WASHINGTON — Federal bank regulators savaged an interim Securities and Exchange Commission rule Monday that implemented broker-dealer provisions of the Gramm-Leach-Bliley Act, saying it instituted “overly complex, costly, and unworkable requirements” for banks.

In a strongly worded comment letter, the agencies faulted the rule’s substance and its approval process; said it violated congressional intent; and urged the SEC to replace it with a thoroughly revised proposal with a later compliance deadline.

“The rules will significantly disrupt and may force discontinuation of major lines of business for banks and longstanding relationships with their customers,” the letter said, which was signed by Federal Reserve Board Chairman Alan Greenspan, Comptroller of the Currency John D. Hawke Jr., and Federal Deposit Insurance Corp. Chairman Donna Tanoue.

“We believe the interim final rules are contrary to the plain language of the Gramm-Leach-Bliley Act and its legislative history in various critical respects. By imposing unnecessarily burdensome, costly, and unworkable requirements, the interim final rules effectively eliminate exemptions established by statue, disrupt existing customer relationships, and force traditional banking activities out of banks, a result that Congress specifically sought to avoid.”

But the SEC did not make any promises. In a prepared statement, a spokesman for the agency said, “The Commission will carefully review the issues raised in the comment letter from the federal bank regulators on the Commission’s rules to implement the broker-dealer registration exemptions of the Gramm-Leach Bliley Act. The Commission welcomes comments on the rules and urges all interested parties to provide specific practical comments on the rules as written.”

The interim final rule, published May 18 by the SEC, is meant to implement Title II of the 1999 financial reform law, which outlines the extent of the agency’s authority over bank securities offerings. The law created 15 exemptions that let banks continue offering traditional banking products, such as trust services and loan participation, without registering as broker-dealers.

Banks with nonexempt securities activities would have to register as broker-dealers or move the activities into broker-dealer affiliates. Some banks and thrifts wish to avoid registration because it subjects them to more regulation and paperwork from the SEC.

Soon after its release, banking industry representatives said the rule should have been a proposal and argued that the Oct. 1 deadline for many of the requirements was too soon.

In their comment letter, the banking agencies agreed.

“We believe that the process used by the commission of publishing interim final rules without first receiving the benefit of public comment is fundamentally unfair and inconsistent with sound administrative practice,” the letter said.

They argued that banks are being put in an “untenable position.”

“Although the rules require substantial modification, banks must take steps now to comply with them by the effective date, since they have no way of knowing how or when the rules may be changed,” the bank regulators wrote. “We believe it is wrong to require banks to establish procedures to comply with the interim final rules before the commission has reviewed public comments and addressed the significant concerns raised by the banking agencies and the banking industry.”

In its seven-page letter and 49-page appendix, the agencies also agreed with industry complaints that the SEC did not observe congressional intent in writing the law and that the commission misunderstood many traditional bank activities. For example, the agencies said that the SEC’s interpretation of the financial reform law’s exemption for custody and safekeeping activities was not broad enough because it did not include order-taking activities, and that it put too many restrictions on the exemption.

“These SEC-imposed conditions are not consistent with the banking practices that Congress sought to protect, would restrict activities that banks are expressly permitted to conduct under other provisions” of Gramm-Leach-Bliley “and would impose an unworkable framework of restrictions on traditional bank activities,” the appendix to the letter said. “As a practical matter, the restrictions make the exemptions virtually worthless for many banks and, in our view, are the regulatory equivalent of ‘death by a thousand cuts.’ ”

For the industry, the agencies’ comment letter amounted to a victory, and representatives said they hope the SEC will rethink its position.

“I’m hopeful that the SEC is obviously waiting upon a new chairman to come on board and will take this to heart,” said Robert M. Kurucza, a partner at the law firm Morrison & Foerster and general counsel for the Bank Securities Associations. “It really is an incredible statement to come out on a collective basis and question the process and substance of a rule from the SEC.”

The deadline for comments is July 17. But if the interim rule is adopted in its current form, bank regulators warned there could be dire consequences for banks and their customers.

“Because of the complexity and numerous nonstatutory conditions imposed by the rules, the rules will also impose substantial additional costs on banks,” the regulators said. “As a result, customer costs may increase. These consequences of the rules are wholly unwarranted.”


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