(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

SEC Adopts Regulation R to Implement Bank Broker Provisions

The SEC commissioners unanimously approved Regulation R, which implements the bank broker provisions of the Exchange Act. Erik Sirri, the director of the Division of Market Regulation, advised that the final set of rules has been modified and clarified to address concerns raised during the comment period. The modifications are mostly technical in nature. Banks will have an 18-month transitional exemption before complying with Regulation R, beginning with their first fiscal year after September 30, 2008. Regulation R was developed jointly with the Federal Reserve Board which will consider the rules at its next meeting. A separate release outlines SEC-only rules. The Federal Reserve will have to draft separate recordkeeping rules and guidance for banks, according to Sirri.

Commissioner Paul Atkins commented on the amount of detail in the rules, especially with respect to networking. The level of detail may be surprising to banks which are used to more principles-based rules, he said.

The networking exception will allow banks to receive compensation for referring bank customers to broker-dealers. The rules define the nominal fees that may be paid to unregistered employees who make these referrals. The rules also define incentive compensation in a manner that better reflects how typical bank bonus programs operate. Banks will be permitted to pay more than nominal fees for referrals of certain institutional customers and high net worth customers to brokers or dealers that meet certain conditions.

Commissioner Atkins questioned the selection of the $5 million net worth threshold for natural persons since it adds to the "crazy quilt" of sophisticated investor tests. Sirri said the amount was arrived at through a process of negotiation. Mr. Atkins said he was pleased that the threshold includes trusts in meeting the net worth test, but called for a rationalization of the various thresholds for sophisticated investors.

Banks will be permitted to effect securities transactions in a trustee or fiduciary capacity if they are chiefly compensated for those transactions consistent with fiduciary principles and standards based on specifically enumerated fees, known as relationship compensation. Banks may choose either an account-by-account or a bank-wide approach in determining whether they meet the chiefly compensated test. The revenues of certain foreign branches of the banks can be excluded for purposes of the test.

The rules include a sweep account exception to permit banks to sweep deposits into no-load money market funds. A safekeeping and custody exception will permit banks to perform specified services in connection with the safekeeping and custody of securities. If a bank accepts securities orders for a custodial account on an accommodation basis, it may not advertise securities order taking, provide investment advice or research, or make recommendations about securities to the account.

Another exemption will permit banks to effect certain transactions in mutual funds and certain variable insurance products that are registered and funded by a separate account through the National Securities Clearing Corporation, directly with a transfer agent, or indirectly with an insurance company or a separate account that is excluded from the definition of transfer agent under the Exchange Act. To rely on this exemption, the security must not be traded on a national securities exchange or through the facilities of a national securities association or an inter-dealer quotation system.

Banks may effect transactions in the securities of a company directly with a transfer agent acting for the company as long as no commission is charged, the transaction is conducted solely for the benefit of an employee benefit plan, the security is obtained directly from the company or the company's employee benefit plan and it must be transferred only to the company or an employee benefit plan of the company.

A rule relating to noncustodial securities lending that would have been voided by the Regulatory Relief Act was reinstated. Banks will also be permitted to effect certain agency transactions involving Regulation S securities based on a reasonable belief that the securities were initially sold in compliance with Regulation S.

A transitional exemption will prevent banks' contracts from being void under Exchange Act Section 29(b). Banks will have a permanent exemption from Section 29(b) where they act in good faith and have reasonable policies and procedures in place to comply with the bank broker rules and regulations. The exemption is conditioned upon any violations of the registration requirements not resulting in significant harm, financial loss or cost to the person seeking to void the contract. The SEC-only release includes a conditional exemption from the definition of dealer for banks' Regulation S transactions, and includes a number of technical amendments.