Controversial interim final rules issued by the Securities and Exchange Commission in May 2001, purporting to implement the broker-dealer provisions of the Gramm-Leach-Bliley Act of 1999, have the timeline for removal of the blanket bank exemption from federal broker-dealer regulation up in the air.

The Gramm-Leach-Bliley Act repealed a blanket exclusion in federal securities laws that permitted banks to engage in securities activities without registering as a broker or dealer and replaced the blanket exclusion with new "functional" exceptions intended to permit banks to continue to engage in traditional banking activities without registration. The SEC final interim rules define terms in the statutory exceptions and grant banks additional exemptions from broker-dealer registration. Among other provisions, the rules would require banks to conduct an account-by-account review of their trust department to establish that the bank is chiefly compensated by permitted fees for each individual trust account, would exclude order-taking activities from the statutory exemption for bank custodial services, and would create new limits on referral fees that are not included in the Act.

In the face of severe criticism from banks, Congress and federal banking regulators that the interim final rules interfere with traditional trust activities of banks and overstep the intent of the Act, the SEC has extended the blanket exclusion for banks until at least May 12, 2002. Additionally, in the same July 2001 release announcing this extension, the SEC stated that, based on its dialogue with representatives from the banking industry and banking regulators subsequent to release of the interim final rules, it recognized that some of the rules needed to be amended, and that it will again extend the exclusion as appropriate so that banks will have a sufficient transition period to achieve compliance with the amended rules. The SEC noted that comments it has received have indicated that banks may need as much as one year to develop appropriate compliance system to adapt to the amended rules.

Although the comment period for the interim final rules expired in September 2001, the SEC has not yet issued amended rules, making it nearly certain that the blanket exemption for banks will be extended through at least the third quarter of 2002.

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