

[Federal Register: October 3, 2007 (Volume 72, Number 191)]
[Rules and Regulations]               
[Page 56562-56568]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03oc07-16]                         

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-56502; File No. S7-23-06]
RIN 3235-AJ77

 
Exemptions for Banks Under Section 3(a)(5) of the Securities 
Exchange Act of 1934 and Related Rules

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting rules and rule amendments regarding exemptions from the 
definitions of ``broker'' and ``dealer'' under the Securities Exchange 
Act of 1934 (``Exchange Act'') for banks' securities activities. In 
particular, the Commission is adopting a conditional exemption that 
will allow banks to effect riskless principal transactions with non-
U.S. persons pursuant to Regulation S under the Securities Act of 1933 
(``Securities Act''). The Commission also is amending and redesignating 
an existing exemption from the definition of ``dealer'' for banks' 
securities lending activities as a conduit lender. In addition, the 
Commission is conforming a rule that grants a limited exemption from 
U.S. broker-dealer registration for foreign broker-dealers to the 
amended definitions of ``broker'' and ``dealer'' under the Exchange 
Act. Finally, the Commission is withdrawing three rules under the 
Exchange Act: A rule defining the term ``bank'' for purposes of the 
Exchange Act's definitions of ``broker'' and ``dealer,'' due to 
judicial invalidation; a time-limited exemption for banks' securities 
activities, due to the passage of time; and an exemption from the 
definitions of ``broker'' and ``dealer'' for savings associations and 
savings banks, as the exemption no longer necessary in light of 
subsequent legislation.

DATES: Effective Date: The final rules are effective on November 2, 
2007.

FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief Counsel, 
Linda Stamp Sundberg, Senior Special Counsel, Joshua Kans, Senior 
Special Counsel, John Fahey, Branch Chief, or Elizabeth K. MacDonald, 
Special Counsel, at (202) 551-5550, Office of Chief Counsel, Division 
of Market Regulation, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting new Rules 3a5-2 
[17 CFR 240.3a5-2] and 3a5-3 [17 CFR 3a5-3], amending Rule 15a-6 [17 
CFR 240.15a-6], and withdrawing Rules 3b-9 [17 CFR 240.3b-9], 15a-8 [17 
CFR 240.15a-8], 15a-9 [17 CFR 240.15a-9] and 15a-11 [17 CFR 15a-11] 
under the Exchange Act.

Table of Contents

I. Introduction and Background
II. Adopted Rules and Rule Amendments
    A. Regulation S Transactions with Non-U.S. Persons
    B. Amendment to Exchange Act Rule 15a-6
    C. Securities Lending by Bank Dealers
    D. Withdrawal of Exchange Act Rule 3b-9, Rule 15a-8, and Rule 
15a-9
III. Administrative Law Matters
    A. Paperwork Reduction Act Analysis
    B. Consideration of Benefits and Costs
    C. Consideration of Burden on Competition, and on Promotion of 
Efficiency, Competition, and Capital Formation
    D. Regulatory Flexibility Certification
IV. Statutory Authority
V. Text of Final Rules and Rule Amendments

I. Introduction and Background

    The rules and rule amendments discussed below complement Regulation 
R, which we are adopting jointly with the Board of Governors of the 
Federal Reserve System (``Board'').\1\ These rules and rule amendments 
in large part reflect changes that the

[[Page 56563]]

Gramm-Leach-Bliley Act (``GLBA'') made to the Exchange Act with respect 
to the status of banks as ``dealers.'' \2\
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    \1\ Exchange Act Release No. 56501 (Sept. 24, 2007).
    \2\ See Exchange Act Release No. 54947 (Dec. 18, 2006), 71 FR 
77550 (Dec. 26, 2006) (``Proposing Release'').
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    As discussed below, we are adopting Exchange Act Rule 3a5-2 to 
provide a conditional exemption from the definition of ``dealer'' to 
allow banks to engage in certain transactions involving securities 
exempted from registration by Regulation S.\3\ We also are adopting a 
clarifying amendment to Exchange Act Rule 15a-6,\4\ which provides a 
conditional exemption from U.S. broker-dealer registration for certain 
foreign broker-dealers. In addition, we are redesignating, as new 
Exchange Act Rule 3a5-3, the dealer provisions of current Exchange Act 
Rule 15a-11\5\ pertaining to banks' securities lending activities.
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    \3\ 17 CFR 230.901 et seq.
    \4\ 17 CFR 240.15a-6.
    \5\ 17 CFR 240.15a-11.
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    Finally, we are withdrawing three rules under the Exchange Act: 
Rule 3b-9,\6\ which defined the term ``bank'' for purposes of the 
Exchange Act definitions of ``broker'' and ``dealer,'' due to judicial 
invalidation; Rule 15a-8,\7\ which provided a time-limited exemption 
for banks' securities activities, due to the passage of time; and Rule 
15a-9,\8\ which provided an exemption from the Exchange Act definitions 
of ``broker'' and ``dealer'' for savings associations and savings 
banks, as this no longer is necessary given the passage of the 
Financial Services Regulatory Relief Act of 2006 (``Regulatory Relief 
Act'').
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    \6\ 17 CFR 240.3b-9.
    \7\ 17 CFR 240.15a-8.
    \8\ 17 CFR 240.15a-9.
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II. Adopted Rules and Rule Amendments

A. Regulation S Transactions With Non-U.S. Persons

    We are adopting Rule 3a5-2, which exempts banks from the definition 
of ``dealer'' under Section 3(a)(5) of the Exchange Act for certain 
principal transactions involving Regulation S securities. As with Rule 
771 of Regulation R, which will permit banks to engage in certain 
Regulation S transactions on an agency basis without being ``brokers,'' 
this rule recognizes that non-U.S. persons generally will not rely on 
the protections of the U.S. securities laws when purchasing Regulation 
S securities from U.S. banks, and that non-U.S. persons can purchase 
the same securities from banks located outside of the U.S.\9\ 
Commenters generally supported the proposal while suggesting certain 
modifications and clarifications.\10\ The rule, as adopted, 
incorporates changes that respond to some of these comments.
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    \9\ See Proposing Release, 71 FR at 77552. When we proposed an 
earlier version of this rule as part of Regulation B, we explained 
that these securities are not intended to be sold within the U.S. 
See Exchange Act Release No. 49879 (June 17, 2004), 69 FR 39682, 
39720 (June 30, 2004) (explaining that although we generally believe 
that U.S. broker-dealers should be subject to the same standards of 
conduct when dealing with non-U.S. persons, this principle is less 
compelling when the foreign person has chosen to deal with a U.S. 
bank with respect to Regulation S securities that are designed to be 
sold to non-U.S. persons offshore).
    \10\ See Institute of Int'l Bankers Letter (``IIB Letter''); 
American Bankers Ass'n Letter (``ABA Letter''); The Clearing House 
Association Letter (``Clearing House Ass'n Letter'').
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    The exemption will apply only to purchases and sales of ``eligible 
securities''--securities that are not in the inventory of the bank or 
an affiliate, and that are not underwritten by the bank or an affiliate 
on a firm commitment basis (apart from securities acquired from an 
unaffiliated distributor).\11\ In addition, this dealer exemption will 
apply only to Regulation S transactions that a bank makes on a 
``riskless principal'' basis.\12\ This focus will permit U.S. banks to 
sell, overseas, securities that foreign banks also sell, thus helping 
to avoid placing U.S. banks at a competitive disadvantage with respect 
to eligible securities, while also helping to safeguard against 
investor protection risks associated with unregistered entities 
distributing eligible securities.
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    \11\ Rule 3a5-2(b)(2) specifically defines an ``eligible 
security'' as a security that is not being sold from the inventory 
of the bank or an affiliate of the bank, and not being underwritten 
by the bank or an affiliate of the bank on a firm-commitment basis 
unless the bank acquired the security from an unaffiliated 
distributor that did not purchase the security from the bank or an 
affiliate of the bank.
    Rule 3a5-2(b)(i) defines the term ``distributor'' to have the 
same meaning as in 17 CFR 230.902(d). That provision of Regulation S 
defines ``distributor'' to mean any underwriter, dealer, or other 
person who participates, pursuant to a contractual arrangement, in 
the distribution of the securities offered or sold in reliance on 
Regulation S.
    \12\ Rule 3a5-2(b)(4) defines a ``riskless principle 
transaction'' as a transaction in which, after receiving an order to 
buy from a customer, the bank purchased the security from another 
person to offset a contemporaneous sale to such customer or, having 
received an order to sell from a customer, the bank sold the 
security to another person to offset a contemporaneous purchase from 
such customer.
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    The exemption is available when a bank purchases a newly issued 
eligible security from an issuer or a broker-dealer and sells that 
security in compliance with the requirements of Rule 903 of Regulation 
S \13\ to a purchaser who is not in the U.S.\14\ The exemption also is 
available when a bank purchases, from a person who is not a U.S. person 
under Rule 902(k) of Regulation S,\15\ an eligible security after its 
initial sale with a reasonable belief that the eligible security was 
initially sold outside of the U.S. within the meaning of and in 
compliance with the requirements of Rule 903, and resells that security 
to a purchaser who is not in the U.S. or to a registered broker-
dealer.\16\ If that resale is made prior to any applicable distribution 
compliance period specified in Rules 903(b)(2) or (b)(3) of Regulation 
S,\17\ the resale must be made in compliance with the

[[Page 56564]]

requirements of Rule 904 of Regulation S.\18\
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    \13\ 17 CFR 230.903. Rule 903 of Regulation S provides that an 
offer or sale of securities by the issuer, a distributor, or an 
affiliate or a person acting on their behalf shall be deemed to 
occur outside the U.S. within the meaning of Rule 901 if the offer 
or sale is made in an offshore transaction, and no directed selling 
efforts are made in the U.S. by the issuer, a distributor, 
affiliate, or person acting on their behalf. Other conditions may 
also apply depending on the place of incorporation and reporting 
status of the issuer, and the amount of U.S. market interest in the 
securities. (Rule 901 of Regulation S generally provides that for 
the purposes of Section 5 of the Securities Act, the terms 
``offer,'' ``offer to sell,'' ``sell,'' ``sale'' and ``offer to 
buy'' include offers and sales that occur within the U.S., but not 
those that occur outside the U.S.)
    \14\ Rule 3a5-2(a)(1).
    \15\ Rule 902(k) of Regulation S defines the term ``U.S. 
person'' to mean: (i) Any natural person resident in the U.S.; (ii) 
any partnership or corporation organized or incorporated under the 
laws of the U.S.; (iii) any estate of which any executor or 
administrator is a U.S. person; (iv) any trust of which any trustee 
is a U.S. person; (v) any agency or branch of a foreign entity 
located in the U.S.; (vi) any non-discretionary account or similar 
account (other than an estate or trust) held by a dealer or other 
fiduciary for the benefit or account of a U.S. person; and (vii) any 
discretionary account or similar account (other than an estate or 
trust) held by a dealer or other fiduciary organized, incorporated, 
or (if an individual) resident in the U.S., and (viii) any 
partnership or corporation if (A) organized or incorporated under 
the laws of any foreign jurisdiction, and (B) formed by a U.S. 
person principally for the purpose of investing in securities not 
registered under the Act, unless it is organized or incorporated, 
and owned, by accredited investors (as defined in Rule 501(a)) who 
are not natural persons, estates or trusts.
    \16\ Rule 3a5-2(a)(2).
    \17\ Under Rule 903 of Regulation S, Category 1 encompasses 
certain securities: (i) Issued by a foreign issuer, for which there 
is no substantial U.S. market interest, (ii) that are offered and 
sold in an overseas directed offering, (iii) that are backed by the 
full faith and credit of a foreign government, or (iv) that are 
offered and sold to employees of the issuer or its affiliates 
pursuant to certain foreign employee benefit plans. Category 2 
encompasses securities, not eligible for Category 1, that are equity 
securities of a reporting foreign issuer, or debt securities of a 
reporting issuer or of a non-reporting foreign issuer. Category 3 
applies to all offerings of securities that do not fall within 
Category 1 or 2.
    Rules 903(b)(2) and (b)(3) of Regulation S subject Category 2 
securities and Category 3 debt securities to a 40-day distribution 
compliance period, and subject Category 3 equity securities to a 
one-year distribution compliance period.
    \18\ Rule 904 of Regulation S provides that an offer or sale of 
securities by any person other than the issuer, a distributor, an 
affiliate (except an officer or director who is an affiliate solely 
by virtue of that position) or person acting on their behalf will be 
deemed to occur outside the U.S. within the meaning of Rule 901 if 
the offer or sale are made in an offshore transaction, and no 
directed selling efforts are made in the U.S. by the seller, an 
affiliate or person acting on their behalf. Additional conditions 
apply in the case of resales of Category 2 or 3 securities by 
dealers and persons receiving selling concessions, and in the case 
of resales by certain affiliates of the issuer or a distributor.
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    Finally, the exemption is available when a bank purchases, from a 
registered broker-dealer, an eligible security after its initial sale 
with a reasonable belief that the eligible security was initially sold 
outside of the U.S. within the meaning of and in compliance with the 
requirements of Rule 903, and resells that security to a purchaser who 
is not in the U.S.\19\ This provision also requires compliance with 
Rule 904 if the resale is made prior to the expiration of the 
security's distribution compliance period.
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    \19\ Rule 3a5-2(a)(3).
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    In adopting Rule 3a5-2, we have modified the proposed rule to 
address concerns raised by commenters and to clarify the exemption. As 
revised, each section of Rule 3a5-2 specifically addresses a bank's 
purchase of a Regulation S security and the bank's subsequent sale or 
resale of the security--a structure that reflects the nature of banks' 
riskless principal transactions involving Regulation S securities \20\ 
and helps Rule 3a5-2 better parallel the equivalent provisions of Rule 
771 of Regulation R regarding banks' Regulation S transactions as 
agent.\21\
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    \20\ Paragraph (a)(1) addresses a bank's sale of newly issued 
Regulation S securities, paragraph (a)(2) addresses a bank's 
riskless principal transaction with a customer who wants to reduce 
or unwind a position in a Regulation S security, and paragraph 
(a)(3) addresses a riskless principal transaction with a customer 
who wants to increase or establish a position in a Regulation S 
security.
    \21\ As proposed, paragraph (a)(1) of the rule would have 
addressed a bank's sale of an eligible security, paragraph (a)(2) 
would have addressed a bank's purchase of an eligible security from 
a non-U.S. person, and paragraph (a)(3) would have addressed a 
bank's purchase of an eligible security from a broker-dealer 
together with the bank's subsequent resale.
    One commenter requested that we clarify the relationship between 
provisions of proposed Rule 3a5-2 and proposed Rule 771. See IIB 
Letter (suggesting that there may be a discrepancy between Rule 
771(a)(2) and Rule 3a5-2(a)(2) and asking for clarification as to 
whether paragraph (a)(2) of Rule 3a5-2 was intended to apply to 
resales).
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    In adopting Rule 3a5-2, we have modified the proposal to provide 
that when the bank purchases an eligible security from a broker-dealer 
after the security's initial sale (for resale to a non-U.S. person), 
the bank may rely on its reasonable belief that the eligible security 
was initially sold outside of the U.S. consistent with Rule 903. The 
proposed rule would have allowed a bank to rely on its reasonable 
belief only when it purchases a security from a non-U.S. person, but 
not when it purchases a security from a broker-dealer. We have made 
this change in light of comments we have received, as we are persuaded 
that the process of determining whether a security initially was issued 
in compliance with Regulation S would require banks to obtain the same 
information whether the purchase is from a broker-dealer or a non-U.S. 
person.\22\
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    \22\ See IIB Letter (``In both cases * * * a Bank is required to 
make a determination regarding the manner in which the eligible 
security that is the subject of the transaction was initially 
issued.''); Clearing House Ass'n Letter. Those comments also 
addressed the agency provisions of Rule 771, which has been revised 
in a similar way.
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    As revised, the provisions of Rule 3a5-2 that apply to a bank's 
resale of previously issued Regulation S securities (but not the 
provision related to a bank's sale of a newly issued security) require 
compliance with Rule 904 of Regulation S if the resale is made prior to 
the expiration of the security's distribution compliance period.\23\ We 
also have revised the rule to enhance its clarity and to better conform 
it to Regulation S.\24\
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    \23\ Specifically, the condition requiring compliance with Rule 
904 is included in paragraphs (a)(2) and (a)(3) of the rule, related 
to a bank's resale of previously issued securities. While the 
condition is not included in paragraph (a)(1), related to a bank's 
sale of newly issued securities, because the requirements of Rule 
904 are targeted to resales of Regulation S securities, a bank's 
sale of a newly issued security would still have to comply with Rule 
903 of Regulation S.
    \24\ We are replacing the phrase ``purchaser who is outside of 
the United States within the meaning of 17 CFR 230.903'' with 
``purchaser who is not in the United States'' to better conform to 
Regulation S. We also are making other technical changes, such as 
removing references to ``broker'' and Section 3(a)(4) under the 
Exchange Act, together with conforming changes.
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    Commenters requested that we state that this exemption would 
continue to be available after the expiration of the applicable 
Regulation S distribution compliance period.\25\ Commenters also 
questioned whether it is necessary for the rule to condition the 
exemption on a bank's compliance with Rule 904 of Regulation S if the 
resale is made prior to the end of the Rule 903 distribution 
period.\26\ We can clarify that this rule (like Rule 771) requires the 
bank to meet the conditions of Rule 904 during, but not after, the 
distribution compliance period. During the distribution compliance 
period, a bank thus will have to comply with Regulation S to take 
advantage of the exception. Even after the end of the distribution 
compliance period, however, a bank may rely on this exemption from the 
dealer definition so long as it satisfies the other requirements of 
Rule 3a5-2. After the expiration of the applicable distribution 
compliance period, although the securities may be offered and sold in 
the U.S. pursuant to registration of the securities under the 
Securities Act or pursuant to an available exemption from the 
registration requirements of that Act, the bank will not be permitted 
to sell them to persons other than a broker-dealer or a person who is 
not in the United States.
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    \25\ See IIB Letter (stating that the Proposing Release 
contained language suggesting that would not be the case); Clearing 
House Ass'n Letter.
    \26\ See IIB Letter (stating that it assumed this provision 
merely required compliance with Regulation S to the extent 
applicable, and requested that we confirm that understanding, or 
delete the provision as unnecessary and potentially confusing).
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    One commenter stated that Rule 3a5-2 (as well as Rule 771) simply 
should refer to sales to a ``purchaser,'' rather than, as proposed, 
being specifically limited to sales to a purchaser who is outside the 
U.S.\27\ We decline, however, to expand the exemption beyond offshore 
sales or sales to registered broker-dealers. Consistent with Regulation 
S, which permits the offshore resale of securities, the purpose of the 
exemption is to permit U.S. banks to sell Regulation S securities to 
their foreign customers. It does not permit banks to sell those 
securities domestically.
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    \27\ See IIB Letter (maintaining that the provision would be 
unduly restrictive by ``supporting the erroneous view that the 
Regulation S Exemption expires once an eligible security has been 
seasoned,'' and that the provision is unnecessary given that Rule 
904 of Regulation S specifically imposes an offshore transaction 
requirement on resales effected prior to expiration of the 
applicable seasoning period).
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    Commenters also requested that we clarify that the definition of 
``eligible security'' in Rule 3a5-2 (as well as in Rule 771)--which 
excludes any security sold from the inventory of an affiliate or that 
is underwritten by an affiliate on a firm-commitment basis--would not 
prohibit a bank from effecting Regulation S exempt transactions in 
securities that have been issued by an affiliate.\28\ The ``eligible 
security'' definition in general does not exclude proprietary products 
such as structured

[[Page 56565]]

notes and mutual funds that are issued by affiliates but not 
underwritten on a firm commitment basis. The exclusion of inventory 
securities and securities underwritten on a firm-commitment basis is 
intended to prevent banks from dumping third-party securities overseas. 
It is not intended to extend to all proprietary products issued by a 
bank affiliate. Proprietary products are sold by foreign banks, and 
permitting U.S. banks to sell comparable products will avoid placing 
U.S. banks at a competitive disadvantage with respect to those foreign 
banks.\29 \
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    \28\ See IIB Letter (``Thus, for example, a Bank could sell a 
structured note or other investment product (whether or not 
customized for the particular customer) that is issued by the Bank 
or an affiliate of the Bank, or shares in an offshore mutual fund 
controlled by the Bank or an affiliate of the Bank.''); ABA Letter.
    \29\ Although there could be higher fees associated with 
proprietary securities than with independent investment company 
securities, this also is true with respect to proprietary securities 
sold by foreign banks. Accordingly, we do not believe that these 
potentially higher fees provide a sufficient reason to exclude 
proprietary securities from these exemptions.
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B. Amendment to Exchange Act Rule 15a-6

    We are adopting, without change, a clarifying amendment to Exchange 
Act Rule 15a-6(a)(4)(i).\30\ This amendment conforms Rule 15a-6--which 
in general permits foreign broker-dealers to engage in certain 
transactions involving U.S. persons without having to register as 
broker-dealers--to revisions to the Exchange Act and its underlying 
regulations resulting from GLBA. We received no comment on the proposed 
amendment.
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    \30\ 17 CFR 240.15a-6(a)(4)(i).
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    This amendment updates Rule 15a-6 to reflect the current Exchange 
Act definitions of ``broker'' and ``dealer'' \31\ and their underlying 
rules. While the ``broker'' and ``dealer'' definitions completely 
excluded banks prior to GLBA, now they provide that banks engaging in 
the activities permitted by the conditional exceptions in those 
definitions ``shall not be considered to be'' brokers or dealers. 
Currently, paragraph (a)(4)(i) of Rule 15a-6 permits a foreign broker-
dealer to engage in certain securities activities with a registered 
broker-dealer or with ``a bank acting in a broker or dealer capacity as 
permitted by U.S. law.'' As amended, that paragraph will refer to ``a 
bank acting pursuant to an exception or exemption from the definition 
of `broker' or `dealer' in sections 3(a)(4)(B), 3(a)(4)(E) or 
3(a)(5)(C) of the Act * * * or the rules thereunder.'' \32\ This 
amendment does not change the substance of Rule 15a-6.\33\
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    \31\ Exchange Act Sections 3(a)(4) and 3(a)(5), 15 U.S.C. 
78c(a)(4) and (a)(5).
    \32\ Sections 3(a)(4)(B) of the Exchange Act provide exceptions 
from the ``broker'' definition for certain bank activities, while 
Section 3(a)(4)(E) provides an exception from that definition for 
banks that, prior to the enactment of GLBA, were subject to Exchange 
Act Section 15(e), 15 U.S.C. 78o(e), which requires certain non 
broker-dealer members of national security exchanges to comply with 
the rules that govern broker-dealers. Section 3(a)(5)(C) provides 
exceptions from the ``dealer'' definition for certain bank 
activities.
    \33\ A U.S. bank's foreign affiliate could rely on Rule 15a-
6(a)(4)(i) for transactions with the bank, and the bank could rely 
on the statutory exception regarding affiliate transactions 
(Exchange Act 3(a)(4)(B)(vi), 15 U.S.C. 78c(a)(4)(B)(vi)) for 
transactions with the foreign affiliate. Exchange Act Rule 15a-
6(a)(4)(i), however, does not permit a foreign broker-dealer or bank 
to have direct contact with customers of the U.S. bank. Exchange Act 
Release No. 44291 (May 11, 2001) 66 FR 27760 (May 18, 2001). Of 
course, the exemptions for transactions in Regulation S securities 
we are adopting today (Exchange Act Rule 3a5-2 and Rule 771 of 
Regulation R) will permit a bank to sell Regulation S securities to 
non-U.S. persons, including customers of a foreign affiliate, as 
long as it meets the conditions of that exemption.
    Nothing in this release should be construed as modifying the 
Exchange Act Section 3(a)(6) definition of ``bank'' as it applies to 
foreign banks. Generally, foreign banks doing business with U.S. 
customers will not meet this definition and would be considered 
broker-dealers under the U.S. securities laws. As such, foreign 
banks generally will be required to register as U.S. broker-dealers 
unless they qualify for an exemption from registration under 
Exchange Act Rule 15a-6.
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C. Securities Lending by Bank Dealers

    We are adopting, as proposed, Rule 3a5-3 under the Exchange Act to 
provide banks engaged in certain securities lending transactions with a 
conditional exemption from the definition of ``dealer.'' Rule 3a5-3 
incorporates the dealer provisions of Exchange Act Rule 15a-11, which 
we are withdrawing.\34\
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    \34\ In 2003, the Commission adopted Exchange Act Rule 15a-11 to 
provide an exemption from the definitions of both ``broker'' and 
``dealer'' for banks engaging in securities lending transactions. 
See Exchange Act Release No. 47364 (Feb .13, 2003), 68 FR 8686 (Feb. 
24, 2003) (http://www.sec.gov/rules/final/34-47364.htm). As 

applicable to banks' broker activities, the Rule 15a-11 exemption 
was never operable because of the temporary exemptions applicable to 
all bank broker activities. The Regulatory Relief Act required the 
Commission and the Federal Reserve Board to jointly propose rules 
governing banks' broker activities, and we are adopting Rule 772 of 
Regulation R jointly with the Federal Reserve Board to exempt banks 
from the ``broker'' definition for certain securities lending 
activities. Exchange Act Release No. 56501 (Sept. 24, 2007). The 
Regulatory Relief Act does not directly affect the operation of the 
rules the Commission adopted concerning banks' dealer activities.
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    The rule provides that a bank is exempt from the dealer definition 
to the extent that, as a ``conduit lender,'' \35\ it engages in or 
effects certain ``securities lending transactions'' \36\ and 
``securities lending services'' \37\ in connection with such 
transactions.\38\ The exemption applies only to securities lending 
activities with or on behalf of a person that the bank reasonably 
believes to be: (1) A qualified investor as defined in Section 
3(a)(54)(A) of the Exchange Act; \39\ or (2) any employee benefit plan 
that owns and invests, on a discretionary basis, not less than $25 
million in investments.
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    \35\ Rule 3a5-3(d) defines the term ``conduit lender'' to mean a 
bank that borrows or loans securities, as principal, for its own 
account, and contemporaneously loans or borrows the same securities, 
as principal, for its own account. The rule further states that a 
bank that qualifies under this definition as a conduit lender at the 
commencement of a transaction will continue to qualify, 
notwithstanding whether: (1) The lending or borrowing transaction 
terminates and so long as the transaction is replaced within one 
business day by another lending or borrowing transaction involving 
the same securities; and (2) any substitutions of collateral occur. 
Rule 3a5-3(d).
    \36\ Rule 3a5-3(b) defines the term ``securities lending 
transaction'' to mean a transaction in which the owner of a security 
lends the security temporarily to another party pursuant to a 
written securities lending agreement under which the lender retains 
the economic interests of an owner of such securities, and has the 
right to terminate the transaction and to recall the loaned 
securities on terms agreed by the parties.
    \37\ Rule 3a5-3(c) defines the term ``securities lending 
services'' to mean: (1) Selecting and negotiating with a borrower 
and executing, or directing the execution of the loan with the 
borrower; (2) receiving, delivering, or directing the receipt or 
delivery of loaned securities; (3) receiving, delivering, or 
directing the receipt or delivery of collateral; (4) providing mark-
to-market, corporate action, recordkeeping or other services 
incidental to the administration of the securities lending 
transaction; (5) investing, or directing the investment of, cash 
collateral; or (6) indemnifying the lender of securities with 
respect to various matters.
    \38\ Rule 3a5-3(a).
    \39\ 15 U.S.C. 78c(a)(54)(A). In part, this definition 
encompasses corporations and partnerships with at least $25 million 
in investments.
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    We are adopting the rule as proposed to permit banks to continue to 
engage in securities lending as conduit lenders, under the conditions 
they have followed since Rule 15a-11 became effective in 2003.\40\ One 
commenter took the position--in the parallel context of banks' agency 
activities--that banks should be able to engage in securities lending 
services for institutional customers that have less than $25 million in 
investments.\41\ We have, however, not expanded the group of persons 
with or on behalf of which a bank may rely on the securities lending 
exemption, inasmuch as we believe that the parameters of the exemption 
reflect banks' existing securities lending businesses.\42\
---------------------------------------------------------------------------

    \40\ One commenter specifically emphasized the need for a 
securities lending exemption to continue to apply to a bank's 
conduit lending activity. See America's Community Bankers Letter.
    \41\ See Union Bank of California Letter.
    \42\ Broker-dealers are the most frequent borrowers of 
securities. In this context, we note that borrowers of securities 
who are not qualified investors do not directly borrow securities 
from noncustodial banks, but instead generally borrow securities 
through intermediaries that would be qualified investors. The rule, 
however, permits banks to lend securities to employee benefit plans 
with at least $25 million in investments, even though those plans do 
not meet all of the requirements of the ``qualified investor'' 
definition, yet are sophisticated market participants. That latter 
provision in part addresses industry concerns. See Letter from 
Edward J. Rosen, Cleary, Gottlieb, Stein & Hamilton, to Annette 
Nazareth, Director, Division of Market Regulation, Commission, dated 
Oct. 9, 2002 (requesting that the exemption encompass banks' 
securities lending activity involving any entity that owns and 
invests on a discretionary basis at least $25 million in 
investments).

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[[Page 56566]]

    Some commenters suggested exempting banks involved in securities 
repurchase and reverse repurchase transactions for non-exempt 
securities from the ``dealer'' definition, based on the view that 
repurchase and reverse repurchase activities constitute the functional 
equivalent of financing or securities lending activities.\43\ We and 
the Federal Reserve Board are soliciting comments about banks' 
involvement in repurchase and reverse repurchase transactions, as 
discussed more fully in the Joint Adopting Release. The information we 
receive through this process should help inform any future actions the 
Commission may take in this area.
---------------------------------------------------------------------------

    \43\ See ABA Letter (specifically addressing repurchase 
transactions involving non-exempt corporate debt; stating that while 
banks could provide similar financing services by converting 
repurchases into secured loans, they would have weaker creditor 
rights in bankruptcy; also stating that some investors may be 
permitted by governing documents to enter into repurchases, but not 
secured loans); Clearing House Ass'n Letter (``We note that 
providing financing and liquidity to customers via repurchase and 
reverse repurchase transactions is a traditional banking activity, 
and permitting banks to engage in such transactions with respect to 
non-exempt securities will benefit customers that do not have exempt 
securities against which to borrow.''); Citigroup Letter (``Given 
the economic equivalence between repurchase and reverse repurchase 
transactions and the traditional bank activity of secured lending, 
it is unclear why the exemption from dealer registration has been 
limited to transactions involving only exempted securities.''); IIB 
Letter (stating that repurchase transactions are the functional 
equivalent of securities lending, and also questioning whether these 
transactions actually constitute securities transactions for 
purposes of the GLBA push-out provisions). One commenter also urged 
the Commission to consider an exemption for banks engaged in 
repurchase transactions in an agency capacity. See Clearing House 
Ass'n Letter.
    Banks are permitted by statutory exception to engage in purchase 
and sale activities with respect to exempt securities such as 
government securities. Exchange Act Section 3(a)(5)(C)(i)(II).
---------------------------------------------------------------------------

D. Withdrawal of Exchange Act Rule 3b-9, Rule 15a-8, and Rule 15a-9

    Finally, we are withdrawing three outdated rules under the Exchange 
Act. No commenters addressed the proposed withdrawal of these rules.
    We are withdrawing Exchange Act Rule 3b-9, in which the Commission 
defined the term ``bank'' for purposes of the Exchange Act definitions 
of ``broker'' and ``dealer,'' because the rule was invalidated by the 
U.S. Court of Appeals for the District of Columbia Circuit.\44\ We also 
are withdrawing Exchange Act Rule 15a-8, which provided a temporary 
exemption--that has since expired--from Exchange Act Section 29 
liability for banks' securities activities. In addition, we are 
withdrawing Exchange Act Rule 15a-9, which provides an exemption from 
the definitions of ``broker'' and ``dealer'' for savings associations 
and savings banks. The Regulatory Relief Act made Rule 15a-9 
unnecessary by causing savings associations and savings banks to be 
treated as ``banks,'' thus eliminating the need to differentiate 
between these entities for the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \44\ American Bankers Association v. SEC, 804 F.2d 739 (D.C. 
Cir. 1986).
---------------------------------------------------------------------------

III. Administrative Law Matters

A. Paperwork Reduction Act Analysis

    These rules and rule amendments do not impose recordkeeping or 
information collection requirements, or other collections of 
information that require approval of the Office of Management and 
Budget under 44 U.S.C. 3501, et seq. Accordingly, the Paperwork 
Reduction Act does not apply.\45\ We received no comments on this 
issue.
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    \45\ We note that, as a practical matter, banks likely already 
keep records that could be used to show they meet the terms of the 
exemption. We also note that Section 203 of the GLBA specifically 
requires the bank regulators to promulgate recordkeeping 
requirements.
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B. Consideration of Benefits and Costs

    We believe the rules and rule amendments that we are adopting are 
consistent with Congress's intent in enacting the GLBA, and will 
facilitate banks' compliance with the federal securities laws and 
provide banks with greater legal certainty regarding their conduct with 
respect to securities transactions. These changes are very limited in 
scope. Specifically, we are: (1) Adopting Exchange Act Rule 3a5-2 to 
permit banks to purchase from and sell to non-U.S. persons and 
registered broker-dealers securities exempt under Regulation S; (2) 
adopting a clarifying amendment to Exchange Act Rule 15a-6 to conform 
the rule to the revised statutory definition of ``broker'' and 
``dealer'' under the Exchange Act as well as to the rules adopted 
thereunder, without changing the substance of the exemption; (3) 
amending Exchange Act Rule 15a-11 to eliminate its reference to banks' 
``broker'' activities and clarify its continued availability for banks' 
``dealer'' activities, and redesignating it as Rule 3a5-3; and (4) 
withdrawing three outdated rules under the Exchange Act--Rule 3b-9 
because of its invalidation by the U.S. Court of Appeals for the 
District of Columbia Circuit; Rule 15a-8(b) because that exemption 
expired on March 31, 2005; and Rule 15a-9, which is no longer necessary 
after passage of the Regulatory Relief Act. In light of comments 
received, we are adopting Rule 3a5-2 with changes to make the rule more 
flexible and to address technical matters. We are adopting the other 
rule changes as proposed. We received no comments on the costs and 
benefits of these rule changes.\46\
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    \46\ As discussed in the release adopting Regulation R, two 
commenters stated that the start-up and ongoing costs of complying 
with Regulation R will be significant, that the Agencies 
underestimated the amount of time associated with compliance, and 
that the Agencies should modify Regulation R to reduce the cost 
burden. See Ass'n of Colorado Trust Companies letter; Fiserv Trust 
Company letter. Those comments, which were general in nature, did 
not discuss the Exchange Act ``dealer'' amendments addressed here.
---------------------------------------------------------------------------

    Rule 3a5-2, by permitting banks to purchase from and sell to non-
U.S. persons and registered broker-dealers securities that are exempt 
under Regulation S, provides the benefit of allowing U.S. banks to 
engage in overseas Regulation S transactions on the same basis as 
foreign banks, subject to terms that are reasonably crafted to maintain 
appropriate standards of functional regulation and investor protection. 
In adopting this rule, we have liberalized the proposal to permit banks 
to rely on their ``reasonable belief'' that the securities initially 
were sold in compliance with Regulation S when purchasing from a 
broker-dealer, as well as when purchasing from a non-U.S. person. This 
change is intended to prevent banks from losing the exemption due to 
inadvertent errors in identifying the source of securities sold under 
the exemption. We believe that permitting banks to engage in these 
Regulation S transactions on a riskless principal basis will provide 
banks with competitive benefits, without imposing significant 
costs.\47\
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    \47\ Under their current blanket exemption from broker 
registration, banks have been able to engage in economically 
equivalent transactions in an agency capacity. This exemption will 
permit banks to engage in such activities in a riskless principal 
capacity, without substantially changing either the costs of the 
activities or the benefits provided. Further, Exchange Act Rule 3a5-
1 already exempts banks from acting as ``dealers'' for engaging in 
riskless principal transactions, provided that they engage in fewer 
than 500 such transactions per year in the aggregate under the 
exemption and the de minimis broker exception in Exchange Act 
Section 3(a)(4)(b)(vi).
---------------------------------------------------------------------------

    The revisions to Rules 15a-6 and 15a-11, and the redesignation of 
Rule 15a-11 as Rule 3a5-3, are technical in nature to bring those rules 
up-to-date in light

[[Page 56567]]

of the GLBA and the Regulatory Relief Act without changing their 
substance in the context of banks' dealer activities. Moreover, the 
withdrawal of the three outdated Rules 3b-9, 15a-8(b), and 15a-9 under 
the Exchange Act is administrative in effect. These changes will impose 
no costs and will provide administrative certainty and clarity.

C. Consideration of Burden on Competition, and on Promotion of 
Efficiency, Competition, and Capital Formation

    Section 3(f) of the Exchange Act requires the Commission, whenever 
it engages in rulemaking and is required to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider whether the action will promote efficiency, competition, 
and capital formation.\48\ In addition, Section 23(a)(2) of the 
Exchange Act requires the Commission, when making rules under the 
Exchange Act, to consider the impact such rules would have on 
competition.\49\ Exchange Act Section 23(a)(2) prohibits the Commission 
from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. We received no comment on these issues.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78w(a)(2).
    \49\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    We do not believe that the rules and rule amendments addressed here 
will result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. The 
rules and rule amendments will provide exemptions for banks that are 
consistent with the exceptions added to the Exchange Act by Congress in 
the GLBA. They will not impose any additional competitive burdens on 
banks engaging in a securities business, other than those imposed by 
Congress through functional regulation in the GLBA. The revisions to 
Rules 15a-6 and 15a-11, and the redesignation of Rule 15a-11 as Rule 
3a5-3, are technical in nature to bring those rules up-to-date in light 
of the GLBA and the Regulatory Relief Act without changing their 
substance in the context of banks' dealer activities. Further, the 
withdrawal of Rules 3b-9, 15a-8(b), and 15a-9 is administrative in 
nature, and will not have any impact on efficiency, competition or 
capital formation.
    As we noted in the proposing release, the types of dealer 
activities that are the subject of these rules and rule amendments 
generally are not the types of activities in which small banks or small 
broker-dealers directly participate, and accordingly there will likely 
be little, if any, competitive costs to small banks.
    We do not believe that the rules and rule amendments impose any 
effects on efficiency, competition, or capital formation that are not a 
consequence of the GLBA statutory provisions. Rule 3a5-2 and Rule 3a5-3 
in particular make it easier for banks to conduct sales of Regulation S 
securities to persons located abroad and securities lending activities, 
respectively, after the GLBA changes to the federal securities laws. 
More generally, the rules and rule amendments also give banks enhanced 
legal certainty for these securities activities. Nothing in the rules 
and rule amendments will adversely affect capital formation. In 
enacting the GLBA, Congress adopted functional regulation for bank 
securities activities, with certain exceptions from Commission 
oversight for specified activities. These rules and rule amendments are 
consistent with Congress' intent and make it easier for banks to comply 
with the requirements of the GLBA.

D. Regulatory Flexibility Certification

    Pursuant to Section 605(b) of the Regulatory Flexibility Act 
(``RFA''),\50\ the Commission certifies that the rules and rule 
amendments will not have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \50\ 5 U.S.C. 603.
---------------------------------------------------------------------------

    In the proposing release, the Commission requested written comments 
on matters discussed in the initial regulatory flexibility analysis 
(``IRFA''), particularly on (a) the number of small entities that would 
be affected by the amendments; (b) the nature of any impact the 
amendments would have on small entities and empirical data supporting 
the extent of the impact; and (c) how to quantify the number of small 
entities that would be affected by and/or how to quantify the impact of 
the amendments. We received no comments and believe that the rules and 
rule amendments will not have a significant economic impact on a 
substantial number of small entities.

IV. Statutory Authority

    Pursuant to authority set forth in the Exchange Act and 
particularly Sections 3(a)(4), 3(b), 15, 17, 23(a), and 36 thereof (15 
U.S.C. 78c(a)(4), 78c(b), 78o, 78q, 78w(a), and 78mm, respectively) the 
Commission is repealing current Rules 3b-9, 15a-8(b), and 15a-9 
(Sec. Sec.  240.3b-9, 240.15a-8(b), and 240.15a-9, respectively). 
Pursuant to the same authority, the Commission also is adopting 
Exchange Act Rule 3a5-2 (Sec.  240.3a5-2) adopting the amendments to 
Exchange Act Rule 15a-6 (Sec.  240.15a-6), and adopting amendments to 
and redesignating Exchange Act Rule 15a-11 as Rule 3a5-3 (Sec.  
240.15a-11 and Sec.  240.3a5-3, respectively).

V. Text of Final Rules and Rule Amendments

List of Subjects in 17 CFR Part 240

    Broker-dealers, Reporting and recordkeeping requirements, 
Securities.

0
For the reasons set forth in the preamble, Title 17, Chapter II of the 
Code of Federal Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for part 240 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise 
noted.

* * * * *

0
2. Sections 240.3a5-2 and 240.3a5-3 are added to read as follows:


Sec.  240.3a5-2  Exemption from the definition of ``dealer'' for banks 
effecting transactions in securities issued pursuant to Regulation S.

    (a) A bank is exempt from the definition of the term ``dealer'' 
under section 3(a)(5) of the Act (15 U.S.C. 78c(a)(5)), to the extent 
that, in a riskless principal transaction, the bank:
    (1) Purchases an eligible security from an issuer or a broker-
dealer and sells that security in compliance with the requirements of 
17 CFR 230.903 to a purchaser who is not in the United States;
    (2) Purchases from a person who is not a U.S. person under 17 CFR 
230.902(k) an eligible security after its initial sale with a 
reasonable belief that the eligible security was initially sold outside 
of the United States within the meaning of and in compliance with the 
requirements of 17 CFR 230.903, and resells that security to a 
purchaser who is not in the United States or to a registered broker or 
dealer, provided that if the resale is made prior to the expiration of 
any applicable distribution compliance period specified in 17 CFR 
230.903(b)(2) or (b)(3), the resale is made in compliance with the 
requirements of 17 CFR 230.904; or

[[Page 56568]]

    (3) Purchases from a registered broker or dealer an eligible 
security after its initial sale with a reasonable belief that the 
eligible security was initially sold outside of the United States 
within the meaning of and in compliance with the requirements of 17 CFR 
230.903, and resells that security to a purchaser who is not in the 
United States, provided that if the resale is made prior to the 
expiration of any applicable distribution compliance period specified 
in 17 CFR 230.903(b)(2) or (b)(3), the resale is made in compliance 
with the requirements of 17 CFR 230.904.
    (b) Definitions. For purposes of this section:
    (1) Distributor has the same meaning as in 17 CFR 230.902(d).
    (2) Eligible security means a security that:
    (i) Is not being sold from the inventory of the bank or an 
affiliate of the bank; and
    (ii) Is not being underwritten by the bank or an affiliate of the 
bank on a firm-commitment basis, unless the bank acquired the security 
from an unaffiliated distributor that did not purchase the security 
from the bank or an affiliate of the bank.
    (3) Purchaser means a person who purchases an eligible security and 
who is not a U.S. person under 17 CFR 230.902(k).
    (4) Riskless principal transaction means a transaction in which, 
after having received an order to buy from a customer, the bank 
purchased the security from another person to offset a contemporaneous 
sale to such customer or, after having received an order to sell from a 
customer, the bank sold the security to another person to offset a 
contemporaneous purchase from such customer.


Sec.  240.3a5-3  Exemption from the definition of ``dealer'' for banks 
engaging in securities lending transactions.

    (a) A bank is exempt from the definition of the term ``dealer'' 
under section 3(a)(5) of the Act (15 U.S.C. 78c(a)(5)), to the extent 
that, as a conduit lender, it engages in or effects securities lending 
transactions, and any securities lending services in connection with 
such transactions, with or on behalf of a person the bank reasonably 
believes to be:
    (1) A qualified investor as defined in section 3(a)(54)(A) of the 
Act (15 U.S.C. 78c(a)(54)(A)); or
    (2) Any employee benefit plan that owns and invests, on a 
discretionary basis, not less than $25,000,000 in investments.
    (b) Securities lending transaction means a transaction in which the 
owner of a security lends the security temporarily to another party 
pursuant to a written securities lending agreement under which the 
lender retains the economic interests of an owner of such securities, 
and has the right to terminate the transaction and to recall the loaned 
securities on terms agreed by the parties.
    (c) Securities lending services means:
    (1) Selecting and negotiating with a borrower and executing, or 
directing the execution of the loan with the borrower;
    (2) Receiving, delivering, or directing the receipt or delivery of 
loaned securities;
    (3) Receiving, delivering, or directing the receipt or delivery of 
collateral;
    (4) Providing mark-to-market, corporate action, recordkeeping or 
other services incidental to the administration of the securities 
lending transaction;
    (5) Investing, or directing the investment of, cash collateral; or
    (6) Indemnifying the lender of securities with respect to various 
matters.
    (d) For the purposes of this section, the term conduit lender means 
a bank that borrows or loans securities, as principal, for its own 
account, and contemporaneously loans or borrows the same securities, as 
principal, for its own account. A bank that qualifies under this 
definition as a conduit lender at the commencement of a transaction 
will continue to qualify, notwithstanding whether:
    (1) The lending or borrowing transaction terminates and so long as 
the transaction is replaced within one business day by another lending 
or borrowing transaction involving the same securities; and
    (2) Any substitutions of collateral occur.


Sec.  240.3b-9  [Removed and reserved]

0
3. Section 240.3b-9 is removed and reserved.

0
4. Section 240.15a-6 is amended by revising paragraph (a)(4)(i) to read 
as follows:


Sec.  240.15a-6  Exemption of certain foreign brokers or dealers.

    (a) * * *
    (4) * * *
    (i) A registered broker or dealer, whether the registered broker or 
dealer is acting as principal for its own account or as agent for 
others, or a bank acting pursuant to an exception or exemption from the 
definition of ``broker'' or ``dealer'' in sections 3(a)(4)(B), 
3(a)(4)(E), or 3(a)(5)(C) of the Act (15 U.S.C. 78c(a)(4)(B), 15 U.S.C. 
78c(a)(4)(E), or 15 U.S.C. 78c(a)(5)(C)) or the rules thereunder;
* * * * *


Sec.  240.15a-8  [Removed and reserved]

0
5. Section 240.15a-8 is removed and reserved.


Sec.  240.15a-9  [Removed and reserved]

0
6. Section 240.15a-9 is removed and reserved.


Sec.  240.15a-11  [Removed and reserved]

0
7. Section 240.15a-11 is removed and reserved.
* * * * *

    By the Commission.

    Dated: September 24, 2007.
Nancy M. Morris,
Secretary.
 [FR Doc. E7-19093 Filed 10-2-07; 8:45 am]

BILLING CODE 8011-01-P
