SEC Amends Definition of "Dealer" for Banks, Adopts Analyst Certification Rule

FOR IMMEDIATE RELEASE
2003-21

Washington, D.C., February 6, 2003 -- The Securities and Exchange Commission voted today to approve certain measures affecting banks and their activities as dealers under the Gramm-Leach-Bliley Act of 1999.

The Commission also voted to adopt Regulation Analyst Certification, requiring research analysts to certify the truthfulness of the views they express and to disclose compensation related to the specific views expressed in reports or appearances.

1. Amendments to Exchange Act Bank Dealer Exceptions

The Gramm-Leach-Bliley Act amended the Exchange Act to eliminate the complete exception of banks from the definitions of "broker" and "dealer." Instead, it provides banks with four exceptions from the definition of "dealer" and eleven exceptions from the definition of "broker." The proposed rules primarily address certain of the exceptions from the definition of "dealer."

Specifically, the Commission voted to adopt rules amending definitions of terms used in a bank exception to the definition of "dealer" in Section 3(a)(5) of the Securities Exchange Act of 1934, amending an exemption for banks from the definition of dealer for certain de minimis riskless principal transactions, adding a new exemption from broker-dealer registration for certain bank securities lending transactions, and extending an exemption from rescission liability for contracts entered into by banks in a dealer capacity for a transition period until March 31, 2005.

Definitions of Terms Used in Asset-Backed Exception to Dealer Registration

The asset-backed transactions exception from the definition of dealer permits a bank to issue and sell securities backed by obligations the bank and its affiliates originated, or other obligations originated by other banks and their affiliates in a syndicate. The Commission adopted amendments with only technical changes from the proposal.

The amendments will

• modify the definition of "originated" so that banks may use distribution channels (such as automobile dealers, mortgage companies, and other banks), even though the bank does not "make and fund" the loan at the exact time that the loan is made;
   
• retain the standard for "predominantly originated" at 85 percent;
   
• replace the definition of "member of a syndicate of banks" with a definition of "member" as it relates to "syndicate of banks" to make clear that the individual banks originate the obligations, not the syndicate; and
   
• retain the requirement that when a syndicate of banks issues asset-backed securities through a grantor trust or other separate entity, each bank selling the securities, and thus, acting as a dealer in the transaction, must have originated at least 10 percent of the value of the pool of obligations backing the securities.

Exemption from the Definition of Dealer for Banks Engaged in "Riskless Principal" Transactions

The de minimis exception from the definition of broker permits banks to engage in up to 500 transactions per year without broker-dealer registration. The Commission permitted "riskless principal" transactions to count toward that total in its existing rules. The rule amendment provides that both legs of a riskless principal transaction are counted as one transaction solely for purposes of the de minimis exemption. The Commission adopted the amendments with only a minor technical change from the proposal.

Exemption for Non-custodial Securities Lending from Dealer and Broker Registration and Custodial Lending from Dealer Registration

The Commission added a new exemption from the definitions of broker and dealer for banks that engage in certain non-custodial securities lending transactions with "qualified investors." The exemption will permit banks to engage in certain non-custodial securities lending transactions with "qualified investors" without registration as a broker or dealer under the securities laws. The term "qualified investor" is defined in Section 3(a)(54) of the Exchange Act and includes certain advised pension plans. For purposes of this exemption, banks may also engage in securities lending transactions with other pension plans that may not meet the restrictions applicable to qualified investor pension plans that have $25 million in investments and are managed on a discretionary basis. The exemption is being adopted with technical changes from the proposal.

Timing

The Commission exemption from the definition of "dealer" for banks, savings associations, and savings banks was set to expire on Feb. 10, 2003. In connection with adopting the rules described above, the Commission is also issuing a separate order to extend this exemption until Sept. 30, 2003. This should give banks time to conform their securities transactions to the dealer provisions of the Gramm-Leach-Bliley Act and the implementing rules adopted by the Commission.

Exemption From Rescission Liability Under Exchange Act Section 29

The Commission is also amending Rule 15a-8 to give practical effect to the previously adopted exemption from rescission liability under Exchange Act Section 29. This rule provides relief from rescission liability for contracts entered into by banks in a dealer capacity for a transition period until March 31, 2005. This additional period will allow banks to perfect their internal controls for dealer transactions without the threat of private liability for inconsequential violations.

The compliance date for these amendments will be Sept. 30, 2003.

2. Regulation AC - Analyst Certification

Research Reports

Under Regulation AC, research reports distributed by brokers, dealers, and certain covered persons will include

• a statement by the research analyst certifying that the views expressed in the research report accurately reflect such research analyst's personal views about the subject securities or issuers; and
   
• a statement by the research analyst certifying whether the analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.

If the analyst received related compensation, the statement will include the source, amount, and purpose of such compensation, and further disclose that such compensation may influence the recommendation in the research report.

Public Appearances

Under Regulation AC, broker-dealers will be required to make a record related to public appearances by research analysts. Specifically, a broker or dealer who publishes, circulates, or provides a research report by a research analyst will be required to make a record within 30 days after each calendar quarter in which the research analyst made the public appearance, that will include

• a written statement by the research analyst certifying that the views expressed in each public appearance accurately reflected such research analyst's personal views about the subject securities or issuers; and
   
• a written statement by the research analyst certifying that no part of such research analyst's compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in any public appearance.

In cases where the broker or dealer does not obtain a statement by the research analyst in connection with public appearances as described above, the broker or dealer will be required to disclose in all research reports prepared by that analyst for the next 120 days that the research analyst did not provide the certifications.

The regulation will be effective 45 days from the date of its publication in the Federal Register.

The full text of detailed releases concerning each of these items will be posted to the SEC Web site as soon as possible.