Recently, the SEC and the Board of Governors of the Federal Reserve System jointly adopted new Regulation R. This regulation implements the banking and brokerage provisions of the Gramm-Leach-Bliley Act (GLB Act) and represents the culmination of a nearly decade-long process in which the SEC, in conjunction with several other federal agencies, has attempted to bring the legislative promise provided by the GLB Act to fulfillment. Specifically, Chairman Cox stated that Regulation R will finally provide customers with the synergies expected by the GLB Act, fortify competition among service providers, and generally lower the cost of brokerage services for investors.

The passage of the GLB Act in 1999 sought to foster competition among banks, securities companies, and insurance companies, primarily by repealing the Glass-Steagall Act. In doing so, the GLB Act subjected the securities activities of banks to the existing broker-dealer regulatory system and SEC oversight unless those activities fit within certain specifically excluded traditional securities-related banking activities. Rather than work out the details, Congress left it to the SEC to define exactly what constituted such "traditional" banking activities.

After several failed attempts gave rise to vehement dissatisfaction within the banking industry and among banking regulators, Congress, in 2006, mandated that the SEC work jointly with the Federal Reserve to ensure that consensus between the banking and securities regulators could be reached. Taking the hint, the SEC and the Federal Reserve proposed Regulation R in December 2006 and stated that it would supersede all other proposed or final rules issued by the commission with regard to the definition of "broker" under the Securities Exchange Act.

The final rules adopted in September 2007 are substantially similar to the rules as originally proposed in December 2006, with only some technical changes to address commentators' concerns. Accordingly, Regulation R provides banks with exemptions from broker-dealer registration for the following limited bank securities transactions:

Networking Exception--allows banks to receive compensation for referring bank customers to broker-dealers if certain conditions are met.

Trust and Fiduciary Activities Exception--permits a bank to effect securities transactions in a trustee or fiduciary capacity if it is "chiefly compensated" for those transactions, consistent with fiduciary principles and standards, on the basis of specifically enumerated types of fees.

Sweep Accounts and Transactions in Money Market Funds Exception--permits a bank to sweep deposits into no-load, money market funds.

Safekeeping and Custody Exception--permits banks to perform specified services in connection with the safekeeping and custody of securities.

Transactions in Investment Company Securities Exemption--permits banks to effect certain transactions in mutual funds and in certain variable insurance products that are registered and funded by a separate account, through the National Securities Clearing Corporation, directly with a transfer agent, or directly with an insurance company or a separate account that is excluded from the definition of transfer agent.

Transactions in Company Securities Exemption--permits a bank to effect a transaction in the securities of a company directly with a transfer agent acting for the company as long as certain conditions are met.

Securities Lending Exemption--provides an exemption for noncustodial securities lending activities that would have been otherwise voided by the Regulatory Relief Act.

Regulation S Securities Exemption--provides an exemption to allow banks to effect certain agency transactions involving Regulation S securities.

Section 29 Exemptions--provides banks with a transitional 18-month exemption to prevent their contracts from being void or voidable under section 29(b) of the Exchange Act.

Regulation R provides banks with a transitional exemption until the first day of their first fiscal year commencing after September 30, 2008. This transition period is designed to give banks time to make any necessary changes to ensure compliance with the Exchange Act provisions relating to the definition of broker.