A bank relying on the exemption provided in proposed Exchange Act
Rule 701 would be required to provide certain referral fee disclosures
to its customers as required by this proposed rule. Banks relying on
the exemption provided in proposed Exchange Act Rule 701 would be also
be required to enter into agreements with a broker or dealer obligating
the broker or dealer to notify the bank upon becoming aware of certain
information with respect to the customer, the bank employee, or the
nature of the securities transaction. Similarly, a bank would be
required to notify a broker or dealer about the name of the bank
employee receiving a referral fee and certain other identifying
information.
g. Record Retention Period
    Proposed Exchange Act Rule 701 would not include a specific record
retention requirement. Banks, however, would be required to retain the
records in compliance with any existing or future recordkeeping
requirements established by the Banking Agencies.
2. Proposed Exchange Act Rule 723
a. Collection of Information
    Proposed Exchange Act Rule 723(d)(1) would require 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,\133\ 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.\134\
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    \133\ See proposed Exchange Act Rule 723(d)(2), which would
require that the total number of accounts excluded by the bank,
under the exclusion from the chiefly compensated test in proposed
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 would be rounded up to
1) or 500.
    \134\ See proposed Exchange Act Rule 723(d)(1).
---------------------------------------------------------------------------

b. Proposed Use of Information
    The collection of information in proposed Exchange Act Rule 723 is
designed to help ensure that a bank relying on the de minimis exclusion

would be 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 proposed Rule 721(a)(1).
c. Respondents
    The proposed collection of information in Exchange Act Rule 723
would apply to banks relying on the de minimis exclusion from the
chiefly compensated test.
d. Reporting and Recordkeeping Burden
    Because the Agencies expect a small number of banks would use the
account-by-account approach in monitoring their compensation, the
Agencies estimate that approximately 50 banks annually would use the de
minimis exclusion in proposed Exchange Act Rule 723 and each such bank
would, 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 proposed Exchange Act Rule 723 would result in approximately 500
accounts annually for which records are required to be maintained. The
Agencies anticipate that these records would consist of records that
are generally created as part of the securities transaction and the
account relationship and minimal additional time would be required in
maintaining these records. Based on this analysis, the Agencies
estimate that a bank would spend approximately 15 minutes per account
to comply with the record maintenance requirement of proposed Exchange
Act Rule 723. Thus, the estimated total annual reporting and
recordkeeping burden for proposed Exchange Act Rule 723 is 125 hours.
We solicit comment on this point as well as on the validity of all of
our estimates and statements in this Section.
e. Collection of Information Is Mandatory
    This collection of information would be mandatory for banks
desiring to rely on de minimis exclusion contained in proposed Exchange
Act Rule 723.
f. Confidentiality
    Proposed Exchange Act Rule 723 does not address or restrict the
confidentiality of the documentation prepared by banks under the rule.
Accordingly, banks would have to make the information available to
regulatory authorities or other persons to the extent otherwise
provided by law.
g. Record Retention Period
    Proposed Exchange Act Rule 723 would include a requirement to
maintain records related to certain securities transactions. Banks
would be required to retain these records in compliance with any
existing or future recordkeeping requirements established by the
Banking Agencies.
3. Proposed Exchange Act Rule 741
a. Collection of Information
    Proposed Exchange Act Rule 741(a)(2)(ii)(A) would require a bank
relying on this proposed 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.
b. Proposed Use of Information
    The purpose of the collection of information in proposed Exchange
Act Rule 741 is to help ensure that a customer of a bank relying on the
exemption would have sufficient information upon which to make an
informed investment decision, in particular, regarding the fees the
customer would pay with respect to the securities.
c. Respondents
    The proposed collection of information in Exchange Act Rule 741
would apply to banks relying on the exemption provided in the proposed
rule.
d. Reporting and Recordkeeping 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 would use the
exemption in proposed Exchange Act Rule 741 and each bank, on average,
would deliver the prospectus required by the proposed rule to
approximately 1,000 customers annually. Therefore, the Agencies
estimate that proposed Exchange Act Rule 741 would result in
approximately 500,000 disclosures per year. The Agencies estimate
further that a bank would spend approximately 5 minutes per response to
comply with the delivery requirement of proposed Exchange Act Rule 741.
Thus, the estimated total annual reporting and recordkeeping burden for
proposed Exchange Act Rule 741 is 41,667 hours. We solicit comment on
this point as well as on the validity of all of our estimates and
statements in this Section.
e. Collection of Information Is Mandatory
    This collection of information would be mandatory for banks relying
on the proposed exemption.
f. Confidentiality
    The collection of information delivered pursuant to proposed
Exchange Act Rule 741 would be provided by banks relying on the
exemption in this rule 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
    Proposed Exchange Act Rule 741 would not include a record retention
requirement.
4. Request for Comment
    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Agencies solicit comments
to:
    (1) Evaluate whether the proposed collections of information are
necessary for the proper performance of the functions of the Agencies,
including whether the information would have practical utility;
    (2) Evaluate the accuracy of the Agencies' estimates of the burden
of the proposed collections of information and provide the Agencies
with data on proposed Exchange Act Rules 701, 723, and 741;
    (3) Enhance the quality, utility, and clarity of the information to
be collected; and
    (4) Minimize the burden of the collections of information on those
required to respond, including through the use of automated collection
techniques or other forms of information technology.
    In addition to the general solicitation of comments above regarding
the collections of information contained in the proposed rules, the
Agencies also solicit comments regarding how many banks would rely on
the exemptions provided in proposed Exchange Act Rules 701, 723, and
741, and whether banks relying on such exemptions would be able to use
existing systems, programs, and procedures to comply with the
collections of information requirements contained in the proposed
rules.
    Persons desiring to submit comments on the collection of
information requirements should direct them in the manner discussed
below. The Agencies propose that the information collections

and burden estimates discussed above will be associated with the Board
for banks and with the Commission for brokers or dealers.
    Commission. Comments should be directed to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and should send a copy of their comments to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, and refer to File No. S7-22-06. OMB is
required to make a decision concerning the collection of information
between 30 and 60 days after publication of this release in the Federal
Register. Therefore, comments to OMB are best assured of having full
effect if OMB receives them within 30 days of this publication.
Requests for materials submitted to OMB by the Agencies with regard to
this collection of information should be in writing, refer to File No.
S7-22-06, and be submitted to the Securities and Exchange Commission,
Records Management, Office of Filings and Information Services, 100 F
Street, NE, Washington, DC 20549.
    Board. You may submit comments, identified by the Docket number, by
any of the following methods:
     Agency Web site: http://www.federalreserve.gov Follow the instructions for submitting comments on the http://.

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

     Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.
     E-mail<EMAIL_ADDRESS>Include docket
number in the subject line of the message.
     FAX:<PHONE_NUMBER> or<PHONE_NUMBER>.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at
http:// www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as

submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW) between 9 a.m. and 5 p.m. on weekdays.

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 would 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.\135\
---------------------------------------------------------------------------

    \135\ See Exchange Act Section 3(a)(4)(B)(i) `` (xi).
---------------------------------------------------------------------------

    While banks' efforts to comply with the GLBA and the exemptions we
propose would 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
proposing exemptions and interpretations which should provide banks
with increased options and flexibility and help to reduce overall
costs.
2. Discussion of Proposed Interpretations and Exemptions
    The potential benefits and costs of the principal exemptions and
interpretations in the proposal 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.\136\
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    \136\ 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 proposal, a ``nominal'' referral fee would be 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 (3) twenty-five dollars ($25), as adjusted
for inflation pursuant to proposed Exchange Act Rule 700(f).
    The Agencies believe these alternatives should 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 rate of pay or the
average rate of pay for a job family would give 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 proposed rules) should enable banks to minimize their overall costs
based on their individual referral programs and cost structures.
    In light of the statutory provision allowing banks to pay a
``nominal one-time cash fee,'' the proposal requires that all referral
fees paid under the exception be paid in cash. The Agencies request
comment on whether existing bank securities referral programs would be
able to operate, or could easily be adjusted to operate, in accordance
with the terms of proposed Exchange Act Rule 700.
    The proposed rules also include a conditional exemption that would
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 or dealer with which the bank has a
contractual or other written networking arrangement.
    This exemption would provide a benefit to banks by expanding the
types of referrals fees that banks could utilize with respect to
institutional customers and high net worth customers. However, there
likely would be costs associated with complying with the conditions in
the proposed 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)\137\ as well as the other terms
and conditions in the statutory networking exception. However, these
costs would be either a result of the statutory requirements or costs
voluntarily incurred by banks because they want to take advantage of
the proposed exemption.
---------------------------------------------------------------------------

    \137\ Proposed Exchange Act Rules 701(a)(2)(i), 701(a)(3)(iii),
and 701(b).
---------------------------------------------------------------------------

    Proposed Exchange Act Rule 700 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 significant factors or variables that
would not be related to securities transactions at the broker or
dealer. Moreover, a referral made by the employee could not be a factor
or variable in determining the employee's compensation under the plan
and the employee's compensation under the plan could not be determined
by reference to referrals made by any other person.
    We request comments generally on the costs and benefits associated
with the proposed provisions regarding the networking exception and the
related exemption. We also invite banks to provide information,
including data, to assist us in further evaluating the costs and
benefits associated with the proposed provisions. We invite banks to
include estimates of their start-up costs for updating their systems,
and their annual ongoing costs for complying with the proposed changes
discussed above. We invite commenters to provide us with data to assist
in further evaluating these proposed rules. For example, we request
comment on whether the proposed provisions relating to bonus and
similar plans would be consistent with current compensation and bonus
arrangements and any costs or burdens that would be incurred to bring
existing plans into compliance with the provisions. We also request
comment on any other costs banks would likely need to incur as a result
of the proposal, and ask that commenters provide us with data to
support their views.
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 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 proposed rules dealing with the trust
and fiduciary activities exception should provide a number of benefits
to banks and their customers without imposing significant costs on
either group.\138\ The proposed provisions regarding the ``chiefly
compensated'' condition and related exemptions, while imposing some
costs related to systems necessary to perform the calculations and
track compensation, should reduce banks' compliance costs and make the
trust and fiduciary activities exception more useful. For example, the
proposed rules would permit a bank to follow an alternate test to the
account-by-account approach to the ``chiefly compensated'' condition.
Under this proposed exemption, a bank could calculate the compensation
it receives from all of its trust and fiduciary accounts on a bank-wide
basis, subject to certain conditions.\139\ This proposed alternative
should provide banks with a potentially less costly approach for
determining compliance with the trust and fiduciary activities
exception. Similarly, the Agencies' proposal to provide exemptions from
the ``chiefly compensated'' condition for certain short-term accounts,
accounts acquired as part of a business combination or asset
acquisition, accounts transferred to a broker or dealer or other
unaffiliated entity, and a de minimis number of accounts should also
reduce banks' compliance costs by facilitating banks' ability to comply
with the ``chiefly compensated'' condition.\140\ While compliance with
the conditions in these proposed exemptions would likely result in some
costs, such as the recordkeeping requirement associated with the de
minimis exclusion, these costs would likely be more than justified by
the benefits associated with the exemptions given that banks could
individually determine whether they wish to utilize the exemptions.
---------------------------------------------------------------------------

    \138\ The trust and fiduciary exception is addressed in proposed
Exchange Act Rules 721-723.
    \139\ See proposed Exchange Act Rule 722.
    \140\ See proposed Exchange Act Rule 723.
---------------------------------------------------------------------------

    As previously noted, banks are likely to incur some costs to comply
with the GLBA. The proposed rules, however, include a number of
exemptions which should help to reduce overall costs. As a result, the
Agencies do not believe that banks would incur significant additional
costs to comply with the liberalized exemptions proposed in Exchange
Act Rules 722 through 723 or the definitional guidance proposed in
Exchange Act Rule 721.
    We solicit comment on the costs and benefits, if any, banks expect
to incur in complying with the ``chiefly compensated'' condition in the
statute and the proposed rules. In particular, we would like
information on the start-up and annual ongoing costs to update systems
to track compensation under the account-by-account approach and under
the proposed bank-wide approach. We also solicit comments on the costs
and burdens associated with the advertising provisions of proposed
Exchange Act Rule 721(b), which would apply to banks operating under
both the account-by-account and bank-wide tests.
c. Sweep Accounts and Transactions in Money Market Funds
    Section 3(a)(4)(B)(v) of the Exchange Act provides banks 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 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 proposed rules provide guidance,
consistent with NASD rules,\141\ regarding the definition of ``no-
load'' as used in the exception. This guidance should benefit banks by
clarifying the types of charges that are permissible and by providing
greater legal certainty.
---------------------------------------------------------------------------

    \141\ See NASD Rule 2830.
---------------------------------------------------------------------------

    The proposed rules also contain an exemption that would permit
banks to effect transactions on behalf of a customer in securities
issued by a money market fund, subject to certain conditions.\142\
While compliance with the conditions associated with this proposed
exemption, such as the prospectus delivery requirement in certain
circumstances, could 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 would be able to
freely determine whether to incur these costs, the exemption should
provide a net benefit

for banks that wish to utilize the exemption. We solicit comment on the
costs and benefits, if any, banks expect to incur in complying with the
conditions in this proposed rule.
---------------------------------------------------------------------------

    \142\ See proposed Exchange Act Rule 741.
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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 proposed rules contain an exemption
that would permit banks, subject to certain conditions, to accept
orders to effect transactions in securities for accounts for which the
bank acts as a custodian. Specifically, this proposed custody exemption
(proposed Exchange Act Rule 760) would allow 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 proposal would allow banks to accept orders
from custody accounts while imposing conditions designed to prevent a
bank from operating a securities broker out of its custody department.
    The exemption should 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 would only be imposed on banks that
choose to utilize the exemption.
    We solicit comment on any costs and benefits banks expect to incur
in complying with the conditions in the proposed exemption.
e. Other Proposed Changes
    We are proposing certain special purpose exemptions. Specifically,
we are proposing an exemption that would permit banks to effect
transactions pursuant to Regulation S with non-U.S. persons.\143\
Another proposed exemption also would, under certain conditions, allow
a bank to effect transactions in investment company securities through
Fund/SERV or directly with a transfer agent acting for an open-end
company.\144\ In addition, we are proposing an exemption that would
permit banks, as an 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.\145\ Furthermore, we are proposing to extend 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
would be 18 months after the effective date of the final rule.\146\
This proposed exemption also would, under certain circumstances,
provide 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.\147\ Finally, we are proposing 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 June 30, 2008.\148\
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    \143\ See proposed Exchange Act Rule 771.
    \144\ See proposed Exchange Act Rule 775.
    \145\ See proposed Exchange Act Rule 772.
    \146\ See proposed Exchange Act Rule 780.
    \147\ Id.
    \148\ See proposed Exchange Act Rule 781.
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    The Agencies believe these proposed changes could offer a number of
benefits to banks and their customers. In particular, the proposed
Regulation S exemption could help to ensure that U.S. banks that effect
transactions in Regulation S securities with non-U.S. customers would
be more competitive with foreign banks or other entities that offer
those services. The proposed exemption from rescission liability under
Exchange Act Section 29 should also provide banks some legal certainty,
both temporarily and on a permanent basis, as they conduct their
securities activities. The proposed exemption related to securities
lending services should enable banks to engage in the types of services
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'' should
also be of benefit to banks by providing them with an adequate period
of time to transition to the requirements under the proposed rules.
    We estimate that the costs of these proposed exemptions would be
minimal and would be justified by the benefits the proposed exemptions
would offer. For example, the Regulation S exemption could impose
certain costs on banks that are designed to ensure that they remain in
compliance with the conditions under the exemption. In particular, the
proposed exemption would require banks to incur certain administrative
costs so that the proposed exemption is used only for ``eligible
securities'' and for a purchaser who is outside of the United States
within the meaning of Section 903 of Regulation S. Nevertheless, the
proposed exemption is an accommodation to banks that wish to effect
transactions in Regulation S securities and, as a result, the
compliance costs would only be imposed on those banks that believe that
it is in their best business interests to take advantage of the
proposed exemption. We request comment on whether banks would incur any
costs related to this proposed exemption.
    Given that Exchange Act Section 29 is rarely used as a remedy, we
do not anticipate that this proposed exemption would impose significant
costs on the industry or on investors. We request comment on whether
any bank would incur any costs or would benefit as a result of this
proposed exemption. We also request comment on whether banks would
incur any costs or benefits in association with the proposed exemptions
concerning securities lending services and effecting transactions in
investment company securities. Please provide any supporting data with
respect to any costs or benefits. We would also welcome comments on the
usefulness of the temporary general exemption from the definition of
``broker'' under Section 3(a)(4) of the Exchange Act.

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.\149\ Exchange Act Section 23(a)(2) requires the Commission,
in adopting rules under that Act, to consider the impact that any

such rule would have on competition. This Section also prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\150\
---------------------------------------------------------------------------

    \149\ 15 U.S.C. 78c(f).
    \150\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Agencies have designed the proposed 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 proposed rules should allow banks to continue to
conduct securities activities they already conduct consistent with the
GLBA. As a result, the Agencies believe that the proposed rules would
permit banks to continue to compete with broker-dealers in providing a
wide range of financial services, which should preserve competition and
help to keep transaction costs low for investors and for companies.
    The proposed 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 proposed rules contain a number of
exemptions that should provide banks flexibility in conducting their
securities activities, which should further promote competition and
reduce costs.
    The Commission is, however, interested in receiving comments
regarding the effect of the proposed rules on efficiency, competition,
and capital formation.
1. General Costs
    Based on the burden hours discussed in the Paperwork Reduction Act
Analysis Section the Agencies expect the ongoing requirements of the
proposed rules to result in a total of 58,709 annual burden hours for
banks and 500 annual burden hours for broker-dealers, for a grand total
of 59,209 annual burden hours.\151\ The Agencies estimate that the
hourly costs for these burden hours will be approximately $68 per
hour.\152\ Therefore, the annual total costs would be approximately
$4,026,212.
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    \151\ See infra at VIII.A.1.d., VIII.A.2.d., and VIII.A.3.d.
    \152\ $68/hour figure for a clerk (e.g. compliance clerk) is
from the SIA 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, the Agencies expect that
many banks also could incur start-up costs for legal and other
professional services.\153\ Many banks would utilize their in-house
counsel, accountants, compliance officers, and programmers in an effort
to achieve compliance with the proposed 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.\154\ Taking an average of these
professional costs, the Agencies estimate a general hourly in-house
labor cost of $240 per hour for professional services.
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    \153\ 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 proposed rules. See infra at
VIII.B.2.a. In addition, there would likely be costs for developing
systems for making determinations regarding compliance with
advertising and compensation restrictions pursuant to the proposed
rules regarding safekeeping and custody. See infra at VIII.B.2.d.
    \154\ 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 would involve
bringing systems into compliance and that many banks would be able to
do so either using existing systems or by slightly modifying existing
systems, the Agencies estimate that the proposed rules would require
banks to utilize an average of 30 hours of professional services. The
Agencies expect that most banks affected by the proposed rules would
either use in-house counsel or employees resulting in an average total
cost of $7,200 per affected bank.\155\ The Agencies estimate that the
proposed rules would apply to approximately 9,475 banks and
approximately 25 percent of these banks would 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.
---------------------------------------------------------------------------

    \155\ 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.).
---------------------------------------------------------------------------

    Based on these estimates, the total costs for the first year would
be approximately $21,081,212 ($17,055,000 + $4,026,212). The Agencies
request comment on these cost estimates or any other applicable costs.
2. General Benefits
    The Agencies believe that the proposed rules would 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 proposed exemptions. Without the proposed
rules, banks could 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 would prove to be useful to banks and provide saving in
legal fees. Specifically, difficulties in interpreting the GBLA, absent
any regulatory guidance, could result in the need for greater input
from outside counsel. Based on the number of interactive issues raised
by the GBLA, the Agencies estimate that absent any regulatory guidance,
banks on average would 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 proposed rules.
Industry sources indicate that the hourly costs for hiring outside
counsel is approximately $400 per hour. The proposed rules would
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
proposed rules would apply to approximately 9,475 banks and
approximately 25 percent of these banks would enjoy more than a de
minimis cost savings benefit. Using these values, the Agencies estimate
a total cost savings of $23,687,500 (9,475 x .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 request comment on these benefits or any other
applicable benefit.
3. Request for Comments
    The Agencies request comment on the costs and benefits of the
proposed rules, and ask commenters to provide supporting empirical data
for any positions advanced. Commenters should address in particular
whether any of the new rules would generate the

anticipated benefits or impose any costs on investors, banks, customers
of banks, registered broker-dealers or other market participants. As
always, commenters are specifically invited to share quantifiable costs
and benefits.

D. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \156\ the Agencies must advise the Office
of Management and Budget as to whether the proposed rules constitute a
``major'' rule. Under SBREFA, a rule is considered ``major'' where, if
adopted, it results or is likely to result in:
---------------------------------------------------------------------------

    \156\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified
in various Sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C.
601).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or
individual industries; or
     A significant adverse effect on competition, investment,
or innovation.
    If a rule is ``major,'' its effectiveness will generally be delayed
for 60 days pending Congressional review. The Agencies do not believe
that the proposed rules, in their current form, would constitute a
major rule. We request comment on the potential impact of the proposed
rules on the economy on an annual basis. Commenters are requested to
provide empirical data and other factual support for their views to the
extent possible.

E. Initial Regulatory Flexibility Analysis

    The Agencies have prepared an Initial Regulatory Flexibility
Analysis (``IRFA''), in accordance with the provisions of the
Regulatory Flexibility Act (``RFA''),\157\ regarding the proposed
rules.
---------------------------------------------------------------------------

    \157\ 5 U.S.C. 603.
---------------------------------------------------------------------------

1. Reasons for the Proposed 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.\158\ On
October 13, 2006, President Bush signed into law the Regulatory Relief
Act.\159\ Section 101 of that Act, among other things, requires the
Agencies jointly to issue a single set of proposed rules implementing
the bank broker exceptions in Section 3(a)(4) of the Exchange Act
within 180 days of the date of enactment of the Regulatory Relief
Act.\160\ These rules are being proposed by the Agencies to fulfill
this requirement. The proposed rules are designed generally to provide
guidance on GLBA 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.
---------------------------------------------------------------------------

    \158\ 15 U.S.C. 78c(a)(4).
    \159\ Pub. L. 109-351, 120 Stat. 1966 (2006).
    \160\ 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 proposed rules.
---------------------------------------------------------------------------

2. Objectives
    The proposed rules would provide guidance to the industry with
respect to the GLBA requirements. The proposal also provides certain
conditional exemptions from the broker definition to allow banks to
perform certain securities activities. The Supplementary Information
Section above contains more detailed information on the objectives of
the proposed rules.
3. Legal Basis
    Pursuant to Section 101 of the Regulatory Relief Act, the Agencies
are issuing the proposed rules for comment. In addition, pursuant to
the Exchange Act and, particularly, the Sections 3(b), 15, 23(a), and
36 thereof, the Commission is issuing the proposed rules for
comment.\161\
---------------------------------------------------------------------------

    \161\ 15 U.S.C. 78c(b), 78o, 78w(a), and 78mm.
---------------------------------------------------------------------------

4. Small Entities Subject to the Rule
    The proposed rule would 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.\162\ Congress did not
exempt small entity banks from the application of the GLBA. Moreover,
because the proposed 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 proposed rules Therefore,
the proposed 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.\163\
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    \162\ See 15 U.S.C. 78c(a)(6); Pub. L. 109-351, 120 Stat. 1966
(2006).
    \163\ 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.
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    The Agencies estimate that the proposed rules would apply to
approximately 9,475 banks, approximately 5,816 of which could be
considered small banks with assets of $165 million or less. We do not
anticipate any significant costs to small entity banks as a result of
the proposed rules.
5. Reporting, Recordkeeping and Other Compliance Requirements
    The proposed rules would not impose any significant reporting,
recordkeeping, or other compliance requirements on banks that are small
entities.\164\
---------------------------------------------------------------------------

    \164\ The Agencies' estimates related to recordkeeping and
disclosure are detailed in the ``Paperwork Reduction Act Analysis''
Section of this Release.
---------------------------------------------------------------------------

    Nevertheless, the Agencies request comment on the costs of
compliance with any recordkeeping, reporting, or other requirements
under the proposed rules. The Agencies also request comment on any
anticipated ongoing costs associated with complying with the proposed
rules.\165\ Commenters should provide detailed estimates of these
costs.
---------------------------------------------------------------------------

    \165\ The Agencies' estimates of the costs and benefits of the
proposed rule amendments are detailed in the ``Consideration of
Costs and Benefits'' Section of this release.
---------------------------------------------------------------------------

6. Duplicative, Overlapping, or Conflicting Federal Rules
    The Agencies believe that there are no rules that duplicate,
overlap, or conflict with the proposed rules.
7. Significant Alternatives
    Pursuant to Section 3(a) of the RFA,\166\ 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 proposed rule for small entities; (3)
the use of performance rather than design standards; and (4) an
exemption from

coverage of the proposed rules, or any part thereof, for small
entities.
---------------------------------------------------------------------------

    \166\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    As discussed above, the GLBA does not exempt small entity banks
from the Exchange Act broker registration requirements and because the
proposed rules are intended to provide guidance to, and exemptions for,
all banks that are subject to the GLBA, the Agencies determined that it
would not be appropriate or necessary to exempt small entity banks from
the operation of the proposed 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 proposed 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 proposed rules should
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 proposed rules because
the proposed rules already use performance standards. Moreover, the
proposed 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 proposed rules.
8. Request for Comments
    The Agencies encourage written comments on matters discussed in the
IRFA. In particular, the Agencies request comments on (1) the number of
small entities that would be affected by the proposed rules; (2) the
nature of any impact the proposed rules would have on small entities
and empirical data supporting the extent of the impact; and (3) how to
quantify the number of small entities that would be affected by and/or
how to quantify the impact of the proposed rules. Such comments will be
considered in the preparation of the Final Regulatory Flexibility
Analysis, if the proposed rules are adopted, and will be placed in the
same public file as comments on the proposal itself. Persons wishing to
submit written comments should refer to the instructions for submitting
comments in the front of this release.

F. 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 has sought to present the proposed
rules, to the maximum extent possible, in a simple and straightforward
manner. The Board invites comments on whether there are additional
steps that could be taken to make the proposed rules easier to
understand.

IX. 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 proposes to repeal 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 proposing to repeal 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 proposing new Rules 700, 701, 721, 722, 723,
740, 741, 760, 771, 772, 775, 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, 247.780, and 247.881,
respectively).

X. Text of Proposed Rules and Rule Amendments

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

    For the reasons set forth in the preamble, the Board proposes to
amend 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 the way
banks effect excepted or exempted transactions in investment company
securities.
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

    For the reasons set forth in the preamble, the Commission proposes
to amend title 17, chapter II of the Code of Federal Regulations as
follows:

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

    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]

    2. Sections 240.3a4-2 through 240.3a4-6, 240.3b-17, 240.15a-7, and
240.15a-8 are removed and reserved.
    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 the way
banks effect excepted or exempted transactions in investment company
securities.
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 proposed to be adopted by the Board as
part 218 of title 12, chapter II of the Code of Federal Regulations and
by the Commission as part 247 of title 17, 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 potential 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 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 on the basis of
any measure of the overall profitability of:
    (i) The bank, either on a stand-alone or consolidated basis;
    (ii) Any of the bank's affiliates (other than a broker or dealer)
or operating units; or
    (iii) A broker or dealer if:
    (A) Such profitability is only one of multiple factors or variables
used to determine the compensation of the officer, director or
employee; and
    (B) The factors or variables used to determine the compensation of
the officer, director or employee include significant factors or
variables that are not related to the profitability of the broker or
dealer.
    (c) Nominal one-time cash fee of a fixed dollar amount means a cash
payment for a referral 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
    (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 a bank employee 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 qualified or otherwise required to be qualified pursuant to
the rules of a 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. Prior to
or at the time of the referral, the bank provides the customer with the
information set forth in paragraph (b) of this section.
    (ii) Customer qualification. (A) In the case of a customer that is
a not a natural person, the bank determines, before the referral fee is
paid to the bank employee, that the customer is an institutional
customer.
    (B) In the case of a customer that is a natural person, the bank,
prior to or at the time of the referral, either:
    (1) Determines that the customer is a high net worth customer; or
    (2) Obtains a signed acknowledgment from the customer that the
customer meets the standards to be considered a high net worth
customer.
    (iii) Employee qualification information. Before the referral fee
is paid to the bank employee, 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 associated with a broker or dealer 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 provides for the following:
    (i) Customer and employee qualifications. Before the referral fee
is paid to the bank employee:
    (A) The bank and broker or dealer must 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 must determine that the customer is a high
net worth customer or an institutional customer.
    (ii) 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 must, 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 must, 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.
    (iii) Notice. The broker or dealer must 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;
    (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; or
    (C) The customer or the securities transaction(s) to be conducted
by the customer do not meet the applicable standard set forth in
paragraph (a)(3)(ii) of this section.
    (b) Required disclosures. The information provided to the high net
worth customer or institutional customer pursuant to paragraph
(a)(2)(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 means 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. In determining whether any person is a high net worth customer,
there may be included in the assets of such person assets held
individually and 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. In determining whether spouses acting jointly are high net
worth customers, there may be included in the amount of each spouse's
assets any assets of the other spouse (whether or not such assets are
held jointly).
    (2) Institutional customer means any corporation, partnership,
limited liability company, trust or other non-natural person that has
at least:
    (i) $10 million in investments; or
    (ii) $40 million in assets; or
    (iii) $25 million in assets 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 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.
    (4) Relationship compensation means any compensation a bank
receives that consists of:
    (i) An administration fee, including, without limitation, a fee
paid for personal services, tax preparation, or real estate settlement
services, or a fee paid by 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);
    (iii) A fee based on a percentage of assets under management,
including, without limitation:
    (A) A fee paid by an investment company pursuant to a plan under 17
CFR 270.12b-1;
    (B) A fee paid by an investment company for personal service or the
maintenance of shareholder accounts; or
    (C) A fee paid by an investment company based on a percentage of
assets under management for any of the following services:
    (1) Providing transfer agent or sub-transfer agent services for
beneficial owners of investment company shares;
    (2) Aggregating and processing purchase and redemption orders for
investment company shares;
    (3) Providing beneficial owners with account statements showing
their purchases, sales, and positions in the investment company;
    (4) Processing dividend payments for the investment company;
    (5) Providing sub-accounting services to the investment company for
shares held beneficially;
    (6) Forwarding communications from the investment company to the
beneficial owners, including proxies, shareholder reports, dividend and
tax notices, and updated prospectuses; or
    (7) Receiving, tabulating, and transmitting proxies executed by
beneficial owners of investment company shares;
    (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.
    (5) 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)).
    (6) Year means a calendar year, or fiscal year consistently used by
the bank for recordkeeping and reporting purposes.
    (b) 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)); 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 equal 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.

Sec.  ----.723  Exemptions for special accounts, transferred accounts,
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) and 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) Accounts transferred to a broker or dealer or other
unaffiliated entity. Notwithstanding section 3(a)(4)(B)(ii)(I) of the
Act (15 U.S.C. 78c(a)(4)(B)(ii)(I)) and Sec.  ----.721(a)(1), a bank
shall not be considered a broker for purposes of section 3(a)(4) of the
Act (15 U.S.C. 78c(a)(4)) solely because a trust or fiduciary account
does not meet the chiefly compensated standard in Sec.  ----.721(a)(1)
if, within 3 months of the end of the year in which the account fails
to meet such standard, the bank transfers the account or the securities
held by or on behalf of the account to a broker or dealer registered
under section 15 of the Act (15 U.S.C. 78o) or another entity that is
not an affiliate of the bank and is not required to be registered as a
broker or dealer.
    (d) De minimis exclusion. A bank may, in determining its compliance
with the chiefly compensated test in Sec.  ----.721(a)(1), exclude a
trust or fiduciary account if:
    (1) The bank maintains 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;
    (2) The total number of accounts excluded by the bank under this
paragraph (d) does not exceed the lesser of:
    (i) 1 percent of the total number of trust or fiduciary accounts
held by the bank, provided that if the number so obtained is less than
1, the amount shall be rounded up to 1; or
    (ii) 500; and
    (3) The bank did not rely on this paragraph (d) with respect to
such account during the immediately preceding year.

Sec.  ----.740  Defined terms relating to the sweep accounts exception
from the definition of ``broker.''

    For purposes of section 3(a)(4)(B)(v) of the Act (15 U.S.C.
78c(a)(4)(B)(v)), the following terms shall have the meaning provided:
    (a) Deferred sales load has the same meaning as in 17 CFR 270.6c-
10.
    (b) Money market fund means an open-end company registered under
the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) that is
regulated as a money market fund pursuant to 17 CFR 270.2a-7.
    (c)(1) No-load, in the context of an investment company or the
securities issued by an investment company, means, for securities of
the class or series in which a bank effects transactions, that:
    (i) That class or series is not subject to a sales load or a
deferred sales load; and
    (ii) Total charges against net assets of that class or series of
the investment company's securities for sales or sales promotion
expenses, for personal service, or for the maintenance of shareholder
accounts do not exceed 0.25 of 1% of average net assets annually.
    (2) For purposes of this definition, charges for the following will
not be considered charges against net assets of a class or series of an
investment company's securities for sales or sales promotion expenses,
for personal service, or for the maintenance of shareholder accounts:
    (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) Open-end company has the same meaning as in section 5(a)(1) of
the Investment Company Act of 1940 (15 U.S.C. 80a-5(a)(1)).
    (e) Sales load has the same meaning as in section 2(a)(35) of the
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(35)).

Sec.  ----.741  Exemption for banks effecting transactions in money
market funds.

    (a) A bank is exempt from the definition of the term ``broker''
under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) to the extent
that it effects transactions on behalf of a customer in securities
issued by a money market fund, provided that:
    (1) The bank provides the customer, directly or indirectly, any
other product

or service, the provision of which would not, in and of itself, require
the bank to register as a broker or dealer under section 15(a) of the
Act (15 U.S.C. 78o(a)); and
    (2)(i) The class or series of securities is no-load; or
    (ii) If the class or series of securities is not no-load, (A) The
bank provides the customer, not later than at the time the customer
authorizes the bank to effect the transactions, a prospectus for the
securities; and
    (B) The bank does not characterize or refer to the class or series
of securities as no-load.
    (b) Definitions. For purposes of this section:
    (1) Money market fund has the same meaning as in Sec.  ----.740(b).
    (2) No-load has the same meaning as in Sec.  ----.740(c).

Sec.  ----.760  Exemption from definition of ``broker'' for banks
accepting orders to effect transactions in securities from or on behalf
of custody accounts.

    (a) Employee benefit plan accounts and individual retirement
accounts or similar accounts. A bank is exempt from the definition of
the term ``broker'' under section 3(a)(4) of the Act (15 U.S.C.
78c(a)(4)) to the extent that, as part of its customary banking
activities, the bank accepts orders to effect transactions in
securities for an employee benefit plan account or an individual
retirement account or similar account for which the bank acts as a
custodian if:
    (1) Employee compensation restriction. The bank complies with the
employee compensation restrictions in paragraph (c) of this section;
    (2) Advertisements. Advertisements by or on behalf of the bank do
not:
    (i) Advertise that the bank accepts orders for securities
transactions for employee benefit plan accounts or individual
retirement accounts or similar accounts, except as part of advertising
the other custodial or safekeeping services the bank provides to these
accounts; or
    (ii) Advertise that such accounts are securities brokerage accounts
or that the bank's safekeeping and custody services substitute for a
securities brokerage account; and
    (3) Advertisements and sales literature for individual retirement
or similar accounts. Advertisements and sales literature issued by or
on behalf of the bank do not describe the securities order-taking
services provided by the bank to individual retirement or similar
accounts more prominently than the other aspects of the custody or
safekeeping services provided by the bank to these accounts.
    (b) Accommodation trades for other custodial accounts. A bank is
exempt from the definition of the term ``broker'' under section 3(a)(4)
of the Act (15 U.S.C. 78c(a)(4)) to the extent that, as part of its
customary banking activities, the bank accepts orders to effect
transactions in securities for an account for which the bank acts as
custodian other than an employee benefit plan account or an individual
retirement account or similar account if:
    (1) Accommodation. The bank accepts orders to effect transactions
in securities for the account only as an accommodation to the customer;
    (2) Employee compensation restriction. The bank complies with the
employee compensation restrictions in paragraph (c) of this section;
    (3) Bank fees. Any fee charged or received by the bank for
effecting a securities transaction for the account does not vary based
on:
    (i) Whether the bank accepted the order for the transaction; or
    (ii) The quantity or price of the securities to be bought or sold;
    (4) Advertisements. Advertisements by or on behalf of the bank do
not state that the bank accepts orders for securities transactions for
the account;
    (5) Sales literature. Sales literature issued by or on behalf of
the bank:
    (i) Does not state that the bank accepts orders for securities
transactions for the account except as part of describing the other
custodial or safekeeping services the bank provides to the account; and
    (ii) Does not describe the securities order-taking services
provided to the account more prominently than the other aspects of the
custody or safekeeping services provided by the bank to the account;
and
    (6) Investment advice and recommendations. The bank does not
provide investment advice or research concerning securities to the
account, make recommendations to the account concerning securities or
otherwise solicit securities transactions from the account; provided,
however, that nothing in this paragraph (b)(6) shall prevent a bank
from:
    (i) Publishing, using or disseminating advertisements and sales
literature in accordance with paragraphs (b)(4) and (b)(5) of this
section; and
    (ii) Responding to customer inquiries regarding the bank's
safekeeping and custody services by providing:
    (A) Advertisements or sales literature consistent with the
provisions of paragraphs (b)(4) and (b)(5) of this section describing
the safekeeping, custody and related services that the bank offers;
    (B) A prospectus prepared by a registered investment company, or
sales literature prepared by a registered investment company or by the
broker or dealer that is the principal underwriter of the registered
investment company pertaining to the registered investment company's
products;
    (C) Information based on the materials described in paragraphs
(b)(6)(ii)(A) and (B) of this section; or
    (iii) Responding to inquiries regarding the bank's safekeeping,
custody or other services, such as inquiries concerning the customer's
account or the availability of sweep or other services, so long as the
bank does not provide investment advice or research concerning
securities to the account or make a recommendation to the account
concerning securities.
    (c) Employee compensation restriction. A bank may accept orders
pursuant to this section for a securities transaction for an account
described in paragraph (a) or (b) of this section only if no bank
employee receives compensation, including a fee paid pursuant to a plan
under 17 CFR 270.12b-1, from the bank, the executing broker or dealer,
or any other person that is based on whether a securities transaction
is executed for the account or that is based on the quantity, price, or
identity of securities purchased or sold by such account, provided that
nothing in this paragraph shall prohibit a bank employee from receiving
compensation that would not be considered incentive compensation under
Sec.  ----.700(b)(1) as if a referral had been made by the bank
employee, or any compensation described in Sec.  ----.700(b)(2).
    (d) Other conditions. A bank may accept orders for a securities
transaction for an account for which the bank acts as a custodian under
this section only if the bank:
    (1) Does not act 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)) with respect to
the account;
    (2) Complies with section 3(a)(4)(C) of the Act (15 U.S.C.
78c(a)(4)(C)) in handling any order for a securities transaction for
the account; and
    (3) Complies with section 3(a)(4)(B)(viii)(II) of the Act (15
U.S.C. 78c(a)(4)(B)(viii)(II)) regarding carrying broker activities.
    (e) Non-fiduciary administrators and recordkeepers. A bank that
acts as a non-fiduciary and non-custodial administrator or recordkeeper
for an employee benefit plan for which another bank acts as custodian
may rely

on the exemption provided in this section if:
    (1) Both the custodian bank and the administrator or recordkeeper
bank meet the requirements of this section; and
    (2) The administrator or recordkeeper bank does not execute a
cross-trade with or for the employee benefit plan or net orders for
securities for the plan, other than orders for shares of open-end
investment companies not traded on an exchange.
    (f) Evasions. In considering whether a bank meets the terms of this
section, both the form and substance of the relevant account(s),
transaction(s) and activities (including advertising activities) of the
bank will be considered in order to prevent evasions of the
requirements of this section.
    (g) Definitions. When used in this section:
    (1) Account for which the bank acts as a custodian means an account
that is:
    (i) An employee benefit plan account for which the bank acts as a
custodian;
    (ii) An individual retirement account or similar account for which
the bank acts as a custodian; or
    (iii) An account established by a written agreement between the
bank and the customer that sets forth the terms that will govern the
fees payable to, and rights and obligations of, the bank regarding the
safekeeping or custody of securities.
    (2) Advertisement means any material that is published or used in
any electronic or other public media, including any Web site,
newspaper, magazine or other periodical, radio, television, telephone
or tape recording, videotape display, signs or billboards, motion
pictures, or telephone directories (other than routine listings).
    (3) Employee benefit plan account means a pension plan, retirement
plan, profit sharing plan, bonus plan, thrift savings plan, incentive
plan, or other similar plan, including, without limitation, an
employer-sponsored plan qualified under section 401(a) of the Internal
Revenue Code (26 U.S.C. 401(a)), a governmental or other plan described
in section 457 of the Internal Revenue Code (26 U.S.C. 457), a tax-
deferred plan described in section 403(b) of the Internal Revenue Code
(26 U.S.C. 403(b)), a church plan, governmental, multiemployer or other
plan described in section 414(d), (e) or (f) of the Internal Revenue
Code (26 U.S.C. 414(d), (e) or (f)), an incentive stock option plan
described in section 422 of the Internal Revenue Code (26 U.S.C. 422);
a Voluntary Employee Beneficiary Association Plan described in section
501(c)(9) of the Internal Revenue Code (26 U.S.C. 501(c)(9)), a non-
qualified deferred compensation plan (including a rabbi or secular
trust), a supplemental or mirror plan, and a supplemental unemployment
benefit plan.
    (4) Individual retirement account or similar account means an
individual retirement account as defined in section 408 of the Internal
Revenue Code (26 U.S.C. 408), Roth IRA as defined in section 408A of
the Internal Revenue Code (26 U.S.C. 408A), health savings account as
defined in section 223(d) of the Internal Revenue Code (26 U.S.C.
223(d)), Archer medical savings account as defined in section 220(d) of
the Internal Revenue Code (26 U.S.C. 220(d)), Coverdell education
savings account as defined in section 530 of the Internal Revenue Code
(26 U.S.C. 530), or other similar account.
    (5) Sales literature means any written or electronic communication,
other than an advertisement, that is generally distributed or made
generally available to customers of the bank or the public, including
circulars, form letters, brochures, telemarketing scripts, seminar
texts, published articles, and press releases concerning the bank's
products or services.
    (6) Principal underwriter has the same meaning as in section
2(a)(29) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(29)).

Sec.  ----.771  Exemption from the definition of ``broker'' for banks
effecting transactions in securities issued pursuant to Regulation S.

    (a) A bank is exempt from the definition of the term ``broker''
under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)), to the extent
that, as agent, the bank:
    (1) Effects a sale in compliance with the requirements of 17 CFR
230.903 of an eligible security to a purchaser who is outside of the
United States within the meaning of 17 CFR 230.903;
    (2) Effects a resale of an eligible security after its initial sale
with a reasonable belief that the eligible security was initially sold
outside of the United States within the meaning of and in compliance
with the requirements of 17 CFR 230.903, by or on behalf of a person
who is not a U.S. person under 17 CFR 230.902(k) to a purchaser who is
outside the United States within the meaning of 17 CFR 230.903 or a
registered broker or dealer, provided that if the sale is made prior to
the expiration of the distribution compliance period specified in 17
CFR 230.903(b)(2) or (b)(3), the sale is made in compliance with the
requirements of 17 CFR 230.904; or
    (3) Effects a resale of an eligible security after its initial sale
outside of the United States within the meaning of and in compliance
with the requirements of 17 CFR 230.903, by or on behalf of a
registered broker or dealer to a purchaser who is outside the United
States within the meaning of 17 CFR 230.903, provided that if the sale
is made prior to the expiration of the distribution compliance period
specified in 17 CFR 230.903(b)(2) or (b)(3), the sale is made in
compliance with the requirements of 17 CFR 230.904.
    (b) Definitions. For purposes of this section:
    (1) Distributor has the same meaning as in 17 CFR 230.902(d).
    (2) Eligible security means a security that:
    (i) Is not being sold from the inventory of the bank or an
affiliate of the bank; and
    (ii) Is not 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.
    (3) Purchaser means a person who purchases an eligible security and
who is not a U.S. person under 17 CFR 230.902(k).

Sec.  ----.772  Exemption from the definition of ``broker'' for banks
engaging in securities lending transactions.

    (a) A bank is exempt from the definition of the term ``broker''
under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)), to the extent
that, as an agent, it engages in or effects securities lending
transactions, and any securities lending services in connection with
such transactions, with or on behalf of a person the bank reasonably
believes to be:
    (1) A qualified investor as defined in section 3(a)(54)(A) of the
Act (15 U.S.C. 78c(a)(54)(A)); or
    (2) Any employee benefit plan that owns and invests on a
discretionary basis, not less than $25,000,000 in investments.
    (b) Securities lending transaction means 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.
    (c) Securities lending services means:

    (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.

Sec.  ----.775  Exemption from the definition of ``broker'' for the way
banks effect excepted or exempted transactions in investment company
securities.

    (a) A bank that meets the conditions for an exception or exemption
from the definition of the term ``broker'' except for the condition in
section 3(a)(4)(C)(i) of the Act (15 U.S.C. 78c(a)(4)(C)(i)), is exempt
from such condition to the extent that it effects transactions in
securities issued by an open-end company that is neither traded on a
national securities exchange nor through the facilities of a national
securities association or an interdealer quotation system, provided
that:
    (1) Such transactions are effected through the National Securities
Clearing Corporation's Mutual Fund Services or directly with a transfer
agent acting for the open-end company; and
    (2) The securities are distributed by a registered broker or
dealer, or the sales charge is no more than the amount a registered
broker or dealer may charge pursuant to the rules of a securities
association registered under section 15A of the Act (15 U.S.C. 78o-3)
adopted pursuant to section 22(b)(1) of the Investment Company Act of
1940 (15 U.S.C. 80a-22(b)(1)).
    (b) Definitions. For purposes of this section:
    (1) Interdealer quotation system has the same meaning as in 17 CFR
240.15c2-11.
    (2) Open-end company has the same meaning as in Sec.  ----.740.

Sec.  .----780  Exemption for banks from liability under section 29 of
the Securities Exchange Act of 1934.

    (a) No contract entered into before [date 18 months after effective
date of the final rule], shall be void or considered voidable by reason
of section 29(b) of the Act (15 U.S.C. 78cc(b)) because any bank that
is a party to the contract violated the registration requirements of
section 15(a) of the Act (15 U.S.C. 78o(a)), any other applicable
provision of the Act, or the rules and regulations thereunder based
solely on the bank's status as a broker when the contract was created.
    (b) No contract shall be void or considered voidable by reason of
section 29(b) of the Act (15 U.S.C. 78cc(b)) because any bank that is a
party to the contract violated the registration requirements of section
15(a) of the Act (15 U.S.C. 78o(a)) or the rules and regulations
thereunder based solely on the bank's status as a broker when the
contract was created, if:
    (1) At the time the contract was created, the bank acted in good
faith and had reasonable policies and procedures in place to comply
with section 3(a)(4)(B) of the Act (15 U.S.C. 78c(a)(4)(B)) and the
rules and regulations thereunder; and
    (2) At the time the contract was created, any violation of the
registration requirements of section 15(a) of the Act by the bank did
not result in any significant harm or financial loss or cost to the
person seeking to void the contract.

Sec.  ----.781  Exemption from the definition of ``broker'' for banks
for a limited period of time.

    A bank is exempt from the definition of the term ``broker'' under
section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) until the first day of
its first fiscal year commencing after June 30, 2008.

    By order of the Board of Governors of the Federal Reserve
System, December 18, 2006.
Jennifer J. Johnson,
Secretary of the Board.
    Dated: December 18, 2006.

    By the Securities and Exchange Commission.
Nancy M. Morris,
Secretary.
[FR Doc. 06-9825 Filed 12-22-06; 8:45 am]

BILLING CODE 6210-01-P