[Federal Register Volume 71, Number 247 (Tuesday, December 26, 2006)]
[Proposed Rules]
[Pages 77550-77556]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-9842]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-54947; File No. S7-23-06]
RIN 3235-AJ77


Exemptions for Banks Under Section 3(a)(5) of the Securities 
Exchange Act of 1934 and Related Rules

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is publishing for 
comment proposed rules and rule amendments regarding exemptions from 
the definitions of ``broker'' and ``dealer'' under the Securities 
Exchange Act of 1934 (``Exchange Act'') for banks'' securities 
activities. In particular, the Commission is re-proposing a conditional 
exemption originally proposed in 2004 that would allow banks to effect 
riskless principal transactions with non-U.S. persons pursuant to 
Regulation S under the Securities Act of 1933 (``Securities Act''). The 
Commission also is proposing to amend and redesignate an existing 
exemption from the definition of ``dealer'' for banks' securities 
lending activities as a conduit lender. In addition, the Commission is 
proposing to amend a rule that grants a limited exemption from U.S. 
broker-dealer registration for foreign broker-dealers, conforming the 
rule to amended definitions of ``broker'' and ``dealer'' under the 
Exchange Act. Finally, the Commission is requesting comment on its 
intention to withdraw a rule defining the term ``bank'' for purposes of 
Sections 3(a)(4) and 3(a)(5) of the Exchange Act, because of judicial 
invalidation, a time-limited exemption for banks' securities 
activities, because of the passage of time, and an exemption from the 
definition of ``broker'' and ``dealer'' for savings associations and 
savings banks, an exemption no longer necessary because of the passage 
of the Regulatory Relief Act.

DATES: Comments should be received on or before March 26, 2007.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments:

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number S7-23-06 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-23-06. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also

[[Page 77551]]

available for public inspection and copying in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549. All comments 
received will be posted without change; we do not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief Counsel; 
Linda Stamp Sundberg, Senior Special Counsel, at (202) 551-5550, Office 
of the Chief Counsel, Division of Market Regulation, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is 
requesting public comment on proposed Rules 3a5-2, 3a5-3, and 15a-6 
under the Exchange Act.

Table of Contents

I. Introduction and Background
II. The Proposed Rules and Rule Amendments
    A. Regulation S Transactions with Non-U.S. Persons
    B. Amendment to Exchange Act Rule 15a-6
    C. Securities Lending by Bank Dealers
    D. Proposed Withdrawal of Exchange Act Rule 3b-9, Rule 15a-8, 
and Rule 15a-9
III. Administrative Law Matters
    A. General Request for Comments
    B. Paperwork Reduction Act Analysis
    C. Consideration of Benefits and Costs
    D. Consideration of Burden on Competition, and on Promotion of 
Efficiency, Competition, and Capital Formation
    E. Consideration of Impact on the Economy
    F. Regulatory Flexibility Analysis
IV. Statutory Authority
V. Text of Proposed Rules and Rule Amendments

I. Introduction and Background

    Today, the Commission and the Board of Governors of the Federal 
Reserve System (``Board'') are requesting comment on jointly proposed 
rules to implement the broker exceptions for banks relating to third-
party networking arrangements, trust and fiduciary activities, sweep 
activities, and safekeeping and custody activities.\1\
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    \1\ Exchange Act Release No. 54946 (Dec. 18, 2006) (``Joint 
Proposal'').
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    The proposals in this release are intended to complement the Joint 
Proposal.\2\ In particular, we re-propose (and propose to redesignate 
as Rule 3a5-2) a conditional exemption from the definition of dealer 
for banks to purchase from and sell to non-U.S. persons offerings in 
securities exempt under Regulation S.\3\ In addition, we propose a 
clarifying amendment to Exchange Act Rule 15a-6,\4\ which provides a 
conditional exemption from U.S. broker-dealer registration for certain 
foreign broker-dealers. This amendment would conform the language of 
Rule 15a-6 to more closely track the statutory changes made by the 
GLBA. We also propose to redesignate as new Rule 3a5-3 existing Rule 
15a-11 and to amend this exemption from the definition of dealer for 
banks' conduit securities lending activities. Finally, we propose to 
withdraw Exchange Act Rule 3b-9,\5\ in which the Commission defined the 
term ``bank'' for purposes of Sections 3(a)(4) \6\ and 3(a)(5) \7\ of 
the Exchange Act, due to judicial invalidation, Exchange Act Rule 15a-
8,\8\ a time-limited exemption for banks' securities activities, 
because of the passage of time, and Exchange Act Rule 15a-9,\9\ an 
exemption from the definitions of ``broker'' and ``dealer'' for savings 
associations and savings banks, an exemption no longer necessary after 
passage of the Regulatory Relief Act.
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    \2\ On May 11, 2001, the Commission adopted interim final rules 
(``the Interim Rules'') regarding the Gramm-Leach-Bliley Act 
(``GLBA'') definitions of broker and dealer. See Exchange Act 
Release No. 44291 (May 11, 2001), 66 FR 27760 (May 18, 2001) (http://www.sec.gov/rules/final/34-44291.htm). On June 17, 2004, the 
Commission proposed Regulation B. See Exchange Act Release No. 49879 
(June 17, 2004), 69 FR 39682 (June 30, 2004) (http://www.sec.gov/rules/proposed/34-49879.htm). Both the Interim Rules as they apply 
to the broker activities of banks and Regulation B are superseded by 
the current joint rulemaking. The Regulatory Relief Act does not 
directly affect the operation of the rules the Commission adopted 
concerning banks' dealer activities. See Exchange Act Release No. 
47364 (Feb.13, 2003), 68 FR 8686 (Feb. 24, 2003) (http://www.sec.gov/rules/final/34-47364.htm). However, we are proposing 
some limited amendments to separate and redesignate certain rules 
that provide exemptions to the definitions of both broker and 
dealer.
    \3\ The rule was proposed in 2004 but no further action on the 
proposed rule was taken by the Commission.
    \4\ 17 CFR 240.15a-6.
    \5\ 17 CFR 240.3b-9.
    \6\ 15 U.S.C. 78c(a)(4).
    \7\ 15 U.S.C. 78c(a)(5).
    \8\ 17 CFR 240.15a-8.
    \9\ 17 CFR 240.15a-9.
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II. The Proposed Rules and Rule Amendments

A. Regulation S Transactions With Non-U.S. Persons

    In response to an industry request,\10\ the Commission proposed 
Exchange Act Rule 771 in 2004.\11\ We are re-proposing at this time the 
exemption we proposed in 2004, as applied to banks' dealer activities, 
substantially as proposed. As originally proposed, this rule would 
provide banks with a conditional exemption from the definition of 
``dealer'' to engage in transactions with non-U.S. persons pursuant to 
Regulation S under the Securities Act of 1933.\12\ In particular, a 
bank could purchase and sell ``eligible securities'' \13\ to offshore, 
non-U.S. persons on a ``riskless principal'' basis.\14\ A bank could 
also resell any eligible Regulation S security, after its purchase and 
after its initial issuance, to a non-U.S. person as long as the bank 
continues to comply with the requirements of Regulation S.\15\ After 
the requirements of Regulation S cease to apply to an issuance, a bank 
could resell such a security to another non-U.S. person or a broker-
dealer, as long as the transaction complies with another bank broker or 
dealer exception or exemption.
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    \10\ See letter dated May 27, 2004, from Lawrence R. Uhlick, 
Executive Director and General Counsel, Institute of International 
Bankers to Catherine McGuire, Chief Counsel, Division of Market 
Regulation, Securities and Exchange Commission (http://www.sec.gov/rules/proposed/s72604.shtml). Regulation S [17 CFR 230.901, et seq.] 
specifies the requirements for an offer or sale of securities to be 
deemed to occur outside the United States and therefore not subject 
to the registration requirements of Section 5 of the Securities Act. 
Regulation S permits the sale of newly issued off-shore securities 
and re-sales of off-shore securities from a non-U.S. person to a 
non-U.S. person.
    \11\ See Exchange Act Release No. 49879, supra note 2. The 
Commission originally proposed this exemption to cover both a banks' 
broker and dealer securities activities. The Commission and the 
Board are jointly are re-proposing this exemption for banks' broker 
activities in response to passage of the Financial Services 
Regulatory Relief Act of 2006, Pub. L. 109-351, 120 Stat. 1966 
(2006) (``Regulatory Relief Act''), which requires a joint proposal 
and provides that the final rules will supersede the existing bank 
broker rules. See text at note 36 infra.
    \12\ Persons that conduct a broker or dealer business while 
located in the United States must register as broker-dealers (absent 
an exemption), even if they direct all of their selling efforts 
offshore. Exchange Act Release No. 27017 (July 11, 1989), 54 FR 
30013, 30016 (July 19, 1989). Nothing in proposed Rule 771 would 
affect the necessity of complying with Regulation S (17 CFR 230.904) 
or any other requirements of or exemptions from the Securities Act. 
Since the original proposal covered both agency and riskless 
principal transactions, an exemption for agency (brokerage) 
transactions is being separately proposed as a part of the Joint 
Proposal.
    \13\ Proposed Rule 771 would define an ``eligible security'' as 
a security not being sold from the inventory of the bank or an 
affiliate of the bank, and not being underwritten by the bank or an 
affiliate of the bank on a firm-commitment basis unless the bank 
acquired the security from an unaffiliated distributor that did not 
purchase the security from the bank or a bank affiliate.
    \14\ Proposed Rule 771 would define a ``riskless principal 
transaction'' as a transaction in which, after receiving 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.
    \15\ Rule 904 of Regulation S (17 CFR 230.904).
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    In explaining the need for an exemption, the industry group 
expressed the view to the Commission

[[Page 77552]]

staff that non-U.S. persons expect to deal with one private banker, and 
that these customers would not choose to deal with a registered broker-
dealer to conduct securities transactions in Regulation S securities, 
but would instead look to foreign banks to effect these transactions.
    We are re-proposing this exemption for the same reasons we proposed 
it in 2004. In proposing this exemption, we noted that the limited 
conditions in the proposed rule reflected our belief that non-U.S. 
persons generally will not be relying on the protections of the U.S. 
securities laws when purchasing Regulation S securities from U.S. 
banks.\16\ By their terms, these securities are not intended to be sold 
within the U.S. We also expressed our understanding that non-U.S. 
persons can purchase the same securities from banks located outside of 
the U.S. We invited comment on whether U.S. broker-dealer registration 
should be required with respect to transactions with these non-U.S. 
persons who are purchasing new offering securities offshore, or may be 
selling or purchasing seasoned securities.
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    \16\ Exchange Act Release No. 49879, supra note 2, 69 FR 39720. 
We also explained that although we generally believe that U.S. 
broker-dealers should be subject to the same standards of conduct 
when dealing with non-U.S. persons, this principle is less 
compelling when the foreign person has chosen to deal with a U.S. 
bank with respect to Regulation S securities that are designed to be 
sold to non-U.S. persons offshore.
    Moreover, while no rules have been adopted, the exemption 
provided by Exchange Act Section 30(b), concerning foreign 
securities, has been held unavailable if the United States is used 
as a base for securities fraud perpetrated on foreigners, Arthur 
Lipper Corp. v. SEC, 547 F.2d 171 (2d Cir. 1976), reh. denied, 551 
F.2d 915 (2d Cir. 1977), cert. denied 434 U.S. 1009.
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    We received few comments on this proposed exemption.\17\ Commenters 
generally supported proposed Rule 771, stating that it would allow 
banks to compete with foreign banks not subject to Commission 
regulation.\18\ However, several commenters urged the Commission to 
broaden the proposed exemption. For example, one commenter suggested 
that the Commission modify the proposed exemption to include 
transactions for foreign investors in all securities sold in the United 
States.\19\ Two commenters urged the Commission to amend the proposed 
definition of ``eligible security'' to eliminate the restriction on 
banks' selling securities from the inventory of affiliates or those 
underwritten by affiliates.\20\ Two commenters suggested that the 
Commission expand the exemption to cover all secondary market trading 
with offshore persons in any ``foreign securities'' not effected on a 
U.S. exchange or Nasdaq, stating that it is burdensome for a bank to 
determine whether a security was initially sold in compliance with 
Regulation S.\21\ One commenter also stated that to the extent the 
proposed rule requires a bank to make any determination or conduct any 
investigation of the way in which a security was initially offered, the 
rule should only require the bank to have a ``reasonable belief'' that 
the eligible security was initially sold in compliance with Regulation 
S.\22\ In this commenter's view, a bank may not have direct access to 
all of the information necessary to determine whether a security was 
initially offered under Regulation S or part of a class that was 
offered under Regulation S.\23\
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    \17\ See, e.g., letter dated September 1, 2004 from Jeffrey P. 
Neubert, President and CEO, the Clearing House (``Clearing House 
letter''); letter dated September 1, 2004 from Lawrence R. Uhlick, 
Executive Director and Chief Counsel, Institute of International 
Bankers (``IIB letter''); letter dated September 1, 2004 from 
Agustin Abalo, President, Florida International Bankers Association, 
Inc. (``FIBA letter''); letter dated September 1, 2004 from Sarah A. 
Miller, Director, Center for Securities, Trust and Investment, 
American Bankers Association and General Counsel, ABA Securities 
Association (``ABA/ABASA letter''); and letter dated September 1, 
2004 from Charles C. Cutrell, III, Executive Vice President and 
General Counsel, State Street Bank and Trust Company (``State Street 
letter'').
    \18\ See, e.g., Clearing House letter, IIB letter.
    \19\ State Street letter.
    \20\ See Clearing House letter; ABA/ABASA letter.
    \21\ IIB letter, FIBA letter.
    \22\ IIB letter.
    \23\ IIB letter. This commenter noted, however, that a bank may 
be able to obtain certain information regarding the security from 
third party information vendors or may need to rely on information 
statements or offering memoranda, filings, or other third-party 
sources to determine how the security was offered. This commenter 
said that the bank's exemption should not be jeopardized if this 
information is inaccurate or misleading as long as the bank had a 
reasonable belief that the information upon which it was relying was 
accurate and complete.
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    After carefully considering the comments, we are proposing the 
exemption for banks' riskless principal transactions in Regulation S 
securities, as new Rule 3a5-2, substantially as initially proposed. 
This proposed rule, however, incorporates the reasonable belief 
standard suggested by one of the commenters because we are persuaded 
that a bank should not suffer the loss of the exemption when due care 
is taken to identify the source of a security, even if an error in the 
identification occurs.\24\ We request comment on all aspects of 
Proposed Rule 3a5-2.
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    \24\ In addition to adding the reasonable belief standard, the 
re-proposal includes some non-substantive clarifying changes to the 
text of the rule as proposed in 2004.
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B. Amendment to Exchange Act Rule 15a-6

    In 2004, the Commission also proposed a clarifying amendment to 
Exchange Act Rule 15a-6, which provides a conditional exemption from 
U.S. broker-dealer registration for certain foreign broker-dealers.\25\ 
Exchange Act Rule 15a-6(a)(4)(i) allows a foreign broker-dealer, 
without registering in the United States, to effect transactions in 
securities with or for a U.S.-registered broker-dealer or bank acting 
``in a broker-dealer capacity as permitted by U.S. law.'' \26\ Thus, in 
transactions between a U.S. bank and its foreign broker-dealer 
affiliate, acting as principal, the U.S. bank could rely on the 
affiliate transactions exception in the GLBA,\27\ and the foreign 
affiliate could rely on Rule 15a-6(a)(4)(i). As the Commission 
explained in 2001, however, Exchange Act Rule 15a-6(a)(4)(i) does not 
permit a foreign broker-dealer or bank to have direct contact with 
customers of the U.S. bank.\28\ Moreover, the GLBA affiliate 
transactions exception from the definition of broker for banks would 
not permit the U.S. bank to effect transactions with the bank's foreign 
affiliate's customers.\29\ We received no comments on our 2001 
discussion of the interplay between Exchange Act Rule 15a-6 and the 
affiliate transactions exemption and we are taking the same approach in 
the current proposal.
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    \25\ Even when the GLBA permits a bank to engage in securities-
related activities without itself registering as a broker-dealer, a 
broker-dealer engaged in the business of effecting transactions for 
such bank still must register--absent an exemption or other 
exclusion from the broker-dealer registration requirements of the 
Exchange Act. For instance, a foreign broker-dealer that executes 
trades for a bank under Exchange Act Section 3(a)(4)(C) would need 
to register as a U.S. broker-dealer if it does not meet the 
conditions of Exchange Act Rule 15a-6, or it does not otherwise 
qualify for an exemption from registration. Foreign banks cannot 
rely on the GLBA bank exceptions because they do not meet the 
definition of ``bank'' in Exchange Act Section 3(a)(6). However, 
U.S. branches and agencies of foreign banks would meet the 
definition of bank. See Exchange Act Release No. 27017, supra note 
12, 54 FR 30015.
    \26\ 17 CFR 240.15a-6(a)(4)(i).
    \27\ 15 U.S.C. 78c(a)(4)(B)(vi).
    \28\ Exchange Act Release No. 44291, supra note 2.
    \29\ Id. If the Commission were to adopt the exemptions for 
Regulation S securities, proposed supra, a bank would be permitted 
to sell Regulation S securities to non-U.S. persons, including 
customers of a foreign affiliate, as long as it met the conditions 
of that exemption.
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    In light of the amended definitions of ``broker'' and ``dealer,'' 
the Commission proposed an amendment to Exchange Act Rule 15a-6 in 
2004.\30\ Currently, Exchange Act Rule 15a-6(a)(4)(i) refers to ``a 
bank acting in a broker or dealer

[[Page 77553]]

capacity as permitted by U.S. law.'' As amended, however, the 
definitions of `broker' and `dealer' in Exchange Act Section 3(a)(4) 
and 3(a)(5), respectively, provide that banks engaging in the 
activities permitted under the conditional exceptions in those 
definitions ``shall not be considered to be'' brokers or dealers. To 
reflect this change, we proposed to amend Exchange Act Rule 15a-
6(a)(4)(i) by replacing the phrase ``in a broker or dealer capacity as 
permitted by U.S. law'' with the phrase ``pursuant to an exception or 
exemption from the definition of `broker' or `dealer' in Sections 
3(a)(4)(B) or 3(a)(5)(C) of the Act.'' \31\ We are now proposing to 
conform Rule 15a-6 to the changes made by the GLBA by incorporating the 
rules applicable to banks' broker and dealer activities as well as the 
statutory provisions with the addition of the phrase, ``or the rules 
thereunder.'' We are therefore re-proposing this modified clarifying 
amendment to Rule 15a-6. We request comment on all aspects of this 
proposal.
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    \30\ Release No. 49879, supra note 2.
    \31\ Nothing in this release should be construed as modifying 
the Exchange Act Section 3(a)(6) definition of ``bank'' as it 
applies to foreign banks. Currently, foreign banks generally would 
not meet this definition and would be considered broker-dealers 
under the U.S. securities laws. As such, foreign banks generally 
would be required to register as U.S. broker-dealers unless they 
qualify for an exemption from registration under Exchange Act Rule 
15a-6.
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C. Securities Lending by Bank Dealers

    In 2003, the Commission adopted Exchange Act Rule 15a-11, which 
provides a conditional exemption from the definitions of both 
``broker'' and ``dealer'' for banks engaging in securities lending 
transactions.\32\ Rule 15a-11 provides that a bank is exempt from the 
definition of ``broker'' and ``dealer'' under Sections 3(a)(4) and 
3(a)(5) of the Exchange Act to the extent that, as a conduit 
lender,\33\ it engages in 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 Exchange 
Act; \34\ or (2) any employee benefit plan that owns and invests, on a 
discretionary basis, not less than $25,000,000 in investments.\35\
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    \32\ See Exchange Act Release No. 47364, supra note 2.
    \33\ Under Rule 15a-11 as adopted, as well as under the proposed 
amendment, ``conduit lender'' would mean 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.
    \34\ 15 U.S.C. 78c(a)(54)(A).
    \35\ Under Rule 15a-11 as adopted, as well as under the proposed 
amendment, ``securities lending transaction'' would mean 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. Under the proposal, ``securities 
lending services'' would mean: (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.
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    As explained in the Joint Proposal, the exemption as applied to 
banks' broker activities was voided by the Regulatory Relief Act. The 
Commission and the Board are proposing to reinstate--as Rule 772--this 
exemption with respect to the definition of ``broker'' in the Joint 
Proposal.\36\ We are proposing in this release to redesignate what was 
Rule 15a-11 as Rule 3a5-3 and to amend former Rule 15a-11 to eliminate 
its applicability to a bank's ``broker'' activities, while proposing to 
maintain its ongoing availability for a bank's ``dealer'' activities. 
We request comment on all aspects of these changes.
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    \36\ As applicable to banks' broker activities, the Rule 15a-11 
exemption was never operable because of the temporary exemption 
applicable to all bank broker activities.
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D. Proposed Withdrawal of Exchange Act Rule 3b-9, Rule 15a-8, and Rule 
15a-9

    We intend to withdraw Exchange Act Rule 3b-9, in which the 
Commission defined the term ``bank'' for purposes of Section 3(a)(4) 
and 3(a)(5) of the Exchange Act. Rule 3b-9 was invalidated by the U.S. 
Court of Appeals for the District of Columbia Circuit.\37\ We also 
intend to withdraw Rule 15a-8, which provided a temporary exemption 
from Exchange Act Section 29 liability for banks' securities 
activities. This exemption expired. In addition, we intend to withdraw 
Rule 15a-9, an exemption from the definition of ``broker'' and 
``dealer'' for savings associations and savings banks. The Regulatory 
Relief Act caused savings associations and savings banks to be treated 
as ``banks,'' eliminating the need to differentiate between these 
entities for the purposes of the Exchange Act. As a result, current 
Rule 15a-9 is no longer necessary. We request comment on all aspects of 
withdrawing Rule 3b-9, Rule 15a-8, and Rule 15a-9.
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    \37\ American Bankers Association v. SEC, 804 F.2d 739 (1986).
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III. Administrative Law Matters

A. General Request for Comments

    Interested persons are invited to submit written data, views and 
arguments concerning this proposal. The Commission will consider the 
comments we previously received. Commenters may reiterate or cross-
reference previously submitted comments.

B. Paperwork Reduction Act Analysis

    These proposed amendments to two rules and this re-proposal of a 
new rule would not impose recordkeeping or information collection 
requirements, or other collections of information that require approval 
of the Office of Management and Budget under 44 U.S.C. 3501, et seq. 
Accordingly, the Paperwork Reduction Act does not apply.\38\
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    \38\ We note that, as a practical matter, banks likely already 
keep records that could be used to show they meet the terms of the 
proposed exemption. We also note that Section 203 of the GLBA 
specifically requires the bank regulators to promulgate 
recordkeeping requirements.
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C. Consideration of Benefits and Costs

    We believe that these two proposed rule amendments and the re-
proposal of a new rule would be consistent with Congress's intent in 
enacting the GLBA and would provide banks with greater legal certainty 
regarding their conduct with respect to securities transactions. The 
rule amendments and the re-proposal are very limited in scope. The 
Commission is re-proposing an exemption that would permit banks to 
purchase from and sell to non-U.S. persons securities exempt under 
Regulation S. The proposed rule would facilitate banks' compliance with 
the federal securities laws and provide banks greater legal certainty 
regarding such conduct. The proposed addition of the reasonable belief 
standard would prevent banks from losing the exemption due to 
inadvertent errors in identifying the source of securities sold under 
the exemption, so long as the other conditions of the rule were met. We 
do not expect banks to incur any costs related to the re-proposal. The 
proposed clarifying amendment to Exchange Act Rule 15a-6 would conform 
the rule to the revised statutory definition of ``broker'' and 
``dealer'' under the Exchange Act as well as to the rules adopted 
thereunder. With regard to securities lending activities, the 
Commission proposes to amend existing Exchange Act Rule 15a-11, and to 
redesignate it as Rule 3a5-3, to

[[Page 77554]]

eliminate the rule's reference to banks' ``broker'' activities, and to 
clarify the rule's continued availability for banks' ``dealer'' 
activities. We do not expect banks to incur any costs related to these 
proposed amendments. The proposed withdrawal of Exchange Act Rules 3b-9 
and 15a-8 reflects the invalidation of Rule 3b-9 by the U.S. Court of 
Appeals for the District of Columbia Circuit,\39\ and the expiration of 
the 15a-8 exemption, respectively. Similarly, the proposed withdrawal 
of Exchange Act Rule 15a-9 is proposed because the exemption is no 
longer necessary after passage of the Regulatory Relief Act. 
Withdrawing these rules would provide administrative certainty and 
clarity, as rules no longer in effect would be removed from the Code of 
Federal Regulations. The withdrawals are administrative in effect, and 
thus would impose no costs. We request comments generally on the costs 
and benefits associated with the re-proposal, the proposed amendments, 
and the proposed rule withdrawals.
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    \39\ See text at note 37 supra.
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D. Consideration of Burden on Competition, and on Promotion of 
Efficiency, Competition, and Capital Formation

    In accordance with our responsibilities under Section 3(f) of the 
Exchange Act,\40\ we have considered both the protection of investors 
and whether these rule amendments and the re-proposal would promote 
efficiency, competition, and capital formation and have determined that 
they are consistent with the public interest.\41\ In addition, Section 
23(a)(2) of the Exchange Act requires us, in adopting rules under the 
Exchange Act, to consider the anticompetitive effects of such rules, if 
any, and to refrain from adopting a rule that will impose a burden on 
competition not necessary or appropriate in furthering the purpose of 
the Exchange Act.
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    \40\ 15 U.S.C. 78w(a)(2). ``Whenever pursuant to this title the 
Commission is engaged in rulemaking * * * and is required to 
consider or determine whether an action is necessary or appropriate 
in the public interest, the Commission shall also consider, in 
addition to the protection of investors, whether the action will 
promote efficiency, competition, and capital formation.''
    \41\ 15 U.S.C. 78c(f).
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    We do not believe that the amendments and the re-proposal, as well 
as the elimination of Rules 3b-9, 15a-8, and 15a-9, would result in any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. The proposed 
amendments and the re-proposal would provide guidance to banks 
regarding the scope of exceptions added to the Exchange Act by Congress 
in the GLBA. The rule amendments and re-proposal also would not impose 
any additional competitive burdens on banks engaging in a securities 
business, other than those imposed by Congress through functional 
regulation in the GLBA. Further, the proposed elimination of Rules 3b-
9, 15a-8, and 15a-9 is administrative in nature.
    Because the types of activities that are the subject of these 
amendments are not the types of activities in which small banks or 
small broker-dealers directly participate, there should be no 
competitive costs to small banks or small broker-dealers.
    We do not believe that those rules impose any adverse effects on 
efficiency, competition, or capital formation that are not a 
consequence of the GLBA statutory provisions. The exemptive rules would 
make it easier for banks to conduct their securities lending and sales 
of Regulation S securities after the GLBA changes to the federal 
securities laws. These proposed rules also would give banks enhanced 
legal certainty for these securities activities. We do not believe that 
those rules impose any adverse effects on efficiency, competition, or 
capital formation that are not a result of the GLBA statute. When 
Congress passed the GLBA, it effectively determined that regulation of 
banks conducting a securities operation outside of certain exceptions 
was necessary, appropriate, and in the public interest. Further, we 
believe that the proposed elimination of Rules 3b-9, 15a-8, and 15a-9 
would not have any impact on efficiency, competition, or capital 
formation.
    The Commission requests comment on whether the proposed amendments 
would promote efficiency, competition, and capital formation. The 
Commission is particularly interested in hearing whether the existence 
of any of the proposed bank exemptions would have a negative impact on 
competition. Please provide detailed information and data on exactly 
how banks and broker-dealers compete and how the particular exemptions 
would impact broker-dealers' business.

E. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \42\ the Commission must advise the Office 
of Management and Budget as to whether the proposed amendments and the 
re-proposal constitute a ``major'' rule. Under SBREFA, a rule is 
considered ``major'' where, if adopted, it results or is likely to 
result in: An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease); a major increase in 
costs or prices for consumers or individual industries; or a 
significant adverse effect on competition, investment, or innovation. 
If a rule is ``major,'' its effectiveness will generally be delayed for 
60 days pending Congressional review. We request comment on the 
potential impact of the proposed amendments, the re-proposal, and the 
rule withdrawals on the economy on an annual basis. Commenters are 
requested to provide empirical data and other factual support for their 
views to the extent possible.
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    \42\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified 
in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 
601).
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F. Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA''), in accordance with the provisions of the 
Regulatory Flexibility Act (``RFA''),\43\ regarding the proposed 
amendments and the re-proposal.
---------------------------------------------------------------------------

    \43\ 5 U.S.C. 603.
---------------------------------------------------------------------------

1. Reasons for the Proposed Action
    The Commission is proposing the amendments to address issues raised 
by the passage of the GLBA and the Regulatory Relief Act. In addition, 
the exemption in proposed Rule 3a5-2 is being re-proposed to permit 
banks to purchase from and sell to non-U.S. persons securities exempt 
under Regulation S. Finally, we are proposing the elimination of Rules 
3b-9, 15a-8, and 15a-9 for administrative clarity and in conformance 
with the Regulatory Relief Act.
2. Objectives
    The proposed amendments, the re-proposal, and the proposed rule 
withdrawals are intended to provide legal certainty to the industry 
with respect to the GLBA requirements. The Commission also seeks to 
make the restrictions imposed by the GLBA more accommodating of current 
securities activities carried out by banks while preserving investor 
protection principles.
3. Legal Basis
    Pursuant to the Exchange Act and, particularly, Sections 3(a)(4), 
3(b), 15, 17, 23(a), and 36 thereof, the Commission proposes to adopt 
the amendments and the re-proposal and to eliminate the obsolete or 
unnecessary rules.

[[Page 77555]]

4. Small Entities Subject to the Rule
    Congress did not exempt small entity banks from the application of 
the GLBA. Moreover, because amendments and the re-proposal are intended 
to provide guidance to all banks that are subject to the GBLA, the 
Commission determined that it would not be appropriate to exempt small 
entity banks from their operation. Therefore, the amendments and the 
re-proposal generally apply to banks that would be considered small 
entities. Nonetheless, as noted above, the types of activities that are 
the subject of the amendments are not the types of activities in which 
small banks or small broker-dealers generally directly participate.
5. Reporting, Recordkeeping and Other Compliance Requirements
    The proposed amendments would not impose any new reporting, 
recordkeeping, or other compliance requirements on banks that are small 
entities.
6. Duplicative, Overlapping, or Conflicting Federal Rules
    The Commission believes that there are no rules that duplicate, 
overlap, or conflict with the proposed amendments.
7. Significant Alternatives
    Pursuant to Section 3(a) of the RFA,\44\ the Commission must 
consider the following types of alternatives: (a) The establishment of 
differing compliance or reporting requirements or timetables that take 
into account the resources available to small entities; (b) the 
clarification, consolidation, or simplification of compliance and 
reporting requirements under the proposed rule for small entities; (c) 
the use of performance rather than design standards; and (d) an 
exemption from coverage of the proposed rule, or any part thereof, for 
small entities.
---------------------------------------------------------------------------

    \44\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    As discussed above, the GLBA does not exempt small banks from the 
Exchange Act broker-dealer registration requirements, and the 
Commission does not believe that an unconditional exemption would be 
consistent with the investor protection principles of the GLBA. 
Moreover, such an exemption could place broker-dealers at a competitive 
disadvantage versus small banks.
    The proposed amendments, the re-proposal and the proposed rule 
withdrawals are intended to clarify and simplify compliance with the 
GLBA. As such, the proposals should ease compliance on banks of all 
sizes, including smaller entities.
    The Commission does not believe that it is necessary to consider 
whether small entities should be permitted to use performance rather 
than design standards to comply with the proposed amendments because 
they already propose performance standards and do not dictate for 
entities of any size any particular design standards (e.g., technology) 
that must be employed to achieve the objectives of the proposed 
amendments.
8. Request for Comments
    The Commission encourages written comments on matters discussed in 
the IRFA. In particular, the Commission requests comments on: (a) The 
number of small entities that would be affected by the proposed 
amendments; (b) the nature of any impact the proposed amendments would 
have on small entities and empirical data supporting the extent of the 
impact; and (c) how to quantify the number of small entities that would 
be affected by and/or how to quantify the impact of the proposed 
amendments. Such comments will be considered in the preparation of the 
Final Regulatory Flexibility Analysis, if the proposed rule is adopted, 
and will be placed in the same public file as comments on the proposed 
rule itself. Persons wishing to submit written comments should refer to 
the instructions for submitting comments in the front of this release.

IV. Statutory Authority

    Pursuant to authority set forth in the Exchange Act and 
particularly Sections 3(a)(4), 3(b), 15, 17, 23(a), and 36 thereof (15 
U.S.C. 78c(a)(4), 78c(b), 78o, 78q, 78w(a), and 78mm, respectively) the 
Commission proposes to repeal current Rules 3b-9, 15a-8, and 15a-9 
(Sec. Sec.  240.3b-9, 240.15a-8, and 240.15a-9, respectively). The 
Commission also is re-proposing Exchange Act Rule 3a5-2 (Sec.  240.3a5-
2), proposing to amend Exchange Act Rule 15a-6 (Sec.  240.15a-6), and 
proposing to amend and redesignate Exchange Act Rule 15a-11 as Rule 
3a5-3 (Sec.  240.15a-11 and Sec.  240.3a5-3, respectively).

V. Text of Proposed Rules and Rule Amendments

List of Subjects in 17 CFR Part 240

    Broker-dealers, Reporting and recordkeeping requirements, 
Securities.
    For the reasons set forth in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for Part 240 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise 
noted.
* * * * *
    2. Sections 240.3a5-2 and 240.3a5-3 are added to read as follows:


Sec.  240.3a5-2  Exemption from the definition of ``dealer'' for banks 
effecting transactions in securities issued pursuant to Regulation S.

    (a) A bank is exempt from the definition of the term ``dealer'' 
under section 3(a)(5) of the Act (15 U.S.C. 78c(a)(5)), to the extent 
that, in a riskless principal transaction, the bank:
    (1) Sells an eligible security in compliance with the requirements 
of 17 CFR 230.903 to a purchaser who is outside of the United States 
within the meaning of 17 CFR 230.903 or to a registered broker or 
dealer, provided that if the sale is made prior to the expiration of 
the distribution compliance period specified in 17 CFR 230.903(b)(2) or 
(b)(3), the sale is made in compliance with the requirements of 17 CFR 
230.904.
    (2) Purchases from a person who is not a U.S. person under 17 CFR 
230.902(k) an eligible security after its initial sale with a 
reasonable belief that the eligible security was initially sold outside 
of the United States within the meaning of and in compliance with the 
requirements of 17 CFR 230.903.
    (3) Purchases from a registered broker or dealer an eligible 
security after its initial sale outside of the United States within the 
meaning of and in compliance with the requirements of 17 CFR 230.903, 
and sells to a purchaser who is outside the United States within the 
meaning of 17 CFR 230.903.
    (b) Definitions. For purposes of this section:
    (1) Distributor has the same meaning as in 17 CFR 230.902(d).
    (2) Eligible security means a security that:
    (i) Is not being sold from the inventory of the bank or an 
affiliate of the bank; and
    (ii) Is not being underwritten by the bank or an affiliate of the 
bank on a firm-commitment basis, unless the bank acquired the security 
from an unaffiliated distributor that did not

[[Page 77556]]

purchase the security from the bank or an affiliate of the bank.
    (3) Purchaser means a person who purchases an eligible security and 
who is not a U.S. person under 17 CFR 230.902(k).
    (4) 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.


Sec.  240.3a5-3  Exemptionfrom the definition of ``dealer'' for banks 
engaging in securities lending transactions.

    (a) A bank is exempt from the definition of the term ``dealer'' 
under section 3(a)(5) of the Act (15 U.S.C. 78c(a)(5)), to the extent 
that, as a conduit lender, 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.


Sec.  240.3b-9  [Removed and Reserved]

    3. Section 240.3b-9 is removed and reserved.
    4. Section 240.15a-6 is amended by revising paragraph (a)(4)(i) to 
read as follows:


Sec.  240.15a-6  Exemption of certain foreign brokers or dealers.

    (a) * * *
    (4) * * *
    (i) A registered broker or dealer, whether the registered broker or 
dealer is acting as principal for its own account or as agent for 
others, or a bank acting pursuant to an exception or exemption from the 
definition of ``broker'' or ``dealer'' in sections 3(a)(4)(B), 
3(a)(4)(E), or 3(a)(5)(C) of the Act (15 U.S.C. 78c(a)(4)(B), 15 U.S.C. 
78c(a)(4)(E), or 15 U.S.C. 78c(a)(5)(C)) or the rules thereunder;
* * * * *


Sec.  240.15a-8  [Removed and Reserved]

    5. Section 240.15a-8 is removed and reserved.


Sec.  240.15a-9  [Removed and Reserved]

    6. Section 240.15a-9 is removed and reserved.


Sec.  240.15a-11  [Removed and Reserved]

    7. Section 240.15a-11 is removed and reserved.

    Dated: December 18, 2006.
    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 06-9842 Filed 12-22-06; 8:45 am]
BILLING CODE 8011-01-P