Any venture into selling stocks could require registration

Banks and trust companies are developing a major case of depression concerning repercussions from the first major overhaul of banking laws since the Great Depression.

At issue are interim rules adopted by the Securities and Exchange Commission in May that would require them to register with the agency if they get into the business of selling stocks and, in effect, act as a broker-dealer.

Federal Reserve Board Chairman Alan Greenspan and the two other federal bank regulator agencies jumped into the fray last month, complaining that the SEC had overstepped its authority. That sent the agency into temporary retreat.

But Congress has since gotten into the act, and all hell has broken loose in Washington.

troubled

The issue erupted when House Financial Services Committee Chairman Michael Oxley, R-Ohio, his six subcommittee chairmen and Sen. Phil Gramm, R-Texas, the ranking Republican on the Senate Banking Committee, indicated their concern in a letter to Laura Unger, the SEC’s acting chairman.

“We are troubled that the rules do not reflect the statutory intent of Congress to allow certain traditional banking activities involving securities, such as trust and custody services, to remain in the bank and outside SEC regulation,” their letter said.

The SEC declined to comment.

Complicating matters, state securities commissioners side with the SEC and are warning banks that they’d better get used to being regulated as brokers if they get into that business.

“One of the overarching goals of Gramm-Leach-Bliley was, everybody should be playing by the same rules,” says Texas Securities Commissioner Denise Crawford, who has long taken a lead on banking issues within the North American Securities Administrators Association.

The issue is whether trust operations would have to “push out” their brokerage operations into a separate broker-dealer subsidiary under the new SEC rules, which were adopted on an interim basis in May.

For their part, trust companies that cater to investment advisers fear they would be among those especially hard hit by the measure.

“Trust is our only real business,” says Tom Batterman, president of Vigil Trust and Financial Advocacy in Wausau, Wis., speaking on behalf of the Association of Independent Trust Companies.

“It would impose burdensome additional regulatory requirements on us. We just don’t have the resources that it makes sense for us to devote to that,” he says.

The rules implement the Gramm-Leach-Bliley Act of 1999, which allows banks, securities firms and insurance companies to get into one another’s businesses.

Trust operations have traditionally been exempt from having to register as broker-dealers, and Gramm-Leach-Bliley includes the exemption.

The SEC rules “would have stopped us from doing what we have historically been doing in the banks,” says Sarah Miller, general counsel for the ABA Securities Association in Washington and director of government relations for the parent American Bankers Association.

Of particular concern to banks is a test that the SEC wants to impose to determine whether banks are chiefly compensated by brokerage commissions or by fees based on assets.

If a trust operation had even one account that was chiefly compensated by brokerage commissions, Ms. Miller says, it could be forced under the rules to set up a separate broker-dealer for the operations.

That in turn, she says, would entail registering employees as broker-dealer representatives, maintaining licenses and training, and would cost far more than current trust operations.

Ms. Miller says the ABA wants the SEC to let banks review their trust operations based on the line of business – such as institutional, personal, employee benefit or charitable foundation – and not let one account trigger the need to register.

Increased costs

David Roberts, president of National Advisors Holdings Inc., plans to start thrift operations out of its Overland Park, Kan., headquarters in September pending final approval from the Office of Thrift Supervision.

But he is concerned that the complicated SEC rules regarding 12(b)1 and shareholder accounting fees from mutual funds might force him to register as a broker-dealer.

National Advisors Holdings is the first thrift in the country owned exclusively by investment advisers. Eighty-two advisers have invested in the company, and will have exclusive access to its trust services.

“The key to all of this is not having to register all of your staff and contact people as broker-dealer agents,” Mr. Roberts says. “It creates a significant increase in the costs of what a trust company does.”

Originally, the rules were to take effect Oct. 1, and comments were due July 17.

But the SEC has pushed back to May 12, 2002, the date for complying with the new rules. The period to file public comments was extended until this Sept. 4.