SEC Sets July 2 Date to 'Repair' Broker Exemption Regulation, Credit Union Inclusion Still Not Known
WASHINGTON -- Nearly six years in the making, the Securities and Exchange Commission recently said it's ready to move forward on approving a regulation that will extend broker-dealer exemptions to banks by July 2.
At issue is the former Regulation B proposed in Spring 2004, now titled Regulation R, which allowed credit unions to enter into the same networking arrangements with broker-dealers that banks can, sweep deposit accounts into no-load money market funds under the same terms as banks and to buy and sell securities for investment purposes for themselves, or for accounts for which they act as trustee or fiduciary.
SEC Chairman Christopher Cox recently said that the agency is aiming to finalize Regulation R by July 2, but there's still no word on whether credit unions will be included in those exemptions.
The regulation has a long, drawn-out history mired in heavy criticism from banking groups, legislators and the credit union industry.
Until the Gramm-Leach-Bliley Act was enacted in 1999, banks were not covered under the broker-dealer definitions as outlined in the Securities and Exchange Act of 1934.This means that banks were not required to register with the SEC when engaging in permissible securities activities. The GLB Act removed this exemption and replaced it with a number of functional exceptions for certain bank securities activities. These interim final rules were issued to clarify these functional exceptions. Although not required under the GLB Act, these exceptions will also apply to thrifts, but not to credit unions. Prior to the GLB Act, credit unions and thrifts were not covered under the exemption that was provided for banks.
In 2004, the SEC issued proposed rule Regulation B that would grant credit unions some of the exemptions from the broker-dealer registration requirements that banks currently receive and provide new exemptions for banks. CUNA, NAFCU, NACUSO and others urged the SEC to include credit unions under the rule. The agency received more than 120 comment letters on the proposal, but the Financial Services Regulatory Relief Act of 2006, enacted in late 2006, literally took credit unions out of the equation again. The new legislation required the SEC to work with the Fed to jointly issue another proposal to clarify these exceptions. This provision of Reg Relief extended these exceptions to thrifts, but not to credit unions.
"One of my fellow Commissioners, Paul Atkins, contends that Regulation B stands for 'broken'--and the new Regulation R stands for 'repaired,'" Cox told attendees at the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition in mid-May. "Very soon, we'll see, because we're now taking all of the comments into account and preparing to consider a final Regulation R at both the SEC and the Federal Reserve Board."
In the past, the SEC has issued opinions that permitted thrifts and insurance agencies to offer securities products without registering as a broker-dealer, if offered through a third-party contractual arrangement in which a registered broker-dealer provides services for the financial institution or insurance agency under certain conditions. NCUA offered similar guidance for credit unions in Letter to Credit Unions Number 150. This exception from the SEC and NCUA was permitted for those that were not able to perform these services. However, the basis for the exception for credit unions no longer applies because the incidental powers rule now allows credit unions to perform these services.
Cox said carrying forth the provisions of Gramm-Leach-Bliley has been less than stellar.
"All-in-all, the eight-year stretch from enactment of Gramm-Leach-Bliley until today is a disappointing record of indecision and inaction," Cox said. "Just as with the Twenty-Seventh Amendment, we've made several efforts to finish the job, but each time we came up short."
What's at stake, Cox said, is the modernization of financial services for consumers, business and the economy.
"If clarity, consistency, and predictability are to be the hallmark of sound regulation, then it's high time that clear, final rules are issued under Gramm-Leach-Bliley," Cox said.