order came through broker-dealer and do if order came through broker-dealer and do not vary based on the quantity or price of the not vary based on the quantity or price of the transaction. Note: can vary based on the type transaction. Note: can vary based on the type of security;of security;

Accommodation Order Accommodation Order ConditionsConditions

Advertisements cannot state that bank Advertisements cannot state that bank accepts orders;accepts orders;

Sales literature cannot state that bank Sales literature cannot state that bank accepts orders separate from other accepts orders separate from other custodial services or describe order custodial services or describe order taking capabilities more prominently taking capabilities more prominently than other custodial services;than other custodial services;

Cannot provide investment advice or Cannot provide investment advice or research or make recommendationsresearch or make recommendations

Which Exemption Should Which Exemption Should Apply?Apply?

Multiple exemptions might work Multiple exemptions might work for a particular accountfor a particular account

Decision should be made based Decision should be made based on compensation test, as well on compensation test, as well as systems and operational as systems and operational limitationslimitations

Which Exemption Should Which Exemption Should Apply?Apply?

Directed trust accounts may not Directed trust accounts may not fit well within the trust and fit well within the trust and fiduciary because of the fiduciary because of the compensation structurecompensation structure

Directed Trust Carve-OutDirected Trust Carve-Out

Under “other conditions,” the Under “other conditions,” the rule specifically allows directed rule specifically allows directed trustees to use the custody trustees to use the custody exceptionexception

CompensationCompensation

Anytime a customer referred to a broker-Anytime a customer referred to a broker-dealer and referral fee paiddealer and referral fee paid

Referral FeeReferral Fee●2x base hourly rate/ 1/1000th of the 2x base hourly rate/ 1/1000th of the

employee’s actual annual base salaryemployee’s actual annual base salary

●2x average min-max hourly wage for job 2x average min-max hourly wage for job familyfamily

●1/10001/1000thth average min-max annual base salary average min-max annual base salary for job familyfor job family

●$25$25

●No pointsNo points

Institutional ReferralsInstitutional Referrals

Can pay larger fees ifCan pay larger fees if● HNW CustomerHNW Customer

● InstitutionalInstitutional

HNWHNW● Individually or jointly, with spouse, has at least $5 Individually or jointly, with spouse, has at least $5

million in net worth excluding primary residence million in net worth excluding primary residence associated liabilities orassociated liabilities or

● Any revocable, or living trust the settler of which is a Any revocable, or living trust the settler of which is a natural person who either individually or jointly with natural person who either individually or jointly with his or her spouse meets the $5 million net worth his or her spouse meets the $5 million net worth standard.standard.

Institutional InvestorInstitutional Investor

$10 million in investments:$10 million in investments:

$20 million in revenues or$20 million in revenues or

$15 million in revenues if the $15 million in revenues if the bank employee refers the bank employee refers the customer to the broker-dealer customer to the broker-dealer for investment banking servicesfor investment banking services

TB 76-1ATB 76-1A

Disclosure before payment of Disclosure before payment of referral feereferral fee

Referral fee arrangement in Referral fee arrangement in writingwriting

Approved by the board of Approved by the board of directors and annually reviewed directors and annually reviewed by senior managementby senior management

Bonus PlansBonus Plans

Overall profitability or revenue of:Overall profitability or revenue of:●Bank or BHCBank or BHC●Any bank affiliate (other than b-d) or Any bank affiliate (other than b-d) or

operating unitsoperating units●B-D ifB-D if

– Profitability only one of multiple Profitability only one of multiple factors/variables usedfactors/variables used

– Significant factors/variables that are not Significant factors/variables that are not related to profitability of broker dealerrelated to profitability of broker dealer

Bonus PlansBonus Plans

DiscretionaryDiscretionary Multiple factors/variablesMultiple factors/variables

●Factors/variables include significant Factors/variables include significant factors/variables not related to factors/variables not related to security transactionssecurity transactions

Referral not a factorReferral not a factor Bonus not determined by reference Bonus not determined by reference

to others’ referralsto others’ referrals

Dual EmployeeDual Employee

FINRA rule: Rule 3040FINRA rule: Rule 3040

●Transaction-by-transaction pre-Transaction-by-transaction pre-approvalapproval

●Regulatory access to bank books Regulatory access to bank books & records& records

Anticipate resolution by 9/30/08Anticipate resolution by 9/30/08

Questions?Questions?