What is '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.

BREAKING DOWN 'Regulation R'

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.

Exceptions for Banks

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.

  1. Broker-Dealer

    Broker-dealer is used in U.S. securities regulation parlance ...
  2. Securities Act Of 1933

    The Securities Act Of 1933 is a federal piece of legislation ...
  3. Alternative Trading System (ATS)

    An alternative trading system (ATS) is one that is not regulated ...
  4. Short Exempt

    Short exempt refers to a short sale order exempted from the uptick ...
  5. Federal Reserve Regulations

    Federal Reserve Regulations are rules put in place by the Federal ...
  6. Regulation T - Reg T

    Regulation T is a collection of provisions that govern investors' ...
Related Articles
  1. Investing

    Top 10 British Broker-Dealer Firms In 2017 By AUM

    Here are the top 10 broker-dealers in the U.K. by assets under management.
  2. Financial Advisor

    How Brokers Are Compensated for Selling Bonds

    Find out how brokers are paid for selling bonds and how the transaction costs are passed on to the investor through a markup or commission.
  3. Insights

    A Brief History of U.S. Banking Regulation

    From the establishment of the First Bank of the United States to Dodd-Frank, American banking regulation has followed the path of a swinging pendulum.
  4. Investing

    Merrill Lynch's New Incentive-Based Advisor Pay Worked Out in Q1

    Merrill Lynch overhauled the compensation incentives for its brokers and advisors, and it has appeared to pay off in the first quarter.
  5. Investing

    Decline Of The Independent Broker-Dealer

    Since the financial crisis of 2008-2009 the numbers of independent broker-dealers have been steadily declining. Find out why, and if the trend will continue.
  6. Investing

    Trump’s First Year: 2017 Equity Strategy (BAC)

    Equity strategists at Bank of America Merrill Lynch have identified key investment themes for 2017.
  7. Investing

    How Bank of America Holds 1/8 of All U.S. Deposits

    Bank of America isn't America's central bank, but given its size and spread, you could be forgiven this misapprehension.
  8. Managing Wealth

    The Top U.S. Regulated Stock Brokers (AMTD, IBKR)

    To operate in the United States, stock brokers must comply with SEC regulations that protect investors. Here is a look at some of the best.
  9. Insights

    The January Effect: Why Stock Inflows Are at a Record

    Investors poured a record $58 billion into equity mutual funds and ETFs during the four weeks through Jan. 17, according to research by Bank of America Merrill Lynch.
  10. Insights

    Financial Regulations: Glass-Steagall to Dodd-Frank

    Here are some of the most important financial regulations that have been established.
  1. What are key government regulations that affect investing in the banking sector?

    Discover how the global financial crisis of 2008 changed the face of banking in the United States and around the world by ... Read Answer >>
  2. What's the difference between investment banks and commercial banks?

    Understand the principal differences between investment banks and commercial banks, and the areas of banking services that ... Read Answer >>
  3. What are the 9 major financial institutions?

    There are nine major types of financial institutions. Understand the major types of financial institutions that exist and ... Read Answer >>
Trading Center