Gramm-Leach-Bliley Act Bank Broker Rules
June 2, 2004 – LAWFUEL – We have before us this morning a recommendation from the Division of Market Regulation to propose a new Regulation B. This set of rules would clarify the securities-related activities that banks, thrifts and credit unions can engage in without registering as brokers under the Securities Exchange Act of 1934. These rules would implement a key part of the Gramm-Leach-Bliley Act of 1999 – itself a landmark step towards the modernization of financial-services regulation.
Gramm-Leach-Bliley repealed the complete separation of investment banking and commercial banking mandated by the Depression-era Glass-Steagall Act, and gave banks the latitude to compete directly with other financial-services providers. At the same time, Gramm-Leach-Bliley discarded a regulatory framework that made sense only so long as banks were walled-off from the securities business. In its place, Gramm-Leach-Bliley designed a system of functional regulation, so that activities that are similar would be regulated similarly. The Act embodies a simple notion of common sense: an investor who buys securities from a bank deserves the same degree of protection that the investor would receive if he or she made that purchase from a broker.
Problems that we’ve all witnessed in the last couple of years only underline the wisdom of Congress’s determination to keep investor protections up-to-date with industry developments. Conflicts of interest between investors and those selling securities will continue to evolve in subtle ways. For example, as we are all-too familiar with in the mutual-fund area, revenue-sharing and other indirect payments for distribution can have an unhealthy impact on an intermediary’s decision to recommend or select a particular investment. Banks, of course, are significant distribution channels for mutual funds.
Here at the Commission, we’re in the business of investor protection. We are not bank regulators, and we do not wish to interfere with banking activities or curtail the revenue streams that banks earn from their trust, custody and other traditional lines of business.
That said, we recognize the obvious – that the line between banking activities and a bank’s securities activities can, at times, be difficult to draw. Fortunately, as far as brokerage activities are concerned, Congress has already done much of the heavy lifting for us. Gramm-Leach-Bliley provides eleven carefully constructed exceptions to the Exchange Act’s definition of “broker.” These exceptions describe the securities activities that a bank can engage in without registering with the Commission. The exceptions Congress created balance a number of competing priorities and are sometimes complex – indeed, the statutory language itself runs to hundreds of lines of text. Because those exceptions are codified in the Exchange Act, Congress made it our responsibility to interpret and apply them.
Proposed Regulation B builds on a set of interim rules that the Commission adopted in 2001. Since we adopted those rules, staff from the Division of Market Regulation have met on a number of occasions with representatives from the banking industry, and with bank regulators, in order to gain a better understanding of how the concepts in the interim rules would affect the business of banking. We have also studied the many thoughtful comment letters that the industry and our fellow regulators provided in response to the adoption of the interim rules. This dialogue has been extraordinarily helpful to the staff in developing the proposal before us today.
But I would like to make an important point: Although I believe that proposed Regulation B makes real strides towards accommodating the concerns expressed by the banking industry and the bank regulators, I do not believe that our dialogue is over. I speak for the Commission when I say that.
The complexity of the Gramm-Leach-Bliley requirements naturally leads to some complexity in our proposed rules. While I hope that the proposal strikes the right balance, I am very interested in the public’s reaction.
I have therefore directed the staff to continue this dialogue vigorously throughout the comment period for Regulation B, and I ask one thing in return. To fulfill our primary mandate to protect investors – but at the same time to avoid unnecessary intrusion into the banking business – we need hard data from the industry. We need to know in practical, concrete, dollars-and-cents terms how these proposed rules would affect the banking business – money-center banks as well as local banks in small towns, thrifts and credit unions. Theoretical or speculative possibilities will not be terribly useful to us. If we have to choose between investor protection and abstract concerns, the choice will be quite easy. So banks need to run the numbers on this proposal and share those numbers with us.
Before I turn to Annette Nazareth to outline the proposal, I would like to thank the staff members who helped put it together. In particular, I would like to acknowledge Bob Colby, Kate McGuire, Paula Jenson, Lourdes Gonzalez, Linda Sundberg, Richard Strasser, Joe Corcoran, Brice Prince and Norman Reed.
Finally, I would also like to extend sincere thanks to our colleagues at the Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision for their interest and invaluable assistance throughout this process. We look forward to continued cooperation with you.
