CUNA Regulatory Comment Call
January 9, 2007
Fed/SEC Broker-Dealer Rules
- Until the Gramm-Leach-Bliley Act (GLB Act) was enacted in 1999, banks were not covered under the broker-dealer definitions as outlined in the Securities and Exchange Act of 1934 (1934 Act). This means banks were not required to register with the Securities and Exchange Commission (SEC) when engaging in permissible securities activities.
- The GLB Act removed this exemption and replaced it with a number of functional exceptions for certain bank securities activities. This proposed rule clarifies these functional exceptions and is being issued jointly by the Federal Reserve Board (Fed) and the SEC.
- In 2004, the SEC issued a proposal to provide certain exceptions for credit unions. This proposal has not been finalized, and these exceptions for credit unions are not included in the proposed rule that has now been issued jointly by the Fed and the SEC.
- Comments on the proposed rule are due by March 26, 2007. Please submit your comments to CUNA by March 13, 2007. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at firstname.lastname@example.org or to Senior Assistant General Counsel Jeffrey Bloch at email@example.com; or mail them to Mary or Jeff in c/o CUNAs Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, 6th Floor, Washington, DC 20004. You may also contact us if you would like a copy of the proposed rule, or you may access it here.
- If you are submitting comments directly to the SEC, the letter should refer to File Number S7-22-06. Comments sent directly to the SEC may be e-mailed to firstname.lastname@example.org. If sending comments by e-mail, please include the File Number in the subject line. If submitting comments to the Fed, the letter and email should refer to Docket No. R-1274.
Under the 1934 Act, entities acting as brokers or dealers must register with the SEC and join a self-regulatory organization (SRO). Brokers are defined as entities engaged in the business of effecting transactions in securities for the account of others, and dealers are defined as entities that buy and sell securities for their own account.
As part of the registration process, broker-dealers are required to pass qualification tests covering substantive aspects of the securities business, which are supplemented by continuing education requirements. Broker-dealers are also under a duty to supervise their employees to prevent violations of federal securities laws. SRO rules also subject broker-dealers to possible enhanced supervision or prohibitions from continued work in the securities business if abuses are committed.
Until the GLB Act was enacted in 1999, banks were not covered under the broker-dealer definitions and were not required to register with the SEC. The GLB Act removed this exemption and replaced it with a number of functional exceptions for certain bank securities activities.
In 2001, the SEC issued an interim final rule to clarify these functional exceptions, and in 2004 the SEC issued a proposed rule to extend some of these exceptions to credit unions. The this link below provides additional information with regard to the 2001 rule, and the this link below provides more information with regard to the 2004 proposal
The Financial Services Regulatory Relief Act of 2006 (Reg Relief) that was enacted late last year required the SEC to work with the Fed to jointly issue another proposal to clarify these exceptions, which is to replace the interim final rule that was issued in 2001. This provision of Reg Relief extended these exceptions to thrifts, but not to credit unions. Prior to the GLB Act, credit unions and thrifts were not covered under the general exemption that was provided for banks.
The SEC has in the past issued opinions that permitted thrifts and insurance agencies to offer securities products without registering as a broker-dealer, if offered through a third-party contractual arrangement in which a registered broker-dealer provides services for the financial institution or insurance agency under certain conditions. The National Credit Union Administration (NCUA) offered similar guidance for credit unions in Letter to Credit Unions Number 150. This exception from the SEC and NCUA was permitted for those that were not able to perform these services. However, the basis for the exception for credit unions no longer applies because the incidental powers rule now allows credit unions to perform these services.
DESCRIPTION OF THE PROPOSED RULE
The proposed rule now being jointly issued by the Fed and the SEC provides guidance on a series of exceptions from the broker-dealer definition that are based on specific functional activities. These exceptions were included in the GLB Act, which replaced the complete exemption that applied to banks prior to 1999.
Below is a description of the exceptions that are addressed in the proposed rule:
- Third party brokerage networking arrangements Permits banks and thrifts to refer their customers to broker-dealers and to receive a share of the commissions. The institution may pay unregistered employees nominal incentive compensation for these referrals. The proposed rule defines the terms used in this exception and permits the institution to pay more than nominal fees for referrals of certain institutional and high net worth customers.
- Trust and fiduciary activities Banks and thrifts may conduct securities transactions in a trustee or fiduciary capacity if it is chiefly compensated for those transactions on the basis of specific types of fees. The proposed rule clarifies the term chiefly compensated.
- Sweep accounts This exception permits the sweeping of consumer funds into no-load money market funds. The proposed rule provides banks and thrifts with a conditional exemption for transactions in money market funds that are not no-load and for transactions that are not sweeps.
- Safekeeping and custodian activities Banks and thrifts may perform certain services in connection with safekeeping and custody of securities. They may take orders for securities transactions from employee benefit plan accounts and individual and similar accounts in which the institution acts as custodian, as well as on an accommodation basis for other safekeeping and custodian accounts. The proposed rule outlines restrictions for compensation for employees with regard to these activities.
- Transaction in investment company securities This exception permits banks and thrifts to undertake mutual fund transactions through the National Securities Clearing Corporations Mutual Fund Services or directly with a transfer agent.
- Securities lending This exception permits banks and thrifts to engage in noncustodial securities lending activities.
- Regulation S Securities This exception refers to agency transactions in Regulation S securities with non-U.S. persons.
The proposed rule also outlines an exception from the definition of dealer for conduit securities lending activities and a conditional exception for riskless principal transactions. Banks and thrifts will have until the first day of their first fiscal year commencing after June 30, 2008 to make the necessary changes to their compliance programs.
QUESTIONS TO CONSIDER REGARDING THE FED/SEC PROPOSED RULE
- Should credit unions be covered under these same exceptions that will apply to
banks and thrifts? On what basis should these exceptions be granted to credit
- Would it be sufficient for these exceptions to be granted for securities activities
that credit unions currently engage in, as opposed to all the activities outlined in
the proposed rule?
- As an alternative, should we request that SEC staff be given delegated authority
to grant exceptions to credit unions? On what basis should we request this additional
- Does your credit union participate in any of the activities covered under the
exceptions? If so, which ones?
- Other comments?
Eric Richard General Counsel (202) 508-6742 email@example.com |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 firstname.lastname@example.org
Jeffrey Bloch Assistant General Counsel (202) 508-6732 email@example.com
Lilly Thomas Assistant General Counsel (202) 508-6733 firstname.lastname@example.org
Catherine Orr Senior Regulatory Counsel (202) 508-6743 email@example.com