Regulation R

Regulation R provides exemptions for banks from broker status as directed by Section 3 of the Securities Exchange Act of 1934. Section 3 of the Act was amended by the 1999 Gramm-Leach-Bliley Act and primarily focuses on regulations for broker-dealers and brokerage transactions.

Regulation R provides exceptions for banks offering certain brokerage services as defined by Section 3 of the Securities Exchange Act of 1934. Regulation R gives banks broader latitude for their operational activities under bank status, allowing them to provide certain brokerage transactions without registration as a broker-dealer.

In 1999, Section 3 of the Securities Exchange Act of 1934 was modified to include provisions instituted from the Gramm-Leach-Bliley Act (GLBA). This Act was known for modernizing and expanding governance of the financial markets. Much of the focus from GLBA was on expanding the offerings a single financial service firm was able to provide.

The 1999 provisions from GLBA allowed financial companies to offer a broader range of services. It also allowed financial companies to more freely partner for mergers involving expansion of services for customers. Prior to 1999, financial service companies were primarily restricted to focusing their products around a single service offering.

In 2007 the Federal Reserve and the Securities and Exchange Commission issued final details on Regulation R. Regulation R outlines exceptions for banks who seek exemption from broker-dealer registration requirements in the amended Securities Exchange Act of 1934. It includes exceptions provided for in the Securities and Exchange Act of 1934 and also adds some additional criteria for exemption. Overall, banks can receive exemption from broker-dealer registration when securities transactions are part of the bank's trust and fiduciary, custodial and deposit sweep functions. Exemptions can also relate to foreign securities transactions, and non-custodial securities lending transactions conducted in an agency capacity. Generally however banks must partner with a third party to offer brokerage services. Thus, activities of banks that fall outside of specified exemptions must be referred to their partnering registered broker-dealer for transaction.

In some cases, banks may choose to acquire a broker-dealer as a subsidiary to comply with market rules and regulations. Merrill Lynch’s merger with Bank of America provides one example. Merrill Lynch was acquired by Bank of America in 2009. Merrill Lynch offers a wide range of brokerage services and serves as the primary broker-dealer partner for Bank of America. Bank of America’s clients are referred to Merrill Lynch for financial advice, full service brokerage transactions and discount brokerage transactions through the Merrill Edge platform. This partnership supports compliance with Section 3 of the Securities Exchange Act of 1934 and Regulation R.