ABA Suggests More Tweaks on Trusts, Safekeeping, Referral Fees in SEC Broker/Dealer Exemption Proposal

WASHINGTON – After two tight-lipped meetings with the SEC, the American Bankers Association has revealed its suggested changes to the SEC on the agency’s broker/dealer exemption proposal. At issue is the SEC’s Regulation B, which, among other exemptions, would allow credit unions and banks to engage in third-party networking, sweep accounts and trust and fiduciary services without having to register with the SEC. Sarah Miller, ABA director of the ABA Center for Securities, Trust and Investment and general counsel, ABA Securities Association, along with other staff, suggested changes to the Regulation B proposal at a Dec. 7 meeting with SEC Commissioner Roel Campos and SEC Counsel Heather Traeger. Among the suggestions, the ABA proposed the “chiefly compensated” test regarding trust and fiduciary services should be measured on a broadly defined line-of-business or department-wide basis rather than on an account-by-account basis. “Method of calculation must be revised so that banks will not be forced to build expensive new reporting systems,” the ABA said. That calculation should be grouped into categories of fees with banks either calculating the ratio of “relationship compensation” to “total compensation,” or the ratio of “sales compensation” to “total compensation.” The ceiling on “sales compensation” must be “substantially greater” than the proposed level of 11%, and “even higher to the extent that Rule 12b-1 fees are treated – inappropriately – as “sales compensation,” and broad exemption is not provided for employee benefit plans,” the ABA suggested. Regarding the SEC’s safekeeping and custody exemption, banks should also be permitted to take orders for securities transactions from other custodial customers and charge securities movement fees that do not differ based on whether the order was taken by the bank directly from the customer, including through his or her adviser, or from the customer’s broker, the ABA said. The definition of “no load” for sweep accounts “must not be so restrictive as to interfere with banks’ long-standing practices for sweeping deposits into money market funds,” the ABA also suggested. Under the ABA’s recommendations, it proposed that banks should be allowed to pay higher referral fees to unregistered bank employees for the referral of certain corporate, institutional, governmental and not-for-profit customers. “Bank bonus plans must not be affected by prohibition on paying referral fees to unregistered bank employees unless bonus is clearly a conduit for paying impermissible referral fees,” the ABA said. “(For example, if (a) bonus is contingent on a number of factors, and only one factor relates to securities activities, (a) bonus plan should not be deemed an impermissible conduit.” The SEC’s proposal must also not affect payments made by broker-dealers to banks as opposed to payments made to individual bank employees, the ABA said. “Nominal referral fees, which are permissible, should not be further defined by regulation, given standards used by bank examiners and given that circumstances change over time,” the ABA proposed. Regarding dual employee relationships between banks and broker-dealers, the ABA suggested clarity needs to be resolved through the coordination with the bank regulators. NCUA, CUNA, NAFCU, several leagues, credit unions and industry vendors have weighed in on Regulation B with the majority applauding the SEC for extending the exemptions to credit unions. The SEC continues to review all comments letters before issuing a final proposal. [email protected]