CUNA Regulatory Comment Call
June 11, 2001
SEC Broker-Dealer Rules
(NOT A MAJOR RULE)
- 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 that 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. These interim final rules were issued to clarify these functional exceptions.
- Although not required under the GLB Act, these exceptions will also apply to thrifts, but not to credit unions. Prior to the GLB Act, credit unions and thrifts were not covered under the exemption that was provided for banks.
- Comments on the interim final rules are due by July 17, 2001. Please submit your comments to CUNA by July 12, 2001. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at firstname.lastname@example.org or to Assistant General Counsel Jeffrey Bloch at email@example.com; or mail them to Mary or Jeff in c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. You may also contact us if you would like a copy of the rules or you may access them on the Internet at the following address: http://www.sec.gov/rules/final/34-44291.htm
- If you are submitting comments directly to the SEC, the letter should refer to File Number S7-12-01. 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.
Under the Act of 1934, 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.
The interim final rules were issued to clarify these functional exceptions. Although not required under the GLB Act, these exceptions will also apply to thrifts, but not to credit unions. Prior to the GLB Act, credit unions and thrifts were not covered under the exemption that was provided for banks.
However, the SEC has issued opinions that permitted thrifts and insurance agencies to offer securities products without registering as a broker-dealer, if offered through a 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 Union Number 150, which may be accessed on the NCUA website at http://www.ncua.gov/ref/letters/e-let150.html.
DESCRIPTION OF THE INTERIM FINAL RULES
The interim final rules provide 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 that was enacted in 1999 to replace the complete exemption that applied to banks prior to 1999.
Some of the exceptions apply only to the "broker" definition, others apply only to the "dealer" definition, while others apply to both definitions. Here is an outline of these exceptions:
Exceptions from Both the "Broker" and "Dealer" Definition
- Trust and fiduciary activities - permits banks acting as brokers and dealers in securities, as long as they act as "trustees" or "fiduciaries" and meet other conditions.
- Permissible securities activities - permits acting as brokers and dealers with regard to certain securities, including U.S. Treasury and securities from government-sponsored enterprises, such as Freddie Mac and Fannie Mae.
- Certain identified banking products - this includes letters of credit, loan participations, and swap agreements.
Other Exceptions from the "Broker" Definition Only
- Third party brokerage arrangements - permits banks to enter into contractual arrangements with registered broker-dealers to sell securities to a financial institution's customers.
- Certain stock purchase plans - permits certain securities transactions in employee benefit plans, dividend reinvestment plans, and issuer plans under certain conditions.
- Sweep accounts - permits sweeping of consumer funds into no-load money market funds.
- Affiliate transactions - permits transactions for affiliates.
- Private securities offerings - permits private placement of securities under certain conditions.
- Safekeeping and custodian activities - permits holding, pledging, and lending of securities held in custody and reinvestment of collateral. Includes custodial activities related to individual retirement accounts and similar benefit plans.
- Municipal securities - permits the brokering of municipal securities.
- De minimis exception - permits 500 securities transactions per year without requiring registration as a broker-dealer.
Other Exceptions from the "Dealer" Definition Only
- Asset-backed products - permits a bank to underwrite and sell certain asset-backed securities representing obligations predominately originated by the bank, an affiliate of the bank, or a syndicate in which the bank is a member.
The interim final rules will also extend the above exceptions to thrifts, but not to credit unions. Before the GLB Act, banks had a complete exemption from the broker-dealer requirements, which did not apply to thrifts or credit unions. This extension for thrifts is not required under the GLB Act and will provide thrifts with significant regulatory flexibility. Credit unions will still be covered under SEC and NCUA opinions that permit credit unions to offer securities products without registering as a broker-dealer, if offered through a contractual arrangement in which a registered broker-dealer provides services under certain conditions.
QUESTIONS TO CONSIDER REGARDING
THE SEC INTERIM FINAL RULES
- Should credit unions be covered under the same exceptions that will apply to banks and thrifts? The SEC's reason for including
thrifts is because they are subject to a similar regulatory structure and examination standard as banks. Should we use a similar
argument for including credit unions? Are there other arguments we can use?
- The interim rules include delegated authority to SEC staff to grant additional exemptions to banks and thrifts. Should we
request that SEC staff also be given delegated authority to grant exemptions to credit unions? On what basis should we request this
additional delegated authority?
- Because credit unions only participate in some of the activities covered under the exceptions, would including credit unions
under the delegated authority provisions be sufficient, as opposed to including credit unions under all of the exceptions?
- 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 & Associate General Counsel (202) 508-6736 firstname.lastname@example.org
Jeffrey Bloch Assistant General Counsel (202) 508-6732 email@example.com
Catherine Orr Senior Regulatory Counsel (202) 508-6743 firstname.lastname@example.org