WASHINGTON -- Nearly six years in the making, the Securities andExchange Commission recently said it's ready to move forward onapproving a regulation that will extend broker-dealer exemptions tobanks by July 2.

At issue is the former Regulation B proposed in Spring 2004, nowtitled Regulation R, which allowed credit unions to enter into thesame networking arrangements with broker-dealers that banks can,sweep deposit accounts into no-load money market funds under thesame terms as banks and to buy and sell securities for investmentpurposes for themselves, or for accounts for which they act astrustee or fiduciary.

SEC Chairman Christopher Cox recently said that the agency isaiming to finalize Regulation R by July 2, but there's still noword on whether credit unions will be included in thoseexemptions.

The regulation has a long, drawn-out history mired in heavycriticism from banking groups, legislators and the credit unionindustry.

Until the Gramm-Leach-Bliley Act was enacted in 1999, banks werenot covered under the broker-dealer definitions as outlined in theSecurities and Exchange Act of 1934.This means that banks were notrequired to register with the SEC when engaging in permissiblesecurities activities. The GLB Act removed this exemption andreplaced it with a number of functional exceptions for certain banksecurities activities. These interim final rules were issued toclarify these functional exceptions. Although not required underthe GLB Act, these exceptions will also apply to thrifts, but notto credit unions. Prior to the GLB Act, credit unions and thriftswere not covered under the exemption that was provided forbanks.

In 2004, the SEC issued proposed rule Regulation B that wouldgrant credit unions some of the exemptions from the broker-dealerregistration requirements that banks currently receive and providenew exemptions for banks. CUNA, NAFCU, NACUSO and others urged theSEC to include credit unions under the rule. The agency receivedmore than 120 comment letters on the proposal, but the FinancialServices Regulatory Relief Act of 2006, enacted in late 2006,literally took credit unions out of the equation again. The newlegislation required the SEC to work with the Fed to jointly issueanother proposal to clarify these exceptions. This provision of RegRelief extended these exceptions to thrifts, but not to creditunions.

"One of my fellow Commissioners, Paul Atkins, contends thatRegulation B stands for 'broken'--and the new Regulation R standsfor 'repaired,'" Cox told attendees at the Federal Reserve Bank ofChicago's 43rd Annual Conference on Bank Structure and Competitionin mid-May. "Very soon, we'll see, because we're now taking all ofthe comments into account and preparing to consider a finalRegulation R at both the SEC and the Federal Reserve Board."

In the past, the SEC has issued opinions that permitted thriftsand insurance agencies to offer securities products withoutregistering as a broker-dealer, if offered through a third-partycontractual arrangement in which a registered broker-dealerprovides services for the financial institution or insurance agencyunder certain conditions. NCUA offered similar guidance for creditunions in Letter to Credit Unions Number 150. This exception fromthe SEC and NCUA was permitted for those that were not able toperform these services. However, the basis for the exception forcredit unions no longer applies because the incidental powers rulenow allows credit unions to perform these services.

Cox said carrying forth the provisions of Gramm-Leach-Bliley hasbeen less than stellar.

"All-in-all, the eight-year stretch from enactment ofGramm-Leach-Bliley until today is a disappointing record ofindecision and inaction," Cox said. "Just as with theTwenty-Seventh Amendment, we've made several efforts to finish thejob, but each time we came up short."

What's at stake, Cox said, is the modernization of financialservices for consumers, business and the economy.

"If clarity, consistency, and predictability are to be thehallmark of sound regulation, then it's high time that clear, finalrules are issued under Gramm-Leach-Bliley," Cox said.

[email protected]