ALI-ABA Course of Study Broker-Dealer Regulation

Transcription

1 69 ALI-ABA Course of Study Broker-Dealer Regulation Cosponsored by the Securities Law Committee of the Federal Bar Association Sponsored with the cooperation of the Philip D. Reed Chair Lecture Serie June 18-19, 2009 New York, New York Analyzing Bank Securities Activities: A Summary of the Push-Out Provisions & Regulation R By Kevin A. Zambrowicz Bingham McCutchen LLP Washington, D.C.

2 70 TABLE OF CONTENTS I. GLB Act -- Background II. Analysing Bank Broker-Dealer Activites -- In General III. STEP 1: Does the Activity Involve a Security? IV. STEP 2: Is the Activity a Broker or Dealer Activity? V. STEP 3: Does the Activity Fall within the Bank Exceptions under the GLB Act? VI. VII. STEP 4: Does the Activity Fall under the Bank Broker Exceptions or an Exemption as Provided by Regulation R? STEP 5: Does the Activity Fall under the Bank Dealer Exceptions or an Exemption as Provided by Regulation R?

3 71 GRAMM-LEACH-BLILEY ACT ( GLB ACT ) AND REGULATION R OVERVIEW I. GLB ACT -- BACKGROUND II. A. Prior to the passage of the GLB Act in 1999, banks had a global exception from the definitions of broker and dealer (and consequently the broker-dealer registration requirements) under the Securities Exchange Act of 1934 ( Exchange Act ). B. Under the GLB Act, if a bank s activities fall within the definitions of broker or dealer but do not fall within one or more of the enumerated exceptions under the Act the bank must push-out such securities activities to a registered broker-dealer. C. Following the adoption of the GLB Act, the Securities and Exchange Commission ( SEC or Commission ) attempted to draft rules to govern the securities broker and securities dealer activities of banks. During this rulemaking process the SEC stated that banks would not have to comply with the push-out provisions of the GLB Act. D. In 2003 the Commission issued final bank dealer rules. The Commission s attempts at issuing rules regarding bank broker activities, however, have been subject to controversy and resulted in several major revisions between 2001 and 2007 (i.e., the Interim Final Rules and proposed Regulation B). E. In September of 2007, the Commission and the Federal Reserve adopted Regulation R. Regulation R supersedes all previous rulemaking from the Commission regarding bank securities broker activities. A bank must comply with the GLB Act and Regulation R beginning on the first day of its first fiscal year that starts after September 30, For banks with a calendar year as their fiscal year this would be January 2, F. In addition to the bank broker rules promulgated under Regulation R, the Commission adopted new bank dealer rules that clarify certain terms under the bank dealer exceptions and offer new exemptions from the definition of dealer. ANALYZING BANK BROKER-DEALER ACTIVITES -- IN GENERAL A. Beginning in 2009, banks would no longer have their global exception from the definition of broker under the Exchange Act and, consequently, if a bank engages in securities broker activity and does not otherwise qualify for an exception or exemption, the bank would have to register as a brokerdealer or push-out the activity to a registered broker-dealer. Banks, therefore, would have to begin analyzing their operations to determine if they are engaging in broker-dealer activity and, if so, whether the activity qualifies for an exception or exemption. B. Banks have been required to comply with the bank dealer rules since The Commission, however, amended certain of the dealer rules in a separate companion release to Regulation R and adopted new dealer rules that banks were required to comply with as of November 2, C. Prior to analyzing an activity under the GLB Act push-out provisions or Regulation R, a bank should first engage in a general analysis of whether the activity is a broker or dealer activity. The following questions should be addressed. This process is generally a 3-step process: 1. Does the activity in question involve a security as defined under Section 3(a)(10) of the Exchange Act that is not an exempted security as defined under Section 3(a)(12) of the Exchange Act? NOTE: Section 15 also includes commercial paper, banker s acceptances and commercial bills as excepted from the Section 15 broker-dealer registration requirement. 2. Is the activity considered to be a broker-dealer activity as defined under Sections 3(a)(4) and 3(a)(5) of the Exchange Act and applicable SEC or SEC staff interpretations (e.g., finder/trader exceptions)? 3. Does the activity fall within one of enumerated bank securities broker or dealer exceptions provided under Sections 3(a)(4)(B) or 3(a)(5)(C) of the Exchange Act or one of the - 2 -

4 72 III. IV. regulatory exemptions included in Regulation R or the bank dealer rules (For example, finder exception from broker and trader exception from dealer)? STEP 1: DOES THE ACTIVITY INVOLVE A SECURITY? A. Determine whether a financial product is a security under the securities laws and not the banking laws. This is a highly fact based analysis. There are, however, certain key definitions that can assist in the analysis. B. A security is defined under Section 3(a)(10) of the Exchange Act. 1. A security is defined to include any note, bond, debenture, stock, security future, investment contract, or any put, call, straddle, option, or privilege on any security. 2. The definition of a security does not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months. C. The Exchange Act also includes a definition of exempt securities (Section 3(a)(12)). Generally, activities in exempt securities do not require broker-dealer registration under the Exchange Act. Exempt securities include: 1. Government securities; and 2. Any interest or participation in a common trust fund or similar fund that is excluded from the definition of the term "investment company." D. Activities in other financial instruments that should not trigger broker-dealer registration under the Exchange Act include: non-securities derivative products (such as OTC swaps as defined in Section 3A of the Exchange Act), commercial paper, bankers' acceptances, and commercial bills. STEP 2: IS THE ACTIVITY A BROKER OR DEALER ACTIVITY? A. Prior to reviewing a particular activity under the push-out provisions or Regulation R a bank should determine if the activity is a securities broker or securities dealer activity. B. In determining whether an activity is a broker or dealer activity, a bank must determine if the person engaging in the activity is: 1. effecting transactions in securities; and 2. engaged in the business of effecting transactions in securities. The Exchange Act does not define either of these phrases. The scope of these phrases is highly fact based and governed by various SEC staff interpretations. Each activity must be individually reviewed. C. The SEC staff has identified some activities that might indicate that a person is engaged in the business of effecting transactions in securities. 1. SEC staff has indicated that the following activities may be indicia of effecting transaction in securities : a. Assisting an issuer in preparing securities offering documents and b. Facilitating the negotiation of a securities transaction, c. Handling customer funds and securities. 2. SEC staff has indicated that the following activities may be indicia of being engaged in the business : a. Receiving transaction-related compensation and b. Holding oneself out as a broker; c. Participating in securities business with some degree of regularity

5 73 D. The finder exclusion from the definition of broker. 1. SEC staff has created an exclusion from the definition of broker for persons not engaged in the business of effecting transactions in securities. This exclusion is generally called the finder exclusion and is available to banks. 2. This exclusion is based on SEC staff administrative interpretations and requires a highly fact-based analysis. 3. Some differences between a finder and a broker include: a. Finders occasionally (but not as a regular activity) attempt to bring together buyers and sellers of securities but do not otherwise engage in securities broker activities. b. After introducing parties, a finder usually steps away from the transaction and is not otherwise further involved in any other facet of the potential transaction. c. In general, a finder does not: (i) (ii) (iii) Receive transaction-based compensation; Participate in the negotiation of a securities transaction; or Recommend securities purchases or sales. E. The trader exclusion from the definition of dealer. 1. A person that buys securities for its own account generally is considered to be a trader and not a dealer under Section 3(a)(5) of the Exchange Act. 2. Like the finder exception, the trader exception is based on SEC staff administrative interpretations and requires a highly fact-based analysis. 3. In general, traders would: a. Own a portfolio of securities tailored to meet their own investment needs rather than an inventory to fill customer orders; b. Place transactions through brokers and dealers, rather than directly with nonbroker counterparties; c. Do not handle customer funds or securities; d. Do not make a market in securities; and e. Do not furnish other securities-related services such as the provision of investment advice, extending or arranging credit or lending securities to customers. 4. In general, traders would not: a. Advertise or otherwise hold themselves out as willing to buy or sell securities from their own account on a continuous basis; b. Purchase or sell securities as principal from or to customers; c. Run a book of repurchase and reverse repurchase agreements; d. Use an inter-dealer broker for securities transactions; e. Issue or originate securities; f. Guarantee contract performance or indemnify the parties for any loss or liability from the failure of the transaction to be successfully consummated; and g. Participate in a selling group or act as an underwriter