As the business of brokers and bankers continues to converge, Alan Greenspan and the U.S. Federal Reserve Board are worried about regulatory encroachment by the U.S. Securities and Exchange Commission.

The Fed has joined the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation expressing their concerns in a letter to the SEC over the SEC’s interim rules to implement provisions of the Gramm-Leach-Bliley Act. The legislation is breaking down some of the decades-old barriers between bankers and brokers.

“We have very serious concerns about the validity and content of a number of provisions of the interim final rules, as well as the process the commission employed to issue them,” the letter states.

The rules implement provisions of the Gramm-Leach-Bliley Act that eliminate the blanket exemptions for banks from the definitions of broker and dealer and replace those exemptions with more specific activity-focused exemptions. Congress designed the new exemptions to permit banks to continue providing trust, fiduciary, custodial, and other traditional banking services to meet customers financial needs.

The banking regulators write that the “rules create an extremely burdensome regime of overly complex, costly and unworkable requirements that effectively negate the statutory exemptions and the congressional intent underlying those exemptions. By regulating and restricting banking operations, the rules adopt an approach that is fundamentally inconsistent with the principles of functional regulation that underlie the GLB Act.”

The rules are premised on misunderstandings of how banks work, states the latter, and “will significantly disrupt and may force discontinuation of major lines of business for banks and longstanding relationships with their customers.”

The SEC’s rules also were issued without the benefit of the normal notice and public comment, say the regulators. “Given the critical flaws in the rules and their impact, we strongly urge the commission to take steps immediately to formally treat the rules as proposed rules and take the steps necessary to address the concerns outlined in this letter.”