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WASHINGTON – In their most extensive criticism yet, the Federal Reserve Board, the FDIC and OCC have jointly attacked the SEC’s broker/dealer exemption proposal concerned that it conflicts with existing regulations and may be a cumbersome waste of time, energy and expenses. In a 32-page, Oct. 8 comment letter, Federal Reserve Board Chairman Alan Greenspan, Donald Powell, FDIC chairman, and John Hawke, outgoing Comptroller of the Currency, expressed dire concern that the exemptions and the definition of “broker” as adopted in the Gramm-Leach Bliley Act are mired in “a SEC-created regime, that in some areas, conflicts with the existing regulatory requirements already applicable to banks, such as the Department of Labor’s rules under the Employee Retirement Income Security Act (“ERISA”). “We believe that the proposed rules reflect a profound misinterpretation of the language and purposes of the “broker” exceptions in the GLB Act, the letter read. “Our agencies also have primary responsibility for examining the activities affected by the proposed rules as well as for designing the recordkeeping requirements that will be used to monitor compliance with (them).” In response, Mary Dunn, CUNA associate general counsel, said the association will continue its ongoing dialogue with the SEC on this matter including the latest comment letter. For more than three years, the CUNA Brokerage Activities Task Force has been working with the SEC on securities-related concerns. NCUA, NAFCU, a number of credit unions and industry firms have generally supported all of the exemptions. Still, the regulators believe SEC’s proposal “would significantly disrupt the normal banking functions and customer relationships that Congress sought to protect and would impose new, complex and burdensome regulatory requirements on longstanding banking functions” and “impose additional costs on bank customers and limit customer choice by preventing or discouraging banks from providing certain services that customers have come to expect and demand from their banking institution. By far, the regulators’ “greatest concern” is the SEC’s approach to exceptions for bank trust, fiduciary and custodial activities, saying they “do not fully comport with the existing operations and customer relationships of banks.” Specifically, the SEC proposal would require that banks comply with the statute’s “chiefly compensated” standard on an account-by-account basis and require that banks classify the fees that they receive from each trust or fiduciary account into three different categories-relationship compensation, sales compensation and other compensation. “The definition of these categories proposed by the SEC would impose significant burdens on banks without faithfully implementing the purposes and wording of the GLB Act,” the letter read. As evidence, the regulators believe the proposal excludes certain types of compensation, such as Rule 12b-1 and service fees from mutual funds that would appear to qualify as relationship compensation “under the plain language of the statute and are legitimate, long-recognized forms of fiduciary compensation.” As a result, banks would be forced to stop providing securities transaction services to many corporate and employee benefit plan customers or significantly restructure their trust and fiduciary operations in these areas, the regulators feared. With custodial and safekeeping activities, the regulators expressed concern that banks’ longstanding tradition of providing such services to 401(k) and other retirement and employee benefit plans would unravel because the SEC’s proposal would not permit them to accept securities orders from their custodial IRA customers, for 401(k) and employee benefit plans that receive custodial and administrative services from a bank. “This interpretation is flatly at odds with the customary practices and customer relationships of banks” and would “force bank customers to incur additional and unnecessary burdens and expenses to effect occasional trades related to their custodial assets.” Since the GLB Act already permits banks to establish and maintain “networking” arrangements with a broker-dealer and the referral of customers to securities services, the letter asserted, the SEC’s proposal would establish “a new, highly complex, restrictive and inflexible definition of what constitutes a nominal cash referral fee rather than allowing examiners, as they do today, to review these fees in light of the geographic location of the bank involved and other relevant factors during the supervisory and examination process.” Specifically, the three regulators are concerned with new “unworkable” limits on non-cash referral programs and the SEC asserting “broad jurisdiction” over employee compensation programs of banks and bank holding companies “even where these programs are not used as a conduit for the payment of referral fees.” Other issues of concern are the restructuring of deposit “sweep” activities and the need to clarify that NASD Rule 3040 does not apply to bank employees that also are associated persons of a broker-dealer when they engage in bank-permissible securities activities in their role as bank employees. When the dust settles on the proposal, the regulators are asking for at least a one-year transition for banks to come into compliance, even suggesting “a longer transition period if the final rules remain as complex and burdensome as the (proposal).” “The Commission must follow a fundamentally different approach to make its rules comport with the language and purposes of the “broker” exceptions adopted by Congress in the GLB Act,” the letter read. “Such an approach should focus on faithfully implementing the statutory exceptions that Congress designed to cover the diverse nature of normal bank activities, rather than developing administrative exemptions that conflict with the statute and Congress’ intent.” [email protected]

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