[Federal Register Volume 60, Number 247 (Tuesday, December 26, 1995)]
[Proposed Rules]
[Pages 66759-66764]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31234]



 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 60, No. 247 / Tuesday, December 26, 1995 / 
Proposed Rules  

[[Page 66759]]


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: Proposed rule; request for public comments.

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SUMMARY: The Board of Governors of the Federal Reserve System is 
proposing amendments to Regulation H pertaining to the recordkeeping 
and confirmation of certain securities transactions. The amendments 
would accommodate developments in the securities markets 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 proposed amendments also would 
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 proposed amendments address the minimum 
recordkeeping requirements for State member banks exempt from the 
paragraph, and include several new definitions and various language 
edits.

DATES: Comments must be submitted on or before February 28, 1996.

ADDRESSES: Comments should refer to Docket No. R-0909, and may be 
mailed to Mr. William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551. Comments also may be delivered to Room B-2222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, and to 
the guard station in the Eccles Building courtyard on 20th Street, NW 
(between Constitution Avenue and C Street) at any time. Comments 
received will be available for inspection in room MP-500 of the Martin 
Building between 9:00 a.m. and 5:00 p.m. weekdays, except as provided 
in 12 CFR 261.8(a) of the Board's rules regarding availability of 
information.

FOR FURTHER INFORMATION CONTACT: Angela Desmond, Senior Counsel, or 
Susan Meyers, Senior Securities Analyst, (202) 452-2781. For users of 
Telecommunications Device for the Deaf (TTD), please contact Dorothea 
Thompson, (202/452-3544), Board of Governors of the Federal Reserve 
System, Washington, D.C. 20551.

SUPPLEMENTARY INFORMATION: Section 208.8(k) of Regulation H, 12 CFR 
part 208, was adopted in 1979 to ensure that banks effecting securities 
transactions for customers conform to securities industry practices 
with respect to the maintenance of records, and the content and timing 
of confirmations and account statements.1 Since that time, a 
number of market and regulatory changes have occurred that have 
relevance to these provisions. As a result, the Board has determined 
that the recordkeeping and notification requirements of Regulation H 
should be amended to ensure that procedures followed by State member 
banks continue to conform with SEC and Department of the Treasury 
regulations, and are consistent with principles of safe and sound 
banking practices. For purposes of organization, the contents of 
Sec. 208.8(k) would be moved into a new Sec. 208.24.

    \1\ 44 FR 43258 (July 24, 1979).
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    Comments are requested on the proposed amendments as described in 
more detail below. The proposed amendments are limited to new 
Sec. 208.24 (current Sec. 208.8(k)) of Regulation H and are not meant 
to obviate the need for the general review of the whole regulation 
scheduled for the latter part of 1996.2 Accordingly, comments 
pertaining to other provisions of Regulation H should be withheld until 
notice of a general review is announced.

    \2\ The OCC and the FDIC are considering similar amendments to 
their versions of the regulation, 12 CFR Part 12, 44 FR 43252 (July 
24, 1979) and 12 CFR Part 344, 44 FR 43261 (July 24, 1979) 
respectively. Consideration of the amendments now will ensure 
continued consistency among the three regulations and obtain parity 
with securities industry practices.
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Summary of Proposed Amendments

    The provisions of Sec. 208.8(k) would be moved to a new section 
(Sec. 208.24) at the end of subpart A of Regulation H and paragraph (k) 
of Sec. 208.8 would be reserved.


Sec. 208.24(a)  Definitions.

    The draft amendments would 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, 15 U.S.C. 78a et seq., or in the SEC's 
confirmation rule 10b-10, 17 CFR 240.10b-10, and are necessary for 
applying the proposed confirmation disclosure and the three day 
settlement requirements. Finally, the term dealer bank in the 
definition of customer would be replaced with 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 
Sec. 208.24 of Regulation H.


Sec. 208.24(b)  Recordkeeping.

    New language would be added to clarify that Sec. 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. 
The amendments also would relocate all confirmation recordkeeping 
requirements into this section. Explanatory language at the end of the 
section would be moved to the first paragraph to simplify the section.


Sec. 208.24(c)  Content and Time of Notification.

    The amendments would rename the section to clarify its subject 
matter. Substantively, the amendments would delete the old five 
business day requirement for confirmation delivery in former Sec. 208.8 
(k)(3) and (k)(4) 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 Sec. 208.24(a).
    In addition, the proposed amendments would require 

[[Page 66760]]
    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 (proposed Sec. 208.24(c)(2)(viii); (ii) disclose the yield and/
or resulting dollar price of transactions involving debt securities and 
asset-backed securities (proposed Sec. 208.24(c)(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 
(proposed Sec. 208.24(c)(2)(xi)). The proposed disclosures would 
conform bank confirmations with disclosures now required of broker 
dealers under SEC rule 10b-10. They also conform to longstanding 
practice in the municipal securities industry.
    In proposing amendments to this section, the Board is mindful of 
the securities regulators' determinations that these confirmation 
disclosures constitute material information necessary to describe the 
securities or to identify the transaction. Comment is requested 
concerning the extent to which banks already are making the proposed 
confirmation disclosures to customers. Comment also is requested 
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 discrete items of confirmation disclosure in the regulation. 
Finally, Sec. 208.24 (c)(v)-(c)(vii) require State member banks to 
disclose in agency transactions the name of any broker dealer utilized, 
the amount of such broker dealer's commission, and the amount of 
commission or other remuneration being received by the bank. Some have 
argued that these requirements have an anticompetitive effect. Comment 
is requested whether this provision is inappropriately anticompetitive, 
and, if so, how a bank should disclose its remuneration and the 
remuneration going to other parties on agency transactions.


Sec. 208.24(d)  Notification by agreement; alternative forms and times.

    Section 208.24(d)(current section 208.8(k)(4)) would be renamed to 
indicate that it deals with alternative arrangements under which 
customers receive notifications of securities transactions effected by 
State member banks. Other than conforming language edits, a substantive 
change would be made to Sec. 208.24(d)(v), pertaining to notifications 
of transactions in periodic plans, to require that notification be 
provided to customers ``not less than every three months'' rather than 
the current requirement of ``as soon as possible after each 
transaction.'' This would conform the section with SEC rule 10b-10 
(notifications required at least quarterly) while creating flexibility 
in scheduling notifications in periodic plans.


Sec. 208.24(e)  Securities Trading Policies and Procedures.

    A new Sec. 208.24(e)(1)(iii) would be added to require 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 under Sec. 208.24 
(e)(1)(i) and (e)(1)(ii).


Sec. 208.24(f)  Settlement of Securities Transactions.

    Proposed Sec. 208.24(f), on settlement of securities transactions, 
would require State member banks to provide for three day (T+3) 
settlement for securities transactions effected for customers unless 
the parties agree to a different settlement date at the time of the 
transaction. The requirement would apply to transactions in securities 
that fall under SEC rule 15c6-1, 17 CFR 240.15c6-1, for broker 
dealers.3

    \3\ Exceptions or other relief, and changes in the standard 
settlement cycle adopted by the SEC under rule 15c6-1 also would 
apply to State member banks. MSRB rules require bank dealers to 
settle municipal securities transactions by T+3.
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    The Board requests comment whether the proposed section is needed 
for banks to meet T+3 settlement, where appropriate, of transactions 
effected for customers. Finally, if the Board determines to adopt the 
new section, comment is requested whether banks prefer that Regulation 
H incorporate SEC rule 15c6-1 by reference rather than the proposed 
language.


Sec. 208.24(g)  Exceptions.

    The exceptions previously found in current Sec. 208.8(k)(6) would 
be contained in Sec. 208.24(g). A new Sec. 208.24(g)(2) would clarify 
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 Sec. 208.24. This exemption would not 
be available if a bank has filed notice or is required to file notice 
indicating that it acts as a government securities broker or dealer. 
Staff at the Bureau of Public Debt, which is the organization within 
the Department of the Treasury that is responsible for administering 17 
CFR 404.4(a), on recordkeeping by government securities brokers and 
dealers that are financial institutions, has advised that they are 
considering amending this regulation to clarify any ambiguity with 
respect to the recordkeeping requirements for financial institutions 
that conduct government securities transactions resulting from the 
interplay of the regulation with the recordkeeping requirements of 
Regulation H.


Sec. 208.24(h)  Safe and Sound Operations.

    Finally, a new Sec. 208.24(h), on safe and sound operations, would 
be added stating that principles of safety and soundness require 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. This provision is consistent with the longstanding 
interpretation and would clarify what is expected of banks that qualify 
for an exception from Sec. 208.24(h).

Regulatory Flexibility Act

    The Board believes there will be no significant economic impact on 
a substantial number of small entities if this proposal is adopted. 
Comments are invited on this statement.

Paperwork Reduction Act

    In accordance with Sec. 3506 of the Paperwork Reduction Act of 1995 
(44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed the 
proposed rule under the authority delegated to the Board by the Office 
of Management and Budget. Comments on the collections of information 
should be sent to the Office of Management and Budget, Paperwork 
Reduction Project (7100-0196), Washington, DC 20503, with copies of 
such comments to be sent to Mary M. McLaughlin, Federal Reserve Board 
Clearance Officer, Division of Research and Statistics, Mail Stop 97, 
Board of Governors of the Federal Reserve System, Washington, DC 20551.
    The collection of information requirements in this proposed 
regulation are found in 12 CFR 208.8(k). This information is required 
to evidence compliance with the requirements of section 208.8(k) of 
Regulation H. The respondents are for-profit financial institutions. 
Records must be retained for three years.
    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. 

[[Page 66761]]

    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.
    Comments are invited on: (a) whether the proposed collection of 
information is necessary for the proper performance of the Federal 
Reserve's functions; including whether the information has practical 
utility; (b) the accuracy of the Federal Reserve's estimate of the 
burden of the proposed information collection, including the cost of 
compliance; (c) ways to enhance the quality, utility, and clarity of 
the information to be collected; and (d) ways to minimize the burden of 
information collection on respondents, including through the use of 
automated collection techniques or other forms of information 
technology.

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 reasons set out in the preamble, the Board proposes to amend 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, 1823(j), 1828(o), 1831o, 1831p-1, 3105, 
3310, 3331-3351 and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g), 
781(i), 78o-4(c)(5), 78q, 78q-1 and 78w; 31 U.S.C. 5318; 42 U.S.C. 
4012a, 4101a, 4104b, 4106 and 4128.


Sec. 208.8  [Amended]

    2. In Sec. 208.8 paragraph (k) is removed and reserved.
    3. A new Sec. 208.24 is added at the end of subpart A to read as 
follows:


Sec. 208.24  Recordkeeping and confirmation of certain securities 
transactions effected by State member banks.

    (a) Definitions. For purposes of this Sec. 208.24:
    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.
    Collective investment fund shall means funds held by a State member 
bank as fiduciary and, consistent with local law, invested collectively 
as follows:
    (1) 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
    (2) 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 (Title 26).
    Completion of the transaction effected by or through a state member 
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 banks makes payment into the 
account of the customer.
    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.
    Customer shall mean any person or account, including any agency, 
trust, estate, guardianship, committee 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 bank or issuer of the securities 
which are the subject of the transactions.
    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.
    Exercise 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.
    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 Securities Exchange 
Commission; 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 
though an 

[[Page 66762]]
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 (as defined in 
Sec. 103(c)(2) of the Internal Revenue Code of 1954) the interest on 
which is excludable from gross income under Sec. 103(a)(1) of such Code 
if, by reason of the application of paragraph (4) or (6) of Sec. 103(c) 
of such Code (determined as if paragraphs (4)(A), (5) and (7) were not 
included in such Sec. 103(c), paragraph (1) of such Sec. 103(c) does 
not apply to such security.
    Periodic plan (including dividend reinvestment plans, automatic 
investment plans and employee stock purchase plans) means any written 
authorization for a State member bank acting as agent to purchase or 
sell for a customer a specific security or securities, in specific 
amounts (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 in 
connection therewith or the manner of calculating them.
    Security means any interest or instrument commonly known as a 
security, whether in the nature of debt or equity, including any stock, 
bond, note, debenture, evidence of indebtedness or any participation in 
or right to subscribe to or purchase any of the foregoing. The term 
security does not include:
    (1) A deposit or share account in a federally or state 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; or
    (8) U.S. Savings Bonds.
    (b) Recordkeeping. Except as provided in paragraph (g) 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 a 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 rule 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.
    (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.
    (c) Content and time of notification. Every State member bank 
effecting a securities transaction for a customer at or before 
completion of the transaction shall give or send to such customer 
either of the following types of notifications:
    (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, and 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 a 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 
(c)(2)(vi) shall apply only with respect to remuneration received by 
the bank in an agency transaction;
    (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; and 
    
[[Page 66763]]

    (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 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;
    (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 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 the 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 the 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.
    (d) 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 shall give or send 
to the customer not less than every three months a written statement 
showing the 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; provided that 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 (c) of this section.
    (e) 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 (e)(1)(iii) should provide for 
supervision and reporting lines that are separate from supervision of 
personnel under paragraphs (e)(1)(i) and (e)(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 

[[Page 66764]]
or employee over which the officer or 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 (e)(4), the term 
securities does not include government securities.
    (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) Exceptions. (1) De minimis Transactions. The requirements of 
paragraphs (b)(2)(ii) through (b)(2)(iv) 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;
    (2) Government Securities. The recordkeeping requirements of 
paragraph (b) 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 that it acts as a 
government securities broker or a government securities dealer;
    (3) 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
    (4) Foreign Branches. The requirements of this section shall not 
apply to the activities of foreign branches of a state member bank.
    (h) Safe and sound operations. Every State member bank qualifying 
for an exemption under paragraph (g) of this section that conducts 
securities transactions for customers shall, to ensure safe and sound 
operations, maintain effective systems of records and controls 
regarding their customer securities transactions that clearly and 
accurately reflect appropriate information and provide an adequate 
basis for an audit of the information.

    By order of the Board of Governors of the Federal Reserve 
System, December, 19, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-31234 Filed 12-22-95; 8:45 am]
BILLING CODE 6210-01-P