FR4025_20140723_omb

Supporting Statement for the
Recordkeeping and Disclosure Requirements Associated with Regulation R
(FR 4025; OMB No. 7100-0316)
Summary
The Board of Governors of the Federal Reserve System, under delegated authority from
the Office of Management and Budget (OMB), proposes to extend for three years, without
revision, the Recordkeeping and Disclosure Requirements Associated with Regulation R
(FR 4025; OMB No. 7100-0316). The Paperwork Reduction Act (PRA) classifies reporting,
recordkeeping, or disclosure requirements of a regulation as an “information collection.”1
Regulation R implements certain exceptions for banks from the definition of broker under
Section 3(a)(4) of the Securities Exchange Act of 1934 (Exchange Act), as amended by the
Gramm-Leach-Bliley Act (GLBA). Sections 701, 723, and 741 of Regulation R contain
information collection requirements.2
Section 701 requires banks that wish to utilize the exemption in that section to make
certain disclosures to the high net worth customer or institutional customer. In addition, section
701 requires banks that wish to utilize the exemption in that section to provide a notice to its
broker-dealer partner regarding names and other identifying information about bank employees.
Section 723 requires a bank that chooses to rely on the exemption in that section to exclude
certain trust or fiduciary accounts in determining its compliance with the chiefly compensated
test in section 721 to maintain certain records relating to the excluded accounts. Section 741
requires a bank relying on the exemption provided by that section to provide customers with a
prospectus for the money market fund securities, not later than the time the customer authorizes
the bank to effect the transaction in such securities, if the class of series of securities are not noload.
The Federal Reserve’s total annual burden for this information collection is estimated to
be 75,563 hours for the estimated 1,500 commercial banks and savings associations that likely
would seek exemptions under the regulation. There are no required reporting forms associated
with this information collection.
Background and Justification
In enacting the GLBA, Congress adopted functional regulation for bank securities
activities, with certain exceptions from Securities and Exchange Commission (SEC) oversight
for specified securities activities. With respect to the definition of broker, the Exchange Act, as
amended by the GLBA, provides eleven specific exceptions for banks. Each of these exceptions
permits a bank to act as a broker or agent with respect to specified securities transactions that
meet specific statutory conditions.
In particular, Section 3(a)(4)(B) of the Exchange Act provides conditional exceptions
from the definition of broker for banks that engage in certain securities activities in connection
1
2

44 U.S.C. § 3501 et seq.
12 CFR §§ 218.701, 218.723, and 218.741.

with third-party brokerage arrangements; trust and fiduciary activities; permissible securities
transactions; certain stock purchase plans; sweep accounts; affiliate transactions; private
securities offerings; safekeeping and custody activities; identified banking products; municipal
securities; and a de minimis number of other securities transactions.
In October 2006, the Financial Services Regulatory Relief Act of 2006 (Regulatory
Relief Act) became effective. Among other things, the Regulatory Relief Act requires that the
SEC and the Federal Reserve (the agencies) jointly adopt a single set of rules to implement the
bank broker exceptions in Section 3(a)(4) of the Exchange Act. It also required that not later
than 180 days after the date of enactment of the Regulatory Relief Act, the agencies jointly issue
a single set of proposed rules to implement these exceptions.3
In accordance with these statutory provisions, the agencies jointly adopted final rules to
implement the broker exceptions for banks relating to third-party networking arrangements, trust
and fiduciary activities, sweep activities, and safekeeping and custody activities.4 The final rules
also include exemptions related to these activities, as well as exemptions related to foreign
securities transactions, securities lending transactions conducted in an agency capacity, the
execution of transactions involving certain investment company securities, the execution of
certain transactions in a company’s securities for its employee benefit plans, the potential
liability of banks under section 29 of the Exchange Act, and the date on which the GLBA’s
broker exceptions for banks will go into effect. The final rules are designed to accommodate the
current business practices of banks and protect investors.
Description of Information Collection
Sections 701, 723, and 741 contain information collection requirements. Details of the
requirements for each section are provided below.
Section 701. Section 701(a)(2)(i) and (b) require banks (or their broker-dealer partners)
that utilize the exemption provided in this section to make certain disclosures to high net worth
or institutional customers. Specifically, these banks must clearly and conspicuously disclose (i)
the name of the broker-dealer and (ii) 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- dealer and payment of this fee may be
contingent on whether the referral results in a transaction with the broker-dealer.
In addition, one of the conditions of the exemption is that the broker-dealer and the bank
have a contractual or other written arrangement containing certain elements, including
notification and information requirements. The bank must provide its broker-dealer partner with
the name of the bank employee receiving a referral fee under the exemption and certain other
identifying information relating to the bank employee.
3

Section 401 of the Regulatory Relief Act also amended the definition of bank in Section 3 (a)(6) of the Exchange
Act to include any Federal savings association or other savings association the deposits of which are insured by the
FDIC. Accordingly, as used in this proposal, the term bank includes any savings association that qualifies as a bank
under Section 3(a)(6) of the Exchange Act, as amended.
4
See 72 FR 56514 (October 3, 2007).

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Section 723. Section 723(e)(1) requires a bank that desires to exclude a trust or fiduciary
account in determining its compliance with the chiefly compensated test in section 721, pursuant
to a de minimis exclusion,5 to maintain records demonstrating that the securities transactions
conducted by or on behalf of the account were undertaken by the bank in the exercise of its trust
or fiduciary responsibilities with respect to the account.
Section 741. Section 741(a)(2)(ii)(A) requires a bank relying on this exemption, which
permits banks to effect transactions in the shares of a money market fund, to provide customers
with a prospectus for the money market fund securities, not later than the time the customer
authorizes the bank to effect the transaction in such securities, if the class or series of securities
are not no-load. In situations where a bank effects transactions under the exemption as part of a
program for the investment or reinvestment of deposit funds of, or collected by, another bank,
the Section permits either the effecting bank or the deposit-taking bank to provide the customer a
prospectus for the money market fund securities.
Time Schedule for Information Collection
This information collection contains both recordkeeping and disclosure requirements, as
mentioned above. The disclosures are required on occasion.
Legal Status
The Board’s Legal Division has determined that section 3(a)(4)(F) of the Exchange Act
(15 U.S.C. § 78c(a)(4)(F)) authorizes the Board and the SEC to require the information
collection. The FR 4025 is required to obtain a benefit because banks wishing to utilize
exemptions provided by the rules 701, 723, and 741 are required to comply with the
recordkeeping and disclosure requirements. If an institution considers the information to be
trade secrets and/or privileged such information could be withheld from the public under the
authority of the Freedom of Information Act (5 U.S.C. § 552(b)(4)). Additionally, to the extent
that such information may be contained in an examination report such information maybe also be
withheld from the public (5 U.S.C. § 552 (b)(8)).
Consultation Outside the Agency
On April 18, 2014, the Federal Reserve published a notice in the Federal Register
(79 FR 21926) requesting public comment for 60 days on the extension of the FR 4025. The
comment period for this notice expired on June 17, 2014. The Federal Reserve did not receive
any comments. On July 18, 2014, the Federal Reserve published a final notice in the Federal
Register (79 FR 42010).

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Rule 723(e)(2), which limits the total number of accounts a bank may exclude from the chiefly compensated test
in Rule 721(a)(1) pursuant to the exemption in Rule 723(e)(2) to the lesser of 1 percent of the total number of trust
or fiduciary accounts held by the bank (if the number so obtained is less than 1 than the amount would be rounded
up to 1) or 500.

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Estimate of Respondent Burden
Under section 701, the Federal Reserve estimates that 1,500 commercial banks and
savings associations make the required referral fee disclosures to 100 customers annually and
that 1,500 commercial banks and savings associations provide one notice annually to its brokerdealer partner regarding names and other identifying information about bank employees. The
Federal Reserve estimates that each respondent spends approximately 5 minutes per customer to
comply with the disclosure requirement and approximately 15 minutes per notice to a brokerdealer. The Federal Reserve estimates that approximately 75 commercial banks and savings
associations annually use the de minimis exclusion in section 723 and on average maintain
records with respect to 10 trust or fiduciary accounts annually conducted in the exercise of the
banks’ trust or fiduciary responsibilities. The Federal Reserve estimates that it takes each
respondent 15 minutes to comply with recordkeeping requirements under section 723. Finally,
the Federal Reserve estimates that approximately 750 commercial banks and savings
associations annually use the exemption in section 741 and deliver the prospectus required by the
section to approximately 1,000 customers annually. The Federal Reserve estimates that a
respondent spends approximately 5 minutes per response to comply with the delivery
requirement of section 741. The total respondent burden for the FR 4025 is estimated to be
75,563 hours, as presented in the following table. These recordkeeping and disclosure
requirements represent less than 1 percent of total Federal Reserve System paperwork burden.

Number of
respondents6

Estimated
annual
frequency

Estimated
average
time per
response

Estimated
annual
burden
hours

Disclosures to customers

1,500

100

5 minutes

12,500

Disclosures to brokers

1,500

1

15 minutes

375

75

10

15 minutes

188

750

1,000

5 minutes

62,500

Section 701

Section 723
Recordkeeping
Section 741
Disclosures to customers

75,563

Total

6

Of these respondents, 500 are small entities as defined by the Small Business Administration (i.e., entities with
less than $550 million in total assets) www.sba.gov/content/table-small-business-size-standards.

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The total cost to the public is estimated to be $3,846,157.7
Sensitive Questions
This collection of information contains no questions of a sensitive nature, as defined by
OMB guidelines.
Estimate of Cost to the Federal Reserve System
The annual cost to the Federal Reserve System for collecting this information is
negligible.

7

Total cost to the public was estimated using the following formula: Percent of staff time, multiplied by annual
burden hours, multiplied by hourly rate (30% Office & Administrative Support at $18, 45% Financial Managers at
$61, 15% Lawyers at $63, and 10% Chief Executives @ $86. Hourly rate estimates for each occupational group are
the mean hourly wages (rounded up) using data from the Bureau of Labor and Statistics (BLS), Occupational
Employment and Wages 2013, www.bls.gov/news.release/ocwage.nr0.htm. Occupations are defined using the BLS
Occupational Classification System, www.bls.gov/soc/.

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