Concurrent with its adoption of Regulation R, the Securities and Exchange Commission has adopted two rules to permit securities activities of U.S. banks to fall within an exemption from the definition of “dealer” under the Exchange Act. Rule 3a5-2 will permit U.S. banks to engage in transactions involving securities exempt from registration under Regulation S, allowing U.S. banks to sell overseas securities that foreign banks sell and thereby help to eliminate a competitive disadvantage. Rule 3a5-3 will permit banks to continue to act as conduit lenders, an activity previously authorized under the now withdrawn Rule 15a-11 adopted in 2003.
Under Rule 3a5-2, U.S. banks will be allowed to purchase and sell any eligible Regulation S security, defined as a Regulation S security that is neither in the inventory of the bank or an affiliate nor underwritten by the bank or any affiliate on a firm commitment basis, on a riskless principal basis. The exemption applies in three situations: (i) when a U.S. bank purchases an eligible new-issue security from an issuer or broker-dealer and sells the security under Rule 903 of Regulation S to a purchaser who is not in the U.S.; or (ii) when a U.S. bank purchases an eligible security after its initial sale from a person who is not a U.S. Person under Rule 902(k) of Regulation S with a reasonable belief that the security was initially sold outside the U.S., and resells to a purchaser who is not in the U.S.; or (iii) when a U.S. bank purchases an eligible security from a registered broker-dealer after its initial sale with a reasonable belief that the security was initially sold outside the U.S., and resells the security to a purchaser who is not in the U.S.
Under Rule 3a5-3, banks acting as conduit lenders will continue to be permitted to engage in or effect certain securities lending transactions and securities lending services in connection with conduit loan transactions. The exemption will only apply to transactions by or on behalf of a person the bank believes to be a qualified investor as defined by Section 3(a)(54) of the Exchange Act or an employee benefit plan that owns and invests more than $25 million in investments on a discretionary basis.