As of May 17, 2012, the guidelines provided here extend to federal savings associations, in addition to national banks, offering a comprehensive overview for all financial institutions.
This document serves to inform you about the collaborative effort between the Securities and Exchange Commission (SEC) and the Board of Governors of the Federal Reserve System (Board). They have jointly finalized rules defining the scope of SEC regulation oveR Banks’ securities brokerage activities.1 These rules, collectively known as “Regulation R,” are a direct result of the Gramm–Leach–Bliley Act of 1999 (GLBA). GLBA established specific exceptions for banks, exempting them from the broker-dealer registration requirements outlined in the Securities Exchange Act of 1934 (Exchange Act).2 The creation of Regulation R involved consultations with key regulatory bodies including the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS). Furthermore, the SEC and the Board took into account public feedback received on the proposed rules from December 2006. Regulation R is a significant update, superseding previous SEC proposals made after GLBA’s enactment.3
Before GLBA, banks enjoyed a broad exclusion from the Exchange Act’s definition of “broker,” effectively exempting them from broker rules and registration mandates. GLBA narrowed this exclusion, stipulating that banks are only excluded from the “broker” definition when their securities activities fall within specific GLBA-defined exceptions. These exceptions cover a range of bank securities activities, including those related to third-party brokerage arrangements, trust and fiduciary services, permissible securities transactions, certain stock purchase plans, sweep accounts, transactions with affiliates, private securities offerings, safekeeping and custody services, identified banking products, municipal securities, and a limited number of other securities transactions. If a bank intends to engage in the business of executing securities transactions for client accounts and does not meet GLBA’s statutory exceptions or the exemptions provided by the SEC and the Federal Reserve, it faces two options: register with the SEC as a broker, or “push out” these activities to a registered affiliate or an independent third-party brokerage firm. This regulatory landscape is crucial for any institution operating as an r bank, or engaging in related financial services.
Decoding Regulation R
Regulation R provides clear definitions for terms used within GLBA’s statutory exceptions and introduces additional related exemptions. Specifically, the rules address statutory exceptions allowing banks, under specific conditions, to continue securities transactions for customers within their trust and fiduciary, custodial, and deposit sweep services. It also governs customer referrals to securities broker-dealers through networking arrangements. Furthermore, Regulation R includes exemptions for foreign securities transactions, non-custodial securities lending conducted as an agent, and transaction executions outside of broker-dealers.
Most provisions of Regulation R became effective on September 28, 2007. However, banks were granted a grace period for compliance with the rules and “broker” exceptions in Section 3(a)(4)(B) of the Exchange Act until the first day of their fiscal year starting after September 30, 2008. For most national banks, this compliance date was January 1, 2009. The full text of Regulation R was published in the Federal Register on October 3, 2007. For institutions operating as an r bank, understanding these dates is paramount for maintaining regulatory compliance.
SEC’s Complementary Rules
In conjunction with Regulation R, the SEC introduced amendments and new rules concerning exemptions from the definitions of “broker” and “dealer” for specific bank securities activities. A key element is a conditional exemption allowing banks to execute riskless principal transactions with non-U.S. individuals under Regulation S of the Securities Act of 1933. The SEC also refined an existing exemption for banks involved in conduit securities lending. Additionally, the SEC updated its broker rules to ensure alignment with the newly established bank broker and dealer regulations.
These SEC rules took effect on November 2, 2007. The detailed release from the SEC was also published in the Federal Register on October 3, 2007, marking a significant date for r bank operations and compliance.
Banking Agencies: Charting the Path Forward
As mandated by GLBA, banking agencies—including the Federal Reserve, OCC, FDIC, and OTS—are tasked with developing record-keeping rules for banks utilizing the broker exceptions in the Exchange Act. These rules, developed in consultation with the SEC, will set forth the necessary record-keeping standards for banks to demonstrate adherence to GLBA’s statutory exceptions and the newly implemented regulations.
Banking agencies are also revisiting the Interagency Statement on Retail Sales of Nondeposit Investment Products to ensure it reflects the changes introduced by GLBA and its implementing regulations. This review is crucial for institutions operating as an r bank to align their practices with current guidelines.
The SEC and Federal Reserve will jointly handle interpretations and responses to no-action letter requests or other interpretative guidance related to Regulation R’s exceptions and requirements. Moreover, the SEC, Federal Reserve, and relevant federal banking agencies will collaborate on any proposed enforcement actions against banks for Regulation R violations.
Furthermore, ongoing discussions between the SEC, banking agencies, and the Financial Industry Regulatory Authority are expected regarding potential adjustments to FINRA’s Rule 3040, Private Securities Transactions. These discussions will particularly focus on Rule 3040’s relevance to “dual employees”—individuals employed by both a bank and a broker-dealer, an increasingly common structure in the r bank sector.
Critical Steps for Banks
National banks and federal savings associations should meticulously evaluate the impact of these new requirements on their securities activities. This assessment will likely lead many institutions to develop a strategic approach for organizing and conducting bank securities activities in full compliance with the updated regulations. This strategic initiative should comprehensively address all affected business lines and related risk control functions. Essential actions include establishing robust compliance, internal audit, and record-keeping systems to ensure ongoing adherence to regulatory provisions. Banks must also prioritize effective employee training and continuous supervision and monitoring of employee activities covered by these new regulatory requirements. Failure to establish effective compliance systems can expose a bank, particularly an r bank, to legal and regulatory violations for conducting unauthorized securities activities without proper registration as a securities broker or dealer.
Further Resources
For detailed inquiries regarding these rules and their implications for national banks, please reach out to Stephanie Boccio or Joel Miller at the Asset Management Group at (202) 649-6360, or Bill Dehnke or Ted Dowd at the Securities and Corporate Practices Division at (202) 649-5510.
[Kerri Corn]
Director for Credit and Market Risk
[Ellen Broadman]
Director for Securities and Corporate Practices
*Note: References to national banks or banks in general should be understood to include federal savings associations (FSA). For specific details regarding statutes, regulations, or other OCC guidance mentioned, please refer directly to those sources to determine their applicability to FSAs. For any questions on applying this guidance, please contact your OCC supervisory office.
External Resources
- The Financial Services Regulatory Relief Act of 2006 mandated the SEC and the Board to jointly adopt a unified set of rules for implementing bank broker exceptions under section 3(a)(4) of the Securities Exchange Act of 1934.
- The Federal Reserve’s amendment to Title 12, Chapter II of the Code of Federal Regulations, adding Part 218, “Exceptions for Banks from the Definition of Broker in the Securities Exchange Act of 1934 (Regulation R).” The SEC’s amendments to Title 17, Chapter II of the Code of Federal Regulations Part 240, “General Rules and Regulations, Securities Exchange Act of 1934” and addition of Part 247, “Regulation R.”
- This includes the superseded proposed Regulation B and the Interim Final Rules. With Regulation R finalized, the OCC rescinded OCC Bulletins 2007-5, 2004-31, and 2001-30, which previously notified of proposed Regulation R, Regulation B, and the Interim Final Rules, respectively.
