Sec. 218.701 Exemption from the definition
of ‘‘broker’’ for certain institutional
referrals.
(a) General. A bank that meets the
requirements for the exception from the
definition of ‘‘broker’’ under section
3(a)(4)(B)(i) of the Act (15 U.S.C.
78c(a)(4)(B)(i)), other than section
3(a)(4)(B)(i)(VI) of the Act (15 U.S.C.
78c(a)(4)(B)(i)(VI)), is exempt from the
conditions of section 3(a)(4)(B)(i)(VI) of
the Act solely to the extent that a bank
employee receives a referral fee for
referring a high net worth customer or
institutional customer to a broker or
dealer with which the bank has a
contractual or other written arrangement
of the type specified in section
3(a)(4)(B)(i) of the Act, if:
(1) Bank employee. (i) The bank
employee is:
(A) Not registered or approved, or
otherwise required to be registered or
approved, in accordance with the
qualification standards established by
the rules of any self-regulatory
organization;
(B) Predominantly engaged in banking
activities other than making referrals to
a broker or dealer; and
(C) Not subject to statutory
disqualification, as that term is defined
in section 3(a)(39) of the Act (15 U.S.C.
78c(a)(39)), except subparagraph (E) of
that section; and
(ii) The high net worth customer or
institutional customer is encountered by
the bank employee in the ordinary
course of the employee’s assigned duties
for the bank.
(2) Bank determinations and
obligations--(i) Disclosures. The bank
provides the high net worth customer or
institutional customer the information
set forth in paragraph (b) of this section
(A) In writing prior to or at the time
of the referral; or
(B) Orally prior to or at the time of the
referral and
(1) The bank provides such
information to the customer in writing
within 3 business days of the date on
which the bank employee refers the
customer to the broker or dealer; or
(2) The written agreement between
the bank and the broker or dealer
provides for the broker or dealer to
provide such information to the
customer in writing in accordance with
paragraph (a)(3)(i) of this section.
(ii) Customer qualification. (A) In the
case of a customer that is a not a natural
person, the bank has a reasonable basis
to believe that the customer is an
institutional customer before the referral
fee is paid to the bank employee.
(B) In the case of a customer that is
a natural person, the bank has a
reasonable basis to believe that the
customer is a high net worth customer
prior to or at the time of the referral.
(iii) Employee qualification
information. Before a referral fee is paid
to a bank employee under this section, the bank provides the broker or dealer
the name of the employee and such
other identifying information that may
be necessary for the broker or dealer to
determine whether the bank employee
is registered or approved, or otherwise
required to be registered or approved, in
accordance with the qualification
standards established by the rules of any
self-regulatory organization or is subject
to statutory disqualification, as that term
is defined in section 3(a)(39) of the Act
(15 U.S.C. 78c(a)(39)), except
subparagraph (E) of that section.
(iv) Good faith compliance and
corrections. A bank that acts in good
faith and that has reasonable policies
and procedures in place to comply with
the requirements of this section shall
not be considered a ‘‘broker’’ under
section 3(a)(4) of the Act (15 U.S.C.
78c(a)(4)) solely because the bank fails
to comply with the provisions of this
paragraph (a)(2) with respect to a
particular customer if the bank:
(A) Takes reasonable and prompt
steps to remedy the error (such as, for
example, by promptly making the
required determination or promptly
providing the broker or dealer the
required information); and
(B) Makes reasonable efforts to
reclaim the portion of the referral fee
paid to the bank employee for the
referral that does not, following any
required remedial action, meet the
requirements of this section and that
exceeds the amount otherwise permitted
under section 3(a)(4)(B)(i)(VI) of the Act
(15 U.S.C. 78c(a)(4)(B)(i)(VI)) and
§ll.700.
(3) Provisions of written agreement.
The written agreement between the
bank and the broker or dealer shall
require that:
(i) Broker-dealer written disclosures.
If, pursuant to paragraph (a)(2)(i)(B)(2)
of this section, the broker or dealer is to
provide the customer in writing the
disclosures set forth in paragraph (b) of
this section, the broker or dealer
provides such information to the
customer in writing:
(A) Prior to or at the time the
customer begins the process of opening
an account at the broker or dealer, if the
customer does not have an account with
the broker or dealer; or
(B) Prior to the time the customer
places an order for a securities
transaction with the broker or dealer as
a result of the referral, if the customer
already has an account at the broker or
dealer.
(ii) Customer and employee
qualifications. Before the referral fee is
paid to the bank employee:
(A) The broker or dealer determine
that the bank employee is not subject to
statutory disqualification, as that term is
defined in section 3(a)(39) of the Act (15
U.S.C. 78c(a)(39)), except subparagraph
(E) of that section; and
(B) The broker or dealer has a
reasonable basis to believe that the
customer is a high net worth customer
or an institutional customer.
(iii) Suitability or sophistication
determination by broker or dealer -- (A)
Contingent referral fees. In any case in
which payment of the referral fee is
contingent on completion of a securities
transaction at the broker or dealer, the
broker or dealer, before such securities
transaction is conducted, perform a
suitability analysis of the securities
transaction in accordance with the rules
of the broker or dealer’s applicable selfregulatory
organization as if the broker
or dealer had recommended the
securities transaction.
(B) Non-contingent referral fees. In
any case in which payment of the
referral fee is not contingent on the
completion of a securities transaction at
the broker or dealer, the broker or
dealer, before the referral fee is paid,
either:
(1) Determine that the customer:
(i) Has the capability to evaluate
investment risk and make independent
decisions; and
(ii) Is exercising independent
judgment based on the customer’s own
independent assessment of the
opportunities and risks presented by a
potential investment, market factors and
other investment considerations; or
(2) Perform a suitability analysis of all
securities transactions requested by the
customer contemporaneously with the
referral in accordance with the rules of
the broker or dealer’s applicable selfregulatory
organization as if the broker
or dealer had recommended the
securities transaction.
(iv) Notice to the customer. The
broker or dealer inform the customer if
the broker or dealer determines that the
customer or the securities transaction(s)
to be conducted by the customer does
not meet the applicable standard set
forth in paragraph (a)(3)(iii) of this
section.
(v) Notice to the bank. The broker or
dealer promptly inform the bank if the
broker or dealer determines that:
(A) The customer is not a high net
worth customer or institutional
customer, as applicable; or
(B) The bank employee is subject to
statutory disqualification, as that term is
defined in section 3(a)(39) of the Act (15
U.S.C. 78c(a)(39)), except subparagraph
(E) of that section.
(b) Required disclosures. The
disclosures provided to the high net
worth customer or institutional
customer pursuant to paragraphs
(a)(2)(i) or (a)(3)(i) of this section shall
clearly and conspicuously disclose:
(1) The name of the broker or dealer;
and
(2) That the bank employee
participates in an incentive
compensation program under which the
bank employee may receive a fee of
more than a nominal amount for
referring the customer to the broker or
dealer and payment of this fee may be
contingent on whether the referral
results in a transaction with the broker
or dealer.
(c) Receipt of other compensation.
Nothing in this section prevents or
prohibits a bank from paying or a bank
employee from receiving any type of
compensation that would not be
considered incentive compensation
under §ll.700(b)(1) or that is
described in §ll.700(b)(2).
(d) Definitions. When used in this
section:
(1) High net worth customer--(i)
General. High net worth customer
means:
(A) Any natural person who, either
individually or jointly with his or her
spouse, has at least $5 million in net
worth excluding the primary residence
and associated liabilities of the person
and, if applicable, his or her spouse; and
(B) Any revocable, inter vivos or
living trust the settlor of which is a
natural person who, either individually
or jointly with his or her spouse, meets
the net worth standard set forth in
paragraph (d)(1)(i)(A) of this section.
(ii) Individual and spousal assets. In
determining whether any person is a
high net worth customer, there may be
included in the assets of such person
(A) Any assets held individually;
(B) If the person is acting jointly with
his or her spouse, any assets of the
person’s spouse (whether or not such
assets are held jointly); and
(C) If the person is not acting jointly
with his or her spouse, fifty percent of
any assets held jointly with such
person’s spouse and any assets in which
such person shares with such person’s
spouse a community property or similar
shared ownership interest.
(2) Institutional customer means any
corporation, partnership, limited
liability company, trust or other nonnatural
person that has, or is controlled
by a non-natural person that has, at
least:
(i) $10 million in investments; or
(ii) $20 million in revenues; or
(iii) $15 million in revenues if the
bank employee refers the customer to
the broker or dealer for investment
banking services.
(3) Investment banking services
includes, without limitation, acting as
an underwriter in an offering for an
issuer; acting as a financial adviser in a
merger, acquisition, tender offer or
similar transaction; providing venture
capital, equity lines of credit, private
investment-private equity transactions
or similar investments; serving as
placement agent for an issuer; and
engaging in similar activities.
(4) Referral fee means a fee (paid in
one or more installments) for the referral
of a customer to a broker or dealer that
is:
(i) A predetermined dollar amount, or
a dollar amount determined in
accordance with a predetermined
formula (such as a fixed percentage of
the dollar amount of total assets placed
in an account with the broker or dealer),
that does not vary based on:
(A) The revenue generated by or the
profitability of securities transactions
conducted by the customer with the
broker or dealer; or
(B) The quantity, price, or identity of
securities transactions conducted over
time by the customer with the broker or
dealer; or
(C) The number of customer referrals
made; or
(ii) A dollar amount based on a fixed
percentage of the revenues received by
the broker or dealer for investment
banking services provided to the
customer.
(e) Inflation adjustments--(1) In
general. On April 1, 2012, and on the 1st
day of each subsequent 5-year period,
each dollar amount in paragraphs (d)(1)
and (d)(2) of this section shall be
adjusted by:
(i) Dividing the annual value of the
Personal Consumption Expenditures
Chain-Type Price Index (or any
successor index thereto), as published
by the Department of Commerce, for the
calendar year preceding the calendar
year in which the adjustment is being
made by the annual value of such index
(or successor) for the calendar year
ending December 31, 2006; and
(ii) Multiplying the dollar amount by
the quotient obtained in paragraph
(e)(1)(i) of this section.
(2) Rounding. If the adjusted dollar
amount determined under paragraph
(e)(1) of this section for any period is
not a multiple of $100,000, the amount
so determined shall be rounded to the
nearest multiple of $100,000.
Amended effective 4/17/2008, 73 Federal Register 20779
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