American Bankers Association
ABA Securities Association
December 5, 2002
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, File No. S7-41-02; 67 Federal Register 67496 (November 5, 2002).
Dear Mr. Katz:
The American Bankers Association ("ABA")1 and the ABA Securities Association ("ABASA")2 appreciate the opportunity to comment on the proposed rules recently released by the Securities and Exchange Commission ("Commission"). These proposed rules address certain exceptions from broker-dealer registration contained in Title II of the Gramm-Leach-Bliley Act. More specifically, the proposed rules:
- Grant an exemption to banks from dealer registration for certain de minimis riskless principal transactions;
- Define terms used in the asset-backed exception to dealer registration, and
- Grant a new exemption to banks from broker and dealer registration for certain securities lending transactions.
We hereinafter refer to these proposals as the "dealer push-out" provisions.
While the ABA and ABASA have several comments on the proposals, we would first like to express our appreciation for the time and effort spent by Commission staff over the last year to meet with bankers and their trade associations in order to hear bankers' issues and concerns. We believe those efforts have, in large part, paid-off as evidenced by the small number of concerns we have regarding the dealer push-out provisions. We sincerely hope that the dialogue begun between the industry and the Commission and its staff with respect to the dealer push-out provisions will continue when Commission staff turns its attentions to the vastly more complicated broker push-out provisions.
Our primary concern with the dealer push-out proposal is the possibility that the Commission will require the banking industry to comply with the dealer push-out provisions before revised broker push-out provisions are proposed, much less put into effect. While we are cognizant that the Commission has not specifically stated that the final dealer and broker push-out provisions will be put into effect on separate timetables, we are concerned that by bifurcating the dealer and broker push-out proposals and extending the conditional exemptions from the definition of dealer and broker to February 10, 2003, and May 12, 2003, respectively, the Commission and its staff may be contemplating separate implementation of the dealer and broker push-out provisions. A sequential implementation of the Title II push-out provisions would be very troubling and burdensome for many of our members.
Our members have expressed concern that they will incur unnecessary and duplicative costs (which includes both equipment and training costs) to build and execute a Title II compliance program in multiple stages or increments and based on less than complete information. Specifically, the costs associated with building such a program on a sequential basis would be significantly larger than if the industry were able to build and implement an overall compliance program at one time. In addition, one can expect expenses and training demands to increase even more should the industry be forced to build a compliance program for the dealer push-out provisions without a complete understanding of the final broker push-out provisions.
For example, it would be extremely difficult for many of our members to build the operational systems and compliance infrastructure necessary to comply with proposed Rule 3a5-1. Specifically, that Rule permits banks to engage in riskless principal transactions under the de minimis broker exception. That exception provides that, in addition to the specifically enumerated broker exceptions provided under Title II, a bank may not effect more than 500 transactions in securities in any calendar year.3 While we applaud the Commission's flexibility in allowing riskless principal transactions to be exempt from registration under the de minimis brokerage exception,4 we note that it is crucial that our members have an adequate understanding of whether the Commission's interpretations regarding the remaining broker push-out provisions will themselves necessitate using the de minimis exception. A multi-stage implementation such as we describe above is, we submit, the regulatory equivalent of building a bridge before the ultimate destination is determined!
Moreover, we note that costs would increase even more if the bank regulators decide to follow the Commission's lead and adopt recordkeeping rules under Section 204 of the Gramm-Leach-Bliley Act in a two-stage process, thereby possibly requiring the necessary compliance program to be built in four stages.5 Implementation could be even further complicated by regulations issued by other regulatory authorities. For example, it is unclear to what extent, if any, NASD Rule 3040 would impact bank compliance programs. Consequently, we strongly urge the Commission to defer implementation of the dealer push-out provisions until such time as the final broker push-out provisions become effective.
Proposed Rule 15a-11 exempts banks from the definition of both broker and dealer under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 to engage in or effect, under certain circumstances, securities lending transactions with qualified investors. While we support the proposed exemption as it offers banks legal certainty in connection with certain securities lending transactions; we note, however, that non-custodial securities lending activities may very well be permissible under various Title II statutory exceptions. In addition, we note that bank securities lending activities undertaken as principal and involving a bank's own investment securities portfolio would properly be exempt from dealer registration under the dealer/trader distinction outlined in the narrative portion of the release.
We would like to offer two specific comments with respect to the exemption. First, proposed Rule 15a-11(a) provides that "..., a bank is exempt from the definitions of the terms "broker" and "dealer" under sections 3(a)(4) and 3(a)(5) of the Act (15 U.S.C. 78c(a)(4) and (a)(5)), solely to engage in or effect securities lending transactions with a qualified investor, ...." (emphasis supplied). We are concerned that the use of the word "solely" could be interpreted to mean that the bank may not provide any other services in connection with non-custodial securities lending transactions. For example, banks often offer fiduciary services to clients for whom the bank provides securities lending services. We assume that banks may properly combine securities lending services exempt under authority of proposed Rule 15a-11 with fiduciary services so long as those services fall properly within the trust and fiduciary exemption from broker registration or, alternatively, do not constitute brokerage activity at all. Clarification of this point would be helpful.
Second, we note that the exemption provided by proposed Rule 15a-11 is conditioned on the securities lending transactions being effected with a qualified investor. In this connection, we support the Commission's reference to the Investment Company Act in order to interpret broadly the term "company" to "encompass any other type of entity not otherwise specifically listed in section 3(a)(54) [of the Exchange
Act]." We encourage the Commission to use this more expansive definition whenever the term is used in the Title II exceptions.
We strongly encourage the Commission to consider providing banks with a cure period for unforeseen circumstances or inadvertent errors that may cause a bank not to be in compliance with a specific exception or exemption from registration. For example, if a bank were to calculate that it had engaged in fewer than 500 riskless principal transactions in a calendar year under the de minimis exception and later it was determined that, due to a mathematical or other error, the bank had actually engaged in 502 transactions, we would hope that the Commission would not consider the bank to be operating as an unregistered broker-dealer. Rather, we would hope that the Commission would give the bank sufficient time in which to correct the problem and bring its operations into compliance with the specific exception.
The interim final rules include a new Rule 15a-8 which provides that contracts entered into by banks for approximately 18 months after the rules became effective, would not be considered void or voidable by reason of Section 29 of the Exchange Act. As the Commission is aware, both the ABA and ABASA had strongly supported new Rule 15a-8, in large part, due to the fact that private parties have occasionally invoked Section 29(b)'s rescission rights as a remedy in instances involving broker-dealer registration violations by the opposite party. We hope that at the adoption stage the Commission will provide for a similar delay of commensurate duration. In addition, the Commission may wish to consider a permanent exemption from Section 29 liability for those errors caused by unforeseen circumstances or inadvertent errors, such as we have described above.
In conclusion, the ABA and ABASA appreciate the opportunity to offer our views on the Commission's proposed dealer push-out rules. We appreciate the time and effort that the Commission staff has expended in working with the industry on these issues, and we look forward to working with the Commission and its staff in the future on the broker push-out provisions.
Should you wish to discuss matters raised in this letter, please do not hesitate to contact the undersigned.
Sarah A. Miller
cc: Commissioner Cynthia Glassman
Robert L. D. Colby
Linda Stamp Sundberg
|1|| The ABA brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership-which includes community, regional, and money center banks and holding companies, as well as savings associations, trust companies, and savings banks-makes ABA the largest trade association in the country.
|2|| The ABA Securities Association is a separately chartered trade association and non-profit affiliate of the American Bankers Association whose mission is to represent the interests of bank underwriting and dealing in securities, proprietary mutual funds and derivatives before Congress, federal and state governments, and the courts.
|3|| In addition, the de minimis exception prohibits the transactions from being effected by a dual employee, i.e., an employee of the bank who is also an employee of the broker-dealer.
|4|| We agree with the Commission's hypothesis that the Gramm-Leach-Bliley Act did not provide a de minimis dealer exception to allow banks to engage in riskless principal transactions because, under banking law, riskless principal transactions are considered agency activities, whereas, under the securities laws, riskless principal transactions are considered principal activities.