At an open meeting on September 19, 2007, the Securities and Exchange Commission (the “SEC” or “Commission”) voted unanimously to adopt, jointly with the Board of Governors of the Federal Reserve System (the “Board”), new Regulation R. Regulation R implements the bank broker provisions of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and represents the culmination of a nearly decade-long process in which several federal agencies have attempted to implement the congressional intent underlying the GLB Act. The Board is scheduled to meet on September 24, 2007, to consider adopting Regulation R as well. Because the adopting release and text of the final rules have not yet been published, the descriptions in this advisory are based on statements made by commissioners and staff at the open meeting.
SEC Chairman Christopher Cox noted that Regulation R brings the legislative promise provided by the GLB Act to fulfillment and represents a tremendous display of interagency cooperation. Specifically, Chairman Cox stated that Regulation R will finally provide customers with the synergies expected by the GLB Act, fortify competition among service providers and generally lower the cost of brokerage services for investors.
Erik R. Sirri, Director of the Division of Market Regulation, noted that the final rules are substantially similar to the rules as originally proposed with only some technical changes to address commenters’ concerns. Regulation R will provide banks with the following exemptions from broker-dealer registration for the following limited bank securities transactions:
- Networking Exception – allows banks to receive compensation for referring bank customers to broker-dealers if certain conditions are met.
- Trust and Fiduciary Activities Exception – permits a bank to effect securities transactions in a trustee or fiduciary capacity if it is “chiefly compensated” for those transactions, consistent with fiduciary principles and standards, on the basis of specifically enumerated types of fees.
- Sweep Accounts and Transactions in Money Market Funds Exception – permits a bank to sweep deposits into no-load, money market funds.
- Safekeeping and Custody Exception – permits banks to perform specified services in connection with the safekeeping and custody of securities.
- Transactions in Investment Company Securities Exemption – permits banks to effect certain transactions in mutual funds and in certain variable insurance products that are registered, and funded by a separate account, through the National Securities Clearing Corporation, directly with a transfer agent, or directly with an insurance company or a separate account that is excluded from the definition of transfer agent.
- Transactions in Company Securities Exemption – permits a bank to effect a transaction in the securities of a company directly with a transfer agent acting for the company as long as certain conditions are met.
- Securities Lending Exemption – provides an exemption for noncustodial securities lending activities that would have been otherwise voided by the Regulatory Relief Act.
- Regulation S Securities Exemption – provides an exemption to allow banks to effect certain agency transactions involving Regulation S securities.
- Section 29 Exemptions – provides banks with a transitional 18-month exemption to prevent their contracts from being void or voidable under Section 29(b) of the Securities Exchange Act of 1934 (the “Exchange Act”).
Regulation R supersedes all other proposed or final rules issued by the Commission with regard to the definition of “broker” under the Exchange Act including, but limited to Rules 3a4-2 through 3a4-6, 3b-17 (adopted in 2001 to address the Commission’s initial interpretation of the GLB Act) and proposed Rules 710 through 781. Accordingly, any discussion or interpretation of such proposed or finals rules shall not be applicable to the single set of rules adopted by the Commission.
Regulation R provides banks with a transitional exemption until the first day of their first fiscal year commencing after September 30, 2008. This transition period is designed to give banks time to make any necessary changes to come into compliance with the Exchange Act provisions relating to the broker definition.