WASHINGTON The Securities and Exchange Commission confirmed Friday that it will postpone implementing controversial provisions of the Gramm-Leach-Bliley Act that could put some market-related banking products like sweep accounts under that agencys supervision.
The provisions had been scheduled to take effect May 12, but there were widespread concerns that financial firms, which still are awaiting compliance guidelines, would miss the deadline.
Late Friday, the agency said it had heeded calls for a delay.
Banks will be given extra time to come into full compliance with the law and the SEC will continue to consult with the industry as it develops guidelines for specific elements of the laws broker-dealer provisions, collectively known as Title II, the commission said.
Groups such as the American Bankers Association Securities Association and the Bank Securities Association, which had urged the SEC to delay action, welcomed the move.
Obviously we dont agree on every issue, but the SEC has indicated their willingness to learn and listen to what we do as banks, said Sarah A. Miller, general counsel of the ABA Securities Association.
The financial reform law, which allowed banks, securities firms, and insurance companies to merge, removed banks longstanding blanket exemption from registering as broker-dealers under the Securities Exchange Act. Recognizing that bankers have long engaged in certain securities-related activities such as trust services, loan participations, and stock purchase plans lawmakers wrote 11 exemptions into the law that let banks continue to offer those products without registering as broker-dealers.
Banks with nonexempt securities activities would have to register as broker-dealers or move those activities into broker-dealer affiliates.
Ever since the laws enactment, banking trade groups have been requesting guidelines from the SEC on how Title II provisions would be applied. Of particular concern was how the SEC would apply exemptions for trust and fiduciary services, custody agreements, and sweeps accounts.
The trust exemption requires that a bank or trust companys earnings come chiefly from annual fees, administrative charges, and other expenses not tied directly to the execution of stock trades. Banks worry that some interpretations of the word chiefly could mean their normal trust operations disqualify them from the exemption.
Other concerns about the agencys application of the law include the fear that self-directed individual retirement accounts, a growing part of banks business, could run afoul of the custody exemption and that an exemption for sweeps accounts might not cover banks that place assets in certain kinds of mutual funds.
On Feb. 6, the interpretation of the sweeps exemption prompted Senate Banking Committee Chairman Phil Gramm, R-Tex., to send a letter to then-SEC Chairman Arthur Levitt. In enacting the broker-dealer provisions Congress intended to permit banks to continue to engage in certain activities, such as sweeps accounts, that they have been conducting in a safe and sound manner for many years, he wrote.
Congress did not intend that rules, definitions, or interpretations would be changed in a way that would limit the current activities preserved by the exemptions.
William Rosenblum, senior vice president and deputy general counsel of HSBC USA and a member of the ABA Securities Association board, said that, because the SEC was largely preoccupied with other legislation last year, it was hard to get a sense of its views on Title II.
We met with the SEC in October and in December, and they indicated that they had taken certain positions which were a reading of the statute with which we did not agree, Mr. Rosenblum said. But they indicated they were willing to work with us and would listen to what we had to say.
But the industry was taken by surprise on Jan. 31, when Robert L.D. Colby, deputy director of the SECs market regulation division, made a speech in which he appeared to assert the SECs authority over a broader range of banking products than bankers had expected, and in far stronger terms than they had heard before.
Mr. Rosenblum said that in the speech, the agency took what I thought were very hard and fast positions on issues that we were trying to work with them on.
Mr. Colbys speech was followed by a series of letters to the SEC from trade associations asking more and more urgently for guidelines and a postponement of the effective date.
On Feb. 28, Ms. Miller of ABA Securities Association warned in a letter to the agency that a delay in the effective date of Title II, Subpart A, is absolutely necessary to avoid wholesale noncompliance by the banking industry with the federal securities laws. As the Commission and staff are well aware, failure to comply with broker-dealer registration requirements raises the unthinkable specter of both SEC enforcement actions and private litigation.
