Securities and Exchange Commission: Tuesday, November 5, 2002

Tuesday,
November 5, 2002
Part III
Securities and
Exchange
Commission
17 CFR Part 240
Definition of Terms in and Specific
Exemptions for Banks, Savings
Associations, and Savings Banks Under
Sections 3(a)(4) and 3(a)(5) of the
Securities Exchange Act of 1934;
Proposed Rule
VerDate 0ct<31>2002 16:53 Nov 04, 2002 Jkt 200001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\05NOP2.SGM 05NOP2
67496 Federal Register / Vol. 67, No. 214 / Tuesday, November 5, 2002 / Proposed Rules
SECURITIES AND EXCHANGE Attorney Fellow; (202) 942–0073, Office Statutory Authority
COMMISSION of the Chief Counsel, Division of Market Text of Proposed Rules and Rule
Regulation, Securities and Exchange Amendments
17 CFR Part 240 Commission, 450 5th Street., NW,
[Release No. 34–46745; File No. S7–41–02] Washington, DC 20549–1001. I. Introduction
RIN 3235–AI19 SUPPLEMENTARY INFORMATION: The A. Statutory Background—The Gramm-

Securities and Exchange Commission Leach-Bliley Act
Definition of Terms in and Specific (‘‘Commission’’) is requesting public On November 12, 1999, the President
Exemptions for Banks, Savings comment on the proposed amendments signed the Gramm-Leach-Bliley Act
Associations, and Savings Banks to Rules 3a5–1 [17 CFR 240.3a5–1] and (‘‘GLBA’’) into law.1 The GLBA changed
Under Sections 3(a)(4) and 3(a)(5) of 3b–18 (17 CFR 240.3b–18) under the federal statutes governing the scope of
the Securities Exchange Act of 1934 Securities Exchange Act of 1934 permissible activities and the
AGENCY: Securities and Exchange (‘‘Exchange Act’’). The Commission also supervision of banks, bank holding
Commission. is requesting public comment on the companies, and their affiliates. The
proposed exemption from the GLBA lowered barriers between the
ACTION: Proposed rule.
definitions of ‘‘broker’’ and ‘‘dealer’’ for banking and securities industries
SUMMARY: The Securities and Exchange erected by the Banking Act of 1933
banks engaging in securities lending
Commission is proposing to amend its (popularly known as the ‘‘Glass-Steagall
transactions pursuant to new Exchange
rule granting an exemption to banks Act’’)2 and between the banking and the
Act Rule 15a–11 (17 CFR 240.15a–11).
from dealer registration for certain de insurance industries erected by the 1982
minimis riskless principal transactions, Table of Contents amendments to the Bank Holding
to amend certain of its rules that define I. Introduction Company Act of 1956 (the ‘‘Bank
terms used in the bank exceptions to A. Statutory Background—The Gramm- Holding Company Act’’).3
dealer registration, and to grant a new Leach-Bliley Act When first enacted in 1934, the
exemption to banks from broker and B. Regulatory and Procedural Exchange Act completely exempted
dealer registration for certain securities Background—the Interim Final Rules, banks from the regulatory scheme
lending under the Securities Exchange Public Comment, and the Temporary provided for brokers and dealers. Over
Act of 1934. These rules address certain Exemptions the past 60 years, however, evolution of
of the exceptions for banks from the II. Dealer Activities and the Dealer/Trader the financial markets driven by
definitions of ‘‘broker’’ and ‘‘dealer’’ Distinction competition and technology eroded the
that were added to the Securities A. Buying and Selling Securities for Own separation that previously existed
Exchange Act of 1934 by the Gramm- Account between banks, insurance companies,
Leach-Bliley Act. B. ‘‘Engaged in the Business’’ Test and securities firms. Regulators
DATES: Comments should be submitted III. Discussion of Comments Received on responded to these changes with
on or before December 5, 2002. ‘‘Dealer’’ Rules interpretations that increasingly sought
A. De Minimis Exception and Rule 3a5–1 to accommodate these market changes.4
ADDRESSES: Comments should be
1. Discussion of Comments Received on In recent years, the Board of Governors
submitted in triplicate to Jonathan G.
Rule 3a5–1, the De Minimis Exemption of the Federal Reserve System (‘‘Federal
Katz, Secretary, Securities and Exchange
2. Proposed Amendment to Rule 3a5–1, the Reserve’’), the Office of the Comptroller
Commission, 450 5th Street, NW.,
De Minimis Exemption of the Currency (‘‘OCC’’), and the
Washington, DC 20549–0609.
B. Rule 3b–18—Definition of Terms Used Federal Deposit Insurance Corporation
Comments also may be submitted
in Asset-Backed Transaction Exception (‘‘FDIC’’) have permitted banks and
electronically at the following e-mail
to Dealer Registration bank holding companies to engage in
address: rule-comments@sec.gov. All 1. Discussion of Comments Received on retail and institutional securities
comment letters should refer to File No. Rule 3b-18 ‘‘ Definition of Terms Used in brokerage and private placement
S7–41–02; this file number should be Asset-Backed Exception to Dealer activities.
included on the subject line if e-mail is Registration The Commission supported
used. To help us process and review 2. Proposed Amendment to Rule 3b–18— modernizing the legal framework
your comments more efficiently, Definition of Terms Used in Asset- governing financial services consistent
comments should be submitted by one Backed Exception to Dealer Registration with a system of functional regulation to
method only. All comments received IV. Rule 15a–11—Exemption from the ensure that investors purchasing
will be available for public inspection Definitions of ‘‘Broker’’ and ‘‘Dealer’’ for securities through banks received the
and copying in the Commission’s Public Banks Engaging in Securities Lending same protections as when they
Reference Room, 450 5th Street, NW., Transactions purchased securities from registered
Washington, DC 20549–0102. V. Definition of ‘‘Qualified Investor’’ broker-dealers.5 The GLBA codified this
Electronically submitted comment VI. Procedural Matters
letters will be posted on the A. General Request for Comments 1 Pub. L. No. 106–102, 113 Stat. 1338 (1999).
Commission’s Internet site (http:// B. Paperwork Reduction Act 2 Pub. L. No. 73–66, ch. 89, 48 Stat. 162 (1933)
www.sec.gov). Personal identifying C. Consideration of Benefits and Costs (as codified in various sections of 12 U.S.C.).
information, such as names or e-mail 1. Benefits 3 The Garn-St. Germain Depository Institutions
addresses will not be edited from Act of 1982, Pub. L. No. 97–320, 96 Stat. 1469
2. Costs
(1982) (as codified in various sections of 12 U.S.C.),
electronic submissions. Submit only D. Consideration of Burden on amending section 4(c)(8) of the Bank Holding
information you wish to make publicly Competition, and on Promotion of Company Act, 12 U.S.C. 1841–1850 (1994).
available. Efficiency, Competition, and Capital 4 See Mayer, Martin, ‘‘Banking’s Future Lies in its
FOR FURTHER INFORMATION CONTACT: Formation Past,’’ The New York Times, Sec. 4, page 9, August
25, 2002.
Catherine McGuire, Chief Counsel; E. Regulatory Flexibility Act Certification 5 See, e.g., letter from Arthur Levitt, Chairman,
Lourdes Gonzalez, Assistant Chief U.S. Securities and Exchange Commission, to
Counsel; or Linda Stamp Sundberg, Senator Phil Gramm, Chairman, Committee on
Federal Register / Vol. 67, No. 214 / Tuesday, November 5, 2002 / Proposed Rules 67497
concept of functional regulation—that The GLBA is the product of many definitions narrowed this general
is, regulation of the same functions, or years of Congressional deliberation. It exception for banks by specifying
activities, by the same expert regulator, reflects a careful balance between particular functional exceptions from
regardless of the type of entity engaging providing investors with the same broker-dealer registration for certain
in those activities. Congress believed protections wherever they purchase bank securities activities.
that, given the expansion of the securities, while not unnecessarily The amended definitions create
activities and affiliations in the financial disturbing certain bank securities eleven ‘‘broker’’ and four ‘‘dealer’’
marketplace, functional regulation was activities. exceptions for banks. The GLBA
important in building a coherent In particular, Sections 201 and 202 of provided that these amended definitions
financial regulatory scheme.6 the GLBA substantially amended the had a delayed effective date of May 12,
Accordingly, Title II of the GLBA Exchange Act’s definitions of ‘‘broker’’ 2001. To accommodate the industry’s
amended the federal securities laws to and ‘‘dealer,’’ respectively.10 Before compliance concerns, the Commission
provide for functional regulation of amendment, Sections 3(a)(4) and 3(a)(5) delayed the effective dates as more fully
securities activities by eliminating the of the Exchange Act provided that the set forth below.
complete exception for banks from the terms ‘‘broker’’ and ‘‘dealer’’ did not
definitions of ‘‘broker’’ and ‘‘dealer.’’ As include a ‘‘bank.’’11 Accordingly, B. Regulatory and Procedural
the legislative history noted, prior to the banks 12 that engaged in securities Background—the Interim Final Rules,
passage of the GLBA, the exception for activities were excepted from the Public Comment, and the Temporary
banks from broker-dealer registration requirement to register as broker-dealers Exemptions
created a competitive disparity by under the Exchange Act.13 The amended
Because the exceptions from the
permitting banks to engage in securities
definition of ‘‘dealer’’ are exceptions to
activities without being subject to the at p. 52 (Sept. 1995); U.S. General Accounting
Office, Report to Congressional Requesters: Banks’ the Exchange Act, the Commission is
same regulatory requirements as broker-
Securities Activities—Oversight Differs Depending statutorily charged with interpreting
dealers. Indeed, Congress specifically on Activity and Regulator, GAO/GGD–95–214, at p.
expressed concern that the complete these exceptions. In response to
25 (Sept. 1995).
exception had permitted banks to 10 Exchange Act Sections 3(a)(4) and 3(a)(5) [15
interpretive questions as well as
engage in securities activities without U.S.C. 78c(a)(4) and 78c(a)(5)].
industry-specific concerns, the
being subject to the provisions of the 11 Before the GLBA, Exchange Act Section 3(a)(4) Commission adopted interim final rules
federal securities laws that were defined the term ‘‘broker’’ as ‘‘any person engaged (‘‘the Rules’’) on May 11, 2001.14 The
designed to protect investors.7
in the business of effecting transactions in securities Rules were designed to provide
for the account of others, but does not include a guidance by defining certain key terms
The federal securities laws provide a bank.’’ Before the GLBA, Exchange Act Section
comprehensive and coordinated system 3(a)(5) defined the term ‘‘dealer’’ as ‘‘any person
used in the new statutory exceptions.
of regulation of securities activities engaged in the business of buying and selling The Rules also provided additional
under the oversight of a single regulator. securities for his own account, through a broker or exemptions from the definition of
otherwise, but does not include a bank * * *.’’ broker for banks that were engaged in
The primary purpose of the federal 12 Exchange Act Section 3(a)(6) [15 U.S.C.
securities laws is the protection of certain types of securities activities.
78c(a)(6)] defines the term ‘‘bank’’ as:
investors. The securities laws are also Although the Rules were adopted as
(A) a banking institution organized under the
aimed at ensuring the maintenance of laws of the United States, (B) a member bank of the interim final rules, the Commission
fair and orderly markets as well as fair Federal Reserve System, (C) any other banking specifically solicited public comment
competition among all participants in institution, whether incorporated or not, doing on them. Moreover, in order to give
business under the laws of any State or of the banks time to comply, the Rules
the securities markets. In contrast, the United States, a substantial portion of the business
primary purpose of the federal banking of which consists of receiving deposits or exercising
included a temporary exemption that
laws is to protect the solvency of fiduciary powers similar to those permitted to effectively extended the general
banks.8 Bank securities activities have national banks under the authority of the exception from broker-dealer
historically taken place outside of the Comptroller of the Currency * * * and which is registration until October 1, 2001.15
supervised and examined by State or Federal
coordinated system of securities authority having supervision over banks, and which
The Commission received over 200
regulation that is designed to protect is not operated for the purpose of evading the letters commenting on the Rules. The
investors. This led to regulatory provisions of this title, and (D) a receiver, vast majority of these letters came from
disparities that, in part, fostered the conservator, or other liquidating agent of any banks or persons representing banks and
institution or firm included in clauses (A), (B), or
GLBA.9 the banking industry. Of those letters,
(C) of this paragraph.
13 Exchange Act Section 15(a) [15 U.S.C. 78o(a)] 33 described concerns about the process
Banking, Housing and Urban Affairs, U.S. Senate generally provides that: of adopting the Rules, with most of
(Oct. 14, 1999) (stating that ‘‘the Securities and those expressing concern about the lack
[i]t shall be unlawful for any broker or dealer
Exchange Commission has long supported financial
modernization legislation that provides the
which is either a person other than a natural person of a comment period before adoption. Of
or a natural person not associated with a broker or those 33 letters, thirteen were from trade
protections of the securities laws to all investors.’’).
dealer which is a person other than a natural person
6 H.R. Rep. No. 106–74, pt. 3, at 113 (1999).
(other than such a broker or dealer whose business
7 Id. at 113–14. broker or dealer is registered in accordance with
is exclusively intrastate and who does not make use
8 See Board of Governors of Federal Reserve [the provisions] of this section.
of any facility of a national securities exchange) to
14 Definition of Terms in and Specific Exemptions
System v. Investment Co. Institute, 450 U.S. 46, 61, make use of the mails or any means or
101 S. Ct. 973, 984, 67 L. Ed. 2d 36 (1981); 75 Cong. instrumentality of interstate commerce to effect any for Banks, Savings Associations, and Savings Banks
Rec. 9913–9914 (1932) (remarks of Sen. Bulkley). transactions in, or to induce or attempt to induce Under Sections 3(a)(4) and 3(a)(5) of the Securities
9 See U.S. General Accounting Office, Report to the purchase or sale of, any security (other than an Exchange Act of 1934, Release No. 34–44291, 66 FR
Congressional Requesters: Bank Mutual Sales exempted security or commercial paper, bankers’ 27760 (May 18, 2001).
Practices and Regulatory Issues GAO/GGD–95–210, acceptances, or commercial bills) unless such 15 17 CFR 240.15a–7.
groups,16 thirteen were from banks,17 two were from mutual fund the temporary exemption from the
two were from eight Congressmen,18 companies,19 one was from a Senator,20 definitions of ‘‘broker’’ and ‘‘dealer’’
one was from a law firm,21 and one was provided in Exchange Act Rule 15a–7.
16 See letter dated June 4, 2001 from James D. from three Federal banking agencies.22 On May 8, 2002, we further extended
McLaughlin, Director, Regulatory and Trust Affairs, Commenters offered various reasons the temporary exemption from the
American Bankers Association and Beth L. Climo,
Executive Director, ABA Securities Association;
for their concern about adopting the definition of ‘‘dealer’’ to November 12,
letter dated July 17, 2001 from Edward L. Yingling, Rules before considering public 2002.25 By separate order issued in
Deputy Executive Vice President and Executive comment. Some of the Congressmen conjunction with this release, we are
Director, American Bankers Association, and Beth expressed concern that this process may further extending that temporary
L. Climo, Executive Director, ABA Securities
Association; letter dated July 17, 2001 from John
have caused confusion and created a exemption to February 10, 2003.
Duncan, American Bar Association Banking Law dilemma for banks. The banking
Committee of the Business Law Section; letter dated agencies stated that there would be II. Dealer Activities and the Dealer/
July 16, 2001 from Roger D. Wiegley, Chair, significant practical operational Trader Distinction
Committee on Banking Law, The Association of The Exchange Act section 3(a)(5) defines a
Bar of the City of New York; letter dated July 17,
implications of potential approaches to
2001 from Charlotte M. Bahin, Director of implementing the statutory exceptions ‘‘dealer’’ generally as a person that is
Regulatory Affairs, Senior Regulatory Counsel, and they specifically urged that ‘‘engaged in the business of buying and
America’s Community Bankers; letter dated July 17, resolution of those issues could be selling securities’’ for its own account
2001 from Robert M. Kurucza, General Counsel, through a broker or otherwise, but
Bank Securities Association (‘‘the BSA letter’’);
greatly aided by an open process of
letter dated July 17, 2001 from Neil Milner, public comment on a proposal. One excepts persons, whether bank or non-
President and CEO, the Conference of State Bank trade group questioned whether the bank, who do not buy or sell securities
Supervisors; letter dated July 17, 2001 from Gerald Commission had satisfied section 553 of ‘‘as part of a regular business.’’26
M. Noonan, President, the Connecticut Bankers Undertaking the analysis of whether a
Association; letter dated July 17, 2001 from Richard
the Administrative Procedure Act by
M. Whiting, Executive Director, Financial Services publishing the Rules without prior bank’s securities activities come within
Roundtable; letter dated July 17, 2001 from Robert notice and comment.23 the definition of dealer under the
I. Gulledge, Chairman, Independent Community Separate from the issue of public federal securities laws is something that
Bankers of America (‘‘the ICBA letter’’); letter dated comment, the banking agencies, as well banks did not have to consider before
July 17, 2001 from Lawrence R. Uhlick, Executive
Director and General Counsel, Institute of as some trade groups and individual the passage of the GLBA. Banks,
International Bankers; letter dated August 1, 2001 banks, stated that the immediate however, can take advantage of several
from Jeffrey P. Neubert, President and Chief effective date, coupled with exemptions additional exceptions or exemptions
Executive Officer, New York Clearing House (‘‘the from the ‘‘dealer’’ definition, as
NYCH letter’’); and letter dated July 17, 2001 from
that function only to suspend
A. Michelle Roberts, Executive Director, The Trust temporarily the Rules’ effectiveness, discussed below. If a bank’s securities-
Financial Services Division of the Texas Bankers placed banks in an untenable position. related activities fall under the general
Association. The banking agencies strongly urged the definition of ‘‘dealer,’’ the bank must
17 See letter dated July 16, 2001 from Alan R.
Commission to extend the effective date register as a broker-dealer unless that
Leach, President, BancorpSouth Investment
Services, Inc.; letter dated July 16, 2001 from John of these GLBA provisions (until after bank can meet the terms of an exception
M. Kramer, Deputy General Counsel, Bank One considering public comment and or exemption from the dealer definition.
Corporation; letter dated September 10, 2001 from adopting final rules) and to provide The question of whether a bank acts
David P. Johnson, Investment Advisor, Bank banks with at least a one-year transition as a ‘‘dealer’’ that must register with the
Midwest; letter dated September 4, 2001 from
Warren R. Jamieson, Chairman, Bonham State Bank; period after the revised rules become Commission therefore turns upon a two-
letter dated July 17, 2001 from Jeffrey S. Missman, final. stage analysis. The first stage focuses on
Vice President, Director—Regulatory Compliance, In response to concerns that banks two factual questions: (1) Whether the
Commerce Bancshares, Inc.; letter dated July 10, needed more time, and in recognition of bank is ‘‘buying and selling securities’’
2001 from William Nappi, CTCP, Trust Compliance
Officer, FirstMerit Corp., N.A.; letter dated July 16,
the likelihood that the Rules would be for its own account; and (2) whether the
2001 from William C. Mutterperl, Executive Vice amended in light of the continuing bank is ‘‘engaged in the business’’ of
President, General Counsel and Secretary, dialogue between the Commission and that activity ‘‘as part of a regular
FleetBoston Financial Corporation; letter dated July industry participants, we extended the business.’’ A bank would not be a dealer
17, 2001 from Maureen W. Sullivan, Associate
General Counsel, Manufacturers and Traders Trust
effective date of the Rules on July 18, unless both of those factual tests are
Company; letter dated July 16, 2001 from David A. 2001.24 At the same time, we extended met. The second stage of the analysis
Daberko, Chairman and Chief Executive Officer, focuses on whether the bank can take
National City Corporation; letter dated July 17, 2001 Policy and Trade, U.S. House of Representatives; advantage of bank-specific exceptions or
from James S. Keller, Chief Regulatory Counsel, and letter dated July 20, 2001 from Representative
PNC Financial Services Group (PNC); letter dated
exemptions from the definition of
John J. LaFalce, Ranking Member, Committee on
July 17, 2001 from Norimichi Kanari, President and Financial Services, U.S. House of Representatives.
dealer. If all of the bank’s securities
CEO, Union Bank of California; letter dated July 16, 19 See letter dated July 2, 2001 from Melanie L. activities fall within one or more of
2001 from W. David Hemingway, Chief Financial Fein, Attorney at Law, on behalf of Federated those bank-specific exceptions or
Officer Zions Bancorporation; and letter dated July
16, 2001 from A. Scott Anderson, President and
Investors, Inc.; letter dated July 17, 2001 from exemptions, the bank does not have to
Stewart P. Greene, Chief Counsel, Securities Law, register as a broker-dealer.
Chief Executive Officer, Zions Bank Capital Teachers Insurance and Annuity-College
Markets, Zions First National. Retirement Equities Fund.
As a result, a bank has flexibility in
18 See letter dated July 19, 2001 from
20 See letter dated July 18, 2001 from Senator Phil the way that it analyzes whether its
Representative Michael G. Oxley, Chairman, Gramm, Ranking Member, Committee on Banking, securities activities would require it to
Committee on Financial Services, Representative
Richard H. Baker, Chairman Subcommittee on
Housing and Urban Affairs, United States Senate. register with the Commission as a
21 See letter dated July 17, 2001 from Satish M.
Capital Markets, Insurance, and Government dealer. A bank may opt first to consider
Kini of Wilmer, Cutler & Pickering.
Sponsored Enterprises, Representative Spencer
22 See letter dated June 29, 2001 from Alan
whether its proprietary securities
Bachus, Chairman, Subcommittee on Financial purchases and sales cause it to be
Institutions and Consumer Credit, Marge Roukema, Greenspan, Chairman, Board of Governors of the
Chairwoman, Subcommittee on Housing and Federal Reserve System, Donna Tanoue, Chairman, ‘‘engaged in the business’’ of buying and
Community Opportunity, Sue W. Kelly, Federal Deposit Insurance Corporation, and John D.
Chairwoman, Subcommittee on Oversight and Hawke, Comptroller of the Currency (collectively, 25 Release No. 34–45897. At the same time, we
Investigations, Peter T. King, Chairman, ‘‘the banking agencies’’ and ‘‘the Banking Agencies’ further extended the temporary exemption from the
Subcommittee on Domestic Monetary Policy, letter’’). definition of broker until May 12, 2003.
23 The BSA letter.
Technology, and Economic Growth, Doug Bereuter, 26 Exchange Act Section 3(a)(5) [15 U.S.C.
Chairman, Subcommittee on International Monetary 24 Release No. 34–44570. 78c(a)(5)].
selling securities for its own account ‘‘as these transactions as a matter of course dealer in the securities markets by
part of a regular business.’’ If the bank would be involved in the business of conducting various activities: (1)
meets that part of the test, the bank then buying and selling securities for their Underwriting; (2) acting as a market
would have to consider whether those own accounts, even if the risk maker or specialist on an organized
securities activities fall within one of associated with the transactions is exchange or trading system; (3) acting as
the bank-specific exceptions or minimal or non-existent.29 Although the a de facto market maker whereby market
exemptions from the dealer definition in OCC and the Federal Reserve interpret professionals or the public look to the
Exchange Act section 3(a)(5). ‘‘riskless’’ principal activity as firm for liquidity; or (4) buying and
Alternatively, a bank may simply equivalent to agency activity under the selling directly to securities customers
analyze whether its proprietary banking laws,30 ‘‘riskless’’ principal together with conducting any of an
securities purchases and sales fall activity requires registration under the assortment of professional market
within an exception or exemption from securities laws unless an exception or activities such as providing investment
section 3(a)(5). If all of the bank’s exemption applies. advice, extending credit and lending
securities activities fall within one or securities in connection with
B. ‘‘Engaged in the Business’’ Test
more exception or exemption from the transactions in securities, and carrying a
dealer definition, then the bank could As noted above, a person that is securities account. These principles
avoid having to determine separately buying securities for its own account demonstrate that the analysis of whether
whether it satisfies the ‘‘engaged in the may still not be a ‘‘dealer’’ because it is a person meets the definition of a dealer
business’’ component of the definition. not ‘‘engaged in the business’’ of buying depends upon all of the relevant facts
As exemplified by the discussion of and selling securities for its own and circumstances.
riskless principal transactions below, account as part of a regular business. A person must evaluate the totality of
the question of whether a bank acts as This exclusion is often referred to as the its securities activities to determine if
a dealer under the securities laws is dealer/trader distinction. A ‘‘trader’’ those activities may constitute engaging
entirely separate from the question of does not have to register as a broker- in dealer activities for which there is no
whether it acts as a dealer under the dealer. exception or exemption from the dealer
banking laws, and it is possible for a As developed over the years, the registration requirements. By analogy
bank to be a ‘‘dealer’’ under the dealer/trader distinction recognizes that when analyzing whether a security
securities laws but not under the dealers normally have a regular exists, some courts have used an
banking laws. Banks therefore should clientele, hold themselves out as buying analysis that turns on the ‘‘economic
look to the securities laws and the or selling securities at a regular place of realities’’ underlying a transaction and
Commission’s rules and interpretations business, have a regular turnover of not the name appended to the
in conducting the analysis under the business (or participate in the transaction.33
Exchange Act. A bank also should distribution of new issues), and The GLBA bank ‘‘dealer’’ exceptions
continue to determine whether any generally transact a substantial portion are outlined briefly below.34
proposed securities activity is permitted
of their business with investors (or, in • Investment transactions: permits
the case of dealers who are market banks to buy and sell securities for
under banking law, and should consult
makers, principally trade with other investment purposes for the bank and
its appropriate Federal banking agency
professionals).31 In contrast, traders for its customers’ trustee and fiduciary
to assist it in that analysis.
In addition, the bank-specific have a less regular volume, do not accounts.
handle others’ money or securities, do • Permissible securities transactions:
exceptions and exemptions from the
not make a market, and do not furnish permits banks to buy and sell exempted
definition of ‘‘dealer’’ for specific
dealer-type services such as rendering securities, certain Canadian government
products or transactions are
investment advice, extending or obligations, and Brady bonds.
independent of the question of whether • Identified banking products:
arranging for credit, or lending
a person would satisfy the general permits banks to buy and sell certain
securities.32
definition of ‘‘dealer’’ in the first A person generally may satisfy the ‘‘identified banking products,’’ as
instance.27 definition, and therefore, be acting as a defined in Section 206 of the GLBA.
A. Buying and Selling Securities for • Asset-backed transactions: permits
Own Account 10(a)(2)(ii)(A) [17 CFR 240. 10b–10(a)(2)(ii)(A)]; Rel. banks through a grantor trust or other
No. 34–33743 (Mar. 9, 1994) at n.11. separate entity to issue and sell to
The phrase ‘‘buying and selling 29 See Exchange Act Section 3(a)(5). The
qualified investors certain asset-backed
securities for such person’s own Commission has noted that ‘‘riskless’’ principal
transactions are in many respects equivalent to securities representing obligations
account’’ means purchasing or selling
transactions effected on an agency basis. See predominantly originated by a bank, an
securities as principal, which includes Securities Confirmations, Rel. No. 34–15219 (Oct. 6, affiliate of the bank other than a broker-
so-called ‘‘riskless principal’’ 1978), 43 FR 47495 (Oct. 6, 1978).
dealer, or a syndicate in which the bank
transactions. Under the securities laws, 30 The OCC stated that, ‘‘riskless principal
activities are the legal and economic equivalent of is a member for some types of products.
‘‘riskless principal’’ transactions are With respect to the ‘‘dealer’’
permissible brokerage activities inasmuch as
dealer activity.28 Entities that engage in riskless principal brokerage is conducted in a exceptions, the Rules defined terms
manner consistent with the express terms of section found in the asset-backed transactions
27 The SEC’s analysis of what constitutes ‘‘dealer’’ 16,’’ of the Glass-Steagall Act. See OCC Interpretive
activity has not changed for persons that are not Letter No. 371 (June 13, 1986). See also 1989 FRB exception and provided an exemption
banks just because banks have exceptions and 829 (October 30, 1989) and 1996 FRB 748 (June 13, for a de minimis number of riskless
exemptions for specific securities activities and 1996). principal transactions.
products. These exceptions and exemptions provide 31 See, e.g., Rel. No. 34–11742 (October 5, 1975)
In general, the bank dealer exceptions
banks with legal certainty for their securities (noting that a bank might be subject to registration
business. as a municipal securities dealer if it engaged in
apply to specified products and contain
28 ‘‘Riskless principal’’ transactions are generally underwriting, maintain a trading account or carried
a dealer inventory, advertised itself as a dealer or 33 See United Housing Foundation, Inc. v.
described as trades in which, after receiving an
order to buy (or sell) from a customer, the broker- otherwise held itself out as a dealer). Forman, 421 U.S. 837, 849, rehearing denied, 423
dealer purchases (or sells) the security from (or to) 32 See generally L. Loss & J. Seligman, SECURITIES U.S. 884 (1975).
another person in a contemporaneous offsetting REGULATION, §§ 8–A–2 and 8–A–3 nn.115 and 143 34 This outline is a summary. It does not describe
transaction. See Exchange Act Rule 10b– (3d ed. 2001). the exceptions in full.
certain limiting conditions. For In particular, the Risk Management 2. Proposed Amendment to Rule 3a5–1,
example, some of the bank dealer Association (‘‘RMA’’) addressed the the De Minimis Exemption
exceptions permit a bank to buy and sell need for interpretive relief or an As we explained in adopting the
securities, but the asset-backed exemption for noncustodial securities Rules, riskless principal transactions are
transactions exception only permits a lending. A letter from a coalition of ‘‘dealer’’ transactions under the
bank to issue and sell securities through banks also addressed the need for securities laws. The GLBA did not
a grantor trust or other separate entity to clarification that would provide legal provide an exception for dealer
qualified investors. The investment certainty for banks engaging in transactions, except for limited types of
transactions exception only permits the securities lending with entities that securities. Indeed, the GLBA did not
bank to buy or sell securities ‘‘for might not strictly meet the statutory provide any exception from the
investment purposes’’ for its own definition of qualified investor in definition of dealer that would allow
account or for the accounts for which it Exchange Act section 3(a)(54). banks to continue to engage in riskless
acts as a trustee or fiduciary. The Banking Agencies’ and the NYCH principal transactions. By allowing
As a bank considers its securities addressed the definitions interpreting banks to use the de minimis transaction
activities, the bank must evaluate the the statutory dealer exception for asset- exception found in the broker
totality of its securities activities to backed activities. The remaining two exceptions for riskless principal
determine if those activities are commenters addressed the asset-backed transactions, the Commission was
permissible under banking law, meet exception and the de minimis attempting to give banks more—not
the definition of dealer (or broker) exception. To more fully understand the less—flexibility than provided under
activities under the securities laws, and concerns leading to these comments, the the literal terms of the GLBA. In other
are excepted or exempted from the staff held meetings in person and by words, this exemption permits banks to
dealer registration requirements under telephone with interested parties. continue to engage in a limited number
the Exchange Act.35 of these transactions without having to
A. De Minimis Exception and Rule register as a dealer.
III. Discussion of Comments Received 3a5–1
on ‘‘Dealer’’ Rules We continue to believe that a de
minimis exemption for a limited
Exchange Act section 3(a)(4)(B)(xi)37
As outlined above, the GLBA provides number of riskless principal
excepts a bank from the definition of
four exceptions to banks from the transactions is appropriate. We believe
broker, if the bank effects no more than
definition of ‘‘dealer.’’ Each of these that one reason that the GLBA may not
exceptions permits a bank to act as a 500 securities transactions per calendar
have extended the de minimis exception
dealer with respect to the specified year, other than transactions that qualify to riskless principal transactions is the
securities products if the bank complies for one of the other statutory exceptions. difference in the way riskless principal
with the enumerated statutory A transaction in which a bank is acting transactions are viewed under banking
conditions. Only six comment letters as an agent for a customer would count law as compared to the securities laws.
addressed either the dealer statutory as one transaction toward the 500- In banking law, riskless principal
exceptions or the dealer exemption.36 transaction limit. The GLBA provisions transactions are considered agency
did not extend this de minimis activity because the principal does not
35 A bank that contemplates a new securities
exception to dealer transactions. assume principal risk.39 Under the
activity may also seek an exemption or no-action Questions arose as to whether banks securities laws, however, riskless
relief from the Commission. Exchange Act Section can rely on the de minimis exception principal activity is conducted by a
36 [15 U.S.C. 78mm] authorizes us to exempt any
person, security, or transaction from the provisions from the definition of broker when they dealer, acting as principal, attempting to
of the Exchange Act, to the extent that such engage in riskless principal eliminate his principal risk. Because the
exemption is necessary or appropriate in the public transactions.38 The Commission exception is in the Exchange Act, the
interest, and consistent with the protection of addressed this issue in the Rules by interpretation under the securities laws
investors. We authorized the Director of the
Division of Market Regulation to consider, on a providing an exemption that permits is controlling.
case-by-case basis, individual requests for riskless principal transactions as well as The Commission addressed this
exemptive relief from banks, savings associations, agency transactions to be counted under distinction in the Rules by providing
and savings banks. Exchange Act Rule 30–3 [17 CFR the 500-transaction limit. The Rules that riskless principal transactions as
200.30–3(a)(72)].
In appropriate circumstances, the staff also may
provide that a transaction in which the well as agency transactions can be
provide guidance in the form of no-action letters. dealer bank is acting as a riskless counted under the limit of 500
See Release No. 33–5127 (January 25, 1971). See principal intermediary between two securities transactions per calendar
also Release No. 33–6279 (December 5, 1980). non-broker-dealer customers counts as year. Exchange Act Rule 3a5–1 counted
36 See the ICBA letter, the NYCH letter, the
two trades (one with each customer) a transaction in which the dealer bank
Banking Agencies’ letter, letter dated July 17, 2001
from Rick D. Burtenshaw, Senior Vice President, under the 500-transaction limit. is acting as a riskless principal
Investment Division, Zions First National Bank intermediary between two non-broker-
(‘‘the Zions letter’’). In addition, a letter dated 1. Discussion of Comments Received on dealer customers as two trades under
October 16, 2002 from Elizabeth Shea Fries of Rule 3a5–1, the De Minimis Exemption the 500-transaction limit.
Goodwin Proctor on behalf the Risk Management
Association (‘‘the RMA letter’’) addresses the need Two commenters addressed this In response to the two comments on
for an exemption for activities related to securities exemption. Both commenters criticized this issue that expressed the view that
lending. Moreover, a letter to Annette Nazareth,
the Rules for counting as two counting a riskless principal transaction
Director, Division of Market Regulation, dated as two trades in certain circumstances
October 9, 2002, from Edward J. Rosen, Cleary, transactions something that they
Gottlieb, Steen & Hamilton, on behalf of a coalition characterize as essentially being a single may be needlessly restrictive, we
of banks actively involved in securities lending transaction.
(‘‘Coalition of Banks letter’’) suggests that the 39 See Bankers Trust New York Corporation, 75
definition of ‘‘qualified investor’’ be clarified to Fed. Res. Bull. 829 (1989); Bank of New York
37 15 U.S.C. 78c(a)(4)(B)(xi).
cover all entities with at least $25 million in Company, Inc. (Order dated June 10, 1996); and
investments that are not otherwise covered under 38 See description of riskless principal OCC Interp. Ltr. No. 626, reprinted in [1993–1994
the statutory definition in connection with the transactions under the securities laws at notes 28 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ (July
securities lending exemption. to 30, supra. 7, 1993).
propose amending the counting of the 1. Discussion of Comments Received on deleterious effects on bank
number of riskless principal Rule 3b–18—Definition of Terms Used securitization activities.’’
transactions. Under the proposed in Asset-Backed Exception to Dealer One commenter addressed the
amendment to Rule 3a5–1, a riskless Registration requirement that each member of a
principal transaction, even if it involves Four commenters addressed these syndicate of banks originate at least
two separate counterparties, would definitions.43 All four commenters 10% of the value of a pool of
count as only one transaction against focused primarily on the definition of obligations.46 This commenter stated
the annual 500-transaction limit.40 We ‘‘predominantly originated.’’ One that this test is too high, that there is no
believe that this change will simplify commenter also addressed the reason to impose a minimum percentage
the rule and make it easier for banks to requirement that a member of a on the concept of syndicate
understand and apply its terms to a syndicate originate more than 10% of membership, and that the test
small annual number of riskless the value of a pool of obligations.44 discriminates against smaller banks that
principal securities transactions. For the purpose of the asset-backed may be unable to securitize obligations
We request comment on this proposed transaction exception, the Rules defined individually and must participate in a
amendment to Exchange Act Rule 3a5– ‘‘predominantly originated’’ so that a syndicate.
1 and whether this is an appropriate bank could engage in the issuance or
sale of asset-backed securities without 2. Proposed Amendments to Rule
way to count transactions under this 3b–18—Definition of Terms Used in
exemption. registration as a dealer if at least 85% of
the obligations underlying the securities Asset-Backed Exception to Dealer
B. Rule 3b–18—Definition of Terms were originated by the bank or its Registration
Used in Asset-Backed Transaction affiliates, other than its broker-dealer The asset-backed transactions
Exception to Dealer Registration affiliates. The definition also stated that exception permits a bank to create,
The GLBA exception to the definition the bank and its affiliates include any issue, and sell through a grantor trust or
of dealer for banks engaging in certain financial institution with which the other separate entity asset-backed
asset-backed issuance and sale bank or its affiliates have merged but securities predominantly originated by
transactions provides that a bank may does not include the purchase of a pool the bank and its affiliates. This
engage in the issuance or sale to of obligations or the purchase of a line exception does not permit a bank to be
qualified investors, through a grantor of business. a dealer by regularly repurchasing and
Each of the commenters stated that reselling the asset-backed securities that
trust or other separate entity, of the definition was too narrow and
securities backed by or representing an it issues.47 However, a bank may
should be expanded to permit a greater purchase these asset-backed securities
interest in notes, drafts, acceptances, percentage of the assets in a pool to be
loans, leases, receivables, other for investment purposes, so long as the
purchased. The commenters suggested bank is not acting as a dealer.48
obligations (other than securities of that the percentage used in this
which the bank is not the issuer), or We considered the comments we
definition should be reduced to a simple
pools of any of these obligations majority or 51% to permit a bank to received as well as additional factual
predominantly originated by the bank, issue asset-backed securities on pools information that the staff learned during
an affiliate of the bank other than a with a smaller percentage of assets subsequent conversations with banking
broker-dealer, or a syndicate in which originated by the bank and its affiliates. agencies and some individual banks.49
the bank is a member.41 As we Each of the commenters urged the After considering the banks’ business
explained when we adopted the Rules, Commission to consider the impact that practices, we propose to expand the
this statutory exception allows banks to a rule that discourages banks from definition of ‘‘originated’’ by
issue and sell asset-backed securities selling assets could have on smaller considering obligations that a bank
through a grantor trust or other separate banks. initially approves and underwrites, or
entity. It does not, however, allow banks One commenter also addressed the agrees to purchase, to be ‘‘originated’’ by
to deal in asset-backed securities. In definition of the term, ‘‘syndicate of the bank as long as the bank meet two
other words, this exception is not broad banks of which the bank is a
enough to permit banks to regularly member.’’ 45 That commenter stated that 46 See the NYCH letter.
purchase and sell these securities in the Exchange Act Rule 3b–18 defines a 47 See Section II, supra, for a discussion of dealer
secondary market.42 activities and the dealer/trader distinction.
‘‘syndicate’’ in a manner that is wholly 48 Exchange Act Section 3(a)(5)(C)(ii) [15 U.S.C.
Exchange Act Rule 3b–18 defined inconsistent with banking practice and, 78c(a)(C)(ii)]. In contrast, a bank also may deal in
terms used in the asset-backed thus, effectively eliminates the statutory government securities, such as securities of the
transactions exception to clarify the provisions authorizing syndicate Federal National Mortgage Association (‘‘Fannie
transactions. In particular, the Mae’’) and the Federal Home Loan Mortgage
parameters of this exception. In Corporation (‘‘Freddie Mac’’). Exchange Act
particular, Rule 3b–18 defined the commenter stated that by defining a Sections 3(a)(5)(C)(II) (exception from ‘‘dealer’’ for
terms: ‘‘affiliate,’’ ‘‘consumer-related ‘‘syndicate’’ to mean ‘‘a group of banks exempted securities) [15 U.S.C. 78c(a)(5)(C)(II)],
receivable,’’ ‘‘member of a syndicate of that acts jointly, on a temporary basis, 3(a)(12)(A) (exempted security defined) [15 U.S.C.
to loan money in one or more bank 78c(a)(12)(A)], and 3(a)(42)(B) and (C) (government
banks,’’ ‘‘obligation,’’ ‘‘originated,’’ securities defined) [15 U.S.C. 78c(a)(42)(B) and (C)].
‘‘pool,’’ ‘‘predominantly originated,’’ credit obligations,’’ the rule reflected a 49 We were informed that very few banks issue
and ‘‘syndicate of banks.’’ fundamental misunderstanding of how and sell asset-backed securities without employing
syndicates function in the banking a registered broker-dealer. The banking agencies
industry. This would effectively identified only four banks that might have issued
40 If, however, a bank offsets the risk in a
and sold asset-backed securities directly without
transaction with one counterparty by arranging preclude banks from taking advantage of using a broker-dealer within the past two years. Of
multiple transactions with other counterparties, the the syndicate portion of the asset- these four banks, only two regularly issue and sell
bank must count each of the transactions on the backed transactions exception in the asset-backed securities without employing a broker-
side of the transaction that involves the largest dealer. These two banks actively participate in
number of transactions as a separate transaction GLBA, and will have ‘‘seriously
making new small business, residential and
against the annual 500 transaction-limit. automobile loans for securitization but employ loan
41 Exchange Act section 3(a)(5)(C)(iii) [15 U.S.C. 43 See note 36, supra. distribution channels that would not permit the
78c(a)(5)(C)(iii)]. 44 See the NYCH letter. banks to meet the definition of ‘‘originated’’ in
42 66 FR 27760 at 27785 (May 18, 2001). 45 See the Banking Agencies’ letter. Exchange Act Rule 3b–18.
conditions. First, the obligation would the obligations in any pool as measured because they sell the securities secured
have to conform to the bank’s by the value of the obligations. by the pool of obligations originated by
underwriting standards or be evidenced We also propose to clarify the rule by banks that are members of a syndicate
on the bank’s documents. This replacing the definition of ‘‘member of of banks. We did, however, modify the
requirement is imposed to ensure that a syndicate of banks’’ with two separate rule to clarify that the affiliates of the
the bank and the entity from whom it definitions. In particular, we first banks other than broker or dealer
obtains the loan have an established propose to define ‘‘member’’ as it relates affiliates also may originate the
arrangement prior to the time the loan to the term ‘‘syndicate of banks’’ to obligations.
is made to either use the bank’s make clear that the individual banks Based on our staff’s conversations
underwriting standards or and their affiliates other than their with those banks that sold asset-backed
documentation prepared by the bank. broker or dealer affiliates, originate the securities, we expect that the changes
Second, the bank would be required to obligations, rather than the syndicate. we propose will permit the banks that
fund the obligation in a timely manner, The syndicate of banks only comes currently issue and sell asset-backed
together to issue and sell the securities directly to continue to do so
not to exceed six months after the
obligations. Second, we propose to under the terms of the exception
obligation is created. We also continue
modify the definition of ‘‘syndicate of without having to employ a broker-
to define an obligation that the bank
banks’’ to mean a group of banks that dealer.
funds at the time that the obligation is acts jointly, on a temporary basis, to We request comment on all aspects of
closed as ‘‘originated’’ by the bank. issue securities backed by obligations the proposed amendments to Rule 3b–
Under this revised definition, a bank originated by each of the individual 18. In particular, we request comment
should be able to use loan origination banks and their affiliates other than from banks that currently sell asset-
channels such as automobile dealers, their broker or dealer affiliates. These backed securities on the impact, if any,
mortgage companies, and other banks, definitions will make it clear that banks of the proposed definition of ‘‘originate’’
even though the bank does not ‘‘make may join together for the purpose of on them. We request that these banks
and fund’’ the obligation at the exact issuing securities backed by the pool of confirm whether the proposed changes
time that the obligation is created. obligations, rather than having to join to the definitions will permit them to
Conversely, a bank that purchases together before the obligations are continue to conduct this business. We
obligations that do not meet the created. also request comment on the
conditions of this exemption would not We propose to retain the requirement requirement to fund the loans in a
have originated that particular that when a syndicate of banks issues timely manner not to exceed six months
obligation for the purpose of the 85% asset-backed securities through a grantor and whether this requirement will have
test. We believe that it is important to trust or other separate entity, each bank any impact on the banks making or
limit the time within which funding of and its affiliates other than its broker or funding the loans. In addition, we
the obligation must occur in order to dealer affiliates selling the securities, request comment on the requirement
give meaning to the term ‘‘originate’’ in and thus acting as a dealer in the that there be established relationships as
transaction, must have originated at shown by conforming loans to the
the exception.
least 10% of the value of the pool of underwriting standards of the bank or
Although commenters urged the obligations backing the securities. This using documentation prepared by the
Commission to modify the definition of 10% requirement is applicable only to bank to evidence the loans. Commenters
‘‘predominantly originated’’ to permit the bank or banks that actively sell the are invited to discuss whether these
banks to purchase more of the securities backed by the pool because requirements would impose any
underlying obligations being these are the only banks that need to use burdens on banks.
securitized, we have not proposed to the dealer exception. We received only
modify the 85% test because the test IV. Rule 15a–11 Exemption From the
one comment on this requirement.51 We
Definitions of ‘‘Broker’’ and ‘‘Dealer’’
closely tracks the language of the believe that this commenter viewed the
for Banks Engaging in Securities
statute.50 To enhance clarity, however, definition as applicable to all of the
Lending Transactions
we are modifying the definition to banks that provide assets to the pool but
expressly set forth the meaning of the do not actually sell the securities. Institutional investors often place
term in the context of a syndicate of We propose to retain this requirement securities in custody with banks. These
banks. Thus, the banks, and their because the legislative history indicates custodian banks effect and administer
affiliates other than broker-dealer that each bank selling the securities securities loans in return for an agreed
affiliates, participating in any such should be more than an insignificant fee. Banks also may engage in securities
syndicate must have originated 85% of member of the syndicate.52 The lending transactions when they do not
legislative history suggests that have custody of the securities. A non-
50 In defining the term ‘‘predominantly,’’ which threshold is met when a bank together custodial securities lending arrangement
modifies the term ‘‘originated,’’ we looked to other with its affiliates other than broker or permits a customer to divide custody
sections of the GLBA in which the term is used. dealer affiliates provided at least 10% of and securities lending management
Section 103(n) of the GLBA uses the term between two expert entities. For
‘‘predominantly’’ to modify ‘‘financial’’ and to
the obligations in the pool. We believe
allow analysis of whether nonfinancial activities that it is reasonable as well as in example, a custodian may be selected
and affiliations may be retained. Bank Holding accordance with the legislative history for efficiency and low cost, while a
Company Act Section 4(n)(2) [12 U.S.C.1843(n)(2)]. to retain this requirement for the bank lending agent may be selected for its
Section 103(n)(2) of the GLBA expressly provides ability to maximize the profitability of
that a firm is predominantly engaged in financial
or banks that need the exception
activities when at least 85% of the annual gross the portfolio.
revenues of the consolidated company derive from 51 See the NYCH letter. Although banks play a role in both
financial activities, excluding any revenue from 52 The legislative history states that, ‘‘[t]he custodial and non-custodial securities
banks. To be consistent, we applied the same Committee expects this provision shall be lending transactions, the GLBA bank
numerical test found in Section 103(n)(2) of GLBA interpreted so that the bank will [have] not less than
for loan product originations for the purpose of the ten percent of the assets in the syndicate or pool
exceptions to the definitions of broker
asset-backed securities exception from the of obligations.’’ H.R. Rep. No. 106–74, pt. 3, at 171 and dealer provide only one exception
definition of dealer. (1999). for securities lending and borrowing
transactions. The need for an exemption credit intermediation and anonymity by principal, for its own account. A bank
to give banks legal certainty for standing between the lender and that qualifies under this definition as a
securities lending transactions when the borrower. conduit lender at the commencement of
bank does not have custody of the The proposed exemption would a transaction would continue to qualify
securities was initially drawn to our require a written securities lending as long as the original securities lending
attention through a letter from a trade agreement, which would be any contract transaction remains outstanding, even
group.53 to conduct securities lending though substitutions of collateral may
Exchange Act section 3(a)(4)(B)(viii) transactions on behalf of a qualified occur on the securities borrowing side
addresses securities lending by investor. In connection with a securities of the transaction.
custodian banks as an exception to the lending transaction, the bank may select To the extent that banks may have a
definition of broker.54 Under paragraph and negotiate with a borrower and legitimate need to, on occasion, lend or
(cc) of section 3(a)(4)(B)(viii), a bank is execute, or direct the execution of, the borrow securities on their own behalf
permitted, without being considered a loan with the borrower; receive, deliver, for hedging or for other reasons, they
broker, to effect securities lending or or take custody of loaned securities; should be subject to the same dealer/
borrowing transactions by custodian receive, deliver, or take custody of trader distinction that applies to all
banks with or on behalf of customers in collateral; provide mark-to-market, other market participants.59 In addition,
two situations: (1) As part of the corporate action, recordkeeping or other the exemption is not indicative of
services provided to safekeeping and services incidental to the administration whether banks or other persons may
custody customers; and (2) when of the securities lending transaction; otherwise engage in securities lending
facilitating the transfer of funds or reinvest, or direct the reinvestment of, as principal without being considered a
securities as a custodian or a clearing cash collateral; or indemnify the lender dealer.
agency in connection with the of securities with respect to various Even though we recognize that
settlement of customers’ transactions in matters. engaging in securities lending
securities. We propose to make this exemption transactions involves taking risks that
We have been advised that the available for banks’ current securities require effective internal controls, we
existence of this limited bank exception lending business. The exemption would have not proposed conditions to the
from the definition of broker creates be limited to transactions with exemption that would require that
uncertainty for banks that may engage in ‘‘qualified investors,’’ as defined in banks conform to the standards
securities lending or borrowing Exchange Act section 3(a)(54).56 applicable to registered broker-dealers
transactions without having custody of Commenters have suggested that both that engage in securities lending
the underlying securities or in situations custodial and non-custodial banks transactions.60 We are proposing an
where a bank might meet the definition should be able to act either as a conduit exemption because we believe that it
of dealer under the securities laws. To lender or as agent in order to offer to will assist institutional investors in
provide legal certainty to banks institutional investors the opportunity obtaining stock loan services for banks
engaging in securities lending to select different banks to provide this that do not act as their custodians. We
transactions, we propose to add an service.57 also believe that the exemption is
exemption from the definition of broker We propose that a bank be required to appropriate in the public interest and is
for banks engaging in non-custodial deal with a qualified investor on both consistent with the protection of
securities lending activities as well as sides of the transaction as a condition of investors because it is limited to
an exemption from the definition of this exemption. We understand that qualified investors.
dealer for banks engaging in certain borrowers of securities that are not We have asked bank regulators to
custodial and non-custodial securities qualified investors do not directly advise us if this exemption would pose
lending activities. This exemption borrow securities from noncustodial any risks that the Commission should
would also enhance legal certainty for banks. Any borrowers of securities that address. We specifically request
banks that have custody of collateral or do not meet the qualified investor test commenters to address our decision not
that have custody of the securities generally borrow securities through to impose the kinds of conditions that
subject to a lending arrangement for less intermediaries that would be qualified are applicable to broker-dealers that
than the entire period of the stock loan. investors. We request comment on any engage in securities lending, which
Industry representatives have advised require them to take precautions against
business practices that involve banks
our staff that banks’ primary role in financial risks to the firm.
engaging in noncustodial securities
securities lending transactions, whether If conditions were to be imposed, we
lending directly with persons that are
operating with or without custody of the request comment on whether we should
not qualified investors.
securities, is to act in an agency require banks to verify that: (1) The
We do not propose extending the
capacity. Less frequently, banks may participants to the securities lending
securities lending exemption to banks
engage in securities lending as principal transactions are borrowing securities for
borrowing securities for, or lending
while acting as a conduit between the a proper purpose; or (2) the participants
from, their own accounts except as a
parties.55 In that role, a bank provides to the transaction have been evaluated
conduit lender.58 For the purposes of
this provision, the term conduit lender for their suitability to participate in the
53 Seethe RMA letter, supra, note 36.
54 15 means a bank that borrows (or loans) transaction, including their
U.S.C. 78c(a)(4)(B)(viii).
55 This conduit role is similar to a riskless securities, as principal, for its own creditworthiness. Moreover, we request
principal transaction, but does not involve activities account, and contemporaneously loans comment on whether this exemption
that could be characterized as running a matched (or borrows) the same securities, as should include a condition that it not be
book. Running a matched book of repurchase used to avoid U.S. margin requirements
agreements or other stock loans has been
characterized as a dealer activity because the ‘‘book borrowing side of the transaction while the original applicable to securities financing
running dealer’’ holds itself out as willing to buy securities lending transaction remains outstanding.
56 See discussion at Section V, infra. 59 See Section II, supra, for a discussion of dealer
and sell and as thus, engaged in the business of
57 See the RMA letter, supra note 36. activities and the dealer/trader distinction.
buying and selling securities. Unlike a riskless
principal transaction, a conduit lender may on 58 Under banking law, with some exceptions, 60 See Rule 15c3–3(b)(3) [17 CFR 240.15c3–
occasion substitute collateral on the securities banks are not permitted to own equity securities. 3(b)(3)].
transactions, or to avoid other banking products when the product is any liquidating agent for any of the
restrictions on the alienability of an equity swap agreement; 65 and (3) the foregoing, in his capacity as such.’’70
securities. We also request comment on dealer exception for asset-backed In light of these other definitions, for
all other aspects of the proposed securities.66 the purposes of the GLBA provisions in
exemption for securities lending With regard to the expansion of the the Exchange Act, we interpret the term
transactions. definition of qualified investor in the ‘‘company’’ as used in the definition of
context of the exemption for securities ‘‘qualified investor’’ in subsection (xi) of
V. Definition of ‘‘Qualified Investor’’ section 3(a)(54) to have a broad meaning
In defining the term ‘‘qualified lending transactions, one commenter
that encompasses any other type of
investor,’’ Exchange Act section 3(a)(54) stated:
As you are aware, banks provide custodial entity not otherwise specifically listed
expressly provides authority to the and non-custodial securities lending services in section 3(a)(54). We believe that
Commission by rule or order to expand to a variety of different types of lenders of interpreting the definition of qualified
the definition to include any other securities. Frequently, these lenders include investor in this way is an appropriate
person, taking into consideration such U.S. persons that are not organized as way to enhance legal certainty for
factors as the financial sophistication of corporations, companies, or partnerships. For entities that are not as precisely
the person, net worth, and knowledge example, a significant number of lenders are described as others in the list of entities
and experience in financial matters.61 In organized as trusts. In addition, some banks expressly listed as ‘‘qualified investors.’’
the context of the securities lending regularly provide securities lending services We believe that it may be appropriate
exemption, one commenter suggested to non-U.S. entities whose legal form has to utilize this interpretation in all
that we use this authority to clarify the been established pursuant to applicable non-
circumstances where the term is used in
U.S. law. Such entities may be organized as
definition of ‘‘qualified investor’’ so that trusts, pension plans managed by foreign the GLBA exceptions as well as in the
it would include any other person, plan, banks or advisers qualified under local law securities lending exemption. However,
or legal entity of any kind that owns or (and as a result not included within Section any type of entity that is specifically
invests on a discretionary basis not less 3(a)(54)(A)(v)), or as some other legal form listed in Exchange Act section 3(a)(54)
than $25 million in investments, even if that does not fit clearly within the U.S.-based will continue to be subject to the
it is not expressly included in section concepts of a ‘‘corporation, company or requirements imposed by that section.
3(a)(54).62 partnership.’’ 67 For example, a government or political
The term ‘‘qualified investor’’ was Exchange Act section 3(a)(54) subdivision, agency, or instrumentality
defined as a part of the GLBA and has enumerates an extensive list of persons of a government is required to invest on
application to several of the bank who qualify for the designation, a discretionary basis at least $50 million
exceptions from broker-dealer ‘‘qualified investor. ’’68 Some of these in investments in order to be considered
registration. Under the GLBA bank entities qualify by merely being certain a qualified investor.71 The statutory
exceptions to broker and dealer types of entities, while other entities requirement for these governmental
registration, certain securities may only must qualify by being both a certain entities would not be changed by this
be sold to qualified investors. The type of entity and by meeting an interpretation.
sections that list the securities that may ownership and investment test. For We request comment on all aspects of
only be sold to qualified investors example, subsection (xi) of section this interpretation, including whether
include: 63 (1) The broker exception for 3(a)(54)(A) provides that ‘‘any there are any other entities that should
identified banking products when the corporation, company, or partnership be considered qualified investors or
product is an equity swap agreement; 64 that owns and invests on a discretionary whether we should exclude any entities
(2) the dealer exception for identified basis, not less than $25,000,000 in that might meet the qualifying
investments’’ is a qualified investor. investment threshold but that
61 15 U.S.C. 78c(a)(54). Under this definition
nonetheless should be excluded from
qualified investors include investment companies, In considering this definition, we first the definition. In addition, we request
banks, small business investment companies, any looked to Exchange Act section 3(a)(9),
State sponsored employee benefit plan, institutional comment on whether the expansion of
trusts, market intermediaries, and natural persons,
which defines the term ‘‘person’’ to the definition of ‘‘qualified investor’’
corporations or partnerships that own and invest on mean ‘‘a natural person, company, should apply: (1) Whenever the term is
a discretionary basis more than $25,000,000. government, or political subdivision, used in the GLBA exceptions; or (2)
62 See Coalition of Securities Lending Banks
agency, or instrumentality of a only to securities lending transactions.
letter. government.’’ 69 We also looked to
63 In addition to these three provisions, a We also request comment on whether
participation in a loan to be an ‘‘identified banking
Investment Company Act section this interpretation brings sufficient
product,’’ also must either be sold to: (1) A qualified 2(a)(8), which provides that the term clarity to provide legal certainty to
investor; or (2) to other persons that have an ‘‘company’’ means a corporation, a banks and their customers.
opportunity to review and assess any material partnership, an association, a joint-stock
information regarding the borrower’s VI. Procedural Matters
creditworthiness and based on such factors as
company, a trust, a fund, or any
financial sophistication, net worth, and knowledge organized group of persons whether A. General Request for Comments
and experience in financial matters, have the incorporated or not; or any receiver,
capability to evaluate the information available, as trustee in a case under title 11 of the We are soliciting comments on all
determined under generally applicable banking
United States Code or similar official or aspects of these proposed amendments
standards or guidelines. Thus, a bank utilizing the as well as the portions of the Rules
exceptions to broker and dealer registration to sell
a participation interest would either have to sell 65 Section 206(a)(6) of Pub. L. 106–102 [15 U.S.C.
pertaining to banks’ dealer activities
such an interest to a qualified investor or undertake 78c note] as incorporated into Exchange Act Section that we are not proposing to amend. We
a more extensive factual assessment of the 3(a)(5)(C)(iv) [15 U.S.C. 78c(a)(5)(C)(iv)]. will amend the Rules as appropriate in
purchaser. See Section 206(a)(5) of Pub. L. 106–102 66 Exchange Act Section 3(a)(5)(C)(iii) [15 U.S.C.
response to comments received when
[15 U.S.C. 78c note] as incorporated into Exchange 78c(a)(5)(C)(iii)].
Act Section 3(a)(4)(B)(ix) [15 U.S.C. 78c(a)(4)(B)(ix)] we adopt final rules relating to the
67 Coalition of Securities Lending Banks letter.
and Section 3(a)(5)(C)(iv) [15 U.S.C.
78c(a)(5)(C)(iv)]. 68 Subsections (i) through (xiv) of Section 3(a)(54) 70 Investment Company Act Section 2(a)(8) [15
64 Section 206(a)(6) of Pub. L. 106–102 [15 U.S.C. list entities that are qualified investors. U.S.C. 80a–2(a)(8)].
78c note] as incorporated into Exchange Act Section 69 Exchange Act Section 3(a)(9) [15 U.S.C. 71 Section 3(a)(54)(C)(xiii) of the Exchange Act [15
3(a)(4)(B)(ix) [15 U.S.C. 78c(a)(4)(B)(ix)]. 78c(a)(9)]. U.S.C. 78c(a)(54)(C)(xiii)].
exceptions from the definition of dealer Amending Rule 3a5–1 to change the those associated with moving the
and the new proposed exemption set way riskless principal transactions are supervision of these limited securities
forth in this proposal. We also counted will allow banks to engage in transactions or products from the
specifically request comment on the more such transactions before triggering Commission and placing them under
timing of the final implementation of the dealer registration requirement. the banking agencies, which we do not
this proposal and the Rules relating to Directly engaging in asset-backed believe to be significant.
the exceptions from the definition of transactions without employing a In addition, because the types of
dealer as well as any specific extensions broker-dealer is very unusual for banks. dealer activities that are the subject of
that individual banks may need. We found only two banks that regularly these rules are not the types of activities
issue and sell asset-backed securities. in which small banks or small broker-
B. Paperwork Reduction Act Based on the staff discussions with dealers participate, there should be no
These proposed rules do not impose these two banks, we believe that the competitive costs to small broker-
recordkeeping or information collection proposed amendments to Rule 3b–18 dealers due to the way in which these
requirements, or other collections of will permit these two banks to continue rules modify the terms of the bank
information that require approval of the to utilize their existing business models exceptions and exemptions. None of the
Office of Management and Budget under with little or no change in their commenters on the dealer rules
44 U.S.C. 3501, et seq. Accordingly, the procedures. These proposed specifically identified costs to
Paperwork Reduction Act does not amendments modify the definition of complying with those rules.
apply.72 ‘‘originate’’ to permit banks to use loan
D. Consideration of Burden on
C. Consideration of Benefits and Costs origination channels that would not be
Competition, and on Promotion of
permitted under the Rules. We believe
We believe that these proposed Efficiency, Competition, and Capital
that the proposed amendments to the
amendments and the new exemption are Formation
definitions under the asset-backed
consistent with Congress’s intent in transactions exception will In accordance with our
enacting the GLBA and are responsive accommodate these banks’ business responsibilities under section 3(f) of the
to the comments we received. These without sacrificing the statutory limits Exchange Act, we have considered both
proposed amendments to the Rules are Congress imposed on banks’ dealer the protection of investors and whether
very limited in scope. The amendments activities. these proposed amendments to certain
propose three changes. In particular, we Lending securities is a highly of the Rules would promote efficiency,
propose to: (1) Modify the way in which specialized business for which Congress competition, and capital formation in
transactions are counted under the provided partial relief under the determining whether they are consistent
exemption from the definition of custody exception to broker registration. with the public interest.73 In addition,
‘‘dealer’’ for a bank engaged in riskless As discussed above, some banks were section 23(a)(2) of the Exchange Act 74
principal transactions, which would concerned about legal certainty for requires us, in adopting rules under the
permit the bank to engage in more securities lending transactions that may Exchange Act, to consider the
transactions under the de minimis not meet the terms of the custody anticompetitive effects of such rules, if
exception to broker and dealer exception to broker registration and to any, and to refrain from adopting a rule
registration; (2) modify certain the extent that some securities lending that will impose a burden on
definitions under the exemption for transactions might be considered to be competition not necessary or
asset-backed transactions exception to subject to dealer registration. The appropriate in furthering the purpose of
the ‘‘dealer’’ rules to permit banks to proposed amendments modify the the Exchange Act.
issue and sell more asset-backed definition of ‘‘originate’’ to permit banks We do not believe that the
securities; and (3) add a new exemption to use loan pipelines that would not be interpretations, definitions, and
from the definitions of both ‘‘broker’’ permitted under the Rules. We believe exemptions contained in these proposed
and ‘‘dealer’’ to provide banks with that banks provide an important amendments to certain of the Rules, or
enhanced legal certainty when they function in this market and that it is in the proposed rules will result in any
engage in securities lending the public interest that they continue to burden on competition that is not
transactions. do so. The proposed exemption should necessary or appropriate in furtherance
provide banks that lend securities with of the purposes of the Exchange Act.
1. Benefits
enhanced legal certainty that will The interim final rules define terms in
Both of the proposed amendments to permit them to continue to engage in the statutory exceptions to the
the existing Rules would modify the this activity without broker-dealer definitions of broker and dealer added
exceptions and the interpretations registration. to the Exchange Act by Congress in the
found in Rules 3a5–1 and 3b–18 in a GLBA, and provide guidance to banks
way that expands the scope of activity 2. Costs
regarding the scope of those exceptions.
in which banks may engage without Although banks may incur certain The proposed rule amendments and
registering as dealers. The new costs to comply with the GLBA, these proposed rules also do not impose any
proposed exemption for banks to engage costs will be necessary because of the additional competitive burdens on
in securities lending transactions found statutory change. Congress determined banks engaging in a securities business,
in new Rule 15a–11 also grants that all securities activities should be other than those imposed by Congress
increased legal certainty to banks. All of functionally regulated by the expert through functional regulation in the
these proposals make it easier for banks securities regulator to ensure investor GLBA.
to conduct these activities. protection, regardless of the entity in Because the types of dealer activities
which the activities occur. Thus, any that are the subject of these rules are not
72 We would expect banks, as a matter of good regulatory costs arise from Congress’s the types of activities in which small
business practice, to be able to demonstrate that determination that amendment of the
they meet the terms of a particular exemption. We
banks or small broker-dealers directly
also note that Section 203 of the GLBA specifically
Exchange Act was necessary. There are
requires the bank regulators to promulgate no out-of-pocket costs as a result of 73 15 U.S.C. 78c(f).
recordkeeping requirements. these proposals. Any costs would be 74 15 U.S.C. 78w(a)(2).
participate, there should be no comments in making any changes to the amend a rule defining certain terms in
competitive costs to small banks or proposed amendments to the Rules, the section 3(a)(5) of the Exchange Act
small broker-dealers due to the way in new proposed exemption, and the new concerning exceptions to the statutory
which these rules modify the terms of rule as necessary. definition of ‘‘dealer’’ for certain bank
the bank exceptions and exemptions. For purposes of the Small Business activities. These amendments also
The new conditional exemption from Regulatory Enforcement Fairness Act of would, if anything, permit banks to
broker-dealer registration would provide 1996, the Commission is also requesting engage in more transactions than would
banks increased legal certainty when information regarding the potential be permitted without registration under
they engage in securities lending impact of the proposed rules and rule the Rules. Third, the proposals would
transactions without any new burdens amendments on the economy on an add a new rule permitting banks to
on banks seeking to use this limited annual basis. Commenters should engage in certain securities lending
exemption. Nothing in the proposed provide empirical data to support their activities without triggering registration
amendments to the Rules, in the new views. requirements. Again, this proposal
proposed exemption, or in the proposed would, if anything, permit banks to
E. Regulatory Flexibility Act
rule will adversely affect capital engage in more transactions than would
Certification
formation. Banks that alter their be permitted without registration under
securities-related activities in Section 3(a) of the Regulatory the Rules. For these reasons, none of the
accordance with the GLBA will Flexibility Act 75 requires the proposals should have a significant
continue to be able to provide securities Commission to undertake an initial economic impact on a substantial
services to their customers. In enacting regulatory flexibility analysis of the number of small entities.
the GLBA, Congress determined that effects of proposed rules and rule We encourage written comments
functional regulation was appropriate— amendments on small entities, unless regarding this certification. We solicit
that is, when a bank was conducting a the Commission certifies that the rules comment as to whether the proposed
securities business outside of the and rule amendments, if adopted, changes could have an effect that we
enumerated exceptions, that bank would not have a significant economic have not considered. We request that
should be registered as a broker-dealer impact on a substantial number of small commenters describe the nature of any
or shifted securities activities to a entities.76 impact on small entities and provide
registered broker-dealer. In the interest The Commission hereby certifies
empirical data to support the extent of
of protecting the public and ensuring pursuant to 5 U.S.C. 605(b) that
the impact.
orderly markets, Congress determined proposed amendments to Rules 3a5–1
that banks conducting a broad securities and 3b–18 under the Exchange Act, and Statutory Authority
business should be subject to the same a proposed exemption for securities The Commission is proposing
regulatory oversight as broker-dealers lending transactions in Rule 15a–11 amendments to Rules 3a5–1 and 3b–18,
conducting the same types of activities. under the Exchange Act under the and a new exemption for securities
These amendments to the Rules and the Exchange Act contained in this release, lending transactions in Rule 15a–11
new proposed exemption promote if adopted, would not have a significant under the Exchange Act, pursuant to
Congress’ intent and make it easier for economic impact on a substantial authority set forth in sections 3(b), 15,
banks to comply with the requirements number of small entities. The proposed 23(a), and 36 of the Exchange Act (15
of the GLBA. amendments and proposed rules will U.S.C. 78c(b), 78o, 78w(a), and 78mm,
Since certain of these proposed not impose compliance requirements on respectively).
amendments to the Rules define depository institutions of any size. They
statutory exceptions mandated by impose no performance standards, no Text of Proposed Rules and Rule
Congress, we do not believe that those fees, no reporting or recordkeeping Amendments
rules impose any extra-statutory adverse criteria, nor any other type of restriction List of Subjects in 17 CFR Part 240
effects on efficiency, competition, or or requirement with which depository
capital formation. With respect to the institutions must comply. Furthermore, Broker-dealers, Reporting and
proposed amendment to a Rule that nothing in these rules prevents or recordkeeping requirements, Securities.
provides exemptive relief and the new impedes small banks from engaging in Text of Amendment
proposed exemption for banks, both any of these activities. The activities
changes would make it easier for banks addressed by these proposed For the reasons set forth in the
to comply with the GLBA and the Rules amendments and proposed rules are not preamble, title 17, chapter II of the Code
and give them enhanced legal certainty. of a type that a small bank is likely to of Federal Regulations is proposed to be
We also do not believe that those rules engage in. In addition, all of these rules amended as follows:
impose any extra-statutory adverse remove impediments to any bank, PART 240—GENERAL RULES AND
effects on efficiency, competition, or including a small bank, engaging these REGULATIONS, SECURITIES
capital formation. When Congress activities. EXCHANGE ACT OF 1934
passed the GLBA, it effectively First, the proposals would modify the
determined that regulation of banks method of counting a bank’s riskless 1. The authority citation for part 240
conducting a securities operation principal transactions for purposes of continues to read, in part, as follows:
outside of certain exceptions was determining whether the volume of Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
necessary, appropriate, and in the such transactions requires the bank to 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
public interest. register as a dealer. The modification 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j,
We are, however, interested in would, if anything, permit banks to 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p,
receiving comments regarding the effect engage in more transactions than would 78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 79q,
of these proposed amendments to the be permitted without registration under 79t, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3,
Rules, the new proposed exemption, the Rules. Second, the proposals would 80b–4 and 80b–11, unless otherwise noted.
and the proposed rule may have on * * * * *
efficiency, competition, and capital 75 5 U.S.C. 603(a). 2. Section 240.3a5–1 is revised to read
formation. We will consider those 76 5 U.S.C. 605(b). as follows:
§ 240.3a5–1 Exemption from the definition (1) Funding an obligation at the time the bank acts as a conduit lender, or an
of ‘‘dealer’’ for a bank engaged in riskless that the obligation is created; or agent.
principal transactions. (2) Initially approving and (b) Securities lending transaction
(a) A bank is exempt from the underwriting the obligation, or initially means a transaction in which the owner
definition of the term ‘‘dealer’’ solely for agreeing to purchase the obligation, of a security lends the security
engaging in riskless principal provided that: temporarily to another party pursuant to
transactions if the number of such (i) The obligation conforms to the a written securities lending agreement
riskless principal transactions during a bank’s own underwriting standards or is under which the lender retains the
calendar year combined with evidenced by the bank’s own loan economic interests of an owner of such
transactions in which the bank is acting documents; and securities, and has the right to terminate
as an agent for a customer pursuant to (ii) The bank funds the obligation in the transaction and to recall the loaned
section 3(a)(4)(B)(xi) of the Act (15 a timely manner, not to exceed six securities on terms agreed by the
U.S.C. 78c(a)(4)(B)(xi)) during that same months after the obligation is created. parties.
year does not exceed 500. (f) The term pool means more than
(c) An agreement to provide securities
(b) For purposes of this section, the one obligation or type of obligation
lending services means any contract to
term riskless principal transaction grouped together to provide collateral
conduct securities lending transactions
means a transaction in which, after for a securities offering.
(g) The term predominantly originated on behalf of a qualified investor in
having received an order to buy from a connection with which the bank may:
customer, the bank purchased the means that no less than 85% of the
value of the obligations in any pool (1) Select and negotiate with a
security from another person to offset a borrower and execute, or direct the
contemporaneous sale to such customer were originated by:
(1)The bank, or its affiliates other than execution, of the loan with the
or, after having received an order to sell borrower;
from a customer, the bank sold the its broker or dealer affiliates; or
(2) Banks that are members of a (2) Receive, deliver, or take custody of
security to another person to offset a loaned securities;
syndicate of banks and affiliates of such
contemporaneous purchase from such
banks other than their broker or dealer (3) Receive, deliver, or take custody of
customer.
affiliates, if the obligations or pool of collateral;
3. Section 240.3b–18 is revised to read
obligations consist of mortgage (4) Provide mark-to-market, corporate
as follows:
obligations or consumer-related action, recordkeeping or other services
§ 240.3b–18 Definitions of terms used in receivables. incidental to the administration of the
Section 3(a)(5) of the Act. (3) For this purpose, the bank and its securities lending transaction;
For the purposes of section 3(a)(5)(C) affiliates include any financial (5) Reinvest, or direct the
of the Act (15 U.S.C. 78c(a)(5)(C): institution with which the bank or its reinvestment of, cash collateral; or
(a) The term affiliate means any affiliates have merged but does not (6) Indemnify the lender of securities
company that controls, is controlled by, include the purchase of a pool of with respect to various matters.
or is under common control with obligations or the purchase of a line of (d) For the purposes of this section,
another company. business. the term conduit lender means a bank
(b) The term consumer-related (h) The term syndicate of banks
that borrows (or loans) securities, as
receivable means any obligation means a group of banks that acts jointly,
principal, for its own account, and
incurred by any natural person to pay on a temporary basis, to issue through
contemporaneously loans (or borrows)
money arising out of a transaction in a grantor trust or other separate entity,
the same securities, as principal, for its
which the money, property, insurance, securities backed by obligations
own account. A bank that qualifies
or services (being purchased) are originated by each of the individual
under this definition as a conduit lender
primarily for personal, family, or banks or their affiliates other than their
at the commencement of a transaction
household purposes. broker or dealer affiliates.
4. Section 240.15a–11 is added to read will continue to have that character as
(c) The term member as it relates to long as the original securities lending
the term ‘‘syndicate of banks’’ means a as follows:
transaction remains outstanding, even
bank that is a participant in a syndicate § 240.15a–11 Exemption from the though substitutions of collateral may
of banks and together with its affiliates definitions of ‘‘broker’’ and ‘‘dealer’’ for occur on the securities borrowing side
other than its broker or dealer affiliates, banks engaging in securities lending of the transaction.
originates no less than 10% of the value transactions. (e) For the purposes of this section,
of the obligations in a pool of (a) Except as otherwise provided in the term qualified investor has the
obligations used to back the securities paragraph (d) of this section, a bank is meaning set forth in section 3(a)(54) of
issued through a grantor trust or other exempt from the definitions of the terms the Act (15 U.S.C. 78c(a)(54)).
separate entity. ‘‘broker’’ and ‘‘dealer’’ under sections
Dated: October 30, 2002.
(d) The term obligation means any 3(a)(4) and 3(a)(5) of the Act (15 U.S.C.
note, draft, acceptance, loan, lease, 78c(a)(4) and (a)(5)), solely to engage in By the Commission.
receivable, or other evidence of or effect securities lending transactions Margaret H. McFarland,
indebtedness that is not a security with a qualified investor, pursuant to an Deputy Secretary.
issued by a person other than the bank. agreement to provide securities lending [FR Doc. 02–28097 Filed 11–4–02; 8:45 am]
(e) The term originated means: services to a qualified investor, whether BILLING CODE 8010–01–P

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RIN 3235–AI19 SUPPLEMENTARY INFORMATION: The A. Statutory Background—The Gramm-

Chairman, Subcommittee on International Monetary 24 Release No. 34–44570. 78c(a)(5)].

3(a)(4)(B)(ix) [15 U.S.C. 78c(a)(4)(B)(ix)]. 78c(a)(9)]. U.S.C. 78c(a)(54)(C)(xiii)].

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