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Regulation R – Definition

Regulation R Definition

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.

A Little More on What is Regulation R

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 firm’s 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.

References for Regulation R

Acacemic Research on Regulation R

  • ·      Regulation R: Bank Broker-Dealer Compliance Guide, Fein, M. L. (2007). This paper is a complete guide that explains the Bank Broker compliance according to Regulation R. according to this paper, this guide explains the correlation between the bank broker and the Regulation R.
  • ·       Resolving the Bank/Broker Impasse: Proposed Regulation R Represents Joint Effort by SEC and Federal Reserve Board, Lybecker, M. E., Yim, S. J., March, C. L., & Johnson, B. M. (2007). Banking LJ124, 144. According to this paper, the method employed in resolving the Bank/Broker impasse was proposed and explained using the Regulation R which represents the Joint Effort by SEC and the Federal Reserve Bond.
  • ·       Third Time Lucky-Regulation R Marks the US’s Latest Attempt to Implement Brokerage Push-out Provisions, Sabel, B. (2007). Third Time Lucky-Regulation R Marks the US’s Int’l Fin. L. Rev.26, 30. In explaining the Regulation R, this paper proposes that the Third Time Lucky- Regulation R marks the United States’ recent attempt which is to implement Brokerage push out positions. According to this research thesis, this process was well defined and explained.
  • ·       Regulation R: The Beginning of the End or the End of the Beginning of Bank Securities Brokerage Activities, Roche, J. J., & Sabahi, B. (2008). NC Banking Inst.12, 141. This research work explains in details the Regulation R from the aspect of the saying which reads “The Beginning of the End or the End of the Beginning” as regards bank securities brokerage activities.
  • ·       The Wealth and Risk Effects of the GrammLeachBliley Act (GLBA) on the US Banking Industry, Mamun, A., Hassan, M. K., & Maroney, N. (2005). Journal of Business Finance & Accounting32(1‐2), 351-388. According to this paper, several legal acts that explain the Regulation R were considered and an example of these acts is the Gramm-Leach-Bliley Act (GLBA) of 1999 which marks the end of the Depression regulation among others. This research work considered the impact of the GLBA on the banking industry and the result of the analyses states that the banking industry has a welfare profit from this law. Two categories were examined and juxtaposed. And it was recorded that in both categories, bigger banks gain more while the profitability power is termed as inconclusive.
  • ·       The Subprime Crisis-A Test Match for the Bankers: Glas-Steagall vs. GrammLeachBliley, Markham, J. W. (2009). U. Pa. J. Bus. L.12, 1081. This research paper explains the recent ongoing debate as regards whether or not the repeal of the Glass-Steagall Act of 1993 passed by the Gramm-Leach-Bliley Act of 1993 (GLBA) explains the framework for the subprime problems. The former Act prevented commercial banks from investing in banking activities which includes dealing in equity securities and underwriting them. The GLBA act, however, did remove that barrier thereby allowing banks to become financial supermarkets. Nonetheless, this paper submits that the GLBA act played little or no role in the event that lines the subprime problems.
  • ·       From GrammLeachBliley to Dodd-Frank: The Unfulfilled Promise of Section 23A of the Federal Reserve Act, Omarova, S. T. (2010). NCL Rev.89, 1683. According to this research thesis, the newest history and implementation of one of the provision of rule of law in the united states’ banking law (section 23 of the Federal Reserve Act) stated in response of one of the cause of the Great Depression and then imposes an exact imitation on extension of credits and other transaction processes between a bank and her affiliate investment or credit risk was explained and practically examined. This paper also explains the correlation between the section 23A and Regulation R as regards the banking sector. Then, it concluded with the argument that states the staging of the consequences of this research thesis as a framework for future financial regulatory reform.
  • ·       Beware of Banks Bearing Gifts: GrammLeachBliley and the Constitutionality of Federal Financial Privacy Legislation, Pandozzi, N. R. (2000). U. Miami L. Rev.55, 163. According to this paper, the implications of falling into the trap of the Bank Bearing gifts were explained. According to the Gramm-Leach-Bliley Act and the Constitutionality of the Federal Financial Privacy Legislation act, these Acts have helped understands the implication of being carried away by the incentives offered by Banks. The result of these analyses states that customers should stay clear off the Bank Bearing Gifts.
  • ·       Gramm-Leach-Bliley: Federal Preemption of Massachusetts Bank Insurance Sales Rules, Ehrlich, K. F. (2001). Ann. Rev. Banking L.20, 121. This paper explains the assumptions stated by Gramm-Leach-Bliley as regards the Federal Preemption of Massachusetts Bank Insurance Sales rule. This paper explains the importance and how this rule has affected the banking sector (pros and cons).
  • ·       On the Riskiness of Universal Banking: Evidence from Banks in the Investment Banking Business Pre‐and Post‐GLBA, Geyfman, V., & Yeager, T. J. (2009). Journal of Money, Credit and Banking41(8), 1649-1669. According to this research thesis, an economically noticeable difference in exists in the market-based risk measures between the traditional and universe bank was explained using a three-asset portfolio model. The result of this analyses states that between 1990 and 2007, there was an increase in the participation of investment in banking that was directly associated with total and unsystematic risk and there was also no change in the systematic risk. The result from this research paper can however not be judged by the GLBA as regards the risk-reduction grounds although, the act maybe be defensible as regards other reasons.
  • ·       Gramm-Leach-Bliley Act and State Regulation of the Business of Insurance-Past, Present and… Future, Sinder, S. A. (2001). NC Banking Inst.5, 49. This research thesis explains the GLBA and the state’s regulation of the business of insurance. It explains the past, present and the future benefits and effect of these acts in the banking sector.

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