[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
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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