At long last, it looks as if there soon will be workable rules dealing with the specific exemptions for US banks from broker-dealer registration. Prior to the passage of the Gramm-Leach-Bliley Act (GLBA) in 1999, banks enjoyed a blanket exemption from registration with the SEC as broker-dealers. GLBA removed the blanket exemption and replaced it with eleven specific exemptions from registration that would cover securities transactions effected as part of banks' traditional banking business. GLBA left it to the SEC to define some of the terms of certain of these exemptions. Ever since then, the SEC and the banking regulators have argued over the scope of the exemptions, with the SEC defining the exemptions in such a way as to interfere with ordinary banking business, a result that the banks argued (with some Congressional support) was not what Congress intended to do in repealing the blanket exemption. The fight continued into last year and Congress, apparently frustrated by the SEC's lack of progress, enacted a provision as part of the Financial Services Regulatory Relief Act of 2006 (which was discussed in the October 2006 Update) that required the SEC to issue joint rules with the Federal Reserve Board (FRB) defining certain of the exemptions. The proposed rules, issued jointly by the SEC and FRB, were published in the Federal Register on December 26, 2006, with comments due on or before March 26, 2007.
The proposed amendments to both the SEC and FRB regulations include parameters for what are arguably the most important exemptions for banks from broker-dealer registration: securities transactions effected as part of networking arrangements, trust and fiduciary operations, "sweep" accounts, and safekeeping and custodial operations.
- Networking arrangements: The proposed rules provide a formula for determining the "nominal" one time fee permitted to be given to an employee for referring a bank customer to a broker-dealer and clarifying prohibited contingent or incentive compensation. The proposed rules also define the circumstances under which a bank employee might be able to receive a higher referral fee for referrals of institutional or high net worth customers.
- Trust and Fiduciary operations: The proposed rules set out the conditions under which securities transactions effected by a bank in its trust department would meet the exemption's statutory requirements that the bank be "chiefly compensated" for such transactions by relationship compensation (such as an annual fee for managing the account or a capped per order fee not in excess of cost). Under the proposed rules, a bank could meet the chiefly compensated test either on an account-by account basis or an aggregate trust and fiduciary account basis, subject to certain accounts being dropped from the calculation, such as new accounts and accounts obtained through a recent merger.
- Sweep accounts: The proposed rules would expand the statutory exemption for banks that sweep customers' balances into no-load money market mutual funds to further define the term "no-load" and increase the money market fund investment options open to customers under this exemption.
- Safekeeping and Custody: The proposed rules would expand the limited statutory exemption for a bank effecting transactions in securities as a custodian to include the ability to effect securities transactions for an employee benefit plan or an individual retirement account so long as the bank employee's compensation is not tied to the success or amount of the transaction, and any advertising of this service is tied to the custodial functions. In addition, bank employees could effect securities transactions as an accommodation to its customers under the same compensation and advertising restrictions, and so long as the bank employee provides no investment advice. The proposed rules also prescribe the conditions under which a bank acting as a non-custodial administrator or recordkeeper for an employee benefit plan would be exempt from registration when it accepts securities orders with respect to the plan's securities held in custody at another bank.
Other proposed amendments include an exemption from registration as a broker for certain securities transactions with non-US persons and another that exempts a bank from registration when it is acting as a non-custodial agent in effecting particular securities lending transactions.
An SEC companion proposed rulemaking includes a proposed exemption from registration as a dealer for banks acting as a riskless principal when effecting certain securities transactions with non-US persons.
The proposed rules, along with useful supplementary information on the rules' background, can be found on the website of the FRB, the SEC or the Federal Register. Comments on the proposed rules must be received on or before March 26, 2007.