What it means
Before the law changed, banks were broadly excluded from the definition of a broker. The Gramm-Leach-Bliley Act replaced that blanket exclusion with a list of specific exceptions, and Regulation R explains how those exceptions work.
A bank that stays within them can offer the services without being treated as a broker-dealer. The exceptions cover activities that fit naturally with banking.
These include trust and fiduciary activities, safekeeping and custody, certain sweep arrangements that move spare cash into money market funds, and networking arrangements in which a bank lets a registered broker-dealer offer securities on its premises. There are also exceptions for some stock purchase plans for employees and for certain transactions in private securities offerings.
The networking exception is the one most customers meet. Bank employees can introduce customers to a registered broker-dealer, but they are limited in how they are paid for it, so that a teller has no strong incentive to push securities.
Typically a one-time, fixed and nominal cash fee is allowed, and commissions tied to the outcome of a sale are not. The rule also covers matters such as the conditions that apply to trust activity, including the way fees are determined.
A bank relying on the trust exception must be paid chiefly through administration fees, annual fees, asset-based fees or flat fees, and not through transaction-based commissions. The aim is to ensure that trust accounts are run for the client and not for commissions.
For business readers, the key point is that the rule keeps two regulated worlds distinct. Banks supervised under banking law can offer limited investment services, and anything beyond the exceptions has to go through a registered securities firm.
Treasury and wealth teams can use the rule as a checklist when evaluating whether a bank's investment offering is structured properly. Another practical point is that these exceptions come with conditions on disclosure and on who may speak to customers.
Staff who are not licensed generally must not give investment advice, and customers must be told that the products are not insured deposits and may lose value. Banks therefore train their branch teams on what they can and cannot say.
In practice
Real-world examples.
Example
A community bank invites a registered broker-dealer to set up a desk in its branch. Bank staff may refer customers to the desk and receive only a nominal fixed referral fee, while the broker-dealer handles all advice and orders.
Example
A bank trust department manages a family trust and charges a fee based on the value of the assets under management. It places securities orders through a broker-dealer, and the fee is not based on transaction commissions.
Example
A bank offers a sweep account that moves unused cash at the end of each day into a money market fund. This service falls within the exception for sweep arrangements, subject to its conditions.
Case study
Seen in the real world.
Ironbridge Bank is an illustrative, fictional regional bank that wanted to grow its investment offering. Its head of retail proposed paying branch staff a percentage of the commission whenever a customer they referred bought a mutual fund through the partner brokerage.
Compliance warned that a commission-based payment would put the arrangement outside the networking exception and could mean the bank was acting as an unregistered broker. The bank redesigned the scheme to pay a small fixed fee per referral, regardless of the outcome. The illustrative lesson is that a payment structure can decide whether an exception is available at all.
Ironbridge also trained its branch staff to hand customers a short written disclosure that investment products are not bank deposits and may lose value. Complaints about misunderstandings fell, and the regulator's next review found the networking arrangement in good order.
Watch out
Common mistakes.
- Assuming banks can do any securities business they like, when they may rely only on the listed exceptions and must stay within their conditions.
- Paying bank staff commission for securities referrals, when the networking exception limits incentive pay to a nominal fixed fee.
- Confusing this rule with the Federal Reserve rule of the same letter, when the current version is a rule of the Securities and Exchange Commission.
Questions
People also ask.
Why do banks need exceptions?
The law now treats a bank as a broker if it engages in broker activity, so the exceptions mark which activities are allowed without registration.
Can a bank sell securities to its customers directly?
Only within the listed exceptions, such as trust and custody work, and otherwise the sales are made through a registered broker-dealer.
Is a sweep account a securities product?
The sweep into a money market fund involves securities, but the rule gives a bank an exception when the service is offered under set conditions.
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