CUNA Regulatory Comment Call

January 9, 2007

Fed/SEC Broker-Dealer Rules



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.


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:

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.


Eric Richard • General Counsel • (202) 508-6742 •
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 •
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 •
Lilly Thomas • Assistant General Counsel • (202) 508-6733 •
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 •