By James Hamilton, J.D., LL.M.
Ending eight years of stalled negotiations and impasse, the SEC today voted to adopt, jointly with the FED, new rules that will finally implement the bank broker provisions of the Gramm-Leach-Bliley Act of 1999. The FED will consider these final rules at its Sept. 24, 2007 meeting.
The rulemaking process that culminated in the Commission's vote of final approval has been an arduous one. After a series of interim proposals and regulatory actions that proved mostly fruitless between 1999 and 2005, the SEC made a fresh start 18 months ago. Congress also helped end the logjam by directing the SEC to work with the FED to promulgate joint regulations to fully implement the functional regulation vision of the Gramm-Leach-Bliley Act. The Financial Services Regulatory Relief Act was designed to ensure that regulators did not create a new and burdensome maze of requirements that would disrupt or interfere with the business practices of banks that offer traditional bank products and services
The Gramm-Leach-Bliley Act repealed the blanket exemption banks had historically enjoyed from the Exchange Act definition of broker and replaced it with a set of limited exemptions that allow the continuation of some traditional activities performed by banks. Thus, a bank will be considered a broker under the Exchange Act and subject to the full panoply of SEC regulation if it engages in the business of effecting transactions in securities for the accounts of others. However, at the same time, the Act carves out a number of exemptions from the definition of broker.
The joint SEC-FED rules are designed to implement GLB’s removal of the blanket exemption from SEC registration for banks that engage in securities activities. The exemptions embrace a number of activities and transactions traditionally performed by banks and those involving identified excepted banking products. If a bank limits its brokerage activities to those described in the exceptions, the bank will not be subject to broker-dealer registration.
Under the new rules, a networking exception will allow banks to receive compensation for referring bank customers to broker-dealers. The trust and fiduciary activities exception will permit 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. The rules establish a test to determine how a bank is chiefly compensated, and permit a bank to choose either an account-by-account or bank-wide approach.
The sweep accounts exception permits a bank to sweep deposits into no-load, money market funds. The rules define terms used in the sweep accounts. The safekeeping and custody exception permits banks to perform specified services in connection with safekeeping and custody of securities. Under the exemption, banks can take orders for securities transactions from employee benefit plan accounts and individual retirement and similar accounts for which the bank acts as a custodian, as well as from other safekeeping and custody accounts on an accommodation basis.
The rules include an exemption that permits banks to effect certain transactions in mutual funds and in certain variable insurance products that are registered, and funded by a separate account. Moreover, there is an exemption to permit 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, including that no commission may be charged with respect to the transaction and the transaction must be conducted solely for the benefit of an employee benefit plan.