Table of Contents

Regulation R: What it Means, How it Works

By

James Chen

Updated March 21, 2024

Reviewed by

Thomas Brock

Fact checked by

Yarilet Perez

What Is Regulation R?

Regulation R was implemented in 2007 as a provision of the Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act focuses on regulations for broker-dealers and brokerage transactions.

Regulation R provides exceptions for banks to offer certain brokerage services once defined in the Securities Exchange Act of 1934.

Broker-Dealer

A broker-dealer is an individual or firm that acts as an intermediary between an investor and a securities exchange.

Understanding Regulation R

Regulation R provides banks a 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 the governance of the financial markets. Much of the focus from GLBA expanded the offerings a single financial service firm could provide.

GLBA allowed financial companies to partner for mergers involving the expansion of services for customers. Before 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. Banks can receive an 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 the 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 refers clients 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.

What Investments Can Be Sold by Banks Under Regulation R?

Regulation R allows the sale of mutual funds, annuities, and other non-deposit investments to retail customers.

How Did the Gramm-Leach-Bliley Act Affect the Exchange Act of 1934?

Regulation R was implemented under the Gramm-Leach-Bliley Act (GLBA) of 1999, which lowered many of the barriers that were erected between the banking and securities industries by the Exchange Act of 1934, created to govern securities transactions on the secondary market.

What Are Some of the Requirements for Banks Under Regulation R?

The Gramm-Leach-Bliley Act and Regulation R impletmentation requires financial institutions, companies that offer consumers financial products or services like loans, financial or investment advice, or insurance to explain their information-sharing practices to their customers and to safeguard sensitive data.

Article Sources

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U.S. Securities and Exchange Commission. "Definitions of Terms and Exemptions Relating to the "Broker" Exceptions for Banks."
U.S. Securities and Exchange Commission. "Regulation R: Exceptions for Banks from the Definition of Broker in the Securities Exchange Act of 1934 — A Small Entity Compliance Guide."
U.S. Congress. "S.900 - Gramm-Leach-Bliley Act."
Federal Reserve History. "Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley)."
U.S. Securities and Exchange Commission. "12 CFR Part 218 and 17 CFR Parts 240 and 247 Definitions of Terms and Exemptions Relating to the ‘‘Broker’’ Exceptions for Banks and Exemptions for Banks Under Section 3(a)(5) of the Securities Exchange Act of 1934 and Related Rules; Final Rules."
U.S. Securities and Exchange Commission. "Staff Compliance Guide to Banks on Dealer Statutory Exceptions and Rules."
Federal Reserve Board. "Acquisition of Merrill Lynch by Bank of America."
U.S. Office of the Comptroller of the Currency. "Gramm-Leach-Bliley Act, Regulation R, and Retail Non-Deposit Investment Sales."
Federal Trade Commission. "Gramm-Leach-Bliley Act."

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