[Federal Register Volume 67, Number 178 (Friday, September 13, 2002)]
[Rules and Regulations]
[Pages 57938-57941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-23364]


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FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Regulation H; Docket No. R-1129]


Reporting and Disclosure Requirements for State Member Banks With 
Securities Registered Under the Securities Exchange Act of 1934

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Interim final rule with request for public comment.

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SUMMARY: The Board has modified its regulations implementing section 
12(i) of the Securities Exchange Act of 1934 to reflect the amendments 
made to section 12(i) by the Sarbanes-Oxley Act of 2002. These 
amendments vest the Board with the authority to administer and enforce 
several of the enhanced reporting, disclosure and corporate governance 
obligations imposed by the Sarbanes-Oxley Act with respect to state 
member banks that have a class of securities registered under the 
Securities Exchange Act of 1934. Because some of the relevant 
provisions of the Sarbanes-Oxley Act to be administered by the Board 
are effective already, or will become effective shortly, the Board has 
adopted the rule on an interim basis and made the rule effective 
immediately. The Board requests comment on all aspects of the interim 
rule, and will modify the rule as appropriate in light of the comments 
received.

DATES: The interim rule is effective on September 13, 2002. Comments on 
the rule must be received by October 15, 2002.

ADDRESSES: Comments should refer to Docket No. R-1129, and should be 
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551 or mailed electronically to 
[email protected]. Comments addressed to Ms. Johnson 
also may be delivered to the Board's mail facility in the west 
courtyard of the Eccles Building, located on 21st Street between 
Constitution Avenue and C Street, NW. Members of the public may inspect 
comments in Room MP-500 of the Martin Building, between 9 a.m. and 5 
p.m. weekdays, in accordance with the Board's Rules Regarding the 
Availability of Information (12 CFR part 261).

FOR FURTHER INFORMATION CONTACT: Kieran J. Fallon, Senior Counsel (202-
452-5270), or Walter R. McEwen, Counsel (202-452-3321), Legal Division; 
Terrill Garrison, Supervisory Financial Analyst (202-452-2712), 
Division of Banking Supervision and Regulation. Users of 
Telecommunication Device for Deaf (TTD) only, call (202) 263-4869.

SUPPLEMENTARY INFORMATION:

Background

    Section 12(i) of the Securities Exchange Act (15 U.S.C. 78l(i)) 
(Exchange Act) vests the Board with the authority to administer and 
enforce the disclosure and reporting requirements of sections 12, 13, 
14(a), 14(c), 14(d), 14(f) and 16 of the Exchange Act with respect to 
state member banks that have a class of securities registered under 
section 12(b) or 12(g) of the Exchange Act (registered banks).\1\ 
Section 208.36 of the Board's Regulation H (12 CFR part 208.36) 
implements the reporting and disclosure provisions of sections 12, 13, 
14(a), 14(c), 14(d), 14(f) and 16 of the Exchange Act for registered 
banks. As a general matter, Regulation H requires registered banks to 
comply with the rules, regulations and forms adopted by the Securities 
and Exchange Commission (SEC) under sections 12, 13, 14(a), 14(c), 
14(d), 14(f) and 16 of the Exchange Act, but requires registered banks 
to file any reports or forms required by such regulations with the 
Board (rather than the SEC) and substitutes the ``Board'' for the 
``SEC'' each place that term appears in the SEC's rules and forms.
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    \1\ As of June 30, 2002, 19 state member banks had a class of 
securities registered under sections 12(b) or 12(g) of the Exchange 
Act and, thus, are considered registered banks.
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Description of Interim Rule

    On July 30, 2002, President Bush signed into law the Sarbanes-Oxley 
Act of 2002 (occasionally referred to hereafter as the ``Act'').\2\ 
Titles III and IV of the Sarbanes-Oxley Act include a number of 
provisions that are designed to improve the corporate governance and 
financial disclosures of issuers that have a class of securities 
registered under sections 12(b) or 12(g) of the Exchange Act, or that 
are required to file periodic reports with the SEC under section 15(d) 
of the Exchange Act (public issuers).
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    \2\ Pub. L. 102-204 (2002).
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    The Sarbanes-Oxley Act also amended section 12(i) of the Exchange 
Act to vest the Board with the authority to administer and enforce 
several of the Act's new corporate governance and disclosure 
requirements with respect to registered banks.\3\ In particular, this 
amendment provides that the Board shall be the appropriate agency to 
administer and enforce the following sections of the Act with respect 
to registered banks. (The effective date of the relevant section, as 
well as any required timeframe for the SEC to adopt implementing rules, 
are indicated parenthetically.)
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    \3\ See Sarbanes-Oxley Act at Sec.  3(b)(4) (amending 15 U.S.C. 
78l(i)).
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    [sbull] Section 301, which establishes certain oversight, 
independence, funding and other requirements for the audit committees 
of public issuers, and requires the SEC to issue rules that prohibit 
any national securities exchange or national securities association 
from listing the securities of an issuer that fails to comply with 
these audit committee requirements. (The SEC must adopt rules 
implementing the listing prohibition by April 26, 2003.) \4\
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    \4\ These audit committee and listing requirements were enacted 
as a new subsection (m) to section 10A of the Exchange Act. See 15 
U.S.C. 78f(m).
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    [sbull] Section 302, which mandates that the SEC adopt rules that 
require the principal executive officer(s) and principal financial 
officer(s) of public issuers to include certain certifications in the 
issuer's annual and quarterly reports filed under the Exchange Act. 
(The SEC issued final rules implementing this section on August 28, 
2002.) \5\
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    \5\ See Exchange Act Rel. No. 34-46427 (Aug. 28, 2002), 
available at http://www.sec.gov/rules/final.shtml. Section 906 of 
the Sarbanes-Oxley Act includes another certification requirement 
that is separate from the certification requirements of section 302. 
Section 906 provides that all periodic reports that contain 
financial statements and that are filed by public issuers under 
sections 13(a) or 15(d) of the Exchange Act must include a written 
certification by the chief executive officer and chief financial 
officer (or equivalent) that (1) the report complies with the 
requirements of section 13(a) or 15(d) of the Exchange Act, and (2) 
the information contained in the periodic report fairly presents, in 
all material respects, the financial condition and results of 
operations of the issuer. Section 906 became effective on July 30, 
2002, and persons who knowingly or willfully violate section 906 are 
subject to specified criminal penalties. See 18 U.S.C. 1350.

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[[Page 57939]]

    [sbull] Section 303, which requires the SEC to issue rules 
prohibiting the officers and directors of public issuers, and persons 
acting under their direction, from fraudulently influencing, coercing, 
manipulating, or misleading the issuer's independent auditor for 
purposes of rendering the issuer's financial statements materially 
misleading. (The SEC must issue proposed rules implementing section 303 
by October 28, 2002, and must adopt final rules implementing this 
section by April 26, 2003.)
    [sbull] Section 304, which requires the chief executive officer and 
chief financial officer of public issuers to reimburse the issuer for 
certain compensation and profits received if the issuer is required to 
restate its financial reports due to material noncompliance, as a 
result of misconduct, with the Federal securities laws. (The 
requirements of section 304 became effective on July 30, 2002.)
    [sbull] Section 306(a), which prohibits the directors and executive 
officers of any public issuer of equity securities from purchasing, 
selling or transferring any equity security acquired by the director or 
executive officer in connection with his or her service as a director 
or executive officer during any ``blackout period'' with respect to the 
security. (The provisions of section 306(a) will become effective on 
January 26, 2003.)
    [sbull] Section 401(b), which requires the SEC to issue rules that 
prohibit issuers from including misleading pro forma financial 
information in their filings with the SEC or in any public release, and 
that require issuers to reconcile any pro forma financial information 
included in such filings or public releases with the issuer's financial 
statements prepared in accordance with generally accepted accounting 
principles (GAAP). (The SEC must issue final rules implementing section 
401(b) by January 26, 2003.)
    [sbull] Section 404, which mandates that the SEC issue rules that 
require all annual reports filed under section 13(a) or 15(d) of the 
Exchange Act to include certain statements and assessments related to 
the issuer's internal control structures and procedures for financial 
reporting.\6\ (The Act does not establish a date by which the SEC must 
issue rules implementing the requirements of section 404.)
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    \6\ Section 404 also requires the registred public accounting 
firm that prepares or issues the audit report for the issuer's 
annual report to attest to, and report on, the issuer's assessment 
of its internal control structures and procedures for financial 
reporting.
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    [sbull] Section 406, which mandates that the SEC adopt rules that 
require public issuers to (1) disclose in their periodic reports filed 
under the Exchange Act whether the issuer has adopted a code of ethics 
for its senior financial officers and, if not, the reasons why such a 
code has not been adopted; and (2) promptly disclose on Form 8-K any 
change to, or waiver of, the issuer's code of ethics. (The SEC must 
issue proposed rules implementing section 406 by October 28, 2002, and 
must adopt final rules implementing the section by January 26, 2003.)
    [sbull] Section 407, which mandates that the SEC adopt rules that 
require public issuers to disclose in their periodic reports filed 
under the Exchange Act whether the audit committee of the issuer 
includes at least one financial expert and, if not, the reasons why the 
audit committee does not include such an expert. (The SEC must issue 
proposed rules implementing section 407 by October 28, 2002, and must 
adopt final rules implementing the section by January 26, 2003.)
    In light of the foregoing, the Board has amended section 208.36(a) 
of Regulation H to reflect the fact that the Board will administer and 
enforce the above-described sections of the Sarbanes-Oxley Act with 
respect to registered banks. As noted above, Regulation H currently 
requires registered banks to comply generally with the rules, 
regulations and forms adopted by the SEC under sections 12, 13, 14(a), 
14(c), 14(d), 14(f) and 16 of the Exchange Act. The interim rule 
similarly requires registered banks to comply with any rules, 
regulations and forms that the SEC adopts under section 10A(m) of the 
Exchange Act (as added by section 301 of the Sarbanes-Oxley Act), or 
sections 302, 303, 304, 306(a), 401(b), 404, 406 and 407 of the 
Sarbanes-Oxley Act. Registered banks should monitor the SEC's Web site 
(http://www.sec.gov), the Federal Register, or other appropriate 
publications to remain informed about any rules or regulations issued 
by the SEC under these sections of the Sarbanes-Oxley Act.\7\ If the 
rules or forms issued by the SEC under these sections require issuers 
to file documents with the SEC, registered banks must make such filings 
with the Board (rather than the SEC) in accordance with the provisions 
of section 208.36.
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    \7\ As noted above, the SEC already has adopted a final rule to 
implement the certification requirements of section 302 of the Act. 
See Exchange Act Release No. 34-46427 (Aug. 28, 2002).
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Effective Date of Rule

    Some of the provisions of the Sarbanes-Oxley Act to be administered 
and enforced by the Board became effective immediately upon enactment 
of the Act (July 30, 2002), or became effective on August 29, 2002.\8\ 
In light of these statutory deadlines, the Board has adopted the 
modifications to section 208.36(a) of Regulation H on an interim basis 
without first reviewing public comments, and has made the rule 
effective immediately upon its publication in the Federal Register. 
Pursuant to 5 U.S.C. 553, the Board finds that it is impracticable to 
review public comments prior to the effective date of the interim rule, 
and that there is good cause, for the reasons discussed above, to make 
the interim rule effective on September 13, 2002. The Board also finds, 
pursuant to 12 U.S.C. 4802(b)(1), that there is good cause to make the 
rule effective prior to the first day of the first calendar quarter 
that begins after publication of the rule.
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    \8\ See Sarbanes-Oxley Act, sections 302 and 304.
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Request for Comments

    The Board requests comment on all aspects of the interim rule. The 
interim rule generally requires registered banks to comply with the 
rules, regulations and forms adopted by the SEC under the sections of 
the Exchange Act and the Sarbanes-Oxley Act listed in the rule. The 
Board notes that section 12(i) permits the Board to modify the 
requirements of these SEC rules, regulations and forms for registered 
banks if the Board (1) determines that the SEC's rules, regulations or 
forms are not necessary or appropriate in the public interest or for 
the protection of investors, and (2) publishes such findings (and the 
reasons supporting such findings) in the Federal Register.\9\
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    \9\ See 15 U.S.C. 78l(i)(4)
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    The Board intends to monitor the rules, regulations and forms 
adopted by the SEC to implement the provisions of the Sarbanes-Oxley 
Act that will be administered and enforced by the Board with respect to 
registered banks, and to consider whether any modifications to

[[Page 57940]]

such rules, regulations or forms would be appropriate or necessary for 
registered banks. The Board requests comment on whether it would be 
appropriate at this time to modify any of the rules, regulations or 
forms adopted by the SEC to implement the provisions of the Sarbanes-
Oxley Act referenced in section 12(i) of the Exchange Act. Commenters 
supporting any modifications to the SEC's rules, regulations or forms 
should discuss why compliance with the SEC's rules would be 
impracticable or unduly burdensome for registered banks, and how the 
proposed modification would be consistent with the standards set forth 
in section 12(i) of the Exchange Act.

Other Sarbanes-Oxley Act Issues Relevant to Registered Banks

    Besides the provisions discussed above, the Sarbanes-Oxley Act also 
includes a variety of other provisions that will affect all issuers of 
public securities, including state member banks that report to the 
Board under the Exchange Act. For example, the Act includes important 
changes relating to the independence of outside auditors, the services 
that audit firms may provide to their audit clients, and the 
composition and duties of audit committees of public issuers.
    In addition, the Sarbanes-Oxley Act made several amendments to 
sections 13 and 16 of the Exchange Act which relate to the financial 
disclosures of public issuers, lending by public issuers to their 
directors and executive officers, and the timeframe for officers, 
directors and principal shareholders of public issuers to report trades 
in the equity securities of the issuer.\10\ Because these amendments 
were made to sections 13 and 16 of the Exchange Act, the Board is the 
agency responsible for administering and enforcing these provisions 
with respect to registered banks.\11\ Moreover, because section 208.36 
of Regulation H already requires registered banks to comply with any 
rules, regulations and forms adopted by the SEC under sections 13 and 
16 of the Exchange Act, registered banks must comply with any rules 
issued by the SEC to implement the amendments made by the Sarbanes-
Oxley Act to sections 13 and 16 of the Exchange Act, unless these rules 
are modified by the Board.
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    \10\ See Sarbanes-Oxley Act, sections 401(a), 402, 403 and 409 
(to be codifed at 15 U.S.C. 78m(i), (j), (k) and (l) and 78p(a)).
    \11\ See 15 U.S.C. 78l(i)
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    Accordingly, registered banks are encouraged to review the 
Sarbanes-Oxley Act and to discuss the Act's requirements with their 
directors, outside auditors, audit committees and counsel as 
appropriate. Registered banks also are encouraged to monitor the SEC's 
Web site (http://www.sec.gov) or other appropriate publications to keep 
abreast of actions taken by the SEC to implement the provisions of the 
Sarbanes-Oxley Act relating to public issuers and their officers, 
directors and auditors. The Board notes, for example, that the SEC has 
adopted a final rule implementing the amendments made by the Sarbanes-
Oxley Act to the insider transaction reporting requirements of section 
16 of the Exchange Act.\12\ The Board also intends to monitor 
developments in this area and may issue supervisory guidance in the 
future to assist registered banks and other banking organizations 
supervised by the Federal Reserve in understanding and complying with 
the requirements of the Sarbanes-Oxley Act.
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    \12\ See Exchange Act Rel. No. 34-46421 (Aug. 27, 2002), which 
is available on the Internet at http://www.sec.gov/rules/final.shtml.
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Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (12 U.S.C. 4809) requires 
the Board to use ``plain language'' in all rules published in the 
Federal Register after January 1, 2000. The Board believes the interim 
rule is presented in a simple and straightforward manner, and invites 
comment on whether there are additional steps that the Board could take 
to make the interim rule easier to understand.

Regulatory Flexibility Act

    Pursuant to section 3(a) of the Regulatory Flexibility Act (5 
U.S.C. 603(a)), the Board must publish an initial regulatory 
flexibility analysis with this interim rule. The rule implements for 
registered banks several of the new reporting and disclosure 
obligations imposed by the Sarbanes-Oxley Act on public issuers of 
securities. Consistent with section 12(i) of the Exchange Act, the 
interim rule requires registered banks to comply with any rules, 
regulations or forms that the SEC may issue under the relevant 
provisions of the Sarbanes-Oxley Act. By incorporating the SEC's rules, 
regulations and forms by reference, the interim rule seeks to minimize 
the potential conflict between the interim rule and the corresponding 
SEC rules and, thus, reduce the potential burden associated with 
complying with the Board's rule. The Board also has requested comment 
on whether any of the SEC's rules incorporated by reference into the 
Board's rules would impose undue burdens on registered banks.
    The objectives and legal basis for the interim rule are discussed 
in the supplementary information set forth above. As of June 30, 2002, 
19 state member banks had a class of securities registered under 
sections 12(b) or 12(g) of the Exchange Act and, thus, would be subject 
to the rule. As of the same date, only eight of these institutions have 
assets of less than $100 million and are considered small entities for 
purposes of the Regulatory Flexibility Act. See 5 U.S.C. 601; 13 CFR 
121.201.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR part 1320 Appendix A), the Board has reviewed this interim 
rule under the authority delegated to the Board by the Office of 
Management and Budget. Consistent with the requirements of section 
12(i) of the Exchange Act, the interim rule requires registered banks 
to abide by any collection of information requirements adopted by the 
SEC under sections 301, 302, 303, 304, 306(a), 401(b), 404, 406 and 407 
of the Sarbanes-Oxley Act of 2002. As of June 30, 2002, there were 19 
registered banks that will be subject to the interim rule. Registered 
banks may request confidential treatment of any information submitted 
to the Board under the interim rule in the manner described in section 
208.36(d) of the Board's Regulation H (12 CFR 208.36(d)).
    Because the SEC has not yet adopted many of the rules necessary to 
implement the sections of the Sarbanes-Oxley Act referenced above, the 
Board is unable at this time to estimate the annual burden registered 
banks will incur in complying with the interim rule. The Board notes 
that the SEC must consider the paperwork burden imposed by its rules in 
connection with its rulemaking process, and provide an estimate of the 
number of hours persons subject to the rule would spend each year in 
complying with any collections of information imposed by the SEC's 
rule. Registered banks and other persons interested in the potential 
paperwork burden imposed by the interim rule are encouraged to monitor 
the SEC's rulemaking process under the Sarbanes-Oxley Act.
    The Federal Reserve may not conduct or sponsor, and an organization 
is not required to respond to, an information collection unless the 
Board has displayed a currently valid OMB control number. The OMB 
control number for the information collections required by the interim 
rule is 7100-0091.

[[Page 57941]]

Comments on the collections of information required by the interim rule 
may be sent to the Office of Management and Budget, Paperwork Reduction 
Project, Washington, DC 20503, with copies of the comments sent to Mary 
M. West, Federal Reserve Board Clearance Officer, Division of Research 
and Statistics, Mail Stop 41, Board of Governors of the Federal Reserve 
System, Washington, DC 20551.

List of Subjects in 12 CFR Part 208

    Accounting, Banks, banking, Reporting and recordkeeping 
requirements, Securities.

Authority and Issuance

    For the reasons set forth in the preamble, the Board of Governors 
of the Federal Reserve System amends part 208 of chapter II of title 12 
of the Code of Federal Regulations as follows:

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. 24, 24a, 36, 92a, 93a, 248(a), 248(c), 321-
338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 
1823(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x, 
1835a, 1843(l), 1882, 2901-2907, 3105, 3310, 3331-3351, and 3906-
3909; 15 U.S.C. 78b, 78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-
1, and 78w; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 
4128.

    2. Section 208.36(a) is revised to read as follows:


Sec.  208.36  Reporting requirements for State member banks subject to 
the Securities Exchange Act of 1934.

    (a) Filing, disclosure and other requirements--(1) General. Except 
as otherwise provided in this section, a member bank whose securities 
are subject to registration pursuant to section 12(b) or section 12(g) 
of the Securities Exchange Act of 1934 (the 1934 Act) (15 U.S.C. 78l(b) 
and (g)) shall comply with the rules, regulations and forms adopted by 
the Securities and Exchange Commission (Commission) pursuant to--
    (i) Sections 10A(m), 12, 13, 14(a), 14(c), 14(d), 14(f) and 16 of 
the 1934 Act (15 U.S.C. 78f(m), 78l, 78m, 78n(a), (c), (d) and (f), and 
78p); and
    (ii) Sections 302, 303, 304, 306, 401(b), 404, 406 and 407 of the 
Sarbanes-Oxley Act of 2002 (codified at 15 U.S.C. 7241, 7242, 7243, 
7244, 7261, 7262, 7264 and 7265).
    (2) References to the Commission. Any references to the 
``Securities and Exchange Commission'' or the ``Commission'' in the 
rules, regulations and forms described in paragraph (a)(1) of this 
section shall with respect to securities issued by member banks be 
deemed to refer to the Board unless the context otherwise requires.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, September 9, 2002.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 02-23364 Filed 9-12-02; 8:45 am]
BILLING CODE 6210-01-P