Mar 27, 2001 12:00 PM

By Donna R. Spivey
Northern Trust
Chicago, IL

President Clinton signed the Gramm-Leach-Bliley Act (GLB) into law on November 12, 1999. Beginning shortly thereafter and continuing until the present day, federal banking, and other agencies have been issuing proposed and final rules as required under the Act. Banking organizations around the country have been working to understand the nuances of the Act, the regulations and how they will impact business going forward. While GLB impacts banking companies in many ways, there are several key provisions that impact trust and investment activities of banks. For these provisions, 2001 brings important deadlines, which are rapidly approaching.

Two key provisions affecting fiduciary activities include the new privacy regulations and the elimination of the bank exemption from broker-dealer regulation mandated since the Depression era by the Securities Exchange Act of 1934.

Privacy

Notice of policies and practices regarding the disclosure of non-public personal information to affiliated and non-affiliated third parties must be made to all consumers no later than July 1, 2001. Further, organizations must make this disclosure to all new consumers at the time a relationship is established and then annually thereafter.

By this time many banks are well along the way toward fulfilling the initial notice requirement. It is important to keep in mind that there are other very important activities that must also take place for ongoing compliance. A few of these items include:

• Review of applicable state trust law requirements, as well as state financial privacy laws, to the extent applicable regarding information disclosure;

• Initial and then periodic training for employees so they are fully conversant with privacy laws and regulations, your corporate privacy policy and procedures, and any specific trust department policies relating to the confidentiality of client information;

• Modification of new account opening procedures to provide the initial notice to clients at the time a relationship is established;

• Development of procedures to provide the annual notice to clients;

• Review of client agreements and forms;

• Modification of third party contracts if necessary to include appropriate privacy/confidentiality language;

• Establish process for periodic review of privacy practices and policies.

Bank Securities Activity

GLB allows banks to deliver a wide and comprehensive array of financial products and services, which will better enable them to meet the needs of the wealth market. And with this ability to offer new products and combinations of products and services comes a new regulatory environment. Going forward, banks and their affiliated companies will be regulated based on the type of activity in which they are engaged. This functional regulation represents a significant departure from the traditional regulation of the banking industry by banking regulators.

The bank exemption under the Securities Exchange Act of 1934 is eliminated under GLB. This elimination requires a "push out" of all securities brokerage and dealing activities into a registered broker-dealer affiliate. However, Congress provided 11 exceptions to the "push out" rule for traditional bank functions that will remain in the bank under supervision of banking regulators. While securities activities were previously blended into trust department activity, GLB and these exceptions require all banks to clearly delineate their securities functions from their fiduciary functions and to put the former into a securities- regulated entity. The date for compliance with the "push out" provisions is May 12, 2001.

Thus, securities brokerage activity need not be "pushed out", so long as the activity takes place as an integral part of the fiduciary relationship. The key exception, to broker-dealer registration for bank fiduciary activities is found in Title II, Sec. 201 (4) (B) (ii) of the Act. This section exempts trust activities where "the bank effects transactions in a trustee capacity, or in a fiduciary capacity in a department that is regularly examined by bank examiners for compliance with fiduciary principles and standards and where the bank

• is chiefly compensated for such transactions on the basis of and administration or annual fee (payable monthly, quarterly, or other basis), a percentage of assets under management, or a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers, or any combination of such fees; and

• where the bank does not solicit brokerage business, other than by advertising that it effects transactions in securities in conjunction with advertising its other trust activities."

The act also provides for an exemption for securities brokerage and dealing activities in connection with safekeeping and securities custody services, as well as custody and administrative services for Individual Retirement Accounts and other retirement plans.

If banks comply with these key requirements (compensation and advertising) cited above, the trust activity exemption should protect most if not all of the activity performed in the management of fiduciary relationships. Banks will be required to maintain records that will clearly indicate that the trust department securities activities fall within the exemptions.

While banking regulators will provide guidance on the nature and types of records they will ask banks to maintain, there are a few steps banks can take immediately to ensure compliance with these new rules. Banks should, among other things, undertake the following:

• Review all fee schedules to ensure they meet the specific requirements for compensation;

• Develop ongoing review process to ensure that all fee schedules are in compliance and that exceptions to the regular schedules are also in compliance;

• Documentation of annual investment (Regulation 9) reviews;

• Review of standard agreements (e.g. investment management, securities custody, IRA, etc.) to determine if changes are necessary;

• Review marketing materials to determine if changes are necessary;

• Develop process to incorporate GLB exemption requirements into product development and marketing activities;

• Training for staff involved in fiduciary or custody activity at banks is critical to enhance understanding of the requirements of the exemptions and to ensure compliance with them.

Another important aspect of GLB that deserves attention is employee compensation. In order to receive incentive compensation for various securities transactions, employees must be licensed appropriately and registered with a broker-dealer. Dual employee arrangements between the bank and an affiliated broker-dealer are possible to accomplish this goal.

There are other important aspects to Gramm-Leach-Bliley that deserve attention. The issues covered in this article are the key issues that impact our traditional trust business and will affect all banks even if they do not elect to take advantage of the new opportunities available under GLB. The deadlines are drawing near, and while we will hear more from our regulators in the near future regarding compliance requirements, the activities listed above are worthy of our immediate attention.2u

 

Donna R. Spivey is a senior vice president in the Personal Financial Services Group at The Northern Trust Company, where she serves as Chief Fiduciary Officer. She is Co-Chair of the Advisory Board of the American Bankers Association National Trust Schools where she also serves as a member of the faculty.

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