[14530]
March 13, 2002
TO: ADVISORY GROUP ON BANKING ISSUES
BANK INVESTMENT MANAGEMENT MEMBERS No. 1-02
BANK AND TRUST ADVISORY COMMITTEE No. 3-02
OPERATIONS MEMBERS No. 6-02
RE: USE OF NSCC AND FUND/SERV BY BANKS UNDER THE GRAMM-LEACH BLILEY
ACT
The Institute was recently asked by members the impact of the functional regulation
provisions of the Gramm-Leach-Bliley Act (GLB Act) on the ability of banks to effect
transactions through NSCC and Fund/SERV. As discussed in greater detail below, banks may
utilize NSCC and Fund/SERV to effect transactions without running afoul of the GLB Act.
I. BACKGROUND: GLB ACT AMENDMENTS TO THE SECURITIES EXCHANGE ACT OF 1934
As you may recall, Title II, Subtitle A of the GLB Act amended the provisions in the
Securities Exchange Act of 1934 relating to the regulation of banks. Prior to these amendments,
banks were excluded from the terms “broker” and “dealer” as used in the Exchange Act and, as
such, were not required to register under the Act if they engaged in the offer and sale of
securities. The GLB Act replaced these exclusions with functional exceptions that were more
narrowly tailored to ensure that investors purchasing securities through a bank receive the
same protections as those who purchase through registered broker-dealers. Banks that elect to
continue engaging in a securities business and that do not qualify for an exemption from
registration are required under the GLB Act to become registered under the Exchange Act as a
broker or dealer. Under the Act, these provisions were to be effective as of May 12, 2001. This
date has since been postponed until May 12, 2002.
II. USE OF NSCC AND FUND/SERV BY BANKS UNDER THE GLB ACT
One exclusion preserved in the GLB Act for banks provides that a bank shall not be
deemed to be a broker or dealer under the Exchange Act if the bank (1) limits its activities to
trades involving certain trust activities, stock purchase plans, and safekeeping and custody
activities and (2) “directs [the trades permitted] to a registered broker or dealer for execution.”
(See amendments to Section 3(a)(4)(C) of the Exchange Act.) Because of this latter condition,
there was a question under the GLB Act as to whether banks that engaged in the permitted
trading, but did so directly through NSCC and Fund/SERV, could rely on this exclusion. In
2
May 2001, the Securities and Exchange Commission addressed this issue when it adopted, on an
interim final basis, a variety of rules to implement the GLB Act. In particular, these interim final
rules expressly provided that banks that executed their trades directly through NSCC and
Fund/SERV could continue to rely upon the exclusion. (See Interim Final Rule 3a4-6.) In July
2001, however, the SEC, in essence, stayed the application of the interim final rules and
postponed the date by which banks were required to comply with the Exchange Act provisions
in the GLB Act until May 12, 2002. Since July 2001, the SEC has not issued any additional
releases relating to this issue.
As a result of the SEC’s stay of the interim final rules, questions have arisen concerning
the applicability of the provisions in Section 3(a)(4)(C) of the Exchange Act to banks that execute
the permitted trades through NSCC and Fund/SERV, rather than through a registered broker
or dealer. The Institute recently contacted the staff of the SEC regarding this issue. The
Institute was informed by the staff that, due to the SEC extending the date for compliance with
the Exchange Act provisions of the GLB Act, banks may continue to rely upon the exclusions
currently in the Exchange Act. As such, there is currently no prohibition against banks effecting
transactions through NSCC and Fund/SERV. Moreover, when the SEC adopts rules to
implement the GLB Act, it is likely to accommodate the continued use by banks of NSCC and
Fund/SERV.
Tamara K. Reed
Associate Counsel