X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
The banking industry fired its first shot last week in a battle with the Securities and Exchange Commission over the regulation of securities-related activities conducted by banks. In a June 4 letter, the American Bankers Association accused the agency of overstepping its authority to regulate traditional bank activities. The letter called for the complete withdrawal of a May 11 SEC rule that the industry claims would significantly impede the ability of banks to continue to provide securities-related services, such as managing trust and retirement accounts that include stock components. “We think the regulation as a whole is so pervasively misguided and so troublesome they need to go back and start over,” says Beth Climo, executive director of the American Bankers Association, which signed on to the June 4 letter. SEC defenders respond that the agency is simply exercising the authority explicitly granted by Congress when it passed the Gramm-Leach-Bliley Act of 1999. The milestone act tore down longstanding barriers between the banking, securities and insurance industries. The current dispute between banks and the SEC is the latest in a series of conflicts created as regulators struggle to implement the law. Already, the fight has drawn the attention of federal bank regulators and members of Congress. Sen. Phil Gramm, R-Texas, former chairman of the Senate Committee on Banking, Housing, and Urban Affairs and lead sponsor of Gramm-Leach-Bliley, has voiced strong opposition to the SEC rule. “Sen. Gramm is encouraging banks to let the SEC know they’re not happy with this,” says Gramm communications director Christi Harlan. “The staff, in reviewing the SEC rule, has determined it is not in keeping with what Congress intended.” SEC officials declined to comment on the rule. Yet, in a speech to the Bank Securities Association last week, SEC Deputy Director for Market Regulation Robert Colby said the agency was aware of industry concerns and would be willing to make reasonable adjustments. Coloring the controversy between the banking industry and the SEC has been a historic lack of trust between banks and banking regulators on one side, and the SEC on the other. For more than a decade, the SEC has butted heads with the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corp. over the right to regulate certain bank activities with securities elements. And in the mid-1980s the SEC tried to assert control over the broker-dealer activities of banks — an action ultimately overturned in federal court. Some see history repeating itself in the current tussle. “In a world where banks are getting larger and more powerful, the SEC may be very conscious about protecting their turf vis-�-vis banking regulators,” says one Washington, D.C., banking lawyer. “They want to hold on to what they’ve got.” Officials with the Fed and the Comptroller of the Currency declined to comment on the current SEC rule. Many industry insiders predicted just this type of upheaval when Gramm-Leach-Bliley was being contemplated two years ago. “I don’t think anyone should have had a Pollyanna view about it,” says Charlotte, N.C., attorney Eugene Katz, chairman of the bank securities subcommittee of the American Bar Association. “Financial modernization is going to be difficult to implement until regulators figure out where the lines are. Ultimately, if we’re going to have a consolidated financial services industry, then consistent regulation across the board is necessary.” PUSH COMES TO SHOVE At the center of the growing dispute are the so-called push-out provisions of Gramm-Leach-Bliley. Previously, banks had enjoyed a blanket exemption from SEC oversight. Under the new regime — originally scheduled to take effect May 12 — banks would be required to push certain securities-related activities into separate subsidiaries regulated by the SEC. To protect some traditional banking activities, however, Congress specified 15 exceptions. In March, facing pressure from the banking industry for more guidance on what activities would trigger a push-out, the SEC postponed the compliance date until Oct. 1. The agency published the sought-after clarification last month. “We were very surprised,” says Sarah Miller, general counsel of the American Bankers Association. “We did not expect to be in total sync with the SEC, but we were quite shocked on some of these rules.” One pressing area of concern, Miller says, are limitations placed on the management of trust accounts. For example, the SEC rule would force a bank to show, on an account-by-account basis, that its trust work generated more money from traditional administrative fees than from brokerage commissions. Miller says such an undertaking would be so burdensome as to be unprofitable to continue. Robert Kurucza, general counsel to the Bank Securities Association, calls the rule a “terrible miscalculation.” Kurucza claims large banking institutions already conduct the majority of their securities-related services through affiliated brokerage houses subject to SEC oversight. “The real impact is going to be on small community banks that don’t have broker-dealer affiliates and that engage in these activities in order to compete,” says Kurucza, a partner in the D.C. office of Morrison & Foerster. One group keeping quiet, at least for the moment, is the securities industry. Once, securities firms would have been expected to line up behind the SEC, in the hope that the agency would rein in prospective competitors. But consolidation between banks and broker-dealers is erasing old rivalries. Alan Sorcher, assistant general counsel of the Securities Industry Association, says his group is still analyzing the rule’s impact. It is unclear what position — if any — new banking committee chairman Sen. Paul Sarbanes, D-Md., will take. Sarbanes’ spokesman did not return calls seeking comment. Committee Republicans are expected to raise the new SEC rules in hearings over the confirmation of Harvey Pitt as chairman of the agency. A hearing date has not yet been set. Former SEC General Counsel James Doty, a partner in the D.C. office of Houston’s Baker Botts, defends the agency’s action, asserting that regulators had a mandate to bring the broker-dealer functions of banks under their scrutiny. “It’s a transitional phase,” Doty says. “The SEC may have views that differ from the banking industry and banking regulators, but I think their intent is to find common ground.” Adds Katz, a former bank regulator himself, “The SEC may be pushing what Congress intended, but I don’t think their interpretations are at all irrational.”

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.