CUNA Regulatory Comment Call


June 11, 2001

SEC Broker-Dealer Rules
(NOT A MAJOR RULE)

EXECUTIVE SUMMARY

BACKGROUND

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

Other Exceptions from the "Broker" Definition Only

Other Exceptions from the "Dealer" Definition Only

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

Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com