1. FIRMA National Training Conference Washington, D.C. Regulation B Sally Miller ABA smiller@aba.com (202) 663-5325 smiller@aba.com

2. Regulation B What is it? What is it? –SEC’s second attempt to write implementing rules for Title II of GLBA Brokerage Brokerage Dealing: effective Dealing: effective

3. Title II Banks lose their exemption from broker-dealer registration Banks lose their exemption from broker-dealer registration Replaced with 15 exceptions (aka “push-out” provisions) Replaced with 15 exceptions (aka “push-out” provisions) Effecting transactions in securitie Effecting transactions in securitie –For account of another: broker –For own account: dealer

4. Broker Push-outs (11) Networking Networking Trust/Fiduciary Trust/Fiduciary Permissible Securities Transactions Permissible Securities Transactions Stock Purchase Plans Stock Purchase Plans Sweep Accounts Sweep Accounts Affiliate Transactions Affiliate Transactions Private Securities Offerings Private Securities Offerings Safekeeping and Custody Safekeeping and Custody Indentified Banking Products Indentified Banking Products Municipal Securities Municipal Securities De Minimus Exception De Minimus Exception

5. Dealer Pushouts (4) Permissible Securities Transactions Permissible Securities Transactions Investment Trustee and Fiduciary transactions Investment Trustee and Fiduciary transactions Asset-backed Transactions Asset-backed Transactions Identified Banking Products Identified Banking Products

6. Non-Controversial Broker Provisions Permissible Securities Transactions Permissible Securities Transactions –Commercial paper, bankers, acceptances, commercial bills –Government securities –Common/collective funds –Qualified Canadian GOs and NA develop bank obligations –Brady bills

7. Stock Purchase Plans Misnomer: really transfer agent activities Misnomer: really transfer agent activities Employee benefits, DRIPs, open enrollment plans Employee benefits, DRIPs, open enrollment plans Numerous conditions! Numerous conditions!

8. Conditions to Transfer Agency Attitudes Bank can’t solicit transactions or provide investment advice Bank can’t solicit transactions or provide investment advice –Applies to employee benefits, DRIPs, open enrollment plans –Can deliver written/electronic material to investors as permitted by SEC at time of GLBA enactment or as permitted by SEC in future

9. Conditions (continued) Cannot net buy & sell orders, except for odd-lot holders or plans registered with SEC Cannot net buy & sell orders, except for odd-lot holders or plans registered with SEC –Applies to DRIPs & open enrollment plans

10. Conditions (continued) Bank must execute brokerage transactions through a registered broker-dealer (affiliated or otherwise) Bank must execute brokerage transactions through a registered broker-dealer (affiliated or otherwise) Cross-trades permitted if permitted under ERISA or other applicable law Cross-trades permitted if permitted under ERISA or other applicable law

11. Caution! SEC working on transfer agent rules SEC working on transfer agent rules

12. Affiliate Transactions Effects brokerage for affiliated firms, e.g. trust companies Effects brokerage for affiliated firms, e.g. trust companies Condition: affiliate cannot be a registered broker-dealer or engaged in merchant banking Condition: affiliate cannot be a registered broker-dealer or engaged in merchant banking

13. Private Securities Offerings Private placements permissible so long as: Private placements permissible so long as: –Bank is not engaged in underwriting, dealing or market-making in corporate debt or equity; and –If a bank is not affiliated with ANY broker-dealer, the dollar value of any single offering is not greater than 25% of bank capital

14. Banking Products Identified Banking Products Identified Banking Products –Deposits, bankers acceptances, letters of credit, loans, debit accounts and certain loan participants –All sweep agreements equity swaps sold to non-qualified investors must be sold through the broker-dealer equity swaps sold to non-qualified investors must be sold through the broker-dealer

15. Banking Products (continued) Hybrid Products Hybrid Products –Not on statutory list of products –Not registered as a security as of 11/12/99 –SEC through rulemaking may determine whether hybrid product is a security –Board can seek judicial review Operates as a stay Operates as a stay –Standard of review – no deference to either views of the Board or the SEC

16. Municipal Securities

17. De Minimis Brokers 500 or less transactions Brokers 500 or less transactions Employee cannot be a dual employee Employee cannot be a dual employee 500 does not include transactions that fall under other exceptions 500 does not include transactions that fall under other exceptions

18. Controversial Brokerage Provisions Networking Networking –Contract with third party or affiliated broker –Brokerage offered on or off bank premises –Broker is clearly identified as performing services –Area is clearly marked and, to the extent practicable, physically separate from routine deposit-taking

19. Networking (continued) Materials used by the bank to advertise/promote brokerage services include services provided by broker and are in compliance with federal securities laws Materials used by the bank to advertise/promote brokerage services include services provided by broker and are in compliance with federal securities laws Bank employees perform only clerical or ministerial functions, including scheduling appointments with broker Bank employees perform only clerical or ministerial functions, including scheduling appointments with broker –Bank employees may forward customer funds or securities and may describe generally products available –Significant statutory protection

20. Networking (continued) Compensation – bank employees do not receive incentive compensation but can receive compensation for the referral of any customer if the compensation is a nominal one-time fee of a fixed dollar amount and the payment of the fee is not contingent on whether a transaction results from the referral Compensation – bank employees do not receive incentive compensation but can receive compensation for the referral of any customer if the compensation is a nominal one-time fee of a fixed dollar amount and the payment of the fee is not contingent on whether a transaction results from the referral

21. Networking (continued) Services provided by broker are fully disclosed to the customer Services provided by broker are fully disclosed to the customer Bank does not act as carrying broker, except for trust and custody services Bank does not act as carrying broker, except for trust and custody services Bank or broker provides disclosures regarding the lack of FDIC insurance Bank or broker provides disclosures regarding the lack of FDIC insurance

22. Reg B - Compensation Nominal one-time cash fee of a fixed dollar amount: Nominal one-time cash fee of a fixed dollar amount: –Value that does not exceed Employee’s Base Hourly Rate, Employee’s Base Hourly Rate, $25, or $25, or $15 in 1999 dollars, adjusted for CPI $15 in 1999 dollars, adjusted for CPI

23. Reg B - Compensation Nominal one-time cash fee of a fixed dollar amount: Nominal one-time cash fee of a fixed dollar amount: –Can only be paid one-time per customer referred

24. Reg B - Compensation Cash/non-cash referral fee together meet nominal conditions set out above and is paid under an incentive program that covers a broad range of products. Programs must be designed to reward activities unrelated to securities. Cash/non-cash referral fee together meet nominal conditions set out above and is paid under an incentive program that covers a broad range of products. Programs must be designed to reward activities unrelated to securities. –Permits cash/non-cash payments: Paid in units of value with a readily ascertainable cash equivalent Paid in units of value with a readily ascertainable cash equivalent

25. Networking (continued) Nominal one-time cash fee for a fixed dollar amount Nominal one-time cash fee for a fixed dollar amount –Has a set value that a particular employee making a referral would receive for any referral to a registered broker that does not vary based on factors such as: the financial status of a customer the employee refers; the financial status of a customer the employee refers; the identity of the registered broker or dealer to which the customer is referred; the identity of the registered broker or dealer to which the customer is referred; the number of referrals the employee makes, or the number of referrals the employee makes, or whether the customer expresses an interest in a particular type of securities product. whether the customer expresses an interest in a particular type of securities product.

26. Networking (continued) Referral Referral –Action taken by a bank employee to direct a customer of the bank to a registered broker or dealer for purchase or sale of securities for the customer’s account.

27. Networking Problems Amount of referral fee Amount of referral fee Application to both retail and institutional Application to both retail and institutional Bonus Plans: Overall profitability of bank Bonus Plans: Overall profitability of bank

28. Trust and Fiduciary Bank effects transactions in a trustee or fiduciary capacity Bank effects transactions in a trustee or fiduciary capacity In a department that is regularly examined by bank examiners for compliance with fiduciary principles and standards In a department that is regularly examined by bank examiners for compliance with fiduciary principles and standards Is chiefly compensated on the basis of an administration or annual fee (payable on a monthly, quarterly, or other basis), a percentage of assets under management, or a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers, or any combination of such fees Is chiefly compensated on the basis of an administration or annual fee (payable on a monthly, quarterly, or other basis), a percentage of assets under management, or a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers, or any combination of such fees Does not publicly solicit brokerage business, other than by advertising that it effects transaction in securities in conjunction with advertising its other trust activities Does not publicly solicit brokerage business, other than by advertising that it effects transaction in securities in conjunction with advertising its other trust activities US security trades must be executed through broker dealer, unless cross-trading permissible. US security trades must be executed through broker dealer, unless cross-trading permissible.

29. Chiefly Compensated Defined as “during the preceding year, the bank received more relationship compensation than sales compensation from an account. Defined as “during the preceding year, the bank received more relationship compensation than sales compensation from an account. “Relationship compensation” defined as “any compensation a bank received directly from a customer or beneficiary, or directly from the assets of an account that consists solely of an administration or annual fee (payable on a monthly, quarterly, or other basis); a fee based on a percentage of assets under management; a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers (defined)”; or any combination of these fees. “Relationship compensation” defined as “any compensation a bank received directly from a customer or beneficiary, or directly from the assets of an account that consists solely of an administration or annual fee (payable on a monthly, quarterly, or other basis); a fee based on a percentage of assets under management; a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers (defined)”; or any combination of these fees.

30. Chiefly Compensated (continued) “Sales compensation” defined as any fee over and above the flat or capped per order processing fee; compensation that if paid to a broker would be payment for order flow; a finders fee (but not a networking referral fee); fees received from mutual funds with an allocation formula; 12b-1 fees with an allocation formula; fees paid by mutual funds for personal service or maintenance of shareholder accounts with an allocation formula. “Sales compensation” defined as any fee over and above the flat or capped per order processing fee; compensation that if paid to a broker would be payment for order flow; a finders fee (but not a networking referral fee); fees received from mutual funds with an allocation formula; 12b-1 fees with an allocation formula; fees paid by mutual funds for personal service or maintenance of shareholder accounts with an allocation formula.

31. Chiefly Compensated (continued) Other compensation: Other compensation: –Transfer agency or sub-transfer agency; aggregating and processing purchase and redemption orders for mutual fund shares; providing beneficial owners with account statements showing their purchases, sales, and positions in mutual funds; processing dividend payments for mutual funds; providing sub- accounting services for mutual fund shares; forwarding communications from the mutual fund, including proxies, shareholder reports, dividend and tax notices, and updated prospectuses, or receiving, tabulating, and transmitting proxies executed. (AKA 7 Dwarfs)

32. Exemptions from “Chiefly compensated” Existing living, testamentary, or charitable trust accounts Existing living, testamentary, or charitable trust accounts Line of business Line of business Account-by-account Account-by-account

33. Existing living, testamentary, or charitable trust accounts Accounts must be opened or established before 7/30/04 (Proposal published on 6/30/04) Accounts must be opened or established before 7/30/04 (Proposal published on 6/30/04) Bank must be serving in a trust or fiduciary capacity (can’t be a custodian other than a custodian under a uniform gift to minors act) Bank must be serving in a trust or fiduciary capacity (can’t be a custodian other than a custodian under a uniform gift to minors act) Can’t negotiate with accountholder or beneficiary to increase the proportion of sales compensation to relationship compensation after 7/30/04. Can’t negotiate with accountholder or beneficiary to increase the proportion of sales compensation to relationship compensation after 7/30/04. Testamentary trusts deemed established as of the date of the will that directed that the trust be established. Testamentary trusts deemed established as of the date of the will that directed that the trust be established. Must meet all other conditions of the broker exception. Must meet all other conditions of the broker exception.

34. Line of Business Exemption Line of business defined as “an identifiable department, unit, or division of a bank organized and operated on an ongoing basis for business reasons with similar types of accounts for which the bank acts in a similar types of fiduciary capacity.” Line of business defined as “an identifiable department, unit, or division of a bank organized and operated on an ongoing basis for business reasons with similar types of accounts for which the bank acts in a similar types of fiduciary capacity.” Demonstrates that the ratio of sales to relationship compensation was not more than 1:9. Demonstrates that the ratio of sales to relationship compensation was not more than 1:9. Maintains procedures reasonably designed to ensure that before an account is opened or established, the bank reviews the account to ensure that the bank is likely to receive more relationship compensation than sales compensation Maintains procedures reasonably designed to ensure that before an account is opened or established, the bank reviews the account to ensure that the bank is likely to receive more relationship compensation than sales compensation Maintains procedures reasonably designed to ensure that after opening or establishing an account, at any time the bank individually negotiates with the accountholder or beneficiary to increase the proportion of sales to relationship compensation, the bank reviews the account to ensure that the bank receives more relationship to sales compensation Maintains procedures reasonably designed to ensure that after opening or establishing an account, at any time the bank individually negotiates with the accountholder or beneficiary to increase the proportion of sales to relationship compensation, the bank reviews the account to ensure that the bank receives more relationship to sales compensation Must meet all the other conditions of the exception Must meet all the other conditions of the exception Complicated safe harbor for non-compliance with 1:9 ratio. Complicated safe harbor for non-compliance with 1:9 ratio.

35. Account-by-Account Exemption Complicated safe harbor for non- compliance with the requirement that relationship compensation outweigh sales compensation for each account. Complicated safe harbor for non- compliance with the requirement that relationship compensation outweigh sales compensation for each account. Must have procedures in place similar to those required under the line-of- business exemption Must have procedures in place similar to those required under the line-of- business exemption Must meet all the other conditions of the exception Must meet all the other conditions of the exception

36. Exemptions from “chiefly compensated” no help to: Indenture Trustees Indenture Trustees Employee Benefit Plans Employee Benefit Plans

37. Indenture Trustee Exemption Exempt completely from chiefly compensated calculations if Exempt completely from chiefly compensated calculations if –Acting in an indenture trustee capacity Not paying agent, fiscal agent, disbursement agent, etc. Not paying agent, fiscal agent, disbursement agent, etc. –Invests assets in no-load money market mutual funds No-load defined as no front-end or back-end load, personal or shareholder maintenance charges do not exceed 25 bps, personal or shareholder maintenance charges does not include fees paid for 7 Dwarf services. No-load defined as no front-end or back-end load, personal or shareholder maintenance charges do not exceed 25 bps, personal or shareholder maintenance charges does not include fees paid for 7 Dwarf services.

38. Employee Benefit Exemption For transactions in mutual fund for qualified plans, or 403(b) or 457 plans and participant-directed brokerage accounts For transactions in mutual fund for qualified plans, or 403(b) or 457 plans and participant-directed brokerage accounts Acting in either a fiduciary or custodial capacity Acting in either a fiduciary or custodial capacity Offset or credit any compensation it receives from the fund against fees and expenses that the plan owes Offset or credit any compensation it receives from the fund against fees and expenses that the plan owes Provides clear and conspicuous disclosure the plan sponsor of all fees and expenses assessed and all compensation received from the fund Provides clear and conspicuous disclosure the plan sponsor of all fees and expenses assessed and all compensation received from the fund The brokerage accounts are offered through a registered broker-dealer The brokerage accounts are offered through a registered broker-dealer Bank does not pay incentive compensation to the unlicensed individuals that differs based on the value of the security, the type of security purchase or sold, or the person who exercises control over the assets of the account. Bank does not pay incentive compensation to the unlicensed individuals that differs based on the value of the security, the type of security purchase or sold, or the person who exercises control over the assets of the account.

39. Custody Bank, as part of customary banking activities: Provides safekeeping or custody services with respect to securities Provides safekeeping or custody services with respect to securities Facilitates the transfer of funds or securities, as a custodian or a clearing agency, in connection with the clearance and settlement of its customers transactions Facilitates the transfer of funds or securities, as a custodian or a clearing agency, in connection with the clearance and settlement of its customers transactions Effects securities lending or borrowing transactions as part of custodial services, or invests cash collateral pledged in connection with such transactions Effects securities lending or borrowing transactions as part of custodial services, or invests cash collateral pledged in connection with such transactions Holds securities pledged or securities subject to purchase or resale agreements, facilitates the pledging or transfer of such securities Holds securities pledged or securities subject to purchase or resale agreements, facilitates the pledging or transfer of such securities Serves as 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. Serves as 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. All trades of US securities conducted in US must be executed by a broker, except where cross-trading permitted. All trades of US securities conducted in US must be executed by a broker, except where cross-trading permitted.

40. Order-taking Not permissible except Not permissible except –For participant-directed plans under the employee benefit exemption

41. Order taking (continued) For small banks if: For small banks if: Bank not associated with a broker-dealer Bank not associated with a broker-dealer Bank does not publicly solicit securities transactions, except as permitted under the statute Bank does not publicly solicit securities transactions, except as permitted under the statute Annual sales compensation for order-taking does not exceed $100,000 (2004$) Annual sales compensation for order-taking does not exceed $100,000 (2004$) Can use this exemption for fiduciary accounts so long as bank does not take use any other chiefly compensated exemption. Can use this exemption for fiduciary accounts so long as bank does not take use any other chiefly compensated exemption. Bank does not pay incentive compensation for any order taking transactions except as allowed under the networking exception Bank does not pay incentive compensation for any order taking transactions except as allowed under the networking exception All trades executed by broker-dealer, except where cross- trading permitted. All trades executed by broker-dealer, except where cross- trading permitted. Small banks defined as a bank that had less than $500 million in assets as of 12/31 for two prior calendar years and is not and has not for three prior calendar years been an affiliate of a bank holding company that has more than $1 billion in assets for the two preceding calendar years. Small banks defined as a bank that had less than $500 million in assets as of 12/31 for two prior calendar years and is not and has not for three prior calendar years been an affiliate of a bank holding company that has more than $1 billion in assets for the two preceding calendar years.

42. Order taking (continued) Permissible Permissible –If the account opened before 7/30/04 or –If the account is opened for a qualified investor. A natural person with a $25 million investment portfolio, a corporation with a $25 million investment portfolio, a municipality with a $50 million investment portfolio, any trust where a bank or savings association has investment discretion A natural person with a $25 million investment portfolio, a corporation with a $25 million investment portfolio, a municipality with a $50 million investment portfolio, any trust where a bank or savings association has investment discretion Can charge a fee for service but the fee cannot vary based on whether or not the bank accepts the order but can receive 12b-1 and shareholder servicing fees Can charge a fee for service but the fee cannot vary based on whether or not the bank accepts the order but can receive 12b-1 and shareholder servicing fees Cannot solicit order-taking transactions but can respond to customer inquiries. In responding to these inquiries, type of information disclosed is limited. Cannot solicit order-taking transactions but can respond to customer inquiries. In responding to these inquiries, type of information disclosed is limited.

43. Sweep Accounts Bank effects transactions as part of a program for the investment or reinvestment of deposit funds into any no-load money market fund. Bank effects transactions as part of a program for the investment or reinvestment of deposit funds into any no-load money market fund. No-load defined as no front-end or back end loads, no more than 25 bp for personal services or shareholder maintenance services, but does not include 7 Dwarfs. No-load defined as no front-end or back end loads, no more than 25 bp for personal services or shareholder maintenance services, but does not include 7 Dwarfs. Exemption: Exemption: –Prior non-securities qualified investor customer; a person who directs the purchase of securities from any cash flows that related to an asset-backed security with a minimum original asset amount of $25 million; or –Bank acting in a trust or fiduciary capacity; –Bank acting in escrow agent, collateral agent, depository agent, or paying agent capacity and the funds are no-load. If the funds are load and the customer is not a qualified investor, the bank must provide certain disclosures to the customer. No exemption for bank retail sweep accounts No exemption for bank retail sweep accounts

44. Savings Associations  Subject to same provisions except no exemptions for order-taking or employee benefit plan transactions.

45. Credit Unions Subject to same provisions for networking and sweep accounts. Subject to same provisions for networking and sweep accounts.

46. Dealer Provisions Effective Effective Provide broker exemption when bank acting as securities lending agent (not in custodial capacity) Provide broker exemption when bank acting as securities lending agent (not in custodial capacity)

47. Conclusion Stay Tuned!!!! Stay Tuned!!!!