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SEC ADOPTS REGULATION R, IMPLEMENTING GRAMM-LEACH-BLILEY ACT RULES ON SECURITIES ACTIVITIES OF BANKS

The SEC today adopted Regulation R, which implements the limitations on bank securities activities when acting as agent, imposed by the Gramm-Leach-Bliley Act of 1999. The Securities and Exchange Commission (SEC) staff indicated at the open meeting today that Regulation R, as adopted, is substantially as proposed, subject to technical changes generally clarifying or liberalizing the conditions in the proposed regulation. Banks will be required to come into compliance with many of the provisions of Regulation R, including the "networking exception," as of the first day of the bank’s fiscal year after September 30, 2008. Although the staff did not elaborate on this, the compliance date for certain other provisions of Regulation R, such as the trust and fiduciary activities exception appears to be at some point farther in the future. Some of the significant points mentioned at the SEC open meeting include:

• Banks may consider a networking broker-dealer’s profitability or its revenues, along with other factors unrelated to brokerage activities, in determining discretionary bonuses for unregistered bank employees.
• Regulation R, as adopted, has retained the $5 million dollar net worth requirement in order for the referral of an individual customer to be eligible for referral fees that are higher than a nominal amount.
• Banks may effect transactions in mutual funds or variable annuities directly through NSCC Fund/SERV, without the intermediation of a registered broker-dealer.

The Board of Governors of the Federal Reserve System (Federal Reserve Board) will vote on proposed Regulation R at an open meeting on September 24, 2007. Assuming that the Federal Reserve Board adopts Regulation R at that meeting, it will begin drafting recordkeeping rules for banks implementing the regulation’s requirements. The SEC staff also indicated at today’s meeting that it intends to work with FINRA (the successor to the merger of the New York Stock Exchange Member Regulation division and the NASD) on the application of NASD Conduct Rule 3040 (private securities transactions) to the securities activities of dual bank/broker-dealer employees.

BISA will provide additional details on Regulation R after the SEC and Federal Reserve Board publish additional information on it in the Federal Register, which is expected shortly after the Federal Reserve Board meets to vote on it.

For more information on the application of GLBA to banks and broker-dealers, please contact, in Los Angeles, John F. Hartigan, 213.612.2630, jhartigan@morganlewis.com; and in Washington, D.C., Kathleen W. Collins, 202.739.5642, kcollins@morganlewis.com; or Jack P. Drogin, 202.739.5380, jdrogin@morganlewis.com.