[Federal Register: December 26, 2006 (Volume 71, Number 247)]
[Proposed Rules]
[Page 77550-77556]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26de06-23]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-54947; File No. S7-23-06]
RIN 3235-AJ77
Exemptions for Banks Under Section 3(a)(5) of the Securities
Exchange Act of 1934 and Related Rules
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission is publishing for
comment proposed rules and rule amendments regarding exemptions from
the definitions of ``broker'' and ``dealer'' under the Securities
Exchange Act of 1934 (``Exchange Act'') for banks'' securities
activities. In particular, the Commission is re-proposing a conditional
exemption originally proposed in 2004 that would allow banks to effect
riskless principal transactions with non-U.S. persons pursuant to
Regulation S under the Securities Act of 1933 (``Securities Act''). The
Commission also is proposing to amend and redesignate an existing
exemption from the definition of ``dealer'' for banks' securities
lending activities as a conduit lender. In addition, the Commission is
proposing to amend a rule that grants a limited exemption from U.S.
broker-dealer registration for foreign broker-dealers, conforming the
rule to amended definitions of ``broker'' and ``dealer'' under the
Exchange Act. Finally, the Commission is requesting comment on its
intention to withdraw a rule defining the term ``bank'' for purposes of
Sections 3(a)(4) and 3(a)(5) of the Exchange Act, because of judicial
invalidation, a time-limited exemption for banks' securities
activities, because of the passage of time, and an exemption from the
definition of ``broker'' and ``dealer'' for savings associations and
savings banks, an exemption no longer necessary because of the passage
of the Regulatory Relief Act.
DATES: Comments should be received on or before March 26, 2007.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments:
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-23-06 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-23-06. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also
[[Page 77551]]
available for public inspection and copying in the Commission's Public
Reference Room, 100 F Street, NE., Washington, DC 20549. All comments
received will be posted without change; we do not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief Counsel;
Linda Stamp Sundberg, Senior Special Counsel, at (202) 551-5550, Office
of the Chief Counsel, Division of Market Regulation, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is
requesting public comment on proposed Rules 3a5-2, 3a5-3, and 15a-6
under the Exchange Act.
Table of Contents
I. Introduction and Background
II. The Proposed Rules and Rule Amendments
A. Regulation S Transactions with Non-U.S. Persons
B. Amendment to Exchange Act Rule 15a-6
C. Securities Lending by Bank Dealers
D. Proposed Withdrawal of Exchange Act Rule 3b-9, Rule 15a-8,
and Rule 15a-9
III. Administrative Law Matters
A. General Request for Comments
B. Paperwork Reduction Act Analysis
C. Consideration of Benefits and Costs
D. Consideration of Burden on Competition, and on Promotion of
Efficiency, Competition, and Capital Formation
E. Consideration of Impact on the Economy
F. Regulatory Flexibility Analysis
IV. Statutory Authority
V. Text of Proposed Rules and Rule Amendments
I. Introduction and Background
Today, the Commission and the Board of Governors of the Federal
Reserve System (``Board'') are requesting comment on jointly proposed
rules to implement the broker exceptions for banks relating to third-
party networking arrangements, trust and fiduciary activities, sweep
activities, and safekeeping and custody activities.\1\
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\1\ Exchange Act Release No. 54946 (Dec. 18, 2006) (``Joint
Proposal'').
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The proposals in this release are intended to complement the Joint
Proposal.\2\ In particular, we re-propose (and propose to redesignate
as Rule 3a5-2) a conditional exemption from the definition of dealer
for banks to purchase from and sell to non-U.S. persons offerings in
securities exempt under Regulation S.\3\ In addition, we propose a
clarifying amendment to Exchange Act Rule 15a-6,\4\ which provides a
conditional exemption from U.S. broker-dealer registration for certain
foreign broker-dealers. This amendment would conform the language of
Rule 15a-6 to more closely track the statutory changes made by the
GLBA. We also propose to redesignate as new Rule 3a5-3 existing Rule
15a-11 and to amend this exemption from the definition of dealer for
banks' conduit securities lending activities. Finally, we propose to
withdraw Exchange Act Rule 3b-9,\5\ in which the Commission defined the
term ``bank'' for purposes of Sections 3(a)(4) \6\ and 3(a)(5) \7\ of
the Exchange Act, due to judicial invalidation, Exchange Act Rule 15a-
8,\8\ a time-limited exemption for banks' securities activities,
because of the passage of time, and Exchange Act Rule 15a-9,\9\ an
exemption from the definitions of ``broker'' and ``dealer'' for savings
associations and savings banks, an exemption no longer necessary after
passage of the Regulatory Relief Act.
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\2\ On May 11, 2001, the Commission adopted interim final rules
(``the Interim Rules'') regarding the Gramm-Leach-Bliley Act
(``GLBA'') definitions of broker and dealer. See Exchange Act
Release No. 44291 (May 11, 2001), 66 FR 27760 (May 18, 2001) (http://www.sec.gov/rules/final/34-44291.htm
). On June 17, 2004, the
Commission proposed Regulation B. See Exchange Act Release No. 49879
(June 17, 2004), 69 FR 39682 (June 30, 2004) (http://www.sec.gov/rules/proposed/34-49879.htm
). Both the Interim Rules as they apply
to the broker activities of banks and Regulation B are superseded by
the current joint rulemaking. The Regulatory Relief Act does not
directly affect the operation of the rules the Commission adopted
concerning banks' dealer activities. See Exchange Act Release No.
47364 (Feb.13, 2003), 68 FR 8686 (Feb. 24, 2003) (http://www.sec.gov/rules/final/34-47364.htm
). However, we are proposing
some limited amendments to separate and redesignate certain rules
that provide exemptions to the definitions of both broker and
dealer.
\3\ The rule was proposed in 2004 but no further action on the
proposed rule was taken by the Commission.
\4\ 17 CFR 240.15a-6.
\5\ 17 CFR 240.3b-9.
\6\ 15 U.S.C. 78c(a)(4).
\7\ 15 U.S.C. 78c(a)(5).
\8\ 17 CFR 240.15a-8.
\9\ 17 CFR 240.15a-9.
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II. The Proposed Rules and Rule Amendments
A. Regulation S Transactions With Non-U.S. Persons
In response to an industry request,\10\ the Commission proposed
Exchange Act Rule 771 in 2004.\11\ We are re-proposing at this time the
exemption we proposed in 2004, as applied to banks' dealer activities,
substantially as proposed. As originally proposed, this rule would
provide banks with a conditional exemption from the definition of
``dealer'' to engage in transactions with non-U.S. persons pursuant to
Regulation S under the Securities Act of 1933.\12\ In particular, a
bank could purchase and sell ``eligible securities'' \13\ to offshore,
non-U.S. persons on a ``riskless principal'' basis.\14\ A bank could
also resell any eligible Regulation S security, after its purchase and
after its initial issuance, to a non-U.S. person as long as the bank
continues to comply with the requirements of Regulation S.\15\ After
the requirements of Regulation S cease to apply to an issuance, a bank
could resell such a security to another non-U.S. person or a broker-
dealer, as long as the transaction complies with another bank broker or
dealer exception or exemption.
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\10\ See letter dated May 27, 2004, from Lawrence R. Uhlick,
Executive Director and General Counsel, Institute of International
Bankers to Catherine McGuire, Chief Counsel, Division of Market
Regulation, Securities and Exchange Commission (http://www.sec.gov/rules/proposed/s72604.shtml
). Regulation S [17 CFR 230.901, et seq.]
specifies the requirements for an offer or sale of securities to be
deemed to occur outside the United States and therefore not subject
to the registration requirements of Section 5 of the Securities Act.
Regulation S permits the sale of newly issued off-shore securities
and re-sales of off-shore securities from a non-U.S. person to a
non-U.S. person.
\11\ See Exchange Act Release No. 49879, supra note 2. The
Commission originally proposed this exemption to cover both a banks'
broker and dealer securities activities. The Commission and the
Board are jointly are re-proposing this exemption for banks' broker
activities in response to passage of the Financial Services
Regulatory Relief Act of 2006, Pub. L. 109-351, 120 Stat. 1966
(2006) (``Regulatory Relief Act''), which requires a joint proposal
and provides that the final rules will supersede the existing bank
broker rules. See text at note 36 infra.
\12\ Persons that conduct a broker or dealer business while
located in the United States must register as broker-dealers (absent
an exemption), even if they direct all of their selling efforts
offshore. Exchange Act Release No. 27017 (July 11, 1989), 54 FR
30013, 30016 (July 19, 1989). Nothing in proposed Rule 771 would
affect the necessity of complying with Regulation S (17 CFR 230.904)
or any other requirements of or exemptions from the Securities Act.
Since the original proposal covered both agency and riskless
principal transactions, an exemption for agency (brokerage)
transactions is being separately proposed as a part of the Joint
Proposal.
\13\ Proposed Rule 771 would define an ``eligible security'' as
a security not being sold from the inventory of the bank or an
affiliate of the bank, and not being underwritten by the bank or an
affiliate of the bank on a firm-commitment basis unless the bank
acquired the security from an unaffiliated distributor that did not
purchase the security from the bank or a bank affiliate.
\14\ Proposed Rule 771 would define a ``riskless principal
transaction'' as a transaction in which, after receiving an order to
buy from a customer, the bank purchased the security from another
person to offset a contemporaneous sale to such customer or, after
having received an order to sell from a customer, the bank sold the
security to another person to offset a contemporaneous purchase from
such customer.
\15\ Rule 904 of Regulation S (17 CFR 230.904).
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In explaining the need for an exemption, the industry group
expressed the view to the Commission
[[Page 77552]]
staff that non-U.S. persons expect to deal with one private banker, and
that these customers would not choose to deal with a registered broker-
dealer to conduct securities transactions in Regulation S securities,
but would instead look to foreign banks to effect these transactions.
We are re-proposing this exemption for the same reasons we proposed
it in 2004. In proposing this exemption, we noted that the limited
conditions in the proposed rule reflected our belief that non-U.S.
persons generally will not be relying on the protections of the U.S.
securities laws when purchasing Regulation S securities from U.S.
banks.\16\ By their terms, these securities are not intended to be sold
within the U.S. We also expressed our understanding that non-U.S.
persons can purchase the same securities from banks located outside of
the U.S. We invited comment on whether U.S. broker-dealer registration
should be required with respect to transactions with these non-U.S.
persons who are purchasing new offering securities offshore, or may be
selling or purchasing seasoned securities.
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\16\ Exchange Act Release No. 49879, supra note 2, 69 FR 39720.
We also explained that although we generally believe that U.S.
broker-dealers should be subject to the same standards of conduct
when dealing with non-U.S. persons, this principle is less
compelling when the foreign person has chosen to deal with a U.S.
bank with respect to Regulation S securities that are designed to be
sold to non-U.S. persons offshore.
Moreover, while no rules have been adopted, the exemption
provided by Exchange Act Section 30(b), concerning foreign
securities, has been held unavailable if the United States is used
as a base for securities fraud perpetrated on foreigners, Arthur
Lipper Corp. v. SEC, 547 F.2d 171 (2d Cir. 1976), reh. denied, 551
F.2d 915 (2d Cir. 1977), cert. denied 434 U.S. 1009.
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We received few comments on this proposed exemption.\17\ Commenters
generally supported proposed Rule 771, stating that it would allow
banks to compete with foreign banks not subject to Commission
regulation.\18\ However, several commenters urged the Commission to
broaden the proposed exemption. For example, one commenter suggested
that the Commission modify the proposed exemption to include
transactions for foreign investors in all securities sold in the United
States.\19\ Two commenters urged the Commission to amend the proposed
definition of ``eligible security'' to eliminate the restriction on
banks' selling securities from the inventory of affiliates or those
underwritten by affiliates.\20\ Two commenters suggested that the
Commission expand the exemption to cover all secondary market trading
with offshore persons in any ``foreign securities'' not effected on a
U.S. exchange or Nasdaq, stating that it is burdensome for a bank to
determine whether a security was initially sold in compliance with
Regulation S.\21\ One commenter also stated that to the extent the
proposed rule requires a bank to make any determination or conduct any
investigation of the way in which a security was initially offered, the
rule should only require the bank to have a ``reasonable belief'' that
the eligible security was initially sold in compliance with Regulation
S.\22\ In this commenter's view, a bank may not have direct access to
all of the information necessary to determine whether a security was
initially offered under Regulation S or part of a class that was
offered under Regulation S.\23\
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\17\ See, e.g., letter dated September 1, 2004 from Jeffrey P.
Neubert, President and CEO, the Clearing House (``Clearing House
letter''); letter dated September 1, 2004 from Lawrence R. Uhlick,
Executive Director and Chief Counsel, Institute of International
Bankers (``IIB letter''); letter dated September 1, 2004 from
Agustin Abalo, President, Florida International Bankers Association,
Inc. (``FIBA letter''); letter dated September 1, 2004 from Sarah A.
Miller, Director, Center for Securities, Trust and Investment,
American Bankers Association and General Counsel, ABA Securities
Association (``ABA/ABASA letter''); and letter dated September 1,
2004 from Charles C. Cutrell, III, Executive Vice President and
General Counsel, State Street Bank and Trust Company (``State Street
letter'').
\18\ See, e.g., Clearing House letter, IIB letter.
\19\ State Street letter.
\20\ See Clearing House letter; ABA/ABASA letter.
\21\ IIB letter, FIBA letter.
\22\ IIB letter.
\23\ IIB letter. This commenter noted, however, that a bank may
be able to obtain certain information regarding the security from
third party information vendors or may need to rely on information
statements or offering memoranda, filings, or other third-party
sources to determine how the security was offered. This commenter
said that the bank's exemption should not be jeopardized if this
information is inaccurate or misleading as long as the bank had a
reasonable belief that the information upon which it was relying was
accurate and complete.
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After carefully considering the comments, we are proposing the
exemption for banks' riskless principal transactions in Regulation S
securities, as new Rule 3a5-2, substantially as initially proposed.
This proposed rule, however, incorporates the reasonable belief
standard suggested by one of the commenters because we are persuaded
that a bank should not suffer the loss of the exemption when due care
is taken to identify the source of a security, even if an error in the
identification occurs.\24\ We request comment on all aspects of
Proposed Rule 3a5-2.
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\24\ In addition to adding the reasonable belief standard, the
re-proposal includes some non-substantive clarifying changes to the
text of the rule as proposed in 2004.
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B. Amendment to Exchange Act Rule 15a-6
In 2004, the Commission also proposed a clarifying amendment to
Exchange Act Rule 15a-6, which provides a conditional exemption from
U.S. broker-dealer registration for certain foreign broker-dealers.\25\
Exchange Act Rule 15a-6(a)(4)(i) allows a foreign broker-dealer,
without registering in the United States, to effect transactions in
securities with or for a U.S.-registered broker-dealer or bank acting
``in a broker-dealer capacity as permitted by U.S. law.'' \26\ Thus, in
transactions between a U.S. bank and its foreign broker-dealer
affiliate, acting as principal, the U.S. bank could rely on the
affiliate transactions exception in the GLBA,\27\ and the foreign
affiliate could rely on Rule 15a-6(a)(4)(i). As the Commission
explained in 2001, however, Exchange Act Rule 15a-6(a)(4)(i) does not
permit a foreign broker-dealer or bank to have direct contact with
customers of the U.S. bank.\28\ Moreover, the GLBA affiliate
transactions exception from the definition of broker for banks would
not permit the U.S. bank to effect transactions with the bank's foreign
affiliate's customers.\29\ We received no comments on our 2001
discussion of the interplay between Exchange Act Rule 15a-6 and the
affiliate transactions exemption and we are taking the same approach in
the current proposal.
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\25\ Even when the GLBA permits a bank to engage in securities-
related activities without itself registering as a broker-dealer, a
broker-dealer engaged in the business of effecting transactions for
such bank still must register--absent an exemption or other
exclusion from the broker-dealer registration requirements of the
Exchange Act. For instance, a foreign broker-dealer that executes
trades for a bank under Exchange Act Section 3(a)(4)(C) would need
to register as a U.S. broker-dealer if it does not meet the
conditions of Exchange Act Rule 15a-6, or it does not otherwise
qualify for an exemption from registration. Foreign banks cannot
rely on the GLBA bank exceptions because they do not meet the
definition of ``bank'' in Exchange Act Section 3(a)(6). However,
U.S. branches and agencies of foreign banks would meet the
definition of bank. See Exchange Act Release No. 27017, supra note
12, 54 FR 30015.
\26\ 17 CFR 240.15a-6(a)(4)(i).
\27\ 15 U.S.C. 78c(a)(4)(B)(vi).
\28\ Exchange Act Release No. 44291, supra note 2.
\29\ Id. If the Commission were to adopt the exemptions for
Regulation S securities, proposed supra, a bank would be permitted
to sell Regulation S securities to non-U.S. persons, including
customers of a foreign affiliate, as long as it met the conditions
of that exemption.
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In light of the amended definitions of ``broker'' and ``dealer,''
the Commission proposed an amendment to Exchange Act Rule 15a-6 in
2004.\30\ Currently, Exchange Act Rule 15a-6(a)(4)(i) refers to ``a
bank acting in a broker or dealer
[[Page 77553]]
capacity as permitted by U.S. law.'' As amended, however, the
definitions of `broker' and `dealer' in Exchange Act Section 3(a)(4)
and 3(a)(5), respectively, provide that banks engaging in the
activities permitted under the conditional exceptions in those
definitions ``shall not be considered to be'' brokers or dealers. To
reflect this change, we proposed to amend Exchange Act Rule 15a-
6(a)(4)(i) by replacing the phrase ``in a broker or dealer capacity as
permitted by U.S. law'' with the phrase ``pursuant to an exception or
exemption from the definition of `broker' or `dealer' in Sections
3(a)(4)(B) or 3(a)(5)(C) of the Act.'' \31\ We are now proposing to
conform Rule 15a-6 to the changes made by the GLBA by incorporating the
rules applicable to banks' broker and dealer activities as well as the
statutory provisions with the addition of the phrase, ``or the rules
thereunder.'' We are therefore re-proposing this modified clarifying
amendment to Rule 15a-6. We request comment on all aspects of this
proposal.
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\30\ Release No. 49879, supra note 2.
\31\ Nothing in this release should be construed as modifying
the Exchange Act Section 3(a)(6) definition of ``bank'' as it
applies to foreign banks. Currently, foreign banks generally would
not meet this definition and would be considered broker-dealers
under the U.S. securities laws. As such, foreign banks generally
would be required to register as U.S. broker-dealers unless they
qualify for an exemption from registration under Exchange Act Rule
15a-6.
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C. Securities Lending by Bank Dealers
In 2003, the Commission adopted Exchange Act Rule 15a-11, which
provides a conditional exemption from the definitions of both
``broker'' and ``dealer'' for banks engaging in securities lending
transactions.\32\ Rule 15a-11 provides that a bank is exempt from the
definition of ``broker'' and ``dealer'' under Sections 3(a)(4) and
3(a)(5) of the Exchange Act to the extent that, as a conduit
lender,\33\ it engages in securities lending transactions and any
securities lending services in connection with such transactions, with
or on behalf of a person the bank reasonably believes to be: (1) A
qualified investor as defined in Section 3(a)(54)(A) of the Exchange
Act; \34\ or (2) any employee benefit plan that owns and invests, on a
discretionary basis, not less than $25,000,000 in investments.\35\
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\32\ See Exchange Act Release No. 47364, supra note 2.
\33\ Under Rule 15a-11 as adopted, as well as under the proposed
amendment, ``conduit lender'' would mean a bank that borrows or
loans securities, as principal, for its own account, and
contemporaneously loans or borrows the same securities, as
principal, for its own account.
\34\ 15 U.S.C. 78c(a)(54)(A).
\35\ Under Rule 15a-11 as adopted, as well as under the proposed
amendment, ``securities lending transaction'' would mean a
transaction in which the owner of a security lends the security
temporarily to another party pursuant to a written securities
lending agreement under which the lender retains the economic
interests of an owner of such securities, and has the right to
terminate the transaction and to recall the loaned securities on
terms agreed by the parties. Under the proposal, ``securities
lending services'' would mean: (1) Selecting and negotiating with a
borrower and executing, or directing the execution of, the loan with
the borrower; (2) receiving, delivering, or directing the receipt or
delivery of loaned securities; (3) receiving, delivering, or
directing the receipt or delivery of collateral; (4) providing mark-
to-market, corporate action, recordkeeping or other services
incidental to the administration of the securities lending
transaction; (5) investing, or directing the investment of, cash
collateral; or (6) indemnifying the lender of securities with
respect to various matters.
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As explained in the Joint Proposal, the exemption as applied to
banks' broker activities was voided by the Regulatory Relief Act. The
Commission and the Board are proposing to reinstate--as Rule 772--this
exemption with respect to the definition of ``broker'' in the Joint
Proposal.\36\ We are proposing in this release to redesignate what was
Rule 15a-11 as Rule 3a5-3 and to amend former Rule 15a-11 to eliminate
its applicability to a bank's ``broker'' activities, while proposing to
maintain its ongoing availability for a bank's ``dealer'' activities.
We request comment on all aspects of these changes.
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\36\ As applicable to banks' broker activities, the Rule 15a-11
exemption was never operable because of the temporary exemption
applicable to all bank broker activities.
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D. Proposed Withdrawal of Exchange Act Rule 3b-9, Rule 15a-8, and Rule
15a-9
We intend to withdraw Exchange Act Rule 3b-9, in which the
Commission defined the term ``bank'' for purposes of Section 3(a)(4)
and 3(a)(5) of the Exchange Act. Rule 3b-9 was invalidated by the U.S.
Court of Appeals for the District of Columbia Circuit.\37\ We also
intend to withdraw Rule 15a-8, which provided a temporary exemption
from Exchange Act Section 29 liability for banks' securities
activities. This exemption expired. In addition, we intend to withdraw
Rule 15a-9, an exemption from the definition of ``broker'' and
``dealer'' for savings associations and savings banks. The Regulatory
Relief Act caused savings associations and savings banks to be treated
as ``banks,'' eliminating the need to differentiate between these
entities for the purposes of the Exchange Act. As a result, current
Rule 15a-9 is no longer necessary. We request comment on all aspects of
withdrawing Rule 3b-9, Rule 15a-8, and Rule 15a-9.
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\37\ American Bankers Association v. SEC, 804 F.2d 739 (1986).
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III. Administrative Law Matters
A. General Request for Comments
Interested persons are invited to submit written data, views and
arguments concerning this proposal. The Commission will consider the
comments we previously received. Commenters may reiterate or cross-
reference previously submitted comments.
B. Paperwork Reduction Act Analysis
These proposed amendments to two rules and this re-proposal of a
new rule would not impose recordkeeping or information collection
requirements, or other collections of information that require approval
of the Office of Management and Budget under 44 U.S.C. 3501, et seq.
Accordingly, the Paperwork Reduction Act does not apply.\38\
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\38\ We note that, as a practical matter, banks likely already
keep records that could be used to show they meet the terms of the
proposed exemption. We also note that Section 203 of the GLBA
specifically requires the bank regulators to promulgate
recordkeeping requirements.
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C. Consideration of Benefits and Costs
We believe that these two proposed rule amendments and the re-
proposal of a new rule would be consistent with Congress's intent in
enacting the GLBA and would provide banks with greater legal certainty
regarding their conduct with respect to securities transactions. The
rule amendments and the re-proposal are very limited in scope. The
Commission is re-proposing an exemption that would permit banks to
purchase from and sell to non-U.S. persons securities exempt under
Regulation S. The proposed rule would facilitate banks' compliance with
the federal securities laws and provide banks greater legal certainty
regarding such conduct. The proposed addition of the reasonable belief
standard would prevent banks from losing the exemption due to
inadvertent errors in identifying the source of securities sold under
the exemption, so long as the other conditions of the rule were met. We
do not expect banks to incur any costs related to the re-proposal. The
proposed clarifying amendment to Exchange Act Rule 15a-6 would conform
the rule to the revised statutory definition of ``broker'' and
``dealer'' under the Exchange Act as well as to the rules adopted
thereunder. With regard to securities lending activities, the
Commission proposes to amend existing Exchange Act Rule 15a-11, and to
redesignate it as Rule 3a5-3, to
[[Page 77554]]
eliminate the rule's reference to banks' ``broker'' activities, and to
clarify the rule's continued availability for banks' ``dealer''
activities. We do not expect banks to incur any costs related to these
proposed amendments. The proposed withdrawal of Exchange Act Rules 3b-9
and 15a-8 reflects the invalidation of Rule 3b-9 by the U.S. Court of
Appeals for the District of Columbia Circuit,\39\ and the expiration of
the 15a-8 exemption, respectively. Similarly, the proposed withdrawal
of Exchange Act Rule 15a-9 is proposed because the exemption is no
longer necessary after passage of the Regulatory Relief Act.
Withdrawing these rules would provide administrative certainty and
clarity, as rules no longer in effect would be removed from the Code of
Federal Regulations. The withdrawals are administrative in effect, and
thus would impose no costs. We request comments generally on the costs
and benefits associated with the re-proposal, the proposed amendments,
and the proposed rule withdrawals.
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\39\ See text at note 37 supra.
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D. Consideration of Burden on Competition, and on Promotion of
Efficiency, Competition, and Capital Formation
In accordance with our responsibilities under Section 3(f) of the
Exchange Act,\40\ we have considered both the protection of investors
and whether these rule amendments and the re-proposal would promote
efficiency, competition, and capital formation and have determined that
they are consistent with the public interest.\41\ In addition, Section
23(a)(2) of the Exchange Act requires us, in adopting rules under the
Exchange Act, to consider the anticompetitive effects of such rules, if
any, and to refrain from adopting a rule that will impose a burden on
competition not necessary or appropriate in furthering the purpose of
the Exchange Act.
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\40\ 15 U.S.C. 78w(a)(2). ``Whenever pursuant to this title the
Commission is engaged in rulemaking * * * and is required to
consider or determine whether an action is necessary or appropriate
in the public interest, the Commission shall also consider, in
addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation.''
\41\ 15 U.S.C. 78c(f).
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We do not believe that the amendments and the re-proposal, as well
as the elimination of Rules 3b-9, 15a-8, and 15a-9, would result in any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act. The proposed
amendments and the re-proposal would provide guidance to banks
regarding the scope of exceptions added to the Exchange Act by Congress
in the GLBA. The rule amendments and re-proposal also would not impose
any additional competitive burdens on banks engaging in a securities
business, other than those imposed by Congress through functional
regulation in the GLBA. Further, the proposed elimination of Rules 3b-
9, 15a-8, and 15a-9 is administrative in nature.
Because the types of activities that are the subject of these
amendments are not the types of activities in which small banks or
small broker-dealers directly participate, there should be no
competitive costs to small banks or small broker-dealers.
We do not believe that those rules impose any adverse effects on
efficiency, competition, or capital formation that are not a
consequence of the GLBA statutory provisions. The exemptive rules would
make it easier for banks to conduct their securities lending and sales
of Regulation S securities after the GLBA changes to the federal
securities laws. These proposed rules also would give banks enhanced
legal certainty for these securities activities. We do not believe that
those rules impose any adverse effects on efficiency, competition, or
capital formation that are not a result of the GLBA statute. When
Congress passed the GLBA, it effectively determined that regulation of
banks conducting a securities operation outside of certain exceptions
was necessary, appropriate, and in the public interest. Further, we
believe that the proposed elimination of Rules 3b-9, 15a-8, and 15a-9
would not have any impact on efficiency, competition, or capital
formation.
The Commission requests comment on whether the proposed amendments
would promote efficiency, competition, and capital formation. The
Commission is particularly interested in hearing whether the existence
of any of the proposed bank exemptions would have a negative impact on
competition. Please provide detailed information and data on exactly
how banks and broker-dealers compete and how the particular exemptions
would impact broker-dealers' business.
E. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \42\ the Commission must advise the Office
of Management and Budget as to whether the proposed amendments and the
re-proposal constitute a ``major'' rule. Under SBREFA, a rule is
considered ``major'' where, if adopted, it results or is likely to
result in: An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease); a major increase in
costs or prices for consumers or individual industries; or a
significant adverse effect on competition, investment, or innovation.
If a rule is ``major,'' its effectiveness will generally be delayed for
60 days pending Congressional review. We request comment on the
potential impact of the proposed amendments, the re-proposal, and the
rule withdrawals on the economy on an annual basis. Commenters are
requested to provide empirical data and other factual support for their
views to the extent possible.
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\42\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified
in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C.
601).
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F. Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA''), in accordance with the provisions of the
Regulatory Flexibility Act (``RFA''),\43\ regarding the proposed
amendments and the re-proposal.
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\43\ 5 U.S.C. 603.
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1. Reasons for the Proposed Action
The Commission is proposing the amendments to address issues raised
by the passage of the GLBA and the Regulatory Relief Act. In addition,
the exemption in proposed Rule 3a5-2 is being re-proposed to permit
banks to purchase from and sell to non-U.S. persons securities exempt
under Regulation S. Finally, we are proposing the elimination of Rules
3b-9, 15a-8, and 15a-9 for administrative clarity and in conformance
with the Regulatory Relief Act.
2. Objectives
The proposed amendments, the re-proposal, and the proposed rule
withdrawals are intended to provide legal certainty to the industry
with respect to the GLBA requirements. The Commission also seeks to
make the restrictions imposed by the GLBA more accommodating of current
securities activities carried out by banks while preserving investor
protection principles.
3. Legal Basis
Pursuant to the Exchange Act and, particularly, Sections 3(a)(4),
3(b), 15, 17, 23(a), and 36 thereof, the Commission proposes to adopt
the amendments and the re-proposal and to eliminate the obsolete or
unnecessary rules.
[[Page 77555]]
4. Small Entities Subject to the Rule
Congress did not exempt small entity banks from the application of
the GLBA. Moreover, because amendments and the re-proposal are intended
to provide guidance to all banks that are subject to the GBLA, the
Commission determined that it would not be appropriate to exempt small
entity banks from their operation. Therefore, the amendments and the
re-proposal generally apply to banks that would be considered small
entities. Nonetheless, as noted above, the types of activities that are
the subject of the amendments are not the types of activities in which
small banks or small broker-dealers generally directly participate.
5. Reporting, Recordkeeping and Other Compliance Requirements
The proposed amendments would not impose any new reporting,
recordkeeping, or other compliance requirements on banks that are small
entities.
6. Duplicative, Overlapping, or Conflicting Federal Rules
The Commission believes that there are no rules that duplicate,
overlap, or conflict with the proposed amendments.
7. Significant Alternatives
Pursuant to Section 3(a) of the RFA,\44\ the Commission must
consider the following types of alternatives: (a) The establishment of
differing compliance or reporting requirements or timetables that take
into account the resources available to small entities; (b) the
clarification, consolidation, or simplification of compliance and
reporting requirements under the proposed rule for small entities; (c)
the use of performance rather than design standards; and (d) an
exemption from coverage of the proposed rule, or any part thereof, for
small entities.
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\44\ 5 U.S.C. 603(c).
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As discussed above, the GLBA does not exempt small banks from the
Exchange Act broker-dealer registration requirements, and the
Commission does not believe that an unconditional exemption would be
consistent with the investor protection principles of the GLBA.
Moreover, such an exemption could place broker-dealers at a competitive
disadvantage versus small banks.
The proposed amendments, the re-proposal and the proposed rule
withdrawals are intended to clarify and simplify compliance with the
GLBA. As such, the proposals should ease compliance on banks of all
sizes, including smaller entities.
The Commission does not believe that it is necessary to consider
whether small entities should be permitted to use performance rather
than design standards to comply with the proposed amendments because
they already propose performance standards and do not dictate for
entities of any size any particular design standards (e.g., technology)
that must be employed to achieve the objectives of the proposed
amendments.
8. Request for Comments
The Commission encourages written comments on matters discussed in
the IRFA. In particular, the Commission requests comments on: (a) The
number of small entities that would be affected by the proposed
amendments; (b) the nature of any impact the proposed amendments would
have on small entities and empirical data supporting the extent of the
impact; and (c) how to quantify the number of small entities that would
be affected by and/or how to quantify the impact of the proposed
amendments. Such comments will be considered in the preparation of the
Final Regulatory Flexibility Analysis, if the proposed rule is adopted,
and will be placed in the same public file as comments on the proposed
rule itself. Persons wishing to submit written comments should refer to
the instructions for submitting comments in the front of this release.
IV. Statutory Authority
Pursuant to authority set forth in the Exchange Act and
particularly Sections 3(a)(4), 3(b), 15, 17, 23(a), and 36 thereof (15
U.S.C. 78c(a)(4), 78c(b), 78o, 78q, 78w(a), and 78mm, respectively) the
Commission proposes to repeal current Rules 3b-9, 15a-8, and 15a-9
(Sec. Sec. 240.3b-9, 240.15a-8, and 240.15a-9, respectively). The
Commission also is re-proposing Exchange Act Rule 3a5-2 (Sec. 240.3a5-
2), proposing to amend Exchange Act Rule 15a-6 (Sec. 240.15a-6), and
proposing to amend and redesignate Exchange Act Rule 15a-11 as Rule
3a5-3 (Sec. 240.15a-11 and Sec. 240.3a5-3, respectively).
V. Text of Proposed Rules and Rule Amendments
List of Subjects in 17 CFR Part 240
Broker-dealers, Reporting and recordkeeping requirements,
Securities.
For the reasons set forth in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 240 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
* * * * *
2. Sections 240.3a5-2 and 240.3a5-3 are added to read as follows:
Sec. 240.3a5-2 Exemption from the definition of ``dealer'' for banks
effecting transactions in securities issued pursuant to Regulation S.
(a) A bank is exempt from the definition of the term ``dealer''
under section 3(a)(5) of the Act (15 U.S.C. 78c(a)(5)), to the extent
that, in a riskless principal transaction, the bank:
(1) Sells an eligible security in compliance with the requirements
of 17 CFR 230.903 to a purchaser who is outside of the United States
within the meaning of 17 CFR 230.903 or to a registered broker or
dealer, provided that if the sale is made prior to the expiration of
the distribution compliance period specified in 17 CFR 230.903(b)(2) or
(b)(3), the sale is made in compliance with the requirements of 17 CFR
230.904.
(2) Purchases from a person who is not a U.S. person under 17 CFR
230.902(k) an eligible security after its initial sale with a
reasonable belief that the eligible security was initially sold outside
of the United States within the meaning of and in compliance with the
requirements of 17 CFR 230.903.
(3) Purchases from a registered broker or dealer an eligible
security after its initial sale outside of the United States within the
meaning of and in compliance with the requirements of 17 CFR 230.903,
and sells to a purchaser who is outside the United States within the
meaning of 17 CFR 230.903.
(b) Definitions. For purposes of this section:
(1) Distributor has the same meaning as in 17 CFR 230.902(d).
(2) Eligible security means a security that:
(i) Is not being sold from the inventory of the bank or an
affiliate of the bank; and
(ii) Is not being underwritten by the bank or an affiliate of the
bank on a firm-commitment basis, unless the bank acquired the security
from an unaffiliated distributor that did not
[[Page 77556]]
purchase the security from the bank or an affiliate of the bank.
(3) Purchaser means a person who purchases an eligible security and
who is not a U.S. person under 17 CFR 230.902(k).
(4) Riskless principal transaction means a transaction in which,
after having received an order to buy from a customer, the bank
purchased the security from another person to offset a contemporaneous
sale to such customer or, after having received an order to sell from a
customer, the bank sold the security to another person to offset a
contemporaneous purchase from such customer.
Sec. 240.3a5-3 Exemptionfrom the definition of ``dealer'' for banks
engaging in securities lending transactions.
(a) A bank is exempt from the definition of the term ``dealer''
under section 3(a)(5) of the Act (15 U.S.C. 78c(a)(5)), to the extent
that, as a conduit lender, it engages in or effects securities lending
transactions, and any securities lending services in connection with
such transactions, with or on behalf of a person the bank reasonably
believes to be:
(1) A qualified investor as defined in section 3(a)(54)(A) of the
Act (15 U.S.C. 78c(a)(54)(A)); or
(2) Any employee benefit plan that owns and invests, on a
discretionary basis, not less than $25,000,000 in investments.
(b) Securities lending transaction means a transaction in which the
owner of a security lends the security temporarily to another party
pursuant to a written securities lending agreement under which the
lender retains the economic interests of an owner of such securities,
and has the right to terminate the transaction and to recall the loaned
securities on terms agreed by the parties.
(c) Securities lending services means:
(1) Selecting and negotiating with a borrower and executing, or
directing the execution of the loan with the borrower;
(2) Receiving, delivering, or directing the receipt or delivery of
loaned securities;
(3) Receiving, delivering, or directing the receipt or delivery of
collateral;
(4) Providing mark-to-market, corporate action, recordkeeping or
other services incidental to the administration of the securities
lending transaction;
(5) Investing, or directing the investment of, cash collateral; or
(6) Indemnifying the lender of securities with respect to various
matters.
(d) For the purposes of this section, the term conduit lender means
a bank that borrows or loans securities, as principal, for its own
account, and contemporaneously loans or borrows the same securities, as
principal, for its own account. A bank that qualifies under this
definition as a conduit lender at the commencement of a transaction
will continue to qualify, notwithstanding whether:
(1) The lending or borrowing transaction terminates and so long as
the transaction is replaced within one business day by another lending
or borrowing transaction involving the same securities; and
(2) Any substitutions of collateral occur.
Sec. 240.3b-9 [Removed and Reserved]
3. Section 240.3b-9 is removed and reserved.
4. Section 240.15a-6 is amended by revising paragraph (a)(4)(i) to
read as follows:
Sec. 240.15a-6 Exemption of certain foreign brokers or dealers.
(a) * * *
(4) * * *
(i) A registered broker or dealer, whether the registered broker or
dealer is acting as principal for its own account or as agent for
others, or a bank acting pursuant to an exception or exemption from the
definition of ``broker'' or ``dealer'' in sections 3(a)(4)(B),
3(a)(4)(E), or 3(a)(5)(C) of the Act (15 U.S.C. 78c(a)(4)(B), 15 U.S.C.
78c(a)(4)(E), or 15 U.S.C. 78c(a)(5)(C)) or the rules thereunder;
* * * * *
Sec. 240.15a-8 [Removed and Reserved]
5. Section 240.15a-8 is removed and reserved.
Sec. 240.15a-9 [Removed and Reserved]
6. Section 240.15a-9 is removed and reserved.
Sec. 240.15a-11 [Removed and Reserved]
7. Section 240.15a-11 is removed and reserved.
Dated: December 18, 2006.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 06-9842 Filed 12-22-06; 8:45 am]
BILLING CODE 8011-01-P