Individual retirement accounts and individually directed 401(k) plan accounts are an important part of the business of bank trust departments, providing a needed service to customers while generating valuable fee income.

But bank customers would no longer be able to obtain these services from their banks under the financial modernization legislation pending in the House. Under HR 10 as approved by the House Banking Committee, banks that offer IRA and 401(k) custodial services would be deemed broker-dealers, making them subject to the Securities and Exchange Commission's net capital rule.

This rule, which requires that 100% capital be maintained against illiquid assets such as loans, would make it untenable for a bank to become a registered broker-dealer.

This "push out" provision in HR 10 advances the concept of functional regulation by forcing banks to establish SEC-registered broker-dealers for their securities activities.

While functional regulation has some theoretical appeal, it applies awkwardly at best to small banks that offer individual retirement services on a limited basis. These banks already are subject to extensive oversight by federal banking regulators which examine bank trust departments and, in any event, are subject to the antifraud provisions of the securities laws even without the push-out provision.

Many small banks do not have sufficient securities brokerage business to justify the cost of organizing and maintaining a broker-dealer or have chosen not to offer retail brokerage services. In some cases these banks offer individual retirement services only on an accommodation basis or as a defensive measure to keep the business. In most cases the services are performed in the bank's trust department and clearly are fiduciary in nature.

There is no indication that banks are offering individual retirement services in any way other than with high regard for fiduciary duty. No abuses have been reported and there is no demonstrable need for Congress to prohibit banks from offering these services or to force them to incur the costs of a separate broker-dealer to continue doing so.

HR 10 does include an exemption that would allow certain securities activities conducted in a fiduciary capacity to remain in banks. The exemption is available, however, only if the bank does not advertise its services.

Moreover, it is unclear whether the exemption would apply to IRAs and 401(k) accounts where the bank acts solely as custodian. Custodial activities are not treated as fiduciary activities under the bill.

Though the SEC could decide to treat IRA and 401(k) custodial services as fiduciary in nature - and thus exempt under the bill - the SEC is not known for its accommodating ways toward banks. The agency has been itching to get its hands on bank trust departments for years and some within the agency believe that HR 10 does not go far enough.

Parallel legislation passed by the Senate-S 900-includes a similar push- out provision but specifically exempts custodial services for individual retirement accounts along with other fiduciary activities in recognition of the valuable service performed by banks in offering these services.

In a statement on the bill, the Senate Banking Committee made clear its intention to allow IRA and 401(k) accounts to remain in bank trust departments.

Financial modernization legislation should result in a reduction of regulatory burdens and costs on banks, not the creation of new ones. The House Commerce Committee should follow the Senate's lead and exempt bank individual retirement services from the push-out provision. Ms. Fein is a specialist in banking and financial institutions law.

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