[Federal Register Volume 62, Number 32 (Tuesday, February 18, 1997)]
[Rules and Regulations]
[Pages 7153-7155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3834]


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DEPARTMENT OF THE TREASURY

Office of the Under Secretary for Domestic Finance

17 CFR Part 404


Government Securities Act Regulations: Recordkeeping

AGENCY: Office of the Under Secretary for Domestic Finance, Treasury.

ACTION: Final Rule.

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SUMMARY: The Department of the Treasury (``Department'') is issuing in 
final form an amendment to the recordkeeping rules in Sec. 404.4 of the 
regulations issued under the Government Securities Act of 1986 
(``GSA''). 17 CFR 404.4 of the GSA regulations requires financial 
institutions that are government securities brokers or dealers to make 
and preserve records. Specifically, the Department is amending 
Sec. 404.4(a)(1) to clarify the applicability of the federal bank 
regulatory agencies' rules, as adopted by the GSA rules, to financial 
institutions and to conform with current recordkeeping rule revisions 
being undertaken by the federal bank regulatory agencies.

EFFECTIVE DATE: This amendment is effective April 30, 1997.

FOR FURTHER INFORMATION CONTACT: Kerry Lanham or Kurt Eidemiller, 
Government Securities Regulations Staff, Bureau of the Public Debt, 
Department of the Treasury, at (202) 219-3632.

SUPPLEMENTARY INFORMATION:

I. Background

    The Government Securities Act of 1986 (``GSA''), as amended 1 
requires, among other things, that a financial institution that is a 
government securities broker or dealer notify its appropriate 
regulatory agency (``ARA'') of its status as such, thereby providing 
for the regulation of its government securities business.2 In 
1987, when the Department developed the GSA regulations affecting 
financial institutions that are required to file notice as government 
securities brokers or dealers (``bank broker-dealers''), it decided to 
adopt the existing recordkeeping regulations of the federal bank 
regulatory agencies.3 These rules are similar to the Securities 
and Exchange Commission's recordkeeping requirements in Rule 17a-
3.4
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    \1\ 15 U.S.C. 78o-5.
    \2\ 15 U.S.C. 78o-5(a)(1)(B).
    \3\ See 12 CFR Part 12 for national banks, which are regulated 
by the Office of the Comptroller of the Currency (``OCC''); 12 CFR 
Part 208 for state member banks of the Federal Reserve System, which 
are regulated by the Board of Governors of the Federal Reserve 
System (``Board''); and 12 CFR Part 344 for state banks that are not 
members of the Federal Reserve System, which are regulated by the 
Federal Deposit Insurance Corporation (``FDIC'').
    \4\ 17 CFR 240.17a-3.
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    The reason for relying on existing bank regulations was that those 
financial institutions effecting government securities broker-dealer 
transactions were already subject to a system of federal regulation and 
supervision, which explicitly included recordkeeping requirements 
relating to securities activities. Requiring those institutions to 
follow another set of recordkeeping requirements was viewed as unduly 
burdensome and did not promote the purposes of the GSA.5
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    \5\ 52 FR 5675 (February 25, 1987).
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    Section 404.4 of the GSA regulations provides that, for bank 
broker-dealers, compliance with the recordkeeping rules of the bank 
ARAs, together with additional GSA recordkeeping provisions,6 
constitutes compliance with the GSA recordkeeping rules. However, the 
respective ARAs' regulations provide for certain exemptions from, or 
exceptions to, most of their recordkeeping rules based on a stated 
transaction threshold. Specifically, the ARAs' regulations exempt banks 
from most of the respective recordkeeping requirements if the bank 
transacts a de minimis annual average number of transactions. The 
regulations state, with minor variations, the following: ``The 
requirements * * * shall not apply to banks having an average of less 
than 200 securities transactions per year for customers over the prior 
three calendar year period, exclusive of transactions in U.S. 
government and federal agency obligations.'' 7 The ARAs have 
interpreted this exemption as excluding government securities 
transactions, meaning that government securities transactions are not 
included in the

[[Page 7154]]

exempted, or de minimis, transaction count.
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    \6\ In addition to complying with the recordkeeping rules of its 
ARA, a bank broker-dealer is required to maintain, among other 
things, records pertaining to securities positions (17 CFR 
404.4(a)(3)(i)(A)).
    \7\ See 12 CFR 12.7(a); 12 CFR 208.8(k)(6)(i); and 12 CFR 
344.7(a).
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    However, paragraph 404.4(a)(1) of the GSA regulations, in adopting 
the bank ARAs' recordkeeping rules for bank broker-dealers, contains 
the following provision: ``* * * provided however, that the records 
required to be made and kept by those regulations shall be made or kept 
without regard to the exemptions for transactions in U.S. government or 
Federal agency obligations provided in 12 CFR 12.7(a), 12 CFR 
208.8(k)(6)(i), and 12 CFR 344.7(a).'' Since implementing the GSA 
regulations, the Department has consistently interpreted this provision 
to mean that a bank broker-dealer's government securities transactions 
are included in the 200 securities transaction exemption threshold that 
is provided by the ARA rules. This provision was intended to permit 
bank broker-dealers that conduct government securities transactions to 
take advantage of the de minimis exemption from the ARAs' recordkeeping 
rules that was available to them for their other securities business. 
Accordingly, the GSA regulations allow a bank broker-dealer to conduct 
up to 200 government securities transactions, or a combination of up to 
200 government and other securities transactions, per year without 
having to comply with most of the bank ARAs' recordkeeping rules. It 
has been the Department's view that, for purposes of this part, a bank 
broker-dealer falling within these parameters is exempt from paragraph 
404.4(a)(1) of the GSA recordkeeping rules.
    As a result of the cross-referencing, there has been some confusion 
about the applicability of the ARAs' exemption threshold to bank 
broker-dealers' government securities transactions. The 
interrelationship between the recordkeeping language of the ARAs' rules 
and the GSA regulations often has been confusing and ambiguous. The 
ARAs and the Department are working together to eliminate this 
ambiguity and to provide for a clear, understandable and consistent 
interpretation of the rules.
    The ARAs have proposed revisions to their recordkeeping rules that 
would conflict, in part, with the GSA recordkeeping requirements as 
they are presently stated in section 404.4(a).8 This amendment to 
the GSA regulations will help to eliminate any ambiguity or confusion 
resulting from the interplay of the respective regulations. This final 
rule amendment is intended to be published within the same timeframe as 
those final rules that are being adopted by the Board and the OCC.
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    \8\ See 60 FR 66517 (December 22, 1995) for the OCC's proposed 
revisions and 60 FR 66759 (December 26, 1995) for the Board's 
proposed revisions. It is the Department's understanding that the 
FDIC also intends to address this same rule modification to ensure 
consistent application and interpretation of the rules. The FDIC 
published an Advance Notice of Proposed Rulemaking on this subject 
on May 24, 1996 (61 FR 26135).
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    As stated by the OCC in the preamble section of their proposed rule 
revisions, ``Consistent with the GSA regulations, proposed 
Sec. 12.1(c)(2)(ii) exempts a national bank that conducts fewer than 
500 government securities brokerage transactions per year from 
complying with the recordkeeping requirements under proposed (and 
current) Sec. 12.3 * * * This exemption does not apply to government 
securities dealer transactions by national banks, however.'' 9
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    \9\ 60 FR 66518 (December 22, 1995).
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    The Board has proposed a similar rule revision. As stated in the 
preamble section to its proposed rules, ``A new Sec. 208.24(g)(2) would 
clarify that State member banks that effect up to 500 government 
securities brokerage transactions and are exempt from registration 
under Department of the Treasury regulation 401.3(a)(2)(i), 17 CFR 
401.3(a)(2), also are exempt from Sec. 208.24. This exemption would not 
be available if a bank has filed notice or is required to file notice 
indicating that it acts as a government securities broker or dealer.'' 
10
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    \10\ 60 FR 66760 (December 26, 1995).
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    In the rule proposals, both agencies also stated that they had been 
advised by staff at the Bureau of the Public Debt, which is the 
organization within the Department of the Treasury that is responsible 
for administering the GSA regulations, that the staff was considering 
amending the GSA recordkeeping rules. The purpose would be to clarify 
any ambiguity with respect to the recordkeeping requirements for 
financial institutions that conduct government securities transactions 
resulting from the interplay of the GSA regulations with the ARA 
recordkeeping requirements.
    The final rules being adopted by the OCC and the Board, which are 
virtually unchanged from the proposed rules, will increase the 
exemption threshold to 500 government securities brokerage 
transactions, which is consistent with the limited brokerage exemption 
provided by the GSA regulations in Sec. 401.3 (17 CFR 401.3, Exemption 
for financial institutions that are engaged in limited government 
securities brokerage activities). The GSA limited brokerage exemption 
provision basically states that a financial institution is not regarded 
as acting as a government securities broker and is exempt from the 
requirement to file notice as a government securities broker and from 
most of the GSA regulations, including the recordkeeping requirements, 
if it effects fewer than 500 government securities brokerage 
transactions per year.11
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    \11\ The GSA requirements of Part 450 (17 CFR Part 450) 
concerning custodial holdings of government securities for customers 
apply to all financial institutions.
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    However, the OCC's and the Board's final rules contain additional 
language that we view as contradictory to the intended applicability of 
17 CFR 404.4(a) to bank dealers.12 The final rules state that the 
de minimis exception does not apply to dealer transactions by national 
banks (OCC) 13 or noticed financial institution government 
securities brokers or dealers (Board).14 As a result, entities 
engaging in government securities dealer transactions would be subject 
to the bank ARA recordkeeping rules regardless of how many transactions 
were conducted. As mentioned earlier, the Department views 17 CFR 
404.4(a) as meaning that, for purposes of the GSA, bank broker-dealers 
are not required to follow most of the ARAs' recordkeeping rules if 
their annual government securities dealer transactions, or a 
combination of their government and other securities transactions, are 
less than 200. Given this difference in application of the GSA and 
ARAs' rules, section 404.4 of the GSA regulations is being amended to 
conform with the ARAs' rules and to make clear its intended 
applicability.
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    \12\ The OCC published its final rule on December 2, 1996. See 
61 FR 63958 (December 2, 1996). The Board intends to publish its 
final rule in January 1997.
    \13\ 12 CFR 12.1(c)(2)(ii).
    \14\ 12 CFR 208.24(g)(2).
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    The Department is therefore amending paragraph 404.4(a)(1) of the 
GSA regulations (17 CFR 404.4, Records to be made and preserved by 
government securities brokers and dealers that are financial 
institutions) with respect to bank broker-dealers that are subject to 
bank regulatory agency recordkeeping rules by deleting the current 
provision, ``provided however, that the records required to be made and 
kept by those regulations shall be made or kept without regard to the 
exemptions for transactions in U.S. government or Federal agency 
obligations provided in 12 CFR 12.7(a), 12 CFR 208.8(k)(6)(i), and 12 
CFR 344.7(a).'' As a result, in order to be in compliance with the GSA 
recordkeeping rules at 17 CFR 404.4(a)(1), all bank

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broker-dealers will be required to follow the ARAs' recordkeeping rules 
if even a single government securities dealer transaction is conducted.

II. Special Analyses

    This final rule amendment does not meet the criteria for a 
``significant regulatory action'' pursuant to Executive Order 12866. 
The Administrative Procedure Act (``APA'') (5 U.S.C. 553) generally 
requires that prior notice and opportunity for comment be afforded 
before the adoption of rules by federal agencies. Inasmuch as this 
final rule merely involves changes to conform with the rule revisions 
currently being adopted by the federal banking regulatory agencies, 
while not involving any substantive changes to the regulations, the 
notice and comment provisions of the APA are unnecessary pursuant to 5 
U.S.C. 553(b)(B).
    As no notice and public comment are required for this rulemaking, 
the provisions of the Regulatory Flexibility Act (5 U.S.C. 601, et. 
seq.), do not apply.
    The Paperwork Reduction Act (44 U.S.C. 3504(h)) requires that 
collections of information be submitted to the Office of Management and 
Budget for review and approval. Since this rule revision does not 
include any new collection of information given the ARAs' current 
interpretation and application of their recordkeeping requirements, the 
Paperwork Reduction Act is inapplicable.

List of Subjects in 17 CFR Part 404

    Banks, banking, Brokers, Government securities, Reporting and 
recordkeeping requirements.

    For the reasons set out in the preamble, 17 CFR Part 404 is amended 
as follows:

PART 404--RECORDKEEPING AND PRESERVATION OF RECORDS

    1. The authority citation for Part 404 continues to read as 
follows:

    Authority: 15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(2), (b)(4).

    2. Section 404.4 is amended by revising paragraph (a)(1) to read as 
follows:


Sec. 404.4  Records to be made and preserved by government securities 
brokers and dealers that are financial institutions.

    (a) * * *
    (1) Is subject to 12 CFR part 12 (relating to national banks), 12 
CFR part 208 (relating to state member banks of the Federal Reserve 
System) or 12 CFR part 344 (relating to state banks that are not 
members of the Federal Reserve System), or is a United States branch or 
agency of a foreign bank and complies with 12 CFR part 12 (for 
federally licensed branches and agencies of foreign banks) or 12 CFR 
part 208 (for uninsured state-licensed branches and agencies of foreign 
banks) or 12 CFR part 344 (for insured state licensed branches and 
agencies of foreign banks);
* * * * *
    Dated: January 16, 1997.
John D. Hawke, Jr.,
Under Secretary for Domestic Finance.
[FR Doc. 97-3834 Filed 2-14-97; 8:45 am]
BILLING CODE 4810-39-W