May 2001

The Gramm-Leach-Bliley Act of 1999 removed the blanket exclusion for banks from regulation as a broker/dealer under the federal securities laws effective May 12, 2001. In place of the general exclusion, the Gramm-Leach-Bliley Act created limited exceptions for certain bank securities activities, including trust department activities and third-party networking arrangements.

On April 17, 2001, the SEC issued a statement that it intended to engage soon in rulemaking on the new exceptions to the definition of broker and dealer. In connection with such rulemaking, the Commission announced that it expects to provide temporary exemptions for banks such that banks will continue to be exempt from the definition of broker and dealer, notwithstanding the May 12, 2001 effective date under the Gramm-Leach-Bliley Act, through October 1, 2001 for existing securities activities and through January 1, 2002 if the availability of any new exception from the definitions of broker or dealer is affected by compensation received by banks and paid by banks to their employees.

It is anticipated that the forthcoming SEC regulations will be very restrictive. Banks should pay particular attention to whether their trust department activities fall within the exception provided by the Gramm-Leach-Bliley Act which exempts trust department activities if they are "chiefly compensated" on the basis of an administrative or annual fee, percentage of assets under management or flat processing fee to cover costs only. How the forthcoming SEC regulations define "chiefly compensated" could have substantial and far-reaching ramifications for bank trust department activities.

Please contact Chuck Ferry at 717-233-5731 for additional information on what preparations your institution should be making in advance of the effectiveness of these new provisions.