Congress Passes Financial Services Regulatory Relief Act,Timetable for Enactment of Final Rules Under Gramm-Leach-Bliley Act
- United States
- 10/05/2006
- Morgan, Lewis & Bockius LLP
On September 30, 2006, Congress passed the Financial Services Regulatory Relief Act of 2006 (the Act). The President is expected to sign the legislation into law. The Act largely affects the activities of banking institutions and, in several respects, affects banks that engage in certain types of securities business, including:
Treatment of Thrifts Under the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934
The Act extends the same treatment to federal savings associations, also known as “thrifts,” that is extended to other banking institutions under the Investment Advisers Act of 1940 (the Advisers Act) and the Securities Exchange Act of 1934 (the Exchange Act). Currently, Section 202(a)(11) of the Advisers Act excludes banks from the definition of the term investment adviser (except banks that act as investment advisers to registered investment companies). However, the definition of the term “bank” under Section 202(a)(2) of the Advisers Act does not include thrifts, and thrifts are, therefore, generally subject to investment adviser registration to the extent that they provide investment advisory services to their clients. The Act amends the definition of “bank” under the Advisers Act to include thrifts and, as a result, thrifts are excluded from the definition of “investment adviser” and the registration requirements of the Advisers Act.
Similarly, banks are permitted under the Exchange Act to engage in certain types of securities activities without being considered brokers, but the definition of “bank” under the Exchange Act does not currently include thrifts. The Act amends Section 3(a)(6) of the Exchange Act to add thrifts to the definition of “bank” under the Exchange Act. As a result, thrifts will enjoy the same exceptions from broker-dealer registration as other banking institutions.
Registration of Banks as Broker-Dealers
The Act directs the SEC and the Federal Reserve Board (Fed) to jointly propose new rules to implement the banking exceptions from broker-dealer registration that Congress enacted in the Gramm-Leach-Bliley Act (GLBA). By way of background, before the enactment of GLBA, banks were generally excluded from the definition of “broker” under Section 3(a)(4) of the Exchange Act, and, therefore, generally were not required to register as broker-dealers. GLBA replaced that blanket exception from broker-dealer registration with limited exceptions for certain traditional banking activities.
In 2001, the SEC adopted interim final rules to implement the banking exceptions from the broker definition and in 2004 proposed Regulation B, which would have replaced the interim final rules. Both of those rulemaking efforts attracted criticism from banking regulators and from the banking industry, and the SEC has extended the bank exclusion from the broker definition through a series of exemptive orders.
Under the Act, the SEC and the Fed are directed to jointly issue proposed rules, within 180 days after enactment, to implement the GLBA banking exceptions and to consult with banking regulators before adopting any such rules. The Act also provides that the rules adopted by the SEC and the Fed under the Act will supersede the interim final rules and Regulation B. In anticipation of the Act’s passage by Congress, SEC Chairman Cox announced that he expected a rulemaking proposal to be issued by December 31, 2006, and that final rules could be expected in late spring or early summer 2007. Cox added that, because banks will need time to implement systems to ensure compliance with the new rules, any final rules would have a delayed effective date.
Click here to view a copy of the Act.
Click here to view Chairman Cox’s public statement.
Securities Industry FYI is a service of the Broker-Dealer and Investment Management Practices of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any of the following Morgan Lewis attorneys:
Jack Drogin
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave, NW
Washington, D.C. 20004
Telephone: 202.739.5380
Fax: 202.739.3001
[email protected]
Karen A. Aspinall
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave, NW
Washington, D.C. 20004
Telephone: 202.739.5355
Fax: 202.739.3001
[email protected]
