Glass-Steagall Act as Modified By Gramm-Leach-Bliley Act

Links to Securities Law, Regulations, and Miscellaneous Statutes

The following items can be found in the three volume FDIC Rules and Regulations.

SEC Rule 240.10b-5:  Employment of manipulative and deceptive devices

SEC Rule 240.13f-1: Reporting by institutional investment managers of information with respect to accounts over which they exercise investment discretion

SEC Rule 249.325: Form 13F, report of institutional investment manager pursuant to Section 13(f)

SEC Rule 240.14e-3:  Transactions in securities on the basis of material, nonpublic information in the context of tender offers (Insider information)

SEC Rule 240.17f-1: Requirements for reporting and inquiry with respect to missing, lost, counterfeit or stolen securities.

* codified at 17 CFR Part 240 -- General Rules and Regulations -- Securities Exchange Act of 1934.

Glass-Steagall Act As Modified By Gramm-Leach-Bliley Act

Applicability of Federal Securities Laws to Banks and Bank Sponsored Securities Activities

1. Registration of Bank Securities
Securities Act of 1933 :  To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.

The Act exempts any security issued or guaranteed by a bank from all Sections except Section 17 fraud provisions. (§ 3(a)(2)).

Securities Exchange Act of 1934 :  To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Bank securities must be registered with the appropriate bank regulatory agency which administers and enforces §§ 12, 13, 14(a), (c), (d), (f), and 16 in a manner substantially similar to the SEC (§ 12(i)).

2. Bank as Broker
1. Securities Exchange Act of 1934 :  To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

§3(a)(4) : The GLBA  Section 201, Definition of Broker, amended §3(a)(4) of the Securities Exchange Act of 1934.  

There is an exemption for banks engaging in traditional trust and fiduciary activity, provided a few key points are followed. These include how compensation is received, how the activity is marketed, and how transactions are directed.  A further explanation of these concepts is found in subsections (B)(ii) and (C).  Fiduciary activity is defined in subsection (D). 

An exemption has also been afforded to certain stock purchase plans (subsection B(iv)) and safekeeping and custodial activity (subsection B(viii).  Again, these are subject to how transactions are directed.  There is also a "catch-all" de minimis exemption for isolated transactions that fall outside of the items specifically exempted (subsection B(xi)). It is expected that this will help with incidental transactions.

There is no specific recordkeeping requirement set-forth in this section; however, management will need sufficient records to demonstrate that the institution qualifies for the exemption.  If an activity does not meet any of the exemptions detailed below the bank must register with the SEC. Either the SEC or the NASD will provide regulatory oversight. Management may decide to move the activity to a subsidiary or affiliate. In that case, the subsidiary or affiliate must register with the SEC. 

On October 3, 2007, the Federal Reserve and SEC published Regulation R, "Definitions of Terms and Exemptions Relating to the 'Broker' Exceptions for Banks and Exemptions for Banks Under Section 3(a)(5) of The Securities Exchange Act and Related Rules; Final Rule," which sets forth requirements for satisfying the conditions for the Trust & Fiduciary exceptions, the Custody & Safekeeping exemptions, as well as the Networking exception and other exemptions for banks from the definition of "Broker." See SEC Release No. 34-56501: File No. S7-22-0 (353KB PDF file - PDF Help). Also refer to Section 10.F for a detailed discussion of Regulation R.                                                                                                          

The revised definition of a broker in Section §3(a)(4) states, in part,  

Broker:

1. In General - The term `broker' means any person engaged in the business of effecting transactions in securities for the account of others.

2. Exception for certain bank activities - A bank shall not be considered to be a broker because the bank engages in any one or more of the following activities under the conditions described:

1. Third party brokerage arrangements - "text not included"
2. Trust Activities - The bank effects transactions in a trustee capacity, or effects transactions in a fiduciary capacity in its trust department or other department that is regularly examined by bank examiners for compliance with fiduciary principles and standards, and
   1. is chiefly compensated for such transactions, consistent with fiduciary principles and standards, on the basis of an administration or annual fee (payable on a monthly, quarterly, or other basis), a percentage of assets under management, or a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers, or any combination of such fees; and
   2. does not publicly solicit brokerage business, other than by advertising that it effects transactions in securities in conjunction with advertising its other trust activities.
3. Permissible Securities Transactions - "text not included"
4. Certain Stock Purchase Plans
   1. Employee Benefit Plans - The bank effects transactions, as part of its transfer agency activities, in the securities of an issuer as part of any pension, retirement, profit-sharing, bonus, thrift, savings, incentive, or other similar benefit plan for the employees of that issuer or its affiliates (as defined in Section 2 of the Bank Holding Company Act of 1956), if the bank does not solicit transactions or provide investment advice with respect to the purchase or sale of securities in connection with the plan.
   2. Dividend Reinvestment Plans - The bank effects transactions, as part of its transfer agency activities, in the securities of an issuer as part of that issuer's dividend reinvestment plan, if
      1. the bank does not solicit transactions or provide investment advice with respect to the purchase or sale of securities in connection with the plan; and
      2. the bank does not net shareholders' buy and sell orders, other than for programs for odd-lot holders or plans registered with the Commission.
   3. Issuer Plans - The bank effects transactions, as part of its transfer agency activities, in the securities of an issuer as part of a plan or program for the purchase or sale of that issuer's shares, if
      1. the bank does not solicit transactions or provide investment advice with respect to the purchase or sale of securities in connection with the plan or program; and
      2. the bank does not net shareholders' buy and sell orders, other than for programs for odd-lot holders or plans registered with the Commission.
   4. Permissible Delivery of Materials - The exception to being considered a broker for a bank engaged in activities described in sub clauses (I), (II), and (III) will not be affected by delivery of written or electronic plan materials by a bank to employees of the issuer, shareholders of the issuer, or members of affinity groups of the issuer, so long as such materials are
      1. comparable in scope or nature to that permitted by the Commission as of the date of the enactment of the Gramm-Leach-Bliley Act; or
      2. otherwise permitted by the Commission.
5. Sweep Accounts .--The bank effects transactions as part of a program for the investment or reinvestment of deposit funds into any no-load, open-end management investment company registered under the Investment Company Act of 1940 that holds out as a money market fund.
6. Affiliate Transactions - "text not included"
7. Private Securities Offerings - "text not included"
8. Safekeeping and Custody Activities
   1. In General- The bank, as part of customary banking activities
      1. provides safekeeping or custody services with respect to securities, including the exercise of warrants and other rights on behalf of customers;
      2. facilitates the transfer of funds or securities, as a custodian or a clearing agency, in connection with the clearance and settlement of its customers' transactions in securities;
      3. effects securities lending or borrowing transactions with or on behalf of customers as part of services provided to customers pursuant to division (a) or (b) or invests cash collateral pledged in connection with such transactions;
      4. holds securities pledged by a customer to another person or securities subject to purchase or resale agreements involving a customer, or facilitates the pledging or transfer of such securities by book entry or as otherwise provided under applicable law, if the bank maintains records separately identifying the securities and the customer; or
      5. serves as a custodian or provider of other related administrative services to any individual retirement account, pension, retirement, profit sharing, bonus, thrift savings, incentive, or other similar benefit plan.
   2. Exception for Carrying Broker Activities - "text not included"
9. Identified Banking Products -- The bank effects transactions in identified banking products as defined in Section 206 of the Gramm-Leach-Bliley Act.
10. Municipal Securities - The bank effects transactions in municipal securities.
11. De Minimis Exception - The bank effects, other than in transactions referred to in clauses (i) through (x), not more than 500 transactions in securities in any calendar year, and such transactions are not effected by an employee of the bank who is also an employee of a broker or dealer.

3. Execution by Broker or Dealer- The exception to being considered a broker for a bank engaged in activities described in clauses (ii), (iv), and (viii) of subparagraph (B) shall not apply if the activities described in such provisions result in the trade in the United States of any security that is a publicly traded security in the United States, unless

1. the bank directs such trade to a registered broker or dealer for execution;

2. the trade is a cross trade or other substantially similar trade of a security that
   1. is made by the bank or between the bank and an affiliated fiduciary; and
   2. is not in contravention of fiduciary principles established under applicable Federal or State law; or
3. the trade is conducted in some other manner permitted under rules, regulations, or orders as the Commission may prescribe or issue.

4. Fiduciary Capacity - For purposes of subparagraph (B)(ii), the term `fiduciary capacity' means
   1. in the capacity as trustee, executor, administrator, registrar of stocks and bonds, transfer agent, guardian, assignee, receiver, or custodian under a uniform gift to minor act, or as an investment adviser if the bank receives a fee for its investment advice;
   2. in any capacity in which the bank possesses investment discretion on behalf of another; or
   3. in any other similar capacity.

5. Exception for Entities Subject to Section 15(e) - "text not included"

2. Investment Company Act of 1940:  To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

The GLBA  in Section 215, Definition of Broker Under the Investment Company Act of 1940, amended Section 2(a)(6) of the Investment Company Act of 1940.

The term `broker' has the same meaning as given in Section 3 of the Securities Exchange Act of 1934, except that such term does not include any person solely by reason of the fact that such person is an underwriter for one or more investment companies.

3. Investment Advisers Act of 1940 :  To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

The GLBA  in Section 218, Definition of Broker Under the Investment Advisers Act of 1940 amended Section 202(a)(3). 

The term `broker' has the same meaning as given in Section 3 of the Securities Exchange Act of 1934.

3. Bank as Dealer
1. Securities Exchange Act of 1934 :  To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

§3(a)(5) : The GLBA  Section 202, Definition of Dealer, amended Section 3(a)(5) of the Securities Exchange Act of 1934.

There is an exception for trustee and fiduciary transactions and asset-backed activity. However, the Securities Exchange Act of 1934 does not define what is considered a trustee or fiduciary as it pertains to dealer activity. It does define fiduciary activity in the revised Section 3(a)(4)(D).

The revised definition of a dealer in Section 3(a)(5) states, in part,

Dealer:

1. In General - The term `dealer' means any person engaged in the business of buying and selling securities for such person's own account through a broker or otherwise.
2. Exception for person not engaged in the business of Dealing - "text not included"
3. Exception for Certain Bank Activities - A bank shall not be considered to be a dealer because the bank engages in any of the following activities under the conditions described:
   1. Permissible Securities Transactions - "text not included"
   2. Investment, Trustee, and Fiduciary Transactions - The bank buys or sells securities for investment purposes
      1. for the bank; or
      2. for accounts for which the bank acts as a trustee or fiduciary.
   3. Asset-Backed Transactions - The bank engages in the issuance or sale to qualified investors, through a grantor trust or other separate entity, of securities backed by or representing an interest in notes, drafts, acceptances, loans, leases, receivables, other obligations (other than securities of which the bank is not the issuer), or pools of any such obligations predominantly originated by
      1. the bank;
      2. an affiliate of any such bank other than a broker or dealer; or
      3. a syndicate of banks of which the bank is a member, if the obligations or pool of obligations consists of mortgage obligations or consumer-related receivables.
   4. Identified Banking Products - The bank buys or sells identified banking products, as defined in Section 206 of the Gramm-Leach-Bliley Act.

Furthermore, the SEC issued a Final Rule (below) and separate Staff Commentary in 2003 to clarify the requirements for bank exemptions for broker and dealer rules.  The new guidance finalizes dealer rules, but separate broker rules are to be issued separately at a later date.  Broker rules definitions had not been issued as of this printing.  The revised sections of the Securities Exchange Act of 1934 are quoted below.  For preamble and endnotes to the SEC's final rule, refer to either SEC Release No. 34-47364 or 68 Federal Register 8686.

SEC Final Rule:  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  Securities and Exchange Commission  17 CFR Part 240  [Release No. 34-47364; File No. S7-41-02]

Excerpt:
Summary: The Securities and Exchange Commission is adopting amendments to its rule granting an exemption to banks from dealer registration for a de minimis number of riskless principal transactions, and to its rule that defines terms used in the bank exception to dealer registration for asset-backed transactions. The Commission also is adopting a new exemption for banks to the definition of broker and dealer under the Securities Exchange Act of 1934 for certain securities lending transactions. In addition, the Commission is extending the exemption from rescission liability under Exchange Act Section 29 to contracts entered into by banks acting in a dealer capacity before March 31, 2005. These rules address certain of the exceptions for banks from the definitions of "broker" and "dealer" that were added to the Securities Exchange Act of 1934 by the Gramm-Leach-Bliley Act.

Compliance Date: September 30, 2003.

Section 240.3a5-1 is revised to read as follows:

§ 240.3a5-1 Exemption from the definition of "dealer" for a bank engaged in riskless principal transactions.
(a) A bank is exempt from the definition of the term "dealer" to the extent that it engages in or effects riskless principal transactions if the number of such riskless principal transactions during a calendar year combined with transactions in which the bank is acting as an agent for a customer pursuant to Section 3(a)(4)(B)(xi) of the Act (15 U.S.C. 78c(a)(4)(B)(xi)) during that same year does not exceed 500.

(b) For purposes of this section, the term riskless principal transaction means a transaction in which, after having received an order to buy from a customer, the bank purchased the security from another person to offset a contemporaneous sale to such customer or, after having received an order to sell from a customer, the bank sold the security to another person to offset a contemporaneous purchase from such customer.

Section 240.3b-18 is revised to read as follows:

§ 240.3b-18 Definitions of terms used in Section 3(a)(5) of the Act.
For the purposes of Section 3(a)(5)(C) of the Act (15 U.S.C. 78c(a)(5)(C):

(a) The term affiliate means any company that controls, is controlled by, or is under common control with another company.

(b) The term consumer-related receivable means any obligation incurred by any natural person to pay money arising out of a transaction in which the money, property, insurance, or services (being purchased) are primarily for personal, family, or household purposes.

(c) The term member as it relates to the term "syndicate of banks" means a bank that is a participant in a syndicate of banks and together with its affiliates, other than its broker or dealer affiliates, originates no less than 10% of the value of the obligations in a pool of obligations used to back the securities issued through a grantor trust or other separate entity.

(d) The term obligation means any note, draft, acceptance, loan, lease, receivable, or other evidence of indebtedness that is not a security issued by a person other than the bank.

(e) The term originated means:

(1) Funding an obligation at the time that the obligation is created; or

(2) Initially approving and underwriting the obligation, or initially agreeing to purchase the obligation, provided that:

(i) The obligation conforms to the underwriting standards or is evidenced by the loan documents of the bank or its affiliates, other than its broker or dealer affiliates; and

(ii) The bank or its affiliates, other than its broker or dealer affiliates, fund the obligation in a timely manner, not to exceed six months after the obligation is created.

(f) The term pool means more than one obligation or type of obligation grouped together to provide collateral for a securities offering.

(g) The term predominantly originated means that no less than 85% of the value of the obligations in any pool were originated by:

(1) The bank or its affiliates, other than its broker or dealer affiliates; or

(2) Banks that are members of a syndicate of banks and affiliates of such banks, other than their broker or dealer affiliates, if the obligations or pool of obligations consist of mortgage obligations or consumer-related receivables.

(3) For this purpose, the bank and its affiliates include any financial institution with which the bank or its affiliates have merged but does not include the purchase of a pool of obligations or the purchase of a line of business.

(h) The term syndicate of banks means a group of banks that acts jointly, on a temporary basis, to issue through a grantor trust or other separate entity, securities backed by obligations originated by each of the individual banks or their affiliates, other than their broker or dealer affiliates.

Section 240.15a-8 is revised to read as follows:

§ 240.15a-8 Exemption for banks from Section 29 liability.
(a) No contract entered into before January 1, 2003 shall be void or considered voidable by reason of Section 29 of the Act (15 U.S.C. 78cc) because any bank that is a party to the contract violated the registration requirements of Section 15(a) of the Act (15 U.S.C. 78o(a)) or any applicable provision of the Act (15 U.S.C. 78a et seq.) and the rules and regulations thereunder based solely on the bank's status as a broker or dealer when the contract was created.

(b) No contract entered into before March 31, 2005, shall be void or considered voidable by reason of Section 29 of the Act (15 U.S.C. 78cc) because any bank that is a party to the contract violated the registration requirements of Section 15(a) of the Act (15 U.S.C. 78o(a)) or any applicable provision of the Act (15 U.S.C. 78a et seq.) and the rules and regulations thereunder based solely on the bank's status as a dealer when the contract was created.

Section 240.15a-11 is added to read as follows:

§ 240.15a-11 Exemption from the definitions of "broker" and "dealer" for banks engaging in securities lending transactions.
(a) A bank is exempt from the definitions of the terms "broker" and "dealer" under Sections 3(a)(4) and 3(a)(5) of the Act (15 U.S.C. 78c(a)(4) and (a)(5)), to the extent that, as a conduit lender, or as an agent, it engages in or effects securities lending transactions, and any securities lending services in connection with such transactions, with or on behalf of a person the bank reasonably believes to be:

(1) A qualified investor as defined in Section 3(a)(54)(A) of the Act (15 U.S.C. 78c(a)(54)(A)); or

(2) Any employee benefit plan that owns and invests on a discretionary basis, not less than $25,000,000 in investments.

(b) Securities lending transaction means a transaction in which the owner of a security lends the security temporarily to another party pursuant to a written securities lending agreement under which the lender retains the economic interests of an owner of such securities, and has the right to terminate the transaction and to recall the loaned securities on terms agreed by the parties.

(c) Securities lending services means:

(1) Selecting and negotiating with a borrower and executing, or directing the execution of the loan with the borrower;

(2) Receiving, delivering, or directing the receipt or delivery of loaned securities;

(3) Receiving, delivering, or directing the receipt or delivery of collateral;

(4) Providing mark-to-market, corporate action, recordkeeping or other

services incidental to the administration of the securities lending transaction;

(5) Investing, or directing the investment of, cash collateral; or

(6) Indemnifying the lender of securities with respect to various matters.

(d) For the purposes of this section, the term conduit lender means a bank that borrows or loans securities, as principal, for its own account, and contemporaneously loans or borrows the same securities, as principal, for its own account. A bank that qualifies under this definition as a conduit lender at the commencement of a transaction will continue to qualify, notwithstanding whether:

(1) The lending or borrowing transaction terminates and so long as the transaction is replaced within one business day by another lending or borrowing transaction involving the same securities; and

(2) Any substitutions of collateral occur.

2. Investment Company Act of 1940 :  To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

The GLBA  in Section 216, Definition of Dealer Under the Investment Company Act of 1940, amended Section 2(a)(11) of the Investment Company Act of 1940 to read as follows. 

The term `dealer' has the same meaning as given in the Securities Exchange Act of 1934, but does not include an insurance company or investment company.

3. Investment Advisers Act of 1940 :  To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

The GLBA  in Section 219, Definition of Dealer Under the Investment Advisers Act of 1940 amended Section 202(a)(7) to read as follows.

The term `dealer' has the same meaning as given in Section 3 of the Securities Exchange Act of 1934, but does not include an insurance company or investment company.

4. Bank as Underwriter
1. Securities Act of 1933  :  To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.

No exemption from definition of "underwriter" (§ 2(11)).  The provisions of the Act are applicable to banks.

2. Securities Exchange Act of 1934 :  To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Not exempt from definition (§ 3(a)(20)).  The provisions of the act are applicable to banks.

3. Investment Company Act of 1940 :  To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

Not exempt from definition of "underwriter"  (§ 2(a)(40)).  The provisions of the act are applicable to banks.

5. Bank as Principal Underwriter
Investment Company Act of 1940 :  To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

No exemption from definition (§ 2(a)(29)).

6. Bank as a Municipal Bond Underwriter
The GLBA  amends the corporate powers of National banks. They now have the authority to underwrite municipal revenue bonds. This activity may be performed within the bank. State banks may also engage in this activity to the extent permitted by the respective State's laws. This activity may be at the holding company, the bank, or the bank subsidiary level.

Section 151 of the GLBA  amends the paragraph designating the Seventh of Section 5136 of the Revised Statutes of the United States (12 U.S.C. 24(7)). It adds the following sentence.

In addition to the provisions in this paragraph for dealing in, underwriting, or purchasing securities, the limitations and restrictions contained in this paragraph as to dealing in, underwriting, and purchasing investment securities for the national bank's own account shall not apply to obligations (including limited obligation bonds, revenue bonds, and obligations that satisfy the requirements of Section 142(b)(1) of the Internal Revenue Code of 1986) issued by or on behalf of any State or political subdivision of a State, including any municipal corporate instrumentality of 1 or more States, or any public agency or authority of any State or political subdivision of a State, if the national bank is well capitalized (as defined in Section 38 of the Federal Deposit Insurance Act).

7. Bank as Clearing Agency
Securities Exchange Act of 1934 :  To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

No exemption from definition (§ 3(a)(23)(A); however, a bank is not to be deemed a clearing agency if it only performs customary bank functions or acts as agent for a clearing agency or participant in a clearing agency (§ 3(a)(23)(B)).

8. Bank as Municipal Securities Dealer
Securities Exchange Act of 1934 :  To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.  

No exemption from "municipal securities dealer" definition for banks (§ 3(a)(30)); however, § 3(a)(30)(B) allows a separately identifiable department or division and not the bank itself to register as a municipal securities dealer

9. Bank as Municipal Securities Broker
Securities Exchange Act of 1934 :  To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Exempts banks from definition of broker (§3(a)(4)(B)(ix))

10. Bank as Investment Adviser
1. Securities Exchange Act of 1934 :  To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Incorporates Investment Advisers, as defined in the Investment Advisers Act of 1940.  (§3(a)(20))

2. Investment Advisers Act of 1940 :  To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

Banks, bank holding companies, or their SIDDs (separately identifiable department or division) are required to register and comply with the Investment Advisers Act of 1940 if the bank, bank holding company, or SIDD serves or acts as an investment adviser to a registered investment company.  A registered investment company is defined in the Investment Company Act of 1940 Section 3(a)(1) and includes mutual funds and other similar issuers.

An "investment adviser" under the Investment Advisers Act of 1940 is subject to SEC jurisdiction, recordkeeping requirements, advertising and solicitation rules, rules on receipt of performance fees, and limits on use of nonpublic information.

If the bank or bank holding company does not advise a registered investment company - the bank or bank holding company is exempt from the Act.  This is explained below in an excerpt from Section 202(a)(11).

(§202(a)(11)) :  "Investment adviser" means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include (A) a bank, or any bank holding company as defined in the Bank Holding Company Act of 1956, which is not an investment company, except that the term "investment adviser" includes any bank or bank holding company to the extent that such bank or bank holding company serves or acts as an investment adviser to a registered investment company, but if, in the case of a bank, such services or actions are performed through a separately identifiable department or division, the department or division, and not the bank itself, shall be deemed to be the investment adviser. "

If management elects to provide investment advice to a registered investment company, they will need to register the bank with the SEC or establish a "separately identifiable department or division" (SIDD) that will provide the advisory service. The SIDD must meet the provisions of 202(a)(26) below and register with the SEC.

(§202(a)(26)) :  "The term "separately identifiable department or division" of a bank means a unit--
      (A)  that is under the direct supervision of an officer or officers designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's investment adviser activities for one or more investment companies, including the supervision of all bank employees engaged in the performance of such activities; and
      (B)  for which all of the records relating to its investment adviser activities are separately maintained in or extractable from such unit's own facilities or the facilities of the bank, and such records are so maintained or otherwise accessible as to permit independent examination and enforcement by the Commission of this Act or the Investment Company Act of 1940 and rules and regulations promulgated under this Act or the Investment Company Act of 1940. "

(§210(A) Consultation) :   This section of the Investment Advisors Act was added in 1999 through the GLBA .  It allows for the sharing of information, between the SEC and the appropriate federal banking agency, regarding the investment advisory activities of any bank, bank holding company, or SIDD that is registered under Section 203 of the Act.

11. Banks as Investment Company
1. Securities Exchange Act of 1934 :  To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Incorporates Investment Company Act definition of "investment company".  (§ 3(a)(19)).

2. Investment Company Act of 1940 :  To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

Banks are exempt from definition of investment company for the Act  (§ 3(c)(3)).

3. Investment Advisers Act of 1940 : To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

Incorporates Investment Company Act definition of investment company (§ 202(a)(12)).

12. Collective Trust Fund Treatment
1. Securities Act of 1933  :  To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.

Exempts any interest or participation in any common trust fund or similar fund that is excluded from the definition of the term 'investment company' under Section 3(c)(3) of the Investment Company Act of 1940 from all except fraud provisions under Section 17 of the Securities Act of 1933.   (§ 3(a)(2)).

2. Securities Exchange Act of 1934 :  To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Exempts any interest or participation in any common trust fund or similar fund that is excluded from the definition of the term `investment company' under Section 3(c)(3) of the Investment Company Act of 1940.     (§ 3(a)(12))

3. Investment Company Act of 1940 :  To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

The GLBA  codified the SEC's position on common trust funds and collective pooled investment funds.  An exemption under Section 3(c)(3) of the Investment Company Act of 1940 is available for common trust fund or similar fund if: 

1. such fund is employed by the bank solely as an aid to the administration of trusts, estates, or other accounts created and maintained for a fiduciary purpose;
2. except in connection with the ordinary advertising of the bank's fiduciary services, interests in such fund are not-
   1. advertised; or
   2. offered for sale to the general public; and
3. fees and expenses charged by such fund are not in contravention of fiduciary principles established under applicable Federal or State law.  (§ 3(c)(3))

Staff Compliance Guide to Banks on Dealer Statutory Exceptions and Rules
September 16, 2003

Division of Market Regulation
This Staff Compliance Guide to Banks on Dealer Statutory Exceptions and Rules was prepared by and represents the views of the staff of the Division of Market Regulation and does not constitute rules, regulations, or statements of the Securities and Exchange Commission ("Commission"). The Commission has neither approved nor disapproved its contents.

Beginning October 1, 2003, banks that buy and sell securities need to consider whether they are "dealers" under the federal securities laws.

Dealer activity is not interpreted the same way under securities law and banking law.
Banks need to be aware that "dealer" activity under the federal securities laws is not necessarily the same thing as "dealer" activity under banking law. For example, so-called "riskless principal" transactions are dealer activity for securities law purposes, even though they are agency activity for banking law purposes. Similarly, repurchase agreement transactions are treated as purchases and sales of securities for securities law purposes. Generally, these transactions would also be characterized for securities law purposes as transactions in the underlying security.

Although this Staff Compliance Guide highlights some of the significant provisions of the Securities Exchange Act of 1934 ("Exchange Act") and the Commission's rules, it is not comprehensive. We urge banks that need more information about particular exceptions and exemptions to consult the applicable law, including Section 3(a)(5) of the Exchange Act and the rules cited below. Banks can also obtain additional information by reading Exchange Act Release No. 47364 (February 14, 2003) (which can be found at http://www.sec.gov/rules/final/34-47364.htm) and Exchange Act Release No. 44291 (May 11, 2001) (which can be found at http://www.sec.gov/rules/final/34-44291.htm).

Banks that have additional questions may contact SEC staff for guidance at 202-942-0069 or at marketreg@sec.gov. Banks may also wish to consult with private counsel.

What is a "dealer" under the federal securities laws?
Section 3(a)(5) of the Exchange Act generally defines a "dealer" as "any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise." All transactions that go through a bank's own accounting books are potential dealer transactions.

The securities laws and rules, however, distinguish "dealers" (which buy and sell securities as part of a regular business) from "traders" (which buy and sell securities for investment and not as part of a regular business). For additional information on distinguishing "dealers" from "traders," see http://www.sec.gov/rules/proposed/34-46745.htm and http://www.sec.gov/rules/final/34-47364.htm at "Dealer Activities and the Dealer/Trader Distinction."

Typical dealer functions include:

• Providing two-sided quotations, or otherwise indicating an ongoing willingness to buy and sell particular securities; or
   
• Issuing or originating securities that the person also buys and sells.

If you are trying to determine whether a particular bank is acting as a dealer, you might want to consider the following questions:

• Does the bank hold itself out as being in the business of buying and selling securities?
   
• Does the bank engage in transactions with the public?
   
• Does the bank make a market in, or quote prices for both purchases and sales of, one or more securities?
   
• Does the bank participate in a "selling group" or otherwise underwrite securities?
   
• Does the bank hold a dealer inventory or does it trade with an affiliate that is a dealer?

A "yes" answer to any of these questions indicates that the bank may be a dealer.

Special Rules for Banks and FDIC-Insured Savings Associations
If a bank - or an FDIC-insured savings association or savings bank (which we will refer to as "savings banks") - is engaging in dealer activity, it does not necessarily have to register as a dealer with the Commission. Rather, Section 3(a)(5) of the Exchange Act and certain Commission rules provide transaction-specific exceptions and exemptions from the definition of "dealer" for banks and savings banks. These exceptions and exemptions are outlined below.

Exceptions From the Definition of "Dealer" Under Exchange Act Section 3(a)(5)
The Exchange Act provides four exceptions from the definition of "dealer." While the statute only makes these exceptions available to "banks" as defined in Section 3(a)(6) of the Exchange Act, the Commission has extended the scope of these exceptions to include savings banks. The four exceptions cover permissible securities transactions, investment transactions, asset-backed transactions, and identified banking products.

1. Permissible securities transactions. This exception permits banks to buy and sell commercial paper, bankers acceptances or commercial bills, certain Canadian government obligations, Brady bonds, and "exempted securities." "Exempted securities" include government securities, municipal securities, and interests or participations in common or collective trust funds.

Note: Banks that deal in