Upload
agnes-shaw
View
217
Download
1
Tags:
Embed Size (px)
Citation preview
Regulation R: It’s Finally Here
ABA’s Regulatory Compliance ConferenceChicago, IL
June 8-11, 2008
Sally Miller 202-663-5335
2
Gramm-Leach-Bliley Act
• Background Enacted 11/12/99 Intermediaries ability to offer a full array of
products and services through functional regulation
When is a bank functioning as a broker and subject to SEC jurisdiction?
3
Regulation R
• Finalized on 9/24/07• Compliance date: first day of fiscal year ending
after 9/30/08• Forthcoming
Record keeping rules Examiner guidance Resolution of Dual Employee
4
Networking Arrangements
• With third party or affiliated broker-dealers• Statutory conditions similar to 1994 Inter-Agency
Statement; e.g. B/D services provided in an area that is clearly
marked and to the extent practicable physically separate from routine deposit-taking
Advertisement and promotional material provided by b/d and comply with securities laws
5
Networking Arrangements
• Statutory Conditions (cont.) Bank employees perform only clerical and
ministerial but can:– Schedule appointments– Describe in general terms investment products– No incentive compensation but can receive
nominal one-time cash fee of a fixed dollar amount not tied to the success of the sale
6
Referral Fees- Rule 700
• Not “contingent on whether the referral results in a transaction” Can not tie fee to: (1) purchase or sale of a security;
(2) account opening (3) purchase or sale of a particular type of security or multiple securities transactions occurring.
Can tie fee to: (1) customer contacting or keeping appointment with b/d: (2) qualifications criteria (minimum assets, net worth, income, income tax rate, citizenship or residency)
7
Referral Fees• Nominal one-time cash fee of a fixed $ amount• Referral Fee
2x base hourly rate/ 1/1000th of the employee’s actual annual base salary
2x average min-max hourly wage for job family (defined term)
1/1000th average min-max annual base salary for job family
$25, adjusted for inflation No points
8
Institutional Referrals (Rule 701)
• Can pay larger referral fees if HNW Customer Institutional
• HNW Individually or jointly, with spouse, has at least $5 million in
net worth excluding primary residence and associated liabilities or
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 $5 million net worth standard.
Need reasonable basis to believe prior to or at time of referral
9
Institutional Investor
• $10 million in investments:• $20 million in revenues or• $15 million in revenues if the bank employee
refers the customer to the broker-dealer for investment banking services
• Need reasonable basis to believe prior to or at time of referral
10
HNW/ Institutional Exemption
• Bank employee Predominantly engaged in banking activities
other than referral activities HNW/ Institutional customer encountered in
ordinary course of performing assigned duties
11
HNW/ Institutional Exemption
• Disclosures Clear and conspicuous: may receive more than a
nominal referral fee for making referral and payment contingent on whether referral results in a transaction
Writing or orally prior to or at time of referral If oral, must give written within 3 business days of
referral By bank employee or by agreement broker-dealer
12
Referrals
• Contingent B/D must perform suitability analysis even if b/d had
not recommended transaction• Non-Contingent
B/D must determine that customer has (1) ability to evaluate investment risk and make independent decisions and (2) is exercising independent judgment, or
B/D performs suitability analysis
13
Referral Fees Paid
• Predetermined $ amount or $ amount determined in accordance with a predetermined formula
• Cannot vary based on: (1) revenue or profitability of securities transactions *; (2) quantity, price or type of security; (3) number of customer referrals
• *Exception for investment banking services -can pay based on a fixed percent of revenues
14
Incentive Compensation
• Cannot pay to bank employees• Defined as compensation that is intended to
encourage a bank employee to refer customers to a b/d or give a bank employee an interest in the success of a securities transaction
15
Bonus Plans
• Overall profitability or revenue of: Bank or BHC Any bank affiliate (other than b-d) or operating units B-D if
– Profitability only one of multiple factors/variables used
– Significant factors/variables that are not related to profitability of broker dealer
16
Bonus Plans
• Discretionary• Multiple factors/variables
Factors/variables include significant factors/variables not related to security transactions
• Referral not a factor• Bonus not determined by reference to others’
referrals
17
Sales of Money Market Mutual Funds (Rule 741)
• Can sweep into mmmf so long as Customer also buys other banking product,
e.g. deposit, credit, custody or Provided as part of a program for the
investment or reinvestment of deposit funds collected by another bank
18
Sales of Money Market Mutual Funds (Rule 741)
• MMMF No-load Load
– Provides prospectus– Doesn’t describe fund as no-load
Also have statutory exemption for sweep activity
19
Dual Employee
• FINRA rule: Rule 3040 Transaction-by-transaction pre-approval Regulatory access to bank books & records
• Anticipate resolution by 9/30/08
20
Trust & Fiduciary Exception
• A bank acting in a trustee or fiduciary capacity will be excepted from registration if: Does not publicly solicit brokerage business Directs the trades to a registered broker-dealer Chiefly compensated through relationship
compensation
21
Trust & Fiduciary Exception
• Applies to personal, institutional (inc. retirement), charitable and corporate trust accounts
• Chiefly compensated test – need to build systems to both characterize and measure compensation received on trust and fiduciary accounts.
22
Relationship Compensation
• Administrative• Annual fees• Fee based on a % of assets under management • 12b-1 fees
23
Not Relationship Compensation
• Processing Fees• Soft dollars• Internal payments• Credits for deposits• Sale of portfolio management software
24
Trust & Fiduciary Exception
• Two ways of measuring: Bank-wide basis, then relationship comp must
at least make up 70% of total compensation Account-by-account, then relationship
compensation must be greater than 50% of total compensation
25
Trust & Fiduciary Exception
• Calculation to be performed by average preceding two year compensation ratios.
• Impact on compliance date: 1/1/11 for bank with fiscal year the same as
calendar year.
26
International
• Applies to foreign branches managed from US• Exception for foreign branches managed from
foreign locations, may require sampling of foreign account addresses to demonstrate that number of US accounts managed from foreign branch is minimal.
27
Custody Accounts
• Statute protects all custodial accounts and related securities lending activities
• But if engaged in order taking, i.e., taking orders from trustee, investment adviser, need to look at Regulation R.
28
Order-Taking: Rule 760
• Order Taking Permissible for: Employee Benefit, IRA and Similar Accounts, so long
as:– Bank employees do not receive compensation
based on any securities transaction that resulted from the order;
– Advertisements do not advertise bank order taking capabilities separate from other custodial services or that the bank custodial accounts are a substitute for brokerage accounts;
29
Order-Taking: Rule 760
– Advertisements and sales literature for IRAs and other similar accounts do not advertise order taking capabilities more prominently than other custodial services.
30
Order-Taking As Accommodation
• All Other Accounts (Accommodation Orders), so long as: Bank employee compensation restriction same as
above; Fees charged for providing services same as if order
came through broker-dealer and do not vary based on the quantity or price of the transaction. Note: can vary based on the type of security;
31
Accommodation Order Conditions
• Advertisements cannot state that bank accepts orders;
• Sales literature cannot state that bank accepts orders separate from other custodial services or describe order taking capabilities more prominently than other custodial services;
• Cannot provide investment advice or research or make recommendations
32
Which Exemption Should Apply?
• Multiple exemptions might work for a particular account
• Decision should be made based on compensation test, as well as systems and operational limitations
33
Which Exemption Should Apply?
• Directed trust accounts may not fit well within the trust and fiduciary because of the compensation structure
34
Directed Trust Carve-Out
• Under “other conditions,” the rule specifically allows directed trustees to use the custody exception
35
Questions?