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Last update: 07/28/14

SEC Adopts Interim Rule Outlining Bank Exceptions for Broker-Dealer Registration

WWR Article - May 18, 2001

The SEC has issued an interim rule providing further guidance on the new exceptions to broker dealer registration requirements for banks that engage in securities activities. Banks that engage in any securities activities on behalf of customers should take a careful look at the rule to see how their activities are impacted.

The Gramm-Leach-Bliley Act instituted functional regulation for banks, broker-dealers and insurance companies. In connection with this change, the blanket exemption for banks from registration for broker-dealer activities was eliminated. Instead, a series of specific exceptions to the registration requirements for certain activities that involve securities, such as trust department activities, were adopted. Though the rule is technically effective May 11, the SEC has extended the date for compliance to October 1. The interim rule will be open for comment for 60 days after the proposal is published in the Federal Register.

Banks that limit their activities to the 15 exceptions outlined in the rule will continue to be exempt from broker-dealer registration and the compliance and paperwork burden that goes with it. However, banks that engage in broker-dealer activities not covered by one of the exceptions will either have to register or shift those functions to a registered broker-dealer.

One of the key exceptions to the registration requirement addresses trust and fiduciary activities. To qualify for this exception, income from trust activities must come chiefly from annual fees, administrative charges and other income not tied directly to the securities trades. There was some concern about how the SEC would define “chiefly,” but the SEC took what some are calling a “lenient” approach by allowing up to 50 percent of income to come from securities trading. The SEC is giving banks until Jan. 1, 2002 to come into compliance with the compensation arrangement requirements.

Banks may enter into arrangements with third party brokers and execute transactions in exempted securities and identified banking products without having to register as a broker-dealer. In their transfer agency capacity, banks will be allowed to make certain stock purchases under employee benefit plans and dividend reinvestment plans without registering. Another important exception allows banks to carry out securities trading for self-directed IRAs without having to register. Banks are also allowed to sweep customer funds into no-load money market funds (defined by the rule as any fund that does not charge service fees in excess of 25 basis points, a narrower definition than traditionally used) without registering.

Other exceptions allow banks to conduct securities transactions for affiliates that are not broker-dealers, engage in private placements under certain conditions, provide safekeeping and custody activities for securities, underwrite and sell asset-backed securities and act as broker for municipal securities without being required to register. And finally, banks are exempt from SEC broker-dealer registration requirements if they conduct less than 500 securities transactions annually, other than transactions that qualify for one of the listed exceptions.

The SEC rule clarifies that these registration requirements and exceptions apply to thrifts as well as banks. Previously, thrifts wishing to engage in any type of security activity would have had to register, since the exemptions that applied to banks did not apply to them. This will allow thrifts to conduct the excepted securities activities without having to register with the SEC.

The full text of the interim rule is available on the SEC's Web site at www.sec.gov/rules/final/34-44291.pdf.






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