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III. Exception for Custodial and Safekeeping Activities

Custody and safekeeping activities—like trust and fiduciary activities—are core banking services that historically have involved certain securities-related functions. For example, banks have for many years served as custodians for self-directed individual retirement accounts (“IRAs”). Bank-offered custodial IRAs provide customers throughout the United States a convenient and economical way to invest for retirement on a tax-deferred basis. In fact, the Internal Revenue Code prohibits non-bank entities from offering custodial IRAs absent the specific approval of the Secretary of the Treasury,41 and imposes strict requirements on banks offering custodial IRAs.

Banks also provide custodial and safekeeping services to 401(k) and other retirement and benefit plans where a third party acts as trustee and investment adviser to the plan. As part of these custodial and safekeeping services, banks may accept and process orders from the plan, the plan’s fiduciary or the plan’s participants for the investment of new contributions or the re-allocation of existing contributions. In these circumstances, the custodial bank performs its order-taking and order-execution functions pursuant to the direction and supervision of one or more plan fiduciaries.42 These bank-offered services allow plan administrators to obtain securities execution and other administrative services in a cost-effective manner, thereby reducing plan expenses and benefiting plan beneficiaries.

Bank custodians also have a long-standing history of accommodating their other custodial customers by accepting and transferring, on an unsolicited basis, orders for securities to a registered broker-dealer. This customer-driven service allows customers to avoid having to go through the unnecessary expense of establishing a separate account with a broker-dealer to effect occasional trades associated with the customer’s custodial assets. Because these services customarily are provided only as an accommodation to custodial accounts, banks typically do not solicit the securities orders, do not publicly advertise their order-taking services, and do not charge transaction-based fees that vary depending on whether or not the bank accepted the customer’s order. Banks have offered these services for many years without significant consumer-related problems under the supervision and regulation of the Banking Agencies.

The custody and safekeeping exception in the GLB Act was designed to permit banks to continue to engage in their customary custodial and safekeeping activities, including related securities order-taking activities. The Exception expressly permits a bank, without being considered a broker, to engage in a variety of custodial- and safekeeping-related activities “as part of its customary banking activities,” including —

(1) providing safekeeping or custody services with respect to securities, including the exercise of warrants and other rights on behalf of customers; and

(2) serving as a custodian or provider of other related administrative services to any IRA, pension, retirement, profit sharing, bonus, thrift savings, incentive, or other similar benefit plan.43

In addition, the Custody and Safekeeping Exception provides that a bank must transmit any order it receives for a publicly traded security to a registered broker-dealer for execution.

The Commission, however, continues to assert that the statutory Custody and Safekeeping Exception does not permit banks to accept securities orders from their custodial customers. This interpretation is wholly inconsistent with the language of the Act, its legislative history, and the normal custodial and safekeeping operations of banks. The conflict between the Commission’s interpretation and the language and intent of the Act is most starkly presented with respect to IRAs and employee benefit plans. As noted above, the statute’s express language permits banks to continue to provide custodial and other administrative services to IRAs and a wide range of benefit plans. This language was specifically added to the GLB Act by the Conference Committee to permit banks to continue to accept and process securities orders for these customers.44

The Banking Agencies believe the Commission should interpret the statute’s Custody and Safekeeping Exception in a way that gives effect to the language and purposes of the exemption and does not disrupt traditional custodial banking relationships. Specifically, the Commission should provide that the Custody and Safekeeping Exception itself permits banks to accept securities orders from custodial IRAs and the other types of accounts expressly described in subsection (ee) of the exception, as well as from other custodial customers on an unsolicited and accommodation basis.

We recognize that the Commission has adopted certain administrative exemptions that would allow banks to continue to accept securities orders from some custodial accounts in certain circumstances. However, these administrative exemptions do not comport with the existing custodial and safekeeping activities of banks and would prevent banks from continuing to provide services that customers have come to expect and demand of bank custodians. For example, exemptions that are available only for preexisting custodial accounts have a chilling effect on the ability of banks to provide comparable services to future customers; exemptions limited to “qualified investors” deny other bank customers valued choices; and exemptions limited to smaller banks preclude larger institutions for offering longstanding traditional banking services to their customers.

Accordingly, the limited administrative exemptions would significantly disrupt the traditional custody and safekeeping activities that Congress intended to protect, would reduce customer choice and would force the custodial customers of banks to incur additional and unnecessary burdens and expenses. More fundamentally, these administrative exemptions, and the complexities and disruptions they involve, would be unnecessary if the Commission were to give effect to the words and purpose of the statutory Custody and Safekeeping Exception that Congress debated and adopted.

Finally, we note that the Proposed Rules also provide that a bank will be considered to be acting as a “custodian” for an account (other than an IRA) only if the bank has a written agreement with the customer that sets forth the bank’s obligations with respect to seven specific types of actions.45 It is inappropriate and inconsistent with functional regulation for the Commission to attempt to define what provisions must be in a bank’s custodial agreement with a customer. Moreover, the Proposed Rules would require that banks review each custody agreement already in place with existing customers to determine whether the agreement includes each of the provisions specified in the Proposed Rules and, if not, to modify their existing agreements that do not meet the Commission’s definitional conditions. This will further increase the costs and disruptions caused by the Proposed Rules.

In light of the problems caused by the Commission’s unduly narrow interpretation of the statutory Custody and Safekeeping Exception, the Proposed Rules include two general administrative exemptions for the custodial activities of banks.46 The first exemption would permit “small” banks to effect securities transactions for any custodial customer provided that, among other things, the annual “sales compensation” that the bank receives from such transactions does not exceed $100,000 (as indexed after 2004 to the Consumers Price Index All Urban Consumers).47 A bank would qualify as a “small” bank for purposes of this exemption only if—

  • The bank had less than $500 million in assets as of December 31st of both of the prior two calendar years;
  • The bank is not, and since December 31st of the 3rd prior calendar year has not been, affiliated with a bank holding company that as of December 31st of the prior two calendar years had consolidated assets of more than $1 billion; and
  • The bank is not associated with a broker-dealer.

The second exemption is available to any bank, other than a small bank that utilizes the Small Bank Exemption. However, this exemption permits a bank to effect securities transactions only for those custody accounts that (i) were opened before July 30, 2004, or (ii) are held by a “qualified investor.”48

We appreciate the Commission’s decision to loosen some of the restrictions that were contained in the custody exemptions of the Initial Rules. Nevertheless, the conditions retained in the Small Bank and General Custody Exemptions are incompatible with the custody business of many banks and would significantly limit the ability of banks to continue to engage in customary banking practices that Congress intended to protect.

In particular, we see no reason to allow larger banks to provide a customary banking service—securities order-taking services—only to existing custody accounts and those established in the future by “qualified investors.” Prohibiting banks from providing these services to new accounts essentially forces this long-standing customer service out of banks over time, prohibits banks from providing the same level of custody services to new customers, and forces many custody clients—regardless of their desire—to incur the additional expense of establishing an account at a broker-dealer.

The exception for “qualified investors” also does not provide meaningful relief given the Commission’s very restrictive definition of this term. For example, a corporation or natural person generally would qualify as a “qualified investor” under the Proposed Rules only if the entity or person owns or invests on a discretionary basis at least $25 million in investments. Very few new custodial customers of a bank are likely to satisfy such a high threshold. This threshold certainly is not sufficient to accommodate the typical customer base of custodial IRAs or the participants in 401(k) and other participant-directed benefit plans—customers that Congress specifically sought to ensure could continue to receive securities services from their custodial bank.

It is notable that the Commission’s own Regulation D49 governing private placements of securities permits unregistered securities to be marketed and sold to any person (i) whose individual net worth, or joint net worth with that person’s spouse, exceeds $1 million, or (ii) who had individual income in excess of $200,000 in each of the two most recent years, or joint income with that person’s spouse in excess of $300,000 in each of those years. Given these thresholds for purchasing unregistered securities, it is difficult to understand why a person would be prohibited from giving a bank an unsolicited order to buy and sell the securities held in custody by the bank unless the person had $25 million in investments.50

Small banks that grow beyond the $500 million asset threshold, that decide to establish or become affiliated with a registered broker-dealer or that are acquired by a bank holding with more than $1 billion in consolidated assets would face similar, and perhaps even more severe, problems. For example, a small bank that permitted non-qualified investors to open custodial IRAs at the bank after June 30, 2004, under the Small Bank Exemption would appear to be prohibited from effecting transactions for these custodial IRA customers if the bank’s assets grew to more than $500 million. Thus, the established customers of a bank may find their access to services cut-off by the artificial thresholds and restrictions included in the Small Bank Exemption.

Finally, we see no reason to deny a small bank the ability to offer its customers a traditional banking product solely because the bank is affiliated with a broker-dealer—a restriction that effectively penalizes a bank for an affiliation that the GLB Act expressly permits.


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41 See 26 U.S.C. §§ 408(a)(2) and 408(h).

42 Under Department of Labor regulations, a bank may provide securities execution services to an ERISA plan without becoming a “fiduciary” to the plan so long as the transactions are conducted pursuant to instructions received from a plan fiduciary that is not an affiliate of the bank. See 29 C.F.R. § 2510.3-21(d).

43 See 15 U.S.C. § 78c(a)(4)(B)(viii)(I)(aa) and (ee).

44 See 2001 Comment Letter, Appendix, at 27-28 (discussing legislative history of the Custody and Safekeeping Exception).

45 See Proposed Rule 242.762(a). These actions are (i) the safekeeping of securities; (ii) settling trades; (iii) investing cash balances as directed; (iv) collecting income; (v) processing corporate actions; (vi) pricing securities positions; and (vii) providing recordkeeping and reporting services. We note that it is unclear whether this definition would apply to a bank acting under the Custody and Safekeeping Exception as well as under the administrative exemptions the Commission has adopted for custodial activities. For purposes of this letter, we have assumed that the Commission would apply this definition of a “custody” account to banks seeking to operate under the statutory exception.

46 The Proposed Rules also include an exemption that would allow banks to effect securities transactions for certain types of employee benefit plans (not including IRAs) for which the bank acts as custodian. As discussed in Part II.B above, this exemption does not cover the full range of employee benefit plans currently serviced by bank custodians and includes restrictions that would significantly disrupt existing customer relationships.

47 See Proposed Rule 242.761 (“Small Bank Exemption”).

48 See Proposed Rule 242.760 (“General Bank Exemption”).

49 17 C.F.R. §§ 230.501 – 230.508.

50 The General Bank Exemption also prohibits a bank from directly or indirectly soliciting securities transactions from its custodial customers, with certain limited exceptions. The Adopting Release provides that this solicitation restriction “would not permit a bank to solicit through another bank department securities activities in its custody department.” See Adopting Release at 39,710. Banks often market their trust and fiduciary, deposit sweep, and other bank services to their custody customers and it is unclear whether the solicitation restriction in the exemption would prohibit banks from conducting these normal cross-selling activities.

Last Updated 10/08/2004

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