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Key Provisions of the Joint Rules
The rules define statutory terms, and provide banks with exemptions from broker-dealer registration for limited bank securities activities. In addition, the rules provide an exemption from possible third-party rescission rights when a bank acts as an unregistered broker. The following is a detailed description of these provisions of Regulation R.
Networking Exception. The networking exception allows banks to receive compensation for referring bank customers to broker-dealers. The Exchange Act provides that banks may pay unregistered employees "nominal" incentive compensation for making these referrals.
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 rules refer to these fees collectively as "relationship compensation." These fees may be considered "relationship compensation" even if paid by a service provider rather than directly by an investment company.
The rules establish a test to determine how a bank is "chiefly compensated," and permit a bank to choose either an account-by-account or bank-wide approach. Either alternative uses a two-year rolling average comparison of the fees from the account and allows banks to exclude the compensation associated with a securities transaction conducted in accordance with any of the other exceptions or exemptions as long as the bank excludes that compensation from both relationship compensation (if applicable) and total compensation. The revenues of certain foreign branches of U.S. banks are excluded for purposes of the "chiefly compensated" test.
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 rules define terms used in the sweep accounts exception, and 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 will have to provide the customer with a prospectus showing the fund's fees, and could not characterize the fund shares as no-load. This final rule also will permit a bank to effect transactions under the exemption on behalf of another bank as part of a program for the investment or reinvestment of the deposit funds of, or collected by, the other bank.
Safekeeping and Custody. The safekeeping and custody exception permits banks to perform specified services in connection with safekeeping and custody of securities. Under the 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.
Exemption for Banks to Effect Transactions in Investment Company Securities. The rules include an exemption that permits banks to effect certain transactions in mutual funds and in certain variable insurance products that are registered, and funded by a separate account, through the National Securities Clearing Corporation, directly with a transfer agent, or directly with an insurance company or a separate account that is excluded from the definition of transfer agent in Section 3(a)(25) of the Exchange Act. To take advantage of the exemption, the security must not be traded on a national securities exchange or through the facilities of a national securities association or an interdealer quotation system.
Exemption for Banks to Effect Transactions in Company Securities. The rules include an exemption to permit a bank to effect a transaction in the securities of a company directly with a transfer agent acting for the company as long as four conditions are met. First, no commission may be charged with respect to the transaction. Second, the transaction must be conducted solely for the benefit of an employee benefit plan. Third, the security must be obtained directly from the company or an employee benefit plan of the company. And fourth, the security must be transferred only to the company or an employee benefit plan of the company. Securities obtained from, or transferred to, a participant in an employee benefit plan on behalf of the plan are considered to be obtained from, or transferred to, the plan.
Securities Lending Exemption. The exemption for banks from the definition of broker for noncustodial securities lending activities will 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. The Commission also voted to jointly with the Board request comment regarding repurchase agreements.
Regulation S Securities Exemption. The rules provide an exemption to allow banks to effect certain agency transactions involving Regulation S securities. Banks may rely on the rule if they have a reasonable belief that securities were initially sold in compliance with Regulation S.
Section 29 Exemptions. The rules 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, the rules 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 did not result in any significant harm, financial loss, or cost to the person seeking to void the contract.
Key Provisions of the SEC-only Release
The second release to be issued by the Commission concerns a conditional exemption from the definition of "dealer" for banks' Regulation S transactions, renumbers the current exemption from the definition of "dealer" for banks' securities lending activities, eliminates outdated rules, and provides a clarifying amendment to Exchange Act Rule
Timing and Temporary Exemption
As adopted, Regulation R provides banks with a transitional exemption until the first day of their first fiscal year commencing after Sept. 30, 2008. This will give banks time to make any necessary changes in their systems and compliance programs and should ensure that banks have time to come into compliance with the Exchange Act provisions relating to the broker definition.
So feel free to explain what in these rules constitutes "teeth" ?
How would any of these provisions have helped prevent the banking mess??
