What is a Broker-Dealer? - Davis Polk & Wardwell

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§ 1A:7.4 BROKER-DEALER REGULATION net worth customers.” 415 Regulation R also provides that if a bank acts in good faith and has reasonable policies and procedures, the bank will not be subject to registration as a broker-dealer for failing to comply with the provisions of the exemption so long as the bank takes prompt corrective action and attempts to reclaim any non-compliant referral fee. 416 [B][4] Trust and Fiduciary Activities The “push-out” provisions allow a bank to effect securities transactions as a trustee or fiduciary from a trust department (or other department of the bank regularly examined for compliance with fiduciary principles and standards). 417 To qualify for the statutory exception, however, the bank must be “chiefly compensated” in one of three enumerated ways (or a combination thereof), generally referred to as “relationship compensation,” and abide by certain advertising restrictions. 418 Regulation R provides criteria for determining “relationship compensation” and a bank’s compliance with the trust and fiduciary activities exception. 419 Section 3(a)(4)(C) conditions the exception (and certain of the other GLB exceptions) to being considered a broker for a bank on transactions for publicly traded securities in the United States being executed by a registered broker-dealer, among other requirements, or the trade, subject to certain conditions, being a cross-trade. [B][5] Sweep Accounts and Money Market Funds Under section 3(a)(4)(B)(v) of the Exchange Act, a bank may effect transactions as part of a program for the investment or reinvestment of deposit funds into any no-load, open-end management investment company that holds itself out as a money market fund. 420 Regulation R provides definitions for “money market fund,” “no-load” and other terms, 421 and a conditional exemption for banks effecting transactions in money market funds. 422 415. Regulation R, at 59, provides a conditional exemption that allows a bank employee to receive otherwise prohibited contingent and greater-thannominal referral fees if the customer referred to the broker-dealer is either an “institutional customer” or a “high net worth customer.” See Rule 701. 416. Rule 701(iv). 417. See Exchange Act § 3(a)(4)(B)(ii). There is a separate exception in Exchange Act § 3(a)(4)(B)(iv) for bank transfer agent activities. 418. See Exchange Act § 3(a)(4)(B)(ii). 419. See Rules 721 and 722. 420. Exchange Act § 3(a)(4)(B)(v). 421. Rule 740. 422. Rule 741. 1A–96
What Is a Broker-Dealer? § 1A:7.4 [B][6] Safekeeping and Custody The “push-out” provisions permit banks to engage in certain customary safekeeping and custody activities, including (i) providing safekeeping or custody services, (ii) facilitating the transfer of funds or securities, as custodian or clearing agent, (iii) effecting securities lending or borrowing transactions with or on behalf of customers as part of custodial services or cash collateral investment pledged as part of such services, (iv) investing related cash collateral and holding securities pledged by customers, or (v) providing custodial or other related administrative services to individual retirement, pension or similar accounts. 423 Regulation R adds two additional exemptions under this exception: (i) broker activities as an accommodation to customers, and (ii) broker activities in relation to certain employee benefit plan, individual retirement and similar accounts. 424 Regulation R also clarifies that banks are exempt under the above Regulation R custody and safekeeping exception only if the bank is not acting in a trust or fiduciary capacity and the bank complies with the trade execution and carrying broker requirements of the Exchange Act. 425 The trade execution limitation in section 3(a)(4)(C) referred to in d. above also applies to transactions executed under the safekeeping and custody exception. Regulation R also includes several additional conditional exemptions for banks’ brokerage activities, including exemptions for: (i) certain agency transactions involving securities offered and sold outside the United States in accordance with Regulation S under the Securities Act (“Regulation S”); (ii) securities lending transactions; (iii) transactions in certain investment company securities; 423. Exchange Act § 3(a)(4)(B)(viii). A bank may not act as a “carrying broker” (as such term and different formulations are used in Exchange Act § 15(c)(3)), except with regard to “government securities” (as defined in Exchange Act § 3(a)(42)) under this exception. 424. Rule 760. 425. Rule 760(d). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–97
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