This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents. Prices of

new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

9909

Vol. 62, No. 43

Wednesday, March 5, 1997

1 44 FR 43258 (July 24, 1979). The OCC and the

FDIC adopted similar rules on the same date, 12

CFR Part 12, 44 FR 43252 (July 24, 1979) and 12

CFR Part 344, 44 FR 43261 (July 24, 1979),

respectively.

2SEC rule 10b-10, 17 CFR 240.10b-10; rule 17a3, 17 CFR 240.17a-3; and rule 17a-4, 17 CFR

240.17a-4, all adopted under the Securities

Exchange Act.

3 60 FR 66759.

4The OCC published amendments for comment

on December 22, 1995, 60 FR 66517, and adopted

final amendments on December 2, 1996, 61 FR

63958. The FDIC published an advanced notice of

rulemaking on its regulation on May 24, 1996, 61

FR 26135 and published amendments for comment

on December 24, 1996, 61 FR 67729.

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Regulation H; Docket No. R–0909]

Membership of State Banking

Institutions in the Federal Reserve

System; Recordkeeping and

Confirmation of Certain Securities

Transactions Effected by State

Member Banks

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Final rule.

SUMMARY: The Board of Governors of the

Federal Reserve System is adopting final

amendments to Regulation H pertaining

to the recordkeeping and confirmation

of certain securities transactions. The

amendments accommodate

developments in recordkeeping,

confirmation and settlement

requirements for broker-dealers by

adding certain yield-related

confirmation disclosure requirements

for transactions involving debt and

asset-backed securities effected by State

member banks for customers, and

providing for three-day settlement of

those transactions. The amendments

also clarify that State member banks that

effect de minimis government securities

brokerage transactions and are exempt

from registration under Department of

the Treasury regulations, also are

exempt from Regulation H. Finally, the

amendments address the minimum

recordkeeping requirements for State

member banks exempt from the

regulation, require State member banks

to establish trading policies and

procedures that separate the sales

function from the back office function,

liberalize the written notification

requirements for periodic plans, and

include several new definitions and

language edits.

DATES: Effective April 1, 1997.

FOR FURTHER INFORMATION CONTACT:

Angela Desmond, Senior Counsel, or

Susan Meyers, Senior Securities

Regulation Analyst, (202) 452–2781. For

users of Telecommunications Device for

the Deaf (TDD), please contact Dorothea

Thompson, (202/452–3544), Board of

Governors of the Federal Reserve

System, Washington, D.C. 20551.

SUPPLEMENTARY INFORMATION: The

amendments to § 208.24 are part of an

interagency effort to update the

respective regulations of the Board, the

OCC and the FDIC (agencies) that were

adopted in 1979 1 as part of a

coordinated effort to provide guidance

to banks effecting securities transactions

for customers in trust departments and

in other areas of the bank. The

regulations are based on SEC

recordkeeping and confirmation rules. 2

Recognizing that a number of market

and regulatory changes have occurred

since the regulation was adopted, the

Board, in consultation with the other

agencies, published draft amendments

for comment on December 26, 1995. 3

The draft amendments were designed to

update the recordkeeping and

confirmation requirements of Regulation

H to conform with SEC rules, with

pertinent Department of the Treasury

regulations adopted under the

Government Securities Act of 1986, 15

U.S.C. 78o–5, and with principles of

safe and sound banking practices. The

draft amendments also were consistent

with the amendments published by the

other agencies. 4

After reviewing the comments, the

Board has determined to adopt final

amendments to Regulation H as

described in the section-by-section

summary below. The amendments are

limited to § 208.24 (formerly § 208.8(k))

of Regulation H and are part of an

ongoing comprehensive review of the

regulation. Adoption of the amendments

will provide continued consistency

among the regulations of the agencies

and parity with securities industry

practices in these important areas.

As is the practice with respect to

other notification practices of banks, the

confirmation and notification

requirements of § 208.24 can be satisfied

by facsimile and, when the parties agree

and the necessary safeguards are in

place, via electronic means. Such

safeguards should ensure correct

delivery, the maintenance of

confidentiality and security of the

transmission, appropriate notice that the

transmission is being sent, and evidence

of delivery. In addition, a customer

consenting to electronic delivery should

still be able to request and obtain a

written version of the information.

Summary of Comments and Section-bySection Summary of Final Amendments

The Board received twelve comment

letters; seven were from Federal Reserve

Banks, one from a trade association,

three from banks, and one from a law

firm. Eleven commenters expressed

general support for the proposed

amendments, and one bank expressed

general concern with the complexity

and burden of complying with the

regulation. Six commenters stated that

the proposed amendments would not

have a significant cost or burden impact

on banks.

Several commenters offered

constructive suggestions that were

incorporated into the final amendments.

In addition, certain organizational

changes have been made to assure as

much consistency as possible between

the respective regulations of the

agencies. A section-by-section summary

of the final amendments noting changes

from the amendments proposed for

comment follows.

Section 208.24(a) Exceptions and Safe

and Sound Operations

The exceptions previously found in

current § 208.8(k)(6) and the new

section related to safe and sound

operations for banks exempt from

§ 208.24 have been combined into one

subsection and moved to the front of the

regulation, to § 208.24(a). This makes it

easier for State member banks to

determine whether they qualify for an

exemption from the regulation, and if

so, what recordkeeping procedures are

expected.
9910 Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules and Regulations

5Notwithstanding the provisions of this

paragraph, banks that retain custody of government

securities that are the subject of a hold-in-custody

purchase agreement are subject to the requirements

of 17 CFR 403.5(d).

The Board is adopting the proposed

language in § 208.24(a)(1)(B), which

clarifies that State member banks that

effect up to 500 government securities

brokerage transactions and are exempt

from registration under Department of

the Treasury regulation 401.3(a)(2)(i), 17

CFR 401.3(a)(2), also are exempt from

§ 208.24. This exemption is not

available if a bank has filed notice or is

required to file notice indicating that it

acts as a government securities broker or

dealer.

The Board also is adopting, with the

support of the commenters, a provision

on safe and sound operations for banks

exempt from § 208.24. The provision

codifies the longstanding interpretation

of Board staff that principles of safety

and soundness require such a bank to

maintain effective systems of records

and controls regarding customer

securities transactions that reflect

accurate information and are sufficient

to provide an adequate basis for an audit

of the information.

Section 208.24(b) Definitions

The amendments add definitions of:

asset-backed security, completion of the

transaction, crossing of buy and sell

orders, debt security, government

security, and municipal security. In

general, the new definitions are based

on definitions contained in the

Securities Exchange Act, or in the SEC’s

confirmation rule 10b–10, 17 CFR

240.10b–10, and are necessary for

applying the confirmation disclosure

and the three-day settlement

requirements. The definition of

‘‘security’’ has been amended to

conform generally to the definition in

section 3(a)(10) of the Securities

Exchange Act, 15 U.S.C. 78c(a)(10),

although the Board has retained the

current exclusions from the definition

in the final rule.

The definition of ‘‘periodic plan’’ has

been modified to include cash

management sweep services or other

prearranged automated transfers of

funds from a deposit account to

purchase a security in response to

commenters seeking clarification how

the transaction notification

requirements for periodic plans apply to

automatic sweep or transfer

arrangements. Finally, the term ‘‘dealer

bank’’ in the definition of ‘‘customer’’

has been replaced by the term

‘‘municipal securities broker or dealer’’

to clarify that a bank acting as a

municipal securities broker is not a

customer for purposes of § 208.24.

Section 208.24(c) Recordkeeping

The Board is adopting language in

§ 208.24(c) that clarifies that § 208.24

applies to government securities

transactions effected for customers by

State member banks and to municipal

securities transactions effected by State

member banks that are not registered as

municipal securities dealers. All

recordkeeping requirements are now

located in § 208.24(c), and explanatory

language that was at the end of the old

recordkeeping section has been moved

to the beginning of the rule to simplify

the section.

Section 208.24(d) Content and Time of

Notification

Section 208.24(d) has been renamed

to clarify its subject matter.

Substantively, the amendments delete

the old five business day requirement

for confirmation delivery and provide

that confirmations be given or sent to

customers ‘‘at or by completion of the

transaction,’’ defined as the payment

and delivery of the securities in

§ 208.24(b).

The proposed amendments would

have deleted the extension of time for

State member banks that choose to send

confirmations from the executing broker

to a customer rather than creating their

own confirmations. In response to a

commenter who stated that it may be

difficult to meet the three-day delivery

requirement in this situation,

§ 208.24(d) now provides that if a State

member bank uses a broker-dealer’s

confirmation, it must give or send the

confirmation to its customer within one

business day of the bank’s receipt of the

confirmation.

As proposed, the final amendments

require confirmations to: (i) Contain a

legend when the security is callable

prior to maturity indicating that an early

redemption could affect the yield stated

on the confirmation and offering

additional information on request

(§ 208.24(d)(2)(viii)); (ii) disclose the

yield and/or resulting dollar price of

transactions involving debt securities

and asset-backed securities

(§ 208.24(d)(2) (ix) and (x)); and, (iii)

indicate when a debt security, other

than a government security, is unrated

by a nationally recognized statistical

rating organization (§ 208.24(d)(2)(xii)).

These disclosures conform bank

confirmations with those of brokerdealers under SEC rule 10b–10 and with

longstanding practice in the municipal

securities industry.

The Board had requested comment

whether it would be preferable to

incorporate SEC rules 10b–10, 17a–3

and 17a–4 by reference for State

member banks to refer to, rather than

specify items of confirmation disclosure

in the regulation. All of the comments

received on this issue preferred the

current approach, i.e., to specify the

disclosures required to be contained on

confirmations in the regulation.

Section 208.24(d)(2)(vi) requires

banks to disclose on confirmations the

amount of any remuneration received by

the bank on the transaction. In response

to commenters who pointed out that

SEC rule 10b–10(a)(2)(i)(D) provides

more flexibility to brokers in this area,

the final amendments provide that a

State member bank may elect to disclose

whether it has or will receive

remuneration from a party other than

the customer and offer to furnish the

information within a reasonable time on

request.

Section 208.24(e) Notification by

Agreement; Alternative Forms and

Times

Section 208.24(e) has been renamed to

indicate that it deals with alternative

arrangements for the delivery of

notifications of securities transactions to

customers. Substantive changes have

been made to § 208.24(e)(5), pertaining

to notifications of transactions in

periodic plans, to conform more

completely with securities industry

requirements. Formerly, the regulation

required that a notification be provided

to a customer ‘‘as soon as possible after

each transaction.’’ The Board is

amending this requirement to require

notification ‘‘not less than every three

months’’ for all periodic plans other

than cash management sweep accounts.

As requested by two commenters, the

final amendments provide that a

notification of a transaction involving a

cash management sweep service should

be given or sent to a customer ‘‘for each

month in which a securities transaction

takes place but not less than every three

months if there are no securities

transactions.’’ 5 These amendments will

provide more flexibility to State member

banks in scheduling notifications in

periodic plans and conform with SEC

rule 10b–10(b)(2).

Section 208.24(f) Settlement of

Securities Transactions

The amendments to § 208.24(f) update

the regulation to require State member

banks to settle transactions effected for

customers within the ‘‘standard

settlement cycle for broker-dealers in

the United States’’ unless the parties

agree to a different settlement date at the

time of the transaction. The standard

settlement cycle currently is three

business days (T+3) after the trade date.
Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules and Regulations 9911

The requirement applies to transactions

in securities that would fall under SEC

rule 15c6–1, 17 CFR 240.15c6–1, for

broker-dealers, and brings banks into

line with the rest of the securities

industry in this area.

The commenters were nearly split

with respect to the rule’s use of the term

‘‘standard settlement cycle for brokerdealers in the United States’’ rather than

specifying T+3 for sending customer

confirmations. Four commenters favor

the approach taken in the rule, while

three commenters would specify T+3.

The Board has determined to adopt the

proposed language as it will avoid

having to amend the regulation to reflect

expected future modifications to the

standard settlement cycle. Moreover, the

same term is used in the Board’s

Regulation T and has not engendered

any confusion.

Section 208.24(g) Securities Trading

Policies and Procedures

The amendments add

§ 208.24(g)(1)(iii) that requires State

member banks to establish supervisory

procedures and reporting lines for back

office personnel that are separate from

those established to oversee personnel

accepting orders and effecting

transactions. All comments received on

this provision favored its adoption.

With respect to filing notices of

personal securities transactions by bank

officers and directors under

§ 208.24(g)(4), the Board notes that

affected individuals that file similar

reports under SEC rule 17j–1, 15 CFR

270.17j–1, for investment advisers, do

not need to file a separate notice to

satisfy Regulation H requirements.

Regulatory Flexibility Act

The Board certifies that the final rule

will have no significant economic

impact on a substantial number of small

entities. While the final rule adds

certain confirmation disclosure

requirements, it also streamlines and

reduces other confirmation,

recordkeeping and regulatory burdens

for State member banks engaged in

certain securities transactions for

customers.

Paperwork Reduction Act

In accordance with section 3506 of

the Paperwork Reduction Act of 1995

(44 U.S.C. Ch. 35; 5 CFR 1320 Appendix

A.1), the Board reviewed the rule under

the authority delegated to the Board by

the Office of Management and Budget.

The Federal Reserve may not conduct or

sponsor, and an organization is not

required to respond to, this information

collection unless it displays a currently

valid OMB control number. The OMB

control number is 7100–0196.

The collection of information

requirements in this regulation are

found in 12 CFR 208.24. This

information is required to evidence

compliance with the requirements of

section 208.24 of Regulation H. The

respondents are for-profit financial

institutions. Records must be retained

for three years.

No comments specifically addressing

the burden estimate were received.

The proposed amendments would

provide for only a minor addition in

disclosure practices of state member

banks, would not increase the banks’

reporting requirements to the Federal

Reserve, and would have a negligible

effect on respondent burden. The

estimated burden is 3 minutes per

response. There are 1,214 respondents

and the number of their recordkeeping

and notification occurrences varies with

the amount and type of securities

transactions. The total annual

recordkeeping and disclosure burden for

these respondents is estimated to be

165,520 hours. Based on an hourly cost

of $20, the annual cost to the public is

estimated to be $3,310,400.

Because the records would be

maintained at state member banks and

the notices are not provided to the

Federal Reserve, no issue of

confidentiality under the Freedom of

Information Act arises.

The Federal Reserve has a continuing

interest in the public’s opinions of our

collections of information. At any time,

comments regarding the burden

estimate, or any other aspect of this

collection of information, including

suggestions for reducing the burden,

may be sent to: Secretary, Board of

Governors of the Federal Reserve

System, 20th and C Streets, N.W.,

Washington, DC 20551; and to the

Office of Management and Budget,

Paperwork Reduction Project (7100–

0196), Washington, DC 20503.

List of Subjects in 12 CFR Part 208

Accounting, Agriculture, Banks,

banking, State member banks,

Confidential business information,

Crime, Currency, Federal Reserve

System, Flood insurance, Mortgages,

Reporting and recordkeeping

requirements, Securities.

For the reasons set out in the

preamble, the Board amends 12 CFR

Part 208 as set forth below:

PART 208—MEMBERSHIP OF STATE

BANKING INSTITUTIONS IN THE

FEDERAL RESERVE SYSTEM

(REGULATION H)

1. The authority citation for Part 208

continues to read as follows:

Authority: 12 U.S.C. 36, 248(a), 248(c),

321–338a, 371d, 461, 481–486, 601, 611,

1814, 1820(d)(8), 1823(j), 1828(o), 1831o,

1831p–1, 3105, 3310, 3331–3351, and 3906–

3909; 15 U.S.C. 78b, 78l(b), 78l(g), 78l(i),

78o–4(c)(5), 78q, 78q–1 and 78w; 31 U.S.C.

5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106

and 4128.

§ 208.8 [Amended]

2. In § 208.8 paragraph (k) is removed

and reserved.

3. A new § 208.24 is added to subpart

A to read as follows:

§ 208.24 Recordkeeping and confirmation

of certain securities transactions effected

by State member banks.

(a) Exceptions and safe and sound

operations.

(1) A State member bank may be

excepted from one or more of the

requirements of this section if it meets

one of the following conditions of

paragraphs (a)(1)(i) through (a)(1)(iv) of

this section:

(i) De minimis transactions. The

requirements of paragraphs (c)(2)

through (c)(4) and paragraphs (e)(1)

through (e)(3) of this section shall not

apply to banks having an average of less

than 200 securities transactions per year

for customers over the prior three

calendar year period, exclusive of

transactions in government securities;

(ii) Government securities. The

recordkeeping requirements of

paragraph (c) of this section shall not

apply to banks effecting fewer than 500

government securities brokerage

transactions per year; provided that this

exception shall not apply to government

securities transactions by a State

member bank that has filed a written

notice, or is required to file notice, with

the Federal Reserve Board that it acts as

a government securities broker or a

government securities dealer;

(iii) Municipal securities. The

municipal securities activities of a State

member bank that are subject to

regulations promulgated by the

Municipal Securities Rulemaking Board

shall not be subject to the requirements

of this section; and

(iv) Foreign branches. The

requirements of this section shall not

apply to the activities of foreign

branches of a State member bank.

(2) Every State member bank

qualifying for an exemption under

paragraph (a)(1) of this section that

conducts securities transactions for
9912 Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules and Regulations

customers shall, to ensure safe and

sound operations, maintain effective

systems of records and controls

regarding its customer securities

transactions that clearly and accurately

reflect appropriate information and

provide an adequate basis for an audit

of the information.

(b) Definitions. For purposes of this

section:

(1) Asset-backed security shall mean a

security that is serviced primarily by the

cash flows of a discrete pool of

receivables or other financial assets,

either fixed or revolving, that by their

terms convert into cash within a finite

time period plus any rights or other

assets designed to assure the servicing

or timely distribution of proceeds to the

security holders.

(2) Collective investment fund shall

mean funds held by a State member

bank as fiduciary and, consistent with

local law, invested collectively as

follows:

(i) In a common trust fund maintained

by such bank exclusively for the

collective investment and reinvestment

of monies contributed thereto by the

bank in its capacity as trustee, executor,

administrator, guardian, or custodian

under the Uniform Gifts to Minors Act;

or

(ii) In a fund consisting solely of

assets of retirement, pension, profit

sharing, stock bonus or similar trusts

which are exempt from Federal income

taxation under the Internal Revenue

Code (26 U.S.C.).

(3) Completion of the transaction

effected by or through a state member

bank shall mean:

(i) For purchase transactions, the time

when the customer pays the bank any

part of the purchase price (or the time

when the bank makes the book-entry for

any part of the purchase price if

applicable); however, if the customer

pays for the security prior to the time

payment is requested or becomes due,

then the transaction shall be completed

when the bank transfers the security

into the account of the customer; and

(ii) For sale transactions, the time

when the bank transfers the security out

of the account of the customer or, if the

security is not in the bank’s custody,

then the time when the security is

delivered to the bank; however, if the

customer delivers the security to the

bank prior to the time delivery is

requested or becomes due then the

transaction shall be completed when the

banks makes payment into the account

of the customer.

(4) Crossing of buy and sell orders

shall mean a security transaction in

which the same bank acts as agent for

both the buyer and the seller.

(5) Customer shall mean any person

or account, including any agency, trust,

estate, guardianship, or other fiduciary

account, for which a State member bank

effects or participates in effecting the

purchase or sale of securities, but shall

not include a broker, dealer, bank acting

as a broker or dealer, municipal

securities broker or dealer, or issuer of

the securities which are the subject of

the transactions.

(6) Debt security as used in paragraph

(c) of this section shall mean any

security, such as a bond, debenture,

note or any other similar instrument

which evidences a liability of the issuer

(including any security of this type that

is convertible into stock or similar

security) and fractional or participation

interests in one or more of any of the

foregoing; provided, however, that

securities issued by an investment

company registered under the

Investment Company Act of 1940, 15

U.S.C. 80a–1 et seq., shall not be

included in this definition.

(7) Government security shall mean:

(i) A security that is a direct

obligation of, or obligation guaranteed

as to principal and interest by, the

United States;

(ii) A security that is issued or

guaranteed by a corporation in which

the United States has a direct or indirect

interest and which is designated by the

Secretary of the Treasury for exemption

as necessary or appropriate in the public

interest or for the protection of

investors;

(iii) A security issued or guaranteed as

to principal and interest by any

corporation whose securities are

designated, by statute specifically

naming the corporation, to constitute

exempt securities within the meaning of

the laws administered by the Securities

and Exchange Commission; or

(iv) Any put, call, straddle, option, or

privilege on a security as described in

paragraphs (b)(7) (i), (ii), or (iii) of this

section other than a put, call, straddle,

option, or privilege that is traded on one

or more national securities exchanges,

or for which quotations are

disseminated though an automated

quotation system operated by a

registered securities association.

(8) Investment discretion with respect

to an account shall mean if the State

member bank, directly or indirectly, is

authorized to determine what securities

or other property shall be purchased or

sold by or for the account, or makes

decisions as to what securities or other

property shall be purchased or sold by

or for the account even though some

other person may have responsibility for

such investment decisions.

(9) Municipal security shall mean a

security which is a direct obligation of,

or obligation guaranteed as to principal

or interest by, a State or any political

subdivision thereof, or any agency or

instrumentality of a State or any

political subdivision thereof, or any

municipal corporate instrumentality of

one or more States, or any security

which is an industrial development

bond (as defined in 26 U.S.C. 103(c)(2)

the interest on which is excludable from

gross income under 26 U.S.C. 103(a)(1),

by reason of the application of

paragraph (4) or (6) of 26 U.S.C. 103(c)

(determined as if paragraphs (4)(A), (5)

and (7) were not included in 26 U.S.C.

103(c)), paragraph (1) of 26 U.S.C. 103(c)

does not apply to such security.

(10) Periodic plan shall mean:

(i) A written authorization for a State

member bank to act as agent to purchase

or sell for a customer a specific security

or securities, in a specific amount

(calculated in security units or dollars)

or to the extent of dividends and funds

available, at specific time intervals, and

setting forth the commission or charges

to be paid by the customer or the

manner of calculating them (including

dividend reinvestment plans, automatic

investment plans, and employee stock

purchase plans); or

(ii) Any prearranged, automatic

transfer or sweep of funds from a

deposit account to purchase a security,

or any prearranged, automatic

redemption or sale of a security with the

funds being transferred into a deposit

account (including cash management

sweep services).

(11) Security shall mean:

(i) Any note, stock, treasury stock,

bond, debenture, certificate of interest

or participation in any profit-sharing

agreement or in any oil, gas, or other

mineral royalty or lease, any collateraltrust certificate, preorganization

certificate or subscription, transferable

share, investment contract, voting-trust

certificate, for a security, any put, call,

straddle, option, or privilege on any

security, or group or index of securities

(including any interest therein or based

on the value thereof), any instrument

commonly known as a ‘‘security’’; or

any certificate of interest or

participation in, temporary or interim

certificate for, receipt for, or warrant or

right to subscribe to or purchase, any of

the foregoing.

(ii) But does not include a deposit or

share account in a federally or state

insured depository institution, a loan

participation, a letter of credit or other

form of bank indebtedness incurred in

the ordinary course of business,

currency, any note, draft, bill of

exchange, or bankers acceptance which
Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules and Regulations 9913

has a maturity at the time of issuance of

not exceeding nine months, exclusive of

days of grace, or any renewal thereof the

maturity of which is likewise limited,

units of a collective investment fund,

interests in a variable amount (master)

note of a borrower of prime credit, or

U.S. Savings Bonds.

(c) Recordkeeping. Except as provided

in paragraph (a) of this section, every

State member bank effecting securities

transactions for customers, including

transactions in government securities,

and municipal securities transactions by

banks not subject to registration as

municipal securities dealers, shall

maintain the following records with

respect to such transactions for at least

three years. Nothing contained in this

section shall require a bank to maintain

the records required by this paragraph

in any given manner, provided that the

information required to be shown is

clearly and accurately reflected and

provides an adequate basis for the audit

of such information. Records may be

maintained in hard copy, automated, or

electronic form provided the records are

easily retrievable, readily available for

inspection, and capable of being

reproduced in a hard copy. A bank may

contract with third party service

providers, including broker/dealers, to

maintain records required under this

part.

(1) Chronological records of original

entry containing an itemized daily

record of all purchases and sales of

securities. The records of original entry

shall show the account or customer for

which each such transaction was

effected, the description of the

securities, the unit and aggregate

purchase or sale price (if any), the trade

date and the name or other designation

of the broker/dealer or other person

from whom purchased or to whom sold;

(2) Account records for each customer

which shall reflect all purchases and

sales of securities, all receipts and

deliveries of securities, and all receipts

and disbursements of cash with respect

to transactions in securities for such

account and all other debits and credits

pertaining to transactions in securities;

(3) A separate memorandum (order

ticket) of each order to purchase or sell

securities (whether executed or

cancelled), which shall include:

(i) The account(s) for which the

transaction was effected;

(ii) Whether the transaction was a

market order, limit order, or subject to

special instructions;

(iii) The time the order was received

by the trader or other bank employee

responsible for effecting the transaction;

(iv) The time the order was placed

with the broker/dealer, or if there was

no broker/dealer, the time the order was

executed or canceled;

(v) The price at which the order was

executed; and

(vi) The broker/dealer utilized;

(4) A record of all broker/dealers

selected by the bank to effect securities

transactions and the amount of

commissions paid or allocated to each

such broker during the calendar year;

and

(5) A copy of the written notification

required by paragraphs (c) and (d) of

this section.

(d) Content and time of notification.

Every State member bank effecting a

securities transaction for a customer

shall give or send to such customer

either of the following types of

notifications at or before completion of

the transaction or; if the bank uses a

broker/dealer’s confirmation, within one

business day from the bank’s receipt of

the broker/dealer’s confirmation:

(1) A copy of the confirmation of a

broker/dealer relating to the securities

transaction; and if the bank is to receive

remuneration from the customer or any

other source in connection with the

transaction, and the remuneration is not

determined pursuant to a prior written

agreement between the bank and the

customer, a statement of the source and

the amount of any remuneration to be

received; or

(2) A written notification disclosing:

(i) The name of the bank;

(ii) The name of the customer;

(iii) Whether the bank is acting as

agent for such customer, as agent for

both such customer and some other

person, as principal for its own account,

or in any other capacity;

(iv) The date of execution and a

statement that the time of execution will

be furnished within a reasonable time

upon written request of such customer

specifying the identity, price and

number of shares or units (or principal

amount in the case of debt securities) of

such security purchased or sold by such

customer;

(v) The amount of any remuneration

received or to be received, directly or

indirectly, by any broker/dealer from

such customer in connection with the

transaction;

(vi) The amount of any remuneration

received or to be received by the bank

from the customer and the source and

amount of any other remuneration to be

received by the bank in connection with

the transaction, unless remuneration is

determined pursuant to a written

agreement between the bank and the

customer, provided, however, in the

case of Government securities and

municipal securities, this paragraph

(d)(2)(vi) shall apply only with respect

to remuneration received by the bank in

an agency transaction. If the bank elects

not to disclose the source and amount

of remuneration it has or will receive

from a party other than the customer

pursuant to this paragraph (d)(2)(vi), the

written notification must disclose

whether the bank has received or will

receive remuneration from a party other

than the customer, and that the bank

will furnish within a reasonable time

the source and amount of this

remuneration upon written request of

the customer. This election is not

available, however, if, with respect to a

purchase, the bank was participating in

a distribution of that security; or with

respect to a sale, the bank was

participating in a tender offer for that

security;

(vii) The name of the broker/dealer

utilized; or, where there is no broker/

dealer, the name of the person from

whom the security was purchased or to

whom it was sold, or the fact that such

information will be furnished within a

reasonable time upon written request;

(viii) In the case of a transaction in a

debt security subject to redemption

before maturity, a statement to the effect

that the debt security may be redeemed

in whole or in part before maturity, that

the redemption could affect the yield

represented and that additional

information is available on request;

(ix) In the case of a transaction in a

debt security effected exclusively on the

basis of a dollar price:

(A) The dollar price at which the

transaction was effected;

(B) The yield to maturity calculated

from the dollar price; provided,

however, that this paragraph

(c)(2)(ix)(B) shall not apply to a

transaction in a debt security that either

has a maturity date that may be

extended by the issuer with a variable

interest payable thereon, or is an assetbacked security that represents an

interest in or is secured by a pool of

receivables or other financial assets that

are subject to continuous prepayment;

(x) In the case of a transaction in a

debt security effected on the basis of

yield:

(A) The yield at which the transaction

was effected, including the percentage

amount and its characterization (e.g.,

current yield, yield to maturity, or yield

to call) and if effected at yield to call,

the type of call, the call date, and the

call price; and

(B) The dollar price calculated from

the yield at which the transaction was

effected; and

(C) If effected on a basis other than

yield to maturity and the yield to

maturity is lower than the represented

yield, the yield to maturity as well as
9914 Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules and Regulations

the represented yield; provided,

however, that this paragraph (c)(2)(x)(C)

shall not apply to a transaction in a debt

security that either has a maturity date

that may be extended by the issuer with

a variable interest rate payable thereon,

or is an asset-backed security that

represents an interest in or is secured by

a pool of receivables or other financial

assets that are subject to continuous

prepayment;

(xi) In the case of a transaction in a

debt security that is an asset-backed

security which represents an interest in

or is secured by a pool of receivables or

other financial assets that are subject

continuously to prepayment, a

statement indicating that the actual

yield of such asset-backed security may

vary according to the rate at which the

underlying receivables or other financial

assets are prepaid and a statement of the

fact that information concerning the

factors that affect yield (including at a

minimum, the estimated yield, weighted

average life, and the prepayment

assumptions underlying yield) will be

furnished upon written request of such

customer; and

(xii) In the case of a transaction in a

debt security, other than a government

security, that the security is unrated by

a nationally recognized statistical rating

organization, if that is the case.

(e) Notification by agreement;

alternative forms and times of

notification. A State member bank may

elect to use the following alternative

procedures if a transaction is effected

for:

(1) Accounts (except periodic plans)

where the bank does not exercise

investment discretion and the bank and

the customer agree in writing to a

different arrangement as to the time and

content of the notification; provided,

however, that such agreement makes

clear the customer’s right to receive the

written notification pursuant to

paragraph (c) of this section at no

additional cost to the customer;

(2) Accounts (except collective

investment funds) where the bank

exercises investment discretion in other

than an agency capacity, in which

instance the bank shall, upon request of

the person having the power to

terminate the account or, if there is no

such person, upon the request of any

person holding a vested beneficial

interest in such account, give or send to

such person the written notification

within a reasonable time. The bank may

charge such person a reasonable fee for

providing this information;

(3) Accounts, where the bank

exercises investment discretion in an

agency capacity, in which instance:

(i) The bank shall give or send to each

customer not less frequently than once

every three months an itemized

statement which shall specify the funds

and securities in the custody or

possession of the bank at the end of

such period and all debits, credits and

transactions in the customer’s accounts

during such period; and

(ii) If requested by the customer, the

bank shall give or send to each customer

within a reasonable time the written

notification described in paragraph (c)

of this section. The bank may charge a

reasonable fee for providing the

information described in paragraph (c)

of this section;

(4) A collective investment fund, in

which instance the bank shall at least

annually furnish a copy of a financial

report of the fund, or provide notice that

a copy of such report is available and

will be furnished upon request, to each

person to whom a regular periodic

accounting would ordinarily be

rendered with respect to each

participating account. This report shall

be based upon an audit made by

independent public accountants or

internal auditors responsible only to the

board of directors of the bank;

(5) A periodic plan, in which instance

the bank:

(i) Shall (except for a cash

management sweep service) give or send

to the customer a written statement not

less than every three months if there are

no securities transactions in the

account, showing the customer’s funds

and securities in the custody or

possession of the bank; all service

charges and commissions paid by the

customer in connection with the

transaction; and all other debits and

credits of the customer’s account

involved in the transaction; or

(ii) Shall for a cash management

sweep service or similar periodic plan

as defined in § 208.24(b)(10)(ii) give or

send its customer a written statement in

the same form as prescribed in

paragraph (e)(i) above for each month in

which a purchase or sale of a security

takes place in a deposit account and not

less than once every three months if

there are no securities transactions in

the account subject to any other

applicable laws or regulations;

(6) Upon the written request of the

customer the bank shall furnish the

information described in paragraph (c)

of this section, except that any such

information relating to remuneration

paid in connection with the transaction

need not be provided to the customer

when paid by a source other than the

customer. The bank may charge a

reasonable fee for providing the

information described in paragraph (d)

of this section.

(f) Settlement of securities

transactions. All contracts for the

purchase or sale of a security shall

provide for completion of the

transaction within the number of

business days in the standard settlement

cycle for the security followed by

registered broker dealers in the United

States unless otherwise agreed to by the

parties at the time of the transaction.

(g) Securities trading policies and

procedures. Every State member bank

effecting securities transactions for

customers shall establish written

policies and procedures providing:

(1) Assignment of responsibility for

supervision of all officers or employees

who:

(i) Transmit orders to or place orders

with broker/dealers;

(ii) Execute transactions in securities

for customers; or

(iii) Process orders for notification

and/or settlement purposes, or perform

other back office functions with respect

to securities transactions effected for

customers; provided that procedures

established under this paragraph

(g)(1)(iii) should provide for supervision

and reporting lines that are separate

from supervision of personnel under

paragraphs (g)(1)(i) and (g)(1)(ii) of this

section;

(2) For the fair and equitable

allocation of securities and prices to

accounts when orders for the same

security are received at approximately

the same time and are placed for

execution either individually or in

combination;

(3) Where applicable and where

permissible under local law, for the

crossing of buy and sell orders on a fair

and equitable basis to the parties to the

transaction; and

(4) That bank officers and employees

who make investment recommendations

or decisions for the accounts of

customers, who participate in the

determination of such recommendations

or decisions, or who, in connection with

their duties, obtain information

concerning which securities are being

purchased or sold or recommended for

such action, must report to the bank,

within ten days after the end of the

calendar quarter, all transactions in

securities made by them or on their

behalf, either at the bank or elsewhere

in which they have a beneficial interest.

The report shall identify the securities

purchased or sold and indicate the dates

of the transactions and whether the

transactions were purchases or sales.

Excluded from this requirement are

transactions for the benefit of the officer

or employee over which the officer or
Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules and Regulations 9915

1 1 See 12 CFR 208.8(k), 44 FR 43258 (July 24,

1979) (FRB regulation); 12 CFR part 12, 44 FR

43254 (July 24, 1979)(OCC regulation).

employee has no direct or indirect

influence or control, transactions in

mutual fund shares, and all transactions

involving in the aggregate $10,000 or

less during the calendar quarter. For

purposes of this paragraph (g)(4), the

term securities does not include

government securities.

By order of the Board of Governors of the

Federal Reserve System, February 27, 1997.

William W. Wiles,

Secretary of the Board.

[FR Doc. 97–5423 Filed 3–4–97; 8:45 am]

BILLING CODE 6210–01–P

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 344

RIN 3064–AB74

Recordkeeping and Confirmation

Requirements for Securities

Transactions

AGENCY: Federal Deposit Insurance

Corporation.

ACTION: Final rule.

SUMMARY: The Federal Deposit

Insurance Corporation (FDIC) is

amending its regulations governing the

procedures for recordkeeping and

confirmation requirements with respect

to effecting securities transactions for

customers of an insured state

nonmember bank or a foreign bank

having an insured branch (Bank). The

final rule updates, clarifies and

streamlines the FDIC regulations and

reduces unnecessary regulatory costs

and other burdens. The final rule also

reorganizes and clarifies the regulation

in areas where it previously was

confusing. In addition, the FDIC has

incorporated significant interpretive

positions and updated various

provisions to address market

developments and regulatory changes

by other regulators that affect

requirements for recordkeeping and

confirmation of securities transactions

by Banks.

DATES: Effective date. The final rule is

effective April 1, 1997. Early

compliance. These revisions may be

followed immediately by the affected

party.

FOR FURTHER INFORMATION CONTACT:

Miguel D. Browne, Manager—Risk

Policy Development, (202) 898–6789;

Keith A. Ligon, Chief, Policy Unit, (202)

898–3618; and John F. Harvey, Review

Examiner (Trust), Securities, Capital

Markets and Trust Branch, Division of

Supervision (202) 898–6762; and Patrick

J. McCarty, Counsel, Regulations and

Legislation Section, Legal Division,

(202) 898–8708.

SUPPLEMENTARY INFORMATION:

Background

In 1979, the FDIC adopted part 344 to

require Banks under its jurisdiction to

establish uniform procedures and

recordkeeping and confirmation

requirements with respect to effecting

securities transactions for customers.

The requirements reflected, in part, the

recommendations of the Securities and

Exchange Commission’s (SEC) Final

Report of the Securities and Exchange

Commission on Bank Securities

Activities (June 30, 1977). Part 344’s

recordkeeping and confirmation

requirements were patterned after the

SEC’s rules applicable to broker/dealers

and were intended to serve similar

purposes for Banks involved in effecting

customers’ securities transactions. See

44 FR 43261 (July 24, 1979). The Board

of Governors of the Federal Reserve

System (FRB) and the Office of the

Comptroller of the Currency (OCC) also

adopted regulations substantially

identical to part 344 in 1979.1

The FDIC and the other federal

banking agencies are required by section

303 of the Riegle Community

Development and Regulatory

Improvement Act of 1994 (CDRI) to

review and streamline their regulations

to improve efficiency, reduce

unnecessary costs and eliminate

unwarranted constraints on credit

availability. 12 U.S.C. 4803(a). Section

303(a) also requires the federal banking

agencies to work jointly to make

uniform all regulations and guidelines

implementing common statutory or

supervisory policies.

On December 22, 1995, the OCC

published a notice of proposed

rulemaking (60 FR 66517) to revise 12

CFR part 12, the OCC’s Recordkeeping

and Confirmation Requirements for

Securities Transactions regulation. The

purpose of the proposal was to

modernize part 12, address various

market developments and regulatory

changes, and reduce regulatory burden,

where possible. The OCC published its

final rule on December 2, 1996. See 61

FR 63958. The FRB published a

substantially similar yet somewhat

differently worded proposed rule on

December 26, 1995. See 60 FR 66759.

The FDIC published an advance

notice of proposed rulemaking on May

24, 1996, soliciting comment on issues

similar to those raised in the OCC’s and

FRB’s proposed rules, as well as issues

which the OCC and FRB proposals did

not address. See 61 FR 26135. On

December 24, 1996, the FDIC published

a notice of proposed rulemaking (61 FR

67729) to amend part 344 to address

various market developments and

regulatory changes, and reduce

regulatory burden, where possible.

Consistent with Section 303 of CDRI,

the FDIC reviewed the OCC rule and the

FRB proposal in connection with the

preparation of its notice of proposed

rulemaking. The FDIC has endeavored

to create a rule that is uniform with the

other agencies. As part of that effort, the

staff of the FDIC has been in contact

with the staffs of the FRB and the OCC

in connection with the drafting of the

final rule. The FDIC’s final rule is closer

in structure, definitions, language and

form to the FRB’s proposal than the

OCC’s final rule, however, all of the

agencies’ rules are substantively very

similar.

Comments Received and Changes Made

The FDIC received six comments on

the proposal. One comment came from

a bank, one from a bank holding

company and four comments came from

trade associations representing banks,

investment companies and accountants.

In general, the commenters strongly

supported the proposal as promoting

uniformity among the Federal bank

regulatory agencies, reducing regulatory

burdens as well as addressing recent

developments in the securities market.

Most commenters specifically supported

the provision of the proposal that

excluded from the scope of part 344

customer transactions conducted

directly with a broker/dealer where the

customer has a written account

agreement with the broker-dealer and

the broker-dealer is fully disclosed to

the customer. This change would

exclude from part 344’s coverage

commonly utilized contractual

relationships between banks and broker/

dealers whereby the broker/dealers

conducts securities transactions on bank

premises, known as networking

arrangements.

In addition, certain of the commenters

requested specific changes to the

proposal. The FDIC has considered each

of the comments carefully and has made

a number of changes in response to the

comments received. Overall, the final

rule adopts most of the changes to part

344 as proposed by the FDIC although

certain changes have been made in an

attempt to increase uniformity with

regard to recordkeeping and

confirmation requirements among the

federal banking regulatory agencies. The

section-by-section discussion of this

preamble describes the final regulation