The Board of Governors of the Federal Reserve System and the Securities and Exchange Commission jointly issued proposed Regulation R to implement certain exceptions for banks from the definition of ‘‘broker’’ under Section 3(a)(4) of the Securities Exchange Act of 1934.
Regulation R would exempt banks from the definition of “broker” when acting as an agent where the bank: (i) sells Regulation S securities to purchasers outside the U.S.; (ii) resells eligible securities after their initial sale to purchasers outside the U.S., provided that the bank reasonably believed that the shares were initially sold under Regulation S; or (iii) resells an eligible security after its initial sale outside the U.S. on behalf of a registered broker-dealer or purchaser outside of the U.S., provided that the sale complies with Regulation S if the sale is made prior to the expiration of the compliance period specified in Regulation S. The bank could also effect riskless principal transactions in securities originally sold under Regulation S without coming within the definition of dealer.
Additionally, the proposed rules would exempt banks from the definition of “broker” to the extent that the bank acts as an agent engaging in or effecting securities lending transactions, and any securities lending services in connection with such transaction with or for a person that the bank reasonably believes to be: (i) a qualified investor; or (ii) an employee benefit plan that owns and invests on a discretionary basis not less than $25,000,000.
Regulation R also stipulates changes to the current policies on networking arrangements. Furthermore, Regulation R provides guidelines under which unregistered bank employees may receive more than nominal referral fees for referring institutional and other high net worth customers. Although the proposed rules prohibit incentive compensation for referrals, discretionary bonuses are permitted and may be transaction based.
Regulation R would expand the base over which a bank could include securities transaction fees as part of the fiduciary activities without coming within the definition of broker. Operating a sweep account would be permitted if the funds went into either a no load or a load money market fund if a prospectus is given to the customer. The SEC also extended the exemption of banks from the definition of broker until July 2.