Will Your New Year’s Resolution Focus on Your Reg R Requirements?

Patience is a virtue, and now we are finally rewarded with the long awaited arrival of the “push-out” provisions of the Graham-Leach-Bliley Act. They have now arrived and are effective the first day of the fiscal year commencing after September 30, 2008. For some of you – that time is now. Reg R addresses the four bank broker exceptions:

Trust and Fiduciary Activities;
Safekeeping and Custody Activities;
Sweep Accounts; and
Third Party Brokerage Arrangements

In order to qualify for these exceptions however, certain requirements need to be met and supported. Yes, there are special factors that must be achieved in order for your institution to qualify for the exception.

The Trust Exception limits the types compensation that a banking organization may obtain for effecting securities transactions in its “fiduciary capacity” to a specific list of fees and requires that the banking organization be “chiefly compensated” for these services on the basis of the permissible fees. The “chiefly compensated” requirement can be met using one of two alternative methods.

Account-by-Account Basis: Using this method, the requirement will be met if the bank’s relationship compensation is greater than 50 percent of its entire compensation from the account on a two-year rolling average comparison.
Bank-wide Basis: Using this method, the requirement will be met if the bank’s relationship compensation is more than 70 percent of its entire compensation.

Basically, in order to qualify for the Trust Exception you now need to know where your revenue is coming from. For those organizations that have an appropriate Trust accounting and fee system, this should not be a problem. For those that do not, additional work and effort will be needed to comply with Reg R.

The Custody Exception allows a bank to accept securities orders from certain persons, including employee benefit plans, IRAs and other similar accounts. Also, banking organization may accept securities orders from its custody customers on an accommodation basis, with certain additional conditions.

The Sweep Exception allows banks to effect transactions in securities as part of a sweep program the invests in a no-load mutual fund. Also, banks will be permitted to sweep customer funds into mutual funds that assess higher fees than no-load funds; however additional requirements must be met.

Bearmoor continues to have conversations with the banking regulators and through our discussions we have determined that examiner training on Reg R is currently taking place. This will be an area of increased importance over the next year. If you have not yet begun to think about how your organization will comply with the exceptions of Reg R, perhaps this should be a New Year’s resolution.