TO: BISA Primary Contacts; BISA Legislative, Regulatory & Compliance Committee
FROM: Kathleen Collins
DATE: 29 October 2003
SUBJECT: Dialogue with the SEC Continues

Your response is needed by November 7th. Please take a moment to review and comment or to get this to the appropriate person in your organization who can provide comments on your behalf.

As you know, the SEC Staff is seeking informal public comment to help it draft a revised set of "push-out" regulations which will govern bank securities activities under the Gramm-Leach-Bliley Act. We had previously distributed sets of questions focusing on "networking practices," the Gramm-Leach-Bliley Act money market sweep exception, as well as the trust and fiduciary operations "chiefly compensated" issue. Attached to this Member Alert are new questions dealing with ERISA plan administration and investment advice for a fee. BISA requests that bank members review these questions and provide feedback to us by November 7, 2003 so that we can further BISA’s dialogue with the SEC Staff on these important matters. It is also not too late to reply to earlier SEC inquiries.

Any information supplied to us will be converted to work product which will not disclose the identity of the financial institution when it is submitted to the SEC. However, the material is not protected by attorney-client privilege, and thus could be discoverable.

It is important to engage the SEC in this dialogue in order to improve these important regulations from the Interim Final Rules issued in May 2001. Please take the time to complete and return the Questionnaire to Kathleen W. Collins and/or Jack P. Drogin at Morgan, Lewis & Bockius LLP, 1111 Pennsylvania Avenue, N.W., Washington, DC 20004; fax number 202-739-3001; e-mail address: kcollins@morganlewis.com or jdrogin@morganlewis.com.

ERISA Plan Administration Questions

1. Does your bank typically act as a trustee or as a non-fiduciary recordkeeper with respect to ERISA plans? How does your bank determine in which capacity to act? How do the bank's services and compensation differ depending on capacity? What transactional or asset-based charges does the bank earn when it services ERISA plans?
2. What investment options does the bank typically offer to ERISA plans? If it offers unaffiliated mutual funds, how is it compensated by these funds? What other revenue sharing arrangements, if any, does the bank have for ERISA plans?
3. Does your bank ever give investment advice to 401(k) plan participants? Does it offer an advice option directly, through a registered broker-dealer or investment adviser, or through an unaffiliated company such as Financial Engines?
4. How does your bank compensate its employees working in 401(k) plan administration (including education)? Are they compensated in any way based on the product sold? Please explain regular compensation as well as bonus potential.
5. Are any employees working in 401(k) plan administration (including education) dual employees of broker-dealers? If they are, what is their reason for registering?
6. Does your bank offer a brokerage window option to plan sponsors? Does the bank contract with a broker-dealer to offer that option? If so, does the broker-dealer know the identity of the participants?
7. Some commenters cited Universal Pension Services in their comment letter for the proposition that the SEC has recognized that banks offering a bundle of custodial and administrative services may accept and process orders for the plan's participants for the investment of new contributions or the reallocation of existing contributions. This SEC no-action letter involves a third-party recordkeeper that is paid shareholder servicing fees for receiving participants' investment instructions and maintaining records for participant accounts. An independent trustee submits purchases and sales for the plan as a whole. The recordkeeper does not provide investment advice, offer mutual funds, or otherwise engage in any activity other than act as a mechanical order gatherer for very limited compensation and is not affiliated with any other entity that does so. If affiliation were not an issue, is this a model that the bank could use for its 401(k) plan business?

Investment Advice for a Fee Questions

1. We understand banks have concerns about the definition of "investment adviser if a bank offers investment advice for a fee." We use this term to describe a bank that does not have investment discretion on behalf of another, and is not a trustee, executor, administrator, registrar of stock and bonds, transfer agent, guardian, assignee, receiver, or custodian under a uniform gift to minor act. From reports on the investment advice industry, we understand that investment programs are typically categorized by the degree to which the advice provided through them is personalized. These categories involve advice that is, in order of increasing personalization,
1. not customized for particular investors;
2. typically based on limited investor information to meet the needs of a person in an investor's situation;
3. customized, but limited to nonrecurring recommendations concerning a limited range of products;
4. provided according to preset asset-allocation models determined by committee and monitored on an ongoing basis;
5. provided as needed on a recurring basis; or
6. provided as part of a long-term and recurring client relationship, based on a highly detailed investor profile and interview that takes into account factors such as estate planning considerations.

If your bank provides investment advice for a fee, which of the above categories best describe the program or programs your bank offers, and how much of your bank's advice falls into each category?

For each type of investment program listed above that your bank offers, please describe the bank's responsibility to review, select, or recommend specific securities for an account, or to monitor assets held in the account for risk and suitability.

For each type of program your bank offers, how frequently does the bank review or monitor its advised accounts, how does it determine whether an advised account requires rebalancing or other action, and how frequently and in what format does it communicate with the owners or beneficiaries of the accounts?

For each type of program your bank offers, what is the fee for the advice, and are there separate fees for brokerage transactions? What are the brokerage fees?

If your bank provides investment advice for a fee that does not match any of the above categories, how would you characterize it, and how much of the advice your bank provides for a fee does it represent?

2. What obligations to disclose conflicts does your bank have to customers for whom the bank acts as an investment adviser for a fee? Are there any material conflicts that the bank is not required to disclose? Do these obligations differ based on the personalization of the investment program? If not, what determines the difference -- recall that trust accounts and discretionary accounts are not included in this discussion.
3. When your bank acts as an investment adviser for a fee, does it always provide advice regarding specific securities? If not, how is the bank paid for advice not regarding specific securities?
4. Does your bank ever provide one-time investment advice in connection with a single brokerage transaction? If so, how frequently does it provide such advice, what is the fee for the advice, and is there a separate fee for the brokerage transaction? What is the fee for the brokerage?