ICBA - Publications - ICBA Urges Substantial Change to the SEC's Broker-Dealer Exceptions Rule

ICBA Urges Substantial Change to the SEC's Broker-Dealer Exceptions Rule

WWR Article - July 20, 2001

Defending the rights of community banks to continue to offer securities transactions as part of trusts, custodial accounts and other traditional banking services, the ICBA urged the Securities and Exchange Commission to substantially revise and reissue for public comment its rule implementing the securities title of the Gramm-Leach-Bliley Act, calling the rule unnecessarily complex, restrictive, burdensome and costly. The ICBA told the SEC that community banks depend on the statutory exceptions to serve customers, and that registration as a broker-dealer is neither an economical nor viable option.

In a comment letter to the SEC, the ICBA told the agency that the rule would be so costly to implement that it would prevent many community banks from offering securities transactions as part of traditional banking products. ICBA Chairman Robert Gulledge also said the rule is incompatible with Congress' intent that banks be able to conduct traditional banking activities that involve securities transactions without registering as broker-dealers. The ICBA emphasized that Congress adopted the Gramm-Leach-Bliley exceptions to ensure banks could continue existing trust and fiduciary, custody and safekeeping and sweep account services without disruption.

"The net effect of the restrictions and conditions contained in the interim final rule is to nullify the statutory exceptions," wrote Gulledge. Without substantial changes, the interim final rule will force many community banks to discontinue offering securities transactions through trust and custodial accounts, disrupting service to customers and resulting in "investor exclusion" instead of "investor protection," the ICBA said.

Questioning issuance of an interim final rule without public input, the ICBA urged the agency to issue a substantially revised proposal for public comment and to defer compliance until at least 12 months after a final rule is published.

Last month, the Federal Reserve, FDIC and OCC jointly filed their own comments on the SEC proposal. In a very detailed and specific submission, the agencies took issue with the SEC approach to the GLBA exceptions. They expressed serious concern about the unduly narrow scope of the SEC interim final rule, the cost and burden the rule would have for banks and their customers, the misinterpretation of congressional intent, and the process used by the agency to develop a rule. The agencies criticized the SEC's issuance of an interim rule without adhering to normal administrative procedures as especially unfair to the banking industry, since it would force compliance with a rule that has not yet been finalized.

On July 18, the day after the comment deadline, the SEC heeded the requests of commenters and announced it would defer compliance with the rule from October 1 to May 12, 2002 while it assesses the comments it has received. The agency also said that it would consider extending the deadline further if more time is needed to allow banks to comply. Although the SEC did not indicate whether it will issue a revised rule for public comment, the Commission said it will take all the comments it has received into consideration in drafting a final rule. The SEC also stated that banks do not have to begin to prepare for compliance until a final rule has been issued. The SEC also extended the comment period on the interim final rule until September 4.

As the SEC moves under new leadership, we expect weighty talks between the SEC and the bank regulators before a final rule is issued. ICBA has been asked to testify on the rule before the full House Financial Services Committee on August 2.