Commission Notice:
Order Extending Temporary Exemption of Banks, Savings Associations, and Savings Banks from the Definitions of "Broker" and "Dealer" Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934; Notice of Intent to Amend Rules

SECURITIES AND EXCHANGE COMMISSION

Release No. 34-44570 / July 18, 2001

File No. S7-12-01

Commission Order and Notice:

Order Extending Temporary Exemption of Banks, Savings Associations, and Savings Banks from the Definitions of "Broker" and "Dealer" Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934; Notice of Intent to Amend Rules

I. Background

The Gramm-Leach-Bliley Act ("GLBA") repealed the blanket exception of banks from the definitions of "broker" and "dealer" under the Securities Exchange Act of 1934 ("Exchange Act")¹ and replaced this full exception with functional exceptions incorporated in amended definitions of "broker" and "dealer." Under the statute, banks that engage in securities activities either must conduct those activities through a broker-dealer or assure that their securities activities fit within the terms of a functional exception to the amended definitions of "broker" and "dealer."

Under the GLBA, the amended definitions of "broker" and "dealer" became effective May 12, 2001. On May 11, 2001, the Securities and Exchange Commission ("Commission") issued interim final rules ("Rules") to define certain terms used in, and grant additional exemptions from, the amended definitions of "broker" and "dealer."² The Rules include Rule 15a-7, which gives banks a temporary exemption from the definitions of "broker" and "dealer" until October 1, 2001, and provides an additional conditional exemption until January 1, 2002. The effect of Rule 15a-7 is to delay the date for compliance with the new statutory scheme under the GLBA. A separate rule extends the exceptions and exemptions granted to banks under the statute and Rules to savings associations and savings banks.³

II. Extension of Temporary Exemption from Definitions of "Broker" and "Dealer"

Based on comments received to date in response to the Adopting Release⁴ and recent discussions with banks and banking agencies, it appears that the temporary exemptions from the definitions of "broker" and "dealer" granted in Rule 15a-7 might not provide some banks with sufficient time to adapt to the new statutory scheme under the GLBA.

In addition, in light of the continuing dialogue between the Commission and industry participants, the Commission recognizes that some of the Rules in their current form will need to be amended. As such, banks could be faced with the challenge of complying with the new statutory scheme based on the guidance (and exemptions) provided under the current Rules only to have that guidance (and exemptions) change when the Rules are amended. Several commenters requested that the Commission extend the temporary exemption from the definitions of "broker" and "dealer," thereby extending the date for compliance with the new statutory scheme, to address this concern.⁵

The Commission also notes that the Rules were issued with a request for comments and that the Commission will need time to give careful consideration to the comments and determine what changes should be made to the Rules.

For these reasons, the Commission finds that extending the temporary exemption of banks, savings associations, and savings banks from the definitions of "broker" and "dealer" is necessary and appropriate in the public interest, and is consistent with the protection of investors. The Commission believes that extending the exemption until May 12, 2002 will prevent banks from unnecessarily incurring costs to comply with the statutory scheme based on the current Rules rather than the Rules when amended and will give the Commission time to fully consider comments received on the Rules and amend the Rules as necessary.

III. Notice of Intent to Amend Rules

As discussed above, the Commission has engaged in constructive dialogue with the banking industry and banking regulators. Based on this dialogue and comment letters received to date, the Commission recognizes that some of the Rules in their current form will need to be amended.

The Commission hereby gives notice that it expects to amend the Rules and further extend the temporary exemption from the definitions of "broker" and "dealer," as appropriate, so that banks will have a sufficient transition period to bring their operations into compliance with the new statutory scheme based on the amended Rules. We note that comments received to date have indicated that banks may need as much as a year to develop compliance systems to adapt to the GLBA in light of amended Rules. The Commission does not expect banks to develop compliance systems for the provisions of the GLBA discussed in the Rules until the Commission has amended the Rules. The Commission believes that banks should continue to focus on the transition to full implementation of functional regulation, including seeking compliance advice regarding issues under the GLBA and exploring forming relationships with broker-dealers if needed.

IV. Conclusion

Accordingly, pursuant to Section 36 of the Exchange Act [15 U.S.C. 78mm],

IT IS HEREBY ORDERED that banks, savings associations, and savings banks are exempt from the definitions of the terms "broker" and "dealer" under the Exchange Act until May 12, 2002.

By the Commission.

Jonathan G. Katz
Secretary

July 18, 2001

Footnotes

http://www.sec.gov/rules/other/34-44570.htm