TBC - 17
Type: Trust Banking Circular
Subject: "Soft Dollar" Purchases
Date: March 19, 1980

TO:  Regional Administrators, Presidents of National Banks with Trust
     Powers (Attention: Senior Trust Officer), and National Trust
     Examiners

It has come to the attention of this Office that a number of national
banks are not fully aware of the provision of Section 28(e) of the
Securities Exchange Act of 1934, as interpreted by the SEC, in relation to
the purchase by fiduciaries of products and services with soft brokerage
dollars. This Circular is issued to clarify the requirements of Section
28(e) for national banks having trust powers. Reference should also be
made to Trust Circulars Nos. 6, 9, and 12 which provide additional
guidance on the subject.

If a national bank chooses to purchase products or services and pay for
them with brokerage commissions arising form securities transactions for
trust accounts, the bank must either (1) avail itself of the protections
of the "safe harbor" provision of Section 28(e), consistent with all of
the requirements thereof; or (2) make accurate and complete disclosure of
the bank's related policies and practices to prospective trust customers
and, with respect to an existing trust account generating brokerage, to
the person with rights of termination or the vested beneficiaries of an
irrevocable trust, and obtain such persons' consent.

Section 28(e) provides that:
 
(1) No person using the mails, or any means or instrumentality of
interstate commerce, in the exercise of investment discretion with respect
to an account shall be deemed to have acted unlawfully or to have breached
a fiduciary duty under State or Federal law unless expressly provided to
the contrary by a law enacted by the Congress or any State subsequent to
the date of enactment of the Securities Acts Amendments in 1975 solely by
reason of this having caused the account to pay a member of an exchange,
broker, or dealer an amount of commission for effecting a securities
transaction in excess of the amount of commission another member of an
exchange, broker, or dealer would have charged for effecting that
transaction, if such person determined in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and
research services provided by such member, 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 subsection is exclusive and plenary insofar as
conduct is covered by the foregoing, unless otherwise expressly provided
by contract: Provided, however, that nothing in this subsection shall be
construed to impair or limit the power of the Commission under any other
provision of this title or otherwise.

Section 28(e) is available only under limited circumstances. First, the
bank must have investment discretion as to the account. Second, it applies
only where research or brokerage services are provided by a broker to the
bank. Third, the bank must determine in good faith that the commission
being paid is reasonable in relation to the value of the brokerage or
research services being provided by the broker.

As was discussed in Trust Banking Circular No. 6 and consistent with
paragraph (3) of Section 28(e), "brokerage or research service" does not
include products or services which are readily and customarily available
and offered to the general public on a commercial basis. Excluded are
newspapers, magazines and periodicals, computer hardware, government
publications, electronic calculators, quotation equipment, office
furniture or equipment, airline tickets, business supplies, and similar
items.

The SEC, in a recent investigation involving several national banks,
construed Section 28(e) in a very restrictive fashion. The proceeding
concerned an arrangement established by Investment Information, Inc. (III)
which provided money managers with a method of paying for goods and
services with clients' commissions. The money managers directed clients'
brokerage to designated brokers, who in turn rebated 50% of the commission
to III. III then paid vendor invoices submitted by the money managers for
services purchases.

The following excerpts from the Commission's report may be of assistance
in avoiding problems in this area:

     The brokers involved in the III arrangement in no significant sense
provided the money managers with research services. They only executed the
transactions and paid 50% of the commissions to III. All arrangements for
acquiring the services were made by the money managers and the vendors of
the services. III simply held the money for the money managers and paid
the bills as requested. The services were selected and ordered by the
money managers. The money managers were obligated to pay the vendors for
the services, and the brokers generally were not aware of the specific
services which the managers acquired. Accordingly, the Commission believes
that the brokers did not "provide" services within the meaning and intent
of Section 28(e).

     It is not necessary that broker produce the research services "in
house" in order to obtain the protection afforded by Section 28(e).  As
the Commission has previously stated:

Section 28(e) might under appropriate circumstances, be applicable to
situations where a broker provides a money manager with research produced
by third parties. . . .

It is necessary, however, in order to satisfy the statutory requirement,
that the research services be "provided by" the broker.  While a broker
may under appropriate circumstances arrange to have research materials or
services produced by a third party, it is not "providing" such research
services when it pays obligations incurred by the money manager to the
third party.  Securities Exchange Act of 1934 Release No. 16679/March 19,
1980

This Office is concerned that some national banks may have used
soft-dollar arrangements to pay for goods or services which do not qualify
for the protections afforded by § 28(e), and about which adequate
disclosures were not made to trust customers. Such arrangements may
involve violations of ERISA and antifraud provisions of the federal
securities laws, and may constitute unsafe or unsound banking practices.
Examiners are being instructed to specially monitor this area of activity
as problems become apparent.

Banks which are considering soft-dollar arrangements which do not conform
to the foregoing principles should be aware that the practice could
involve violations of law and unsafe and unsound banking practices. This
Office will consider enforcement proceedings in appropriate cases.
Furthermore, the SEC may also take enforcement action to enjoin
continuation of such practices.

Paul M. Homan
Senior Deputy Comptroller for Bank Supervision