Some recent press reports and legal commentaries have suggested that the financial modernization legislation being considered by Congress could be the death knell for bank trust departments that service pension plans, especially individual retirement accounts and participant-directed 401(k) plans.
These reports suggest that ifthe legislation becomes law, these services will be "pushed out" of banks and into broker-dealer affiliates subject to registration and oversight by the Securities and Exchange Commission.
As anyone who was present during the negotiations of the securities provisions can tell you, nothing could be further from the truth. Every version of financial modernization legislation under consideration would let banks continue to offer IRAs and participant-directed 401(k) accounts.
The Financial Services Act-HR 10 in the House of Representatives and S 900 in the Senate-represents a broad rewrite of the financial services laws. The bill would repeal parts of the Glass-Steagall Act, the Bank Holding Company Act, and other legal provisions that have restricted affiliations among banks, insurance companies, and securities firms.
In exchange for broad affiliation powers - including permission to underwrite and distribute mutual funds - banks would no longer be automatically exempt from the definition of broker-dealer under the Securities Exchange Act of 1934. Any bank that engages in brokerage activities as defined by the SEC would be required to register as a broker- dealer and be subject to SEC regulation and oversight.
Key to the loss of the blanket exemption, however, is the notion that certain bank securities activities should always stay in the bank-even if the SEC were to consider the activity to involve securities brokerage. Fiduciary and custodial activities are just two examples of activities that would stay in the bank under the legislation.
The exemption from brokerage registration for trust and fiduciary activities specifically covers situations where a bank serves as trustee, executor, administrator, or investment adviser and receives a fee for that advice. The exemption also applies when a bank exercises investment discretion on behalf of its fiduciary customers.
Consequently, if a bank is trustee, provides investment advice for a fee, or exercises investment discretion with respect to a pension plan, then that activity would be exempt from broker-dealer registration.
Contrary to the assertions of some, if a bank serves as trustee (whether directed or not) of an IRA or a participant-directed 401(k) account, then the bank would most certainly be protected from being pushed out. This conclusion, of course, assumes that the other conditions of the exemption are satisfied.
One of those other conditions requires that a bank not publicly solicit brokerage business. The exemption does not, however, prohibit a bank from advertising its trust or pension plan services.
The exemption specifically recognizes that a bank will advertise its trust and fiduciary activities, by providing that the bank can advertise that it engages in brokerage transactions only in conjunction with advertising of trust activities.
A bank offering custodial services to IRA and participant-directed 401(k) accounts must look to the safekeeping and custody exemption to avoid moving these banking activities to a registered broker-dealer. This exemption is often ignored or overlooked.
Both the House and Senate versions have substantially the same language with respect to permissible safekeeping and custody activities. A bank, as part of its customary banking activities, may provide safekeeping or custody services, facilitate the transfer of funds or securities, and act as a custodian or clearing agency in connection with the clearance and settlement of its customers' securities transactions.
Consequently, a bank engaged in its customary banking activities by serving as custodian to a self-directed IRA or participant-directed 401(k) account will not be required to push this activity out of the bank and into a registered broker-dealer. The language in the Senate Banking Committee reports from both the 105th and 106th Congresses clearly supports this conclusion.
The trust and fiduciary and the custodial exemptions of HR 10 and S 900 have been reviewed by members of the American Bankers Association's trust counsel committee, the ABA Securities Association lawyers' committee, various state bankers associations, and numerous trust bankers.
All generally agree that banks would be able to continue offering fiduciary and custodial services directly, and not in a registered broker- dealer.
In a commentary in the June 1 issue of American Banker ("Is Reform Bill a Menace to Bank Retirement Plans?," page 12), attorney Melanie L. Fein of Great Falls, Va., made many of the assertions that Ms. Miller of the American Bankers Association criticizes. Ms. Fein provided the following reply:
The Senate bill, S 900, includes language specifically stating that the exemption for bank fiduciary activities includes acting as "custodian ... for an individual retirement account." This language is noticeably absent from HR 10, which limits the custodial exemption to custodial services that are part of "customary banking activities," leaving the door open to mischief by the SEC.
If those who are comfortable with HR 10 have conferred with the SEC and received its written blessing of their reading of the bill, then small banks can take comfort. The fact remains that the Senate language dispenses with the issue in a way that the House bill does not.