Comment: Is Reform Bill a Menace to Bank Retirement Plans?

Article excerpt

Individual retirement accounts and individually directed 401(k) plan accounts are an important part of the business of bank trust departments, providing a needed service to customers while generating valuable fee income.

But bank customers would no longer be able to obtain these services from their banks under the financial modernization legislation pending in the House. Under HR 10 as approved by the House Banking Committee, banks that offer IRA and 401(k) custodial services would be deemed broker-dealers, making them subject to the Securities and Exchange Commission's net capital rule.

This rule, which requires that 100% capital be maintained against illiquid assets such as loans, would make it untenable for a bank to become a registered broker-dealer.

This "push out" provision in HR 10 advances the concept of functional regulation by forcing banks to establish SEC-registered broker-dealers for their securities activities.

While functional regulation has some theoretical appeal, it applies awkwardly at best to small banks that offer individual retirement services on a limited basis. These banks already are subject to extensive oversight by federal banking regulators which examine bank trust departments and, in any event, are subject to the antifraud provisions of the securities laws even without the push-out provision.

Many small banks do not have sufficient securities brokerage business to justify the cost of organizing and maintaining a broker-dealer or have chosen not to offer retail brokerage services. In some cases these banks offer individual retirement services only on an accommodation basis or as a defensive measure to keep the business. In most cases the services are performed in the bank's trust department and clearly are fiduciary in nature.

There is no indication that banks are offering individual retirement services in any way other than with high regard for fiduciary duty. …