• Networking Arrangements.
• Bonuses. GLBA permitted banks to pay unregistered employees nominal incentive compensation for making referrals. To accommodate bank bonus programs, the proposed definition of "incentive compensation" will explicitly exclude "qualifying discretionary compensation" paid under bank bonus plans.
• This indicates an attempt by the regulators to provide some flexibility, allowing banks to include brokerage revenues in bonuses to unregistered bank employees.
• The SEC, however, did not provide details as to how "qualifying discretionary compensation" will be defined. Details of this proposal may therefore not be evident until after the FRB votes on the proposal at its December 18th meeting.
• Institutional Referrals. Regulation R includes a new exception for institutional and high net worth referrals. Under the proposal, banks may pay employees higher than nominal referral fees that may be contingent on the execution of a securities transaction, for the referral of institutional accounts and high net worth individuals.
• Bank employees providing an institutional referral would be prohibited from making transaction recommendations. Any resulting transactions must be subject to a traditional self-regulatory organization suitability analysis by the executing broker-dealer, as though it was recommended by the broker-dealer.
• Institutional accounts will include entities with at least $10 million in investments or $40 million in assets; high net worth individuals must have, individually or jointly with their spouse, $5 million in assets, excluding primary residence and associated liabilities.

Other notable changes from Regulation B include:

• Trust and Fiduciary Activities. Regulation R includes a 70% (lowered from 90%) required bank-wide ratio of relationship compensation to sales compensation that banks must meet to be considered "chiefly compensated" by relationship compensation. Banks must meet this test to provide trust and fiduciary services without registering as a broker-dealer. The SEC also proposed to include 12b-1 fees as relationship compensation in computing the chiefly compensated ratio.
• Money Market Sweeps. Regulation R includes a requirement that banks provide another banking service to the customer, beside the sweep, to ensure that a legitimate banking relationship exists. The SEC also proposed that banks may include as an additional option money market funds that have higher costs than no-load funds, as well as transactions that are not sweeps. To sell funds with fees higher than no-load funds, banks must provide customers with a prospectus showing the fund’s fees, and they may not characterize the funds as no-load.
• Safekeeping and Custody: Regulation R includes an increase in the types of safekeeping and custody accounts from which a bank may accept orders to include employee benefit plans, individual retirement account, health savings accounts and similar accounts for which the bank acts as custodian, administrator or recordkeeper.
• Proposed Compliance Date: The SEC proposed to provide banks until the first day of their first fiscal year beginning on or after June 30, 2008, to come into compliance with proposed Regulation R.

The SEC also voted to separately publish proposed revisions to certain exceptions for bank dealer activities, including relaxing a bank’s due diligence requirement in Regulation S resale transactions, and to provide technical amendments to Rule 15a-6.

After the FRB votes to propose Regulation R on December 18th, the agencies will jointly publish the regulation for a 90-day public comment period. In order to allow the agencies time to publish the proposal and to consider comments, the SEC also extended the existing temporary bank exemption from the definition of "broker" until July 2, 2007.

BISA will continue to monitor this rulemaking, and intends to file appropriate comments to this proposal. Additional information will be provided to members as soon as Regulation R is published.

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