What is Regulation R?

Regulation R implements an exemption for banks offering certain brokerage services and allows them to provide those services without registering themselves as a broker-dealer. Section 3 of Securities Exchange Act 1934 defined certain activities as brokerage service and mandated brokerage dealer registration for the institutions providing such services.

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How Does Regulation R Work?

The Gramm-Leach-Bliley Act of 1999 amended the section for modernizing and expanding the operations of the financial institutions. Before 1999, financial institutions in the United States were not allowed to offer products around more than one service offerings. The provisions of the Gramm-Leach-Bliley Act allowed financial institutions to expand their operations by offering a range of financial services to its clients. The financial institutions were also allowed to partner more freely with other institutions in order to provide services to the customers. The final version of Regulation R was issued in 2007 by the Federal Reserve and the Securities and Exchange Commission. The rule defines the conditions under which a bank is allowed to provide services involving securities without a brokerage dealer registration. It also defines the situations where only a registered broker/dealer is allowed to perform a security transaction. Regulation R added few more provisions for exemptions for the banks from broker-dealer registration requirement prescribed by the Security Exchange Act of 1934. If a security transaction is a part of the banks trust and fiduciary, custodial, and deposit sweep function, the bank is exempted from the requirement of broker-dealer registration. Banks can also conduct non-custodial securities lending transactions in an agency capacity without a broker-dealer registration. Foreign securities transaction may also be done by the banks not registered as brokerage dealer. However, all other security transactions that are not covered by the specific exemption provision must be done by a registered broker-dealer and a bank must refer all such transaction to a third-party registered broker. Banks must partner with registered firms offering brokerage services for this purpose. Sometimes, banks acquire broker-dealer for providing non-exempted services to its customer. The customers of the bank are referred to that broker-dealer firms platform for discount brokerage transactions and other brokerage services. In 2009, Bank of America acquired Merrill Lynch for this purpose. This type of merger is allowed in section 3 of the Securities Exchange Act of 1934.