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WASHINGTON – The Securities and Exchange Commission released more details on its proposal listing the type of securities activities credit unions, banks and thrifts may engage in without having to register as brokers with the SEC. The new Regulation B would implement provisions of the Gramm-Leach-Bliley Act (GLBA) of 1999. GLBA replaced banks’ complete exception from the definition of “broker” with 11 “functional exceptions.” While the SEC uses the term “bank” throughout its Regulation B proposal, all the exemptions would apply to credit unions and thrifts. On June 2, the SEC voted to propose new rules to implement the GLBA definition by defining some of the statutory terms used in the eleven exceptions. It also proposed a number of new exemptions for some particular bank activities, under conditions that are consistent with investor protections. All of these provisions build off of rules the Commission adopted in 2001. CUNA Associate General Counsel Mary Dunn had previously said the Association was waiting on the SEC to provide the fine details of Regulation B. CUNA is encouraging credit unions to send comments, which must be submitted to SEC by Aug. 1. Regarding the networking exception, the statutory third-party brokerage allows banks to partner with broker-dealers to offer their customers a wide range of financial services, including securities brokerage. The exception allows a broker-dealer to offer brokerage services to bank customers and share the compensation with the bank and unregistered bank employees to receive incentive compensation in the form of a “nominal one-time cash fee of a fixed dollar amount” for referring bank customers The SEC voted to propose amendments to the interim rules to clarify the scope of activities in which unregistered bank employees may engage; define nominal compensation as the employee’s base hourly rate of pay, a flat $25 dollar amount; or an inflation adjusted amount based on “fifteen 1999 dollars.” For the growing number of credit unions offering trust services, the SEC’s proposed trust and fiduciary activities exception, would permit them and banks, under certain conditions, to receive commission-type compensation or sales charges and service fees paid out of mutual fund assets pursuant to a distribution plan adopted under rule 12b for customer transactions in a trustee or fiduciary capacity without registering as a broker. Under this exception, a credit union or bank must handle such transactions in its trust department, or other department that is regularly examined by bank examiners for compliance with fiduciary principles and standards. The SEC said the bank also must be “chiefly compensated” for any securities transactions, consistent with fiduciary principles and standards, on the basis of “relationship compensation” such as an administration or annual fee, a percentage of assets under management, a flat or capped per order processing fee that does not exceed the cost the bank incurs in executing such securities transactions, or any combination of these fees. The SEC also proposed a safekeeping and custody exception that would give a bank, acting as a custodian, legal certainty that it may engage in specified securities transactions while holding the funds and securities related to those transactions. This exception lists transactions that a bank may undertake for investors, and permits it to provide “related administrative services” to retirement and benefit plans. Finally the SEC proposed three new “targeted” exemptions in recognition of banks’ existing business practices. These exemptions would permit a bank to conduct 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; permit a bank, under limited conditions, to sell securities that are exempt from registration under Regulation S to non-U.S. persons who are located outside of the U.S. Additional details on each exemption can be found on the SEC’s Web site at http://www.sec.gov/ news/press/2004-73.htm. [email protected]

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