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qualification, suitability, and other sales practice issues. 20/ For example, federal banking law contains no counterpart to the testing and qualifications programs (e.g., the Series 7 examination) administered by the securities self-regulatory organizations ("SROs"). Moreover, bank securities customers have no formal avenue of redress for complaints. The federal banking laws do not generally contain private rights of action for investors, 21/ and there is no banking law counterpart to the securities arbitration scheme for bank securities investors.

Finally, banking agency enforcement programs historically have not emphasized investor protection. In fact, it appears that the federal banking regulators generally seek to minimize disclosure of their enforcement actions against banks. 22/ This is in contrast to the Commission's enforcement program, which fully and aggressively informs the investing

20/

21/

22/

These issues were discussed previously in a Memorandum of the Securities and
Exchange Commission to the Subcommittee on Telecommunications and Finance of
the House Committee on Energy and Commerce Concerning Financial Services
Deregulation and Repeal of the Glass-Steagall Act (April 11, 1988).

See, e.g., In re Fidelity Bank Trust Fee Litigation, 839 F. Supp. 318 (E.D. Pa.
1993); In re Corestates Trust Fee Litigation, 837 F. Supp. 104 (E.D. Pa. 1993). Of
course, banks are subject to section 10(b) of the Exchange Act and Rule 10b-5
thereunder, so bank customers can presumably bring private rights of action against
banks under these provisions. But see Simpson v. Mellon Bank, N.A., [Current]
Fed. Sec. L. Rep. (CCH) ¶ 98,027 (E.D. Pa. 1993) (National Bank Act preempts
application of federal securities laws in case challenging reasonableness of sweep fees
charged by national bank: "The comprehensiveness of the National Bank Act in
addressing the fees charged by banks as fiduciaries excludes application of the federal
securities law [even though customers had no private right of action under the
National Bank Act with respect to such fees].")

While the banking agencies are required to "publish and make available to the
public" final orders issued in connection with enforcement proceedings, the banking
agencies' releases usually do not describe the nature of the violation and the
enforcement action taken. 12 U.S.C. § 1818(u). Rather, the releases are lists of
enforcement actions that typically only include the docket number, names of the
parties involved, the type of action, the date of the action, and whether the action
was by consent. It is difficult for an investor to determine from the listings which
proceedings are of interest in order to request copies of documents of specific final
actions from the banking agencies.

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public of enforcement actions under the federal securities laws. Commission and SRO disciplinary proceedings are matters of public record Commission press releases describe the nature of the proceedings and the identity of the parties disciplined. In addition, (as mandated by the Exchange Act), the NASD operates an "800" number hotline which allows investors to obtain information about the disciplinary and civil liability records of brokerdealers' registered representatives.

Bank Investment Adviser Activities. Although bank fiduciary activities are subject to inspection by the federal banking regulators, there is currently a regulatory gap when banks act as advisers to registered investment companies. Bank inspections do not focus on issues such as conflicts of interest under the Investment Company Act, nor are they coordinated with Commission inspection and enforcement efforts, which focus on such securities law issues. While Commission examiners inspect bank-advised investment companies, they cannot also examine the bank adviser's books and records because bank advisers are not required to register with the Commission as investment advisers. This limitation impairs the Commission's ability to examine investment companies and enforce their compliance with the federal securities laws.

The lack of express authority to review a bank's investment adviser activities particularly hinders the Commission's ability to evaluate potential conflicts of interest when the bank acts as an adviser to an investment company. For example, in order to determine whether an adviser is allocating securities transactions in a manner that is fair to all of its advisory clients, including an investment company, the Commission's examination staff must have access to records reflecting securities transactions for all of the advisers' clients. When the adviser to an investment company is a bank, however, the Commission staff does

13

not have express authority to review the adviser's records relating to clients other than the

investment company. 23/

A bank that advises mutual funds faces other potential conflicts of interest that are not regulated by banking law. To address such conflicts of interest, the Commission has supported legislation that would amend the Investment Company Act of 1940 to: (i) prohibit an investment company from borrowing from an affiliated bank; (ii) prohibit an investment company from purchasing securities in an underwriting when the proceeds of that underwriting will be used to retire debt owed by the issuer to an affiliated bank; (iii) prohibit an investment company's investment adviser that also acts as trustee for trust clients from voting on behalf of those clients to continue its service as the investment adviser when that continued relationship is not in the shareholders' best interest; and (iv) prohibit an investment company from using an affiliated bank as a custodian. These are the types of abuses that existed historically and contributed to the adoption of the Glass-Steagall Act prohibitions. Although many of the Glass-Steagall prohibitions have been eroded, provisions have not been enacted to address these potential conflicts.

C.

Recent Developments Relating to Bank Securities Activities

Against the backdrop of this limited regulatory environment and liberal interpretations of the Glass-Steagall Act by the federal banking agencies, there has been an ongoing

23/ Notably, a recent Commission enforcement cases involved a mutual adviser's unfairly allocating securities transactions. The adviser's employees delayed designating the account for which trades were conducted until after the trades were executed and then allocated more favorable trades to a private profit-sharing plan for the adviser's employees and less favorable trades to the adviser's public mutual funds. The Commission required the adviser to pay $9.2 million in compensation to the funds' shareholders. See In the matter of Kemper Financial Services, Inc., Investment Advisers Act Release No. 1387 (Oct. 20, 1993).

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expansion of bank securities and mutual fund activities. In particular, in recent years bank involvement in direct sales of mutual funds and other securities has grown significantly. In addition, banks have become increasingly involved in advising registered investment

companies.

These developments have sparked new interest in the issue of the appropriate regulation of bank securities activities. Of particular concern have been various investor protection issues, particularly the problem of investor confusion as to common name funds and deposit insurance protection. In response, in 1993 the four federal banking regulators separately issued "guidelines" designed to address some of the investor protection issues raised by bank securities and mutual fund sales. 24/ These guidelines represented recognition by the federal banking agencies of the shortcomings in their regulatory structure for bank securities activities. The banking agencies subsequently issued a joint interagency statement intended to consolidate, standardize, and supersede the earlier, separate guidelines.25/

The guidelines contained in the recent Interagency Statement do not succeed, however, in creating a regulatory scheme comparable to regulation under the federal securities laws. As "guidelines," rather than regulations, they are generally hortatory in nature and are not legally enforceable by the bank regulators or by bank customers. Moreover, the guidelines do not establish clear and uniform standards of conduct for banks

24/ See OCC Banking Circular No. 274 (July 19, 1993); letter from Richard

25/

Spillenkothen, Director, Federal Reserve Division of Banking Supervision and
Regulation, on "Separation of Mutual Fund Sales Activities from Insured Deposit-
Taking Activities" (June 17, 1993); FDIC Supervisory Statement on State
Nonmember Bank Sales of Mutual Funds and Annuities (Oct. 8, 1993); OTS Bulletin
23-1, "Guidance on the Sale of Uninsured Products" (Sept. 7, 1993).

See "Interagency Statement on Retail Sales of Nondeposit Investment Products," Feb. 15, 1994, at 2, n.1.

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engaged directly in securities activities. The standards are general in nature, and banks are given wide latitude to establish procedures and policies to implement them. For example, the new Interagency Statement advises banks to "ensure that [their] personnel who are authorized to sell nondeposit investment products or to provide investment advice with respect to such products are adequately trained with regard to the specific products being sold or recommended." 26/ The Statement does not, however, establish anything approaching the NASD's uniform and comprehensive scheme for testing and qualification of broker-dealer personnel. Similarly, the discussion of suitability and sales practices contained in the Interagency Statement does not even make reference to the NASD's long-established Rules of Fair Practice. Finally, the recent guidelines raise serious potential problems of regulatory overlap and conflict in their provisions for banking regulator oversight of registered broker-dealers that assist banks in the sale of securities products.

Although these recent efforts are laudable, they do not address the fundamental disparities between the bank securities regulatory scheme and the protections afforded investors under the federal securities laws.

III. H.R. 3447

H.R. 3447, the "Securities Regulatory Equality Act," would provide for functional regulation of bank securities activities, thus eliminating the anachronistic disparities in the existing regulatory structure. The Commission strongly supports H.R. 3447. As stated in a memorandum accompanying a recent letter from Chairman Levitt to Chairman Dingell:

26/ Interagency Statement at 11.