Networking Arrangements

When a member operates a desk inside a bank branch, the customer must understand that securities are not bank deposits. The networking-arrangement framework sets the customer-protection mechanic, while the Gramm-Leach-Bliley Act's amendments to the SEA "broker" definition set the rules for when a bank itself is treated as a broker.

What a "Networking Arrangement" Is

A networking arrangement is a contractual or other written agreement between a FINRA member and a financial institution under which the member offers broker-dealer services on or off the institution's premises.

• "Financial institution" generally means a bank, savings association, or credit union
• The member, not the financial institution, is the registered broker-dealer offering the securities services
• The arrangement may be inside the bank lobby, in a separate room, or off-site under shared marketing

Think of it this way: A networking arrangement is a member's bank-branch desk. The bank rents the space and provides the customer flow; the member provides registered persons, products, and supervision. The networking-arrangement framework makes sure the customer knows which entity is doing what.

Required Written Agreement

The networking-arrangement framework requires the arrangement to be in writing, and the agreement must:

• Set forth the responsibilities of the parties (which entity does what)
• Specify the compensation arrangements between the member and the financial institution
• Incorporate all applicable broker-dealer obligations under SEC Regulation R (the joint SEC and Federal Reserve framework that allows banks to participate in networking arrangements without registering as a broker)
• Allow member supervisory personnel, SEC staff, and FINRA staff access to the financial institution's premises to inspect books and records related to broker-dealer services

Customer Disclosure Requirements

Customer disclosures protect customers from confusing securities purchased through a member at a bank branch with bank deposits. Disclosures must be made at or prior to account opening.

The substantive disclosure content must include all of the following:

• Securities products are not FDIC-insured
• Securities products are not deposits or obligations of the financial institution
• Securities products are not guaranteed by the financial institution
• Securities products are subject to investment risks, including possible loss of principal

Exam Tip: Gotchas

• Oral disclosure is triggered by the location of the account opening, not the location of the customer. An account opened on the bank's premises requires oral disclosure even if the customer is a long-time relationship. An account opened over the phone or online from a non-bank location requires only the written disclosure.
• The "not FDIC-insured / not a deposit / not guaranteed / subject to investment risk" content is the substance. Any disclosure that omits any of these four elements fails the rule even if the customer otherwise understands the arrangement.

Physical Separation and Identification

To prevent customer confusion, the member must distinguish its services from the financial institution's services through physical and signage cues.

• The member must be clearly identified as the broker-dealer service provider
• Broker-dealer services must be distinguished from the financial institution's services
• The area must clearly display the member's name
• To the extent practicable, broker-dealer services must be physically separate from the routine retail deposit-taking activities of the financial institution

The "to the extent practicable" qualifier on physical separation acknowledges that small bank branches may not have separate rooms. Where physical separation is not feasible, signage and identification become the primary protection.

Compensation to Bank Employees

A networking arrangement may permit a member to pay an unregistered bank employee only a one-time nominal cash referral fee, contingent on the customer contacting the broker-dealer.

• The fee must be one-time per referral, not recurring
• The fee must be nominal in amount (the rule does not set a dollar threshold; nominal is interpreted by reference to industry practice and what a typical employee would consider an incentive rather than transaction-based compensation)
• The fee is contingent on the customer contacting the broker-dealer, not on whether the customer opens an account or executes a trade
• Transaction-based compensation to unregistered bank employees is prohibited (a fee that scales with the size of the trade, the number of trades, or the customer's assets is broker activity that requires registration)

Exam Tip: Gotchas

• A nominal one-time cash referral fee is the only compensation a member may pay an unregistered bank employee. A graduated fee (more for bigger accounts) crosses into transaction-based compensation, which the payments-to-unregistered-persons prohibition forbids without registration.
• The fee is contingent on customer contact, not on account opening. A bank teller earns the referral fee when the customer calls the broker-dealer, even if the customer never opens an account. Conditioning the fee on a completed transaction is the kind of structure that converts the teller into an unregistered broker.

Bank Broker Exceptions (GLBA Functional Exceptions)

The historical full bank exception from "broker" was replaced by the Gramm-Leach-Bliley Act (GLBA) with functional exceptions in the SEA "broker" definition. A bank is not treated as a "broker" when it engages in any of the listed exempted securities activities.

The most-tested exempted activities are:

• Third-party networking arrangements with a registered broker-dealer (the bank-branch networking setup)
• Trust and fiduciary activities (subject to the chiefly-compensated test, which restricts compensation paid for trustee or fiduciary services)
• Deposit sweep activities into no-load money market funds
• Custody and safekeeping activities for customer accounts
• Limited transactions in exempt securities, stock purchase plans, affiliate transactions, private securities offerings, identified banking products, municipal securities, and a de minimis number of other securities transactions

Activities outside these exceptions must be "pushed out" to a registered broker-dealer (the broker push-out rule). A bank that wants to engage in securities activities not covered by an exception must either register as a broker-dealer itself or push the activity to its registered broker-dealer affiliate.

Exam Tip: Gotchas

• GLBA replaced the bank exception with functional exceptions. The pre-GLBA "banks are never brokers" rule is gone. A bank now relies on a specific GLBA functional exception for each securities activity it conducts; if the activity does not fit an exception, the bank must push it to a registered B/D or itself register.
• The networking-arrangement bank-employee carve-out is narrow. A bank employee may receive a one-time nominal cash referral fee without registering. The moment the fee becomes transaction-based, the employee is acting as a broker and must register, and the bank loses the GLBA networking exception for that activity.