Guest Article

GLBA and Employee Benefit Plans

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by Lisa J. Bleier <lbleier@aba.com>
Senior Counsel
American Bankers Association
(202) 663-5479

In General

The Gramm-Leach-Bliley Act removed the exemption for banks from broker-dealer regulations under the federal securities law. Previously, the Securities Exchange Act of 1934 provided that the terms "broker" and "dealer" did not include a "bank." The amended definition in GLBA replaced this general exception with specific functional exceptions from broker-dealer registration for certain bank securities activities.

The expectation was that certain securities activities traditionally conducted by banks that did not meet the specific functional exceptions would have to be "pushed out"-- out of the banks-- into SEC-registered and supervised securities firms.

As part of the negotiations in passing GLBA, the following exceptions, among others, to being "pushed out" were made (i.e. the following could continue to be handled within the bank):

Trust and fiduciary activities Safekeeping and custody activities

While these do seem fairly specific, there was still some lack of clarity regarding how these terms would be defined. But the general assumption was that these exceptions would allow banks to continue handling employee benefit plans in much the same manner as previously.

The new law was to go into effect on May 11, 2001; however, it was unclear as to exactly what activities were to be "pushed-out", therefore, after intense lobbying, the SEC delayed the implementation, and issued guidance intended to clarify the new law.

The SEC postponed implementation until October 1, 2001. In addition, the SEC issued final interim rules clarifying the new law, and what activities would need to be "pushed-out."

The Problem with the New Rules

These new rules appear to go much further in their impact than anyone expected, or intended. As a result of these rules, there are many aspects of managing an employee benefit plan that a bank would be unable to do, making the exemptions intended for employee benefit plans ineffective.

The trust and fiduciary activities exemption requires that banks be "chiefly compensated" in a certain manner. As this is defined, a bank's receipt of "relationship compensation" must be greater than "sales compensation." "Relationship compensation," as defined in the rules, does not include any fees received from investment companies. These fees must be received from the client or paid out of assets under management. One problem this raises is that often there are 401(k) and other defined contribution plans where the plan sponsor is not charged by the bank, but instead, the bank receives compensation only from the investment company through 12b-1 fees-- which would be considered "sales compensation" under the SEC's proposal. This type of payment arrangement would not satisfy the chiefly compensated standard. If a bank is unable to accept these fees, it would be forced to charge the plan sponsor. The safekeeping and custody activities exemption permits banks to provide "custody and related administrative services"; however, as interpreted by the SEC, "the exception does not allow banks ... to accept orders to purchase and sell securities."

If the bank cannot conduct order-taking, then it cannot manage any participant-directed accounts, since, by definition, those accounts would involve order-taking.

What Does this Mean?

These rules, if allowed to remain as written, will result in requiring financial institutions to push-out their IRA and 401(k) business. For larger banks, this may only mean "pushing-out" to an affiliate; however, smaller banks and community banks often do not have an affiliated broker-dealer, and would have to leave the retirement plan business.

This has the potential to impact all types of plans: 401(k) plans, IRA, 457 plans, and other tax-qualified plans.

What are we doing?

The ABA has written to the SEC asking them to withdraw these rules-- arguing that they are not following Congressional intent.

We are also reaching out to other agencies and groups on this issue.

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