rely on the protections of the U.S. securities laws when purchasing
Regulation S securities from U.S. banks, and that those persons may
purchase the same securities from foreign banks located outside the
U.S. without subjecting the foreign bank to U.S. broker-dealer
registration.
---------------------------------------------------------------------------

    \289\ The Commission's Regulation S (17 CFR 230.901 et seq.)
provides that offers and sales of securities conducted in accordance
with the terms of the regulation will not be deemed to constitute an
offer, offer to sell, sale or offer to buy within the United States
for purposes of the securities registration requirements of Section
5 of the Securities Act. See 17 CFR 230.901. Specifically, Rule 903
of Regulation S provides that an offer or sale of securities by the
issuer, a distributor, or an affiliate or a person acting on their
behalf shall be deemed to occur outside the U.S. within the meaning
of Rule 901 if the offer or sale is made in an offshore transaction
(as defined in Rule 901), and no directed selling efforts are made
in the U.S. by the issuer, a distributor, affiliate, or person
acting on their behalf. Other conditions may also apply depending on
the place of incorporation and reporting status of the issuer, and
the amount of U.S. market interest in the securities.
    Rule 904 of Regulation S provides that an offer or sale of
securities by any person other than the issuer, a distributor, an
affiliate (except an officer or director who is an affiliate solely
by virtue of that position) or person acting on their behalf will be
deemed to occur outside the U.S. within the meaning of Rule 901 if
the offer or sale is made in an offshore transaction (as defined in
Rule 901), and no directed selling efforts are made in the U.S. by
the seller, an affiliate or person acting on their behalf.
Additional conditions apply in the case of resales of certain types
of securities by dealers and persons receiving selling concessions,
and in the case of resales by certain affiliates of the issuer or a
distributor.
---------------------------------------------------------------------------

    Commenters generally supported the proposal while suggesting
certain modifications and clarifications.\290\ For example, commenters
requested that the Agencies clarify that the exemption is available to
banks both during and after any applicable distribution compliance
period for the securities required by Regulation S, and allow banks to
conduct resales of eligible securities for either non-U.S. persons or
registered broker-dealers if the bank has a reasonable belief that the
securities were initially sold in compliance with Regulation S.\291\ In
addition, some commenters argued that the exemption should not require
a bank to comply with the resale restrictions in Rule 904 of Regulation
S if the bank effects a resale of an eligible security in accordance
with Rule 903 of Regulation S prior to the end of any applicable
distribution compliance period for the security.\292\ Commenters also
urged the Agencies to make the proposed ``broker'' exemption in
Regulation R and the ``dealer'' exemption proposed by the Commission as
consistent as possible and to make both exemptions as consistent as
possible with Regulation S.
---------------------------------------------------------------------------

    \290\ See IIB Letter; ABA Letter; Clearing House Ass'n Letter.
    \291\ See IIB Letter; Clearing House Ass'n Letter. Rules
903(b)(2) and (b)(3) of Regulation S subject Category 2 securities
and Category 3 debt securities to a 40-day distribution compliance
period, and subject Category 3 equity securities to a one-year
distribution compliance period, during which certain restrictions
apply to offers or sales of the securities in order to preserve the
foreign nature of the transactions. Under Rule 903 of Regulation S,
Category 1 encompasses certain securities: (i) Issued by a foreign
issuer, for which there is no substantial U.S. market interest, (ii)
that are offered and sold in an overseas directed offering, (iii)
that are backed by the full faith and credit of a foreign
government, or (iv) that are offered and sold to employees of the
issuer or its affiliates pursuant to certain foreign employee
benefit plans. Category 2 encompasses securities, not eligible for
Category 1, that are equity securities of a reporting foreign
issuer, or debt securities of a reporting issuer or of a non-
reporting foreign issuer. Category 3 applies to all offerings of
securities that do not fall within Category 1 or 2.
    \292\ See IIB Letter.
---------------------------------------------------------------------------

    The Agencies have modified the rule in several respects in light of
the comments, to enhance its clarity and to better conform it to
Regulation S. The final rule, like the proposed rule, continues to have
three parts. The first part permits a bank to effect a sale of an
eligible security in compliance with the requirements of Rule 903 of
Regulation S to a purchaser who is not in the United States.\293\ The
term ``purchaser'' is defined to mean a person who purchases an
eligible security and who is not a U.S. person under Rule 902(k) of
Regulation S.\294\
---------------------------------------------------------------------------

    \293\ Rule 771(a)(1).
    \294\ Rule 771(b)(3). Rule 902(k) of Regulation S defines the
term ``U.S. person'' to mean: (i) Any natural person resident in the
U.S.; (ii) any partnership or corporation organized or incorporated
under the laws of the U.S.; (iii) any estate of which any executor
or administrator is a U.S. person; (iv) any trust of which any
trustee is a U.S. person; (v) any agency or branch of a foreign
entity located in the U.S.; (vi) any non-discretionary account or
similar account (other than an estate or trust) held by a dealer or
other fiduciary for the benefit or account of a U.S. person; and
(vii) any discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary organized,
incorporated, or (if an individual) resident in the U.S., and (viii)
any partnership or corporation if (A) organized or incorporated
under the laws of any foreign jurisdiction, and (B) formed by a U.S.
person principally for the purpose of investing in securities not
registered under the Act, unless it is organized or incorporated,
and owned, by accredited investors (as defined in Rule 501(a) under
the Securities Act) who are not natural persons, estates or trusts.
---------------------------------------------------------------------------

    The second part permits a bank to effect, by or on behalf of a
person who is not a U.S. person under Rule 902(k) of Regulation S, a
resale of an eligible security after its initial sale to a purchaser
who is not in the United States or to a registered broker-dealer.\295\
To take advantage of this second exemption, the bank (1) must have a
reasonable belief that the eligible security was initially sold outside
of the United States within the meaning of and in compliance with Rule
903 of Regulation S, and (2) if the resale is made prior to any
applicable distribution compliance period specified in Rules 903(b)(2)
or (b)(3) of Regulation S, the resale must be made in compliance with
the requirements of Rule 904 of Regulation S.\296\
---------------------------------------------------------------------------

    \295\ Rule 771(a)(2).
    \296\ Rule 771(a)(2).
---------------------------------------------------------------------------

    The third part of the exemption permits a bank to effect, by or on
behalf of a registered broker-dealer, a resale of an eligible security
after its initial sale to a purchaser who is not in the United
States.\297\ As under the second part, the bank must have a reasonable
belief that the eligible security was initially sold outside of the
United States within the meaning of and in compliance with Rule 903 of
Regulation S and, if the resale is made prior to the expiration of any
applicable distribution compliance period in Rules 903(b)(2) or (b)(3)
of Regulation S, the bank must effect the resale in compliance with the
requirements of Rule 904 of Regulation S. The proposed rule would have
allowed a bank to rely on a reasonable belief that the security was
sold in compliance with Regulation S only when it purchases a security
from a non-U.S. person but not when it purchases a security from a
broker-dealer. In light of comments received, the reasonable belief
standard is also available under the final rule for a bank's
transactions with a broker-dealer because the process of determining
whether a security initially was issued in compliance with Regulation S
should be similar whether the purchase is from a broker-dealer or a
non-U.S. person.\298\ As the rule makes clear, a bank effecting a
resale of an eligible security under the exemption must effect the
transaction in accordance with the conditions of Rule 904 if the
transaction occurs during, but not after, any applicable distribution
compliance period for the security under Rule 903(b)(2) or (b)(3) of
Regulation S.
---------------------------------------------------------------------------

    \297\ Rule 771(a)(3).
    \298\ See IIB Letter and Clearing House Ass'n Letter.
---------------------------------------------------------------------------

    The final rule continues to require, however, that any sale
effected under paragraph (b)(1) of the Rule, or resale effected under
paragraphs (b)(2) or (b)(3) of the Rule (other than one to a registered
broker-dealer), be to a ``purchaser who is not in the United States.''
This is true even if the applicable distribution compliance period for
the overseas offering of the security under Regulation S has expired.
Consistent with Regulation S, which permits the offshore resale of
securities, the purpose of the exemption in Rule 771 is to permit U.S.
banks to sell Regulation S securities to customers outside the United
States. It does not permit banks to sell those securities domestically
(other than to a registered

broker-dealer).\299\ For purposes of the exemption, an ``eligible
security'' means any security other than a security that is being sold
from the inventory of the bank or an affiliate of the bank or that is
being underwritten by the bank or an affiliate of the bank on a firm-
commitment basis unless the bank acquired the security from an
unaffiliated distributor that did not purchase the security from the
bank or an affiliate of the bank.\300\ Commenters requested that the
Agencies clarify that the definition of ``eligible security'' would not
prohibit a bank from effecting transactions under the exemption in
securities that have been issued by the bank or an affiliate.\301\ A
security that is issued by a bank or an affiliate of a bank, such as a
structured note or share in a pooled investment vehicle, may be an
eligible security if it otherwise meets the terms of paragraph (b)(2)
of Rule 771.
---------------------------------------------------------------------------

    \299\ The Agencies recognize that the ``offshore transaction''
condition in Rules 903 and 904 of Regulation S also require that the
offer not be made to a person in the United States. See 17 CFR
230.902(h), 230.903(a)(1) and 230.904(a)(1). For this reason, one
commenter stated that the rule simply should refer to sales to a
``purchaser,'' rather than to a purchaser who is outside the United
States. See IIB Letter. The Agencies have retained the ``purchaser
who is not in the United States'' language in the final rule, even
for those transactions that must be conducted in accordance with
Rule 903 or 904 of Regulation S, to highlight and reaffirm that
these transactions must be with persons outside the United States.
    \300\ Rule 771(b)(1). For purposes of the rule, the term
``distributor'' has the same meaning as in Rule 902(k) of Regulation
S (17 CFR 230.902(k)).
    \301\ See IIB Letter, ABA Letter.
---------------------------------------------------------------------------

B. Exemption for Non-Custodial Securities Lending Transactions

    The Agencies are adopting, as proposed, Rule 772 of Regulation R to
provide banks engaged in certain securities lending transactions with a
conditional exemption from the definition of ``broker.'' The exemption
allows a bank to engage in securities lending transactions as agent in
circumstances where the bank does not have custody of the securities or
has custody of such securities for less than the entire period of the
transaction. This exemption reinstates, without modification, an
exemption that the Commission adopted previously.\302\
---------------------------------------------------------------------------

    \302\ See Exchange Act Release No. 47364 (Feb. 13, 2003), 68 FR
8686 (Feb. 24, 2003) (adopting Exchange Act Rule 15a-11 to provide
an exemption from the definitions of both ``broker'' and ``dealer''
for banks engaging in securities lending transactions). The broker
provisions of the Rule 15a-11 exemption, which never became operable
due to the temporary exemption applicable to all bank broker
activities, will become void under the Regulatory Relief Act with
the Agencies' adoption of a single set of final ``broker'' rules.
See Pub. L. No. 109-351, Sec.  101(a)(3), 120 Stat. 1968 (1999). In
light of this, the Commission separately has amended Rule 15a-11 to
remove the ``broker'' aspects of that rule. As discussed in the
accompanying release, the Commission is re-adopting, without
modification, the ``dealer'' portions of Rule 15a-11, as Exchange
Act Rule 3a5-3. See Exchange Act Release No. 56502 (Sept. 24, 2007).
---------------------------------------------------------------------------

    Most commenters that addressed the exemption supported its
adoption.\303\ One commenter opposed the exemption, arguing that
securities lending and borrowing transactions should be conducted only
by broker-dealers or, alternatively, banks providing such services
should be subject to additional disclosure and customer approval
requirements.\304\ The Agencies continue to believe that the exemption
is appropriate and necessary. The exemption enables sizable and
sophisticated customers to divide custody and securities lending
management between two expert entities when the customer decides such
actions are in the customer's interest, and permits banks to continue
to provide the types of non-custodial securities lending services that
they currently provide without disruption. The Agencies note, moreover,
that the statutory custody and safekeeping exception permits banks to
effect securities lending transactions (and provide related securities
lending services) when the bank has custody of the securities. A bank
need not rely on the exemption in Rule 772 to engage in securities
lending transactions when acting in this capacity.
---------------------------------------------------------------------------

    \303\ See, e.g., State Street Corp. Letter, PNC Letter, Mellon
Letter, and ABA Letter.
    \304\ See NASAA Letter.
---------------------------------------------------------------------------

    Rule 772 provides that a bank is exempt from the broker definition
to the extent that, as agent, it engages in or effects certain
``securities lending transactions'' \305\ and ``securities lending
services'' \306\ in connection with such transactions.\307\ The
exemption applies only to securities lending activities with or on
behalf of a person that the bank reasonably believes to be: (1) A
qualified investor as defined in Section 3(a)(54)(A) of the Exchange
Act;\308\ or (2) any employee benefit plan that owns and invests, on a
discretionary basis, not less than $25 million in investments. One
commenter requested that the Agencies modify the rule to allow banks to
engage in securities lending transactions under the exemption as agent
for institutional customers that have less than $25 million in
investments.\309\ We have not amended the investment requirements,
however, as we believe they are consistent with the nature of customers
that utilize banks for non-custodial securities lending
transactions.\310\
    Another commenter suggested that the Agencies exempt banks
involved, as agent, in securities repurchase and reverse repurchase
transactions in non-exempt securities from the ``broker'' definition,
stating that repurchase and reverse repurchase activities are
functionally equivalent to securities lending.\311\ As discussed in the
accompanying release, moreover, a number of commenters also requested
that banks be exempted from the ``dealer'' definition for repurchase
and reverse repurchase agreement activities involving non-exempt
securities they undertake in a principal capacity.\312\ The Agencies
have not acted on these requests at this time because we believe
additional information from banks and other interested parties would be
helpful in understanding the issues raised by these requests. For this
reason, we invite comment on the following matters, as well as any
other matters that interested parties believe may be relevant to the
Agencies' consideration of the issues posed by the requests: (1) The
nature, structure (including term and type of security involved), and
purpose of repurchase and reverse repurchase agreements currently
conducted with respect to non-exempt securities; (2) the types of
customers

and financial institutions currently involved in repurchase and reverse
repurchase agreements with respect to non-exempt securities; (3) the
extent to and manner in which banks currently engage, as agent or
principal, in repurchase and reverse repurchase agreements with respect
to non-exempt securities; (4) recent developments or trends in the
market for repurchase and reverse repurchase agreements with respect to
non-exempt securities; (5) any material similarities or differences in
the use, structure, customer base, or legal, regulatory, tax or
accounting treatment of repurchase and reverse repurchase agreements
with respect to non-exempt securities, on the one hand, and repurchase
or reverse repurchase agreements with respect to exempt securities or
securities lending transactions involving exempt or non-exempt
securities. The information we receive through this process should help
inform any future actions the Agencies may take in this area.
---------------------------------------------------------------------------

    \305\ Rule 772(b) defines the term ``securities lending
transaction'' to mean a transaction in which the owner of a security
lends the security temporarily to another party pursuant to a
written securities lending agreement under which the lender retains
the economic interests of an owner of such securities, and has the
right to terminate the transaction and to recall the loaned
securities on terms agreed by the parties.
    \306\ Rule 772(c) defines the term ``securities lending
services'' to mean: (1) Selecting and negotiating with a borrower
and executing, or directing the execution of the loan with the
borrower; (2) receiving, delivering, or directing the receipt or
delivery of loaned securities; (3) receiving, delivering, or
directing the receipt or delivery of collateral; (4) providing mark-
to-market, corporate action, recordkeeping or other services
incidental to the administration of the securities lending
transaction; (5) investing, or directing the investment of, cash
collateral; or (6) indemnifying the lender of securities with
respect to various matters.
    \307\ Rule 772(a).
    \308\ 15 U.S.C. 78c(a)(54)(A). In part, this definition
encompasses corporations and partnerships with at least $25 million
in investments.
    \309\ See Union Bank Letter.
    \310\ See, e.g. Letter from Edward J. Rosen, Cleary, Gottlieb,
Stein & Hamilton, to Annette Nazareth, Director, Division of Market
Regulation, Commission, dated Oct. 9, 2002 (requesting that the
exemption encompass banks' securities lending activity involving any
entity that owns and invests on a discretionary basis at least $25
million in investments).
    \311\ See Clearing House Ass'n Letter. Banks are permitted by
statutory exception to engage in repurchase and reverse repurchase
activities with respect to exempt securities such as government
securities. Exchange Act Section 3(a)(5)(C)(i)(II).
    \312\ See Exchange Act Release No. [--------] (Sept. ----,
2007).
---------------------------------------------------------------------------

C. Exemption for Banks Effecting Certain Excepted or Exempted
Transactions in Investment Company Securities and Variable Insurance
Products

    The Agencies are adopting Rule 775 of Regulation R to allow banks
to take advantage of certain exceptions and exemptions to the broker
definition for transactions involving mutual funds, variable annuity
contracts and variable life insurance policies without having to comply
with the broker-execution requirement of Exchange Act Section
3(a)(4)(C)(i).\313\ The rule as proposed permitted banks to effect
transactions in open-end mutual funds through the National Securities
Clearing Corporation (``NSCC'') or the fund's transfer agent, rather
than through a broker-dealer.
---------------------------------------------------------------------------

    \313\ As discussed above, Section 3(a)(4)(C) generally provides
that a bank effecting a transaction in any ``publicly traded
security'' in the United States under the trust and fiduciary, stock
purchase plan, or custody and safekeeping exception must direct the
resulting trade to a broker-dealer for execution unless the trade is
a cross trade or similar trade or the trade otherwise is permitted
by Commission rule, regulation or order. 15 U.S.C. 78c(a)(4)(C).
Rule 760, the exemption for order-taking by banks acting as
custodians, also requires banks to comply with Section 3(a)(4)(C).
See Rule 760(d)(2).
---------------------------------------------------------------------------

    A number of commenters stated, however, that the exemption should
be broadened to also encompass variable annuities and variable life
insurance, with some commenters noting that only variable annuities and
mutual funds are permissible investments for 403(b) plans.\314\
Commenters noted that transactions in variable annuity and variable
life products typically are effected directly with the relevant
insurance company.\315\
---------------------------------------------------------------------------

    \314\ See ABA Letter; TIAA-CREF Letter; American Council of Life
Insurers Letters of March 26 (``ACLI March 26 Letter'') and August
2, 2007, Roundtable Letter, Business Law Section Letter, The
Depository Trust & Clearing Corp. (``DTCC'') Letter.
    \315\ See ACLI March 26 Letter, DTCC Letter.
---------------------------------------------------------------------------

    In light of these comments, the Agencies have expanded the rule to
cover transactions involving variable annuities and variable life
insurance policies, as well as transactions involving mutual funds.
Applying the exemption to transactions in variable insurance products,
as well as to transactions involving mutual funds, will avoid needless
disruptions and costs with respect to banks' transactions with
customers in which interposing an executing broker-dealer would be
inefficient, inconsistent with market practice and unnecessary for
investor protection.
    Specifically, Rule 775 as modified is available for transactions
involving securities issued by an open-end company, as defined by
Section 5(a)(1) of the Investment Company Act,\316\ that is registered
under that Act,\317\ as well as variable insurance contracts funded by
any separate account, as defined by Section 2(a)(37) of the Investment
Company Act, that is registered under that Act. To take advantage of
the exemption, the security must not be traded on a national securities
exchange or traded through the facilities of a national securities
association or an interdealer quotation system.\318\ In addition, the
securities must be distributed by a registered broker-dealer, or the
sales charge must be no more than the amount permissible for a security
sold by a registered broker-dealer pursuant to any applicable rules of
a registered securities association.\319\ Finally, the transaction must
be effected through the NSCC, or directly with a transfer agent or with
an insurance company or a separate account that is excluded from the
definition of transfer agent in Section 3(a)(25) of the Exchange
Act.\320\
---------------------------------------------------------------------------

    \316\ Rule 775(b)(1). We note that banks may effect transactions
in securities that meet the conditions to be an ``exempted
security'' under Exchange Act Section 3(a)(12)(A)(iv) without
complying with the exemption provided by Rule 775. Exchange Act
Section 3(a)(4)(B)(iii)(II) permits banks to effect transactions
involving ``exempted securities'' without registering as a broker
and without effecting the transaction through a registered broker-
dealer.
    \317\ Rule 775(b)(2).
    \318\ Rule 775(a)(1).
    \319\ Rule 775(a)(2). FINRA currently is the only registered
securities association. FINRA Rule 2830 limits the sales charges
associated with open-end mutual funds. Currently, there are no FINRA
rules limiting the sales charges associated with the insurance
securities subject to Rule 775. Therefore currently, in all cases,
these insurance securities would satisfy the condition under Rule
775(a)(2) that the sales charge be no more than the amount
permissible under applicable registered securities association
rules.
    \320\ Rule 775(a)(3).
---------------------------------------------------------------------------

D. Exemption for Certain Transactions involving a Company's Securities
for its Employee Benefit Plans and Participants

    In response to issues raised by a commenter, the Agencies are
adopting an additional exemption (Rule 776) to permit banks that rely
on certain exceptions and exemptions to effect certain transactions
involving the securities of a company for the company's employee
benefit plans and participants without complying with the broker-
execution requirements of Exchange Act Section 3(a)(4)(C)(i).\321\ The
commenter stated that banks that act as trustee or custodian for the
defined benefit or defined contribution plans of a company at times
effect in-kind contributions, purchases and sales, and distribution
transactions for the plan involving the securities of the company
without the involvement of a broker-dealer. The commenter indicated
that these transactions are effected through the company's transfer
agent and that no commission is charged in connection with the
transaction.\322\
---------------------------------------------------------------------------

    \321\ See note 313 supra for a listing of the relevant
exceptions and exemptions.
    \322\ See The Northern Trust Company Letter. The commenter
further stated that ERISA effectively prohibits a commission from
being charged in connection with in-kind contributions by a company
of its stock to the company's benefit plans and direct purchases and
sales by the company of its stock with the company's plans.
---------------------------------------------------------------------------

    In light of these comments, Rule 776 permits a bank utilizing
particular exceptions and exemptions to effect a transaction in the
securities of a company to do so directly with a transfer agent acting
for the company, subject to four conditions. First, no commission may
be charged with respect to the transaction.\323\ Second, the
transaction must be conducted solely for the benefit of an employee
benefit plan.\324\ Third, the security must be obtained directly from
the company or an employee benefit plan of the company.\325\ And
fourth, the security must be transferred only to the company or an
employee benefit plan of the company.\326\ Securities obtained from, or
transferred to, a participant in an employee benefit plan on behalf of
the

plan are considered to be obtained from, or transferred to, the plan.
---------------------------------------------------------------------------

    \323\ Rule 776(a)(1).
    \324\ Rule 776(a)(2). For these purposes, an ``employee benefit
plan'' is defined to mean any pension plan, retirement plan, profit
sharing plan, bonus plan, thrift savings plan, incentive plan, or
other similar plan. Rule 776(b).
    \325\ Rule 776(a)(3).
    \326\ Rule 776(d).
---------------------------------------------------------------------------

    We are adopting this rule because we believe that requiring banks
to send these types of transactions to a broker-dealer for execution--
as would be required to comply with Section 3(a)(4)(C)(i) of the
Exchange Act--at times would preclude plans from engaging in these
transactions, would disrupt existing practices and otherwise would
introduce cost and complexity to those transactions without materially
promoting functional regulation and investor protection.\327\
---------------------------------------------------------------------------

    \327\ The commenter also stated that banks acting as trustees
and custodians at times directly effect transactions with and for
different employee benefit plans involved in a corporate spin-off
transaction with respect to company stock of both companies involved
in the spin-off transaction. See Northern Trust letter. We
understand that the same bank typically is the trustee or custodian
for the different plans in such transactions and conducts such
transactions through cross-trades within the bank. Accordingly, no
additional exemption is required for these transactions.
---------------------------------------------------------------------------

E. Temporary and Permanent Exemption for Contracts Entered Into by
Banks From Being Considered Void or Voidable

    The Agencies are adopting as proposed Rule 780, which grants one
temporary and one permanent exemption from section 29(b) of the
Exchange Act, which addresses inadvertent failures by banks that could
trigger rescission of contracts between a bank and a customer.\328\
Under the temporary exemption, no contract entered into before 18
months after the effective date of the exemption would be void or
considered voidable by reason of Section 29 of the Exchange Act because
any bank that is a party to the contract violated the registration
requirements of Section 15(a) of the Exchange Act, any other applicable
provision of that Act, or the rules and regulations adopted under the
Exchange Act based solely on the bank's status as a broker when the
contract was created.\329\
---------------------------------------------------------------------------

    \328\ 15 U.S.C. 78cc(b). Exchange Act Section 29(b) provides, in
pertinent part, that every contract made in violation of the
Exchange Act or of any rule or regulation adopted under the Exchange
Act (with certain exceptions) shall be void.
    \329\ Rule 780(a).
---------------------------------------------------------------------------

    Under the permanent exemption, no contract entered into is void or
considered voidable by reason of Section 29(b) of the Exchange Act
because any bank that is a party to the contract violated the
registration requirements of Section 15(a) of the Exchange Act or the
rules and regulations adopted thereunder based solely on the bank's
status as a broker when the contract was created if two conditions are
met. First, at the time the contract was created, the bank must have
acted in good faith and had reasonable policies and procedures in place
to comply with Section 3(a)(4)(B) of the Exchange Act, and the rules
and regulations, thereunder. Second, any violation of the registration
requirements by the bank must not have resulted in any significant
harm, financial loss or cost to the person seeking to void the
contract. This exemption is provided because a bank that is acting in
good faith and has reasonable policies and procedures in effect at the
time a securities contract is created should not be subject to
rescission claims as a result of an inadvertent failure to comply with
the requirements under Section 3(c)(4) of the Exchange Act if customers
are not significantly harmed. One commenter supported the
exemptions,\330\ and no commenters objected to their adoption.
---------------------------------------------------------------------------

    \330\ ICBA Letter.
---------------------------------------------------------------------------

F. Extension of Time and Transition Period

    The Agencies are further extending the time that banks have to come
into compliance with the Exchange Act provisions relating to the
definition of ``broker.'' Under the final rule, a bank is exempt from
the definition of ``broker'' under Section 3(a)(4) of the Exchange Act
until the first day of its first fiscal year commencing after September
30, 2008. This is an additional calendar quarter beyond the date (June
30, 2008) provided in the proposed rule. A bank that has a fiscal year
based on the calendar year, for example, must comply with the new
exceptions for banks and these rules beginning on January 1, 2009. Some
commenters noted that banks and broker-dealers would need sufficient
time to make the changes necessary to come into compliance with the
statute and these rules.\331\ The Agencies believe that the extension
granted by the rule, which is a minimum of one year, should provide
banks a reasonable period of time to come into compliance with these
provisions.
---------------------------------------------------------------------------

    \331\ See, e.g., HSBC Securities Letter.
---------------------------------------------------------------------------

    The Administrative Procedure Act (``APA'') permits an agency to
issue a rule without delaying its effective date for 30 days from the
date of publication if, among other reasons, the rule is a substantive
rule which grants or recognizes an exemption or relieves a restriction,
or if the agency finds good cause and publishes its finding with the
rule.\332\ The Agencies find that this Rule 781 grants or recognizes an
exemption or relieves a restriction and also that there is good cause
for adopting Rule 781 without a delayed effective date because it is in
the public interest that banks not unnecessarily incur costs to comply
with the statutory exceptions and related rules before such exceptions
and rules would become effective in accordance with Rule 781.\333\
---------------------------------------------------------------------------

    \332\ The APA provides that publication of a substantive rule
must be made not less than 30 days prior to its effective date,
except ``(1) a substantive rule which grants or recognizes an
exemption or relieves a restriction; (2) interpretive rules and
statements of policy; or (3) otherwise provided by the agency for
good cause found and published with the rule.'' 5 U.S.C. 553(d).
    \333\ This finding also satisfies the requirements of 5 U.S.C.
Section 808(2), which allows a rule to become effective immediately
notwithstanding the requirements of 5 U.S.C. Section 801 if an
agency ``for good cause finds that notice and public procedure
thereon are impracticable, unnecessary, or contrary to the public
interest.''
---------------------------------------------------------------------------

VII. Finding That the Exemptions are Appropriate in the Public Interest
and Consistent With the Protection of Investors

    Section 36(a)(1) of the Exchange Act generally provides that the
Commission may conditionally or unconditionally exempt any person or
class of persons from any provision of the Exchange Act to the extent
that an exemption is necessary or appropriate in the public interest
and consistent with the protection of investors.\334\ Taken as a whole,
the exemptions will implement the bank broker provisions of the GLBA
while providing banks with flexibility to structure their business
models under conditions designed to preserve key investor protections,
and therefore, as discussed above more fully, are appropriate in the
public interest and consistent with the protection of investors.
---------------------------------------------------------------------------

    \334\ 15 U.S.C. 78mm(a)(1).
---------------------------------------------------------------------------

VIII. Withdrawal of Proposed Regulation B and Removal of Exchange Act
Rules 3a4-2 Through 3a4-6, and 3b-17

    Under the Regulatory Relief Act, a final single set of rules or
regulations jointly adopted by the Board and Commission in accordance
with that Act shall supersede any other proposed or final rule issued
by the Commission on or after the date of enactment of Section 201 of
the GLBA with regard to the definition of ``broker'' under Exchange Act
Section 3(a)(4).\335\ Moreover, the law states that ``[n]o such other
rule, whether or not issued in final form, shall have any force or
effect on or after that date of enactment.''
---------------------------------------------------------------------------

    \335\ President Clinton signed the GLBA into law on November 12,
1999.
---------------------------------------------------------------------------

    In 2001, the Commission adopted Interim Rules discussing the way in

which the Commission would interpret the GLBA.\336\ The rules that
address the definition of ``broker'' under Section 3(a)(4) of the
Exchange Act (and applicable exemptions) are Exchange Act Rules 3a4-2
through 3a4-6 and Rule 3b-17.\337\ In 2004, the Commission proposed to
revise and restructure the ``broker'' provisions of the Interim Rules
and codify them in a new regulation, proposed Regulation B, which would
consist of proposed new Exchange Act Rules 710 through 781.\338\ By
operation of the Regulatory Relief Act, the joint adoption of these
final rules by the Board and the Commission supersedes Exchange Act
Rules 3a4-2 through 3a4-6, 3b-17, and proposed Rules 710 through 781.
Any discussion or interpretation of these prior rules in their
accompanying releases does not apply to this single set of rules
adopted by the Agencies.
---------------------------------------------------------------------------

    \336\ Exchange Act Release No. 44291 (May 11, 2001), 66 FR 27760
(May 18, 2001).
    \337\ 17 CFR 240.3a4-2 through 3a4-6 and 17 CFR 240.3b-17.
    \338\ 17 CFR 242.710 through 781. See Exchange Act Release No.
49879 (June 17, 2004), 69 FR 39682 (June 30, 2004).
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IX. Administrative Law Matters

A. Paperwork Reduction Act Analysis

    Certain provisions of Rules 701, 723, and 741, contain ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995.\339\ The Commission has submitted these
information collections to the Office of Management and Budget
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. The Board has reviewed the rules under authority delegated by
OMB.\340\
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    \339\ 44 U.S.C. 3501, et seq.
    \340\ 5 CFR 1320.16; Appendix A.1.
---------------------------------------------------------------------------

    The collections of information under Rules 701, 723, and 741 are
new. The Commission's title for the new collection of information under
Rule 701 is ``Rule 701: Exemption from the definition of `broker' for
certain institutional referrals.'' The Commission's title for the new
collection of information under Rule 723 is ``Rule 723: Exemptions for
special accounts, foreign branches, transferred accounts, and a de
minimis number of accounts.'' The Commission's title for the new
collection of information under Rule 741 is ``Rule 741: Exemption for
banks effecting transactions in money market funds.'' The Commission's
OMB control number for the three rules is 3235-0624. The Board's title
for the new collection of information under Rules 701, 723, and 741 is
``Recordkeeping and Disclosure Requirements Associated with Regulation
R'' (FR 4025). The Board's OMB control number will be 7100-0316. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid control number.\341\ We received no comments on the paperwork
reduction analysis in the proposal.
---------------------------------------------------------------------------

    \341\ 44 U.S.C. 3512.
---------------------------------------------------------------------------

1. Rule 701
    Rule 701 provides a conditional exemption from the requirements
under the networking exception under the Exchange Act. This exemption
permits bank employees to receive payment of more than a nominal amount
for referring institutional customers and high net worth customers to a
broker-dealer and permits such payments to be contingent on whether the
customer effects a securities transaction with the broker-dealer.
a. Collection of Information
    Rules 701(a)(2)(i), (a)(3)(i) and (b) require banks or their
broker-dealer partners that utilize the exemption provided in this rule
to make certain disclosures to high net worth or institutional
customers. Specifically, these disclosures must clearly and
conspicuously disclose (1) the name of the broker-dealer; and (2) that
the bank employee participates in an incentive compensation program
under which the bank employee may receive a fee of more than a nominal
amount for referring the customer to the broker-dealer and payment of
this fee may be contingent on whether the referral results in a
transaction with the broker-dealer.\342\ These requirements were
modified from the proposal to permit timely oral disclosure of this
information, followed by written disclosure, to better accommodate the
variety of circumstances in which referrals may occur.
---------------------------------------------------------------------------

    \342\ See Rules 701(a)(2)(i), (a)(3)(i) and (b).
---------------------------------------------------------------------------

    In addition, one of the conditions of the exemption is that the
broker-dealer and the bank need to have a contractual or other written
arrangement containing certain elements, including notification and
information requirements.\343\ Rule 701(a)(3)(v) requires the written
agreement to obligate a broker-dealer to notify its bank partner if the
broker-dealer determines that (1) the customer referred under the
exemption is not a high net worth or institutional customer, as
applicable; or (2) the bank employee making the referral is subject to
statutory disqualification (as defined in Section 3(a)(39) of the
Exchange Act).\344\ In addition, Rule 701(a)(3)(iv) requires the
written agreement to obligate the broker-dealer to notify the customer
if the securities transaction(s) to be conducted by the customer or the
customer do not meet the applicable suitability or sophistication
determination standards set forth in the rule.\345\ Similarly, the bank
is required to provide its broker-dealer partner with the name of the
bank employee receiving the referral fee and certain other identifying
information.\346\
---------------------------------------------------------------------------

    \343\ See Rule 701(a) and (a)(3).
    \344\ See Rule 701(a)(3)(v). The latter requirement does not
apply to subparagraph (E) of Section 3(a)(39) of the Exchange Act
((15 U.S.C. 78c(a)(39)).
    \345\ See Rule 701(a)(3)(iv).
    \346\ See Rule 701(a)(2)(iii).
---------------------------------------------------------------------------

b. Use of Information
    The purpose of the collection of information in Rules 701(a)(2)(i),
(a)(3)(i) and (b) is to provide a customer of a bank relying on the
exemption with information to assist the customer in identifying and
assessing any conflict of interest on the part of the bank employee
making a referral to a broker-dealer and for which the bank employee
may receive a higher-than-nominal and/or contingent referral fee. The
collection of information in Rule 701(a)(2)(iii) and (a)(3)(v) is
designed to help a bank determine whether it is acting in compliance
with the exemption. The collection of information in Rule 701(a)(3)(iv)
is designed to provide the customer with information that may be
helpful to the customer in deciding whether to engage in a securities
transaction with the broker-dealer.
c. Respondents
    The collections of information in Rule 701 will apply to banks that
wish to utilize the exemption provided in this rule and broker-dealers
with which those banks enter into networking arrangements.
d. Disclosure Burden
    The Agencies estimate that approximately 1,000 banks annually will
use the exemption in Rule 701 and that each bank, individually or
working with its partner broker-dealer, will on average make the
required referral fee disclosures to 200 customers annually. In
addition, we estimate that each bank will provide one notice annually
to its broker-dealer partner regarding names and other identifying
information about bank employees. The Agencies also estimate that
broker-dealers will, on average, notify each of the 1,000 banks
approximately twice a year about a determination regarding a customer's
high net worth or institutional status as well as a bank employee's
statutory

disqualification status. The Agencies further estimate that each
broker-dealer will notify three customers of each partner bank per year
concerning transaction suitability or the customer's financial
sophistication.
    Based on these estimates, the Agencies anticipate that Rule 701
will result in approximately 200,000 disclosures to customers, 1,000
notices to broker-dealers about bank employees, 2,000 notices to banks
about customer status, and 3,000 notices to customers per year about
suitability or sophistication. The Agencies further estimate (based on
the level of difficulty and complexity of the applicable activities)
that a bank or broker-dealer will spend approximately 5 minutes per
customer to comply with the disclosure requirement, and that a bank
will spend approximately 15 minutes per notice to a broker-dealer. The
Agencies also estimate that a broker-dealer will spend approximately 15
minutes per notice to a bank or customer. Thus, the estimated total
annual disclosure burden for these requirements in Rule 701 is
approximately 8,583 hours for banks and approximately 9,583 hours for
broker-dealers.\347\
---------------------------------------------------------------------------

    \347\ Because banks and broker-dealers will share the disclosure
obligation under the final rule, these estimates attribute 50
percent of that disclosure burden to banks and 50 percent to broker-
dealers.
---------------------------------------------------------------------------

e. Collection of Information Is Mandatory
    This collection of information is mandatory for banks relying on
Rule 701 and their broker-dealer partners.
f. Confidentiality
    A bank relying on the exemption provided in Rule 701 or its partner
broker-dealer is required to provide certain referral fee disclosures
to the customers referred by the bank under this rule. Banks relying on
the exemption provided in Rule 701 are required also to enter into
agreements with a broker-dealer obligating the broker-dealer to notify
the bank upon becoming aware of certain information with respect to the
customer or the bank employee, and to notify the customer upon becoming
aware of certain information concerning the customer or the nature of a
securities transaction.\348\ Similarly, a bank is required to notify a
broker-dealer about the name of the bank employee receiving a referral
fee and certain other identifying information.
---------------------------------------------------------------------------

    \348\ These requirements are discussed in more detail in section
1.d (Rule 701, Disclosure Burden), supra.
---------------------------------------------------------------------------

g. Record Retention Period
    Rule 701 does not include a specific record retention requirement.
Banks, however, are required to retain the records in compliance with
any existing or future recordkeeping or disclosure requirements
established by the Banking Agencies. Broker-dealers are also required
to retain records in compliance with existing or future recordkeeping
or disclosure requirements established by the Commission or any self-
regulatory organization.
2. Rule 723
a. Collection of Information
    Rule 723(e)(1) requires a bank that desires to exclude a trust or
fiduciary account in determining its compliance with the chiefly
compensated test, pursuant to a de minimis exclusion,\349\ to maintain
records demonstrating that the securities transactions conducted by or
on behalf of the account were undertaken by the bank in the exercise of
its trust or fiduciary responsibilities with respect to the
account.\350\
---------------------------------------------------------------------------

    \349\ See Rule 723(e)(2), which requires that the total number
of accounts excluded by the bank, under the exclusion from the
chiefly compensated test in Rule 721(a)(1), do not exceed the lesser
of 1 percent of the total number of trust or fiduciary accounts held
by the bank (if the number so obtained is less than 1, the amount
will be rounded up to 1) or 500.
    \350\ See Rule 723(e)(1).
---------------------------------------------------------------------------

b. Use of Information
    The collection of information in Rule 723 is designed to help
ensure that a bank relying on the de minimis exclusion is able to
demonstrate that it was acting in a trust or fiduciary capacity with
respect to an account excluded from the chiefly compensated test in
Rule 721(a)(1).
c. Respondents
    The collection of information in Rule 723 will apply to banks
relying on the de minimis exclusion from the chiefly compensated test.
d. Recordkeeping Burden
    Because the Agencies expect a small number of banks may use the
account-by-account approach in monitoring their compliance with the
chiefly compensated test, the Agencies estimate that approximately 50
banks annually will use the de minimis exclusion in Rule 723 and each
such bank will, on average, need to maintain records with respect to 10
trust or fiduciary accounts annually conducted in the exercise of the
banks' trust or fiduciary responsibilities. Therefore, the Agencies
estimate that Rule 723 will result in approximately 500 accounts
annually for which records are required to be maintained. The Agencies
anticipate that these records will consist of records that are
generally created as part of the securities transaction and the account
relationship and minimal additional time will be required in
maintaining these records. Based on this analysis, the Agencies
estimate that a bank will spend approximately 15 minutes per account to
comply with the record maintenance requirement of Rule 723. Thus, the
estimated total annual recordkeeping burden for Rule 723 is 125 hours.
e. Collection of Information Is Mandatory
    This collection of information is mandatory for banks desiring to
rely on de minimis exclusion contained in Rule 723.
f. Confidentiality
    Rule 723 does not address or restrict the confidentiality of the
documentation prepared by banks under the rule. Accordingly, banks will
have to make the information available to regulatory authorities or
other persons to the extent otherwise provided by law.
g. Record Retention Period
    Rule 723 will include a requirement to maintain records related to
certain securities transactions. Banks will be required to retain these
records in compliance with any existing or future recordkeeping
requirements established by the Banking Agencies.
3. Rule 741
a. Collection of Information
    Rule 741(a)(2)(ii)(A) requires a bank relying on this exemption
(i.e., the exemption from the definition of the term ``broker'' under
Section 3(a)(4) of the Exchange Act for effecting transactions on
behalf of a customer in securities issued by a money market fund) to
provide customers with a prospectus of the money market fund
securities, not later than the time the customer authorizes the bank to
effect the transaction in such securities, if they are not no-load. In
situations where a bank effects transactions under the exemption as
part of a program for the investment or reinvestment of deposits funds
of, or collected by, another bank, the rule permits either the
effecting bank or deposit-taking bank to provide the customer a
prospectus for the money market fund securities.
b. Use of Information
    The purpose of the collection of information in Rule 741 is to help
ensure that a customer of a bank whose

funds or deposits are invested into a money market fund that is not a
no-load fund under the exemption will have sufficient information upon
which to make an informed investment decision, in particular, regarding
the fees the customer will pay with respect to the securities.
c. Respondents
    The collection of information in Rule 741 applies to banks that
directly or indirectly rely on the exemption provided in the rule in
the manner described above.
d. Disclosure Burden
    The Agencies believe that banks generally sweep or invest their
customer funds into no-load money market funds. Accordingly, the
Agencies estimate that approximately 500 banks annually will use the
exemption in Rule 741 and each bank (or its partner bank), on average,
will deliver the prospectus required by the rule to approximately 1,000
customers annually. Therefore, the Agencies estimate that Rule 741 will
result in approximately 500,000 disclosures per year. The Agencies
estimate further that a bank will spend approximately 5 minutes per
response to comply with the delivery requirement of Rule 741. Thus, the
estimated total annual disclosure burden for Rule 741 is 41,667 hours.
e. Collection of Information Is Mandatory
    This collection of information is mandatory for banks relying on
the exemption.
f. Confidentiality
    The collection of information delivered pursuant to Rule 741 must
be provided by banks relying on the exemption in this rule (or in the
case of programs involving deposits of another bank, the other bank) to
customers that are engaging in transactions in securities issued by a
money market fund that is not a no-load fund.
g. Record Retention Period
    Rule 741 does not include a record retention requirement.

B. Consideration of Benefits and Costs

1. Introduction
    Prior to enactment of the GLBA, banks were exempted from the
definition of ``broker'' in Section 3(a)(4) of the Exchange Act.
Therefore, notwithstanding the fact that banks may have conducted
activities that will have brought them within the scope of the broker
definition, they were not required by the Exchange Act to register as
such. The GLBA replaced banks' historic exemption from the definition
of ``broker'' with eleven exceptions.\351\
---------------------------------------------------------------------------

    \351\ See Exchange Act Section 3(a)(4)(B)(i)-(xi).
---------------------------------------------------------------------------

    While banks' efforts to comply with the GLBA and the exemptions
will result in certain costs, the Agencies have sought to minimize
these burdens to the extent possible consistent with the language and
purposes of the GLBA. For example, the Agencies are adopting exemptions
and interpretations that are expected to provide banks with increased
options and flexibility and help to reduce overall costs. Some
commenters noted that the rules as proposed will give banks flexibility
in structuring their operations, and one bank trade association stated
that small banks will be able to comply with the proposed rules without
significantly altering their activities.\352\ Two commenters stated
that the Agencies had underestimated the costs associated with coming
into compliance with Regulation R and also provided estimates of
ongoing compliance costs.\353\
---------------------------------------------------------------------------

    \352\ See Citigroup Letter, ACB Letter, ICBA Letter.
    \353\ See Fiserv Letter, Colorado Trust Letter.
---------------------------------------------------------------------------

2. Discussion of Rule Interpretations and Exemptions
    The benefits and costs of the principal exemptions and
interpretations in the rules are discussed below.
a. Networking Exception
    Exchange Act Section 3(a)(4)(B)(i) excepts banks from the
definition of ``broker'' if they enter into a contractual or other
written arrangement with a registered broker-dealer under which the
broker-dealer offers brokerage services to bank customers. This
networking exception is subject to several conditions. The Section also
prohibits banks from paying unregistered bank employees--such as
tellers, loan officers, and private bankers--``incentive compensation''
for any brokerage transaction, except that bank employees may receive a
``nominal'' referral fee for referring bank customers to their broker-
dealer networking partners.\354\
---------------------------------------------------------------------------

    \354\ Exchange Act Section 3(a)(4)(B)(i)(VI) limits such
referral fees to a ``nominal one-time cash fee of a fixed dollar
amount'' and requires that the payment of the fees not be contingent
on whether the referral results in a transaction.
---------------------------------------------------------------------------

    Under the rule, a ``nominal'' referral fee is defined as a fee that
does not exceed any of the following standards: (1) Twice the average
of the minimum and maximum hourly wage established by the bank for the
current or prior year for the job family that includes the employee or
1/1000th of the average of the minimum and maximum annual base salary
established by the bank for the current or prior year for the job
family that includes the employee; (2) twice the employee's actual base
hourly wage or 1/1000th of the employee's actual annual base salary; or
(3) twenty-five dollars ($25), as adjusted for inflation pursuant to
Rule 700(f).
    The Agencies believe these alternatives likely will provide banks
appropriate flexibility while being consistent with the statute. For
example, some banks, and particularly small banks, may find it most
useful to establish a flat fee or inflation-adjusted fee for securities
referrals as this method is easy to understand and requires no
complicated calculations. In addition, permitting banks to pay referral
fees based on either an employee's base hourly or annual rate of pay or
the average hourly or annual rate of pay for a job family gives banks
objective and easily calculable approaches to paying their employees
referrals while remaining consistent with the requirements of the GLBA
that such fees be ``nominal'' in relation to the overall compensation
of the referring employees. While some start-up costs may be incurred
by banks in the process of developing a fee structure in line with the
requirements of the GLBA, the ability to choose among alternative
methods (as reflected in the rules) is expected to enable banks to
minimize their overall costs based on their individual referral
programs and cost structures. Several commenters supported these
alternatives, or stated that the rules implementing the networking
exception as a whole struck an appropriate balance.\355\
---------------------------------------------------------------------------

    \355\ See ABA Letter, Roundtable Letter, ACB Letter.
---------------------------------------------------------------------------

    In light of the statutory provision allowing banks to pay a
``nominal one-time cash fee,'' the rule requires that all referral fees
paid under the exception be paid in cash. At the same time, the
Agencies have clarified that banks have the flexibility to use cash-
equivalent points, paid no less often than quarterly, in paying nominal
referral fees under the exception.
    Rule 700(b) also contains a definition of ``incentive
compensation'' and excludes from this definition compensation paid by a
bank under a bonus or similar plan that meets certain criteria. The
bonus or similar program must be paid on a discretionary basis and
based on multiple factors or variables. These factors or variables must
include multiple, significant factors or variables that are not related
to securities transactions at the broker-

dealer. Moreover, a referral made by the employee may not be a factor
or variable in determining the employee's compensation under the plan
and the employee's compensation under the plan may not be determined by
reference to referrals made by any other person. Rule 700(b) also
provides a conditional safe harbor from the definition of ``incentive
compensation'' for certain bonus or similar plans that are based on any
measure of the overall profitability of a bank; an affiliate of a bank
(other than a broker-dealer); an operating unit of a bank or of an
affiliate of a bank (other than a broker-dealer); or a broker-dealer
(if the bonus plan meets certain criteria designed to ensure, among
other things, that the plan includes other factors or variables). The
final definition has been revised from the proposal to give banks more
flexibility in using their existing bonus plans within the framework
required by the GLBA.
    The rules also include a conditional exemption to permit a bank to
pay an employee a contingent referral fee of more than a nominal amount
for referring an institutional customer or high net worth customer to a
broker-dealer with which the bank has a contractual or other written
networking arrangement. This exemption provides a benefit to banks by
expanding the types of referral fees that banks may utilize with
respect to institutional customers and high net worth customers. A
number of commenters supported granting an exemption for such
referrals.\356\ There likely will be costs associated with complying
with the conditions in the exemption (such as the requirement for banks
to make certain disclosures to high net worth or institutional
customers and the requirement for broker-dealers to make certain
determinations and provide certain notifications to banks or a
customer) \357\ as well as the other terms and conditions in the
statutory networking exception. These costs, however, will be either a
result of the statutory requirements or costs voluntarily incurred by
banks because they want to take advantage of the exemption.
---------------------------------------------------------------------------

    \356\ See State Street Letter, SIMFA Letter, U.S. Trust Letter,
BISA Letter.
    \357\ Rule 701(a)(2)(i), (a)(3)(iii)-(v), and 701(b).
---------------------------------------------------------------------------

b. Trust and Fiduciary Activities Exception
    Exchange Act Section 3(a)(4)(B)(ii) permits a bank, under certain
conditions, to effect transactions in a trustee or fiduciary capacity
in its trust department or other department that is regularly examined
by bank examiners for compliance with fiduciary principles and
standards without registering as a broker. To qualify for the trust and
fiduciary activities exception, Exchange Act Section 3(a)(4)(B)(ii)
requires that the bank be ``chiefly compensated'' for such transactions
on the basis of the types of fees specified in the GLBA and comply with
certain advertising restrictions set forth in the statute.
    The Agencies believe that the rules dealing with the trust and
fiduciary activities exception will provide a number of benefits to
banks and their customers without imposing significant costs on either
group.\358\ The provisions regarding the ``chiefly compensated''
condition and related exemptions, while imposing some costs related to
systems necessary to perform the calculations and track compensation,
are expected to reduce banks' compliance costs and make the trust and
fiduciary activities exception more useful. For example, the rules
permit a bank to follow an alternate test to the account-by-account
approach to the ``chiefly compensated'' condition. Under this
exemption, a bank may calculate the compensation it receives from its
trust and fiduciary business as a whole on a bank-wide basis, subject
to certain conditions.\359\ This alternative is designed to provide
banks with a potentially less costly approach for determining
compliance with the trust and fiduciary activities exception. Some
commenters noted that this alternative approach was workable.\360\
Similarly, the Agencies' exemptions from the ``chiefly compensated''
condition for certain short-term accounts, accounts acquired as part of
a business combination or asset acquisition, accounts held at a non-
shell foreign branch, accounts transferred to a broker-dealer or other
unaffiliated entity, and a de minimis number of accounts are expected
also to reduce banks' compliance costs by facilitating banks' ability
to comply with the ``chiefly compensated'' condition.\361\ While
compliance with the conditions in these exemptions likely will result
in some costs, such as the recordkeeping requirement associated with
the de minimis exclusion, these costs are likely more than justified by
the benefits associated with the exemptions given that banks could
individually determine whether they wish to utilize the exemptions.
---------------------------------------------------------------------------

    \358\ The trust and fiduciary exception is addressed in Rules
721-723.
    \359\ See Rule 722.
    \360\ See, e.g., ABA Letter, WBA Letter, U.S. Trust Letter, PNC
Letter.
    \361\ See Rule 723.
---------------------------------------------------------------------------

    As previously noted, banks are likely to incur some costs to comply
with the GLBA. The rules, however, include a number of exemptions which
are intended to help to reduce overall costs. As a result, the Agencies
do not believe that banks will incur significant additional costs to
comply with the liberalized exemptions of Rules 722 through 723 or the
definitional guidance of Rule 721.
c. Sweep Accounts and Transactions in Money Market Funds
    Section 3(a)(4)(B)(v) of the Exchange Act provides a bank with an
exception from the definition of ``broker'' to the extent it effects
transactions as part of a program for the investment or re-investment
of deposit funds for a customer or on behalf of another bank into any
no-load, open-end management investment company registered under the
Investment Company Act that holds itself out as a money market fund.
The rules provide guidance, consistent with FINRA rules,\362\ regarding
the definition of ``no-load'' as used in the exception. This guidance
likely will benefit banks by clarifying the types of charges that are
permissible and by providing greater legal certainty.
---------------------------------------------------------------------------

    \362\ See FINRA Rule 2830.
---------------------------------------------------------------------------

    The rules also contain an exemption that permits banks to effect
transactions on behalf of a customer, or for the deposit funds of
another bank, in securities issued by a money market fund, subject to
certain conditions.\363\ While compliance with the conditions
associated with this exemption, such as the prospectus delivery
requirement in certain circumstances, may require banks to incur some
costs, these costs are likely to be more than justified by the investor
protection benefits enjoyed by the banks' customers and the enhanced
flexibility granted banks by the exemption. Furthermore, because banks
are free to determine whether to incur these costs, the exemption is
expected to provide a net benefit for banks that wish to utilize the
exemption.
---------------------------------------------------------------------------

    \363\ See Rule 741.
---------------------------------------------------------------------------

d. Safekeeping and Custody Exception
    Section 3(a)(4)(B)(viii) of the Exchange Act provides banks with an
exception from the definition of ``broker'' for certain bank custody
and safekeeping activities. The rules contain an exemption that permits
a bank, subject to certain conditions, to accept orders to effect
transactions in securities for accounts for which the bank acts as a
custodian (including an account for which a bank acts as directed
trustee),

or, in some cases, for which the bank acts as a subcustodian or a non-
fiduciary administrator or recordkeeper. Specifically, this custody
exemption (Rule 760) allows banks, subject to certain conditions, to
accept orders for securities transactions from employee benefit plan
accounts and individual retirement and similar accounts for which the
bank acts as a custodian. In addition, the exemption allows banks,
subject to certain conditions, to accept orders for securities
transactions on an accommodation basis from other types of custodial
accounts. This exemption allows banks to accept orders from custody
accounts while imposing conditions designed to prevent a bank from
operating a brokerage business out of its custody department.
    The exemption is designed to benefit banks by permitting certain
order-taking activities for securities transactions. While banks may
incur some costs in complying with the conditions contained in the
exemption, such as developing systems for making determinations
regarding compliance with advertising and compensation restrictions,
the Agencies believe the conditions contained in the rules are
consistent with the practices of banks and any costs will only be
imposed on banks that choose to utilize the exemption.
e. Other Rules
    The Agencies are also adopting certain special purpose exemptions.
Specifically, we are adopting an exemption that permits banks to effect
transactions in Regulation S securities with non-U.S. persons or
registered broker-dealers.\364\ Another exemption also allows, under
certain conditions, a bank to effect transactions in investment company
securities and variable life insurance and variable annuities through
the National Securities Clearing Corporation or directly with a
transfer agent or insurance company or separate account that is
excluded from the definition of transfer agent, instead of through a
broker-dealer.\365\ In addition, an exemption permits banks that rely
on certain exceptions and exemptions to effect certain transactions
involving the securities of a company for the company's employee
benefit plans and participants through the National Securities Clearing
Corporation or directly with a transfer agent or insurance company or
separate account that is excluded from the definition of transfer
agent, instead of through a broker-dealer. An additional exemption
permits a bank, as agent, to effect securities lending transactions
(and engage in related securities lending services) for securities that
they do not hold in custody with or on behalf of a person the bank
reasonably believes is a qualified investor (as defined in Section
3(a)(54)(A) of the Exchange Act) or any employee benefit plan that owns
and invests on a discretionary basis at least $25 million in
investments.\366\ We also are extending the exemption from rescission
liability under Exchange Act Section 29 to contracts entered into by
banks acting in a broker capacity until a date that is 18 months after
the effective date of the final rule.\367\ This exemption also
provides, under certain circumstances, protections from rescission
liability under Exchange Act Section 29 resulting solely from a bank's
status as a broker, if the bank has acted in good faith, adopted
reasonable policies and procedures, and any violation of broker
registration requirements did not result in significant harm or
financial loss to the person seeking to void the contract.\368\
Finally, we are issuing a temporary general exemption from the
definition of ``broker'' under Section 3(a)(4) of the Exchange Act
until the first day of a bank's first fiscal year commencing after
September 30, 2008.\369\
---------------------------------------------------------------------------

    \364\ See Rule 771.
    \365\ See Rule 775.
    \366\ See Rule 772.
    \367\ See Rule 780.
    \368\ Id.
    \369\ See Rule 781.
---------------------------------------------------------------------------

    The Agencies believe these provisions offer a number of benefits to
banks and their customers. In particular, the Regulation S exemption
helps ensure that U.S. banks that effect transactions in Regulation S
securities with non-U.S. customers will be more competitive with
foreign banks or other entities that offer those services without being
registered as broker-dealers. The exemption from rescission liability
under Exchange Act Section 29 also provides banks some legal certainty,
both temporarily and on a permanent basis, as they conduct their
securities activities. The exemption related to securities lending
services enables banks to engage in the types of services in which they
currently engage thereby minimizing compliance costs, while providing
the banks' customers with continuity of service. The temporary general
exemption from the definition of ``broker'' also benefits banks by
providing them with an adequate period of time to transition to the
requirements under the statute and the rules.
    The Agencies estimate that the costs of these exemptions will be
minimal and are justified by the benefits the exemptions offer. For
example, the Regulation S exemption may impose certain costs on banks
that are designed to ensure that they remain in compliance with the
conditions under the exemption. In particular, the exemption permits
banks to rely on the exemption only for transactions in ``eligible
securities'' and with either broker-dealers or purchasers who are not
U.S. persons within the meaning of Section 903 of Regulation S. Banks
may incur certain administrative costs to ensure that a transaction
meets these requirements. Nevertheless, the exemption is an
accommodation to banks that wish to effect transactions in Regulation S
securities and, as a result, the compliance costs will be imposed only
on those banks that believe that it is in their best business interests
to take advantage of the exemption.
    Given that Exchange Act Section 29 is rarely used as a remedy, we
do not anticipate that this exemption will impose significant costs on
the industry or on investors.
3. General Costs and Benefits
    Based on the burden hours discussed in the Paperwork Reduction Act
Analysis section, supra, the Agencies expect the ongoing requirements
of the rules to result in a total of 50,375 annual burden hours for
banks and 9583 annual burden hours for broker-dealers, for a grand
total of 59,958 annual burden hours.\370\ The Agencies estimate that
the hourly costs for these burden hours will be approximately $68 per
hour.\371\ Therefore, the annual total costs will be approximately
$4,077,144.
---------------------------------------------------------------------------

    \370\ See infra at VIII.A.1.d., VIII.A.2.d., and VIII.A.3.d.
    \371\ $68/hour figure for a clerk (e.g. compliance clerk) is
from the Securities Industry Association (now SIFMA) Report on
Office Salaries in the Securities Industry 2005, modified to account
for an 1800-hour work-year and multiplied by 2.93 to account for
bonuses, firm size, employee benefits and overhead.
---------------------------------------------------------------------------

    In addition to the costs associated with burden hours discussed in
the Paperwork Reduction Act Analysis section, supra, the Agencies
expect that many banks also could incur start-up costs for legal and
other professional services.\372\ Many banks will utilize their in-
house counsel, accountants, compliance officers, and programmers in an
effort to achieve compliance with the rules. Industry sources indicate
the

following hourly labor costs: Attorneys--$324 per hour, intermediate
accountants--$162 per hour, compliance manager--$205 per hour, and
senior programmer--$268.\373\ Taking an average of these professional
costs, the Agencies estimate a general hourly in-house labor cost of
$240 per hour for professional services.
---------------------------------------------------------------------------

    \372\ For example, banks may incur start-up costs in the process
of reviewing or developing their networking arrangements in line
with the requirements of the rules. See supra at VIII.B.2.a. In
addition, there likely will be costs for developing systems for
making determinations regarding compliance with advertising and
compensation restrictions pursuant to the rules regarding
safekeeping and custody. See supra at VIII.B.2.d.
    \373\ The hourly figures for an attorney, intermediate account,
and compliance manager is from the SIA Report on Management &
Professional Earnings in the Securities Industry 2005, modified to
account for an 1800-hour work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits and overhead.
---------------------------------------------------------------------------

    Based on our expectation that most start-up costs will involve
bringing systems into compliance and that many banks will be able to do
so either using existing systems or by slightly modifying existing
systems, the Agencies estimate that the rules will require banks to
utilize an average of 30 hours of professional services. The Agencies
expect that most banks affected by the rules will either use in-house
counsel or employees resulting in an average total cost of $7,200 per
affected bank.\374\ The Agencies estimate that the rules will apply to
approximately 9,475 banks and approximately 25 percent of these banks
will incur more than a de minimis cost. Using these values, the
Agencies estimate total start-up costs of $17,055,000 (9,475 x .25 x
$7,200). As previously discussed, the Agencies have sought to minimize
these costs to the extent possible consistent with the language and
purposes of the GLBA.
---------------------------------------------------------------------------

    \374\ Some banks may choose to utilize outside counsel, either
exclusively or as a supplement to in-house resources. The Agencies
estimate these costs as being similar to the in-house costs
(Industry sources indicate the following hourly costs for hiring
external workers: Attorneys--$400, accountant--$250, auditor--$250,
and programmer--$160.).
---------------------------------------------------------------------------

    Two commenters stated that the Agencies' estimates of hourly rates
in the proposal were fair, but that the estimates of the time
requirements were too low. These commenters estimated startup costs of
between $43,000 and $55,000.\375\ In addition, these commenters
estimated ongoing costs to be between $60,000 and $95,000 per year.
Based on these commenters' estimates, startup costs would range from
$101.9 million (9475 banks x 0.25 affected x $43,000) to $130.3 million
(9475 x 0.25 x $55,000), and a range of annual ongoing costs of $142.1
million (9475 x 0.25 x $60,000) to $225 million (9475 x 0.25 x
$95,000). The Agencies, however, believe that these cost estimates are
not representative of the costs for the majority of banks affected by
Regulation R. The Agencies received approximately 60 comments,
primarily from banks and banking industry groups, and the comments
generally were favorable. Only these two commenters stated that the
Agencies had underestimated start-up and continuing compliance costs.
The Agencies therefore believe that the estimates in the proposal
reflect the costs that the majority of the banks affected by the rules
are likely, on average, to incur, and are appropriately used to
estimate the overall compliance costs of Regulation R.
---------------------------------------------------------------------------

    \375\ See Fiserv Letter, Colorado Trust Letter.
---------------------------------------------------------------------------

    The Agencies believe that the rules will provide greater legal
certainty for banks in connection with their determination of whether
they meet the terms and conditions for an exception to the definition
of broker under the Exchange Act as well as provide additional relief
through the exemptions. Without the rules, banks may have difficulty
planning their businesses and determining whether their operations are
in compliance with the GLBA. This, in turn, could hamper their
business. The Agencies anticipate these benefits will be useful to
banks in a number of ways.
    The Agencies expect that one component of the benefits to banks
will be savings in legal fees, given that difficulties in interpreting
the GLBA absent any regulatory guidance could result in the need for
greater input from outside counsel. Based on the number of interpretive
issues raised by the GLBA, the Agencies estimate that, absent any
regulatory guidance, banks on average will use the services of outside
counsel for approximately 25 more hours for the initial year and 5 more
hours per year thereafter, than with the existence of the rules.
Industry sources indicate that the hourly costs for hiring outside
counsel are approximately $400 per hour. The rules will therefore
result in an average total cost savings of approximately $10,000 per
affected bank per year during the initial year and $2,000 per affected
bank per year thereafter. The Agencies estimate that the rules will
apply to approximately 9,475 banks and approximately 25 percent of
these banks will enjoy more than a de minimis cost savings benefit.
Using these values, the Agencies estimate a cost savings related to
reduced legal fees of $23,687,500 (9,475 x 0.25 x $10,000) for the
initial year and $4,737,500 (9,475 x 0.25 x $2,000) per year
thereafter.
    The Agencies believe that the benefits of Regulation R justify the
costs.

C. Consideration of Burden on Competition, and on Promotion of
Efficiency, Competition, and Capital Formation

    Exchange Act Section 3(f) requires the Commission, whenever it
engages in rulemaking and is required to consider or determine if an
action is necessary or appropriate in the public interest, to consider
whether the action will promote efficiency, competition, and capital
formation.\376\ Exchange Act Section 23(a)(2) requires the Commission,
in adopting rules under that Act, to consider the impact that any such
rule will have on competition. This Section also prohibits the
Commission from adopting any rule that will impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\377\
---------------------------------------------------------------------------

    \376\ 15 U.S.C. 78c(f).
    \377\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Agencies have designed the interpretations, definitions, and
exemptions to minimize any burden on competition. Indeed, the Agencies
believe that by providing legal certainty to banks that conduct
securities activities, by clarifying the GLBA requirements, and by
exempting a number of activities from those requirements, the rules
allow banks to continue to conduct securities activities consistent
with the GLBA.
    The rules define terms in the statutory exceptions to the
definition of broker added to the Exchange Act by Congress in the GLBA,
and provide guidance to banks as to the appropriate scope of those
exceptions. In addition, the rules contain a number of exemptions that
provide banks flexibility in conducting their securities activities,
which will promote competition and reduce costs.

D. Final Regulatory Flexibility Analysis

    The Agencies have prepared a Final Regulatory Flexibility Analysis
(``FRFA''), in accordance with the provisions of the Regulatory
Flexibility Act (``RFA''),\378\ regarding the rules.
---------------------------------------------------------------------------

    \378\ 5 U.S.C. 604.
---------------------------------------------------------------------------

1. Reasons for the Action
    Section 201 of the GLBA amended the definition of ``broker'' in
Section 3(a)(4) of the Exchange Act to replace a blanket exemption from
that term for ``banks,'' as defined in Section 3(a)(6) of the Exchange
Act. Congress replaced this blanket exemption with eleven specific
exceptions for securities activities conducted by banks.\379\ On
October 13, 2006, President Bush signed into law

the Regulatory Relief Act.\380\ Section 101 of that Act, among other
things, requires the Agencies jointly to issue a single set of rules
implementing the bank broker exceptions in Section 3(a)(4) of the
Exchange Act.\381\ These rules are being adopted by the Agencies to
fulfill this requirement. The rules are designed generally to provide
guidance on the GLBA's bank exceptions from the definition of broker in
Exchange Act Section 3(a)(4) and to provide conditional exemptions from
the broker definition consistent with the purposes of the Exchange Act
and the GLBA.
---------------------------------------------------------------------------

    \379\ 15 U.S.C. 78c(a)(4).
    \380\ Pub. L. No. 109-351, 120 Stat. 1966 (2006).
    \381\ See Exchange Act Section 3(a)(4)(F), as added by Section
101 of the Regulatory Relief Act. The Regulatory Relief Act also
requires that the Board and SEC consult with, and seek the
concurrence of, the OCC, FDIC and OTS prior to jointly adopting
final rules. As noted above, the Board and the SEC also have
consulted extensively with the OCC, FDIC and OTS in developing these
joint rules.
---------------------------------------------------------------------------

2. Objectives
    The rules provide guidance to the industry with respect to the GLBA
requirements. The rules also provide certain conditional exemptions
from the broker definition to allow banks to perform certain securities
activities. The Supplementary Information section, supra, contains more
detailed information on the objectives of the rules.
3. Legal Basis
    Pursuant to Section 101 of the Regulatory Relief Act, the Agencies
are issuing the rules.
4. Small Entities Subject to the Rule
    The rules apply to ``banks,'' which is defined in Section 3(a)(6)
of the Exchange Act to include banking institutions organized in the
United States, including members of the Federal Reserve System, Federal
savings associations, as defined in Section 2(5) of the Home Owners'
Loan Act, and other commercial banks, savings associations, and
nondepository trust companies that are organized under the laws of a
state or the United States and subject to supervision and examination
by state or federal authorities having supervision over banks and
savings associations.\382\ Congress did not exempt small entity banks
from the application of the GLBA. Moreover, because the rules are
intended to provide guidance to, and exemptions for, all banks that are
subject to the GBLA, the Agencies determined that it would not be
appropriate or necessary to exempt small entity banks from the
operation of the rules. The rules generally apply to all banks,
including banks that would be considered small entities (i.e., banks
with total assets of $165 million or less) for purposes of the
RFA.\383\ The Agencies, however, have adopted several interpretations
or exceptions that likely will be particularly useful for small banks
such as, for example, the fixed inflation-adjusted dollar alternative
to the ``nominal'' requirement in the networking exception and the
exception in Rule 723 from the chiefly compensated test for a de
minimis number of trust or fiduciary accounts.
---------------------------------------------------------------------------

    \382\ See 15 U.S.C. 78c(a)(6); Pub. L. No. 109-351, 120 Stat.
1966 (2006).
    \383\ Small Business Administration regulations define ``small
entities'' to include banks and savings associations with total
assets of $165 million or less. 13 CFR 121.201.
---------------------------------------------------------------------------

    The Agencies estimate that the rules will apply to approximately
9,475 banks, approximately 5,816 of which could be considered small
banks with assets of $165 million or less. Moreover, we do not
anticipate any significant costs to small entity banks as a result of
the rules. We note that a trade association whose membership consists
primarily of small banking organizations indicated that small banks
would be able to comply with the rules as proposed without
significantly altering their activities.\384\
---------------------------------------------------------------------------

    \384\ See ICBA Letter.
---------------------------------------------------------------------------

5. Reporting, Recordkeeping and Other Compliance Requirements
    The rules will not impose any significant reporting, recordkeeping,
or other compliance requirements on banks that are small entities.\385\
---------------------------------------------------------------------------

    \385\ The Agencies' estimates related to recordkeeping and
disclosure are detailed in the ``Paperwork Reduction Act Analysis''
Section of this Release.
---------------------------------------------------------------------------

6. Duplicative, Overlapping, or Conflicting Federal Rules
    The Agencies believe that no other rules duplicate, overlap, or
conflict with the final rules.
7. Significant Alternatives
    Pursuant to Section 3(a) of the RFA,\386\ the Agencies must
consider the following types of alternatives: (1) The establishment of
differing compliance or reporting requirements or timetables that take
into account the resources available to small entities; (2) the
clarification, consolidation, or simplification of compliance and
reporting requirements under the rule for small entities; (3) the use
of performance rather than design standards; and (4) an exemption from
coverage of the rules, or any part thereof, for small entities.
---------------------------------------------------------------------------

    \386\ 5 U.S.C. 604(a).
---------------------------------------------------------------------------

    As discussed above, the GLBA does not exempt small entity banks
from the Exchange Act broker registration requirements and because the
rules are intended to provide guidance to, and exemptions for, all
banks that are subject to the GLBA and are designed to accommodate the
business practices of all banks (including small entity banks), the
Agencies determined that it would not be appropriate or necessary to
exempt small entity banks from the operation of the rules. Moreover,
providing one or more special exemptions for small banks could place
broker-dealers, including small broker-dealers, or larger banks at a
competitive disadvantage versus small banks.
    The rules are intended to clarify and simplify compliance with the
GLBA by providing guidance with respect to exceptions and by providing
additional exemptions. As such, the rules are expected to facilitate
compliance by banks of all sizes, including small entity banks.
    The Agencies do not believe that it is necessary to consider
whether small entity banks should be permitted to use performance
rather than design standards to comply with the rules because the rules
already use performance standards. Moreover, the rules do not dictate
for entities of any size any particular design standards (e.g.,
technology) that must be employed to achieve the objectives of the
rules.

E. Plain Language

    Section 722 of the GLBA (12 U.S.C. 4809) requires the Board to use
plain language in all proposed and final rules published by the Board
after January 1, 2000. The Board believes the rules, to the maximum
extent possible, are presented in a simple and straightforward manner.

X. Statutory Authority

    Pursuant to authority set forth in the Exchange Act and
particularly Sections 3(a)(4), 3(b), 15, 17, 23(a), and 36 thereof (15
U.S.C. 78c(a)(4), 78c(b), 78o, 78q, 78w(a), and 78mm, respectively) the
Commission is repealing by operation of statute current Rules 3a4-2,
3a4-3, 3a4-4, 3a4-5, 3a4-6, and 3b-17 (Sec. Sec.  240.3a4-2, 240.3a4-3,
240.3a4-4, 240.3a4-5, 240.3a4-6, and 240.3b-17, respectively). The
Commission is repealing Exchange Act Rules 15a-7 and 15a-8 (Sec.
240.15a-7 and Sec.  240.15a-8, respectively). The Commission, jointly
with the Board of Governors of the Federal Reserve System, is also
adopting new Rules 700, 701, 721, 722, 723, 740, 741, 760, 771, 772,
775, 776, 780, and 781 under the Exchange Act (Sec. Sec.  247.700,
247.701, 247.721, 247.722, 247.723, 247.740,

247.741, 247.760, 247.771, 247.772, 247.775, 247.776, 247.780, and
247.881, respectively).

XI. Text of Rules and Rule Amendment

List of Subjects

12 CFR Part 218

    Banks, Brokers, Securities.

17 CFR Part 240

    Broker-dealers, Reporting and recordkeeping requirements,
Securities.

17 CFR Part 247

    Banks, Brokers, Securities.

Federal Reserve System

Authority and Issuance

0
For the reasons set forth in the preamble, the Board amends Title 12,
Chapter II of the Code of Federal Regulations by adding a new Part 218
as set forth under Common Rules at the end of this document:

PART 218--EXCEPTIONS FOR BANKS FROM THE DEFINITION OF BROKER IN THE
SECURITIES EXCHANGE ACT OF 1934 (REGULATION R)

Sec.
218.100 Definition.
218.700 Defined terms relating to the networking exception from the
definition of ``broker.''
218.701 Exemption from the definition of ``broker'' for certain
institutional referrals.
218.721 Defined terms relating to the trust and fiduciary activities
exception from the definition of ``broker.''
218.722 Exemption allowing banks to calculate trust and fiduciary
compensation on a bank-wide basis.
218.723 Exemptions for special accounts, transferred accounts, and a
de minimis number of accounts.
218.740 Defined terms relating to the sweep accounts exception from
the definition of ``broker.''
218.741 Exemption for banks effecting transactions in money market
funds.
218.760 Exemption from definition of ``broker'' for banks accepting
orders to effect transactions in securities from or on behalf of
custody accounts.
218.771 Exemption from the definition of ``broker'' for banks
effecting transactions in securities issued pursuant to Regulation
S.
218.772 Exemption from the definition of ``broker'' for banks
engaging in securities lending transactions.
218.775 Exemption from the definition of ``broker'' for banks
effecting certain excepted or exempted transactions in investment
company securities.
218.776 Exemption from the definition of ``broker'' for banks
effecting certain excepted or exempted transactions in a company's
securities for its employee benefit plans.
218.780 Exemption for banks from liability under section 29 of the
Securities Exchange Act of 1934.
218.781 Exemption from the definition of ``broker'' for banks for a
limited period of time.

    Authority: 15 U.S.C. 78c(a)(4)(F).

Securities and Exchange Commission

Authority and Issuance

0
For the reasons set forth in the preamble, the Commission amends Title
17, Chapter II of the Code of Federal Regulations as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
1. The authority citation for part 240 continues to read, in part, as
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise
noted.

Sec. Sec.  240.3a4-2 through 240.3a4-6, 240.3b-17, 240.15a-7, and
240.15a-8  [Removed and Reserved]

0
2. Sections 240.3a4-2 through 240.3a4-6, 240.3b-17, 240.15a-7, and
240.15a-8 are removed and reserved.

0
3. Part 247 is added as set forth under Common Rules at the end of this
document:

PART 247--REGULATION R--EXEMPTIONS AND DEFINITIONS RELATED TO THE
EXCEPTIONS FOR BANKS FROM THE DEFINITION OF BROKER

Sec.
247.100 Definition.
247.700 Defined terms relating to the networking exception from the
definition of ``broker.''
247.701 Exemption from the definition of ``broker'' for certain
institutional referrals.
247.721 Defined terms relating to the trust and fiduciary activities
exception from the definition of ``broker.''
247.722 Exemption allowing banks to calculate trust and fiduciary
compensation on a bank-wide basis.
247.723 Exemptions for special accounts, transferred accounts, and a
de minimis number of accounts.
247.740 Defined terms relating to the sweep accounts exception from
the definition of ``broker.''
247.741 Exemption for banks effecting transactions in money market
funds.
247.760 Exemption from definition of ``broker'' for banks accepting
orders to effect transactions in securities from or on behalf of
custody accounts.
247.771 Exemption from the definition of ``broker'' for banks
effecting transactions in securities issued pursuant to Regulation
S.
247.772 Exemption from the definition of ``broker'' for banks
engaging in securities lending transactions.
247.775 Exemption from the definition of ``broker'' for banks
effecting certain excepted or exempted transactions in investment
company securities.
247.776 Exemption from the definition of ``broker'' for banks
effecting certain excepted or exempted transactions in a company's
securities for its employee benefit plans.
247.780 Exemption for banks from liability under section 29 of the
Securities Exchange Act of 1934.
247.781 Exemption from the definition of ``broker'' for banks for a
limited period of time.

    Authority: 15 U.S.C. 78c, 78o, 78q, 78w, and 78mm.

Common Rules

    The common rules that are adopted by the Commission as Part 247 of
Title 17, Chapter II of the Code of Federal Regulations and by the
Board as Part 218 of Title 12, Chapter II of the Code of Federal
Regulations follow:

Sec.  ----.100  Definition.

    For purposes of this part the following definition shall apply: Act
means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).

Sec.  ----.700  Defined terms relating to the networking exception from
the definition of ``broker.''

    When used with respect to the Third Party Brokerage Arrangements
(``Networking'') Exception from the definition of the term ``broker''
in section 3(a)(4)(B)(i) of the Act (15 U.S.C. 78c(a)(4)(B)(i)) in the
context of transactions with a customer, the following terms shall have
the meaning provided:
    (a) Contingent on whether the referral results in a transaction
means dependent on whether the referral results in a purchase or sale
of a security; whether an account is opened with a broker or dealer;
whether the referral results in a transaction involving a particular
type of security; or whether it results in multiple securities
transactions; provided, however, that a referral fee may be contingent
on whether a customer:
    (1) Contacts or keeps an appointment with a broker or dealer as a
result of the referral; or
    (2) Meets any objective, base-line qualification criteria
established by the bank or broker or dealer for customer referrals,
including such criteria as minimum assets, net worth, income, or

marginal federal or state income tax rate, or any requirement for
citizenship or residency that the broker or dealer, or the bank, may
have established generally for referrals for securities brokerage
accounts.
    (b)(1) Incentive compensation means compensation that is intended
to encourage a bank employee to refer customers to a broker or dealer
or give a bank employee an interest in the success of a securities
transaction at a broker or dealer. The term does not include
compensation paid by a bank under a bonus or similar plan that is:
    (i) Paid on a discretionary basis; and
    (ii) Based on multiple factors or variables and:
    (A) Those factors or variables include multiple significant factors
or variables that are not related to securities transactions at the
broker or dealer;
    (B) A referral made by the employee is not a factor or variable in
determining the employee's compensation under the plan; and
    (C) The employee's compensation under the plan is not determined by
reference to referrals made by any other person.
    (2) Nothing in this paragraph (b) shall be construed to prevent a
bank from compensating an officer, director or employee under a bonus
or similar plan on the basis of any measure of the overall
profitability or revenue of:
    (i) The bank, either on a stand-alone or consolidated basis;
    (ii) Any affiliate of the bank (other than a broker or dealer), or
any operating unit of the bank or an affiliate (other than a broker or
dealer), if the affiliate or operating unit does not over time
predominately engage in the business of making referrals to a broker or
dealer; or
    (iii) A broker or dealer if:
    (A) Such measure of overall profitability or revenue is only one of
multiple factors or variables used to determine the compensation of the
officer, director or employee;
    (B) The factors or variables used to determine the compensation of
the officer, director or employee include multiple significant factors
or variables that are not related to the profitability or revenue of
the broker or dealer;
    (C) A referral made by the employee is not a factor or variable in
determining the employee's compensation under the plan; and
    (D) The employee's compensation under the plan is not determined by
reference to referrals made by any other person.
    (c) Nominal one-time cash fee of a fixed dollar amount means a cash
payment for a referral, to a bank employee who was personally involved
in referring the customer to the broker or dealer, in an amount that
meets any of the following standards:
    (1) The payment does not exceed:
    (i) Twice the average of the minimum and maximum hourly wage
established by the bank for the current or prior year for the job
family that includes the employee; or
    (ii) 1/1000th of the average of the minimum and maximum annual base
salary established by the bank for the current or prior year for the
job family that includes the employee; or
    (2) The payment does not exceed twice the employee's actual base
hourly wage or 1/1000th of the employee's actual annual base salary; or
    (3) The payment does not exceed twenty-five dollars ($25), as
adjusted in accordance with paragraph (f) of this section.
    (d) Job family means a group of jobs or positions involving similar
responsibilities, or requiring similar skills, education or training,
that a bank, or a separate unit, branch or department of a bank, has
established and uses in the ordinary course of its business to
distinguish among its employees for purposes of hiring, promotion, and
compensation.
    (e) Referral means the action taken by one or more bank employees
to direct a customer of the bank to a broker or dealer for the purchase
or sale of securities for the customer's account.
    (f) Inflation adjustment--(1) In general. On April 1, 2012, and on
the 1st day of each subsequent 5-year period, the dollar amount
referred to in paragraph (c)(3) of this section shall be adjusted by:
    (i) Dividing the annual value of the Employment Cost Index For
Wages and Salaries, Private Industry Workers (or any successor index
thereto), as published by the Bureau of Labor Statistics, for the
calendar year preceding the calendar year in which the adjustment is
being made by the annual value of such index (or successor) for the
calendar year ending December 31, 2006; and
    (ii) Multiplying the dollar amount by the quotient obtained in
paragraph (f)(1)(i) of this section.
    (2) Rounding. If the adjusted dollar amount determined under
paragraph (f)(1) of this section for any period is not a multiple of
$1, the amount so determined shall be rounded to the nearest multiple
of $1.

Sec.  ----.701  Exemption from the definition of ``broker'' for certain
institutional referrals.

    (a) General. A bank that meets the requirements for the exception
from the definition of ``broker'' under section 3(a)(4)(B)(i) of the
Act (15 U.S.C. 78c(a)(4)(B)(i)), other than section 3(a)(4)(B)(i)(VI)
of the Act (15 U.S.C. 78c(a)(4)(B)(i)(VI)), is exempt from the
conditions of section 3(a)(4)(B)(i)(VI) of the Act solely to the extent
that a bank employee receives a referral fee for referring a high net
worth customer or institutional customer to a broker or dealer with
which the bank has a contractual or other written arrangement of the
type specified in section 3(a)(4)(B)(i) of the Act, if:
    (1) Bank employee. (i) The bank employee is:
    (A) Not registered or approved, or otherwise required to be
registered or approved, in accordance with the qualification standards
established by the rules of any self-regulatory organization;
    (B) Predominantly engaged in banking activities other than making
referrals to a broker or dealer; and
    (C) Not subject to statutory disqualification, as that term is
defined in section 3(a)(39) of the Act (15 U.S.C. 78c(a)(39)), except
subparagraph (E) of that section; and
    (ii) The high net worth customer or institutional customer is
encountered by the bank employee in the ordinary course of the
employee's assigned duties for the bank.
    (2) Bank determinations and obligations--(i) Disclosures. The bank
provides the high net worth customer or institutional customer the
information set forth in paragraph (b) of this section
    (A) In writing prior to or at the time of the referral; or
    (B) Orally prior to or at the time of the referral and
    (1) The bank provides such information to the customer in writing
within 3 business days of the date on which the bank employee refers
the customer to the broker or dealer; or
    (2) The written agreement between the bank and the broker or dealer
provides for the broker or dealer to provide such information to the
customer in writing in accordance with paragraph (a)(3)(i) of this
section.
    (ii) Customer qualification. (A) In the case of a customer that is
a not a natural person, the bank has a reasonable basis to believe that
the customer is an institutional customer before the referral fee is
paid to the bank employee.
    (B) In the case of a customer that is a natural person, the bank
has a reasonable basis to believe that the customer is a high net worth
customer prior to or at the time of the referral.
    (iii) Employee qualification information. Before a referral fee is
paid to a bank employee under this section,

the bank provides the broker or dealer the name of the employee and
such other identifying information that may be necessary for the broker
or dealer to determine whether the bank employee is registered or
approved, or otherwise required to be registered or approved, in
accordance with the qualification standards established by the rules of
any self-regulatory organization or is subject to statutory
disqualification, as that term is defined in section 3(a)(39) of the
Act (15 U.S.C. 78c(a)(39)), except subparagraph (E) of that section.
    (iv) Good faith compliance and corrections. A bank that acts in
good faith and that has reasonable policies and procedures in place to
comply with the requirements of this section shall not be considered a
``broker'' under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4))
solely because the bank fails to comply with the provisions of this
paragraph (a)(2) with respect to a particular customer if the bank:
    (A) Takes reasonable and prompt steps to remedy the error (such as,
for example, by promptly making the required determination or promptly
providing the broker or dealer the required information); and
    (B) Makes reasonable efforts to reclaim the portion of the referral
fee paid to the bank employee for the referral that does not, following
any required remedial action, meet the requirements of this section and
that exceeds the amount otherwise permitted under section
3(a)(4)(B)(i)(VI) of the Act (15 U.S.C. 78c(a)(4)(B)(i)(VI)) and Sec.
----.700.
    (3) Provisions of written agreement. The written agreement between
the bank and the broker or dealer shall require that:
    (i) Broker-dealer written disclosures. If, pursuant to paragraph
(a)(2)(i)(B)(2) of this section, the broker or dealer is to provide the
customer in writing the disclosures set forth in paragraph (b) of this
section, the broker or dealer provides such information to the customer
in writing:
    (A) Prior to or at the time the customer begins the process of
opening an account at the broker or dealer, if the customer does not
have an account with the broker or dealer; or
    (B) Prior to the time the customer places an order for a securities
transaction with the broker or dealer as a result of the referral, if
the customer already has an account at the broker or dealer.
    (ii) Customer and employee qualifications. Before the referral fee
is paid to the bank employee:
    (A) The broker or dealer determine that the bank employee is not
subject to statutory disqualification, as that term is defined in
section 3(a)(39) of the Act (15 U.S.C. 78c(a)(39)), except subparagraph
(E) of that section; and
    (B) The broker or dealer has a reasonable basis to believe that the
customer is a high net worth customer or an institutional customer.
    (iii) Suitability or sophistication determination by broker or
dealer--(A) Contingent referral fees. In any case in which payment of
the referral fee is contingent on completion of a securities
transaction at the broker or dealer, the broker or dealer, before such
securities transaction is conducted, perform a suitability analysis of
the securities transaction in accordance with the rules of the broker
or dealer's applicable self-regulatory organization as if the broker or
dealer had recommended the securities transaction.
    (B) Non-contingent referral fees. In any case in which payment of
the referral fee is not contingent on the completion of a securities
transaction at the broker or dealer, the broker or dealer, before the
referral fee is paid, either:
    (1) Determine that the customer:
    (i) Has the capability to evaluate investment risk and make
independent decisions; and
    (ii) Is exercising independent judgment based on the customer's own
independent assessment of the opportunities and risks presented by a
potential investment, market factors and other investment
considerations; or
    (2) Perform a suitability analysis of all securities transactions
requested by the customer contemporaneously with the referral in
accordance with the rules of the broker or dealer's applicable self-
regulatory organization as if the broker or dealer had recommended the
securities transaction.
    (iv) Notice to the customer. The broker or dealer inform the
customer if the broker or dealer determines that the customer or the
securities transaction(s) to be conducted by the customer does not meet
the applicable standard set forth in paragraph (a)(3)(iii) of this
section.
    (v) Notice to the bank. The broker or dealer promptly inform the
bank if the broker or dealer determines that:
    (A) The customer is not a high net worth customer or institutional
customer, as applicable; or
    (B) The bank employee is subject to statutory disqualification, as
that term is defined in section 3(a)(39) of the Act (15 U.S.C.
78c(a)(39)), except subparagraph (E) of that section.
    (b) Required disclosures. The disclosures provided to the high net
worth customer or institutional customer pursuant to paragraphs
(a)(2)(i) or (a)(3)(i) of this section shall clearly and conspicuously
disclose
    (1) The name of the broker or dealer; and
    (2) That the bank employee participates in an incentive
compensation program under which the bank employee may receive a fee of
more than a nominal amount for referring the customer to the broker or
dealer and payment of this fee may be contingent on whether the
referral results in a transaction with the broker or dealer.
    (c) Receipt of other compensation. Nothing in this section prevents
or prohibits a bank from paying or a bank employee from receiving any
type of compensation that would not be considered incentive
compensation under Sec.  ----.700(b)(1) or that is described in Sec.
----.700(b)(2).
    (d) Definitions. When used in this section:
    (1) High net worth customer--(i) General. High net worth customer
means:
    (A) Any natural person who, either individually or jointly with his
or her spouse, has at least $5 million in net worth excluding the
primary residence and associated liabilities of the person and, if
applicable, his or her spouse; and
    (B) Any revocable, inter vivos or living trust the settlor of which
is a natural person who, either individually or jointly with his or her
spouse, meets the net worth standard set forth in paragraph
(d)(1)(i)(A) of this section.
    (ii) Individual and spousal assets. In determining whether any
person is a high net worth customer, there may be included in the
assets of such person
    (A) Any assets held individually;
    (B) If the person is acting jointly with his or her spouse, any
assets of the person's spouse (whether or not such assets are held
jointly); and
    (C) If the person is not acting jointly with his or her spouse,
fifty percent of any assets held jointly with such person's spouse and
any assets in which such person shares with such person's spouse a
community property or similar shared ownership interest.
    (2) Institutional customer means any corporation, partnership,
limited liability company, trust or other non-natural person that has,
or is controlled by a non-natural person that has, at least:
    (i) $10 million in investments; or
    (ii) $20 million in revenues; or
    (iii) $15 million in revenues if the bank employee refers the
customer to the broker or dealer for investment banking services.
    (3) Investment banking services includes, without limitation,
acting as

an underwriter in an offering for an issuer; acting as a financial
adviser in a merger, acquisition, tender offer or similar transaction;
providing venture capital, equity lines of credit, private investment-
private equity transactions or similar investments; serving as
placement agent for an issuer; and engaging in similar activities.
    (4) Referral fee means a fee (paid in one or more installments) for
the referral of a customer to a broker or dealer that is:
    (i) A predetermined dollar amount, or a dollar amount determined in
accordance with a predetermined formula (such as a fixed percentage of
the dollar amount of total assets placed in an account with the broker
or dealer), that does not vary based on:
    (A) The revenue generated by or the profitability of securities
transactions conducted by the customer with the broker or dealer; or
    (B) The quantity, price, or identity of securities transactions
conducted over time by the customer with the broker or dealer; or
    (C) The number of customer referrals made; or
    (ii) A dollar amount based on a fixed percentage of the revenues
received by the broker or dealer for investment banking services
provided to the customer.
    (e) Inflation adjustments--(1) In general. On April 1, 2012, and on
the 1st day of each subsequent 5-year period, each dollar amount in
paragraphs (d)(1) and (d)(2) of this section shall be adjusted by:
    (i) Dividing the annual value of the Personal Consumption
Expenditures Chain-Type Price Index (or any successor index thereto),
as published by the Department of Commerce, for the calendar year
preceding the calendar year in which the adjustment is being made by
the annual value of such index (or successor) for the calendar year
ending December 31, 2006; and
    (ii) Multiplying the dollar amount by the quotient obtained in
paragraph (e)(1)(i) of this section.
    (2) Rounding. If the adjusted dollar amount determined under
paragraph (e)(1) of this section for any period is not a multiple of
$100,000, the amount so determined shall be rounded to the nearest
multiple of $100,000.

Sec.  ----.721  Defined terms relating to the trust and fiduciary
activities exception from the definition of ``broker.''

    (a) Defined terms for chiefly compensated test. For purposes of
this part and section 3(a)(4)(B)(ii) of the Act (15 U.S.C.
78c(a)(4)(B)(ii)), the following terms shall have the meaning provided:
    (1) Chiefly compensated--account-by-account test. Chiefly
compensated shall mean the relationship-total compensation percentage
for each trust or fiduciary account of the bank is greater than 50
percent.
    (2) The relationship-total compensation percentage for a trust or
fiduciary account shall be the mean of the yearly compensation
percentage for the account for the immediately preceding year and the
yearly compensation percentage for the account for the year immediately
preceding that year.
    (3) The yearly compensation percentage for a trust or fiduciary
account shall be
    (i) Equal to the relationship compensation attributable to the
trust or fiduciary account during the year divided by the total
compensation attributable to the trust or fiduciary account during that
year, with the quotient expressed as a percentage; and
    (ii) Calculated within 60 days of the end of the year.
    (4) Relationship compensation means any compensation a bank
receives attributable to a trust or fiduciary account that consists of:
    (i) An administration fee, including, without limitation, a fee
paid--
    (A) For personal services, tax preparation, or real estate
settlement services;
    (B) For disbursing funds from, or for recording receipt of payments
to, a trust or fiduciary account;
    (C) In connection with securities lending or borrowing
transactions;
    (D) For custody services; or
    (E) In connection with an investment in shares of an investment
company for personal service, the maintenance of shareholder accounts
or any service described in paragraph (a)(4)(iii)(C) of this section;
    (ii) An annual fee (payable on a monthly, quarterly or other
basis), including, without limitation, a fee paid for assessing
investment performance or for reviewing compliance with applicable
investment guidelines or restrictions;
    (iii) A fee based on a percentage of assets under management,
including, without limitation, a fee paid
    (A) Pursuant to a plan under Sec.  270.12b-1;
    (B) In connection with an investment in shares of an investment
company for personal service or the maintenance of shareholder
accounts;
    (C) Based on a percentage of assets under management for any of the
following services--
    (I) Providing transfer agent or sub-transfer agent services for
beneficial owners of investment company shares;
    (II) Aggregating and processing purchase and redemption orders for
investment company shares;
    (III) Providing beneficial owners with account statements showing
their purchases, sales, and positions in the investment company;
    (IV) Processing dividend payments for the investment company;
    (V) Providing sub-accounting services to the investment company for
shares held beneficially;
    (VI) Forwarding communications from the investment company to the
beneficial owners, including proxies, shareholder reports, dividend and
tax notices, and updated prospectuses; or
    (VII) Receiving, tabulating, and transmitting proxies executed by
beneficial owners of investment company shares;
    (D) Based on the financial performance of the assets in an account;
or
    (E) For the types of services described in paragraph (a)(4)(i)(C)
or (D) of this section if paid based on a percentage of assets under
management;
    (iv) A flat or capped per order processing fee, paid by or on
behalf of a customer or beneficiary, that is equal to not more than the
cost incurred by the bank in connection with executing securities
transactions for trust or fiduciary accounts; or
    (v) Any combination of such fees.
    (6) Trust or fiduciary account means an account for which the bank
acts in a trustee or fiduciary capacity as defined in section
3(a)(4)(D) of the Act (15 U.S.C. 78c(a)(4)(D)).
    (7) Year means a calendar year, or fiscal year consistently used by
the bank for recordkeeping and reporting purposes.
    (b) Revenues derived from transactions conducted under other
exceptions or exemptions. For purposes of calculating the yearly
compensation percentage for a trust or fiduciary account, a bank may at
its election exclude the compensation associated with any securities
transaction conducted in accordance with the exceptions in section
3(a)(4)(B)(i) or sections 3(a)(4)(B)(iii)-(xi) of the Act (15 U.S.C.
78c(a)(4)(B)(i) or 78c(a)(4)(B)(iii)-(xi)) and the rules issued
thereunder, including any exemption related to such exceptions jointly
adopted by the Commission and the Board, provided that if the bank
elects to exclude such compensation, the bank must exclude the
compensation from both the relationship compensation (if applicable)
and total compensation for the account.
    (c) Advertising restrictions--

    (1) In general. A bank complies with the advertising restriction in
section 3(a)(4)(B)(ii)(II) of the Act (15 U.S.C. 78c(a)(4)(B)(ii)(II))
if advertisements by or on behalf of the bank do not advertise--
    (i) That the bank provides securities brokerage services for trust
or fiduciary accounts except as part of advertising the bank's broader
trust or fiduciary services; and
    (ii) The securities brokerage services provided by the bank to
trust or fiduciary accounts more prominently than the other aspects of
the trust or fiduciary services provided to such accounts.
    (2) Advertisement. For purposes of this section, the term
advertisement has the same meaning as in Sec.  ----.760(g)(2).

Sec.  ----.722  Exemption allowing banks to calculate trust and
fiduciary compensation on a bank-wide basis.

    (a) General. A bank is exempt from meeting the ``chiefly
compensated'' condition in section 3(a)(4)(B)(ii)(I) of the Act (15
U.S.C. 78c(a)(4)(B)(ii)(I)) to the extent that it effects transactions
in securities for any account in a trustee or fiduciary capacity within
the scope of section 3(a)(4)(D) of the Act (15 U.S.C. 78c(a)(4)(D)) if:
    (1) The bank meets the other conditions for the exception from the
definition of the term ``broker'' under sections 3(a)(4)(B)(ii) and
3(a)(4)(C) of the Act (15 U.S.C. 78c(a)(4)(B)(ii) and 15 U.S.C.
78c(a)(4)(C)), including the advertising restrictions in section
3(a)(4)(B)(ii)(II) of the Act (15 U.S.C. 78c(a)(4)(B)(ii)(II) as
implemented by Sec.  --.721(c); and
    (2) The aggregate relationship-total compensation percentage for
the bank's trust and fiduciary business is at least 70 percent.
    (b) Aggregate relationship-total compensation percentage. For
purposes of this section, the aggregate relationship-total compensation
percentage for a bank's trust and fiduciary business shall be the mean
of the bank's yearly bank-wide compensation percentage for the
immediately preceding year and the bank's yearly bank-wide compensation
percentage for the year immediately preceding that year.
    (c) Yearly bank-wide compensation percentage. For purposes of this
section, a bank's yearly bank-wide compensation percentage for a year
shall be
    (1) Equal to the relationship compensation attributable to the
bank's trust and fiduciary business as a whole during the year divided
by the total compensation attributable to the bank's trust and
fiduciary business as a whole during that year, with the quotient
expressed as a percentage; and
    (2) Calculated within 60 days of the end of the year.
    (d) Revenues derived from transactions conducted under other
exceptions or exemptions. For purposes of calculating the yearly
compensation percentage for a trust or fiduciary account, a bank may at
its election exclude the compensation associated with any securities
transaction conducted in accordance with the exceptions in section
3(a)(4)(B)(i) or sections 3(a)(4)(B)(iii)-(xi) of the Act (15 U.S.C.
78c(a)(4)(B)(i) or 78c(a)(4)(B)(iii)-(xi)) and the rules issued
thereunder, including any exemption related to such sections jointly
adopted by the Commission and the Board, provided that if the bank
elects to exclude such compensation, the bank must exclude the
compensation from both the relationship compensation (if applicable)
and total compensation of the bank.

Sec.  ----.723  Exemptions for special accounts, transferred accounts,
foreign branches and a de minimis number of accounts.

    (a) Short-term accounts. A bank may, in determining its compliance
with the chiefly compensated test in Sec.  ----.721(a)(1) or Sec.  --
--.722(a)(2), exclude any trust or fiduciary account that had been open
for a period of less than 3 months during the relevant year.
    (b) Accounts acquired as part of a business combination or asset
acquisition. For purposes of determining compliance with the chiefly
compensated test in Sec.  ----.721(a)(1) or Sec.  ----.722(a)(2), any
trust or fiduciary account that a bank acquired from another person as
part of a merger, consolidation, acquisition, purchase of assets or
similar transaction may be excluded by the bank for 12 months after the
date the bank acquired the account from the other person.
    (c) Non-shell foreign branches--(1) Exemption. For purposes of
determining compliance with the chiefly compensated test in Sec.  --
--.722(a)(2), a bank may exclude the trust or fiduciary accounts held
at a non-shell foreign branch of the bank if the bank has reasonable
cause to believe that trust or fiduciary accounts of the foreign branch
held by or for the benefit of a U.S. person as defined in 17 CFR