May 18, 2000
Dear [ ]:
Your letter to Deputy Superintendent & Counsel [ ], dated April 10, 2000, has been referred to me for reply. Currently [ ] ("TNA"), a New York based national banking association which has trust powers, has employed its affiliate, [ ]("TIS"), an introducing brokerage firm, to purchase and sell securities for TNAs fiduciary and trust accounts. To compensate TIS for providing such services, TNA pays TIS a standard fee from said accounts in cases where the trust beneficiary has so consented or the provisions of the governing instrument expressly provide therefor. In all other cases TNA employs an unaffiliated brokerage firm and pays it the same standard fee as it pays TIS.
As you are aware, when a national bank is acting as a fiduciary, it must comply with the laws of the state in which it is located and which regulates its acts and functions. The procedure employed by TNA is mandated by New Yorks standards of conduct and performance which require that a trustee (a) act in good faith and loyalty in the administration of a trust and (b) is under a duty to refrain from self-dealing. In addition, TNAs primary regulator, the Office of the Comptroller of the Currency, has determined that:
" [S]ufficient benefit results from the increased volume of transactions that a conflict of interest is presented by the execution of transactions with a related broker even on a nonprofit basis. Therefore [a]bsent statutory authority, no security transactions may be executed with a related broker firm unless lawfully authorized by the instrument creating the relationship, by court order, or through compliance with the doctrine of consent."
In your letter you argue that the foregoing restrictions are contrary to the "intent" of the Gramm-Leach-Bliley Act ("GLBA") and that TNA should be permitted to employ TIS to purchase and sell securities for all its fiduciary and trust accounts, whether or not TNA has been given explicit permission to do so. However, you have not referred the Banking Department to a specific section of the GLBA in support of this position. Thus, for purposes of my analysis I have assumed that you are referring to Section 104 and Section 201 of GLBA.
Section 104(c)(1) provides that:
" [N]o State may, by statute, regulation, order, interpretation, or other action, prevent or restrict a depository institution, or an affiliate thereof, from being affiliated directly or indirectly or associated with any person, as authorized or permitted by this Act or any other provision of Federal law."
Section 201, which amends Section 3(a)(4) of the Securities Exchange Act of 1934, provides that a bank shall not be considered a broker if:
"The bank effects transactions in a trustee capacity, or effects transactions in a fiduciary capacity in its trust department or other department that is regularly examined by bank examiners for compliance with fiduciary principles and standards, and
- is chiefly compensated for such transactions, consistent with fiduciary principles and standards, 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; and
- does not publicly solicit brokerage business, other than by advertising that it effects transactions in securities in conjunction with advertising its other trust activities."
If your position is predicated on Section 104, my research thus far has uncovered nothing in GLBAs legislative history that would support the view that GLBA, in addition to eliminating State laws prohibiting affiliations, also eliminated State laws requiring good faith and prohibiting self-dealing when a bank, such as TNA, serving in a trustee capacity is dealing with an affiliate. If your position is predicated on Section 201, you have not provided the Banking Department with information as to whether or not TNA meets the conditions set forth in that section. Nor have you explained how, if at all, Section 201 applies to the matter under consideration.
It is your position that the prohibitions TNA operates under are "harmful to its fiduciary and agency customers and are unnecessary" if: (1) the fees charged by TIS are competitive and are set forth in the periodic transactional statements sent to its trust customers and there are no undisclosed fees; and (2) TIS is able to obtain best execution for the trust accounts of TNA by reason of the increase in scale in the size of the transactions handled for TNA and time saved in not having to segregate allowable and non-allowable TIS orders.
Based on the information provided by you, we are unable, at this time, to make a determination on the validity of your position, let alone concur in your views. We recommend that you submit additional information to the Banking Department in support of TNAs position. If you wish to make a more detailed analytical submission, I will be happy to review it.
I trust the foregoing will be helpful.