INSTITUTE OF INTERNATIONAL BANKERS
299 PARK AVENUE, 17TH FLOOR, NEW YORK, N.Y. 10171
TELEPHONE: (212) 421-1611 FACSIMILE: (212) 421-1119
LAWRENCE R. UHLICK
EXECUTIVE DIRECTOR AND GENERAL COUNSEL
DIRECT E-MAIL: LUHLICK@IIB.ORG
December 5, 2002
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-41-02
Dear Mr. Katz:
The Institute of International Bankers is an association that represents the interests of internationally headquartered financial institutions that conduct banking, securities and/or insurance activities in the United States. On behalf of our member institutions, we appreciate this opportunity to comment on the Commission's proposed amendments to its interim final rules adopted under the Securities Exchange Act of 1934 (the "Exchange Act") addressing the functional exceptions for banks from the "push-out" provisions of Title II, Subtitle A of the Gramm-Leach-Bliley (the "GLB Act").1 The Commission's proposal would (1) amend its interim rule granting an exemption to banks from dealer registration for certain de minimis riskless principal transactions (Exchange Act Rule 3a5-1), (2) amend its interim rule defining terms used in the GLB Act exceptions to dealer registration (Exchange Act Rule 3b-18), and (3) grant a new exemption to banks from broker and dealer registration for certain securities lending activities (proposed Exchange Act Rule 15a-11).
The Institute's members conduct banking operations in the United States through federal and state-licensed branches and agencies as well as incorporated bank subsidiaries. As such, they are directly affected by the Commission's rules relating to the push-out provisions of the GLB Act.
The Institute strongly supports many of the central aspects of the Commission's proposal, including broader flexibility for banking institutions to continue to engage in custodial and non-custodial securities lending activities under proposed Rule 15a-11, and the treatment of riskless principal transactions as one transaction rather than two transactions for purposes of the 500-transaction annual de minimis limit of Rule 3a5-1.
The Institute's principal concerns regarding the Commission's proposal relate to the timing of its final implementation, an issue on which the Commission has specifically requested comment.2 As recently extended by the Commission, the GLB Act exceptions to dealer registration are scheduled to become effective on February 10, 2003 (i.e., when the Commission's temporary extension of the general exemption from dealer registration for banks is scheduled to expire). We assume that final versions of Exchange Act Rules 3a5-1, 3b-18 and 15a-11 would become effective on or before February 10, 2003. In contrast, the GLB Act exceptions to broker registration are scheduled to become effective on May 12, 2003. Although the Commission has indicated that it expects to release a new proposal implementing the GLB Act exceptions to broker registration, that proposal has not yet been published. We assume, however, that any final rules resulting from such a proposal would become effective on or before May 12, 2003.
The foregoing schedule of effective dates creates significant problems for affected banking institutions, particularly as it relates to the de minimis exception for riskless principal transactions in Rule 3a5-1. First, even if the Commission were to finalize its proposed amendments to Rule 3a5-1 promptly after the close of the public comment period (December 5, 2002), institutions will have an extremely limited amount of time to modify existing activities and implement necessary internal system changes to ensure compliance with the ultimate outcome of the rulemaking process before February 10, 2003. The Commission has previously noted that it does not expect institutions to develop compliance systems for the provisions of the GLB Act implemented in its interim rules until the Commission has amended the rules, and the Commission has indicated that it will give institutions an adequate transition period to achieve compliance with the final rules.3 The Institute respectfully submits that, in view of the timing of the Commission's proposed amendments to Rule 3a5-1, it would be virtually impossible to provide a sufficient transition period without further delaying the effective date of the GLB Act exceptions from dealer registration.
Secondly, additional issues arise from the timing gap between the effective date of the GLB Act exceptions to dealer registration and the effective date of the GLB Act exceptions to broker registration. Although Rule 3a5-1 would apply a combined 500-transaction limit to both riskless principal transactions (relating to the Commission's regulatory exemption from dealer registration) and agency transactions (relating to the GLB Act exception to broker registration), Rule 3a5-1 would become effective well in advance of the effective date of the GLB Act exceptions to broker registration.
To alleviate the problems associated with these timing issues, the Institute urges the Commission to further extend its temporary extension of the general bank exemption from dealer registration (Exchange Act Rule 15a-7), at least insofar as it applies to riskless principal transactions, from February 10, 2003, until the ultimate effective date of the GLB Act exceptions to broker registration (and the Commission's final implementing regulations thereunder). Ensuring compliance with the 500-transaction de minimis limitation will require affected institutions to modify their securities activities and to implement significant systems changes. The Institute believes that affected institutions should be permitted to adopt these changes on a comprehensive basis for both riskless principal transactions and agency transactions. Under the currently proposed schedule of effective dates, institutions would instead be forced to implement these changes in a staggered fashion-first to address riskless principal transactions and then again to address agency transactions. Such an approach creates unnecessary burden, as well as the potential for redundancy and the adoption of systems changes that may not ultimately be necessary.
Furthermore, to the extent that a combined 500-transaction limit becomes effective before the Commission publishes its final rules implementing the GLB Act exceptions to broker registration, institutions will be prevented from making fully informed business judgments regarding whether they should use their de minimis authority for a particular riskless principal transaction. Without knowing what types of agency transactions it will need to count toward the 500-transaction limit, an institution will not be able to determine how much "room" it has to conduct riskless principal transactions under the 500-transaction limit.
By aligning the effective dates for the dealer and broker exceptions (and thereby creating a single relevant effective date for the de minimis limit for riskless principal and agency transactions), the Commission would avoid these problems without prejudicing the policy objectives that underlie the GLB Act push-out provisions and the Commission's implementing regulations thereunder.4
* * *
Please contact the Institute if we can provide further assistance.
Lawrence R. Uhlick
Executive Director and
|1|| See 67 Fed. Reg. 67,496 (Nov. 5, 2002).
|2|| See 67 Fed. Reg. at 67,505.
|3|| See Release No. 34-46751 (Nov. 1, 2002); Release No. 34-44570 (July 18, 2001).
|4|| Alternatively, the Commission should clarify that riskless principal transactions conducted prior to the effective date of the GLB Act exceptions to broker registration will be subject to a separate 500-transaction limit. Such a clarification would alleviate some, but certainly not all, of the problems that arise from staggered implementation dates.