By James Hamilton, J.D., LL.M.
Congress has ended the nearly-seven-year logjam over the SEC’s proposed Regulation B for bank brokerage activities by directing the SEC to work with the Federal Reserve Board to promulgate joint regulations to fully implement the functional regulation vision of the Gramm-Leach-Bliley Act. The Financial Services Regulatory Relief Act of 2006, S. 2856, passed the House by a vote of 417-0; passed the Senate by voice vote; and has been cleared for the President. The measure is intended to ensure that regulators do not create a new and burdensome maze of requirements that would disrupt or interfere with the business practices of banks and thrifts that offer traditional bank products and services.
Before passage of Gramm-Leach-Bliley, banks were exempt from registering as brokers under the Securities Exchange Act. Gramm-Leach-Bliley repealed the blanket exemption enjoyed by banks and replaced it with a series of activity-specific statutory exceptions. Thus, as long as a bank is engaged in these traditional banking activities, it would not be subject to SEC broker-dealer regulation. These activities would, however, continue to be supervised by the federal banking regulators.
While the SEC has proposed rules to implement these exceptions, the agency has never finalized these rules in the face of intense criticism from the federal banking agencies. Section 101 of the relief act directs the SEC and the Federal Reserve Board to adopt final rules implementing the exceptions to the definition of broker granted by GLB. Moreover, the Act mandates that these rules must be jointly proposed within 180 days.
Anticipating passage of the Act, SEC Chairmen Christopher Cox pledged that the deadline set by Congress would be met and possibly exceeded. In fact, with the expectation that proposed new rules will be issued by year end, the Commission extended the current exemption from the definition of broker until January 15, 2007 in order to give time to complete the rule-writing and propose new rules before the exemption expires.
If the new rules are proposed with a 90-day comment period beginning at year end, final rules could be expected in late spring or early summer 2007. In addition, since the SEC recognizes that banks will need time to implement systems to ensure compliance with the new bank broker provisions, the SEC anticipates that the final rules would have a delayed effective date.