[Federal Register Volume 62, Number 43 (Wednesday, March 5, 1997)]
[Rules and Regulations]
[Pages 9909-9915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5423]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
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Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules
and Regulations
[[Page 9909]]
FEDERAL RESERVE SYSTEM
12 CFR Part 208
[Regulation H; Docket No. R-0909]
Membership of State Banking Institutions in the Federal Reserve
System; Recordkeeping and Confirmation of Certain Securities
Transactions Effected by State Member Banks
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board of Governors of the Federal Reserve System is
adopting final amendments to Regulation H pertaining to the
recordkeeping and confirmation of certain securities transactions. The
amendments accommodate developments in recordkeeping, confirmation and
settlement requirements for broker-dealers by adding certain yield-
related confirmation disclosure requirements for transactions involving
debt and asset-backed securities effected by State member banks for
customers, and providing for three-day settlement of those
transactions. The amendments also clarify that State member banks that
effect de minimis government securities brokerage transactions and are
exempt from registration under Department of the Treasury regulations,
also are exempt from Regulation H. Finally, the amendments address the
minimum recordkeeping requirements for State member banks exempt from
the regulation, require State member banks to establish trading
policies and procedures that separate the sales function from the back
office function, liberalize the written notification requirements for
periodic plans, and include several new definitions and language edits.
DATES: Effective April 1, 1997.
FOR FURTHER INFORMATION CONTACT: Angela Desmond, Senior Counsel, or
Susan Meyers, Senior Securities Regulation Analyst, (202) 452-2781. For
users of Telecommunications Device for the Deaf (TDD), please contact
Dorothea Thompson, (202/452-3544), Board of Governors of the Federal
Reserve System, Washington, D.C. 20551.
SUPPLEMENTARY INFORMATION: The amendments to Sec. 208.24 are part of an
interagency effort to update the respective regulations of the Board,
the OCC and the FDIC (agencies) that were adopted in 1979 1 as
part of a coordinated effort to provide guidance to banks effecting
securities transactions for customers in trust departments and in other
areas of the bank. The regulations are based on SEC recordkeeping and
confirmation rules. 2
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\1\ 44 FR 43258 (July 24, 1979). The OCC and the FDIC adopted
similar rules on the same date, 12 CFR Part 12, 44 FR 43252 (July
24, 1979) and 12 CFR Part 344, 44 FR 43261 (July 24, 1979),
respectively.
\2\ SEC rule 10b-10, 17 CFR 240.10b-10; rule 17a-3, 17 CFR
240.17a-3; and rule 17a-4, 17 CFR 240.17a-4, all adopted under the
Securities Exchange Act.
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Recognizing that a number of market and regulatory changes have
occurred since the regulation was adopted, the Board, in consultation
with the other agencies, published draft amendments for comment on
December 26, 1995. 3 The draft amendments were designed to update
the recordkeeping and confirmation requirements of Regulation H to
conform with SEC rules, with pertinent Department of the Treasury
regulations adopted under the Government Securities Act of 1986, 15
U.S.C. 78o-5, and with principles of safe and sound banking practices.
The draft amendments also were consistent with the amendments published
by the other agencies. 4
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\3\ 60 FR 66759.
\4\ The OCC published amendments for comment on December 22,
1995, 60 FR 66517, and adopted final amendments on December 2, 1996,
61 FR 63958. The FDIC published an advanced notice of rulemaking on
its regulation on May 24, 1996, 61 FR 26135 and published amendments
for comment on December 24, 1996, 61 FR 67729.
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After reviewing the comments, the Board has determined to adopt
final amendments to Regulation H as described in the section-by-section
summary below. The amendments are limited to Sec. 208.24 (formerly
Sec. 208.8(k)) of Regulation H and are part of an ongoing comprehensive
review of the regulation. Adoption of the amendments will provide
continued consistency among the regulations of the agencies and parity
with securities industry practices in these important areas.
As is the practice with respect to other notification practices of
banks, the confirmation and notification requirements of Sec. 208.24
can be satisfied by facsimile and, when the parties agree and the
necessary safeguards are in place, via electronic means. Such
safeguards should ensure correct delivery, the maintenance of
confidentiality and security of the transmission, appropriate notice
that the transmission is being sent, and evidence of delivery. In
addition, a customer consenting to electronic delivery should still be
able to request and obtain a written version of the information.
Summary of Comments and Section-by-Section Summary of Final
Amendments
The Board received twelve comment letters; seven were from Federal
Reserve Banks, one from a trade association, three from banks, and one
from a law firm. Eleven commenters expressed general support for the
proposed amendments, and one bank expressed general concern with the
complexity and burden of complying with the regulation. Six commenters
stated that the proposed amendments would not have a significant cost
or burden impact on banks.
Several commenters offered constructive suggestions that were
incorporated into the final amendments. In addition, certain
organizational changes have been made to assure as much consistency as
possible between the respective regulations of the agencies. A section-
by-section summary of the final amendments noting changes from the
amendments proposed for comment follows.
Section 208.24(a) Exceptions and Safe and Sound Operations
The exceptions previously found in current Sec. 208.8(k)(6) and the
new section related to safe and sound operations for banks exempt from
Sec. 208.24 have been combined into one subsection and moved to the
front of the regulation, to Sec. 208.24(a). This makes it easier for
State member banks to determine whether they qualify for an exemption
from the regulation, and if so, what recordkeeping procedures are
expected.
[[Page 9910]]
The Board is adopting the proposed language in
Sec. 208.24(a)(1)(B), which clarifies 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 is not available if a bank has filed notice or is
required to file notice indicating that it acts as a government
securities broker or dealer.
The Board also is adopting, with the support of the commenters, a
provision on safe and sound operations for banks exempt from
Sec. 208.24. The provision codifies the longstanding interpretation of
Board staff that principles of safety and soundness require such a bank
to maintain effective systems of records and controls regarding
customer securities transactions that reflect accurate information and
are sufficient to provide an adequate basis for an audit of the
information.
Section 208.24(b) Definitions
The amendments add definitions of: asset-backed security,
completion of the transaction, crossing of buy and sell orders, debt
security, government security, and municipal security. In general, the
new definitions are based on definitions contained in the Securities
Exchange Act, or in the SEC's confirmation rule 10b-10, 17 CFR 240.10b-
10, and are necessary for applying the confirmation disclosure and the
three-day settlement requirements. The definition of ``security'' has
been amended to conform generally to the definition in section 3(a)(10)
of the Securities Exchange Act, 15 U.S.C. 78c(a)(10), although the
Board has retained the current exclusions from the definition in the
final rule.
The definition of ``periodic plan'' has been modified to include
cash management sweep services or other prearranged automated transfers
of funds from a deposit account to purchase a security in response to
commenters seeking clarification how the transaction notification
requirements for periodic plans apply to automatic sweep or transfer
arrangements. Finally, the term ``dealer bank'' in the definition of
``customer'' has been replaced by the term ``municipal securities
broker or dealer'' to clarify that a bank acting as a municipal
securities broker is not a customer for purposes of Sec. 208.24.
Section 208.24(c) Recordkeeping
The Board is adopting language in Sec. 208.24(c) that clarifies
that Sec. 208.24 applies to government securities transactions effected
for customers by State member banks and to municipal securities
transactions effected by State member banks that are not registered as
municipal securities dealers. All recordkeeping requirements are now
located in Sec. 208.24(c), and explanatory language that was at the end
of the old recordkeeping section has been moved to the beginning of the
rule to simplify the section.
Section 208.24(d) Content and Time of Notification
Section 208.24(d) has been renamed to clarify its subject matter.
Substantively, the amendments delete the old five business day
requirement for confirmation delivery and provide that confirmations be
given or sent to customers ``at or by completion of the transaction,''
defined as the payment and delivery of the securities in
Sec. 208.24(b).
The proposed amendments would have deleted the extension of time
for State member banks that choose to send confirmations from the
executing broker to a customer rather than creating their own
confirmations. In response to a commenter who stated that it may be
difficult to meet the three-day delivery requirement in this situation,
Sec. 208.24(d) now provides that if a State member bank uses a broker-
dealer's confirmation, it must give or send the confirmation to its
customer within one business day of the bank's receipt of the
confirmation.
As proposed, the final amendments require confirmations to: (i)
Contain a legend when the security is callable prior to maturity
indicating that an early redemption could affect the yield stated on
the confirmation and offering additional information on request
(Sec. 208.24(d)(2)(viii)); (ii) disclose the yield and/or resulting
dollar price of transactions involving debt securities and asset-backed
securities (Sec. 208.24(d)(2) (ix) and (x)); and, (iii) indicate when a
debt security, other than a government security, is unrated by a
nationally recognized statistical rating organization
(Sec. 208.24(d)(2)(xii)). These disclosures conform bank confirmations
with those of broker-dealers under SEC rule 10b-10 and with
longstanding practice in the municipal securities industry.
The Board had requested comment whether it would be preferable to
incorporate SEC rules 10b-10, 17a-3 and 17a-4 by reference for State
member banks to refer to, rather than specify items of confirmation
disclosure in the regulation. All of the comments received on this
issue preferred the current approach, i.e., to specify the disclosures
required to be contained on confirmations in the regulation.
Section 208.24(d)(2)(vi) requires banks to disclose on
confirmations the amount of any remuneration received by the bank on
the transaction. In response to commenters who pointed out that SEC
rule 10b-10(a)(2)(i)(D) provides more flexibility to brokers in this
area, the final amendments provide that a State member bank may elect
to disclose whether it has or will receive remuneration from a party
other than the customer and offer to furnish the information within a
reasonable time on request.
Section 208.24(e) Notification by Agreement; Alternative Forms and
Times
Section 208.24(e) has been renamed to indicate that it deals with
alternative arrangements for the delivery of notifications of
securities transactions to customers. Substantive changes have been
made to Sec. 208.24(e)(5), pertaining to notifications of transactions
in periodic plans, to conform more completely with securities industry
requirements. Formerly, the regulation required that a notification be
provided to a customer ``as soon as possible after each transaction.''
The Board is amending this requirement to require notification ``not
less than every three months'' for all periodic plans other than cash
management sweep accounts. As requested by two commenters, the final
amendments provide that a notification of a transaction involving a
cash management sweep service should be given or sent to a customer
``for each month in which a securities transaction takes place but not
less than every three months if there are no securities transactions.''
5 These amendments will provide more flexibility to State member
banks in scheduling notifications in periodic plans and conform with
SEC rule 10b-10(b)(2).
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\5\ Notwithstanding the provisions of this paragraph, banks that
retain custody of government securities that are the subject of a
hold-in-custody purchase agreement are subject to the requirements
of 17 CFR 403.5(d).
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Section 208.24(f) Settlement of Securities Transactions
The amendments to Sec. 208.24(f) update the regulation to require
State member banks to settle transactions effected for customers within
the ``standard settlement cycle for broker-dealers in the United
States'' unless the parties agree to a different settlement date at the
time of the transaction. The standard settlement cycle currently is
three business days (T+3) after the trade date.
[[Page 9911]]
The requirement applies to transactions in securities that would fall
under SEC rule 15c6-1, 17 CFR 240.15c6-1, for broker-dealers, and
brings banks into line with the rest of the securities industry in this
area.
The commenters were nearly split with respect to the rule's use of
the term ``standard settlement cycle for broker-dealers in the United
States'' rather than specifying T+3 for sending customer confirmations.
Four commenters favor the approach taken in the rule, while three
commenters would specify T+3. The Board has determined to adopt the
proposed language as it will avoid having to amend the regulation to
reflect expected future modifications to the standard settlement cycle.
Moreover, the same term is used in the Board's Regulation T and has not
engendered any confusion.
Section 208.24(g) Securities Trading Policies and Procedures
The amendments add Sec. 208.24(g)(1)(iii) that requires State
member banks to establish supervisory procedures and reporting lines
for back office personnel that are separate from those established to
oversee personnel accepting orders and effecting transactions. All
comments received on this provision favored its adoption.
With respect to filing notices of personal securities transactions
by bank officers and directors under Sec. 208.24(g)(4), the Board notes
that affected individuals that file similar reports under SEC rule 17j-
1, 15 CFR 270.17j-1, for investment advisers, do not need to file a
separate notice to satisfy Regulation H requirements.
Regulatory Flexibility Act
The Board certifies that the final rule will have no significant
economic impact on a substantial number of small entities. While the
final rule adds certain confirmation disclosure requirements, it also
streamlines and reduces other confirmation, recordkeeping and
regulatory burdens for State member banks engaged in certain securities
transactions for customers.
Paperwork Reduction Act
In accordance with section 3506 of the Paperwork Reduction Act of
1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed
the rule under the authority delegated to the Board by the Office of
Management and Budget. The Federal Reserve may not conduct or sponsor,
and an organization is not required to respond to, this information
collection unless it displays a currently valid OMB control number. The
OMB control number is 7100-0196.
The collection of information requirements in this regulation are
found in 12 CFR 208.24. This information is required to evidence
compliance with the requirements of section 208.24 of Regulation H. The
respondents are for-profit financial institutions. Records must be
retained for three years.
No comments specifically addressing the burden estimate were
received.
The proposed amendments would provide for only a minor addition in
disclosure practices of state member banks, would not increase the
banks' reporting requirements to the Federal Reserve, and would have a
negligible effect on respondent burden. The estimated burden is 3
minutes per response. There are 1,214 respondents and the number of
their recordkeeping and notification occurrences varies with the amount
and type of securities transactions. The total annual recordkeeping and
disclosure burden for these respondents is estimated to be 165,520
hours. Based on an hourly cost of $20, the annual cost to the public is
estimated to be $3,310,400.
Because the records would be maintained at state member banks and
the notices are not provided to the Federal Reserve, no issue of
confidentiality under the Freedom of Information Act arises.
The Federal Reserve has a continuing interest in the public's
opinions of our collections of information. At any time, comments
regarding the burden estimate, or any other aspect of this collection
of information, including suggestions for reducing the burden, may be
sent to: Secretary, Board of Governors of the Federal Reserve System,
20th and C Streets, N.W., Washington, DC 20551; and to the Office of
Management and Budget, Paperwork Reduction Project (7100-0196),
Washington, DC 20503.
List of Subjects in 12 CFR Part 208
Accounting, Agriculture, Banks, banking, State member banks,
Confidential business information, Crime, Currency, Federal Reserve
System, Flood insurance, Mortgages, Reporting and recordkeeping
requirements, Securities.
For the reasons set out in the preamble, the Board amends 12 CFR
Part 208 as set forth below:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for Part 208 continues to read as
follows:
Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461,
481-486, 601, 611, 1814, 1820(d)(8), 1823(j), 1828(o), 1831o, 1831p-
1, 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.
Sec. 208.8 [Amended]
2. In Sec. 208.8 paragraph (k) is removed and reserved.
3. A new Sec. 208.24 is added to subpart A to read as follows:
Sec. 208.24 Recordkeeping and confirmation of certain securities
transactions effected by State member banks.
(a) Exceptions and safe and sound operations.
(1) A State member bank may be excepted from one or more of the
requirements of this section if it meets one of the following
conditions of paragraphs (a)(1)(i) through (a)(1)(iv) of this section:
(i) De minimis transactions. The requirements of paragraphs (c)(2)
through (c)(4) and paragraphs (e)(1) through (e)(3) of this section
shall not apply to banks having an average of less than 200 securities
transactions per year for customers over the prior three calendar year
period, exclusive of transactions in government securities;
(ii) Government securities. The recordkeeping requirements of
paragraph (c) of this section shall not apply to banks effecting fewer
than 500 government securities brokerage transactions per year;
provided that this exception shall not apply to government securities
transactions by a State member bank that has filed a written notice, or
is required to file notice, with the Federal Reserve Board that it acts
as a government securities broker or a government securities dealer;
(iii) Municipal securities. The municipal securities activities of
a State member bank that are subject to regulations promulgated by the
Municipal Securities Rulemaking Board shall not be subject to the
requirements of this section; and
(iv) Foreign branches. The requirements of this section shall not
apply to the activities of foreign branches of a State member bank.
(2) Every State member bank qualifying for an exemption under
paragraph (a)(1) of this section that conducts securities transactions
for
[[Page 9912]]
customers shall, to ensure safe and sound operations, maintain
effective systems of records and controls regarding its customer
securities transactions that clearly and accurately reflect appropriate
information and provide an adequate basis for an audit of the
information.
(b) Definitions. For purposes of this section:
(1) Asset-backed security shall mean a security that is serviced
primarily by the cash flows of a discrete pool of receivables or other
financial assets, either fixed or revolving, that by their terms
convert into cash within a finite time period plus any rights or other
assets designed to assure the servicing or timely distribution of
proceeds to the security holders.
(2) Collective investment fund shall mean funds held by a State
member bank as fiduciary and, consistent with local law, invested
collectively as follows:
(i) In a common trust fund maintained by such bank exclusively for
the collective investment and reinvestment of monies contributed
thereto by the bank in its capacity as trustee, executor,
administrator, guardian, or custodian under the Uniform Gifts to Minors
Act; or
(ii) In a fund consisting solely of assets of retirement, pension,
profit sharing, stock bonus or similar trusts which are exempt from
Federal income taxation under the Internal Revenue Code (26 U.S.C.).
(3) Completion of the transaction effected by or through a state
member bank shall mean:
(i) For purchase transactions, the time when the customer pays the
bank any part of the purchase price (or the time when the bank makes
the book-entry for any part of the purchase price if applicable);
however, if the customer pays for the security prior to the time
payment is requested or becomes due, then the transaction shall be
completed when the bank transfers the security into the account of the
customer; and
(ii) For sale transactions, the time when the bank transfers the
security out of the account of the customer or, if the security is not
in the bank's custody, then the time when the security is delivered to
the bank; however, if the customer delivers the security to the bank
prior to the time delivery is requested or becomes due then the
transaction shall be completed when the banks makes payment into the
account of the customer.
(4) Crossing of buy and sell orders shall mean a security
transaction in which the same bank acts as agent for both the buyer and
the seller.
(5) Customer shall mean any person or account, including any
agency, trust, estate, guardianship, or other fiduciary account, for
which a State member bank effects or participates in effecting the
purchase or sale of securities, but shall not include a broker, dealer,
bank acting as a broker or dealer, municipal securities broker or
dealer, or issuer of the securities which are the subject of the
transactions.
(6) Debt security as used in paragraph (c) of this section shall
mean any security, such as a bond, debenture, note or any other similar
instrument which evidences a liability of the issuer (including any
security of this type that is convertible into stock or similar
security) and fractional or participation interests in one or more of
any of the foregoing; provided, however, that securities issued by an
investment company registered under the Investment Company Act of 1940,
15 U.S.C. 80a-1 et seq., shall not be included in this definition.
(7) Government security shall mean:
(i) A security that is a direct obligation of, or obligation
guaranteed as to principal and interest by, the United States;
(ii) A security that is issued or guaranteed by a corporation in
which the United States has a direct or indirect interest and which is
designated by the Secretary of the Treasury for exemption as necessary
or appropriate in the public interest or for the protection of
investors;
(iii) A security issued or guaranteed as to principal and interest
by any corporation whose securities are designated, by statute
specifically naming the corporation, to constitute exempt securities
within the meaning of the laws administered by the Securities and
Exchange Commission; or
(iv) Any put, call, straddle, option, or privilege on a security as
described in paragraphs (b)(7) (i), (ii), or (iii) of this section
other than a put, call, straddle, option, or privilege that is traded
on one or more national securities exchanges, or for which quotations
are disseminated though an automated quotation system operated by a
registered securities association.
(8) Investment discretion with respect to an account shall mean if
the State member bank, directly or indirectly, is authorized to
determine what securities or other property shall be purchased or sold
by or for the account, or makes decisions as to what securities or
other property shall be purchased or sold by or for the account even
though some other person may have responsibility for such investment
decisions.
(9) Municipal security shall mean a security which is a direct
obligation of, or obligation guaranteed as to principal or interest by,
a State or any political subdivision thereof, or any agency or
instrumentality of a State or any political subdivision thereof, or any
municipal corporate instrumentality of one or more States, or any
security which is an industrial development bond (as defined in 26
U.S.C. 103(c)(2) the interest on which is excludable from gross income
under 26 U.S.C. 103(a)(1), by reason of the application of paragraph
(4) or (6) of 26 U.S.C. 103(c) (determined as if paragraphs (4)(A), (5)
and (7) were not included in 26 U.S.C. 103(c)), paragraph (1) of 26
U.S.C. 103(c) does not apply to such security.
(10) Periodic plan shall mean:
(i) A written authorization for a State member bank to act as agent
to purchase or sell for a customer a specific security or securities,
in a specific amount (calculated in security units or dollars) or to
the extent of dividends and funds available, at specific time
intervals, and setting forth the commission or charges to be paid by
the customer or the manner of calculating them (including dividend
reinvestment plans, automatic investment plans, and employee stock
purchase plans); or
(ii) Any prearranged, automatic transfer or sweep of funds from a
deposit account to purchase a security, or any prearranged, automatic
redemption or sale of a security with the funds being transferred into
a deposit account (including cash management sweep services).
(11) Security shall mean:
(i) Any note, stock, treasury stock, bond, debenture, certificate
of interest or participation in any profit-sharing agreement or in any
oil, gas, or other mineral royalty or lease, any collateral-trust
certificate, preorganization certificate or subscription, transferable
share, investment contract, voting-trust certificate, for a security,
any put, call, straddle, option, or privilege on any security, or group
or index of securities (including any interest therein or based on the
value thereof), any instrument commonly known as a ``security''; or any
certificate of interest or participation in, temporary or interim
certificate for, receipt for, or warrant or right to subscribe to or
purchase, any of the foregoing.
(ii) But does not include a deposit or share account in a federally
or state insured depository institution, a loan participation, a letter
of credit or other form of bank indebtedness incurred in the ordinary
course of business, currency, any note, draft, bill of exchange, or
bankers acceptance which
[[Page 9913]]
has a maturity at the time of issuance of not exceeding nine months,
exclusive of days of grace, or any renewal thereof the maturity of
which is likewise limited, units of a collective investment fund,
interests in a variable amount (master) note of a borrower of prime
credit, or U.S. Savings Bonds.
(c) Recordkeeping. Except as provided in paragraph (a) of this
section, every State member bank effecting securities transactions for
customers, including transactions in government securities, and
municipal securities transactions by banks not subject to registration
as municipal securities dealers, shall maintain the following records
with respect to such transactions for at least three years. Nothing
contained in this section shall require a bank to maintain the records
required by this paragraph in any given manner, provided that the
information required to be shown is clearly and accurately reflected
and provides an adequate basis for the audit of such information.
Records may be maintained in hard copy, automated, or electronic form
provided the records are easily retrievable, readily available for
inspection, and capable of being reproduced in a hard copy. A bank may
contract with third party service providers, including broker/dealers,
to maintain records required under this part.
(1) Chronological records of original entry containing an itemized
daily record of all purchases and sales of securities. The records of
original entry shall show the account or customer for which each such
transaction was effected, the description of the securities, the unit
and aggregate purchase or sale price (if any), the trade date and the
name or other designation of the broker/dealer or other person from
whom purchased or to whom sold;
(2) Account records for each customer which shall reflect all
purchases and sales of securities, all receipts and deliveries of
securities, and all receipts and disbursements of cash with respect to
transactions in securities for such account and all other debits and
credits pertaining to transactions in securities;
(3) A separate memorandum (order ticket) of each order to purchase
or sell securities (whether executed or cancelled), which shall
include:
(i) The account(s) for which the transaction was effected;
(ii) Whether the transaction was a market order, limit order, or
subject to special instructions;
(iii) The time the order was received by the trader or other bank
employee responsible for effecting the transaction;
(iv) The time the order was placed with the broker/dealer, or if
there was no broker/dealer, the time the order was executed or
canceled;
(v) The price at which the order was executed; and
(vi) The broker/dealer utilized;
(4) A record of all broker/dealers selected by the bank to effect
securities transactions and the amount of commissions paid or allocated
to each such broker during the calendar year; and
(5) A copy of the written notification required by paragraphs (c)
and (d) of this section.
(d) Content and time of notification. Every State member bank
effecting a securities transaction for a customer shall give or send to
such customer either of the following types of notifications at or
before completion of the transaction or; if the bank uses a broker/
dealer's confirmation, within one business day from the bank's receipt
of the broker/dealer's confirmation:
(1) A copy of the confirmation of a broker/dealer relating to the
securities transaction; and if the bank is to receive remuneration from
the customer or any other source in connection with the transaction,
and the remuneration is not determined pursuant to a prior written
agreement between the bank and the customer, a statement of the source
and the amount of any remuneration to be received; or
(2) A written notification disclosing:
(i) The name of the bank;
(ii) The name of the customer;
(iii) Whether the bank is acting as agent for such customer, as
agent for both such customer and some other person, as principal for
its own account, or in any other capacity;
(iv) The date of execution and a statement that the time of
execution will be furnished within a reasonable time upon written
request of such customer specifying the identity, price and number of
shares or units (or principal amount in the case of debt securities) of
such security purchased or sold by such customer;
(v) The amount of any remuneration received or to be received,
directly or indirectly, by any broker/dealer from such customer in
connection with the transaction;
(vi) The amount of any remuneration received or to be received by
the bank from the customer and the source and amount of any other
remuneration to be received by the bank in connection with the
transaction, unless remuneration is determined pursuant to a written
agreement between the bank and the customer, provided, however, in the
case of Government securities and municipal securities, this paragraph
(d)(2)(vi) shall apply only with respect to remuneration received by
the bank in an agency transaction. If the bank elects not to disclose
the source and amount of remuneration it has or will receive from a
party other than the customer pursuant to this paragraph (d)(2)(vi),
the written notification must disclose whether the bank has received or
will receive remuneration from a party other than the customer, and
that the bank will furnish within a reasonable time the source and
amount of this remuneration upon written request of the customer. This
election is not available, however, if, with respect to a purchase, the
bank was participating in a distribution of that security; or with
respect to a sale, the bank was participating in a tender offer for
that security;
(vii) The name of the broker/dealer utilized; or, where there is no
broker/dealer, the name of the person from whom the security was
purchased or to whom it was sold, or the fact that such information
will be furnished within a reasonable time upon written request;
(viii) In the case of a transaction in a debt security subject to
redemption before maturity, a statement to the effect that the debt
security may be redeemed in whole or in part before maturity, that the
redemption could affect the yield represented and that additional
information is available on request;
(ix) In the case of a transaction in a debt security effected
exclusively on the basis of a dollar price:
(A) The dollar price at which the transaction was effected;
(B) The yield to maturity calculated from the dollar price;
provided, however, that this paragraph (c)(2)(ix)(B) shall not apply to
a transaction in a debt security that either has a maturity date that
may be extended by the issuer with a variable interest payable thereon,
or is an asset-backed security that represents an interest in or is
secured by a pool of receivables or other financial assets that are
subject to continuous prepayment;
(x) In the case of a transaction in a debt security effected on the
basis of yield:
(A) The yield at which the transaction was effected, including the
percentage amount and its characterization (e.g., current yield, yield
to maturity, or yield to call) and if effected at yield to call, the
type of call, the call date, and the call price; and
(B) The dollar price calculated from the yield at which the
transaction was effected; and
(C) If effected on a basis other than yield to maturity and the
yield to maturity is lower than the represented yield, the yield to
maturity as well as
[[Page 9914]]
the represented yield; provided, however, that this paragraph
(c)(2)(x)(C) shall not apply to a transaction in a debt security that
either has a maturity date that may be extended by the issuer with a
variable interest rate payable thereon, or is an asset-backed security
that represents an interest in or is secured by a pool of receivables
or other financial assets that are subject to continuous prepayment;
(xi) In the case of a transaction in a debt security that is an
asset-backed security which represents an interest in or is secured by
a pool of receivables or other financial assets that are subject
continuously to prepayment, a statement indicating that the actual
yield of such asset-backed security may vary according to the rate at
which the underlying receivables or other financial assets are prepaid
and a statement of the fact that information concerning the factors
that affect yield (including at a minimum, the estimated yield,
weighted average life, and the prepayment assumptions underlying yield)
will be furnished upon written request of such customer; and
(xii) In the case of a transaction in a debt security, other than a
government security, that the security is unrated by a nationally
recognized statistical rating organization, if that is the case.
(e) Notification by agreement; alternative forms and times of
notification. A State member bank may elect to use the following
alternative procedures if a transaction is effected for:
(1) Accounts (except periodic plans) where the bank does not
exercise investment discretion and the bank and the customer agree in
writing to a different arrangement as to the time and content of the
notification; provided, however, that such agreement makes clear the
customer's right to receive the written notification pursuant to
paragraph (c) of this section at no additional cost to the customer;
(2) Accounts (except collective investment funds) where the bank
exercises investment discretion in other than an agency capacity, in
which instance the bank shall, upon request of the person having the
power to terminate the account or, if there is no such person, upon the
request of any person holding a vested beneficial interest in such
account, give or send to such person the written notification within a
reasonable time. The bank may charge such person a reasonable fee for
providing this information;
(3) Accounts, where the bank exercises investment discretion in an
agency capacity, in which instance:
(i) The bank shall give or send to each customer not less
frequently than once every three months an itemized statement which
shall specify the funds and securities in the custody or possession of
the bank at the end of such period and all debits, credits and
transactions in the customer's accounts during such period; and
(ii) If requested by the customer, the bank shall give or send to
each customer within a reasonable time the written notification
described in paragraph (c) of this section. The bank may charge a
reasonable fee for providing the information described in paragraph (c)
of this section;
(4) A collective investment fund, in which instance the bank shall
at least annually furnish a copy of a financial report of the fund, or
provide notice that a copy of such report is available and will be
furnished upon request, to each person to whom a regular periodic
accounting would ordinarily be rendered with respect to each
participating account. This report shall be based upon an audit made by
independent public accountants or internal auditors responsible only to
the board of directors of the bank;
(5) A periodic plan, in which instance the bank:
(i) Shall (except for a cash management sweep service) give or send
to the customer a written statement not less than every three months if
there are no securities transactions in the account, showing the
customer's funds and securities in the custody or possession of the
bank; all service charges and commissions paid by the customer in
connection with the transaction; and all other debits and credits of
the customer's account involved in the transaction; or
(ii) Shall for a cash management sweep service or similar periodic
plan as defined in Sec. 208.24(b)(10)(ii) give or send its customer a
written statement in the same form as prescribed in paragraph (e)(i)
above for each month in which a purchase or sale of a security takes
place in a deposit account and not less than once every three months if
there are no securities transactions in the account subject to any
other applicable laws or regulations;
(6) Upon the written request of the customer the bank shall furnish
the information described in paragraph (c) of this section, except that
any such information relating to remuneration paid in connection with
the transaction need not be provided to the customer when paid by a
source other than the customer. The bank may charge a reasonable fee
for providing the information described in paragraph (d) of this
section.
(f) Settlement of securities transactions. All contracts for the
purchase or sale of a security shall provide for completion of the
transaction within the number of business days in the standard
settlement cycle for the security followed by registered broker dealers
in the United States unless otherwise agreed to by the parties at the
time of the transaction.
(g) Securities trading policies and procedures. Every State member
bank effecting securities transactions for customers shall establish
written policies and procedures providing:
(1) Assignment of responsibility for supervision of all officers or
employees who:
(i) Transmit orders to or place orders with broker/dealers;
(ii) Execute transactions in securities for customers; or
(iii) Process orders for notification and/or settlement purposes,
or perform other back office functions with respect to securities
transactions effected for customers; provided that procedures
established under this paragraph (g)(1)(iii) should provide for
supervision and reporting lines that are separate from supervision of
personnel under paragraphs (g)(1)(i) and (g)(1)(ii) of this section;
(2) For the fair and equitable allocation of securities and prices
to accounts when orders for the same security are received at
approximately the same time and are placed for execution either
individually or in combination;
(3) Where applicable and where permissible under local law, for the
crossing of buy and sell orders on a fair and equitable basis to the
parties to the transaction; and
(4) That bank officers and employees who make investment
recommendations or decisions for the accounts of customers, who
participate in the determination of such recommendations or decisions,
or who, in connection with their duties, obtain information concerning
which securities are being purchased or sold or recommended for such
action, must report to the bank, within ten days after the end of the
calendar quarter, all transactions in securities made by them or on
their behalf, either at the bank or elsewhere in which they have a
beneficial interest. The report shall identify the securities purchased
or sold and indicate the dates of the transactions and whether the
transactions were purchases or sales. Excluded from this requirement
are transactions for the benefit of the officer or employee over which
the officer or
[[Page 9915]]
employee has no direct or indirect influence or control, transactions
in mutual fund shares, and all transactions involving in the aggregate
$10,000 or less during the calendar quarter. For purposes of this
paragraph (g)(4), the term securities does not include government
securities.
By order of the Board of Governors of the Federal Reserve
System, February 27, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-5423 Filed 3-4-97; 8:45 am]
BILLING CODE 6210-01-P