[Federal Register Volume 61, Number 232 (Monday, December 2, 1996)]
[Rules and Regulations]
[Pages 63958-63969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30636]



[[Page 63957]]

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Part V





Department of the Treasury





_______________________________________________________________________



Office of the Comptroller of the Currency



_______________________________________________________________________



12 CFR Part 12



Recordkeeping and Confirmation Requirements for Securities 
Transactions; Final Rule

  Federal Register / Vol. 61, No. 232 / Monday, December 2, 1996 / 
Rules and Regulations  

[[Page 63958]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 12

[Docket No. 96-25]
RIN 1557-AB42


Recordkeeping and Confirmation Requirements for Securities 
Transactions

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
amending its rule that prescribes recordkeeping and confirmation 
requirements for securities transactions. The final rule is another 
part of the OCC's Regulation Review Program to update and streamline 
OCC regulations and eliminate unnecessary regulatory costs and other 
burdens. The final rule reorganizes the OCC's regulation by placing 
related subjects together, clarifies areas where the rule was 
confusing, incorporates significant OCC interpretive positions, and 
updates various provisions to address market developments and 
regulatory changes by other regulators that affect requirements for 
recordkeeping and confirmation of securities transactions by national 
banks.

EFFECTIVE DATE: December 31, 1996.

FOR FURTHER INFORMATION CONTACT: Suzette H. Greco, Senior Attorney, 
Securities and Corporate Practices Division (202) 874-5210; Joseph W. 
Malott, National Bank Examiner, Capital Markets Division (202) 874-
5070; William L. Granovsky, National Bank Examiner, Fiduciary 
Activities (202) 874-4861.

SUPPLEMENTARY INFORMATION:

Background

    The OCC adopted 12 CFR part 12 on July 24, 1979 (44 FR 43252) to 
require national banks to establish uniform procedures and records 
relating to the handling of 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 
12'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.1 The OCC amended part 12 on December 31, 1979 (44 FR 
77137) to include additional suggestions recommended by commenters, and 
the part became effective on January 1, 1980. The Board of Governors of 
the Federal Reserve System (FRB) and the Federal Deposit Insurance 
Corporation (FDIC) also adopted regulations substantially identical to 
part 12 in 1979. See 12 CFR 208.8(k), 44 FR 43258 (July 24, 1979) (FRB 
regulation); 12 CFR part 344, 44 FR 43261 (July 24, 1979) (FDIC 
regulation).
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     1  Brokers and dealers generally must register with the 
SEC under the Securities Exchange Act of 1934. See 15 U.S.C. 
78o(a)(1). Banks are excluded from the definitions of ``broker'' and 
``dealer'' and thus are not subject to the registration provisions. 
See 15 U.S.C. 78c(a) (4) and (5).
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    On December 22, 1995, the OCC published a notice of proposed 
rulemaking (60 FR 66517) (proposal) 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 FRB published a substantively 
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, but has not yet 
proposed a rule. See 61 FR 26135.

Comments Received and Changes Made

    The OCC received ten comments on the proposal. The comment letters 
included eight from banks and bank holding companies, one from a trade 
association, and one on behalf of a mutual fund sponsor and 
distributor. Commenters generally supported the proposal, but several 
commenters requested changes. The OCC carefully considered each of the 
comments and has made a number of changes in response to the comments 
received.
    Overall, the final rule adopts most of the changes to part 12 as 
proposed by the OCC. The section-by-section discussion of this preamble 
identifies and discusses the comments received and changes made to 
certain sections of the proposal. A derivation table identifying 
sections of former part 12 changed by the final rule is included at the 
end of this preamble.

Section-by-Section Discussion

Authority, Purpose, and Scope (Sec. 12.1)

    The proposal revised and expanded the scope section to clarify the 
securities transactions to which part 12 applies and identify the types 
of transactions that are subject to other regulatory requirements. 
Generally, any national bank effecting a securities transaction for a 
customer is subject to the requirements of part 12, unless the 
transaction specifically is excepted. For example, part 12 requirements 
apply to transactions in mutual funds as well as other securities.
    National banks conducting government securities transactions for 
their customers also are within the scope of part 12.2 Consistent 
with regulations issued pursuant to the Government Securities Act of 
1986, 15 U.S.C. 78o-5, part 12 (Sec. 12.1(c)(2)(ii)) exempts a national 
bank that conducts fewer than 500 government securities brokerage 
transactions per year from complying with the recordkeeping 
requirements under Sec. 12.3. See 17 CFR 401.3(a)(2)(i) and 
404.4(a).3 This exemption does not apply to government securities 
dealer transactions by national banks, however.
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     2 The Department of the Treasury, under its authority 
pursuant to the Government Securities Act of 1986 (GSA), 15 U.S.C. 
78o-5, has issued regulations in 17 CFR parts 400 through 405, 449, 
and 450, applicable to many government securities transactions by 
national banks (GSA regulations). The GSA regulations define the 
terms ``government securities broker'' and ``government securities 
dealer'' to include financial institutions. See 17 CFR 400.3 (k) and 
(l). Part 404 of the GSA regulations provides specific recordkeeping 
requirements for government securities brokers and dealers that are 
financial institutions. See 17 CFR 404.4.
    \3\ National banks, because they are subject to part 12 
recordkeeping requirements, are not required to follow the 
recordkeeping requirements of the GSA regulations at 17 CFR 404.2 
and 404.3. See 17 CFR 404.4(a). National banks, however, must follow 
other recordkeeping requirements under the GSA regulations. See 17 
CFR 404.4 (a)(3), (b), and 450.4 (c), (d), and (f). Part 12 
confirmation requirements apply to all government securities 
transactions by national banks.
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    The ``scope'' section (Sec. 12.1(c)(1)) also clarifies that a 
national bank's transactions in municipal securities that are not 
subject to the Municipal Securities Rulemaking Board's (MSRB) rules, 
are subject to part 12.4 Thus,

[[Page 63959]]

under Sec. 12.1(c)(2)(iii), transactions in municipal securities 
conducted by a national bank registered with the SEC as a ``municipal 
securities dealer'' are exempt from part 12. However, municipal 
securities brokerage transactions by a national bank not registered as 
a municipal securities dealer are subject to part 12 requirements.
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    \4\ The MSRB adopts rules with respect to transactions in 
``municipal securities'' effected by brokers, dealers, and 
``municipal securities dealers.'' See 15 U.S.C. 78o-4; Rules of the 
MSRB, MSRB Manual (CCH) para. 3501 et seq. As defined in the 
Exchange Act, a ``municipal securities dealer'' includes a bank, as 
well as a ``separately identifiable department or division of a 
bank,'' that is engaged in the business of buying and selling 
municipal securities for its own account through a broker or 
otherwise. See 15 U.S.C. 78c(a)(30). Under the SEC's regulatory 
requirements, however, a bank need not register as a ``municipal 
securities broker.'' See 15 U.S.C. 78c(a) (4) and (31).
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    The proposal's ``scope'' section provided exceptions from part 12 
requirements for: (1) Banks conducting a small number of securities 
transactions; (2) certain government securities transactions; (3) 
certain municipal securities transactions; and (4) securities 
transactions conducted by a foreign branch of a national bank. The 
proposal also clarified that notwithstanding the exceptions from part 
12, the OCC expects a national bank conducting securities transactions 
for its customers to maintain effective systems of records and controls 
to ensure safe and sound operations.
    Most commenters supported the clarifications to the proposed scope 
section. With respect to the scope section as discussed in the 
proposal's preamble, two commenters requested further clarification. 
One commenter requested clarification of whether part 12 requires a 
national bank to provide a confirmation of a trade placed by a customer 
directly with a registered broker/dealer for settlement in the 
customer's custodial account. In these circumstances, a national bank 
need not provide a confirmation if the customer receives a confirmation 
from the registered broker/dealer.
    Another commenter suggested clarifying that part 12 generally would 
not apply when dual employees are involved in a networking operation 
with a registered broker/dealer. As noted in the proposal's preamble, 
the OCC recognizes that a national bank may enter into various 
arrangements with registered broker/dealers that permit the broker/
dealers to operate on the bank's premises. Part 12 generally does not 
apply to securities transactions executed by these registered broker/
dealers for their customers. As registered broker/dealers, they already 
are subject to the SEC's recordkeeping and confirmation rules.5 
The OCC agrees that when a dual employee is performing work for and 
under the control of a registered broker/dealer pursuant to an 
arrangement between the bank and a registered broker/dealer, part 12 
requirements do not apply. However, if the dual employee is performing 
work for and under control of the bank, then the part 12 requirements 
do apply. See Interpretive Letter No. 680 (July 26, 1995), reprinted in 
[1994-95 Transfer Binder] Fed. Banking L. Rep. (CCH) 83628.
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    \5\ As noted in the proposal, however, if the bank is using this 
registered broker/dealer solely to clear securities transactions 
effected by the bank for the bank's own customers, then the 
requirements of part 12 do apply to the bank because the bank has 
executed the transactions.
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    Accordingly, the final rule adds a new provision 
(Sec. 12.1(c)(2)(v)) clarifying that part 12 does not apply to 
securities transactions effected by a broker or dealer registered with 
the SEC, including securities transactions effected by a bank employee 
when the employee is acting as an employee of an SEC-registered broker/
dealer. The final rule also adopts the amendments to the scope section 
as proposed and revises Sec. 12.1(c)(1) to state more clearly that both 
part 12 and 12 CFR part 9 govern fiduciary transactions effected by a 
national bank.6
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    \6\ The final rule also changes the caption of Sec. 12.1(c)(2) 
from ``exemptions'' to ``exceptions'' to better reflect that 
Sec. 12.1(c)(2) does not necessarily exempt the specified 
transactions from all part 12 requirements.
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Definitions (Sec. 12.2)

    The proposal added new definitions of asset-backed security, 
completion of the transaction, crossing of buy and sell orders, debt 
security, government security, and municipal security, and modified the 
definitions of collective investment fund, customer, investment 
discretion, periodic plan, and security.
    Several commenters asked the OCC to make clarifications. One 
commenter questioned whether the definition of customer includes a bank 
when that bank acts as the fiduciary of an account and effects 
transactions for that account. That is not the intent of part 12. While 
both the former rule and the proposal define customer to include any 
person or account (including fiduciary accounts) for which a national 
bank makes or participates in making the purchase or sale of 
securities, the account is the customer when the bank acts as fiduciary 
and has investment discretion over the account. Accordingly, the final 
rule clarifies that part 12 does not require that the bank notify 
itself of a transaction.
    Another commenter asked whether, for purposes of the notification 
requirements for transactions involving periodic plans or employee 
benefit plans, the customer is the plan trustee or the plan 
participant. The OCC does not intend part 12 to require a bank acting 
as a trustee of an employee benefit plan to provide notifications to 
itself where the bank as trustee is the shareholder of record of the 
securities being bought and sold. Generally, a written agreement 
between the trustee and the participants governs these plans and 
dictates the type of notifications required. The primary law governing 
employee benefit plans and trusts is the Employee Retirement Income 
Security Act of 1974 (ERISA), 29 U.S.C. 1001 et seq. The final rule 
clarifies that the definition of customer does not include a bank as 
trustee acting as shareholder of record for the purchase and sale of 
securities.
    Several commenters raised questions about the proposed definition 
of investment discretion. The proposal, like the former rule, tracked 
the definition of ``investment discretion'' in the Securities Exchange 
Act of 1934, 15 U.S.C. 78c(a)(35). Under this definition, a bank 
exercises investment discretion with respect to an account if the bank 
directly or indirectly: (1) Is authorized to determine what securities 
or other property to purchase or sell, or (2) makes decisions as to 
what securities or other property to purchase or sell even though some 
other person may have responsibility for these investment decisions. 
The significance of a finding under part 12 that a bank exercises 
investment discretion is that the bank then may choose from more 
options when providing a customer with notice of a transaction. For 
example, instead of complying with the generally applicable rule 
requiring a bank to provide notification at or before completion of the 
transaction, a bank exercising investment discretion in an agency 
capacity may send an itemized statement to a customer every three 
months.
    Three commenters recommended revising the part 12 definition of 
investment discretion to conform to the proposed definition of 
investment discretion in 12 CFR part 9, the OCC's regulation governing 
fiduciary powers of national banks.7 The final rule does not 
substantively change the former part 12 definition of investment 
discretion. Given that the broader definition of the term in part 12 
serves to reduce burden on national banks by providing more flexibility 
to banks in giving notices of securities transactions, the OCC believes 
it appropriate to retain the definition as proposed. The OCC will 
review the definition of investment discretion used in part 9 in the 
course of adopting amendments to that rule.
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     7  The OCC published a notice of proposed rulemaking on 12 
CFR part 9 on December 21, 1995. See 60 FR 66163.

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[[Page 63960]]

    Three commenters asked the OCC to clarify that the definition of 
periodic plan also includes cash management sweep services, such as 
arrangements where funds are transferred or ``swept'' out of a bank to 
purchase money market mutual funds. Both the former and proposed rules 
define periodic plan to include dividend reinvestment plans, automatic 
investment plans, employee stock purchase plans, and other plans where 
the bank has written authority to act as agent for the customer to 
purchase and sell specific securities, in specific amounts, at specific 
time intervals. Cash management services, whereby a bank will allow a 
depositor to transfer or ``sweep'' all funds or all funds above a 
specified amount from deposits into investment vehicles, often money 
market mutual funds, on a daily basis and to automatically redeem 
securities as needed, are not expressly included in the former or 
proposed rules.
    The OCC agrees with the views of the commenters that the definition 
of periodic plan encompasses cash management sweep services. Many banks 
today engage in cash management sweep services to allow customers to 
earn an investment return on otherwise idle cash balances. The types of 
cash management services banks offer vary and banks should take care to 
comply with all applicable requirements with respect to any particular 
arrangement. Accordingly, the final rule revises the definition of 
periodic plan to specifically include these services. The final rule 
also adopts a separate timeframe for notifications for cash management 
sweep services, as discussed in Sec. 12.5.
    Finally, one commenter urged the OCC to retain the exception in the 
definition of security for letters of credit and other forms of bank 
indebtedness incurred in the ordinary course of business. The proposed 
definition closely tracks the definition of security in the Securities 
Exchange Act of 1934, 15 U.S.C. 78c(a)(10), which does not explicitly 
contain this exception. However, the final rule retains this exception, 
because, upon further consideration, the OCC has concluded that this 
exception avoids extending the regulation's coverage to transactions 
where the requirements of part 12 are unnecessary.

Recordkeeping (Sec. 12.3)

    The proposal provided that a national bank may maintain the records 
required by Sec. 12.3(a) in any manner, if the records clearly and 
accurately reflect the information required and provide an adequate 
basis for auditing the information (Sec. 12.3(b)). This provision is 
intended to give banks flexibility in the maintenance of records 
required by part 12. The OCC requested comments addressing whether and 
in what manner banks rely upon this provision. The OCC received two 
comments on this issue. The commenters suggested that the OCC clarify 
the extent to which a national bank may use electronic or automated 
records.
    The OCC recognizes that better and more affordable technology will 
increase banks' interest in replacing paper files with electronic data 
bases and filing systems. The OCC has no objection to a national bank 
using an electronic or automated recordkeeping system as long as the 
records are maintained in conformity with Sec. 12.3(b). Accordingly, 
the final rule specifically permits the use of electronic or automated 
records as long as the records are easily retrievable and readily 
available for inspection and the bank has the capability to reproduce 
the records in hard copy form.

Content and Time of Customer Notification (Sec. 12.4)

    Under the proposal a national bank may give or send the required 
written notification to a customer for whom the bank has effected a 
securities transaction by providing either (1) a copy of a registered 
broker/dealer's confirmation prepared for the bank and a statement 
regarding remuneration, or (2) a bank-generated confirmation containing 
essentially the same information as the SEC requires for registered 
broker/dealer confirmations. The written notification conveys 
information to the bank's customers about their securities 
transactions, thereby giving them an opportunity to verify the terms of 
their transactions and evaluate the accuracy of the bank's execution.
    The proposal did not include former part 12's provision permitting 
an additional five business days for a national bank to provide 
notification to a customer by using a copy of the registered broker/
dealer's confirmation to the bank. The OCC, however, specifically 
requested comments on the need for additional time by a national bank 
opting to provide notification by using a copy of the registered 
broker/dealer's confirmation.
    The OCC received four comments on this issue. One commenter opposed 
giving a bank additional time and stated that it was not necessary and 
not conducive to a uniform regulatory environment. Three commenters 
favored continuing to allow a bank additional time. In light of the 
comments, the final rule retains the provision allowing a bank 
additional time. However, the final rule changes the length of the 
additional time allowed from five days to one day from receipt by the 
bank of the registered broker/dealer's confirmation. The former 
regulation's five-day period was based on the industry practice of 
having the settlement of a securities transaction on the fifth business 
day after the trade day (T+5). The industry now must settle most 
securities transactions by the third business day after the trade day 
(T+3). Given the advances in electronic technology for providing 
confirmations and market developments, the OCC believes one additional 
business day is sufficient for providing a customer a notification in 
this manner. Accordingly, the final rule adopts this change in the time 
of notification when a bank opts to provide notification by using a 
copy of a registered broker/dealer's confirmation.
    The OCC also requested comments on the adoption of the timeframe at 
or before completion of the transaction for a national bank to provide 
a written notification. Sending the notification at or before 
completion of the transaction is consistent with the SEC's broker/
dealer confirmation rule. See Securities Exchange Act of 1934 Rule 10b-
10, 17 CFR 240.10b-10(a) (SEC Rule 10b-10). The SEC also defines 
completion of the transaction similar to the proposed part 12 
definition, generally meaning payment of funds and delivery of the 
securities. See 17 CFR 240.10b-10(d)(2).
    The OCC received four comments on this issue. One commenter 
supported the adoption of this timeframe and two commenters expressed 
concern about a bank's ability to provide the information so quickly. 
Another commenter noted that in a typical custody arrangement, 
customers employ an outside broker (e.g., a registered broker/dealer) 
to make investments for them and the bank does not process any activity 
on its customer's account records until it receives authorization from 
the registered broker/dealer. However, the commenter interpreted the 
proposal to mean that the bank must provide the customer a notification 
within the T+3 timeframe. With respect to this last comment, the OCC 
notes that part 12 does not apply when a registered broker/dealer is 
effecting the securities transactions and the bank is acting only as 
custodian.
    The final rule adopts the timeframe at or before completion of the 
transaction in order to reflect current securities industry practice. 
This timeframe requires a national bank to give or send notification of 
its customers' securities transactions in the same way as a

[[Page 63961]]

nonbank registered broker/dealer. The OCC believes this change promotes 
consistency among regulators and keeps banks on a level playing field 
with nonbank registered broker/dealers. The OCC also believes that the 
additional day to provide the confirmation when using a copy of a 
registered broker/dealer's confirmation will allow a bank adequate time 
to provide a notification. Further, the OCC notes that the final rule 
only requires the bank to give or send the notification by the 
settlement of the securities transaction, i.e. the completion of the 
transaction, and not that the customer must receive the notification by 
settlement.
    Consistent with SEC Rule 10b-10, the proposal added Sec. 12.4(b) 
(8), (9), (10), and (11), requiring disclosure of yield information on 
debt securities (renumbered in the final rule as Sec. 12.4(a) (8), (9), 
(10), and (11)). The proposal also added Sec. 12.4(b)(12) requiring 
disclosure that a debt security has not been rated by a nationally 
recognized statistical rating organization, if that is the case 
(renumbered in the final rule as Sec. 12.4(a)(12)).
    The OCC sought comments on the applicability and need for these 
disclosure requirements. Both commenters that addressed this issue 
focused on the requirement for unrated debt securities, and both 
supported including these requirements. One commenter stated that its 
trade confirmation already shows ``NR'' for unrated securities. The OCC 
recognizes that there are a variety of situations where certain 
securities may be unrated. The disclosure is intended to alert 
customers that they may wish to obtain further information or 
clarification from the bank on the nature of these securities. For the 
reasons stated in the proposal and in light of the comments, the final 
rule adopts these additional disclosure requirements.
    The proposal also requested comments on whether part 12 should 
include a provision similar to SEC Rule 10b-10(c) stating the required 
period of time for a national bank to furnish information pursuant to a 
customer's request. SEC Rule 10b-10(c) requires broker/dealers to 
furnish to customers requested information within five business days of 
the receipt of the request, or within 15 business days if the broker/
dealer effected the transaction more than 30 days before the receipt of 
the request. See 17 CFR 240.10b-10(c). Former part 12 did not contain a 
similar provision. Two commenters addressed this issue and were opposed 
to incorporating the SEC's standard. The commenters noted that 
furnishing information pursuant to a customer's request ``within a 
reasonable time'' is sufficient. The OCC agrees with the commenters. 
Accordingly, the final rule does not contain this provision.
    The proposal included a new provision concerning the disclosure of 
other remuneration similar to that in the SEC's Rule 10b-10. See 17 CFR 
240.10b-10(a)(2)(i)(D). Under proposed Sec. 12.4(b)(6) (renumbered in 
the final rule as Sec. 12.4(a)(6)), a national bank may choose not to 
disclose the source and amount of other remuneration to the bank, if 
the bank: (1) Informs the customer in writing that it has received or 
will receive other remuneration; and (2) the bank states that it will 
furnish the source and amount of the other remuneration upon the 
customer's written request.
    The OCC received two comments supporting the inclusion of this 
provision but suggesting further clarification. In light of these 
comments, the final rule adopts the provisions on remuneration 
disclosure as proposed with the following clarification. First, the 
final rule clarifies that a notification by means of the written 
statements permitted by Sec. 12.4(a)(6) is available only in lieu of 
disclosing the source and amount of other remuneration, not in lieu of 
disclosing the remuneration paid by the customer. Second, 
Sec. 12.4(a)(6) reflects that the bank will furnish information 
pursuant to a customer's request within a reasonable time.
    Proposed Sec. 12.4(c), captioned ``Notification by agreement,'' 
retains the option in the former rule for the bank and the customer to 
agree in writing to a different time and form of notification for a 
securities transaction where the national bank does not exercise 
investment discretion. The OCC received three comments on this issue. 
Two commenters asked for clarification on the use of the notification 
by agreement option. Another commenter suggested moving Sec. 12.4(c) 
back to Sec. 12.5, the section on alternative forms and times of 
notification, as under the former rule.
    In response to these comments, the OCC notes that a bank does not 
need to provide a notification under Sec. 12.4 (a) or (b) when using 
the notification by agreement option, unless specifically requested by 
the customer. The OCC has not substantively changed the notification by 
agreement option and intends a national bank using this option to 
provide notification in the same way as under the former part 12 
provision. The final rule relocates the notification by agreement 
option to Sec. 12.5(a) in an effort to further clarify Secs. 12.4 and 
12.5.
    Finally, in response to several commenters' suggestions for 
stylistic changes intended to reduce confusion and enhance readability, 
the final rule changes the name of the section, some introductory 
language, and the captions. The final rule also reverses the order of 
the notification options of Sec. 12.4(a) and Sec. 12.4(b) to emphasize 
the information a bank must provide its customer in a notification 
regardless of which type of notification under this section the bank 
elects to provide.

Notification by Agreement; Alternative Forms and Times of Notification 
(Sec. 12.5)

    In addition to the notification requirements in Sec. 12.4, the 
proposal also authorized alternative forms and times of notification 
under Sec. 12.5 for certain specific types of transactions. These were: 
(1) Transactions in which the bank exercises investment discretion in 
other than an agency capacity; (2) transactions in which the bank 
exercises investment discretion in an agency capacity; (3) transactions 
for a collective investment fund; and (4) transactions for a periodic 
plan. The OCC asked commenters to address the continuing need for the 
alternative forms of notification.
    Two commenters addressed this issue. One commenter expressed 
support for the continued inclusion of the alternative forms of 
notification. Another commenter suggested that Sec. 12.5(c) (regarding 
notifications for collective investment fund transactions) was 
unnecessary because banks follow the requirements of 12 CFR part 9, the 
OCC's fiduciary regulation. The OCC agrees with this comment and has 
revised the final rule to state simply that for collective investment 
fund transactions a bank must follow the requirements of 12 CFR part 9. 
The final rule also changes the name of the section, some introductory 
language, and the captions in an effort to eliminate confusion and 
enhance readability.
    The proposal clarified that for Sec. 12.5 purposes generally, it is 
the ``transaction'' that triggers the notification requirements, not 
the type of account. The OCC requested comments about any effects of 
the proposed change regarding alternative forms of notification based 
upon types of transactions instead of types of accounts.
    The OCC received one comment on this proposed change. The commenter 
suggested that the type and form of notification should be negotiated 
as part of the original agreement between the customer and the bank, 
and that automated means then should be used

[[Page 63962]]

to comply with the notification requirements for all transactions in 
the account. The commenter was concerned that the proposed change would 
preclude this option of agreeing to the type and form of the 
notification.
    The OCC agrees with the commenter that the customer and the 
national bank should have the option to determine the type and form of 
notification initially with the account opening. The OCC does not 
believe that the change set out in the proposal would preclude the 
customer and the bank agreeing beforehand on the form and time of the 
notification required. For example, a national bank effecting 
securities transactions for an account in which the bank exercises 
investment discretion may have an agreement with the customer to 
provide a monthly account statement. The alternative notification 
procedures set forth in Sec. 12.5 continue to permit the national bank 
and the customer to agree in writing to another type and form of 
notification. However, even though the national bank and the customer 
may agree on the type and form of notification at the opening of the 
account, the OCC views the ``transaction'' as triggering the part 12 
notification requirements. The OCC does not intend for the proposed 
change to substantively affect a national bank's compliance with the 
part 12 notice requirements. Thus, the final rule adopts this change in 
terminology that the transaction triggers the notification 
requirements.
    The proposed rule amended the notification time for periodic plan 
transactions under Sec. 12.5(d) (renumbered in the final rule as 
Sec. 12.5(e)) to not less than once every three months rather than 
notification as promptly as possible after each transaction. One 
commenter noted their support for this change in notification time. Two 
other commenters specifically suggested the OCC clarify in the final 
rule how the periodic plan notification requirements apply to cash 
management sweep services. One commenter noted that a separate 
confirmation requirement, for example, for every money market mutual 
fund transaction in a sweep arrangement, would impose an unnecessary 
paperwork burden on national banks and their customers and place banks 
at a competitive disadvantage relative to nonbank registered broker/
dealers. Under the SEC's Rule 10b-10, broker/dealers must provide a 
confirmation after the end of each monthly period for transactions in 
money market mutual funds. See 17 CFR 240.10b-10(b)(2).
    The OCC agrees that national banks offering cash management sweep 
services should provide notification similar to that provided by 
nonbank registered broker/dealers offering similar services. As 
discussed in Sec. 12.2, the OCC has revised the definition of periodic 
plan in the final rule to include cash management sweep services. 
Section 12.5(e) in the final rule provides the timeframe for 
notification for periodic plans. The final rule clarifies that, with 
respect to cash management sweep services, the time for notification is 
each month in which a purchase or sale of securities takes place in the 
customer's deposit account and not less than once every three months if 
there are no securities transactions in the account. The final rule 
also adopts the change as proposed for other periodic plans, namely, 
that the time for notification is not less than once every three 
months. The OCC believes that these timeframes are consistent with 
current industry practice and the SEC's notification requirements. 
These timeframes also will serve to eliminate unnecessary regulatory 
burden by reducing the number of required notifications.
    The OCC reminds national banks engaging in cash management sweep 
services that the securities involved in the sweep services remain 
subject to any other applicable rules and regulations. In some 
instances notification requirements other than those of part 12 may 
apply. For example, a bank offering a sweep repurchase agreement 
program involving government securities, commonly called a ``sweep 
repo,'' may be subject to daily confirmation requirements under the 
Government Securities Act of 1986 regulations, 17 CFR parts 400 through 
405, 449, and 450. See OCC Advisory Letter 96-2 (March 22, 1996).

Fees (Sec. 12.6)

    The proposal placed the former provisions in Secs. 12.4 and 12.5 
regarding fees into a new Sec. 12.6. The OCC received no comments on 
this section. The final rule adopts the section substantially as 
proposed except that certain provisions are reordered.

Securities Trading Policies and Procedures (Sec. 12.7)

    The proposal retained the requirement under Sec. 12.7(a)(1) that a 
bank establish written policies and procedures assigning supervisory 
responsibility for personnel engaged in different aspects of the 
trading process. The proposal did not propose specific language 
concerning the separation of supervisory responsibility for sales 
activities and ``back room'' functions. The OCC received one comment 
suggesting that the OCC include a specific reference to establishing 
separate supervisory procedures and reporting lines for ``back room'' 
personnel. On reconsideration and in light of the recent developments 
involving the lack of internal controls in certain highly publicized 
cases,\8\ the final rule includes a provision (Sec. 12.7(a)(1)(iii)) 
that explicitly states the need for separate supervisory procedures for 
back room functions.
---------------------------------------------------------------------------

    \8\ See, e.g., David Brilliant, Tone at the Top: Boards and 
Managers Must Ensure Quality Business and Controls, The Banker 26 
(Nov. 1995); Out of Control: Greater Supervision is Urged by the 
Report into the Barings Fiasco, The Banker 15 (Aug. 1995); Maureen 
Duffy, Barings' Systems: The Blame Game, 12 Wall Street & Technology 
16 (1995).
---------------------------------------------------------------------------

    The OCC received several comments related to the filing of personal 
trading reports by national bank officers and employees under proposed 
Sec. 12.7(a)(4). One commenter recommended revising 
Sec. 12.7(a)(4)(iii) to apply only to employees who perform the 
securities trading functions for the bank. The OCC declines to narrow 
the scope of the requirement in the final rule given the important 
purpose behind the personal reporting requirement and recent concerns 
in the securities industry on personal trading by insiders.\9\ This 
requirement, which is similar to requirements under the securities laws 
and regulations, addresses potential conflicts of interests between 
bank personnel and customers and deters improper or illegal use of 
information by bank insiders.
---------------------------------------------------------------------------

    \9\ See, e.g., Division of Investment Management, SEC, Personal 
Investment Activities of Investment Company Personnel (1994); 
Investment Company Institute, Report of the Advisory Group on 
Personal Investing (1994).
---------------------------------------------------------------------------

    The proposal did not change the scope of former Sec. 12.6 
(renumbered as Sec. 12.7 in the proposal). The OCC requires the filing 
of a report from national bank officers or employees who make 
investment recommendations or decisions for the accounts of customers, 
participate in the determination of the recommendations or decisions, 
or who, in connection with their duties, obtain information concerning 
which securities are being purchased or sold or recommended for 
purchase or sale. The OCC notes that these individuals do not have to 
be regularly or frequently involved in the recommendation or decision-
making process or obtain information on a regular basis to be subject 
to the reporting requirement. However, the mere fact that an officer or 
employee learns of a securities transaction after it has been effected, 
or an investment recommendation after it has been transmitted to a 
customer, would not subject that officer or

[[Page 63963]]

employee to the reporting requirements of Sec. 12.7.
    Another commenter requested that the OCC amend the requirement to 
file personal trading reports ``within ten days'' so that it reads 
``within ten business days'' to accommodate large banking 
organizations. The suggested change is consistent with past informal 
practices to which the OCC has not objected. Accordingly, the final 
rule reflects this change.
    Under Sec. 12.7(d), the proposal requested comment on clarifying 
that a national bank acting as an investment adviser to an investment 
company is subject to section 17 of the Investment Company Act, 15 
U.S.C. 80a-17, and, in particular, the requirements of Rule 17j-1 of 
the Investment Company Act, 17 CFR 270.17j-1 (SEC Rule 17j-1). The 
additional provision in the proposal simply reminded banks of the 
separate existing requirement under SEC Rule 17j-1. As noted in 
Sec. 12.7(d), certain officers and employees of a national bank acting 
as an investment adviser to an investment company must comply with a 
reporting requirement regarding personal securities trading under both 
part 12 and SEC Rule 17j-1.
    The OCC received two comments addressing this issue. The commenters 
suggested that the OCC clarify that filing one report with the bank 
will suffice for purposes of both part 12 and SEC Rule 17j-1 if the 
information required is the same. The OCC believes this would reduce 
burden while enabling the OCC and the SEC to have access to the report. 
Accordingly, the final rule permits national bank officers and 
employees to file one report where the required information is the 
same. Nonetheless, the OCC cautions national banks to recognize that 
the part 12 requirements, in some respects, are broader than those 
under the Investment Company Act because part 12 applies to investment 
advisory activities by national banks whether the bank provides the 
advice to an investment company or to another type of customer.
    The final rule also includes a technical correction to Sec. 12.7(d) 
to clarify that SEC Rule 17j-1 requires personal securities 
transactions to be reported to the investment adviser and maintained 
for review by the SEC.

Waivers (Sec. 12.8)

    The proposal clarified that a national bank may file a written 
request with the OCC for waiver of one or more of the requirements set 
forth in Secs. 12.2 through 12.7, either in whole or in part. The OCC 
received no comments on this section. The final rule adopts Sec. 12.8 
as proposed.

Settlement of securities transactions (Sec. 12.9)

    The proposal added Sec. 12.9 to establish a securities settlement 
timeframe for national banks effecting or entering into contracts for 
the purchase or sale of securities for customers. The OCC intends this 
provision to parallel the SEC's adoption of the ``T+3'' securities 
settlement timeframe. See Securities Exchange Act of 1934 Rule 15c6-1, 
17 CFR 240.15c6-1; 58 FR 52891 (Oct. 13, 1993); 60 FR 26604 (May 17, 
1995) (amendments to the rule). The OCC requested comment on the need 
for and effect of adopting the T+3 securities settlement requirement 
for national banks.
    The OCC received one comment on this issue. The commenter pointed 
out that many small banks do not have access to SEC rules and would 
prefer to have part 12 specify the actual requirement. The commenter 
also noted that incorporating the SEC's rule by reference would permit 
banks to take advantage of any changes by the SEC immediately rather 
than waiting for the OCC to amend part 12. After careful consideration 
of this matter, the OCC decided that national banks would benefit more 
from having immediate access to the text of the SEC's rule rather than 
only having a cross-reference to the SEC's rule in the OCC's 
regulation. For this reason, the final rule adopts Sec. 12.9 as 
proposed.

Interpretations (Secs. 12.101 and 12.102)

    The proposal added two interpretive rulings to part 12. The first 
interpretation (Sec. 12.101) related to the disclosure of remuneration 
for mutual fund transactions. Consistent with the SEC's practice, the 
OCC stated it would allow a bank to fulfill its disclosure requirement 
regarding the source and amount of remuneration for mutual fund 
transactions by providing this information to the customer in a current 
prospectus, at or before completion of the securities transaction.
    The second interpretive ruling (Sec. 12.102) recognized the use of 
electronic communications to satisfy part 12's customer notification 
requirements. This would allow a national bank to send a customer 
notification by facsimile transmission or by some other electronic 
media under certain circumstances. Since the OCC published the 
proposal, the SEC has issued further guidance for broker/dealers using 
electronic media to deliver information to customers under the SEC's 
confirmation rule, SEC Rule 10b-10, 17 CFR 240.10b-10. See Securities 
and Exchange Commission Release No. 33-7288, 61 FR 24644 (May 15, 
1996). The SEC's guidance supersedes its earlier guidance as cited in 
the proposal. However, SEC Release No. 33-7288 retains a general 
approach consistent with the OCC's proposed interpretive ruling.
    The OCC received two comments strongly supporting the addition of 
the interpretive rulings. Since the OCC's proposed interpretive rulings 
are consistent with the SEC's approach, the final rule adopts the 
interpretive rulings as proposed.

                                                Derivation Table                                                
                      [Only substantive modifications, additions and changes are indicated]                     
----------------------------------------------------------------------------------------------------------------
            Revised provision                         Original provision                      Comments          
----------------------------------------------------------------------------------------------------------------
Sec.  12.1(a)............................  Sec.  12.1(a).                                                       
Sec.  12.1(b)............................  Sec.  12.1(a).                                                       
Sec.  12.1(c)(1).........................  .......................................  Added.                      
Sec.  12.1(c)(2)(i)......................  Sec.  12.7(a).                                                       
Sec.  12.1(c)(2)(ii).....................  .......................................  Added.                      
Sec.  12.1(c)(2)(iii)....................  Sec.  12.7(b)..........................  Modified.                   
Sec.  12.1(c)(2)(iv).....................  Sec.  12.7(c).                                                       
Sec.  12.1(c)(2)(v)......................  .......................................  Added.                      
Sec.  12.1(c)(3).........................  .......................................  Added.                      
                                           Sec.  12.1(b)..........................  Removed.                    
Sec.  12.2(a)............................  .......................................  Added.                      
Sec.  12.2(b)............................  Sec.  12.2(a).                                                       
Sec.  12.2(c)............................  .......................................  Added.                      

[[Page 63964]]

                                                                                                                
Sec.  12.2(d)............................  .......................................  Added.                      
Sec.  12.2(e)............................  Sec.  12.2(b)..........................  Modified.                   
Sec.  12.2(f)............................  .......................................  Added.                      
Sec.  12.2(g)............................  .......................................  Added.                      
Sec.  12.2(h)............................  Sec.  12.2(c).                                                       
Sec.  12.2(i)............................  .......................................  Added.                      
Sec.  12.2(j)............................  Sec.  12.2(d)..........................  Modified.                   
Sec.  12.2(k)............................  Sec.  12.2(e)..........................  Modified.                   
Sec.  12.3(b)............................  Sec.  12.3.............................  Modified.                   
Sec.  12.4...............................  Secs.  12.4, 12.5......................  Modified.                   
Sec.  12.5...............................  Secs.  12.4, 12.5......................  Modified.                   
Sec.  12.6...............................  Secs.  12.4, 12.5.                                                   
Sec.  12.7(a)............................  Sec.  12.6 (a), (b), (c), and (d).                                   
Sec.  12.7(b)............................  Sec.  12.6(d)..........................  Modified.                   
Sec.  12.7(c)............................  Sec.  12.6(d)..........................  Modified.                   
Sec.  12.7(d)............................  .......................................  Added.                      
Sec.  12.8...............................   12.7(d).                                                            
Sec.  12.9...............................  .......................................  Added.                      
Sec.  12.101.............................  .......................................  Added.                      
Sec.  12.102.............................  .......................................  Added.                      
----------------------------------------------------------------------------------------------------------------

Effective Date

    The final rule takes effect on December 31, 1996. The OCC finds 
good cause, pursuant to 5 U.S.C. 553(d)(3), for prescribing this year-
end effective date, because it will enable national banks to adjust 
their practices to conform with the regulation at the beginning of a 
calendar quarter. The final rule confers benefits on the public and 
national banks by streamlining and clarifying current requirements 
governing recordkeeping and confirmations for securities transactions.

Regulatory Flexibility Act

    It is hereby certified that this final rule will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis is not required. This 
final rule will have minimal economic impact on national banks, 
regardless of size, since it reduces somewhat regulatory burden but 
makes no material changes.

Executive Order 12866

    The OCC has determined that this final rule is not a significant 
regulatory action.

Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4, March 22, 1995, 109 Stat. 48 (Unfunded Mandates Act), requires 
that an agency prepare a budgetary impact statement before promulgating 
a rule that includes a Federal mandate that may result in the 
expenditure by state, local, and tribal governments, in the aggregate, 
or by the private sector, of $100 million or more in any one year. If a 
budgetary impact statement is required, section 205 of the Unfunded 
Mandates Act also requires an agency to identify and consider a 
reasonable number of regulatory alternatives before promulgating a 
rule. Because the OCC has determined that the final rule will not 
result in expenditures by state, local, and tribal governments, or by 
the private sector, of more than $100 million in any one year, the OCC 
has not prepared a budgetary impact statement or specifically addressed 
the regulatory alternatives considered. Nevertheless, as discussed in 
the preamble, the rule has the effect of reducing somewhat regulatory 
costs and other burdens, where possible.

Paperwork Reduction Act of 1995

    The OCC invites comment on:
    (1) Whether the collections of information contained in this final 
rule are necessary for the proper performance of the agency's 
functions, including whether the information has practical utility;
    (2) The accuracy of the agency's estimate of the burden of the 
information;
    (3) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (4) Ways to minimize the burden of the information collections on 
respondents, including the use of automated information collection 
techniques or other forms of information technology; and
    (5) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    Respondents/recordkeepers are not required to respond to these 
collections of information unless they display a currently valid OMB 
control number.
    The collections of information contained in this final rule have 
been approved by the Office of Management and Budget under OMB Control 
No. 1557-0142 in accordance with the Paperwork Reduction Act of 1995 
(44 U.S.C. 3507(d)). Comments on the collections of information should 
be sent to the Office of Management and Budget, Paperwork Reduction 
Project 1557-0142, Washington, DC 20503, with a copy to the Legislative 
and Regulatory Activities Division (Attention: 1557-0142), Office of 
the Comptroller of the Currency, 250 E Street, SW., Washington, DC 
20219.
    The collections of information in this final rule are found in 12 
CFR 12.3 through 12.5 and 12.7 and 12.8. This information is required 
by the OCC to establish an audit trail. That audit trail is used by the 
OCC in its regulatory examinations as a tool to evaluate a bank's 
compliance with the banking and securities laws and regulations, such 
as the anti-fraud provisions of the Federal securities laws. Further, 
the records provide a basis for adequate disclosure to customers who 
effect securities transactions through national banks. Other 
information provides a basis for the OCC to waive some or all of the 
recordkeeping and confirmation requirements of 12 CFR part 12. The

[[Page 63965]]

respondents/recordkeepers are national banks.
    Estimated average annual burden hours per respondent/recordkeeper: 
The average burden will vary from two hours to more than 700 hours, 
depending upon individual circumstances, with an estimated average of 
53.5 hours.
    Estimated number of respondents and/or recordkeepers: 1,047.
    Estimated total annual reporting and recordkeeping burden: 56,019. 
hours
    Start-up costs to respondents: None.

List of Subjects in 12 CFR Part 12

    National banks, Reporting and recordkeeping requirements, 
Securities.

Authority and Issuance

    For the reasons set out in the preamble, part 12 of chapter I of 
title 12 of the Code of Federal Regulations is revised to read as 
follows:

PART 12--RECORDKEEPING AND CONFIRMATION REQUIREMENTS FOR SECURITIES 
TRANSACTIONS

Sec.
12.1  Authority, purpose, and scope.
12.2  Definitions.
12.3  Recordkeeping.
12.4  Content and time of notification.
12.5  Notification by agreement; alternative forms and times of 
notification.
12.6  Fees.
12.7  Securities trading policies and procedures.
12.8  Waivers.
12.9  Settlement of securities transactions.

Interpretations

12.101  National bank disclosure of remuneration for mutual fund 
transactions.
12.102  National bank use of electronic communications as customer 
notifications.

    Authority: 12 U.S.C. 24, 92a, and 93a.


Sec. 12.1  Authority, purpose, and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 24, 92a, 
and 93a.
    (b) Purpose. This part establishes rules, policies, and procedures 
applicable to recordkeeping and confirmation requirements for certain 
securities transactions effected by national banks for customers.
    (c) Scope--(1) General. Any security transaction effected for a 
customer by a national bank is subject to this part, except as provided 
by paragraph (c)(2) of this section. This part applies to a national 
bank effecting transactions in government securities. This part also 
applies to municipal securities transactions by a national bank that is 
not registered as a ``municipal securities dealer'' with the Securities 
and Exchange Commission. See 15 U.S.C. 78c(a)(30) and 78o-4. This part, 
as well as 12 CFR part 9, applies to securities transactions effected 
by a national bank as fiduciary.
    (2) Exceptions--(i) Small number of transactions. The requirements 
of Secs. 12.3(a)(2) through (4) and 12.7(a)(1) through (3) do not apply 
to a national bank having an average of fewer than 200 securities 
transactions per year for customers over the prior three calendar year 
period. The calculation of this average does not include transactions 
in government securities.
    (ii) Government securities. The recordkeeping requirements of 
Sec. 12.3 do not apply to national banks effecting fewer than 500 
government securities brokerage transactions per year. This exception 
does not apply to government securities dealer transactions by national 
banks. See 17 CFR 404.4(a).
    (iii) Municipal securities. This part does not apply to 
transactions in municipal securities conducted by a national bank 
registered with the Securities and Exchange Commission as a ``municipal 
securities dealer'' as defined in title 15 U.S.C. 78c(a)(30). See 15 
U.S.C. 78o-4.
    (iv) Foreign branches. This part does not apply to securities 
transactions conducted by a foreign branch of a national bank.
    (v) Transactions effected by registered broker/dealers. This part 
does not apply to securities transactions effected by a broker or 
dealer registered with the Securities and Exchange Commission (SEC) 
where the SEC-registered broker or dealer directly provides the 
customer a confirmation; including, transactions effected by a national 
bank employee when acting as an employee of an SEC-registered broker/
dealer.
    (3) Safe and sound operations. Notwithstanding paragraph (c)(2) of 
this section, every national bank conducting securities transactions 
for customers shall maintain effective systems of records and controls 
regarding their customer securities transactions to ensure safe and 
sound operations. The systems maintained must clearly and accurately 
reflect appropriate information and provide an adequate basis for an 
audit.


Sec. 12.2  Definitions.

    (a) Asset-backed security means a security that is primarily 
serviced by the cashflows 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.
    (b) Collective investment fund means any fund established pursuant 
to 12 CFR 9.18.
    (c) Completion of the transaction means:
    (1) In the case of a customer who purchases a security through or 
from a national bank, except as provided in paragraph (c)(2) of this 
section, the time when the customer pays the bank any part of the 
purchase price, or, if payment is made by a bookkeeping entry, the time 
when the bank makes the bookkeeping entry for any part of the purchase 
price;
    (2) In the case of a customer who purchases a security through or 
from a national bank and who makes payment for the security prior to 
the time when payment is requested or notification is given that 
payment is due, the time when the bank delivers the security to or into 
the account of the customer;
    (3) In the case of a customer who sells a security through or to a 
national bank, except as provided in paragraph (c)(4) of this section, 
if the security is not in the custody of the bank at the time of sale, 
the time when the security is delivered to the bank, and if the 
security is in the custody of the bank at the time of sale, the time 
when the bank transfers the security from the account of the customer;
    (4) In the case of a customer who sells a security through or to a 
national bank and who delivers the security to the bank prior to the 
time when delivery is requested or notification is given that delivery 
is due, the time when the bank makes payment to or into the account of 
the customer.
    (d) Crossing of buy and sell orders means a security transaction in 
which the same bank acts as agent for both the buyer and the seller.
    (e) Customer means any person or account, including any agency, 
trust, estate, guardianship, or other fiduciary account for which a 
national bank makes or participates in making the purchase or sale of 
securities, but does not include a broker, dealer, bank acting as a 
broker or dealer, bank acting as the fiduciary of an account, bank as 
trustee acting as shareholder of record for the purchase or sale of 
securities, or issuer of securities that are the subject of the 
transaction.
    (f) Debt security means any security, such as a bond, debenture, 
note, or any other similar instrument that evidences a liability of the 
issuer (including any security of this type that is convertible into 
stock or a similar security) and fractional or participation interests 
in one or more of any of the foregoing. This

[[Page 63966]]

definition does not include securities issued by an investment company 
registered under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et 
seq.
    (g) Government security means:
    (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 and 
Exchange Commission; or
    (4) Any put, call, straddle, option, or privilege on a security 
described in paragraph (g)(1), (2), or (3) of this section, other than 
a put, call, straddle, option, or privilege:
    (i) That is traded on one or more national securities exchanges; or
    (ii) For which quotations are disseminated through an automated 
quotation system operated by a registered securities association.
    (h) Investment discretion means that, with respect to an account, a 
bank directly or indirectly:
    (1) Is authorized to determine what securities or other property 
shall be purchased or sold by or for the account; or
    (2) 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 these investment decisions.
    (i) Municipal security means:
    (1) A security that is a direct obligation of, or an obligation 
guaranteed as to principal or interest by, a State or any political 
subdivision, or any agency or instrumentality of a State or any 
political subdivision;
    (2) A security that is a direct obligation of, or an obligation 
guaranteed as to principal or interest by, any municipal corporate 
instrumentality of one or more States; or
    (3) A security that is an industrial development bond (as defined 
in section 103(c)(2) of the Internal Revenue Code of 1954 (26 U.S.C. 
103(c)(2) (1970)) (Code)) the interest on which is excludable from 
gross income under section 103(a)(1) of the Code (26 U.S.C. 103(a)(1)) 
if, by reason of the application of paragraph (4) or (6) of section 
103(c) of the Code (26 U.S.C. 103(c)) (determined as if paragraphs 
(4)(A), (5), and (7) were not included in section 103(c) (26 U.S.C. 
103(c)), paragraph (1) of section 103(c) (26 U.S.C. 103(c)) does not 
apply to the security.
    (j) Periodic plan means:
    (1) A written authorization for a national 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. These plans include dividend 
reinvestment plans, automatic investment plans, and employee stock 
purchase plans.
    (2) 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).
    (k) Security: (1) Means 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 collateral-trust certificate, preorganization certificate or 
subscription, transferable share, investment contract, voting-trust 
certificate, and 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), or, in general, 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;
    (2) Does not mean currency; any note, draft, bill of exchange, or 
banker's acceptance which has a maturity at the time of issuance not 
exceeding nine months, exclusive of days of grace, or any renewal 
thereof, the maturity of which is likewise limited; a deposit or share 
account in a Federal or State chartered depository institution; a loan 
participation; a letter of credit or other form of bank indebtedness 
incurred in the ordinary course of business; units of a collective 
investment fund; interests in a variable amount note in accordance with 
12 CFR 9.18; U.S. Savings Bonds; or any other instrument the OCC 
determines does not constitute a security for purposes of this part.


Sec. 12.3  Recordkeeping.

    (a) General rule. A national bank effecting securities transactions 
for customers shall maintain the following records for at least three 
years:
    (1) Chronological records. An itemized daily record of each 
purchase and sale of securities maintained in chronological order, and 
including:
    (i) Account or customer name for which each transaction was 
effected;
    (ii) Description of the securities;
    (iii) Unit and aggregate purchase or sale price;
    (iv) Trade date; and
    (v) Name or other designation of the broker/dealer or other person 
from whom the securities were purchased or to whom the securities were 
sold;
    (2) Account records. Account records for each customer, reflecting:
    (i) Purchases and sales of securities;
    (ii) Receipts and deliveries of securities;
    (iii) Receipts and disbursements of cash; and
    (iv) Other debits and credits pertaining to transactions in 
securities;
    (3) Memorandum order. A separate memorandum (order ticket) of each 
order to purchase or sell securities (whether executed or canceled), 
including:
    (i) Account or customer name for which the transaction was 
effected;
    (ii) Type of order (market order, limit order, or subject to 
special instructions);
    (iii) Time the trader or other bank employee responsible for 
effecting the transaction received the order;
    (iv) Time the trader placed the order with the broker/dealer, or if 
there was no broker/dealer, time the order was executed or canceled;
    (v) Price at which the order was executed; and
    (vi) Name of the broker/dealer utilized;
    (4) Record of broker/dealers. A record of all broker/dealers 
selected by the bank to effect securities transactions and the amount 
of commissions paid or allocated to each broker during the calendar 
year; and
    (5) Notifications. A copy of the written notification required by 
Secs. 12.4 and 12.5.
    (b) Manner of maintenance. The records required by this section 
must clearly and accurately reflect the information required and 
provide an adequate basis for the audit of the information. Record 
maintenance may include the use of automated or electronic records 
provided the records are easily retrievable, readily available for 
inspection, and capable of being reproduced in a hard copy.

[[Page 63967]]

Sec. 12.4  Content and time of notification.

    Unless a national bank elects to provide notification by one of the 
means specified in Sec. 12.5, a national bank effecting a securities 
transaction for a customer shall give or send to the customer either of 
the following types of notifications at or before completion of the 
transaction or, if the bank uses a registered broker/dealer's 
confirmation, within one business day from the bank's receipt of the 
registered broker/dealer's confirmation:
    (a) Written notification. A written notification disclosing:
    (1) Name of the bank;
    (2) Name of the customer;
    (3) Capacity in which the bank acts (i.e., as agent for the 
customer, as agent for both the customer and some other person, as 
principal for its own account, or in any other capacity);
    (4) Date and time of execution, or a statement that the bank will 
furnish the time of execution within a reasonable time upon written 
request of the customer, and the identity, price, and number of shares 
or units (or principal amount in the case of debt securities) of the 
security purchased or sold by the customer;
    (5) Amount of any remuneration that the customer has provided or is 
to provide any broker/dealer, directly or indirectly, in connection 
with the transaction;
    (6) (i) Amount of any remuneration that the bank has received or 
will receive from the customer, and the source and amount of any other 
remuneration that the bank has received or will receive in connection 
with the transaction; unless:
    (A) The bank and its customer have determined remuneration pursuant 
to a written agreement; or
    (B) In the case of government securities and municipal securities, 
the bank received the remuneration in other than an agency transaction.
    (ii) 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 paragraph (a)(6)(i) of this section, 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;
    (7) Name of the registered broker/dealer utilized; or where there 
is no registered broker/dealer, the name of the person from whom the 
security was purchased or to whom the security was sold, or a statement 
that the bank will furnish this information within a reasonable time 
upon written request from the customer;
    (8) In the case of any 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 upon request;
    (9) In the case of a transaction in a debt security effected 
exclusively on the basis of a dollar price:
    (i) The dollar price at which the transaction was effected; and
    (ii) The yield to maturity calculated from the dollar price, unless 
the transaction is for a debt security that either:
    (A) Has a maturity date that may be extended by the issuer thereof, 
with a variable interest payable thereon; or
    (B) Is an asset-backed security that represents an interest in or 
is secured by a pool of receivables or other financial assets that 
continuously are subject to prepayment;
    (10) In the case of a transaction in a debt security effected on 
the basis of yield:
    (i) 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 call price;
    (ii) The dollar price calculated from the yield at which the 
transaction was effected; and
    (iii) 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, unless the transaction is 
for a debt security that either:
    (A) Has a maturity date that may be extended by the issuer thereof, 
with a variable interest rate payable thereon; or
    (B) Is an asset-backed security that represents an interest in or 
is secured by a pool of receivables or other financial assets that 
continuously are subject to prepayment;
    (11) 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 continuously are 
subject 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 that information concerning the factors that affect yield 
(including at a minimum estimated yield, weighted average life, and the 
prepayment assumptions underlying yield) will be furnished upon written 
request of the customer; and
    (12) 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; or
    (b) Copy of the registered broker/dealer's confirmation. A copy of 
the confirmation of a registered broker/dealer relating to the 
securities transaction and, if the customer or any other source will 
provide remuneration to the bank in connection with the transaction and 
a written agreement between the bank and the customer does not 
determine the remuneration, a statement of the source and amount of any 
remuneration that the customer or any other source is to provide the 
bank.


Sec. 12.5  Notification by agreement; alternative forms and times of 
notification.

    A national bank may elect to use the following notification 
procedures as an alternative to complying with Sec. 12.4:
    (a) Notification by agreement. A national bank effecting a 
securities transaction for an account in which the bank does not 
exercise investment discretion shall give or send written notification 
at the time and in the form agreed to in writing by the bank and 
customer, provided that the agreement makes clear the customer's right 
to receive the written notification pursuant to Sec. 12.4 (a) or (b) at 
no additional cost to the customer.
    (b) Trust transactions. A national bank effecting a securities 
transaction for an account in which the bank exercises investment 
discretion other than in an agency capacity shall give or send written 
notification within a reasonable time if a person having the power to 
terminate the account, or, if there is no such person, any person 
holding a vested beneficial interest in the account, requests written 
notification pursuant to Sec. 12.4 (a) or (b). Otherwise, notification 
is not required.
    (c) Agency transactions. (1) A national bank effecting a securities 
transaction for an account in which the bank exercises investment 
discretion in an agency capacity shall give or send, not less than once 
every three months, an itemized statement to each customer that 
specifies the funds and securities in the custody or possession of the 
bank at

[[Page 63968]]

the end of the period and all debits, credits and transactions in the 
customer's account during the period.
    (2) If requested by the customer, the bank shall give or send 
written notification to the customer pursuant to Sec. 12.4 (a) or (b) 
within a reasonable time.
    (d) Collective investment fund transactions. A national bank 
effecting a securities transaction for a collective investment fund 
shall follow 12 CFR 9.18.
    (e) Periodic plan transactions. (1) A national bank effecting a 
securities transaction for a periodic plan (except for a cash 
management sweep service) shall give or send to its customer not less 
than once every three months, a written statement showing:
    (i) The customer's funds and securities in the custody or 
possession of the bank;
    (ii) All service charges and commissions paid by the customer in 
connection with the transaction; and
    (iii) All other debits and credits of the customer's account 
involved in the transaction.
    (2) A national bank effecting a securities transaction for a cash 
management sweep service or other periodic plan as defined in 
Sec. 12.2(j)(2) shall give or send its customer a written statement, in 
the same form as under paragraph (e)(1) of this section, 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 and regulations.
    (3) Upon written request of the customer, the bank shall give or 
send the information described in Sec. 12.4 (a) or (b), except that the 
bank need not provide to the customer any information relating to 
remuneration paid in connection with the transaction when the 
remuneration is paid by a source other than the customer.


Sec. 12.6  Fees.

    A national bank may charge a reasonable fee for providing 
notification pursuant to Sec. 12.5(b), (c), and (e). A national bank 
may not charge a fee for providing notification pursuant to Sec. 12.4 
or Sec. 12.5 (a) and (d).


Sec. 12.7  Securities trading policies and procedures.

    (a) Policies and procedures; reports of securities trading. A 
national bank effecting securities transactions for customers shall 
maintain and adhere to policies and procedures that:
    (1) Assign responsibility for supervision of all officers or 
employees who:
    (i) Transmit orders to or place orders with registered broker/
dealers;
    (ii) Execute transactions in securities for customers; or
    (iii) Process orders for notification or settlement purposes, or 
perform other back office functions with respect to securities 
transactions effected for customers. Policies and procedures for 
personnel described in this paragraph (a)(1)(iii) must provide for 
supervision and reporting lines that are separate from supervision and 
reporting lines for personnel described in paragraphs (a)(1) (i) and 
(ii) of this section;
    (2) Provide for the fair and equitable allocation of securities and 
prices to accounts when the bank receives orders for the same security 
at approximately the same time and places the orders for execution 
either individually or in combination;
    (3) Provide for the crossing of buy and sell orders on a fair and 
equitable basis to the parties to the transaction, where permissible 
under applicable law; and
    (4) Require bank officers and employees to report to the bank, 
within ten business days after the end of the calendar quarter, all 
personal transactions in securities made by them or on their behalf in 
which they have a beneficial interest, if the officers and employees:
    (i) Make investment recommendations or decisions for the accounts 
of customers;
    (ii) Participate in the determination of the recommendations or 
decisions; or
    (iii) In connection with their duties, obtain information 
concerning which securities are purchased, sold, or recommended for 
purchase or sale by the bank.
    (b) Required information. The report required under paragraph 
(a)(4) of this section must contain the following information:
    (1) The date of the transaction, the title and number of shares, 
and the principal amount of each security involved;
    (2) The nature of the transaction (i.e. purchase, sale, or other 
type of acquisition or disposition);
    (3) The price at which the transaction was effected; and
    (4) The name of the registered broker, registered dealer, or bank 
with or through whom the transaction was effected.
    (c) Report not required. This section does not require a bank 
officer or employee to report transactions if:
    (1) The officer or employee has no direct or indirect influence or 
control over the transaction;
    (2) The transaction is in mutual fund shares;
    (3) The transaction is in government securities; or
    (4) The transactions involve an aggregate amount of purchases and 
sales per officer or employee of $10,000 or less during the calendar 
quarter.
    (d) Additional reporting requirement. A national bank that acts as 
an investment adviser to an investment company is subject to the 
requirements of Securities and Exchange Commission (SEC) Rule 17j-1 (17 
CFR 270.17j-1) issued under the Investment Company Act of 1940. SEC 
Rule 17j-1 requires an ``access person'' of the investment adviser to 
report certain personal securities transactions to the investment 
adviser for review by the Securities and Exchange Commission. ``Access 
person'' includes directors, officers, and certain employees of the 
investment adviser. The reporting requirement under paragraph (a)(4) of 
this section is a separate requirement from any applicable requirements 
under SEC Rule 17j-1. However, an ``access person'' required to file a 
report with a national bank pursuant to SEC Rule 17j-1 need not file a 
separate report under paragraph (a)(4) of this section if the required 
information is the same.


Sec. 12.8  Waivers.

    A national bank may file a written request with the OCC for waiver 
of one or more of the requirements set forth in Secs. 12.2 through 
12.7, either in whole or in part. The OCC may grant a waiver from the 
requirements of this part to any national bank, or any class of 
national banks, with regard to a specific transaction or a specific 
class of transactions.


Sec. 12.9  Settlement of securities transactions.

    (a) A national bank shall not effect or enter into a contract for 
the purchase or sale of a security (other than an exempted security as 
defined in 15 U.S.C. 78c(a)(12), government security, municipal 
security, commercial paper, bankers' acceptances, or commercial bills) 
that provides for payment of funds and delivery of securities later 
than the third business day after the date of the contract, unless 
otherwise expressly agreed to by the parties at the time of the 
transaction.
    (b) Paragraphs (a) and (c) of this section do not apply to 
contracts:
    (1) For the purchase or sale of limited partnership interests that 
are not listed on an exchange or for which quotations are not 
disseminated through an automated quotation system of a registered 
securities association;

[[Page 63969]]

    (2) For the purchase or sale of securities that the Securities and 
Exchange Commission (SEC) may from time to time, taking into account 
then existing market practices, exempt by order from the requirements 
of paragraph (a) of SEC Rule 15c6-1, 17 CFR 240.15c6-1(a), either 
unconditionally or on specified terms and conditions, if the SEC 
determines that an exemption is consistent with the public interest and 
the protection of investors.
    (c) Paragraph (a) of this section does not apply to contracts for 
the sale for cash of securities that are priced after 4:30 p.m. Eastern 
time on the date the securities are priced and that are sold by an 
issuer to an underwriter pursuant to a firm commitment underwritten 
offering registered under the Securities Act of 1933, 15 U.S.C. 77a et 
seq., or sold to an initial purchaser by a national bank participating 
in the offering. A national bank shall not effect or enter into a 
contract for the purchase or sale of the securities that provides for 
payment of funds and delivery of securities later than the fourth 
business day after the date of the contract unless otherwise expressly 
agreed to by the parties at the time of the transaction.
    (d) For purposes of paragraphs (a) and (c) of this section, the 
parties to a contract are deemed to have expressly agreed to an 
alternate date for payment of funds and delivery of securities at the 
time of the transaction for a contract for the sale for cash of 
securities pursuant to a firm commitment offering if the managing 
underwriter and the issuer have agreed to the date for all securities 
sold pursuant to the offering and the parties to the contract have not 
expressly agreed to another date for payment of funds and delivery of 
securities at the time of the transaction.

Interpretations


Sec. 12.101  National bank disclosure of remuneration for mutual fund 
transactions.

    A national bank may fulfill its obligation to disclose information 
on the source and amount of remuneration, required by Sec. 12.4, for 
mutual fund transactions by providing this information to the customer 
in a current prospectus, at or before completion of the securities 
transaction. The OCC's view is consistent with the position of the 
Securities and Exchange Commission (SEC) as provided in a no-action 
letter dated March 19, 1979, which permits confirmations for mutual 
funds to refer to the sales load disclosed in the prospectus. See 
Letter to the Investment Company Institute, reprinted in [1979 Transfer 
Binder] Fed. Sec. L. Rep. (CCH) 82041 (Mar. 19, 1979). The OCC would 
reconsider its position upon any change in the SEC's practice.


Sec. 12.102  National bank use of electronic communications as customer 
notifications.

    (a) In appropriate situations, a national bank may satisfy the 
``written'' notification requirement under Secs. 12.4 and 12.5 through 
electronic communications. Where a customer has a facsimile machine, a 
national bank may fulfill its notification delivery requirement by 
sending the notification by facsimile transmission. Similarly, a bank 
may satisfy the notification delivery requirement by other electronic 
communications when:
    (1) The parties agree to use electronic instead of hard-copy 
notifications;
    (2) The parties have the ability to print or download the 
notification;
    (3) The recipient affirms or rejects the trade through electronic 
notification;
    (4) The system cannot automatically delete the electronic 
notification; and
    (5) Both parties have the capacity to receive electronic messages.
    (b) The OCC would consider the permissibility of other situations 
using electronic notifications on a case-by-case basis.

    Dated: November 22, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 96-30636 Filed 11-29-96; 8:45 am]
BILLING CODE 4810-33-P