[Federal Register Volume 61, Number 251 (Monday, December 30, 1996)]
[Proposed Rules]
[Pages 68824-68839]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32326]



[[Page 68823]]

_______________________________________________________________________

Part II

Department of the Treasury
Comptroller of the Currency



12 CFR Part 12

Federal Reserve System



12 CFR Parts 208 and 211

Federal Deposit Insurance Corporation



12 CFR Part 342



_______________________________________________________________________



Qualification Requirements for Transactions in Certain Securities, 
Proposed Rule and Proposed Information Collection Comment Request; 
Notice

  Federal Register / Vol. 61, No. 251 / Monday, December 30, 1996 / 
Proposed Rules  

[[Page 68824]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 12

[Docket No. 96-29]
RIN 1557-AB42

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 211

[Docket No. R-0950]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 342

RIN 3064-AB85


Qualification Requirements for Transactions in Certain Securities

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of 
Governors of the Federal Reserve System; Federal Deposit Insurance 
Corporation.

ACTION: Joint notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of 
Governors of the Federal Reserve System (Board), and the Federal 
Deposit Insurance Corporation (FDIC) (banking agencies) propose to 
adopt a qualification regulation for those banks that engage in bank-
direct retail sales or recommendations of certain securities through 
their employees. Because banks are not required to register as a 
broker-dealer under the Securities Exchange Act of 1934, as amended, 15 
U.S.C. 78 et seq. (Securities Exchange Act), the proposed regulation 
establishes requirements for banks and bank securities representatives 
that are consistent with the professional qualification requirements 
for broker-dealers and registered representatives under the Securities 
Exchange Act and rules thereunder and the rules of the securities self 
regulatory organizations (SSROs). The banking agencies invite comment 
on all aspects of the proposal as well as on the specific issues 
identified in the ``Section-by-Section Summary and Request for 
Comment.''
    In a separate document published elsewhere in this separate part of 
the Federal Register as a companion Notice of Forms, the banking 
agencies are proposing to adopt four forms to be used in connection 
with the regulation: Form SB (Uniform Notice for Sponsoring Bank), Form 
SBW (Uniform Notice for Sponsoring Bank Withdrawal), Form U-4B (Uniform 
Application for Bank Securities Representative Registration or 
Transfer), and Form U-5B (Uniform Termination Notice for Bank 
Securities Representative Registration). The proposed forms are based 
on the uniform forms used in the securities industry for broker-dealers 
and their registered representatives. The use of these proposed forms, 
along with this proposed regulation, will promote the safe and sound 
operation of bank retail securities sales programs and customer 
protection by standardizing the qualification requirements of bank 
personnel engaged in the retail sale of certain securities.

DATES: Comments on the proposed regulation must be received by February 
28, 1997.

ADDRESSES: Comments should be directed to:
    OCC: Communications Division, Office of the Comptroller of the 
Currency, 250 E Street, S.W., Washington DC 20219, Attention: Docket 
No. 96-29. Comments will be available for public inspection and 
photocopying at the same location. In addition, comments may be sent by 
facsimile transmission to FAX number (202) 874-5274 or by Internet mail 
to [email protected].
    Board: William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th and Constitution Avenue, N.W., Washington, 
D.C. 20551, Attention: Docket No. R-0950, or delivered to room B-2222 
of the Eccles Building between 8:45 a.m. and 5:15 p.m. Comments may be 
inspected in room MP-500 between 9:00 a.m. and 5:00 p.m. weekdays, 
except as provided in Sec. 261.8 of the Board of Governors' rules 
regarding availability of information, 12 CFR 261.8.
    FDIC: Jerry L. Langley, Executive Secretary, Attention: Room F-402, 
Federal Deposit Insurance Corporation, 550 17th Street, N.W., 
Washington, D.C. 20429. Comments may be hand delivered to Room F-402, 
1776 F Street, N.W., Washington, DC 20429, on business days between 
8:30 a.m. and 5:00 p.m. or transmitted by fax or the internet. The 
FDIC's fax number is (202) 898-3838 and its Internet address is: 
[email protected]. Comments will be available for inspection and 
photocopying in Room 100, 801 17th Street, NW, Washington, DC between 
9:00 a.m. and 5:00 p.m. on business days.

FOR FURTHER INFORMATION CONTACT:

    OCC: Joseph W. Malott, Examiner, Capital Markets (202) 874-5070, 
and Joel Miller, Senior Attorney, Securities and Corporate Practices 
(202) 874-5210.
    Board: Howard Amer, Assistant Director, Division of Banking 
Supervision and Regulation (202) 452-2958, and Angela Desmond, Senior 
Counsel, Division of Banking Supervision and Regulation (202) 452-3497.
    FDIC: William A. Stark, Assistant Director, Division of 
Supervision, (202) 898-6972; Lisa D. Arquette, Senior Capital Markets 
Specialist, Division of Supervision, (202) 898-8633; Ann Hume Loikow, 
Counsel, Regulations and Legislation Section, Legal Division, (202) 
898-3796; and Patrick J. McCarty, Counsel, Regulations and Legislation 
Section, Legal Division, (202) 898-8708.

SUPPLEMENTARY INFORMATION:

Background

    In recent years, sales of securities and other nondeposit 
investment products on bank premises have increased as banks have made 
these products available to retail customers either directly as brokers 
1 or through third parties. As this business has evolved, both the 
banking agencies and the banking industry have identified the need for 
banks to manage the reputational and legal risks to banks that could 
result from customer confusion, to disclose that these investment 
products are not guaranteed by the bank or insured by the FDIC, and to 
ensure that banks are aware of the application of the antifraud 
provisions of the Federal securities laws if material misstatements or 
omissions occur in connection with sales of securities on bank 
premises. These concerns arise whether the bank is selling directly to 
customers or whether SEC-regulated broker-dealers are selling on bank 
premises.2
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    \1\ Banks specifically are excluded from the definition of 
``broker'' in section 3(a)(4) of the Securities Exchange Act, 15 
U.S.C. 78c(a)(4), and may engage in brokerage transactions without 
having to register with the Securities and Exchange Commission 
(SEC).
    \2\ It is estimated that approximately 87 percent of all sales 
of securities on bank premises are effected by SEC-regulated broker-
dealers. See U.S. General Accounting Office, Report to Congressional 
Requesters: Bank Mutual Funds Sales Practices and Regulatory Issues 
GAO/GGD-95-210, at p. 52 (September 1995); U.S. General Accounting 
Office, Report to Congressional Requesters: Banks' Securities 
Activities--Oversight Differs Depending on Activity and Regulator, 
GAO/GGD-95-214, at p. 25 (September 1995).
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    To address these needs, in 1994, the banking agencies and the 
Office of Thrift Supervision issued the Interagency Statement on Retail 
Sales of Nondeposit Investment Products (Interagency Statement), which 
sets forth guidelines for conducting sales of nondeposit investment 
products, consistent with principles of safety and

[[Page 68825]]

soundness and customer protection.3 Among other things, the 
Interagency Statement provides that banks that engage in the retail 
recommendation or sale of securities should provide sales personnel 
with training that is the substantive equivalent of that provided to 
their securities industry counterparts.
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    \3\ 5 Fed. Bnkg. L. Rep. (CCH) PP 70-001, et seq.; Federal 
Reserve Supervisory Letter, SR 94-11(FIS) (February 17, 1994); 
Federal Reserve Supervisory Letter, 95-46 (SPE) (September 14, 
1995), interpreting the Interagency Statement; OCC Bulletin 94-13 
(Nondeposit Investment Sales Examination Procedures) (February 24, 
1994); OCC Bulletin 95-52 (Clarification of Interagency Guidelines) 
(September 22, 1995); FDIC Financial Institutions Letter 9-94 
(February 17, 1994); and FDIC Financial Institutions Letter 61-95 
(September 13, 1995).
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    Since adoption of the Interagency Statement, industry participants 
have commented that it is difficult to measure their compliance with 
the equivalent training requirement when there are no objective 
measures of a bank salesperson's training comparable to that provided 
by the securities industry professional qualifications examinations for 
broker-dealer sales personnel. To address this issue, the banking 
agencies approached the SSROs that own the examinations that pertain to 
the sale of mutual funds 4 and general securities products 5 
and requested that the SSROs make the Investment Company/Variable 
Contracts Products Limited Representative Qualification Examination 
(Series 6 Examination) and the General Securities Registered 
Representative Examination (Series 7 Examination) available to bank 
personnel. The SSROs agreed on the condition that the banking agencies 
adopt regulations establishing registration and qualification 
requirements analogous to those applicable to the securities industry.
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    \4\ The National Association of Securities Dealers, Inc. (NASD).
    \5\ The NASD, New York Stock Exchange, Inc. (NYSE), and 
Municipal Securities Rulemaking Board (MSRB).
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    Adoption of a qualifications regulation for banks and their 
employees who 2make retail solicitations, recommendations, purchases, 
or sales of securities will provide a number of benefits in addition to 
ensuring compliance with the equivalent training requirements of the 
Interagency Statement. The regulation will ensure that bank sales 
representatives have adequate product and regulatory knowledge 
pertaining to those securities being recommended and sold at the retail 
level. This will promote the safe and sound operation of bank- 
sponsored sales programs and enhance customer protection. The 
regulation also will enhance the banking agencies' ability to identify 
and restrict individuals who are subject to a statutory 
disqualification and therefore not qualified under the securities laws 
from soliciting, recommending, purchasing, or selling securities at the 
retail level on behalf of banks.
    Moreover, adoption of the proposed qualification requirements is 
likely to facilitate individuals seeking to move between banks and 
broker-dealers without losing their qualifications to sell certain 
securities in either industry.6 This would create additional 
efficiencies for banks and securities firms and opportunities for their 
employees.
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    \6\ Under current SSRO rules, a bank securities representative 
seeking to move to a broker-dealer must request a waiver from the 
examination requirements from his or her designated SSRO. To the 
extent a bank securities representative seeks to engage in the 
recommendation or sale of municipal securities, the MSRB's 90-day 
apprenticeship requirement applies. See MSRB Rule G-3(a)(iii). To 
the extent a bank securities representative seeks to become a 
candidate for registration with an exchange, a training requirement 
may be required. See, e.g., NYSE Rule 345.15(2).
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    Accordingly, the banking agencies propose to adopt qualification 
regulations that establish filing requirements for banks and 
registration, testing, and continuing education requirements for bank 
securities representatives that are analogous to the professional 
qualification requirements for broker-dealers under the Securities 
Exchange Act, and rules thereunder, and the rules of the SSROs. Any 
filing required to be made to a banking agency will be made at the 
NASD, which will maintain all information in its Central Registration 
Depository (CRD), the national/state computer-based registry for 
broker-dealers and securities personnel.
    The proposed use of securities industry qualification examinations 
and continuing education materials will not alter the statutory scheme 
for banks or their brokerage activities. No SSRO, including the NASD, 
obtains jurisdiction over any sponsoring bank or bank securities 
representative as a result of the proposed rule or the submission of 
filings to the appropriate Federal banking agency at the NASD. Legal 
and supervisory authority over banks remains vested exclusively with 
the appropriate Federal banking agency.

Authority to Issue Regulation

    This rulemaking is authorized pursuant to the banking agencies' 
statutory authority under section 8 of the Federal Deposit Insurance 
Act (FDIA), 12 U.S.C. 1818, to prevent unsafe and unsound practices by, 
and to adopt regulations defining safe and sound practices for, banks 
under their respective jurisdictions.7 In addition, the banking 
agencies have the authority to prescribe specific operational and 
managerial standards, as deemed appropriate, pursuant to section 39p-
1(a)(2) of the FDIA, 12 U.S.C. 831p-1(a)(2).
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    \7\ Independent Bankers Association v. Heimann, 613 F.2d 1164, 
1168-69 (D.C. Cir. 1979), cert. denied, 449 U.S. 823; see also 
National Petroleum Refiners Assoc. v. FTC, 482 F.2d 672, 680-81 
(D.C. Cir. 1973), cert. denied, 415 U.S. 951 (1973).
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Section-by-Section Summary and Request for Comment

Definitions

Appropriate Qualification Examination.
    The proposal defines ``appropriate qualification examination'' as 
the Series 6 Examination or the Series 7 Examination, both of which are 
administered by the NASD.
    The Series 6 Examination is the appropriate qualification 
examination for a bank employee engaged solely in covered transactions 
of open-end investment company shares, original distribution closed-end 
investment company shares, unit investment trusts, or variable 
contracts, including variable life insurance contracts and variable 
annuity contracts. The Series 7 Examination is the appropriate 
examination for a bank securities representative who effects 
transactions in other securities, such as equities and corporate bonds, 
in addition to the products covered by the Series 6 Examination. A 
person who passes the Series 7 Examination need not pass the Series 6 
Examination.
Bank
    The proposal defines ``bank'' as each institution regulated by the 
banking agencies, respectively, but does not include affiliates, 
subsidiaries, or foreign branches of such institutions. (``Foreign 
branches'' located in any Territory of the United States, Puerto Rico, 
Guam, American Samoa, the Trust Territory of the Pacific Islands, or 
the Virgin Islands, however, are included in the definition of 
``bank.'') Bank subsidiaries and affiliates engaged in securities sales 
are already registered with the SEC and are subject to the rules and 
requirements of the SEC and SSROs.
Bank Securities Representative
    The proposal defines ``bank securities representative'' as any bank 
officer, director, or employee (collectively, employee) who engages in 
covered transactions or is designated as the supervisor of a bank 
employee engaged

[[Page 68826]]

in covered transactions. Each employee seeking to qualify as a bank 
securities representative must be sponsored by his or her employing 
bank. A sponsoring bank must file proposed Form U-4B on behalf of its 
employees. The Form U-4B includes an application for a bank employee to 
take either the Series 6 or Series 7 Examination.
    Under the section captioned ``Optional Designation as a Bank 
Securities Representative,'' a bank also may choose to have legal, 
compliance, and audit personnel take a qualification examination. Even 
though those individuals are not engaged in retail sales or 
recommendations of securities, for purposes of this regulation, they 
will be deemed to be bank securities representatives if they pass a 
qualification examination and will be required to comply with all the 
other provisions of the regulation to maintain their registration.
Continuing Education
    The proposal defines ``continuing education'' as the course of 
study specified in the section captioned ``Continuing Education and 
Training Requirements.'' These requirements correspond to SSRO 
continuing education requirements applicable to registered 
representatives.
Covered Product
    The proposal defines ``covered product'' as having the same meaning 
as ``security'' as defined at section 3(a)(10) of the Securities 
Exchange Act, 15 U.S.C. 78c(a)(10). The definition specifically 
excludes a government security as defined at section 3(a)(42) of the 
Securities Exchange Act, 15 U.S.C. 78c(a)(42), because the government 
securities markets already are subject to a comprehensive statutory and 
regulatory scheme that addresses the concerns underlying the proposed 
rule.8 The definition specifically states that deposits, as 
defined in section 3(l) of the FDIA, 12 U.S.C. 1813(l), are not covered 
products.
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    \8\ See Section 15C of the Securities Exchange Act, 15 U.S.C. 
78o-5, and SEC and Treasury rules adopted thereunder. In addition, 
the banking agencies recently issued a notice of proposed 
rulemaking, titled Government Securities Sales Practices, that would 
establish standards concerning the recommendations to customers and 
the conduct of business by a bank that is a government securities 
broker or dealer. 61 FR 18470 (April 25, 1996).
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Covered Transaction
    The proposal defines ``covered transaction'' as a retail 
solicitation, recommendation, purchase, or sale of a covered product by 
a bank through its employee regardless of the means through which the 
solicitation, recommendation, purchase, or sale occurs.9 For 
instance, a transaction that takes place via telephone, mail, or other 
electronic means such as the Internet is included in the definition. 
Sales personnel in a bank's dealer department who engage in covered 
transactions (i.e., a retail solicitation, recommendation, purchase, or 
sale of securities other than government or municipal securities) must 
comply with this regulation. The term ``covered transaction'' does not 
differentiate between those banks that engage in only occasional or a 
limited number of covered transactions for a retail customer and those 
banks that establish programs for the retail sale of covered products. 
Therefore, consistent with the current requirements applicable to the 
securities industry, all banks that engage in covered transactions, 
regardless of frequency or volume, would be considered to be in the 
business of effecting covered transactions and would be required to 
comply with the regulation.10
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    \9\ Under the Interagency Statement, bank employees located in 
the routine deposit taking area are generally prohibited from 
soliciting or recommending nondeposit investment products. Such 
employees may, however, direct or refer bank customers to bank 
securities representatives and may receive a fee from the bank for 
such referral.
    \10\ The scope of the regulation is intended to be the same as 
that for SEC-regulated broker-dealers. If the SEC liberalizes the 
registration or other professional qualification requirements for 
such broker-dealers, the banking agencies will interpret the 
regulation in a similar manner.
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    Consistent with the scope of the Interagency Statement, the term 
does not include a sale to a fiduciary account administered by a bank, 
such as statutory and written trust accounts, employee benefit plans, 
and other types of pension plans normally administered by a trust 
department. Self-directed IRAs, certain types of Keogh accounts, and 
other accounts where the customer retains investment discretion are, 
however, included in the term. Sales of municipal securities by dealer 
banks registered under section 15B of the Securities Exchange Act, 15 
U.S.C. 78o0044, also are excluded because the bank and its sales 
personnel already are subject to registration and professional 
qualifications requirements under the Securities Exchange Act and the 
rules of the MSRB.
    Consistent with Rule 3a4-1 promulgated under the Securities 
Exchange Act, 17 CFR 240.3a4-1, equity and debt offerings by banks of 
their own securities, such as mutual-to-stock conversions, also are 
excluded from the definition of ``covered transaction'' if the 
securities offerings are consistent with the conditions set forth in 
that Rule.11 These offerings tend to be infrequent and generally 
are subject to special oversight by the banking agencies. Banks engaged 
solely in the direct retail sale of their own securities are therefore 
not required to become sponsoring banks. However, if a bank has filed 
Form SB and becomes a sponsoring bank, it must use its bank securities 
representatives to solicit, recommend or sell its own securities.
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    \11\ The bank employee must not be subject to a statutory 
disqualification under the Securities Exchange Act of 1934, may not 
receive a commission or other remuneration for selling bank 
securities, and may not be an associated person of a broker or 
dealer. In addition, the bank employee must restrict his or her 
offer and sale activities to certain groups or entities. Further, 
the bank employee must perform primarily other substantial duties on 
behalf of the bank, not be an associated person of a broker or 
dealer within the last 12 months or participate in selling an 
offering of any issuers securities more than once every 12 months. 
Finally, a bank employee must restrict his or her activities to 
preparing and delivering written communications or other means which 
do not involve oral solicitations, responding to inquiries initiated 
by a potential purchaser, and performing ministerial and clerical 
work in effecting any transaction.
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Disciplinary Action
    The proposal defines ``disciplinary action'' for purposes of this 
regulation as an action resulting in: (1) an employee being ``subject 
to disqualification;'' (2) a civil money penalty or fine of $5,000 or 
more by the SEC or an SSRO; (3) a civil money penalty of $5,000 or more 
by a banking agency pursuant to 12 U.S.C. 1818 for either a violation 
of a securities law or regulation, or an unsafe or unsound practice 
related to a covered transaction; (4) an agreement with the SEC, an 
SSRO, or a banking agency in connection with a disciplinary proceeding; 
or (5) an order by the SEC, an SSRO, or a banking agency to enter the 
continuing education program.
    Disciplinary actions must be reported on the forms referred to in 
the companion Notice of Forms that is being published with this 
proposal. Information on disciplinary actions will be available to the 
public. Bank securities representatives that are subject to a 
disciplinary action as defined under the regulation will be subject to 
additional continuing education requirements that begin as of the date 
of the disciplinary action. The ``$5,000 or more'' figure used in the 
definition is consistent with the threshold used in the definition of 
``disciplinary action'' in the SSRO rules.
NASD
    The proposal defines ``NASD'' as the National Association of 
Securities Dealers, Inc., which is an SSRO

[[Page 68827]]

registered under section 15A of the Securities Exchange Act, 15 U.S.C. 
78o, and NASD Regulation, Inc., the regulatory subsidiary of NASD. The 
NASD will accept filings and maintain in the CRD information filed with 
the banking agencies under this regulation.
Sponsoring Bank
    The proposal defines ``sponsoring bank'' as a bank that engages or 
seeks to engage in the business of effecting covered transactions. A 
bank that enters into an agreement with a registered broker-dealer 
enabling registered representatives of the broker-dealer to engage in 
covered transactions with bank customers, regardless of location, is 
not a ``sponsoring bank,'' even though the broker-dealer may use dual 
employees employed by both the bank and the broker-dealer.
Subject to Disqualification
    The proposal defines the term ``subject to disqualification'' as 
having the same meaning as ``statutory disqualification'' in section 
3(a)(39) of the Securities Exchange Act, 15 U.S.C. 78c(a)(39). 
Individuals who are subject to an order of removal, prohibition, or 
suspension by a Federal banking agency pursuant to section 8 (e) or (g) 
of the FDIA, 12 U.S.C. 1818 (e) or (g), or banks or individuals subject 
to an order or temporary order pursuant to section 8 (b) or (c) of the 
FDIA, 12 U.S.C. 1818 (b) or (c), that restricts their fiduciary or 
securities activities at a depository institution or are subject to a 
prohibition pursuant to section 19 of the FDIA, 12 U.S.C. 1829(a), are 
also subject to disqualification. The definition, therefore, makes a 
bank employee or sponsoring bank subject to disqualification if the 
employee or bank has been barred, suspended, or enjoined from the 
banking or securities industries; convicted of any felony in the past 
10 years; convicted of a felony or misdemeanor involving the purchase 
or sale of a security, or other financial crime (such as theft, 
robbery, or misappropriation of funds); or restricted in his or her 
employment pursuant to Section 19(a) of the FDIA, 12 U.S.C. 1829(a).

Qualification Requirements

Disqualifications
    The proposal sets forth the qualification requirements for both 
sponsoring banks and bank employees. A bank that is or becomes subject 
to disqualification shall not engage in a covered transaction unless 
the appropriate banking agency has granted the bank relief from being 
subject to disqualification and permits the bank to engage in covered 
transactions. This section also prohibits a bank employee who is, or 
becomes, subject to disqualification from engaging in covered 
transactions unless the employee's sponsoring bank has applied for and 
obtained the banking agency's approval for that employee to act as a 
bank securities representative.
Sponsoring Bank Notices
    This section requires a bank seeking to engage in covered sales to 
file a notice. A bank is required to file a completed Form SB 12 
with the appropriate Federal banking agency at the NASD containing the 
bank's name, address, bank identification number, and contact person. 
Upon receipt of a Form SB, the sponsoring bank will be assigned a 
unique CRD number for use on all of the filings required under the 
proposed regulation. Banks that choose to terminate their status as 
sponsoring banks must file the Form SBW with the appropriate banking 
agency at the NASD.
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    \12\ Form SB, Form SBW, Form U-4B, and Form U-5B are published 
elsewhere in this separate part of the Federal Register 
contemporaneously with the proposed regulation.
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Sponsoring Bank Requirements
    This section requires a bank sponsoring an employee to act as a 
bank securities representative to ensure that each employee engaged in 
a covered transaction is not subject to disqualification and has passed 
the appropriate qualification examination. A sponsoring bank also must 
make independent inquiry regarding the background of each sponsored 
employee. A sponsoring bank should, at a minimum, consult the 
employee's employers from the last three years and should investigate 
the good character, business repute, qualifications, and experience of 
any person the bank intends to sponsor. The sponsoring bank also must 
complete the designated portion of the Form U-4B and file it, along 
with a fingerprint card for the employee with the appropriate Federal 
banking agency at the NASD. The NASD in turn will submit the 
fingerprint record cards to the Federal Bureau of Investigation for 
review. A fingerprint card will be required each time an individual is 
hired by a bank to act as a bank securities representative and will be 
used to check whether the employee has a civil or criminal record that 
could subject the individual to disqualification.13
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    \13\ The securities industry is subject to fingerprinting 
requirements under section 17f of the Securities Exchange Act, 15 
U.S.C. 78q(f)(2), and Rule 17f-2 promulgated thereunder, 15 CFR 
240.17f-2.
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    A bank may not sponsor an employee to become a bank securities 
representative if the individual is ``subject to disqualification'' 
unless the bank has applied for and received approval from the 
appropriate banking agency for the individual to engage in covered 
transactions. The banking agencies will consider, on a case-by-case 
basis, whether it is in the public interest to authorize either a 
sponsoring bank that, or a bank employee who, is, or becomes, subject 
to disqualification to engage in covered transactions. The banking 
agencies anticipate they will consider factors such as those detailed 
in SEC Rules of Practice, Rule 193, 17 CFR 201.193 (Applications by 
Barred Individuals for Consent to Associate), in their evaluation of 
the particular facts and circumstances. The banking agencies seek 
comment on whether additional factors should be considered for banks 
and persons who are, or become, ``subject to disqualification.'' The 
banking agencies may adopt various processes for considering these 
applications.
    With the exception of those bank employees sponsored under the 
optional designation as a Bank Securities Representative provision, a 
bank may not sponsor an employee to become a bank securities 
representative if the bank does not intend for that individual to 
engage in the solicitation, recommendation, purchase, or sale of 
covered products or to supervise covered transactions.
    A sponsoring bank is required to file a Form U-5B when a bank 
securities representative ceases to be an employee of the bank for any 
reason or ceases to engage in covered sales on behalf of the bank. A 
bank must provide a copy of Form U-5B and subsequent amendments to the 
employee.
    A sponsoring bank is required to designate one or more individuals, 
as necessary, to supervise the activities of its bank securities 
representatives. A supervisor designated by a sponsoring bank need not 
engage in covered sales but must comply with the qualification 
requirements for bank securities representatives. Supervisors must take 
and pass the appropriate qualification examination (either the Series 6 
or Series 7 Examination) for the bank securities representatives they 
supervise.
    The banking agencies request comment on whether supervisors should 
be required to take one of the securities industry supervisor's 
(principal's) examinations. Commenters

[[Page 68828]]

are requested to discuss whether the General Securities Principal's 
Examination (Series 24), which focuses on the management of an 
investment banking or securities business, including supervision, 
solicitation, conduct of business, and training of registered 
representatives, is relevant or whether one of the other supervisor's 
examinations (Series 26--Investment Company Products/Variable Contracts 
Limited Principal; Series 28--Introducing Broker/Dealer Financial and 
Operations Principal; or Series 8--General Securities Sales Supervisor 
Examination, for example) would be more appropriate for individuals 
supervising bank securities representatives whose activities and 
product offerings are likely to be more limited.
Bank Securities Representative Requirements
    This section requires a bank employee seeking to qualify as a bank 
securities representative to complete designated portions of the Form 
U-4B and submit this form and a fingerprint card to his or her 
sponsoring bank. The employee then must pass the appropriate 
qualification examination and the sponsoring bank must receive approval 
from the appropriate Federal banking agency prior to the employee 
engaging in covered transactions. Fingerprint cards and completed Forms 
U-4B must be filed for employees transferring registration from another 
sponsoring bank or securities firm but the employee will not have to 
retake an examination. The Form U-4B requires disclosure of personal 
and employment information, including whether the employee has been the 
subject of any disciplinary action (as that term is defined in the 
proposed regulation) or certain types of customer complaints involving 
claims of greater than $5,000 or settlements of $10,000 or more. A bank 
securities representative must advise his or her sponsoring bank within 
30 days of an event that renders any information filed on a Form U-4B 
or U-5B incomplete or inaccurate and must cooperate with the sponsoring 
bank in filing an amendment to the Form.
    Any employee who fails an examination will be permitted to retake 
the test after a period of 30 days has elapsed from the date of the 
prior examination, except that any employee who fails to pass an 
examination three or more times in succession (and each additional time 
thereafter) must wait 180 days from the date of the last attempt before 
he or she may again retake the exam. A bank securities representative 
who has not engaged in covered transactions for a period of two years, 
or who has not supervised a bank sales representative for a period of 
two years, must pass the appropriate examination before engaging in 
covered transactions again. An employee engaged in legal, compliance, 
internal audit, or similar responsibilities related to covered 
transactions who has taken an examination pursuant to the optional 
designation provision and who does not perform any of those functions 
for a period of two years also must retake the examination before 
engaging in covered transactions.
Examination Exemptions
    This section establishes two exemptions from the examination 
requirements. First, a bank employee who is qualified as a registered 
representative pursuant to the rules of an SSRO at the time he or she 
seeks to qualify as a bank securities representative will not have to 
retake the examination. As noted earlier, however, a bank securities 
representative seeking to transfer employment from a sponsoring bank to 
a broker-dealer will have to apply to the appropriate SSRO for a waiver 
from retaking any examinations required under applicable SSRO rules and 
policies.
    Second, a sponsoring bank may apply in writing to its appropriate 
Federal banking agency on behalf of an employee for a waiver of the 
examination requirement. Applications will be approved only in 
exceptional cases where good cause is shown. In considering these 
requests, the banking agencies may accept other evidence of an 
employee's qualifications to act as a bank securities representative. 
Advanced age, physical infirmity, or experience in fields ancillary to 
the investment banking or securities business, would not individually 
of themselves constitute sufficient grounds to waive the examination 
requirement. The banking agencies intend to exercise their waiver 
authority in a manner consistent with the waiver policies of the 
SSROs.\14\ Any bank employee who is eligible for the examination 
exemption under this paragraph still must satisfy all other 
qualification, reporting and continuing education requirements of the 
regulation. A bank securities representative who obtains an examination 
waiver from a banking agency under this section and who subsequently 
seeks to work in the securities industry may be required to take an 
examination or apply to the appropriate SSRO for a waiver of that 
examination requirement.
---------------------------------------------------------------------------

    \14\ See, e.g., NASD Membership and Registration Rule 1070 
(Qualification Examinations and Waiver of Requirements), NASD Manual 
(CCH), p. 3291.
---------------------------------------------------------------------------

Approval of Bank Securities Representative Applications
    This section prohibits a sponsoring bank from permitting an 
employee to act as a bank securities representative until the 
appropriate banking agency has notified the sponsoring bank that the 
bank employee's Form U-4B application has been approved. The 
appropriate banking agency will approve the registrations of bank 
employees whose applications do not disclose grounds for 
disqualification and who pass the appropriate qualification 
examination. Registration may be revoked if, for example, the 
fingerprint record identifies any action or item indicating that the 
individual is subject to disqualification.
Grace Period
    This section establishes a one-year grace period following the 
adoption of the final rule for banks and bank employees to comply with 
the regulation. The grace period will permit banks to file the required 
notices and arrange for testing and registration of employees without 
unduly interrupting bank operations. Any bank that is not in compliance 
with the rule after the grace period expires must cease engaging in 
covered transactions until the rule's requirements are met. Similarly, 
any individual who engages in covered transactions who has not complied 
with all testing and registration requirements by the end of the grace 
period must cease all covered transaction activities until such 
requirements are met.

Filing Requirements, Amendments, and Record Retention

    This section requires all filings made with the banking agencies 
under the regulation to be made at the NASD.15 The NASD ultimately 
will maintain this filing information on its CRD, the computer-based 
registry for broker-dealers and securities personnel. Information on 
the CRD will be made available to the public on the same basis that the 
NASD makes information regarding broker-dealers and registered 
representatives available through its Public Disclosure Program.16 
The

[[Page 68829]]

banking agencies expect that members of the public will be able to 
inquire about the record of sponsoring banks and bank securities 
representatives using the NASD's toll free telephone number or other 
means that may become available for CRD inquiries.
---------------------------------------------------------------------------

    \15\ Filings submitted by mail should be sent to the NASD 
address indicated on the Forms SB, SBW, U-4B and U-5B. When the 
NASD's CRD becomes available to sponsoring banks, banks will either 
be required to purchase personal computer software from the NASD to 
make and access filings directly or will be required to utilize a 
private service bureau or vendor to make electronic filings.
    \16\ This information includes disclosure of any investment-
related consumer-initiated complaint or proceeding that: (1) alleges 
compensatory damages of $5,000 or more, fraud, or wrongful taking of 
property; or (2) was settled or decided against a sponsoring bank or 
bank securities representative for $10,000 or more, or found fraud 
or the wrongful taking of property. See Form U-4 (Uniform 
Application for Securities Industry Registration or Transfer) 
Question 22I.
---------------------------------------------------------------------------

    The NASD charges cost-based fees for processing all filings, 
administering tests taken by bank employees, processing fingerprint 
cards, and for access to the CRD. While the exact fees the NASD will 
charge sponsoring banks have not yet been established, the banking 
agencies anticipate that these fees will be consistent with those 
levied by the NASD upon broker-dealers for comparable services.17 
The NASD may also charge sponsoring banks an initial software 
modification fee in order to provide banks access to the CRD.
---------------------------------------------------------------------------

    \17\ See generally Schedule A (Section 2) to the NASD By-Laws, 
NASD Manual (CCH), pp. 1101-03. The NASD may also levy an initial 
fee to defray the cost of modifying the CRD database for banks. An 
additional nominal fee may also be collected by the NASD on behalf 
of the MSRB to defray the MSRB's cost of developing questions for 
the Series 7 Examination.
---------------------------------------------------------------------------

    This section also provides that all information submitted on any 
filing made under the regulation must be true, current, complete, and 
not misleading at the time and in light of the circumstances under 
which it is reported. A sponsoring bank must submit an amended filing 
within 30 days after it learns of any fact or circumstance that causes 
a filing to be inaccurate or incomplete.
    This section further establishes record retention requirements for 
filings made under the regulation. A bank must retain copies of Forms 
U-4B and U-5B filed on behalf of any bank employee for at least three 
years after the employee ceases to act as a bank securities 
representative or terminates his or her employment with the sponsoring 
bank. A bank must retain copies of Forms SB and SBW and any 
applications for waiver of being subject to disqualification for at 
least three years after it files a Form SBW and terminates covered 
sales.
    The banking agencies welcome comment regarding the timing and 
content of the proposed filing requirements, including the public 
availability of information regarding sponsoring banks and their bank 
securities representatives.

Optional Designation as a Bank Securities Representative

    Consistent with SSRO rules, a bank may choose to sponsor an 
employee engaged in legal, compliance, internal audit, or similar 
responsibilities for covered transactions, or who provides 
administrative support functions for bank securities representatives, 
to take a qualification examination. Under these circumstances, the 
employee must meet the registration, testing, reporting, and continuing 
education requirements of a bank securities representative. As long as 
the individual fills one of the enumerated positions or engages in 
covered transactions for a sponsoring bank, the employee's registration 
will remain active.

Applications by Banks and Bank Employees Subject to Disqualification

    A bank may file a written application with the appropriate banking 
agency seeking relief from a disqualification on behalf of itself or an 
employee. The appropriate banking agency may permit the bank or the 
employee to engage in covered transactions or act as a bank securities 
representative if the bank demonstrates to the banking agency why 
granting relief from a disqualification is consistent with safety and 
soundness, the public interest, and the protection of investors. In 
cases in which a disqualification results from an action brought under 
12 U.S.C. 1818 or by operation of law under 12 U.S.C. 1829, 
applications for relief must be sought pursuant to those sections.
    Relief granted under this section will not result in the permanent 
elimination of a disqualification but instead represents approval of a 
sponsoring bank, or employment as a bank securities representative with 
the sponsoring bank, under specified terms and conditions. For example, 
if a bank obtains relief for an employee under this section and the 
employee later becomes employed by another bank, that bank will have to 
seek relief from disqualification on behalf of the employee and agree 
to any special terms or conditions imposed by the appropriate Federal 
banking agency. Any material change in the terms or conditions under 
which relief is granted would require the sponsoring bank to seek 
appropriate relief on behalf of the employee.

Continuing Education and Training Requirements

    This section imposes continuing education requirements upon bank 
securities representatives and sponsoring banks that are comparable to 
requirements for broker-dealers.
Bank Securities Representative Requirements
    The first subsection requires a bank securities representative to 
complete the securities industry's computerized training program 
``Regulatory Element'' covering securities regulation issues following 
the individual's second, fifth, and tenth anniversaries of passing the 
appropriate qualification examination. If an SSRO takes a disciplinary 
action against an individual based upon activities prior to that person 
becoming a bank securities representative, a banking agency takes a 
disciplinary action against a bank securities representative, or an 
individual is otherwise the subject of a disciplinary action, then the 
bank securities representative must take the continuing education 
training program within 120 days of the occurrence of a disciplinary 
action and following the second, fifth, and tenth anniversaries of the 
occurrence of a disciplinary action.18 The proposed regulation 
requires a bank securities representative who does not comply with the 
continuing education requirements to cease activities until the 
representative meets the requirements.
---------------------------------------------------------------------------

    \18\ This is consistent with comparable SSRO rules. See, e.g., 
NASD Membership and Registration Rule 1120(a)(3), NASD Manual (CCH) 
pp. 3381-82.
---------------------------------------------------------------------------

Sponsoring Bank Requirements
    The second subsection incorporates the requirements of the SSROs' 
``Firm Element'' and requires sponsoring banks to develop in-house 
education programs appropriate to the size, structure, scope of 
products offered, and the bank's policies and procedures for covered 
transactions. These programs should address, at a minimum, the general 
investment features of the products and services being offered as well 
as associated risk factors, suitability and sales practice 
considerations, and applicable regulatory requirements (including the 
Interagency Statement). While a bank may choose to use commercial 
training material and outside vendors to assist in meeting this 
education requirement, the bank must ensure that the material or 
program meets the content standards of the proposed rule.

Confidentiality of Qualification Examinations

    This section requires banks and bank employees to maintain the 
confidentiality of the professional qualification examinations and not 
to

[[Page 68830]]

act in a manner that could compromise the integrity of an examination.

Paperwork Reduction Act

    The banking agencies invite comment on:
    (1) Whether the proposed collection of information contained in 
this notice of proposed rulemaking is necessary for the proper 
performance of each agency's functions, including whether the 
information has practical utility;
    (2) the accuracy of each agency's estimate of the burden of the 
proposed information collection;
    (3) ways to enhance the quality, utility, and clarity of the 
information to be collected; and
    (4) ways to minimize the burden of the information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology.
    Respondents/recordkeepers are not required to respond to this 
collection of information unless it displays a currently valid Office 
of Management and Budget (OMB) control number.
    OCC: The collection of information requirements contained in this 
notice of proposed rulemaking have been submitted to the OMB for review 
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 copies to the Legislative and 
Regulatory Activities Division, Office of the Comptroller of the 
Currency, 250 E Street, SW, Washington, DC 20219.
    The collection of information requirements in this proposed rule 
are found in Sec. 12.12 (c)(1)(iii), (c)(3), and (e)(2), Sec. 12.13 (c) 
and (d), Sec. 12.15, and Sec. 12.16 (a)(4) and (b)(3).19 This 
information is required to identify national banks as sponsoring banks, 
to qualify bank employees to take the appropriate qualification 
examination, and to terminate the status as a sponsoring bank or 
licensed bank securities representative. The information also is 
required to evidence compliance with the registration and information 
collection requirements set forth in the proposed regulation. The OCC 
will use the information to monitor the securities activities in 
national banks and to assess the qualifications of a national bank 
employee that wishes to become a bank securities representative. The 
likely respondents/recordkeepers are national banks.
---------------------------------------------------------------------------

    \19\ The Paperwork Reduction Act analysis of the required forms 
appears in the companion Notice of Forms published by the banking 
agencies elsewhere in this separate part of the Federal Register.
---------------------------------------------------------------------------

    Estimated average annual burden hours per respondent/recordkeeper: 
18 hours.
    Estimated number of respondents: 120 national banks.
    Estimated total annual reporting and recordkeeping burden: 2,184 
hours.
    Start-up costs to respondents: None.
    Certain records pertaining to the sponsoring bank's filings are to 
be maintained for the period of time respondent/recordkeeper serves as 
a sponsoring bank, plus three years thereafter. Records pertaining to 
bank employees are to be retained for not less than three years after 
the employee terminates employment with the sponsoring bank or ceases 
to act as a bank securities representative.
    Board: In accordance with section 3506 of the Paperwork Reduction 
Act of 1995 (44 U.S.C. Ch. 35; see also 5 CFR 1320 Appendix A Item 1), 
the Board reviewed the proposed rule under the authority delegated to 
the Board by the Office of Management and Budget. Send comments on the 
collections of information to: the Office of Management and Budget, 
Paperwork Reduction Project (7100-0282), 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 requirements in this proposed collection of information will be 
included in 12 CFR 208. This information collection is needed to 
register state member banks (Form SB), to qualify certain bank 
employees to take the appropriate qualification examination (Form U-
4B), and to terminate the bank's status as a registered bank (Form SBW) 
or the employee's status as a licensed bank securities representative 
(Form U-5B). The Federal Reserve will use the information to monitor 
the securities sales activities of state member banks and to assess the 
qualifications of state member bank employees to become registered bank 
securities representatives. This information collection will be 
mandatory. The likely respondents are state member banks. Small 
businesses will not be affected.
    The Federal Reserve may not conduct or sponsor, and an organization 
(or a person) is not required to respond to, any collection of 
information unless it displays a currently valid OMB control number. 
The OMB control number for this information collection is 7100-0282.
    The reporting burden imposed by the proposed rule is estimated to 
be 18.2 hours per response. It is estimated that there will be 100 
respondents/recordkeepers and a total of 1,820 hours of annual 
paperwork burden. This burden represents the time needed to complete 
the four proposed reporting forms: U-4B, U-5B, SB, and SBW. The 
estimated burden is averaged over the estimated number of filings 
during the first three years that the proposed rule will be in effect, 
with most of the filings presumed to occur in the first year, as 
qualification and registration programs are set up, and with the burden 
for the second and third years representing estimated turnover in 
registered bank securities representatives. The estimated burden is 
further averaged over the size distribution of the likely respondents. 
The burden associated with other requirements of the proposed rule is 
discussed in a separate notice published in this issue.
    FDIC: The collections of information contained in this notice of 
proposed rulemaking have been submitted to the Office of Management and 
Budget for review 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 copies of such 
comments to be sent to Steven F. Hanft, Office of the Executive 
Secretary, Room F-454, Federal Deposit Insurance Corporation, 550 17th 
Street, N.W., Washington, DC 20429.
    The collection of information requirements in this proposed rule 
are found in 12 CFR 342.3(b), 342.3(c) (1) and (3), (e)(2), 342.4(c) 
and (d), 342.6 and 342.7. The collections consist of notice filings for 
the Sponsoring Bank as wells as registration applications on behalf of 
the Bank Securities Representative, 342.3 (b) and (c); examination 
exemption requests, 342.3(e); required amendments to Sponsoring Bank 
notices and Bank Securities Representative registrations, 342.4(c); 
records which the Sponsoring Bank must retain with respect to notice 
filings, Bank Securities Representative registrations, applications for 
relief from being ``subject to disqualification,'' and any amendments 
or other filings submitted, 342.4(d); applications by Sponsoring Banks 
for relief for itself or a Bank Securities Representative, from being 
``subject to disqualification,'' 342.6; and continuing education 
training programs by Sponsoring Banks and attendance/compliance by Bank 
Securities Representatives with respect

[[Page 68831]]

to such continuing education requirements, 342.7.
    The likely respondents/recordkeepers are insured nonmember banks.
    Estimated average annual burden hours per respondent/recordkeeper: 
18 hours.
    Estimated number of respondents and/or recordkeepers: 70 state 
nonmember banks.
    Estimated total annual reporting and recordkeeping burden: 1260 
hours.
    Start-up costs to respondents: None.
    Records are to be maintained for the period of time respondent/
recordkeeper serves as a sponsoring bank.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA) 
(5 U.S.C. 605(b)), the initial regulatory flexibility analysis 
otherwise required under section 603 of the RFA (5 U.S.C. 603) is not 
required if the head of the agency certifies that the rule will not 
have a significant economic impact on a substantial number of small 
entities and the agency publishes such certification and a succinct 
statement explaining the reasons for such certification in the Federal 
Register along with its general notice of proposed rulemaking.
    The banking agencies hereby certify that the proposal will not have 
a significant economic impact on a substantial number of small 
entities. The proposal should result in a net benefit to all banks 
regardless of size that elect to engage in securities activities 
through licensed bank securities representatives, but the economic 
impact on small banks will not be significant. Most banks with total 
assets of under $100 million will not engage in securities activities 
in a manner covered by this regulation. Rather, a small bank typically 
will use either a registered broker/dealer who has rented space on the 
bank's premises or an ``introducing broker'' who will refer a customer 
to a dealer that can effect the desired transaction. The few banks with 
total assets under $100 million that choose to have employees licensed 
under the proposal will incur costs associated with the securities 
activities. However, a bank will incur these costs only if it elects to 
engage in securities activities through bank securities 
representatives.

Executive Order 12866

    The OCC has determined that this proposal is not a significant 
regulatory action as defined in Executive Order 12866.

Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4, 109 Stat. 48 (1995) (Unfunded Mandates Act), requires that 
covered agencies prepare a budgetary impact statement before 
promulgating a rule that includes any 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 covered agencies to identify and 
consider a reasonable number of regulatory alternatives before 
promulgating a rule.
    The OCC has determined that the proposal 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. Accordingly, the OCC 
has not prepared a budgetary impact statement or specifically addressed 
the regulatory alternatives considered.

List of Subjects

12 CFR Part 12

    National banks, Reporting and recordkeeping requirements, 
Securities.

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Mortgages, 
Reporting and recordkeeping requirements, Securities.

12 CFR Part 211

    Exports, Federal Reserve System, Foreign banking, Holding 
companies, Investments, Reporting and recordkeeping requirements.

12 CFR Part 342

    Banks, banking, Reporting and recordkeeping requirements, 
Securities.

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons set forth in the joint preamble, part 12 of chapter 
I of title 12 of the Code of Federal Regulations is proposed to be 
amended to read as follows:

PART 12--RECORDKEEPING AND CONFIRMATION REQUIREMENTS FOR SECURITIES 
TRANSACTIONS; QUALIFICATION REQUIREMENTS FOR TRANSACTIONS IN 
CERTAIN SECURITIES

    1. The part heading is revised to read as set forth above.
    1a. The authority citation for part 12 is revised to read as 
follows:

    Authority: 12 U.S.C. 24, 92a, 93a, 1818, and 1831p-1(a)(2).

    2. Sections 12.1 through 12.7 are designed as subpart A and a new 
subpart heading is added to read as follows:

Subpart A--Recordkeeping and Confirmation Requirements for 
Securities Transactions

    3. In the first line of Sec. 12.1(a), the word ``part'' is changed 
to ``subpart.''
    4. In the introductory text to Sec. 12.2, the word ``part'' is 
changed to ``subpart.''
    5. In the introductory text to Sec. 12.7, the word ``part'' is 
changed to ``subpart.''
    6. A new subpart B, consisting of Secs. 12.10 through 12.17, is 
added to read as follows:

Subpart B--Qualification Requirements for Transactions in Certain 
Securities

Sec.
12.10  Scope.
12.11  Definitions.
12.12  Qualification requirements.
12.13  Filing requirements, amendments, and record retention.
12.14  Optional designation as a bank securities representative.
12.15  Applications by banks and bank employees ``subject to 
disqualification.''
12.16  Continuing education and training requirements.
12.17  Confidentiality of qualification examinations.

Subpart B--Qualification Requirements for Transactions in Certain 
Securities


Sec. 12.10  Scope.

    This subpart is issued by the Comptroller of the Currency pursuant 
to 12 U.S.C. 24, 93a, 1818 and 1831p-1(a)(2). It contains rules 
prescribing operational and managerial standards for national banks, 
and prescribes training and qualification requirements for bank 
employees making retail solicitations, recommendations, purchases, or 
sales of certain securities on behalf of a national bank. It applies to 
all national banks that engage through bank employees in bank-direct 
retail

[[Page 68832]]

solicitations, recommendations, purchases, or sales of certain 
securities.


Sec. 12.11  Definitions.

    For purposes of this subpart:
    (a) Appropriate qualification examination means either the 
Investment Company/Variable Contracts Products Limited Representative 
Qualification Examination (Series 6 Examination) or the General 
Securities Registered Representative Examination (Series 7 
Examination), both of which are administered by the NASD. The Series 6 
Examination is the appropriate qualification examination for a bank 
employee engaged solely in covered transactions of open-end investment 
company shares, original distribution closed-end investment company 
shares, unit investment trusts, or variable contracts, including 
variable life insurance contracts and variable annuity contracts. The 
Series 7 Examination is the appropriate qualification examination for a 
bank employee soliciting, recommending, purchasing, or selling any 
other covered product.
    (b) Bank means any national banking association, any District bank, 
or any Federal branch or agency of a foreign bank. The term ``bank'' 
shall not include a branch of a bank located outside of any State, as 
defined in section 3(a)(3) of the Federal Deposit Insurance Act, as 
amended, 12 U.S.C. 1813(a)(3).
    (c) Bank securities representative means any bank officer, 
director, or employee (collectively referred to as ``employee'') who 
engages in a covered transaction or is designated as the supervisor of 
a bank securities representative who engages in a covered transaction.
    (d) Continuing education requirements means the course of study 
specified in Sec. 12.16.
    (e) Covered product has the same meaning as ``security'' as defined 
at section 3(a)(10) of the Securities Exchange Act, 15 U.S.C. 
78c(a)(10). The term shall not include any product that is a deposit as 
defined in section 3(l) of the Federal Deposit Insurance Act, 12 U.S.C. 
1813(l), or any ``government security'' as defined at section 3(a)(42) 
of the Securities Exchange Act, 15 U.S.C. 78c(a)(42).
    (f) Covered transaction means a retail solicitation, 
recommendation, purchase, or sale of a covered product by a bank 
through its employee regardless of the means through which the 
solicitation, recommendation, purchase, or sale occurs. The term shall 
not include a covered transaction involving a fiduciary account 
administered by a bank, a sale of a municipal security by a municipal 
securities dealer bank registered under section 15B of the Securities 
Exchange Act, 15 U.S.C. 78o-4, or a transaction by a bank in its own 
securities consistent with the conditions set forth in Securities 
Exchange Act Rule 3a4-1(a)(4), 17 CFR 240.3a4-1(a)(4).
    (g) Disciplinary action means an action resulting in:
    (1) An individual being ``subject to disqualification'' as defined 
in this subpart;
    (2) A civil money penalty or fine of $5,000 or more by the 
Securities and Exchange Commission (SEC) or a securities self 
regulatory organization (SSRO) as defined in section 3(a)(26) of the 
Securities Exchange Act, 15 U.S.C. 78c(a)(26);
    (3) A civil money penalty of $5,000 or more by a Federal banking 
agency pursuant to section 8 of the Federal Deposit Insurance Act, 12 
U.S.C. 1818, for a securities law violation, or an unsafe or unsound 
practice related to a covered transaction;
    (4) An agreement with the SEC, an SSRO, or Federal banking agency, 
in connection with a disciplinary proceeding; or
    (5) An order by the SEC, an SSRO, or a Federal banking agency to 
enter the continuing education program.
    (h) NASD means the National Association of Securities Dealers, 
Inc., which is an SSRO registered under section 15A of the Securities 
Exchange Act, 15 U.S.C. 78o, and NASD Regulation, Inc., the regulatory 
subsidiary of the NASD.
    (i) Sponsoring bank means a bank that engages in or seeks to engage 
in the business of effecting covered transactions.
    (j) Subject to disqualification means:
    (1) Subject to a ``statutory disqualification'' as that term is 
used in section 3(a)(39) of the Securities Exchange Act, 15 U.S.C. 
78c(a)(39);
    (2) Subject to an order of removal, prohibition, or suspension by a 
Federal banking agency pursuant to 12 U.S.C. 1818(e) or (g);
    (3) Subject to an order or temporary order pursuant to 12 U.S.C. 
1818(b) or (c) that restricts the fiduciary or securities activities of 
a bank or individual; or
    (4) Subject to a prohibition pursuant to 12 U.S.C. 1829(a).


Sec. 12.12  Qualification requirements.

    (a) Disqualifications. (1) A bank shall not engage in a covered 
transaction if it is, or becomes, subject to disqualification, unless 
it has applied for and received approval to engage in covered 
transactions from the OCC pursuant to Sec. 12.15.
    (2) No bank securities representative shall engage in a covered 
transaction if he or she is, or becomes, subject to disqualification, 
unless the bank that employs the bank securities representative has 
applied for and received approval from the OCC pursuant to Sec. 12.15 
for that person to qualify as a bank securities representative.
    (b) Sponsoring bank notices. (1) A bank seeking to engage in 
covered transactions shall file a completed Uniform Notice for 
Sponsoring Bank (Form SB).
    (2) A bank seeking to terminate its status as a Sponsoring Bank 
shall file a Uniform Request for Sponsoring Bank Withdrawal (Form SBW).
    (c) Sponsoring bank requirements. (1) A bank seeking to sponsor an 
employee as a bank securities representatives shall:
    (i) Make independent inquiry into the individual's employment 
history, including contacting the employee's previous employers for the 
past three years and investigating the character, business reputation, 
qualifications, and experience of the individual;
    (ii) Review, complete as appropriate, and file the Uniform 
Application for Bank Securities Representative Registration or Transfer 
(Form U-4B) and amendments thereto on behalf of the employee; and
    (iii) File a fingerprint record for the employee.
    (2) A bank may not sponsor an employee to qualify as a bank 
securities representative or permit a previously qualified bank 
securities representative to engage in covered transactions if the 
individual is, or becomes, subject to disqualification unless the 
sponsoring bank has applied and received approval for the individual to 
engage in covered transactions from the OCC under Sec. 12.15. A bank 
shall not sponsor an employee to qualify as a bank securities 
representative if it does not intend for the employee to engage in or 
supervise covered transactions or participate in one of the activities 
enumerated in Sec. 12.14.
    (3) A sponsoring bank shall file a Uniform Termination Notice for 
Bank Securities Representative Registration (Form U-5B) when the 
employment of a bank securities representative terminates or when a 
bank securities representative ceases to engage in covered transactions 
on behalf of the bank. The Form U-5B shall be filed within 30 days of 
such termination or cessation and a copy of the Form U-5B, and of any 
amendments to the Form U-5B, shall be provided concurrently to

[[Page 68833]]

the former bank securities representative.
    (4) A sponsoring bank shall designate one or more bank securities 
representatives, as necessary, to supervise the sponsoring bank's 
covered transactions. A supervisor designated under this subpart shall 
pass the appropriate qualification examination for any bank securities 
representative(s) under his or her supervision.
    (d) Bank securities representative requirements. (1) A bank 
employee seeking to qualify as a bank securities representative shall 
complete the Form U-4B, provide a fingerprint record, and pass the 
appropriate qualification examination.
    (2) A bank employee who is eligible for an examination exemption 
under paragraph (e) of this section must complete a Form U-4B and 
receive approval under paragraph (f) of this section prior to being 
qualified as a bank securities representative.
    (3) A bank employee who fails to pass the appropriate qualification 
examination may take the examination again after a period of 30 
calendar days has elapsed from the date of the prior examination. 
However, any bank employee who fails to pass an examination three or 
more times in succession may not take the examination until 180 days 
has elapsed from the date of his or her last attempt to pass the 
examination.
    (4) A bank employee shall advise the sponsoring bank within 30 days 
of any event or occurrence that causes any information on the Form U-4B 
or Form U-5B to become inaccurate or incomplete and shall cooperate 
with the sponsoring bank in filing an amendment to the relevant form.
    (5) A bank securities representative who does not engage in or 
supervise covered transactions for a period of two years must retake 
and pass the appropriate qualification examination prior to acting as a 
bank securities representative. A bank securities representative is 
deemed to be engaging in covered transactions if the employee acts in 
one of the capacities listed in Sec. 12.14.
    (e) Examination exemptions. (1) A bank employee is not required to 
take the appropriate qualification examination if he or she already has 
qualified by taking that examination pursuant to the rules of an SSRO 
and remains qualified as a registered representative.
    (2) Upon written request from a sponsoring bank, the OCC may, in 
exceptional cases and where good cause is shown, waive the appropriate 
qualification examination requirement for a bank employee and may 
accept other evidence of the employee's qualifications to act as a bank 
securities representative. Advanced age, physical infirmity, or 
experience in fields ancillary to the investment banking or securities 
business generally are insufficient for the OCC to waive the 
examination requirement.
    (f) Approval of bank securities representative qualifications. No 
sponsoring bank may permit any bank employee to, and no bank employee 
shall, act as a bank securities representative until the OCC has 
approved the bank employee's application for registration or transfer 
on Form U-4B.
    (g) Grace period. These qualification requirements apply to all 
banks and bank employees with respect to covered transactions 
transacted after [Date One Year After Effective Date of the Final 
Rule]. Any bank or bank employee that is not in compliance with this 
subpart after the grace period shall cease engaging in covered 
transactions until the requirements are met.


Sec. 12.13  Filing requirements, amendments, and record retention.

    (a) All filings required under this subpart shall be filed with the 
OCC at the NASD.
    (b) All information submitted on any filing required under this 
subpart must be true, current, complete, and not misleading at the time 
and in light of the circumstances under which it is reported.
    (c) A bank shall file an amendment no later than 30 days after 
learning of facts or circumstances causing a filing to be inaccurate or 
incomplete.
    (d)(1) A bank shall retain copies of all filings made on Forms U-4B 
and U-5B, including amendments, for not less than three years after the 
employee terminates employment with the sponsoring bank or ceases to 
act as a bank securities representative.
    (2) A bank shall retain copies of all filings made on Forms SB and 
SBW and any applications under Sec. 12.15, including amendments, for 
not less than three years after the bank terminates its status as a 
sponsoring bank.


Sec. 12.14  Optional designation as a bank securities representative.

    A bank may sponsor an employee who is engaged in legal, compliance, 
internal audit, or similar responsibilities related to covered 
transactions or who provides administrative support functions for a 
bank securities representative, and who is not subject to 
disqualification (unless a waiver is granted pursuant to Sec. 12.15), 
to take either the Series 6 or Series 7 Examination. Such sponsored 
employee must meet all filing and continuing education requirements in 
order to be deemed to be a bank securities representative for purposes 
of this subpart.


Sec. 12.15  Applications by banks and bank employees ``subject to 
disqualification.''

    A sponsoring bank may seek, by written application to the OCC on 
behalf of itself or an employee, relief from being subject to 
disqualification and permission to engage in covered transactions or to 
qualify as a bank securities representative, as appropriate. The OCC 
may, consistent with safety and soundness, the public interest, and the 
protection of investors, grant such relief consistent with its 
enforcement powers and on such terms and conditions as the OCC 
considers necessary or appropriate.


Sec. 12.16  Continuing education and training requirements.

    A bank securities representative and a sponsoring bank shall comply 
with the following continuing education requirements:
    (a) Bank securities representative requirements. (1) Each bank 
securities representative shall complete, within 120 days of the 
second, fifth, and tenth anniversaries of passing the appropriate 
qualification examination, the Continuing Education Program 
administered by the NASD.
    (2) The required training intervals for bank securities 
representatives who were registered with an SSRO prior to being 
employed by the sponsoring bank are measured from the date of SSRO 
registration. The bank securities representative requirements of the 
continuing education requirement will be met as of the tenth 
anniversary of a bank securities representative's registration with a 
banking agency and/or SSRO, provided the bank securities representative 
is not subject to paragraph (a)(4) of this section.
    (3) If a bank securities representative has been subject to a 
disciplinary action within the ten years prior to the effective date of 
this subpart, or at any time since that effective date, the bank 
securities representative must complete the Continuing Education 
Program administered by the NASD within 120 days of the disciplinary 
action and no later than the second, fifth, and tenth anniversaries of 
the disciplinary action.
    (4) Unless otherwise determined by the OCC, any bank securities 
representative who does not complete the requirements within the 
prescribed time frames may not perform any bank

[[Page 68834]]

securities representative duties. The OCC may, upon application and a 
showing of good cause, allow additional time for a bank securities 
representative to satisfy the Continuing Education program 
requirements.
    (b) Sponsoring bank requirements. (1) A sponsoring bank shall not 
permit any employee to act as a bank securities representative unless 
the employee has complied with the requirements set forth in paragraphs 
(a)(1) through (a)(4) of this section.
    (2) A sponsoring bank shall maintain a continuing education program 
for its bank securities representatives. A sponsoring bank, at least 
annually, shall evaluate and prioritize its training needs and develop 
or update, as appropriate, a written training plan. The plan must take 
into consideration the bank's size, organizational structure, and scope 
of business activities. Programs used to implement a sponsoring bank's 
training plan must be appropriate for the business of that bank and, at 
a minimum, must cover the following matters concerning securities 
products, services, and strategies offered by the bank:
    (i) General investment features and associated risk factors;
    (ii) Suitability and sales practice considerations;
    (iii) Applicable regulatory requirements; and
    (iv) Bank policies and procedures for covered transactions.
    (3) A sponsoring bank shall administer its continuing education 
programs in accordance with its annual evaluation and written plan and 
must maintain records documenting the content of the programs and 
completion of the programs by its bank securities representatives.


Sec. 12.17  Confidentiality of qualification examinations.

    Every bank and bank employee shall maintain the confidentiality of 
qualification examinations and shall not remove from an examination 
center, reproduce, disclose, receive from or pass to any person, or use 
for study or any other purposes, any portion of an examination, whether 
of a present or past series, that would compromise the integrity of the 
examinations, or use in any manner and at any time the questions or 
answers to the examination.

    Dated: December 10, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.

Federal Reserve System

12 CFR Part 208

    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR Parts 208 and 211 as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for part 208 is revised to read as 
follows:

    Authority: 12 U.S.C. 36, 248, 321-338a, 371d, 461, 481-486, 601, 
611, 1814, 1816, 1818, 1823(j), 1828(o), 1831p-1, 1831p-1(a)(2), 
1831r-1, 2901-2907, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 
78b, 78l(b), 78l(g), 78l(I), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 
U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

    2. A new Sec. 208.25 is added at the end of Subpart A to read as 
follows:


Sec. 208.25  Qualification requirements for transactions in certain 
securities.

    (a) Scope. This section contains rules prescribing operational and 
managerial standards for state member banks, prescribes training and 
qualification requirements for bank employees making retail 
solicitations, recommendations, purchases, or sales of certain 
securities on behalf of a state member bank. It applies to all state 
member banks that engage through bank employees in bank-direct retail 
solicitations, recommendations, purchases, or sales of certain 
securities.
    (b) Definitions. For purposes of this section:
    (1) Appropriate qualification examination means either the 
Investment Company/Variable Contracts Products Limited Representative 
Qualification Examination (Series 6 Examination) or the General 
Securities Registered Representative Examination (Series 7 
Examination), both of which are administered by the National 
Association of Securities Dealers, Inc. (NASD). The Series 6 
Examination is the appropriate qualification examination for a bank 
employee engaged solely in covered transactions of open-end investment 
company shares, original distribution closed-end investment company 
shares, unit investment trusts, or variable contracts, including 
variable life insurance contracts and variable annuity contracts. The 
Series 7 Examination is the appropriate qualification examination for a 
bank employee soliciting, recommending, purchasing, or selling any 
other covered product.
    (2) Bank means any state member bank. The term bank shall not 
include a branch of a bank located outside of any State, as defined in 
section 3(a)(3) of the Federal Deposit Insurance Act, as amended, 12 
U.S.C. 1813(a)(3).
    (3) Bank securities representative means any bank officer, 
director, or employee (collectively referred to as employee) who 
engages in a covered transactions or is designated as the supervisor of 
a bank securities representative who engages in a covered transaction.
    (4) Continuing education requirements means the course of study 
specified in paragraph (g) of this section.
    (5) Covered product has the same meaning as ``security'' as defined 
at section 3(a)(10) of the Securities Exchange Act, 15 U.S.C. 
78c(a)(10). The term shall not include any product that is a deposit as 
defined in section 3(l) of the Federal Deposit Insurance Act, 12 U.S.C. 
1813(l), or any ``government security'' as defined at section 3(a)(42) 
of the Securities Exchange Act, 15 U.S.C. 78c(a)(42).
    (6) Covered transaction means a retail solicitation, 
recommendation, purchase, or sale of a covered product by a bank 
through its employee regardless of the means through which the 
solicitation, recommendation, purchase, or sale occurs. The term shall 
not include a such a transaction in a covered product to a fiduciary 
account administered by a bank, a sale of a municipal security by a 
municipal securities dealer bank registered under section 15B of the 
Securities Exchange Act, 15 U.S.C. 78o-4, or a transaction by a bank in 
its own securities consistent with the conditions set forth in 
Securities Exchange Act Rule 3a4-1(a)(4), 17 CFR 240.3a4-1(a)(4).
    (7) Disciplinary action means an action resulting in:
    (i) An individual being subject to disqualification as defined in 
paragraph (b)(10) of this section;
    (ii) A civil money penalty or fine of $5,000 or more by the 
Securities and Exchange Commission (SEC) or a securities self-
regulatory organization (SSRO) as defined in section 3(a)(26) of the 
Securities Exchange Act, 15 U.S.C. 78c(a)(26);
    (iii) A civil money penalty of $5,000 or more by a Federal banking 
agency pursuant to section 8 of the Federal Deposit Insurance Act, 12 
U.S.C. 1818, for a securities law violation, or an unsafe or unsound 
practice related to a covered transaction;

[[Page 68835]]

    (iv) An agreement with the SEC, an SSRO, Federal banking agency, in 
connection with a disciplinary proceeding; or
    (v) An order by the SEC, an SSRO, or a Federal banking agency to 
enter the continuing education program.
    (8) NASD means the National Association of Securities Dealers, 
Inc., which is an SSRO registered under section 15A of the Securities 
Exchange Act, 15 U.S.C. 78o, and NASD Regulation, Inc., the regulatory 
subsidiary of the NASD.
    (9) Sponsoring bank means a bank that engages in or seeks to engage 
in the business of effecting covered transactions.
    (10) Subject to disqualification means subject to:
    (i) A ``statutory disqualification'' as that term is used in 
section 3(a)(39) of the Securities Exchange Act, 15 U.S.C. 78c(a)(39);
    (ii) An order of removal, prohibition, or suspension by a Federal 
banking agency pursuant to 12 U.S.C. 1818 (e) or (g);
    (iii) An order or temporary order pursuant to 12 U.S.C. 1818 (b) or 
(c) that restricts the fiduciary or securities activities of a bank or 
individual; or
    (iv) A prohibition pursuant to 12 U.S.C. 1829(a).
    (c) Qualification requirements--(1) Disqualifications. (i) A bank 
shall not engage in a covered transaction if it is, or becomes, subject 
to disqualification, unless it has applied for and received approval to 
engage in covered transactions from the Board pursuant to paragraph (h) 
of this section.
    (ii) No bank securities representative shall engage in a covered 
transaction if he or she is, or becomes, subject to disqualification, 
unless the bank that employs the bank securities representative has 
applied for and received approval from the Board pursuant to paragraph 
h of this section for that person to qualify as a bank securities 
representative.
    (2) Sponsoring bank notices. (i) A bank seeking to engage in 
covered transactions shall file a completed Uniform Notice for 
Sponsoring Bank (Form SB).
    (ii) A bank seeking to terminate its status as a Sponsoring Bank 
shall file a Uniform Request for Sponsoring Bank Withdrawal (Form SBW).
    (3) Sponsoring bank requirements. (i) A bank seeking to sponsor an 
employee as a bank securities representative shall:
    (A) Make independent inquiry into the individual's employment 
history, including contacting the employee's previous employers for the 
past three years and investigating the character, business reputation, 
qualifications and experience of the individual;
    (B) Review, complete as appropriate, and file the Uniform 
Application for Bank Securities Representative Registration or Transfer 
(Form U-4B) and amendments thereto on behalf of the employee; and
    (C) File a fingerprint record for the employee.
    (ii) A bank may not sponsor an employee to qualify as a bank 
securities representative or permit a previously qualified bank 
securities representative to engage in covered transactions if the 
individual is, or becomes, subject to disqualification unless the 
sponsoring bank has applied and received approval for the individual to 
engage in covered transactions from the Board under paragraph (h) of 
this section. A bank shall not sponsor an employee to qualify as a bank 
securities representative if it does not intend for the employee to 
engage in or supervise covered transactions or participate in one of 
the activities enumerated in paragraph (e) of this section.
    (iii) A sponsoring bank shall file a Uniform Termination Notice for 
Bank Securities Representative Registration (Form U-5B) when the 
employment of a bank securities representative terminates or when a 
bank securities representative ceases to engage in covered transactions 
on behalf of the bank. The Form U-5B shall be filed within 30 days of 
such termination or cessation and a copy of the Form U-5B, and of any 
amendments to the Form U-5B, shall be provided to the former bank 
securities representative.
    (iv) A sponsoring bank shall designate one or more bank securities 
representatives to supervise the sponsoring bank's covered 
transactions. A supervisor designated under this section shall pass the 
appropriate qualification examination for any bank securities 
representative(s) under his or her supervision.
    (4) Bank securities representative requirements. (i) A bank 
employee seeking to qualify as a bank securities representative shall 
complete the designated sections of the Form U-4B, provide a 
fingerprint record, and pass the appropriate qualification examination.
    (ii) A bank employee who is eligible for an examination exemption 
under paragraph (c)(5)(i) of this section must complete a Form U-4B and 
receive approval under paragraph (c)(6) of this section prior to being 
qualified as a bank securities representative.
    (iii) A bank employee who fails to pass the appropriate 
qualification examination may take the examination again after a period 
of 30 calendar days has elapsed from the date of the prior examination. 
However, any bank employee who fails to pass an examination three or 
more times in succession may not take the examination until 180 days 
has elapsed from the date of his or her last attempt to pass the 
examination.
    (iv) A bank employee shall advise the sponsoring bank within 30 
days of any event or occurrence that causes any information on the Form 
U-4B or Form U-5B to become inaccurate or incomplete and shall 
cooperate with the sponsoring bank in filing an amendment to the 
relevant form.
    (v) A bank securities representative who does not engage in or 
supervise covered transactions for a period of two years must retake 
and pass the appropriate qualification examination prior to acting as a 
bank securities representative. A bank securities representative is 
deemed to be engaging in covered transactions if the employee acts in 
one of the capacities listed in paragraph (e) of this section.
    (5) Examination exemptions. (i) A bank employee is not required to 
take the appropriate qualification examination if he or she already has 
qualified by taking that examination pursuant to the rules of an SSRO 
and remains qualified as a registered representative.
    (ii) Upon written request from a sponsoring bank, the Board may, in 
exceptional cases and where good cause is shown, waive the appropriate 
qualification examination requirement for a bank employee and may 
accept other evidence of the employee's qualifications to act as a bank 
securities representative. Advanced age, physical infirmity, or 
experience in fields ancillary to the investment banking or securities 
business generally are insufficient for the Board to waive the 
examination requirement.
    (6) Approval of bank securities representative qualifications. No 
sponsoring bank may permit any bank employee to, and no bank employee 
shall, act as a bank securities representative until the Board has 
approved the bank employee's application for registration or transfer 
on Form U-4B.
    (7) Grace period. These qualification requirements apply to all 
banks and bank employees with respect to covered transactions 
transacted after Date One Year After Effective Date of the Final Rule. 
Any bank or bank employee that is not in compliance with this section 
after the grace period shall cease engaging in covered transactions 
until the requirements are met.

[[Page 68836]]

    (d) Filing requirements, amendments, and record retention. (1) All 
filings required under this section shall be filed with the Board at 
the NASD.
    (2) All information submitted under this section must be true, 
current, complete, and not misleading at the time and in light of the 
circumstances under which it is reported.
    (3) A bank shall file an amendment no later than 30 days after 
learning of facts or circumstances causing a filing to be inaccurate or 
incomplete.
    (4) A bank shall retain copies of all filings:
    (i) Made on Forms U-4B and U-5B, including amendments, for not less 
than three years after the employee terminates employment with the 
sponsoring bank or ceases to act as a bank securities representative; 
and
    (ii) Made on Forms SB and SBW and any applications under paragraph 
(f) of this section including amendments for not less than three years 
after the bank terminates its status as a sponsoring bank.
    (e) Optional designation as a bank securities representative. A 
bank may sponsor an employee who is engaged in legal, compliance, 
internal audit, or similar responsibilities related to covered 
transactions or who provides administrative support functions for a 
bank securities representative, and who is not subject to 
disqualification (unless a waiver is granted pursuant to paragraph (f) 
of this section), to take the appropriate qualification examination. 
Such sponsored employee must meet all filing and continuing education 
requirements of this section in order to be deemed to be a bank 
securities representative for purposes of this section.
    (f) Applications by banks and bank employees ``subject to 
disqualification.'' A sponsoring bank may seek, by written application 
to the Board on behalf of itself or an employee, relief from being 
subject to disqualification and permission to engage in covered 
transactions or to qualify as a bank securities representative, as 
appropriate. The Board may, consistent with safety and soundness, the 
public interest, and the protection of investors, grant such relief 
consistent with its enforcement powers and on such terms and conditions 
as the Board considers necessary or appropriate.
    (g) Continuing education and training requirements. A bank 
securities representative and a sponsoring bank shall comply with the 
following continuing education requirements:
    (1) Bank securities representative requirements. (i) Each bank 
securities representative shall complete, within 120 days of the 
second, fifth, and tenth anniversaries of passing the appropriate 
qualification examination, the Continuing Education Program 
administered by the NASD.
    (ii) The required training intervals for bank securities 
representatives who were registered with an SSRO prior to being 
employed by the sponsoring bank are measured from the date of SSRO 
registration. The bank securities representative requirements of the 
continuing education requirement will be met as of the tenth 
anniversary of a bank securities representative's registration with a 
banking agency and/or SSRO, provided the bank securities representative 
is not subject to paragraph (g)(1)(iv) of this section.
    (iii) If a bank securities representative has been subject to a 
disciplinary action within the ten years prior to the effective date of 
this section, or at any time since that effective date, the bank 
securities representative must complete the Continuing Education 
Program administered by the NASD within 120 days of the disciplinary 
action and no later than the second, fifth, and tenth anniversaries of 
the disciplinary action.
    (iv) Unless otherwise determined by the Board, any bank securities 
representative who does not complete the requirements within the 
prescribed time frames may not perform any bank securities 
representative duties. The Board may, upon application and a showing of 
good cause, allow additional time for a bank securities representative 
to satisfy the Continuing Education program requirements of the bank 
securities representative requirements.
    (2) Sponsoring bank requirements. (i) A sponsoring bank shall not 
permit any employee to act as a bank securities representative unless 
the employee has complied with the requirements set forth in paragraph 
(g)(1) of this section.
    (ii) A sponsoring bank shall maintain a continuing education 
program for its bank securities representatives. A sponsoring bank, at 
least annually, shall evaluate and prioritize its training needs and 
develop or update, as appropriate, a written training plan. The plan 
must take into consideration the bank's size, organizational structure, 
and scope of business activities. Programs used to implement a 
sponsoring bank's training plan must be appropriate for the business of 
that bank and, at a minimum, must cover the following matters 
concerning securities products, services, and strategies offered by the 
bank:
    (A) General investment features and associated risk factors;
    (B) Suitability and sales practice considerations;
    (C) Applicable regulatory requirements; and
    (D) Bank policies and procedures for covered transactions.
    (iii) A sponsoring bank shall administer its continuing education 
programs in accordance with its annual evaluation and written plan and 
must maintain records documenting the content of the programs and 
completion of the programs by its bank securities representatives.
    (h) Confidentiality of qualification examinations. Every bank and 
bank employee shall maintain the confidentiality of qualification 
examinations and shall not remove from an examination center, 
reproduce, disclose, receive from or pass to any person, or use for 
study or any other purposes, any portion of an examination, whether of 
a present or past series, that would compromise the integrity of the 
examinations, or use in any manner and at any time, the questions or 
answers to the examination.

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

    1. The authority citation for Part 211 continues to read as 
follows:

    Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3101 et 
seq., 3901 et seq.

    2. Section 211.28 is amended as follows:
    a. The section heading is revised;
    b. Paragraphs (a) and (b) are redesignated as paragraphs (a)(1) and 
(a)(2) respectively;
    c. A heading is added to paragraph (a);
    d. All references to ``paragraph (a)'' and ``paragraph (b)'' are 
revised to read ``paragraph (a)(1)'' and ``paragraph (a)(2)'' 
respectively; and,
    e. A new paragraph (b) is added.
    The revisions and additions read as follows:


Sec. 211.28  Provisions applicable to state branches and agencies.

    (a) Limitation on loans to one borrower--(1) Limitation. * * *
 * * * * *
    (b) Retail securities transactions--(1) Requirements. To the extent 
that an uninsured state branch or a state agency is excluded from the 
definition of ``broker'' under section 3(a)(4) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(4)) and engages in an activity 
that would constitute a covered transaction as defined in Sec. 208.25 
of the Board's Regulation H (12 CFR 208.25) for a state member bank, 
the state branch or agency shall be subject to the

[[Page 68837]]

requirements of 12 CFR 208.25 in the same manner that such requirements 
apply to a state member bank.
    (2) Exception. Nothing in paragraph (b)(1) of this section is 
intended to apply the requirements of 12 CFR 208.25 to the lawful 
deposit-taking activities of an uninsured state branch or state agency.

    By order of the Board of Governors of the Federal Reserve 
System, December 11, 1996.
William W. Wiles,
Secretary of the Board.

Federal Deposit Insurance Corporation

12 CFR Part 342

Authority and Issuance

    For the reasons set forth in the joint preamble, part 342 of title 
12 of the Code of Federal Regulations is proposed to be added as 
follows:

PART 342--QUALIFICATION REQUIREMENTS FOR TRANSACTIONS IN CERTAIN 
SECURITIES

Sec.
342.1  Scope.
342.2  Definitions.
342.3  Qualification requirements.
342.4  Filing requirements, amendments, and record retention.
342.5  Optional designation as a bank securities representative.
342.6  Applications by banks and bank employees ``subject to 
disqualification.''
342.7  Continuing education and training requirements.
342.8  Confidentiality of qualification examinations.

    Authority: 12 U.S.C. 1818 and 1831p-1(a)(2)


Sec. 342.1  Scope.

    This part is issued by the Federal Deposit Insurance Corporation 
(the Corporation) pursuant to 12 U.S.C. 1818 and 1831p-1(a)(2). It 
contains rules prescribing operational and managerial standards for 
state nonmember insured banks (except a District bank) or a foreign 
bank having an insured branch, and prescribes training and 
qualification requirements for bank employees making retail 
solicitations, recommendations, purchases, or sales of certain 
securities on behalf of a state nonmember insured bank (except a 
District bank) or a foreign bank having an insured branch. It applies 
to all state nonmember insured banks (except a District bank) or a 
foreign bank having an insured branch that engage through bank 
employees in bank-direct retail solicitations, recommendations, 
purchases, or sales of certain securities.


Sec. 342.2  Definitions.

    For purposes of this part:
    (a) Appropriate qualification examination means either the 
Investment Company/Variable Contracts Products Limited Representative 
Qualification Examination (Series 6 Examination) or the General 
Securities Registered Representative Examination (Series 7 
Examination), both of which are administered by the NASD. The Series 6 
Examination is the appropriate qualification examination for a bank 
employee engaged solely in covered transactions of open-end investment 
company shares, original distribution closed-end investment company 
shares, unit investment trusts, or variable contracts, including 
variable life insurance contracts and variable annuity contracts. The 
Series 7 Examination is the appropriate qualification examination for a 
bank employee soliciting, recommending, purchasing, or selling any 
other covered product.
    (b) Bank means any State nonmember insured bank (except a District 
bank) or a foreign bank having an insured branch. The term ``bank'' 
shall not include a branch of a bank located outside of any State, as 
defined in section 3(a)(3) of the Federal Deposit Insurance Act, as 
amended, 12 U.S.C. 1813(a)(3).
    (c) Bank securities representative means any bank officer, 
director, or employee (collectively referred to as ``employee'') who 
engages in a covered transaction or is designated as the supervisor of 
a bank securities representative who engages in a covered transaction.
    (d) Continuing education requirements means the course of study 
specified in Sec. 342.7.
    (e) Covered product has the same meaning as ``security'' as defined 
at section 3(a)(10) of the Securities Exchange Act, 15 U.S.C. 
78c(a)(10). The term shall not include any product that is a deposit as 
defined in section 3(l) of the Federal Deposit Insurance Act, 12 U.S.C. 
1813(l), or any ``government security'' as defined at section 3(a)(42) 
of the Securities Exchange Act, 15 U.S.C. 78c(a)(42).
    (f) Covered transaction means a retail solicitation, 
recommendation, purchase, or sale of a covered product by a bank 
through its employee regardless of the means through which the 
solicitation, recommendation, purchase, or sale occurs. The term shall 
not include a covered transaction involving a fiduciary account 
administered by a bank, a sale of a municipal security by a municipal 
securities dealer bank registered under section 15B of the Securities 
Exchange Act, 15 U.S.C. 78o-4, or a transaction by a bank in its own 
securities consistent with the conditions set forth in Securities 
Exchange Act Rule 3a4-1(a)(4), 17 CFR 240.3a4-1(a)(4).
    (g) Disciplinary action means an action resulting in:
    (1) An individual being ``subject to disqualification'' as defined 
in this part;
    (2) A civil money penalty or fine of $5,000 or more by the 
Securities and Exchange Commission (SEC) or a securities self-
regulatory organization (SSRO) as defined in section 3(a)(26) of the 
Securities Exchange Act, 15 U.S.C. 78c(a)(26);
    (3) A civil money penalty of $5,000 or more by a Federal banking 
agency pursuant to section 8 of the Federal Deposit Insurance Act, 12 
U.S.C. 1818, for a securities law violation, or an unsafe or unsound 
practice related to a covered transaction;
    (4) An agreement with the SEC, an SSRO, or Federal banking agency, 
in connection with a disciplinary proceeding; or
    (5) An order by the SEC, an SSRO, or a Federal banking agency to 
enter the continuing education program.
    (h) NASD means the National Association of Securities Dealers, 
Inc., which is an SSRO registered under section 15A of the Securities 
Exchange Act, 15 U.S.C. 78o, and NASD Regulation, Inc., the regulatory 
subsidiary of the NASD.
    (i) Sponsoring bank means a bank that engages in or seeks to engage 
in the business of effecting covered transactions.
    (j) Subject to disqualification means:
    (1) a ``Statutory disqualification'' as that term is used in 
section 3(a)(39) of the Securities Exchange Act, 15 U.S.C. 78c(a)(39);
    (2) An order of removal, prohibition, or suspension by a Federal 
banking agency pursuant to 12 U.S.C. 1818(e) or (g);
    (3) An order or temporary order pursuant to 12 U.S.C. 1818 (b) or 
(c) that restricts the fiduciary or securities activities of a bank or 
individual; or
    (4) A prohibition pursuant to 12 U.S.C. 1829(a).


Sec. 342.3  Qualification requirements.

    (a) Disqualifications. (1) A bank shall not engage in a covered 
transaction if it is, or becomes, subject to disqualification, unless 
it has applied for and received approval to engage in covered 
transactions from the Corporation pursuant to Sec. 342.6.
    (2) No bank securities representative shall engage in a covered 
transaction if he or she is, or becomes, subject to disqualification, 
unless the bank that employs the bank securities representative has 
applied for and received approval from the Corporation

[[Page 68838]]

pursuant to Sec. 342.6 for that person to qualify as a bank securities 
representative.
    (b) Sponsoring bank notices. (1) A bank seeking to engage in 
covered transactions shall file a completed Uniform Notice for 
Sponsoring Bank (Form SB).
    (2) A bank seeking to terminate its status as a Sponsoring Bank 
shall file a Uniform Notice for Sponsoring Bank Withdrawal (Form SBW).
    (c) Sponsoring bank requirements. (1) A bank seeking to sponsor an 
employee as a bank securities representative shall:
    (i) Make independent inquiry into the individual's employment 
history, including contacting the employee's previous employers for the 
past three years and investigating the character, business reputation, 
qualifications, and experience of the individual;
    (ii) Review, complete as appropriate, and file the Uniform 
Application for Bank Securities Representative Registration or Transfer 
(Form U-4B) and amendments thereto on behalf of the employee; and
    (iii) File a fingerprint record for the employee.
    (2) A bank may not sponsor an employee to qualify as a bank 
securities representative or permit a previously qualified bank 
securities representative to engage in covered transactions if the 
individual is, or becomes, subject to disqualification unless the 
sponsoring bank has applied and received approval for the individual to 
engage in covered transactions from the Corporation under Sec. 342.6. A 
bank shall not sponsor an employee to qualify as a bank securities 
representative if it does not intend for the employee to engage in or 
supervise covered transactions or participate in one of the activities 
enumerated in Sec. 342.5.
    (3) A sponsoring bank shall file a Uniform Termination Notice for 
Bank Securities Representative Registration (Form U-5B) when the 
employment of a bank securities representative terminates or when a 
bank securities representative ceases to engage in covered transactions 
on behalf of the bank. The Form U-5B shall be filed within 30 days of 
such termination or cessation and a copy of the Form U-5B, and of any 
amendments to the Form U-5B, shall be provided concurrently to the 
former bank securities representative.
    (4) A sponsoring bank shall designate one or more bank securities 
representatives, as necessary, to supervise the sponsoring bank's 
covered transactions. A supervisor designated under this part shall 
pass the appropriate qualification examination for any bank securities 
representative(s) under his or her supervision.
    (d) Bank securities representative requirements. (1) A bank 
employee seeking to qualify as a bank securities representative shall 
complete the Form U-4B, provide a fingerprint record, and pass the 
appropriate qualification examination.
    (2) A bank employee who is eligible for an examination exemption 
under paragraph (e) of this section must complete a Form U-4B and 
receive approval under paragraph (f) of this section prior to being 
qualified as a bank securities representative.
    (3) A bank employee who fails to pass the appropriate qualification 
examination may take the examination again after a period of 30 
calendar days has elapsed from the date of the prior examination. 
However, any bank employee who fails to pass an examination three or 
more times in succession may not take the examination until 180 days 
has elapsed from the date of his or her last attempt to pass the 
examination.
    (4) A bank employee shall advise the sponsoring bank within 30 days 
of any event or occurrence that causes any information on the Form U-4B 
or Form U-5B to become inaccurate or incomplete and shall cooperate 
with the sponsoring bank in filing an amendment to the relevant form.
    (5) A bank securities representative who does not engage in or 
supervise covered transactions for a period of two years must retake 
and pass the appropriate qualification examination prior to acting as a 
bank securities representative. A bank securities representative is 
deemed to be engaging in covered transactions if the employee acts in 
one of the capacities listed in Sec. 342.5.
    (e) Examination exemptions. (1) A bank employee is not required to 
take the appropriate qualification examination if he or she already has 
qualified by taking that examination pursuant to the rules of an SSRO 
and remains qualified as a registered representative.
    (2) Upon written request from a sponsoring bank, the Corporation 
may, in exceptional cases and where good cause is shown, waive the 
appropriate qualification examination requirement for a bank employee 
and may accept other evidence of the employee's qualifications to act 
as a bank securities representative. Advanced age, physical infirmity, 
or experience in fields ancillary to the investment banking or 
securities business generally are insufficient for the Corporation to 
waive the examination requirement.
    (f) Approval of bank securities representative qualifications. No 
sponsoring bank may permit any bank employee to, and no bank employee 
shall, act as a bank securities representative until the Corporation 
has approved the bank employee's application for registration or 
transfer on Form U-4B.
    (g) Grace period. These qualification requirements apply to all 
banks and bank employees with respect to covered transactions 
transacted after Date one year after effective date of the Final Rule. 
Any bank or bank employee that is not in compliance with this part 
after the grace period shall cease engaging in covered transactions 
until the requirements are met.


Sec. 342.4  Filing requirements, amendments, and record retention.

    (a) All filings required under this part shall be filed with the 
Corporation at the NASD.
    (b) All information submitted on any filing required under this 
part must be true, current, complete, and not misleading at the time 
and in light of the circumstances under which it is reported.
    (c) A bank shall file an amendment no later than 30 days after 
learning of facts or circumstances causing a filing to be inaccurate or 
incomplete.
    (d)(1) A bank shall retain copies of all filings made on Forms U-4B 
and U-5B, including amendments, for not less than three years after the 
employee terminates employment with the sponsoring bank or ceases to 
act as a bank securities representative.
    (2) A bank shall retain copies of all filings made on Forms SB and 
SBW and any applications under Sec. 342.6, including amendments, for 
not less than three years after the bank terminates its status as a 
sponsoring bank.


Sec. 342.5  Optional designation as a bank securities representative.

    A bank may sponsor an employee who is engaged in legal, compliance, 
internal audit, or similar responsibilities related to covered 
transactions or who provides administrative support functions for a 
bank securities representative, and who is not subject to 
disqualification (unless a waiver is granted pursuant to Sec. 342.6), 
to take the appropriate qualification examination. Such sponsored 
employee must meet all filing and continuing education requirements in 
order to be deemed to be a bank securities representative for purposes 
of this part.

[[Page 68839]]

Sec. 342.6  Applications by banks and bank employees ``subject to 
disqualification.''

    A sponsoring bank may seek, by written application to the 
Corporation on behalf of itself or an employee, relief from being 
subject to disqualification and permission to engage in covered 
transactions or to qualify as a bank securities representative, as 
appropriate. The Corporation may, consistent with safety and soundness, 
the public interest, and the protection of investors, grant such relief 
consistent with its enforcement powers and on such terms and conditions 
as the Corporation considers necessary or appropriate.


Sec. 342.7  Continuing education and training requirements.

    A bank securities representative and a sponsoring bank shall comply 
with the following continuing education requirements:
    (a) Bank securities representative requirements. (1) Each bank 
securities representative shall complete, within 120 days of the 
second, fifth, and tenth anniversaries of passing the appropriate 
qualification examination, the Continuing Education Program 
administered by the NASD.
    (2) The required training intervals for bank securities 
representatives who were registered with an SSRO prior to being 
employed by the sponsoring bank are measured from the date of SSRO 
registration. The bank securities representative requirements of the 
continuing education requirement will be met as of the tenth 
anniversary of a bank securities representative's registration with a 
banking agency and/or SSRO, provided the bank securities representative 
is not subject to paragraph (a)(4) of this section.
    (3) If a bank securities representative has been subject to a 
disciplinary action within the ten years prior to the effective date of 
this part, or at any time since that effective date, the bank 
securities representative must complete the Continuing Education 
Program administered by the NASD within 120 days of the disciplinary 
action and no later than the second, fifth, and tenth anniversaries of 
the disciplinary action.
    (4) Unless otherwise determined by the Corporation, any bank 
securities representative who does not complete the requirements within 
the prescribed time frames may not perform any bank securities 
representative duties. The Corporation may, upon application and a 
showing of good cause, allow additional time for a bank securities 
representative to satisfy the program requirements.
    (b) Sponsoring bank requirements. (1) A sponsoring bank shall not 
permit any employee to act as a bank securities representative unless 
the employee has complied with the requirements set forth in paragraphs 
(a)(1) through (a)(4) of this section.
    (2) A sponsoring bank shall maintain a continuing education program 
for its bank securities representatives. A sponsoring bank, at least 
annually, shall evaluate and prioritize its training needs and develop 
or update, as appropriate, a written training plan. The plan must take 
into consideration the bank's size, organizational structure, and scope 
of business activities. Programs used to implement a sponsoring bank's 
training plan must be appropriate for the business of that bank and, at 
a minimum, must cover the following matters concerning securities 
products, services, and strategies offered by the bank:
    (i) General investment features and associated risk factors;
    (ii) Suitability and sales practice considerations;
    (iii) Applicable regulatory requirements; and
    (iv) Bank policies and procedures for covered transactions.
    (3) A sponsoring bank shall administer its continuing education 
programs in accordance with its annual evaluation and written plan and 
must maintain records documenting the content of the programs and 
completion of the programs by its bank securities representatives. A 
bank may choose to use commercial training material and outside vendors 
to assist in meeting this education requirement if it ensures that the 
training material or program meets the content standards set forth in 
paragraph (b)(2) of this section.


Sec. 342.8  Confidentiality of qualification examinations.

    Every bank and bank employee shall maintain the confidentiality of 
qualification examinations and shall not remove from an examination 
center, reproduce, disclose, receive from or pass to any person, or use 
for study or any other purposes, any portion of an examination, whether 
of a present or past series, that would compromise the integrity of the 
examinations, or use in any manner and at any time the questions or 
answers to the examination.

    By Order of the Board of Directors.

    Dated at Washington, D.C., this 11th day of December, 1996.

Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 96-32326 Filed 12-27-96; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P