(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 USC 78c(a)(4)(B)(i)), other than section 3(a)(4)(B)(i)(VI)
of the act (15 USC 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 USC 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 three 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 USC 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 USC 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 USC 78c(a)(4)(B)(i)(VI)) and section 218.700.
3-3506
(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 determines that the
bank employee is not subject to statutory disqualification, as that
term is defined in section 3(a)(39) of the act (15 USC 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 self-regulatory organization
as if the broker or dealer had recommended the securities transaction.
(B) Noncontingent 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 self-regulatory
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 USC 78c(a)(39)), except subparagraph
(E) of that section.
3-3507
(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 section 218.700(b)(1) or that
is described in section 218.700(b)(2).
3-3508
(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, 50 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 non-natural 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.
3-3509
(e) Inflation adjustments.
(1) In general. On April 1, 2012, and on the first day of each subsequent five-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.
