SEC Votes to Jointly Issue with the Board of Governors of the Federal Reserve System Rules for Comment to Implement Bank Broker Provisions
FOR IMMEDIATE RELEASE
SEC Issues Companion Proposal Concerning Bank Dealer Activities and Order Extending Temporary Exemption for Banks from the Definition of “Broker”
Washington, D.C., Dec. 13, 2006 — After consulting with and seeking the concurrence of the Federal banking agencies, the Commission today voted to publish for public comment, jointly with the Board of Governors of the Federal Reserve System (Board), rules to implement the bank broker provisions of the Securities Exchange Act of 1934. The Board will consider the proposal at its Dec. 18, 2006, meeting.
In addition, the Commission also voted to publish for public comment a companion proposal concerning certain bank dealer activities and other related matters. To ensure that the Commission will have time to carefully consider public comment, it also extended the temporary exemption of banks from the definition of “broker” until July 2, 2007.
A. Key Provisions of the Proposed Joint Rules
The proposed rules would define certain statutory terms in the areas of third-party brokerage (“networking”), trust and fiduciary activities, safekeeping and custody, and sweep accounts. They also would provide banks with conditional exemptions to accommodate certain limited bank securities activities. In addition, the proposal would provide banks with an exemption from possible third-party rescission rights for acting as an unregistered broker, as well as a related transitional exemption.
1. Networking Exception. The networking exception allows banks to refer bank customers to broker-dealers in exchange for a share of the commissions earned from the customers’ accounts. The Exchange Act provides that banks may pay unregistered employees “nominal” incentive compensation for making these referrals. The proposed rules would define “nominal,” “incentive compensation,” and certain other terms. To accommodate banks’ customary bonus plans, the definition of “incentive compensation” would specifically exclude qualifying discretionary compensation paid under these bonus plans. The proposal also would allow banks to pay more than nominal fees for referrals of certain institutional customers and high net worth customers to a broker or dealer, if the bank and broker-dealer satisfy conditions to protect these customers.
2. Trust and Fiduciary Activities Exception. The trust and fiduciary activities exception permits a bank to effect securities transactions in a trustee or fiduciary capacity if it is “chiefly compensated” for those transactions, consistent with fiduciary principles and standards, on the basis of specifically enumerated types of fees. The proposed rules refer to these fees collectively as “relationship compensation,” which would include a broad range of administration fees, as well as fees paid by investment companies.
To determine whether it is “chiefly compensated” by relationship compensation, a bank would conduct an account-by-account review using a two-year rolling average comparison of the fees from the account. Alternatively, banks are permitted to compare relationship compensation to total aggregate compensation on a bank wide basis using a two-year rolling average comparison. Banks can exclude from the compensation comparison some unusual accounts (such as accounts acquired as part of a business combination or asset acquisition for 12 months).
3. Sweep Accounts and Transactions in Money Market Funds. The sweep accounts exception permits a bank to sweep deposits into no-load, money market funds. The proposed rules would define terms used in the sweep accounts exception, and would provide banks with a conditional exemption for transactions in money market funds that are not no-load as well as for transactions that are not sweeps. A bank relying on this exemption for transactions involving funds that are not no-load would have to provide the customer with a prospectus showing the fund’s fees, and could not characterize the fund shares as no-load.
4. Safekeeping and Custody. The safekeeping and custody exception would permit banks to perform specified services in connection with safekeeping and custody of securities. Under the proposed exemption, banks can take orders for securities transactions from employee benefit plan accounts and individual retirement and similar accounts for which the bank acts as a custodian, as well as from other safekeeping and custody accounts on an accommodation basis. If a bank accepts securities orders under the proposed exemption with respect to a custody account, no bank employee may receive compensation from the bank, the executing broker or dealer, or any other person that is based on whether a securities transaction is executed for the account, or on the quantity, price, or identity of the securities purchased or sold by the account.
Additional conditions would apply when a bank accepts securities orders for a custodial account on an accommodation basis. In particular, the bank can not advertise securities order-taking, provide investment advice or research or make recommnedations concerning securities to the account or otherwise solicit securities transactions from the account. In addition, the bank’s charges for effecting a securities transaction for the account can not vary based on whether the bank accepted the order for the transaction, or on the quantity or price of the securities to be bought or sold.
5. Proposed Exemption for Banks To Effect Transactions in Investment Company Securities . The proposal would include an exemption that would permit banks to effect mutual fund transactions through the National Securities Clearing Corporation’s Mutual Fund Services (Fund/SERV) or directly with a transfer agent.
6. Securities Lending Exemption. The proposal would repropose an exemption for banks from the definition of broker for noncustodial securities lending activities. This exemption would reinstate a rule that would otherwise be voided by the Regulatory Relief Act. The existing rule was adopted as a part of the bank dealer rules and included exemptions for banks’ brokerage activities associated with noncustodial securities lending.
7. Regulation S Securities Exemption. The proposal would include an exemption for banks from the definition of broker for agency transactions in Regulation S securities with non-U.S. persons. The Commission originally proposed this rule in 2004.
8. Section 29 Exemptions. The proposal would provide banks with a transitional 18-month exemption to prevent their contracts from being void or voidable under Exchange Act Section 29(b). In addition, it would provide banks with a permanent exemption from Section 29(b), where a bank has acted in good faith and had reasonable policies and procedures in place to comply with the bank broker rules and regulations, and any violation of the registration requirements would not result in any significant harm, financial loss, or cost to the person seeking to void the contract.
9. Temporary Exemption. The proposed rules also would provide banks with a transitional 18-month exemption until the first day of their first fiscal year commencing after June 30, 2008. This would give banks time to make any necessary changes in their compliance programs.
The Commission, together with the Board, request public comment on these proposals within 90 days of their publication in the Federal Register.
B. Key Provisions of the SEC-only Proposal.
The companion proposal issued by the Commission complements the rules issued for comment jointly with the Board. In particular, the release reproposes an exemption from the definition of “dealer” for banks’ conduit securities lending activities, a conditional exemption from the definition of “dealer” for banks’ riskless principal Regulation S transactions, and a clarifying amendment to Exchange Act Rule 15a-6 to align that rule with the Exchange Act bank broker and dealer provisions and related rules.
The Commission requests public comment on these proposals within 90 days of their publication in the Federal Register.
C. Key Provisions of the Temporary Exemption.
The Commission extended the exemption for banks from the definition of "broker" until July 2, 2007. This will provide the Commission and the Board time to consider fully comments received and to take any final action on the implementing rules.
Gramm-Leach-Bliley and Regulatory Relief Acts. On Oct. 13, 2006, President Bush signed into law the Regulatory Relief Act, which requires the Commission and the Board to jointly issue proposed rules no later than 180 days after the date of enactment and to jointly adopt final rules implementing the bank broker exceptions in Exchange Act Section 3(a)(4). The Regulatory Relief Act also requires the Commission and the Board to consult with and seek the concurrence of the Federal banking agencies (the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation).
A final set of rules jointly adopted by the Commission and the Board will supersede any other proposed or final rule issued by the Commission on or after the date of enactment of the Gramm-Leach-Bliley Act of 1999 (GLBA) with regard to the bank exceptions to the definition of “broker” in Exchange Act Section 3(a)(4)(B). The GLBA replaced banks’ complete exemption from the definition of “broker” with eleven exceptions that permit banks to engage in certain securities activities.
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The full text of detailed releases concerning these items will be posted to the SEC Web site as soon as possible after action is taken by the Board.