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OCC Bulletin 2007-42 | October 29, 2007
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Chief Executive Officers and Compliance Officers of All National Banks, Department and Division Heads, and All Examining Personnel
As of May 17, 2012, this guidance applies to federal savings associations in addition to national banks.*
This issuance is to notify you that the Securities and Exchange Commission (SEC) and the Board of Governors of the Federal Reserve System (Board) have jointly issued final rules that define the extent to which securities brokerage activities of banks are subject to SEC regulation.1 The final rules, known as "Regulation R," will implement provisions of the Gramm–Leach–Bliley Act of 1999 (GLBA) that set forth certain exceptions for banks from the broker-dealer registration requirements of the Securities Exchange Act of 1934 (Exchange Act).2 In developing the final rules, the SEC and the Board consulted with the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS). When finalizing the rules, the SEC and the Board also considered the comments received on the proposed rules issued in December 2006. Regulation R supersedes the SEC’s previous related proposals issued after the enactment of GLBA.3
Prior to GLBA, banks were excluded from the definition of "broker" contained in the Exchange Act and were exempt from the Exchange Act's broker rules and registration requirements. GLBA provided that banks are excluded from the definition of "broker" only to the extent that their securities activities fall within one or more of GLBA's exceptions. These exceptions cover banks' securities activities in connection with third-party brokerage arrangements, trust and fiduciary activities, permissible securities transactions, certain stock purchase plans, sweep accounts, affiliate transactions, private securities offerings, safekeeping and custody activities, identified banking products, municipal securities, and a de minimis number of other securities transactions. To the extent a bank plans to engage in the business of effecting securities transactions for others' accounts and does not qualify for GLBA's statutory exceptions or the exemptions adopted by the SEC and the Federal Reserve, the bank will be required to either register with the SEC as a broker or will have to "push out" these activities to a registered affiliate or third-party brokerage firm.
Regulation R defines the terms used in several of GLBA's statutory exceptions and includes certain related exemptions. Specifically, the final rules implement the statutory exceptions that allow a bank, subject to certain conditions, to continue to conduct securities transactions for its customers as part of the bank's trust and fiduciary, custodial, and deposit sweep functions, and to refer customers to a securities broker-dealer pursuant to a networking arrangement with the broker-dealer. Regulation R also includes certain exemptions related to foreign securities transactions, non-custodial securities lending transactions conducted in an agency capacity, and the execution of transactions other than through a broker-dealer.
The effective date of most of Regulation R's provisions is September 28, 2007. Banks are exempt from complying with the rules and the "broker" exceptions in Section 3(a)(4)(B) of the Exchange Act until the first day of their first fiscal year that commences after September 30, 2008. For most national banks the compliance date will be January 1, 2009. Regulation R was published in the Federal Register on October 3, 2007.
Simultaneously, the SEC also amended and adopted related rules regarding exemptions from the definition of "broker" and "dealer" for certain securities activities conducted by banks. In particular, the SEC is adopting a conditional exemption that will allow banks to effect riskless principal transactions with non-U.S. persons pursuant to Regulation S under the Securities Act of 1933. The SEC is also amending an existing exemption from the definition of "dealer" for banks' conduit securities lending activities. Additionally, the SEC amended its rules governing brokers to align these rules with the new bank broker and dealer provisions.
The effective date of these final rules is November 2, 2007. The SEC's companion release was also published in the Federal Register on October 3, 2007
As required by GLBA, the banking agencies (Federal Reserve, OCC, FDIC, and OTS) will develop, and request public comment on, record keeping rules for banks that operate under the broker exceptions in the Exchange Act. These rules will be developed in consultation with the SEC and will establish record keeping requirements to enable banks to demonstrate compliance with GLBA's statutory exceptions and the newly finalized rules.
The banking agencies also are revisiting the Interagency Statement on Retail Sales of Nondeposit Investment Products to determine the appropriate revisions based on changes implemented by the GLBA and implementing regulations.
The SEC and Federal Reserve will jointly issue any interpretations and responses to requests for no-action letters or other interpretative guidance concerning the scope or terms of the exceptions and requirements of Regulation R. The SEC, Federal Reserve, and the appropriate federal banking agencies will consult and coordinate to the extent appropriate on any proposed formal enforcement actions taken against a bank for violations of Regulation R.
The SEC and banking agencies also expect to continue the dialogue with the Financial Industry Regulatory Authority concerning potential modifications to the Authority’s Rule 3040, Private Securities Transactions. The discussion will focus upon Rule 3040's applicability to "dual employees," in situations when individuals are employees of both a bank and a broker-dealer.
National banks should assess how these new requirements will affect their securities activities. Based upon this assessment, many banks will likely conclude that they need to develop a strategic initiative that focuses on how to organize and conduct bank securities activities in compliance with the new requirements. This strategic initiative should cover comprehensively the effected lines of business and their associated risk control functions. Actions should include establishing effective compliance, internal audit, and record keeping systems to ensure conformance with the regulatory provisions. Banks should also implement effective bank employee training and ongoing supervision and monitoring of bank employee activities covered by the new regulatory requirements. Banks that do not establish effective compliance systems risk exposing the bank to violations of law and regulations for conducting unauthorized securities activities in an unregistered securities broker or dealer.
Should you have any questions regarding these rules and their impact on national banks, please contact Stephanie Boccio or Joel Miller in the Asset Management Group at (202) 649-6360, or Bill Dehnke or Ted Dowd in 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
*References in this guidance to national banks or banks generally should be read to include federal savings associations (FSA). If statutes, regulations, or other OCC guidance is referenced herein, please consult those sources to determine applicability to FSAs. If you have questions about how to apply this guidance, please contact your OCC supervisory office.
1The Financial Services Regulatory Relief Act of 2006, among other things, required the SEC and the Board to adopt jointly a single set of rules to implement the bank broker exceptions in section 3(a)(4) of the Securities Exchange Act of 1934.
2The Federal Reserve amended Title 12, Chapter II of the Code of Federal Regulations by adding a new Part 218, "Exceptions for Banks from the Definition of Broker in the Securities Exchange Act of 1934 (Regulation R)." The SEC amended Title 17, Chapter II of the Code of Federal Regulations Part 240, "General Rules and Regulations, Securities Exchange Act of 1934" and added Part 247, "Regulation R."
3This includes proposed Regulation B and the Interim Final Rules. With the finalization of Regulation R, the OCC is rescinding OCC Bulletins 2007-5, 2004-31 and 2001-30 that respectively provided notification of the previously proposed: Regulation R; Regulation B; and the Interim Final Rules.
