Regulation R Overview FIRMA Orlando, FL April 6-10, 2008 Sally Miller

Gramm-Leach-Bliley Act Background Background ● Enacted 11/12/99 ● Intermediaries ability to offer a full array of products and services through functional regulation ● When is a bank functioning as a broker and subject to SEC jurisdiction?

Regulation R Finalized on 9/24/07 Finalized on 9/24/07 Compliance date: first day of fiscal year ending after 9/30/08 Compliance date: first day of fiscal year ending after 9/30/08 Forthcoming Forthcoming ● Record keeping rules ● Examiner guidance ● Resolution of Dual Employee

Trust & Fiduciary Exception A bank acting in a trustee or fiduciary capacity will be expected from registration if: A bank acting in a trustee or fiduciary capacity will be expected from registration if: ● Does not publicly solicit brokerage business ● Directs the trades to a registered broker-dealer ● Chiefly compensated through relationship compensation

Trust & Fiduciary Exception Applies to personal, institutional (inc. retirement), charitable and corporate trust accounts Applies to personal, institutional (inc. retirement), charitable and corporate trust accounts Chiefly compensated test – need to build systems to both characterize and measure compensation received on trust and fiduciary accounts. Chiefly compensated test – need to build systems to both characterize and measure compensation received on trust and fiduciary accounts.

Relationship Compensation Administrative Administrative Annual fees Annual fees Fee based on a % of assets under management Fee based on a % of assets under management 12b-1 fees 12b-1 fees

Not Relationship Compensation Processing Fees Processing Fees Soft dollars Soft dollars Internal payments Internal payments Credits for deposits Credits for deposits Sale of portfolio management software Sale of portfolio management software

Trust & Fiduciary Exception Two ways of measuring: Two ways of measuring: ● Bank-wide basis, then relationship comp must at least make up 70% of total compensation ● Account-by-account, then relationship compensation must be greater than 50% of total compensation

Trust & Fiduciary Exception Calculation to be performed by average preceding two year compensation ratios. Calculation to be performed by average preceding two year compensation ratios. Impact on compliance date: Impact on compliance date: ● 1/1/11 for bank with fiscal year the same as calendar year.

International Applies to foreign branches managed from US Applies to foreign branches managed from US Exception for foreign branches managed from foreign locations, may require sampling of foreign account addresses to demonstrate that number of US accounts managed from foreign branch is minimal. Exception for foreign branches managed from foreign locations, may require sampling of foreign account addresses to demonstrate that number of US accounts managed from foreign branch is minimal.

Custody Accounts Statute protects all custodial accounts and related securities lending activities Statute protects all custodial accounts and related securities lending activities But if engaged in order taking, i.e., taking orders from trustee, investment adviser, need to look at Regulation R. But if engaged in order taking, i.e., taking orders from trustee, investment adviser, need to look at Regulation R.

Order-Taking: Rule 760 Order Taking Permissible for: Employee Benefit, IRA and Similar Accounts, so long as: Employee Benefit, IRA and Similar Accounts, so long as: ● Bank employees do not receive compensation based on any securities transaction that resulted from the order; ● Advertisements do not advertise bank order taking capabilities separate from other custodial services or that the bank custodial accounts are a substitute for brokerage accounts; ● Advertisements and sales literature for IRAs and other similar accounts do not advertise order taking capabilities more prominently than other custodial services.

Order-Taking As Accommodation All Other Accounts (Accommodation Orders), so long as: All Other Accounts (Accommodation Orders), so long as: ● Bank employee compensation restriction same as above; ● Fees charged for providing services same as if order came through broker-dealer and do not vary based on the quantity or price of the transaction. Note: can vary based on the type of security;

Accommodation Order Conditions Advertisements cannot state that bank accepts orders; Advertisements cannot state that bank accepts orders; Sales literature cannot state that bank accepts orders separate from other custodial services or describe order taking capabilities more prominently than other custodial services; Sales literature cannot state that bank accepts orders separate from other custodial services or describe order taking capabilities more prominently than other custodial services; Cannot provide investment advice or research or make recommendations Cannot provide investment advice or research or make recommendations

Which Exemption Should Apply? Multiple exemptions might work for a particular account Multiple exemptions might work for a particular account Decision should be made based on compensation test, as well as systems and operational limitations Decision should be made based on compensation test, as well as systems and operational limitations

Which Exemption Should Apply? Directed trust accounts may not fit well within the trust and fiduciary because of the compensation structure Directed trust accounts may not fit well within the trust and fiduciary because of the compensation structure

Directed Trust Carve-Out Under “other conditions,” the rule specifically allows directed trustees to use the custody exception Under “other conditions,” the rule specifically allows directed trustees to use the custody exception

Compensation Anytime a customer referred to a broker- dealer and referral fee paid Anytime a customer referred to a broker- dealer and referral fee paid Referral Fee Referral Fee ● 2x base hourly rate/ 1/1000th of the employee’s actual annual base salary ● 2x average min-max hourly wage for job family ● 1/1000 th average min-max annual base salary for job family ● $25 ● No points

Institutional Referrals Can pay larger fees if Can pay larger fees if ● HNW Customer ● Institutional HNW HNW ● Individually or jointly, with spouse, has at least $5 million in net worth excluding primary residence associated liabilities or ● Any revocable, or living trust the settler of which is a natural person who either individually or jointly with his or her spouse meets the $5 million net worth standard.

Institutional Investor $10 million in investments: $10 million in investments: $20 million in revenues or $20 million in revenues or $15 million in revenues if the bank employee refers the customer to the broker-dealer for investment banking services $15 million in revenues if the bank employee refers the customer to the broker-dealer for investment banking services

TB 76-1A Disclosure before payment of referral fee Disclosure before payment of referral fee Referral fee arrangement in writing Referral fee arrangement in writing Approved by the board of directors and annually reviewed by senior management Approved by the board of directors and annually reviewed by senior management

Bonus Plans Overall profitability or revenue of: Overall profitability or revenue of: ● Bank or BHC ● Any bank affiliate (other than b-d) or operating units ● B-D if – Profitability only one of multiple factors/variables used – Significant factors/variables that are not related to profitability of broker dealer

Bonus Plans Discretionary Discretionary Multiple factors/variables Multiple factors/variables ● Factors/variables include significant factors/variables not related to security transactions Referral not a factor Referral not a factor Bonus not determined by reference to others’ referrals Bonus not determined by reference to others’ referrals

Dual Employee FINRA rule: Rule 3040 FINRA rule: Rule 3040 ● Transaction-by-transaction pre- approval ● Regulatory access to bank books & records Anticipate resolution by 9/30/08 Anticipate resolution by 9/30/08

Questions?