12 CFR 218 and 17 CFR 247
Regulation R implements certain of the broker exceptions for banks from the definition of the term "broker" under Section 3(a)(4) of the Securities Exchange Act of 1934 ("Exchange Act"), as amended by the Gramm-Leach-Bliley Act ("GLBA"). Specifically, Regulation R implements the bank broker exceptions relating to third-party networking arrangements, trust and fiduciary activities, deposit "sweep" activities, and custody and safekeeping activities.
Section 3(a)(4)(B) of the Exchange Act also includes other "broker" exceptions for banks. These exceptions include transactions in exempt securities (such as U.S. government securities); certain stock purchase plans; affiliate transactions; private securities offerings; identified banking products; municipal securities; and a de minimis number of other securities transactions. Although Regulation R does not include provisions related to these statutory exceptions, they remain in force and available to banks.
Regulation R also includes certain exemptions related to foreign securities transactions, securities lending transactions conducted in an agency capacity by a bank that does not have custody of the securities being borrowed or lent, the execution of transactions involving mutual fund shares and variable annuities, and the potential liability of banks under Section 29 of the Exchange Act.
If more than one broker exception or exemption is available to a bank under the statute or rules for a securities transaction, the bank may choose the exception or exemption on which it relies to effect the transaction without registering as a broker-dealer. For example, if a bank effects no more than 500 securities transactions as agent for its customer in a calendar year, the bank may rely on the de minimis exception in section 3(a)(4)(B)(xi) of the Exchange Act in lieu of any other available exception or exemption for such transactions. The bank, of course, must comply with all of the requirements contained in the exception or exemption on which it relies.
A general description of the regulation, by section, follows. Any bank that wants to rely on one of these exceptions or exemptions to the definition of broker should review and understand the terms, limits and conditions to the particular exception or exemption.
Section 218.100 and Section 247.100 Definition
Defines "Act" for purposes of this part to mean the Securities and Exchange Act of 1934.
Section 218.700 and Section 247.700 Defined terms relating to the networking exception from the definition of broker
The networking exception in Section 3(a)(4)(B)(i) of the Exchange Act permits bank employees that are not registered representatives of a broker-dealer to refer customers to a broker-dealer subject to several conditions. One of these conditions generally prohibits a bank employee that refers a customer to a securities broker-dealer from receiving "incentive compensation" for a securities brokerage transaction other than a "nominal" one-time cash fee for making the referral that is not contingent on whether the referral results in a securities transaction. Rule 700 defines key terms used in the networking exception, including the terms "incentive compensation" and "nominal one-time cash fee of a fixed dollar amount." Rule 700 includes four different alternatives for satisfying the requirement that a referral fee be "nominal." These alternatives include a flat $25 standard (to be adjusted for inflation) and other standards based on the employee's actual base hourly or annual compensation or the base hourly or annual compensation associated with the employee's job family. The definition of "incentive compensation" in Rule 700 includes exclusions from that definition for certain types of bank bonus plans.
Other Resources
The adopting release for Regulation R can be found at 72 FR 56,501 (Oct. 3, 2007), on the Commission's website at http://www.sec.gov/rules/final/2007/34-56501.pdf, and on the U.S. Government Printing Office's website at http://edocket.access.gpo.gov/2007/pdf/07-4769.pdf.
Contacting the Commission or the Board
The Commission's Division of Trading and Markets and the Board are pleased to assist small entities with questions regarding Regulation R.
At the Commission, the Office of Interpretation and Guidance responds to questions submitted by email and telephone. You can submit a question by email to [email protected] or you can contact the Office of Interpretation and Guidance at (202) 551-5777.
You can submit a question to the Board on the Board's website at http://www.federalreserve.gov/feedback.cfm.