Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules 26135

delivered to the above address no later than

that time.

I Wish to Cancel

lllllllllllllllllllll

Consumer’s Signature

lllllllllllllllllllll

Date

Supplement I—[Amended]

11. In Supplement I to Part 226, under

Section 226.4—Finance Charge, under

4(a) Definition, paragraph 3. ii. would

be removed.

12. In Supplement I to Part 226, under

Section 226.17—General Disclosure

Requirements, under 17(c) Basis of

disclosures and use of estimates,

Paragraph 17(c)(2) would be

redesignated as Paragraph 17(c)(2)(i):

Supplement I—Official Staff

Interpretations

* * * * *

Section 226.17—General Disclosure

Requirements

* * * * *

17(c) Basis of Disclosures and Use of

Estimates

* * * * *

Paragraph 17(c)(2)fl(i).fi

* * * * *

13. In Supplement I to Part 226, under

Section 226.18—Content of Disclosures,

under 18(d) Finance charge, paragraph

2 would be removed.

14. In Supplement I to Part 226, under

Section 226.23—Right of Rescission,

under 23(b) Notice of right to rescind,

the first sentence of paragraph 3 would

be revised to read as follows:

* * * * *

Section 226.23—right of rescission

* * * * *

23(b) Notice of right to rescind.

* * * * *

3. Content. The notice must include

all of the information outlined in

Section 226.23(b)(1)fl(i) through (v)fi

øthrough 5¿. * * *

* * * * *

By order of the Board of Governors of the

Federal Reserve System, May 15, 1996.

William W. Wiles,

Secretary of the Board

[FR Doc. 96–12685 Filed 5–23–96; 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: Advance notice of proposed

rulemaking.

SUMMARY: The Federal Deposit

Insurance Corporation (FDIC) is

considering whether and how to amend

its regulations governing recordkeeping

and confirmation requirements for

securities transactions by state

nonmember banks. The agency’s present

regulation was adopted in 1979 and has

remained essentially unchanged since

that time. The FDIC is undertaking a

review of this regulation with the goal

of modernizing its requirements to,

among other things, reflect the

supervisory role played by other Federal

agencies charged with supervision of

securities transactions. The agency is

soliciting comment on a number of

issues that have been identified. The

responses will be used to aid the FDIC

in developing a proposed amendment

for public comment.

DATES: Comments must be received by

June 24, 1996.

ADDRESSES: Comments should be

directed to Jerry L. Langley, Executive

Secretary, Attention: Room F–402,

Federal Deposit Insurance Corporation,

550 17th Street, NW, Washington, DC

20429. Comments may be delivered to

room F–402, 1776 F Street, NW,

Washington, DC 20429, on business

days between 8:30 am and 5:00 pm or

sent by facsimile transmission to FAX

number 202/898–3838. Internet:

Comments@FDIC.gov. Comments will

be available for inspection and

photocopying in the FDIC Public

Information Center, room 100, 801 17th

Street, NW, Washington, DC 20429,

between 9:00 am and 5:00 pm on

business days.

FOR FURTHER INFORMATION CONTACT:

Curtis Vaughn, Examination Specialist,

Division of Supervision, (202) 898–

6759; John Harvey, Review Examiner

(Trust), Division of Supervision (202)

898–6762; Patrick J. McCarty, Counsel,

Legal Division (202) 898–8708; or

Gerald Gervino, Senior Attorney, Legal

Division (202) 898–3723. Federal

Deposit Insurance Corporation, 550 17th

St., N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

Background

Section 303 of the Riegle Community

Development and Regulatory

Improvement Act of 1994 (CDRI Act)

The FDIC is conducting a systematic

review of its regulations and written

policies. Section 303(a) of the CDRI Act

(12 U.S.C. 4803(a)) requires that each

Federal banking agency review its

regulations to streamline them to

improve efficiency, reduce unnecessary

costs and eliminate unwarranted

constraints on credit availability.

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. As

part of the section 303 process, the FDIC

published in December of 1995 a notice

in the Federal Register describing the

section 303 requirements and inviting

the general public and interested parties

to comment on FDIC regulations and

policy statements. 60 FR 62345

(December 6, 1995).

On July 24, 1979 the FDIC and the

other Federal banking agencies

promulgated regulations addressing

recordkeeping and confirmation

requirements for securities transactions

effected by banks. See 44 FR 43261 (July

24, 1979) (FDIC), 44 FR 43252 (July 24,

1979 (OCC) and 44 FR 43258 (July 24,

1979) (FRB). These regulations were,

and are, virtually identical. With the

exception of two amendments, the

FDIC’s part 344 has remained

unchanged since it was promulgated in

1979. See 45 FR 12777 (February 27,

1980), 60 FR 7111 (February 7, 1995).

The FDIC wishes to review its

recordkeeping and confirmation

requirements for securities transactions

in part 344 with the purposes of section

303 of the CDRI in mind. The Office of

the Comptroller of the Currency (OCC)

and the Board of Governors of the

Federal Reserve System (FRB) have

already proposed amendments to their

regulations concerning recordkeeping

and confirmation requirements for

securities transactions by national and

state member banks, respectively. See

60 FR 66517 (December 22, 1995) and

60 FR 66759 (December 26, 1995).

Before drafting and publishing a

proposed regulation, the FDIC wishes to

receive public comment on several basic

issues underlying the purposes of part

344. The FDIC requests comments at

this stage of regulatory review to assist

development of a specific proposal.
26136 Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules

Summary of Concerns

Part 344 sets forth the recordkeeping

and confirmation requirements with

respect to securities transactions

effected for the customers of state

nonmember banks. State nonmember

banks are required to keep four types of

records (1) Chronological records of

original entry containing an itemized

daily record of all purchases and sales,

(2) Account records for each customer,

(3) Separate order tickets for each

transaction, and (4) A record of all

broker/dealers used and the

commissions paid. Section 344.3(a)

through (d). Banks must keep these

records for at least three years. Section

344.3.

Part 344 addresses both the ‘‘form’’

and ‘‘timing’’ of notification to

customers for whom the bank has

effected a securities transaction.

Sections 344.4 through 344.5. Banks

may provide one of two different types

of notification forms to the customer.

Both notification forms are required to

contain such basic information as the

name of the customer, the identity, price

and number of shares or units of the

security purchased or sold by the

customer, the source and amount of any

remuneration to be received by the

broker/dealer and the bank (unless such

remuneration is determined by a prior

written agreement between the bank and

the customer), and the name of the

broker/dealer used. Banks are again

required to retain copies of the

notification form which is provided to

customers for at least three years. Id.

As a general rule, banks are required

to mail the notification form to

customers within five business days of

the transaction. Section 344.5. If a

broker/dealer is used, the bank has 5

business days from the date of receipt of

the broker/dealer’s confirmation to mail

notification to the customer. Id. Banks

are permitted, however, to use alternate

time of notification procedures

depending upon the type of account

involved. Section 344.5(a) through (e).

The time of notification periods vary

greatly from ‘‘as promptly as possible’’

after the transaction for periodic plans

to annual statements for collective

investment funds. Section 344.5(e) and

(d), respectively.

Part 344 also requires banks effecting

securities transactions for customers to

establish written policies and

procedures regarding securities trading.

Section 344.6 Such policies and

procedures must address supervision of

officers and employees who place

orders and execute transactions,

allocation of securities and prices to

accounts when orders are received at

approximately the same time, the

crossing of buy/sell orders, and the

reporting of personal securities

transactions by bank officers and

employees who participate in or make

investment recommendations or

decisions for customer accounts.

The purpose of the FDIC

implementing recordkeeping and

confirmation requirements for securities

transactions is to ensure that purchasers

of securities in transactions effected by

an insured nonmember bank are

provided adequate information

concerning the transactions. The

regulations also are designed to ensure

that insured nonmember banks maintain

adequate records and controls with

respect to securities transactions for

their customers.

As the financial marketplace has

grown, new delivery systems for bank

customer’s securities transactions have

emerged. This array of delivery systems

has led to the overlap of jurisdiction

between the Federal banking agencies

and the Federal securities regulators.

The FDIC supports minimizing

overlapping jurisdiction through a

concept referred to as ‘‘functional

regulation’’. In order for functional

regulation to work properly, it is

important that securities transactions do

not go unregulated and leave customers

unprotected. As currently written, part

344 overlaps existing securities

regulation in certain areas. Although

this overlap ensures that securities

transactions for bank customers are

adequately covered in relation to

confirmation and recordkeeping

requirements, it can create a competitive

imbalance for banks, create customer

confusion, regulatory uncertainty and

additional costs to banks.

Delivery Systems

There are a variety of ways in which

banks play a role in delivering securities

brokerage services to their customers.

Customers of banks may engage in

securities transactions by either dealing

directly with the bank or by dealing

with a third party who has contracted

with the bank to conduct securities

transactions for, or through, the bank.

Third parties may operate on bank

premises using their own employees, or

use persons who are dual employees of

the bank and the third party. Third

party providers may operate both on

and off the bank’s premises with the

bank receiving remuneration for

transactions originating from the bank.

Other third party providers operate

solely off bank premises. The bank may

or may not receive remuneration for

referring customers to the provider.

Categories of third party providers

also vary by whether or not the provider

is affiliated with the bank and the type

of affiliation. Third party providers may

be owned by the bank, while in other

situations the bank and third party

provider are commonly owned or have

common officers or directors. In other

cases, the bank may be an advisor to a

mutual fund sponsored by a third party.

Within the bank itself, the institution

may be engaged in retail

recommendation and sale of securities,

or the bank may be engaging in

accommodation transactions only for

customers of the bank. A limited

number of banks operate municipal and

government securities dealer

departments separately registered under

government securities regulations or

regulations of the Municipal Securities

Rulemaking Board (MSRB). Where there

is sufficient demand, banks may engage

in private banking for their higher

income customers. In areas where

capital markets are not well established,

banks may engage in the sale of their

own stock or the stock of their affiliates.

Historically banks have been most

commonly involved in securities

transactions through their Trust

Departments. These transactions occur

both when the bank has some fiduciary

responsibility and when the bank is

acting as an agent or custodian. A bank

may have no investment discretion,

partial investment discretion or full

investment discretion over its trust

accounts. Trust Departments often

sponsor collective investment funds for

their customers. They may also act as

the customers’ agent under a periodic

investment plan, such as a stockpurchase plan or a dividend

reinvestment plan. Each situation

presents different customer needs

relative to confirmation and

recordkeeping requirements related to

securities transactions.

Request for Comment

The FDIC is seeking comment from

interested parties concerning the

applicability of part 344 to securities

transactions conducted under each of

these delivery systems. Specifically, if

the transactions under a specific

delivery system are covered by another

regulatory system, what coverage should

an FDIC regulation provide, if any?

Additionally, the FDIC seeks comment

on whether other delivery systems, i.e.,

dedicated phone lines to broker/dealers

and mutual fund complexes, or internet

sites, should be considered in deciding

on the scope of coverage of part 344.

Commenters are asked to identify types

of securities transactions which by their

unique characteristics should be
Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules 26137

exempted, either completely or in part,

from the requirements of part 344. The

OCC and FRB proposals do not

approach the delivery systems and

regulatory coverage issues in the same

manner as the FDIC.

Effecting a Transaction

The recordkeeping and confirmation

requirements of part 344 are generally

triggered when a bank effects a

securities transaction on behalf of a

customer. The regulation does not

define the term ‘‘effecting a securities

transaction’’. The term was borrowed

from the Federal Securities laws, where

it is quite common but also not defined.

See Securities and Exchange Act of

1934, 15 U.S.C. 78o(a)(1), (c)(1)(A)

through (B), Government Securities Act,

15 U.S.C. 78o–5(a)(1)(B)(i), (a)(4) and

(b)(1), and SEC Rule 10b–10(a), 12 CFR

240.10b–10(a). The FDIC has taken a

broad view of the term to include not

only those situations in which securities

transactions are effected by bank

employees but also those situations in

which third parties who are located on

bank premises conduct the transactions

for the bank and the bank receives

transaction based compensation in

connection with the transactions. This

is so even if the transaction takes place

off bank premises. The FDIC is

considering various alternatives in

defining the term ‘‘effecting a securities

transaction’’ and seeks comment as to

how the term should be defined. If

securities transactions are conducted by

third parties, should such transactions

be excluded from the definition? If so,

how should such exclusion/exemption

be drawn? If specific bank activities or

certain types of delivery systems should

be exempted from the definition, what

factors should be considered in

determining which bank activities and

delivery systems should be exempted?

The OCC and FRB proposals do not

address the definition or scope of the

term ‘‘effecting a securities transaction’’

issue.

Retail Sales Through Trust Departments

As noted above, historically banks

have been involved in securities

activities through their Trust

Departments. Trust Departments have

accounting systems, internal controls

and investment expertise with respect to

securities transactions due to their

investment management activities for

trust clients. Banks may, however, be

directing customers with retail

securities transactions to their Trust

Departments, even though such

customers have no formal trust

agreement with the bank. The FDIC

specifically requests comment on

whether this situation is commonplace

in the industry and to what extent the

requirements of part 344 should apply

to such retail securities transactions for

nontrust customers. The OCC and FRB

proposals do not specifically address

the retail sales through bank Trust

Department issue.

Disclosure of the Source and Amount of

Remuneration

Members of the public, including

bank customers, normally pay

commissions or sales loads when

buying or selling securities through a

registered broker/dealer which has no

association with a bank. The securities

transactions effected by the bank may be

somewhat different in that the bank may

share in that commission or load or the

bank may charge a fee in addition to the

usual commission or load. In order to

make this difference clear to those

customers who purchase or sell

securities through their bank, part 344

requires that the bank disclose the

source and amount of its remuneration.

The regulation does not distinguish

between those commissions or loads

which the bank shares with another

party (but the total cost to the customers

remains the same) and fees which may

be added by the bank to those

commissions or loads.

As banks have become more heavily

involved in effecting securities

transactions for their customers, it has

come to the FDIC’s attention that there

are practical problems concerning the

timely disclosure of the source and

amount of the bank’s remuneration.

Many insured nonmember banks have

entered into what are commonly known

as ‘‘networking agreements’’ with

registered broker/dealers. Under these

agreements the broker/dealer typically

leases space on the bank’s premises to

sell securities. In some instances banks

receive a fixed monthly payment plus a

portion of the commissions which

varies depending upon the volume of

sales over a given period. The result is

that in some situations banks are unable

to determine and disclose the total

amount of their remuneration within the

general 5 business day time frame

provided for under § 344.5.

On March 21, 1995, the FDIC Board

of Directors granted a limited waiver of

the remuneration disclosure

requirement contained in § 344.4 based

on the timing problem identified above.

The waiver extends to any insured state

nonmember bank which receives

transaction-based compensation on a

regular basis with respect to securities

transactions effected for customers. The

waiver is subject to the provisos that (1)

no additional fees are added by the bank

other than those described in the

prospectus (if the securities are sold

under a prospectus); (2) the sale is made

by a registered broker/dealer subject to

rules and supervision of the National

Association of Securities Dealers

(NASD) and the Securities and

Exchange Commission (SEC); and (3)

the sale is conducted in a fashion which

meets the requirements of the NASD

and SEC. The waiver does not relieve

banks of the obligation to disclose the

source of their remuneration. Nor does

the waiver apply in the case of (1)

services provided in a fiduciary

capacity, or (2) services for which a flat

fee has been paid which includes

securities brokerage.

At the time the waiver was granted,

the FDIC committed to working with the

other Federal banking agencies to find

an acceptable solution to the timing of

the remuneration disclosure problem.

The FDIC’s current waiver differs from

the position reflected in the OCC’s

proposal in that the FDIC continues to

require that banks disclose the source of

their remuneration and that the FDIC

waiver extends to all securities

transactions and not just to mutual fund

transactions.

In attempting to keep customers who

purchase securities on the premises of a

bank informed of potential conflicts of

interest, the FDIC has taken the position

that the customer should be aware of the

fact that the bank has a financial interest

in the transaction. Thus, the FDIC has

concluded that in all cases, the source

of the remuneration should be

disclosed. The timing of that disclosure

may be important in determining how

much burden this requirement places on

the bank.

We note that the SEC’s position

regarding the disclosure of the source

and amount of remuneration is much

more limited than that under which the

FDIC is currently operating. Pursuant to

SEC Rule 10b–10, broker/dealers are

required to disclose the source and

amount of remuneration at or before

completion of a transaction only when

the broker/dealer is (1) participating in

the distribution of a securities issuance

or (2) participating in a tender offer. See

17 CFR 240.10b–10(a)(7)(iv). Otherwise,

the broker/dealer is required to provide

only a notice which states that the

source and amount of other

remuneration will be furnished ‘‘upon

the written request of the customer.’’ Id.

With respect to the sale of mutual funds,

the SEC is considering changing a long

standing no action position on the

broker/dealer disclosure of source and

remuneration. See Investment Company

Institute, SEC No-Action Letter, 1994

WL 131068 (S.E.C.) (March 16, 1994).
26138 Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules

Since 1979 the SEC’s position has been

that a broker/dealer does not need to

disclose on confirmations the source

and amount of remuneration received

on the sale of open end management

company shares if a prospectus with

current fees, loads and expenses is

provided to the customer. See

Investment Company Institute, SEC NoAction Letter, [1979] Fed. Sec. L. Rep.

(CCH) P82,041 (Mar. 19, 1979). Should

the SEC change its position, broker/

dealers would be required to provide

confirmations which disclose both the

source and amount of remuneration

received on confirmations rather than

relying upon the disclosure provided in

the prospectus.

The FDIC specifically requests

comments concerning the need for

disclosure of the source of remuneration

and, if necessary, when that disclosure

should be made. In addition, the FDIC

requests comment on the circumstances

under which a bank should disclose the

amount of the remuneration and, if

necessary, the timing of these

disclosures. If disclosures concerning

the amount of remuneration are made,

should there be a differentiation

concerning disclosure of the bank’s

portion of loads and commissions

normally charged and those fees which

may be charged in excess of normal

commissions and loads? If FDIC

mandated disclosures are necessary,

how should these disclosures interrelate

with similar disclosures required under

the Federal Securities laws? The OCC

and FRB proposals do not address all of

the issues raised herein.

Definition of Security

In part 344, the term ‘‘security’’ is

defined in order to determine the scope

of the regulation’s coverage. Section

344.2(e). The definition is crafted

specifically for the purposes of this

regulation and does not mirror the

definition of ‘‘security’’ in the Federal

Securities laws. Specifically, there are

eight exemptions to the definition of

‘‘security’’:

(1) A deposit or share account in a

federally insured depository institution;

(2) A loan participation;

(3) A letter of credit or other form of

bank indebtedness incurred in the

ordinary course of business;

(4) Currency;

(5) Any note, draft, bill of exchange,

or bankers acceptance which 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;

(6) Units of a collective investment

fund;

(7) Interests in a variable amount

(master) note of a borrower of prime

credit; and

(8) U.S. Savings Bonds.

The FDIC specifically requests

comment on the adequacy of the

definition of the term ‘‘security’’

currently used in part 344 and if there

are other exceptions which should be

made to the definition. Comment is

invited concerning the practicability of

using the definition of ‘‘security’’ which

is used in the Securities Exchange Act

of 1934, 15 U.S.C. 78c(a)(10).

Other Definitions

The OCC and FRB proposals add

definitions of ‘‘asset-backed security’’,

‘‘completion of the transaction’’,

‘‘crossing of buy and sell orders’’, ‘‘debt

security’’, ‘‘government security’’ and

‘‘municipal security’’ to their respective

regulations. The new definitions are

based on definitions contained in the

Federal Securities laws and the SEC’s

confirmation rule, Rule 10b–10, 17 CFR

240.10b–10, and are necessary for

applying the proposed confirmation

disclosure and three day settlement

requirements. Rule 15c6–1, 17 CFR

240.15c6–1. The definitions of the above

terms contained in the OCC and FRB

proposals are:

‘‘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.

‘‘Completion of the transaction

effected by or through a bank’’ shall

mean:

(1) 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

(2) 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

bank makes payment into the account of

the customer.

‘‘Crossing of buy and sell orders’’

shall mean a security transaction in

which the same banks acts as agent for

both the buyer and the seller.

‘‘Debt security’’ 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.

‘‘Government security’’ shall mean:

(1) A security that is a direct

obligation of, or obligation guaranteed

as to principal and interest by, the

United States;

(2) 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;

(3) 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 SEC; or

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

privilege on a security as described in

paragraph (1), (2), or (3) of this

definition 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 through an

automated quotation system operated by

a registered securities association.

‘‘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.

The FDIC is considering using

identical definitions in revising part 344

and requests comment concerning these

definitions. Specifically, the FDIC

wishes to know if these definitions

should be expanded in any manner or

if they exclude transactions which

should be covered by the scope of the

definition. The FDIC proposal is

consistent with the OCC and FRB

proposals on the new definitions.
Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules 26139

Exceptions

Under the current regulation, certain

requirements concerning recordkeeping

and securities trading policies and

procedures do not apply to banks

having an average of less than 200

securities transactions per calendar year

for customers over the prior threecalendar-year period, exclusive of

transactions in U.S. Government and

Federal agency obligations. Section

344.7(a). The FDIC specifically requests

comment concerning the continued

appropriateness of this exemption and

whether the current 200 transaction

limit should be raised, and if so, what

transaction or dollar limit should be

adopted. Commenters are requested to

address whether any increase in the

threshold would (1) result in any

material diminution in the protections

to investors, and (2) how the

applicability of and compliance with

the Department of Treasury’s

Government Securities Dealer

regulations would be affected. The OCC

and FRB proposals do not address all

the Government Securities trading

issues raised herein.

Since part 344 was originally

implemented, regulation of government

securities has changed as a result of the

enactment of the Government Securities

Act of 1986 (Government Securities

Act). 15 U.S.C. 78o–5. Under this

statute, the Department of the Treasury

has authority over government

securities transactions (including

United States Treasury securities and

securities issued or guaranteed by

Federal government agencies and

government-sponsored enterprises).

State nonmember banks which are

government securities brokers and

dealers are not required to follow

certain recordkeeping requirements

established by the Department of the

Treasury regulations because they are

subject to part 344. Consistent with the

requirements of the Government

Securities Act, state nonmember banks

that conduct fewer than 500 government

securities brokerage transactions per

year would not have to comply with

certain recordkeeping requirements of

part 344 if the exemption contained in

the Government Securities Act is carried

over to the FDIC’s regulation. See 17

CFR 401.3(a). The FDIC specifically

requests comment if there is a need to

adopt this exemption in its regulations.

The FDIC proposal is consistent with

the OCC and FRB proposals on this

issue.

Safe and Sound Operations

As noted above, both the FRB and the

OCC have issued proposed amendments

to their regulations relating to

recordkeeping and confirmation

requirements for securities transactions.

Those proposed amendments include a

provision concerning safe and sound

operations. See proposed § 208.24(h) of

the FRB’s regulations and § 12.1(c)(3) of

the OCC’s regulations. The provisions

would require that a bank 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. The provisions are

intended to emphasize the importance

of effective internal controls with

respect to all securities transactions.

The FDIC requests comment on the

desirability of adding this type of

provision to its regulation.

Settlement of Securities Transactions

In October 1993, the SEC adopted a

securities settlement rule, effective June

7, 1995, requiring the payment of funds

and delivery of most securities by the

third business day after the date of the

contract (T+3). Rule 15c6–1, 17 CFR

240.15c6–1. Many banks effecting

customer securities transactions use a

clearing broker which would be subject

to the T+3 rule. In these situations

securities transactions for bank

customers would routinely settle within

three days. However, some banks may

clear and settle their securities trades

directly. For this reason, the FDIC is

considering revising part 344 to include

a separate T+3 settlement requirement

that tracks the language of the SEC’s

securities settlement rule. Alternatively,

the FDIC could cross-reference the

language of the SEC rule.

The FDIC seeks comment on the need

for and the effect of adopting the T+3

securities settlement requirement and

specifically invites comment on the

feasibility of alternate approaches to

implement the T+3 settlement cycle.

The FDIC’s position is consistent with

the OCC and FRB proposals on this

issue.

Securities Transactions for Banks

The FDIC seeks comment on how part

344 affects small banks which use the

services of other banks to buy and sell

securities for their own account. Small

banks are active buyers and sellers of

U.S. Government and Municipal

securities for their own accounts. It is

not clear what effect, if any, part 344’s

recordkeeping, disclosure and

settlement requirements have had on

the banks which are the securities

customers of other banks. The FDIC

solicits comments from the banks which

are consumers of other bank’s securities

services on what concerns they have

and what improvements can be made to

part 344. The OCC and FRB proposals

do not address the bank as customer

issues raised herein.

Sweep Accounts and Confirmations

It has now become commonplace for

banks to offer ‘‘sweep accounts’’ to

retail, commercial and trust customers.

These ‘‘sweep accounts’’ are cash

management services which permit

customers to earn interest on otherwise

idle cash balances. Sweep accounts

automatically ‘‘sweep’’ excess cash out

of a checking or non interest bearing

deposit account into a money market

mutual fund as frequently as every day

after the close of business at the bank.

The ‘‘sweep’’ is triggered by the amount

of cash in the deposit account, which

can be set by the depositor. The

‘‘sweep’’ may also be reversed so that

shares in the money market mutual fund

are redeemed and cash is deposited into

the checking or non interest bearing

account at certain times or when certain

dollar limits are reached. Banks receive

a fee for the ‘‘sweep’’ service.

The FDIC notes that ‘‘sweep

accounts’’ bear some similarities to

‘‘periodic plans,’’ which is a defined

term under part 344. See § 344.1(d).

Under the current part 344, banks which

are effecting securities transactions

under periodic plans are required to

provide confirmations to customers ‘‘as

promptly as possible after each

transaction. * * * ‘‘ See § 344.5(e). The

SEC permits broker/dealers, under

certain conditions, to send

confirmations for sweep transactions

out of brokerage accounts into money

market mutual funds to be provided on

a quarterly basis. See 12 CFR § 240.10b–

10(b). The OCC and FRB have proposed

amending their regulations to permit

banks to provide confirmations for

periodic plan transactions on a quarterly

basis. The FDIC supports such a change,

as it will reduce regulatory burden for

banks and will harmonize securities and

banking regulation.

The FDIC requests comment on

whether the definition of ‘‘periodic

plans’’ in part 344 needs to be revised

to specifically include ‘‘sweep

accounts’’ or whether the term and

activity is sufficiently distinct to

warrant its own definition. In addition,

the FDIC solicits comment regarding

whether all ‘‘sweep accounts’’ should

receive such treatment or just ‘‘sweep

accounts’’ which invest in certain types

of securities, e.g., money market mutual

funds, and under certain conditions,

e.g., no sales commission is charged for

either purchases or sales. The FDIC also

requests comment on whether ‘‘sweep
26140 Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules

accounts’’ raise any issues peculiar to

bank Trust Departments. The OCC and

FRB proposals do not specifically

address the ‘‘sweep account’’ issues

identified herein.

Reporting of Personal Trading

Part 344 currently requires certain

bank officers and bank employees

engaged in or aware of the investment

decisions or recommendations for

customer accounts to provide quarterly

reports regarding their personal trading

of securities. Section 344.6(d). The

regulation does not require reporting of

personal trading where the securities

transactions aggregate $10,000 or less

during the calendar quarter. The SEC

has a similar reporting requirement for

principal underwriters and investment

advisers of registered investment

companies under the Investment

Company Act of 1940. See SEC Rule

17j–1, 12 CFR 270.17j–1. The SEC Rule

does not provide an exemption for

securities transactions involving in the

aggregate $10,000 or less. The FDIC

requests comments on whether the

exemption from reporting personal

trading by bank officers and employees

engaged in or aware of the investment

decisions or recommendations for

customer accounts in section 344.6(d) is

appropriate. Additionally, the FDIC

requests comment on whether all bank

directors, as opposed to just those bank

directors who are also officers or

employees of the bank, should be

required to report on their personal

trading. The OCC and FRB proposals do

not address the personal trading issues

raised herein.

Additional Comment

The FDIC is interested in receiving

any additional comments regarding part

344 which the public feels should be

taken into account as the agency

undertakes to modernize the regulation.

By Order of the Board of Directors.

Dated at Washington, DC, this 14th day of

May, 1996.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Deputy Executive Secretary.

[FR Doc. 96–12928 Filed 5–23–96; 8:45 am]

BILLING CODE 6714–01–P

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Part 801

[Docket No. 95N–0374]

RIN 0910–AA32

Latex Condoms; User Labeling;

Expiration Dating

AGENCY: Food and Drug Administration,

HHS.

ACTION: Proposed rule.

SUMMARY: The Food and Drug

Administration (FDA) is issuing a

proposed regulation that would require

the labeling of latex condoms to contain

an expiration date based upon physical

and mechanical testing performed after

exposing the product to varying

conditions that age latex. Studies show

that latex condoms degrade over time.

Such degradation has a significant effect

on the product’s ability to provide a

barrier to sexually transmitted disease

(STD) agents, including the human

immunodeficiency virus (HIV). This

requirement is being proposed in order

to provide consumers with essential

information regarding the safe use of

these products.

DATES: Written comments on this

proposed rule by August 22, 1996.

Written comments on the information

collection requirements should be

submitted by June 24, 1996. FDA

proposes that any final rule that may be

issue based on this proposal become

effective 180 days after the date of its

publication in the Federal Register.

ADDRESSES: Submit written comments

on this proposed rule to the Dockets

Management Branch (HFA–305), Food

and Drug Administration, 12420

Parklawn Dr., rm. 1–23, Rockville, MD

20857. Submit written comments on the

information collection requirements to

the Office of Information and Regulatory

Affairs, OMB, New Executive Office

Bldg., 725 17th St. NW., rm. 10235,

Washington, DC 20503, Attn: Desk

Officer for FDA.

FOR FURTHER INFORMATION CONTACT:

Donald E. Marlowe, Center for Devices

and Radiological Health (HFZ–150),

Food and Drug Administration, 12200

Wilkins Ave., Rockville, MD 20852,

301–443–7003.

SUPPLEMENTARY INFORMATION:

I. Background

It is estimated that over 1 million

persons in the United States are infected

with HIV (Ref. 1). HIV is transmitted

primarily through sexual contact;

however, nonsexual transmission has

occurred in health care settings as a

result of contact with infected blood.

Additionally, HIV has been isolated

from other body fluids in addition to

blood. With the prevalence of HIV

infection and the risk of transmission of

other infections, the importance of the

quality of an effective barrier to the

transmission of infection is crucial.

Numerous studies in the scientific

literature, including the proceedings of

a conference on ‘‘Latex as a Barrier

Material’’ sponsored by FDA in 1989,

have addressed and overwhelmingly

supported the use of latex membranes,

such as condoms and medical gloves, as

effective barriers against the

transmission of various disease agents,

including hepatitis, HIV, and other

infections (Ref. 2). The Centers for

Disease Control and Prevention (CDC)

and the Surgeon General of the Public

Health Service have recommended, on

the basis of evidence that latex provides

a barrier against the transmission of

STD’s, that latex condoms should be

used according to instructions with

every act of intercourse for maximum

protection against STD’s (Ref. 3). Two

recent studies involving serodiscordant

heterosexual couples (i.e., one partner is

HIV positive, the other HIV negative)

indicate that using latex condoms

substantially reduces the risk of HIV

transmission (Refs. 4 and 5). In one

study, none of the 123 partners who

used condoms consistently became

infected while 12 (10 percent) of 122

partners who used condoms

inconsistently became infected (Ref. 4).

In the second study, 3 (2 percent) of the

171 consistent condom users became

infected compared to 8 (15 percent) of

55 inconsistent condom users (Ref. 5).

The effectiveness of latex condoms as

a barrier, however, is dependent upon

the integrity of the latex material.

Degradation of latex film products (e.g.,

the embrittlement of the latex film, an

increase in the porosity of the

membrane, or other loss of physical

properties) occurs when latex is

exposed to various types of

environmental conditions (such as

elevated temperature, fluorescent lights,

or ozone) normally experienced in

product use, shipment, or storage

situations. Exposure to these

environmental conditions degrades the

film progressively over time, and may

result in bursts, rips, tears or seepage

that allows the transmission of

infectious agents.

To understand the effects of aging and

other storage conditions on latex

properties, the State of Washington’s

Board of Pharmacy initiated an FDAsponsored study of the material integrity