The Financial Services Act of 1999 would eliminate the exclusion of banks from the definitions of "broker" and "dealer" in the Securities and Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940. The 1999 act describes activities that a bank could engage in without being deemed a broker or a dealer.
A bank would not be allowed to merely rely upon its status as a bank in conducting securities-type activities, but rather would need to demonstrate that its functions (e.g., trust activities, effecting securities trades for accounts, custody, clearing, etc.) fall within detailed, legislatively prescribed exceptions to being considered a broker-dealer.
One troublesome aspect of the legislation is the difference between the House and Senate versions as to the type of bank trust activities that fall outside the regulatory jurisdiction of the Securities and Exchange Commission.
On the Senate side, by virtue of the definition of "fiduciary capacity," a bank that functions as a custodian for individual retirement accounts or as a service provider to any pension, retirement, profit-sharing, bonus, thrift, savings, incentive, or other similar benefit plan and that effects securities transactions would not be considered a broker-dealer.
On the House side, the definition of "fiduciary capacity" is more narrow and does not explicitly let a bank operate as a custodian for IRAs, as a service provider for such retirement plans, or effect securities transactions without falling under the SEC's jurisdiction.
Equally troublesome is that the House version of the Financial Services Act unnecessarily places restrictions on the type of compensation a fiduciary may receive for functioning or providing services on behalf of its accounts without subjecting itself to broker-dealer regulation.
Assuming that the primary purpose of the bill is only to place traditional brokerage functions under the jurisdiction of the Securities and Exchange Commission, then no purpose is served in narrowly defining fiduciary activities in such a manner as to create doubt whether banks will be able to continue to offer legitimate services to IRAs, participant- directed 401(k) plans, and other similar accounts. The Senate version, S 900, includes language that makes clear that these traditional bank activities may continue to be performed and need not be pushed down to a broker-dealer affiliate with the attendant cost and regulatory burdens.
The House's HR 10, by contrast, leaves one to argue whether or not the SEC's regulatory jurisdiction is being expanded over these fiduciary services.
It would be a simple task, and consistent with legislative intent, to modify the language of HR 10 in a fashion similar to S 900, clearly allowing banks to provide these custodial and related administrative services to IRAs and 401(k) plans.
The definition of fiduciary capacity should be that found in S 900. The restrictions on the compensation that a fiduciary may receive under HR 10 go beyond the purpose of the proposed law. House Version of Trust Bill Goes Too Far Mr. Pickard is a partner in the Washington law firm of Pickard & Djinis. He is a former director of the Securities and Exchange Commission's division of market regulation. The topic of this article was the subject of an exchange in American Banker between attorney Melanie L. Fein (June 1) and Sarah A. Miller of the American Bankers Association (June 18).