The SEC voted on June 2, 2004 to publish proposed Regulation B ("Proposed Regulation B") which will implement provisions of the Gramm-Leach-Bliley Act of 1999 ("GLBA") that identify the securities activities that banks may engage in without registering as "brokers" under the Securities Exchange Act of 1934, as amended ("Exchange Act"). The GLBA replaced the blanket exemption from the definition of "broker" previously enjoyed by banks with eleven exemptions. (See the December 12, 2000 issue of the Alert for a description of the exemptions.) Proposed Regulation B builds on interim rules that were adopted by the SEC in 2001 but suspended after banks and their regulators raised objections. As a general matter, Proposed Regulation B seeks to further elucidate the eleven statutory exemptions, adds a few new exemptions, and applies them as appropriate to banks and thrifts.
Based on an SEC release issued June 2, 2004, Proposed Regulation B would amend the interim rules governing third-party brokerage (networking) arrangements to clarify the scope of activities in which unregistered bank employees may engage and define "nominal compensation." The regulation would amend the provisions governing trust and fiduciary activities to expand the definition of "relationship compensation" to include fees generated by all types of assets and provide additional exemptions, including:
- a small bank custody exemption;
- a new exemption allowing banks acting as trustees and in other limited capacities (as well as qualified investors) to be able to make investments in money market funds that pay 12b-1 fees;
- a revision of the 9 to 1 safe harbor ratio exemption that substantially reduces the procedural requirements and allows the exemption to be utilized on a line-of-business basis, on a bank-wide basis, and for accounts that predate the development of an account-by-account compliance system;
- a personal trust account exemption for personal trust accounts established prior to this proposal;
- a conditional safe harbor that allows banks to measure their compensation in one year to determine their status for the next year and provides appropriate cure periods;
- an account-by-account exemption that would give a bank some additional flexibility when evaluating individual accounts for which its compensation would not meet the "chiefly compensated" comparison. (This exemption would also provide formulas to allocate "sales compensation" (which goes into the comparison) from sources such as mutual funds that are paid on an aggregate basis.); and
- an exemption, retained from the interim rules, for a bank acting as an indenture trustee.
Proposed Regulation B would amend the provisions of the interim rules governing the safekeeping and custody exemption, as follows:
- make the small bank custody exemption available to more banks and eliminate many of its restrictions;
- modify the bank custody exemption to do the following:
- permit a bank to accept securities orders so long as the fees it receives for clearing and settling securities transactions do not vary, directly or indirectly, based on whether the bank accepts an order to purchase or sell a security;
- limit the availability of this exemption to "qualified investors" as defined in Exchange Act Section 3(a)(54), on a going forward basis;
- grandfather all existing custody accounts to avoid disruption;
- permit a bank to continue to receive 12b-1 or shareholder servicing fees for these custody accounts; and
- continue to permit a bank to pass any executing broker-dealer's charges through to the customer.
The SEC also proposed three new targeted exemptions that would:
- permit a bank to effect transactions for qualified investors, trustee and fiduciary accounts, and certain agency accounts, including escrow agency accounts, in money market funds that pay 12b-1 fees;
- permit bank trustees and non-fiduciary administrators to receive asset-based sales charges and service fees from mutual funds to offset plan administration fees; and
- permit a bank, subject to the satisfaction of certain limited conditions, to sell securities that are exempt from registration under SEC Regulation S to non-U.S. persons who are located outside of the U.S.
It is expected that the full text of the regulation will be published shortly in the Federal Register. Comments on Proposed Regulation B are due on or before August 1, 2004. A more detailed discussion of the regulation will be provided in a future issue of the Alert after the full text of the regulation becomes available to us.