FEDERAL RESERVE BANK OF NEW YORK

Circular No. 8950 November 12, 1980

Proposed Policy Statement on Payments to Brokers by Trust Institutions for Research and Brokerage Services

To Alt State Member Banks, and Bank Holding Companies, and Other Concerned, in the Second Federal Reserve District:

T h e B o a r d o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y s t e m h a s i n v i t e d p u b l i c c o m m e n t , t h r o u g h

D e c e m b e r 2 2 , 1 9 8 0 , o n a p r o p o s e d p o l i c y s t a t e m e n t c o n c e r n i n g p a y m e n t s t o b r o k e r s b y S t a t e m e m b e r

b a n k s e n g a g e d in t r u s t a c t i v i t i e s , a n d b y S t a t e - c h a r t e r e d n o n d e p o s i t t r u s t c o m p a n i e s th a t a r e s u b s i d i a r i e s o f b a n k h o l d i n g c o m p a n i e s , f o r r e s e a r c h a n d b r o k e r a g e s e r v i c e s . T h e f o l l o w i n g is q u o t e d

f r o m a p r e s s s t a t e m e n t i s s u e d b y t h e B o a r d o f G o v e r n o r s r e g a r d i n g th is m a t t e r :

T h e p rop osed p o licy statem ent w ou ld apply to the trust activities o f State m em ber banks and State- chartered n on dep osit trust com pan ies that are subsidiaries o f bank h old in g com panies.

It w ou ld call u pon such institutions to establish written policies and procedu res — w here the trust departm ent exercises investm ent d iscretion over accoun ts o f custom ers — fo r the internal iden tifica tion and review o f brok erage com m ission practices involving paym ent fo r research services using brokerage com m ission s , and fo r the disclosu re o f its com m ission practices to ow ners o f the accou n ts .

T he B oard p rop osed the p o licy statem ent in con n ection with a p rov ision o f the Securities E xchange A ct perm itting m on ey m anagers to pay reasonable com m ission s in excess o f the low est com m ission rates available in order to pay fo r brok erage and research services.

T he B oard invited com m en t particularly on :

— T h e im pact o f the p rop osed po licy statem ent w here the bank has au th ority , in a n ond iscre- tionary a ccou n t, to select the brok er to be used.

— W hether the regu latory im pact on sm aller institutions can be lightened by the inclusion in the p o licy statem ent o f a d e m in im u s rule.

P r i n t e d o n t h e f o l l o w i n g p a g e s is a n e x c e r p t f r o m t h e Federal Register o f N o v e m b e r 3 , 1 9 8 0 , c o n t a i n ­in g t h e te x t o f t h e p r o p o s e d p o l i c y s t a t e m e n t a n d a n a n a ly s i s o f t h e r e g u l a t o r y i m p a c t o f t h e p o l i c y s t a t e m e n t . C o m m e n t s o n t h e p r o p o s a l s h o u l d b e s u b m i t t e d b y D e c e m b e r 2 2 , a n d m a y b e s e n t t o o u r

B a n k E x a m i n a t i o n s D e p a r t m e n t .

A n t h o n y M . S o l o m o n , President.

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[Docket No. R-0330]

Policy Statement Concerning the Use of Brokerage Commissions to Pay for Research ServicesAGENCY: Board o f Governors o f the Federal Reserve System.ACTION: Proposed policy statement.

SUMMARY: This policy statement reflects the judgment of the Board that each trust institution subject to the Board’s supervisory jurisdictional1 exercising investment discretion over the accounts of customers should: (1) Establish written policies and procedures providing for the identification and periodic review of so-called “ soft- dollar” practices involving the payment for research services with brokerage commissions to ensure compliance with applicable provisions of law, and (2) prepare and make available to its customers a disclosure statement setting forth specific information relating to the brokerage and research services received from, or on behalf of, brokers in exchange for commission dollars. A sample disclosure statement is provided to aid trust institutions in the making of such disclosures.COMMENT PERIOD: All comments should be received by December 22,1980. ADDRESS: Comments, which should refer to Docket No. R-0330, may be mailed to Theodore E. Allison, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, Northwest, Washington, D.C. 20551, or delivered to Room B-2223 between 8:45 and 5:16 p.m. Comments received may also be inspected at Room B-1122 between 8:45 and 5:15 p.m., except as provided in § 261.6(a) of the Board’s Rules Regarding Availability of Information (12 CFR 261.6(a)).FOR FURTHER INFORMATION CONTACT: Robert S. Plotkin, Assistant Director ((202) 452-2782), or W alter R. McEwen, Attorney ((202) 452-2521), Division o f Banking Supervision and Regulation, Board o f Governors o f the Federal Reserve System, Washington, D.C.20551.SUPPLEMENTARY INFORMATION: Prior to the May 1,1975 elimination of fixed commission rates charged by brokers which execute transactions on national securities exchanges, it had been common practice for many brokers to provide research analysis and other market services and to compete on the basis of these services as well as on the basis of execution capacity. Money managers, including bank trust

1 State member banks and State-chartered, nondeposit, trust company subsidiaries of bank holding companies.

departments, were able to obtain research and other services from brokerage firms at no cost beyond the fixed commission rate then in effect for the execution of securities transactions: in effect, paying for such services with so-called “ soft-dollars.” The elimination of the fixed commission rate structure, however, threatened to disrupt this practice since many money managers feared that, under fiduciary law, they would be obliged to seek the lowest execution cost for transactions and the payment of higher commissions for execution plus research could give rise to liability. This could have interrupted the availability and distribution of research services with potentially harmful consequences to investors. In order to prevent such an occurrence, section 28(e) was added to the Securities Exchange Act of 1934 to provide a safe harbor for money managers that use commission dollars, at rates in excess of the lowest rates available, to pay for brokerage and research services where the money manager has determined that the commission paid is reasonable in relation to the value of the services provided by the broker-dealer.

Since the enactment of section 28(e), considerable uncertainty has arisen concerning the extent to which specific products and services do qualify for the protections afforded by section 28(e)(1). In addition, a recent investigation by the Securities and Exchange Commission into soft dollar arrangements utilized by several money managers, including banks, disclosed practices that were not believed to fall within the safe harbor provisions and, in several cases, resulted in the reimbursement of commission dollars to the affected accounts.2Because failure to comply with the safe harbor provision of section 28(e) may subject the money manager to liability where certain products and services are acquired with commission dollars, the Board believes it is incumbent upon each trust institution subject to its supervisory jurisdiction to establish written policies and procedures providing for the identification and periodic review of practices involving payment for research services with commissions in order to ensure conformance with the provisions of section 28(e).3 Moreover, the Board

2 Securities and Exchange Act Release No. 18679, dated March 19,1980.

3 Where a trust institution acts as fiduciary with respect to an employee benefit plan, the failure to comply with section 28(e) could result in a violation of section 406(b)(3) of the Employee Retirement Income Security Act of 1974 which prohibits a fiduciary from receiving any consideration for his own account in connection with a transaction involving the assets of the plan.

believes that the potential for liability can be further minimized and the public interest better served if disclosures o f such practices are made known to interested customers.

To assist the Board in determining the feasibility of implementation of the policy and disclosure requirements contained herein, the Board invites comment on the revisions of this policy statement. In particular, comment is invited on that portion of the policy statement which would suggest establishment of written policies and procedures to ensure that commission dollars generated by nondiscretionary accounts be applied to the purchase of brokerage and research services (other than execution) only with the knowledge and consent of the customer or other holder of the direction power. This provision was inserted in recognition of the fact that the safe harbor provision of section 28(e)(1) literally is available only to persons "in the exercise of investment discretion with respect to an account."In some direction trusts the customer or other third party not only has the power to make investment decisions but also may direct the selection o f the broker to be used in effecting transactions for the account. On the other hand, there may be some direction trusts where the bank has full authority to select the broker to be used in effecting transactions for the direction trust. Query: To what extent would this category o f accounts be impacted by the proposed policy statement? Also, it should be noted that the policy statement as proposed contemplates that orders from discretionary and nondiscretionary accounts be separately identified.

The policy statement would make it clear that it does not apply to any trust institution which does not receive products and services for commission dollars from brokers other than brokerage services. The Board is concerned about the burden o f com pliance with the policy statement on smaller institutions and invites comment as to whether some other criteria might be used consistent with the Board’s statutory responsibilities. For example, should an institution that paid brokerage commissions for research and execution services o f not more than a de minimis dollar amount (say $5,000) during the past year be exempt? Or should the institution be exempt where the total amount o f commissions paid for research and execution did not exceed some de minimis percentage o f total commissions paid? If so, what should such dollar amount or percentage be? In responding to these questions, it should be kept in mind that the Board is seeking

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information as to developing a cut-off point below which the payment of higher brokerage commissions in return for research services is not material to either the bank or the customer.

A regulatory impact analysis has been prepared; this analysis focuses on the burdens and benefits imposed by the proposed policy statement, as compared to alternative methods of dissemination o f the same information. The conclusion o f the regulatory impact analysis is that the proposed policy statement appears to be the most effective and least costly means of guaranteeing that disclosure statements be furnished only to those persons who desire the information provided in the disclosure statement.

The policy statement would be issued pursuant to the authority granted to the Board by section 28(e)(2) o f the Securities Exchange Act o f 1934 (15 U.S.C. 78bb(e)(2)), and pursuant to the Board’s supervisory authority contained in section 9 (12 U.S.C. 321 e t s e q .) o f the Federal Reserve Act, the Financial Institutions Supervisory Act o f 1966 (12 U.S.C. 1818(b)), and the Bank Holding Company Act of 1956 (12 U.S.C. 1844 and 1847).

Statement o f Policy Concerning the Use o f Brokerage Commissions To Pay for Research Activities

Section 28(e)(1) o f the Securities Exchange Act o f 1934, as amended, relieves money managers exercising investment discretion over accounts of customers o f liability under fiduciary law that might accrue to them if they cause the accounts which they manage to pay a brokerage commission in excess o f the amount another broker would have charged for effecting the same transaction if the higher commission is determined in good faith to be justified by the value of brokerage and research services provided by the broker. In order to rely upon this safe harbor provision, the following conditions must be observed: (1) The trust institution must exercise investment discretion over the accounts generating the commissions used to pay for the additional services provided; (2) the services acquired must be brokerage and research services and be provided by the broker to the trust institutions; and (3) the trust institution must determine in good faith that the commission being paid is reasonable in relation to the value o f the services provided.

Since the enactment o f section 28(e), considerable uncertainty has arisen concerning the extent to which specific products and services received in exchange for commission dollars do qualify for the protections afforded by

section 28(e)(1). Because the types of products and services received in exchange for commission dollars are many and varied, the Board recognizes that it is not possible to establish definitive guidelines that would be applicable to all situations. For this reason, the burden necessarily falls upon each trust institution to satisfy itself by a good faith determination that its brokerage allocation practices qualify for the protections o f section 28(e), if liability under fiduciary law is to be avoided or at least minimized. The Board, therefore, expects each trust institution subject to its supervisory jurisdiction that exercises investment discretion over the accounts of customers, to establish written policies and procedures, suitable to its circumstances, to ensure that its obligations under the law are properly observed. Such policies and procedures should, at a minimum provide for: (1)The identification and reporting to an appropriate senior management level o f all services received for which commissions in excess of the lowest available commission rate, consistent with safe and speedy execution, are being paid; (2) the periodic review of such services to ascertain whether the services reasonably enhance the institution’s research capability; and (3) the documentation o f management’s determination that the provision of such services justifies the amount o f commissions paid. Operating procedures should also be established to ensure that commission dollars used or allocated for the payment o f such products and services are generated only by: (1) accounts over which the institution exercises investment discretion; and (2) other accounts, with the knowledge and consent o f the customer or other holder o f the direction power.

The Board also recognizes that brokerage placement practices could have a material influence on the decisions o f many persons in selecting a particular bank o f trust institution to act in their behalf or on behalf o f their designated beneficiaries in effecting securities transactions. Brokerage expenses may constitute a significant cost to a customer's account over a period o f years. Although the use o f commission dollars to pay for research services ultimately enhances the money managers' ability to service, in the aggregate, customers’ accounts, it is possible that a particular account will be structured in such a w ay that research purchased with its commission dollars is o f little or no use to the account. On the other hand, research

services, which were obtained by commissions generated by other accounts, may be used to service a particular account. Accordingly, the Board.believes that information concerning a trust institution’s brokerage placement practices should be made available to its customers. However, the Board recognizes that not all customers would have an interest in this type o f information and, indeed, some may even object to the unsolicited receipt o f information o f this nature. Accordingly, the Board concludes that the public interest w ould be served to the extent the customers o f trust institutions are informed that a disclosure statement o f this nature will be provided to them upon request.

Therefore, the Board expects each trust institution subject to its supervisory jurisdiction which exercises investment discretion over the accounts o f customers and pays higher brokerage commissions in return for research services to prepare and make available to such customers a disclosure statement setting forth certain specific information relative to its brokerage allocation practices. To ensure that interested customers are aware o f the existence o f the disclosure statement, each such trust institution is expected to make part of, or append to, its fee schedules and periodic statements o f account, a notice o f the right to receive the disclosure statement, without charge and upon request.

The disclosure statement to be made available to interested customers should, at a minimum, (1) identify the general types of products and services, other than execution, for which a higher commission rate was paid than that which a competing broker may have charged for a similar transaction; (2) indicate the aggregate com m ission dollars allocated in payment o f these services (including execution) during the previous calendar year stated both in dollars and as a percentage o f total commission dollars paid during the previous calendar year; (3) indicate the extent to which any such arrangements permit the trust institution to recapture commissions paid on a transaction basis in lieu o f purchasing certain goods and services; and (4) describe the use to which these services are put and indicate generally how they benefit the management o f customers’ accounts.The disclosure statement should be revised at any time there is a material change in the information required to be contained therein. A sample disclosure statement is attached for the guidance of trust institutions.

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S a m p le D isc lo su re S tatem en t

B rok era g e a n d R e s e a r c h S e r v ic e s A c q u ir e d Through A llo c a tio n o f B rok era g e C o m m iss io n s

W e regularly utilize brokers in executing orders who have been selected on the basis of the amount and quality o f brokerage an d /or research services that they provide to us, either directly or through a third party. In return for such services, we pay a higher commission rate than that which a competing broker may charge for execution o f the transaction alone. Services acquired in this manner are said to be acquired with ‘ ‘soft dollars” because they do not entail explicit payment o f separate amounts for each component service that is provided.

D e scrip tio n a n d U se o f S e r v ic e s

Specific services for which we have paid a higher commission rate than that which a competing broker would have charged are as follows: (Describe services received such as analytical reports, pricing tapes, market information, financial data, etc.). During 19— (the previous calendar year), we allocated aggregate commission dollars, including cost o f execution, amountingto $---------- on transactions totalling$---------- am ong----------- brokers inpayment for these services. This amount represents — % o f total commission dollars paid during the calendar year.

None o f the above service arrangements permit us to recapture for a client’s account any commissions paid on a per transaction basis in lieu o f the purchase o f these services. In the case of each such arrangement, we have made a good faith determination that the amount o f commissions paid is reasonable in relation to the value o f the serices received and reserve the right to terminate the arrangement at any time that we may determine that the value of the service no longer justifies the cost.

E ffe c t o f B ro k era g e C o m m issio n P a y m en ts U pon A c c o u n ts

The research services obtained from brokers in exchange for commission dollars provides us with information which improves the ability o f our analysts to monitor the securities markets and to keep abreast o f financial developments in the various companies whose securities are held in the accounts o f our clients. The research received is used by us to service all of our managed accounts. However, not all such services may be used by us in connection with a particular account even though that account may have generated some o f the commissions used to pay for the services. Alternatively,

certain research services may be used in connection with a particular portfolio which were obtained with brokerage commissions generated by other accounts.

R egu latory Im p act o f P olicy S tatem en t R equiring D isc lo su re o f B rok erag e P la cem en t P ractices

B a ck g ro u n d

The Securities Reform Act Amendments o f 1975 added Section 28(e) to the Securities Exchange Act of 1934. This section expressly permits investment managers to pay brokerage commissions in excess o f other available rates, if the commissions are reasonable in terms o f the value o f the brokerage and research services provided. Section 28(e) grants broad authority to the appropriate regulatory agency to prescribe regulations requiring the disclosure of practices relating to these brokerage commissions. Board staff, in order to implement Section 28(e)(2), has proposed a policy statement which states the expectation o f the Board o f how state member banks and state chartered, non-deposit trust company subsidiaries o f bank holding companies should disclose the brokerage placement practices o f their trust operations.

The motivation for adding Section 28(e) to the Securities Exchange Act was the transition from minimum fixed to negotiated brokerage rates by the New York Stock Exchange in 1975. Prior to negotiated rates, brokerage houses competed on the basis o f services. However, with the advent o f negotiated rates, competition has becom e more price oriented. As a result, some brokerage houses have becom e specialized in executions only at discount prices, while others offer a full service line at competitive prices. The additions to the Securities Exchange Act are intended to take account o f these changes in the marketplace by allowing investment managers, including bank fiduciaries, to pay commissions in excess o f the minimum executions rates when these commissions are reasonable in terms o f the value o f the brokerage and research services received by the investment manager. The purpose o f the disclosure statement is to notify the fiduciary’s account parties o f the amount and types o f services purchased from brokers.

Board staff has recom mended that state member bank trust departments and state chartered, non-deposit trust company subsidiaries o f bank holding companies make appropriate disclosure statements available to their account parties. Notice o f the availability o f such

statements would be provided without charge and upon request by these notices being made part of, or appended to, fee schedules and periodic statements o f account.

R e g u la to ry Im p a ct

1. C riteria fo r E v a lu a tin g A lte r n a tiv e M e th o d s o f D is c lo s u r e . The intent o f disclosure is to protect trust department account parties by providing them with information pertaining to the brokerage placement practices o f the investment manager. Since the primary function o f this disclosure statement is to provide information to account parties, the econom ic criterion for evaluating alternative methods o f disclosure should be to adopt that disclosure requirement which leads to the most efficient dissemination o f information; that is, to select the method o f disclosure which best provides information to those persons that value this information highly while not incurring costs to provide these statements to persons w ho already have the information or w ho assign a negligible value to it.

Bank trust departments are likely to willingly supply information when they perceive that the benefits accruing to them exceed the cost o f producing this information. Thus, they will be inclined to supply a disclosure statement when they expect it to be helpful in retaining old customer accounts or attracting new trust accounts. Alternatively, when the incremental cost o f providing the information exceeds the value o f the disclosure statement, the bank will probably be unwilling to provide this statement. Similarly, the account parties benefit when the value o f knowing the placement practices and costs o f different bank trust departments is greater than the cost o f supplying these statements. However, when the cost of supplying these statements exceeds the benefits received, despite the fact that the disclosed information might have some positive value, it would not appear to be a productive use o f resources since an alternative use o f these same resources could possibly benefit these customers m ore.1

2. A lte r n a tiv e M e th o d s o f D isc lo su r e . There are four principal alternative methods o f disclosing bank trust operations. These are:

(1) The trust department delivers disclosure statements to each account party.

1 One such alternative utilization would be to allocate the cost of producing disclosure statements to the trust accounts a investment returns. When the marginal cost of supplying information exceeds its information value, then this alternative is preferred by the account parties.

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(2) The trust department delivers disclosure statements to only those accounts over which it has investment discretion.

(3) The trust department provides notice o f the availability o f a disclosure statement to its trust account parties and such parties wifi receive a statement as requested.

(4) No disclosure. Board staff has recommended Alternative 3. The following analysis supports this alternative since it is the most efficient means o f providing information to those persons who desire this information.

In Alternative 1 the trust department is required to deliver a disclosure statement to every account regardless of the degree o f investment discretion exercised by the bank. Technically this exceeds the requirements o f the statute which pertain only to the disclosure o f placement practices for those accounts over which the investment manager has discretion. However, sending disclosure statements to all account parties could be justified since the brokerage placement practices o f bank trust departments affect all accounts, not just the ones over which the bank exercises investment discretion and some o f these other account parties may place a high value on this type o f information. The drawback to Alternative 1 is that the incremental cost to the bank of sending disclosure statements probably exceeds the value o f information to many o f the recipients.2 Not only would there probably be many mailings to parties that place no value on the information content of these statements, but in many situations this information may be redundant. Under this alternative, account parties could either receive multiple mailings (e.g., when one o f the account parties is an investment advisor who employs the services of the bank for a number o f accounts), or the same information might be obtained by other means; for example, discussions with the bank trust department. Extensive discussions between account parties and trust departments would probably occur most frequently with agency accounts,3 where the non-bank investment advisor is in close contact with the bank’s trust department, and with employee benefit trusts where the treasurer’s office o f a large corporation can be expected to maintain close contact with bank trust

2 Although this cost could be minimized by sending the disclosure statement with the annual account mailing, the extra weight of the disclosure statement would almost certainly raise the mailing cost of each statement of at least 13 cents.

‘ In an agency account, the bank provides services to the account party and engages in transactions at the account party’s request.

departments.4On balance, this alternative is unacceptable.

Alternative 2 is the same as 1 except that the non-discretionary accounts are exclused from disclosure requirements. This alternative still has the problems of multiple mailings and redundant information. Furthermore, to the extent that some non-discretionary accounts may value disclosure statement information highly, excluding them will not result in the most desirable dissemination o f information.5 This alternative is also not acceptable.

Alternative 3 differs from the previous alternatives in that it requires the bank to provide notice o f the availability o f a disclosure statement (rather than automatically sending the statement) and to make such statements available upon request to each trust account party over whose account the bank exercises investment discretion. The notice of availability o f the disclosure statement will probably becom e part o f the customer’s annual statement o f account. This alternative has the advantage that all fiduciary accounts will, at negligible cost, be informed o f disclosure statements, and that only those account parties that find such statements valuable will receive them. This disclosure method is efficient in that the benefits o f each statement will outweigh the costs associated with its provision.

Further, although Section 28(e) does not require that disclosure notices be provided to non-discretionary accounts, investment discretion is defined (Section 3A35 o f the Securities Exchange Act) to include any trust department recommendations for purchases or sales to its customers regardless of who has responsibility for such investment decisions. Therefore, most of the bank’s trust accounts w ill entail some degree of investment discretion. Since under this alternative the incremental cost of notification is negligible, it will probably be more expensive for the bank to analyze its accounts to determine the degree o f investment discretion rather than to simply send all its accounts a disclosure notification. Thus, it is anticipated that all account parties will receive a notice o f the availability o f a disclosure statement.

4 The corporation is likely to keep track of fiduciary performance because poor performance will force the company to incur greater expenses than would be necessary under a high-performance trust in order for the employees to receive the same benefits.

“ Even though the account party dictates to the bank trust department what transactions are dasired. the bank may execute in excess of the minimum price to compensate for other services provided such as research. Therefore a disclosure statement could be useful for agency account parties.

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The last principal alternative is no disclosure. P’ rom Section 28(e)(2) the Board appears to have the alternative o f not requiring disclosure if it feels that this is in the public interest and there is adequate protection for investors. This alternative is less desirable than Alternative 3 since account parties that prefer and would benefit from detailed disclosure statements would find it difficult if not impossfble to obtain this information. Board staff has proposed that notice of availability be made part o f or appended to fee schedules and periodic statements o f account. Since it would be expensive to send disclosure notices to those beneficiaries w ho do not receive a statement o f account, and it is unlikely that these beneficiaries assign a high value to the information contained in these statements because they have no control over the trust agreement, sta ffs suggestion is appropriate.

The Board sta ff s proposal also requires that the disclosure sta te m e n t be revised any time there is a “ material change in the information contained therein” . These proposals do not require the bank to provide immediate notice o f a material change in placement practices, but rather that they revise the next statement delivered, after such changes occur. Although changes in placement practices could be important to account parties, it appears unlikely that immediately sending out new disclosure statements would justify the expenses incurred.

3. T h e C o n te n t o f th e D is c lo s u r e S ta tem en t. Section 28(e) o f the Securities Acts Amendments o f 1975 requires that the trust department disclosure its policies and practices with respect to commissions that will be paid for effecting securities transactions. The statute does not require that the bank provide any information on the research services that it performs itself or acquires from an affiliated investment management firm, nor must it report the fees charged for these services. To comply with the requirements o f the statute, Board staff has proposed that the disclosure statement describe the types o f products and services purchased for com m issions in excess of the minimum executions charge, and that banks disclose the relative amount of its total commission charges used to pay for these services (including execution).

The bank’s customers are interested in the relative amount o f executions at minimum transactions charges and the nature o f the services purchased, and at what cost, when com m issions in excess o f the minimum are paid. Bank

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responses consistent with Board staffs sample disclosure statement should accomplish this.6 Certainly some customers can get this kind of general information directly from their banks. For them these disclosure statements principal value is in terms o f confirming the information provided by the bank. But in may other cases the information may not otherwise be available to customers who will find it o f some Use. For these customers the disclosure statement has significant information- content. Therefore, sta ff s recommendations regarding the nature o f disclosed information seems appropriate.

The proposed disclosure statement provides complete information on the cost aspects o f selecting brokers and affecting securities transactions but the bank is not required to include its own services and fees in its disclosure statement.7 It is anticipated that the information contained in the proposed

'The disclosure statement allows customers to determine the cost of transactions involving higher than minimum commission rates. With an estimate of the minimum executions charge, a customer can then compute the triISt’s average.

7 It is expected that many banks will also providethis additional information on their disclosure statements.

disclosure statements together with the information customers typically obtain in their relationship with trust departments will enable customers to make informed decisions regarding their choice and use o f bank trust department services.8

C o n clu sio n s

In this regulatory impact analysis, consideration has been given to how banks can efficiently disseminate information on their trust department activities in such a manner as to maximize the econom ic value o f the information content o f the disclosure statement required by Section 28(e) o f the Securities Act Amendments o f 1975.

'Since the Securities Exchange Act allows some trust account to subsidize others when it states in Section 28(e)(1) that “ . . . services provided by such members, broker, or dealer, viewed in terms of either that particular transaction or his overall responsibilities with respect to the accounts as to which he exercises investment discretion," this information may be valuable to the customer in determining whether his account is subsidizing the returns of others. For example, if the broker purchases information regularly in the area of real estate, but the trust agreement explicitly excludes real estate assets, the customer may be subsidizing the transactions charges of other accounts. In a market with complete information, one would expect a trustor to select a trust department where he believes his account will not subsidize else's.

The impact analysis confirms the sta ffs proposal o f providing at least annual notice o f the availability o f disclosure statements on the customer’s statement o f account. This appears to be the most effective and least costly means o f guaranteeing that disclosure statements go only to those people who place a high value on the information content of these statements.

On the question o f the value o f the disclosed information, it was concluded that the information that is currently available from the bank plus that required in disclosure statements will inform the trustors o f the services and costs associated with different bank trust departments and will allow them to select that fiduciary which is best able to meet their needs.

This policy statement would not apply to any trust institution which does not receive products and services for commission dollars from brokers other than brokerage services.

By order of the Board of Governors,October 23, 1980.Theodore E. Allison,Secretary o f the Board.|FR Doc. 80-34075 Filed 10-31-80; 8:45 am)

BILLING CODE 6210-01-M

Reprinted from FEDERAL REGISTER, VOL. 45, NO. 214 — MONDAY, NOVEMBER 3, 1980

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