[Federal Register Volume 68, Number 18 (Tuesday, January 28, 2003)]
[Rules and Regulations]
[Pages 4092-4096]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1922]


=======================================================================
-----------------------------------------------------------------------

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: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Board has adopted a final rule to reflect the amendments 
made to section 12(i) of the Securities Exchange Act of 1934 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.

DATES: The final rule is effective on April 1, 2003.

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

[[Page 4093]]

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.
---------------------------------------------------------------------------

    \1\ As of December 10, 2002, seventeen state member banks had a 
class of securities registered under section 12(b) or 12(g) of the 
Exchange Act and, thus, are considered registered banks.
---------------------------------------------------------------------------

    On July 30, 2002, President Bush signed into law the Sarbanes-Oxley 
Act of 2002.\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 companies). The Sarbanes-
Oxley Act also amended section 12(i) of the Exchange Act to vest the 
Board with the authority to administer and enforce sections 302, 303, 
304, 306(a), 401(b), 404, 406 and 407 of the Sarbanes-Oxley Act, as 
well as section 10A(m) of the Exchange Act (as added by section 301 of 
the Sarbanes-Oxley Act), with respect to registered banks.\3\
---------------------------------------------------------------------------

    \2\ Pub. L. 102-204, 116 Stat. 745 (2002).
    \3\ See Sarbanes-Oxley Act at section 3(b)(4) (amending 15 
U.S.C. 78l(i)).
---------------------------------------------------------------------------

Summary of Interim Rule

    In September 2002, the Board adopted on an interim basis, and 
requested public comment on, an amendment to section 208.36 of 
Regulation H to implement the revisions made by the Sarbanes-Oxley Act 
to section 12(i) of the Exchange Act.\4\ The interim rule provided that 
the Board will administer and enforce the sections of the Sarbanes-
Oxley Act incorporated into section 12(i) of the Exchange Act with 
respect to registered banks. Consistent with the existing provisions of 
Regulation H, the interim rule also required registered banks to comply 
with any rules, regulations and forms issued by the SEC under the 
sections of the Sarbanes-Oxley Act incorporated into section 12(i) of 
the Exchange Act.
---------------------------------------------------------------------------

    \4\ See 67 FR 57938, Sept. 13, 2002.
---------------------------------------------------------------------------

Explanation of Final Rule

    The Board received two comments on the interim rule, both of which 
were filed by trade associations representing banking organizations. 
After carefully considering these comments, which are discussed below, 
the Board has adopted a final rule that is identical to the interim 
rule.
    As required by section 12(i) of the Exchange Act, the final rule 
provides that the Board will administer and enforce the sections of the 
Sarbanes-Oxley Act described in Table 1 with respect to registered 
banks. The final rule also generally requires registered banks to 
comply with any rules, regulations and forms adopted by the SEC to 
implement the sections of the Sarbanes-Oxley Act listed in Table 1 
(``New SEC Rules''), unless such rules, regulations or forms are 
modified by the Board. If the New SEC Rules require the filing of any 
documents with the SEC, registered banks must file such documents with 
the Board (rather than the SEC) in accordance with section 208.36 of 
Regulation H.

                                                     Table 1
----------------------------------------------------------------------------------------------------------------
      Section of Sarbanes-Oxley Act                       Description                   Implementing SEC rules
----------------------------------------------------------------------------------------------------------------
Section 301 as (codified section 10A(m)   Establishes certain oversight,              Proposed rules issued for
 of Exchange Act, 15 U.S.C. 78f(m)).       independence, funding and other             comment. See 68 rules
                                           requirements for the audit committees of    that FR 2638, Jan. 17,
                                           public companies listed on a the national   2003. The SEC must adopt
                                           securities exchange, and requires the SEC   final rules by April 26,
                                           to issue prohibit any national securities   2003.
                                           exchange or national securities
                                           association from listing the securities
                                           of an issuer that fails to comply with
                                           these audit committee requirements.
Section 302.............................  Mandates that the SEC adopt rules that      Final rules became
                                           require the principal executive             effective August 29,
                                           officer(s) and principal financial          2002. See 67 FR 57275,
                                           officer(s) of public companies to include   Sep. 9, 2002.\5\
                                           certain certifications in the issuer's
                                           annual and quarterly reports filed under
                                           the Exchange Act.
Section 303.............................  Requires the SEC to issue rules             Proposed rules issued for
                                           prohibiting the officers and directors of   comment. See 67 FR 65325,
                                           public companies, and persons acting        Oct. 24, 2002. The SEC
                                           under their direction, from fraudulently    must issue final rules by
                                           influencing, coercing, manipulating, or     April 26, 2003.
                                           misleading the issuer's independent
                                           auditor for purposes of rendering the
                                           issuer's financial statements materially
                                           misleading.
Section 304.............................  Requires the chief executive officer and    Section 304 became
                                           chief financial officer of public           effective on July 30,
                                           companies to reimburse the issuer for       2002. No implementing
                                           certain compensation and profits received   rules are required.
                                           if the issuer is required to restate its
                                           financial reports due to material
                                           noncompliance, as a result of misconduct,
                                           with the Federal securities laws.
Section 306(a)..........................  Prohibits the directors and executive       The SEC adopted final
                                           officers of any public company of equity    rules on January 8, 2003.
                                           securities from purchasing, selling or      See SEC Press Release
                                           transferring any equity security acquired   2003-6 Proposed rules
                                           by the director or executive officer        were issued for comment
                                           during any ``blackout period'' with         in November 2002. See 67
                                           respect to the security.                    FR 69249, Nov. 15, 2002.

[[Page 4094]]

 
Section 401(b)..........................  Requires the SEC to issues rules that       The SEC adopted final
                                           prohibit issuers from including             rules on January 8, 2003.
                                           misleading pro forma financial              See SEC Press Release
                                           information in their filings with the SEC   2003-6. Proposed rules
                                           or in any public release, and that          were issued for public
                                           require issuers to reconcile any pro        comment in November 2002.
                                           forma financial information included in     See 67 FR 68790, Nov. 13,
                                           such filings or public releases with the    2002.
                                           issuer's financial statements prepared in
                                           accordance with generally accepted
                                           accounting principles (GAAP).
Section 404.............................  Mandates that the SEC issue rules that      Proposed rules issued for
                                           require all annual reports filed under      comment. See 67 FR 66207,
                                           section 13(a) or 15(d) of the Exchange      Oct. 30, 2002.
                                           Act to include certain statements and
                                           assessments related to the issuer's
                                           internal control structures and
                                           procedures for financial reporting. \6\
Section 406.............................  Mandates that the SEC adopt rules that      The SEC adopted final
                                           require public companies to (1) disclose    rules on January 8, 2003.
                                           in their periodic reports filed under the   See SEC Press Release
                                           Exchange Act whether the issuer has         2003-6. Proposed rules
                                           adopted a code of ethics for its senior     were issued for comment
                                           financial officers and, if not, the         in October 2002. See 67
                                           reasons why such a code has not been        FR 66207, Oct. 30, 2002.
                                           adopted; and (2) promptly disclose on
                                           Form 8-K any change to, or waiver of, the
                                           issuer's code of ethics.
Section 407.............................  Mandates that the SEC adopt rules that      The SEC adopted final
                                           require public companies to disclose in     rules on January 8, 2003.
                                           their periodic reports filed under the      See SEC Press Release
                                           Exchange Act whether the audit committee    2003-6. Proposed rules
                                           of the issuer includes at least one         were issued for comment
                                           ``financial expert'' and, if not, the       in October 2002. See 67
                                           reasons why the audit committee does not    FR 66207, Oct. 30, 2002.
                                           include such an expert.
----------------------------------------------------------------------------------------------------------------
\5\ The SEC has proposed to modify these certification requirements in certain respects. See 67 FR 66207, Oct.
  30, 2002.
\6\ Section 404 also requires the registered 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.

    Section 12(i) of the Exchange Act permits the Board to modify how 
the New SEC Rules apply to registered banks if the Board determines 
that the New SEC Rules are not necessary or appropriate in the public 
interest or for the protection of investors, and the Board publishes 
such findings (and the reasons supporting such findings) in the Federal 
Register.\7\ The interim rule requested comment on whether it would be 
appropriate for the Board to modify any of the New SEC Rules at this 
time.
---------------------------------------------------------------------------

    \7\ See 15 U.S.C. 78l(i)(4).
---------------------------------------------------------------------------

    Commenters did not request that the Board specifically modify any 
of the New SEC Rules. One commenter, however, requested that the Board, 
in conjunction with the other Federal banking agencies, solicit public 
comment after any New SEC Rules are adopted for purposes of determining 
whether the rule should be modified for registered banks. The Board has 
reviewed and will continue to review the rules, regulations and forms 
adopted by the SEC under the Sarbanes-Oxley Act to determine whether it 
would be appropriate to modify these rules, regulations or forms for 
registered banks. Members of the public that believe any New SEC Rules 
issued in the future should be modified for registered banks are 
encouraged to contact their local Federal Reserve Bank or Board staff. 
If the Board determines that it would be appropriate to modify any New 
SEC Rule for registered banks, the Board will publish notice of the 
modification in the Federal Register in accordance with section 12(i) 
of the Exchange Act.\8\
---------------------------------------------------------------------------

    \8\ One commenter expressed concern that the audit committee and 
internal control report rules issued by the SEC under sections 301, 
404 and 407 of the Sarbanes-Oxley Act may conflict with the audit 
committee and internal control report requirements imposed by 
section 36 of the Federal Deposit Insurance Act on insured 
depository institutions. See 12 U.S.C. 1831m; 12 CFR part 363. The 
SEC has indicated that it intends to work with the Federal banking 
agencies to eliminate, to the extent possible, conflicts between the 
internal controls reports required by section 404 of the Sarbanes-
Oxley Act and the internal controls reports required by section 36 
of the FDI Act. See 67 FR 66208, 66222, Oct. 30, 2002. Staffs of the 
Board and SEC also have met to discuss potential conflicts and 
overlaps between the Sarbanes-Oxley Act and Federal banking laws and 
regulations.
---------------------------------------------------------------------------

    Both commenters asked the Board to clarify how section 906 of the 
Sarbanes-Oxley Act applies to registered banks. Section 906 is a 
criminal provision that requires each ``periodic report filed by an 
issuer with the Securities [and] Exchange Commission pursuant to 
section 13(a) or 15(d) of the Securities Exchange Act of 1934'' to be 
accompanied by a written statement by the issuer's chief executive 
officer and chief financial officer (or equivalent) that the report (1) 
fully complies with the requirements of section 13(a) or 15(d) of the 
Exchange Act, and (2) fairly presents, in all material respects, the 
financial condition and results of operations of the issuer.\9\ This 
certification requirement is separate from the certification 
requirement imposed by section 302 of the Sarbanes-Oxley Act. Because 
section 906 amends the Federal criminal code, the Department of Justice 
(DOJ) is the appropriate agency to interpret its scope and application. 
Nevertheless, pending interpretive guidance from DOJ concerning section 
906, the Board has indicated that any periodic reports (i.e. 10-K or 
10-Q reports) filed with the Board by registered banks after July 29, 
2002 (the effective date of section 906), should be accompanied by the 
certifications required by section 906.\10\ This approach is consistent 
with the current practice of the Federal Deposit Insurance Corporation 
and Office of the Comptroller of the Currency with respect to state 
nonmember banks and national banks, respectively, that file reports 
with such agencies under section 12(i) of the Exchange Act.\11\

Other Sarbanes-Oxley Act Issues Relevant to Registered Banks
---------------------------------------------------------------------------

    \9\ Sarbanes-Oxley Act at section 906 (codified at 18 U.S.C. 
1350).
    \10\ See Letter from Gerald A. Edwards, Jr., Associate Director 
and Chief Accountant-Supervision of the Board, to Chief Executive 
Officers and Chief Financial Officers of Banks Reporting to the 
Board under the Exchange Act, dated Aug. 15, 2002.
    \11\ See Letter from Robert F. Storch, Chief, Accounting and 
Securities Section of the FDIC, to Chief Executive Officers and 
Chief Financial Officers of Banks Reporting to the FDIC under the 
Exchange Act, dated Aug. 13, 2002.
---------------------------------------------------------------------------

    Besides the provisions discussed above, the Sarbanes-Oxley Act also

[[Page 4095]]

includes a variety of other provisions that will affect all public 
companies, 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 the external auditors of public 
companies. In addition, the Sarbanes-Oxley Act added several new 
disclosure requirements to sections 13 and 16 of the Exchange Act that 
apply to public companies that the Board will be responsible for 
administering and enforcing with respect to registered banks.\12\
---------------------------------------------------------------------------

    \12\ See Sarbanes-Oxley Act, sections 401(a), 402, 403 and 409 
(to be codified at 15 U.S.C. 78m(i), (j), (k) and (l), and 78p(a)).
---------------------------------------------------------------------------

    Public banking organizations are encouraged to review the Sarbanes-
Oxley Act and any implementing rules issued by the SEC. The Board also 
recently issued supervisory guidance designed to assist registered 
banks and other public banking organizations supervised by the Federal 
Reserve in understanding and complying with the requirements of the 
Sarbanes-Oxley Act.\13\
---------------------------------------------------------------------------

    \13\ See The Sarbanes-Oxley Act of 2002, SR Letter 02-20 (Oct. 
29, 2002). One commenter expressed concern that the Board and the 
other Federal banking agencies may require all banking organizations 
to comply with some or all of the provisions that the Sarbanes-Oxley 
Act imposes only on public companies. As the Board previously has 
stated, the Board, in conjunction with the other Federal banking 
agencies, is reviewing its existing regulations and supervisory 
guidance to determine what, if any, changes may be appropriate in 
light of the Sarbanes-Oxley Act. Such review is outside the scope of 
this rulemaking. Nevertheless, the Board recognizes that nonpublic 
banking organizations typically have fewer resources and less 
complex operations than public banking organizations and that it may 
be inappropriate to require all nonpublic banking organizations to 
comply with requirements legislatively mandated only for public 
companies.
---------------------------------------------------------------------------

Regulatory Flexibility Act

    Pursuant to section 4(a) of the Regulatory Flexibility Act (5 
U.S.C. 604(a)), the Board must publish a final regulatory flexibility 
analysis with this rulemaking. The rule implements for registered banks 
several of the new reporting and disclosure obligations imposed by the 
Sarbanes-Oxley Act on public companies. Consistent with section 12(i) 
of the Exchange Act, the final 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 rule seeks to 
minimize the potential conflict between the rule and the corresponding 
SEC rules and, thus, reduce the potential burden associated with 
complying with the Board's rule. Moreover, as noted above, the Board 
intends to monitor the SEC rules incorporated by reference into the 
Board's rule to determine whether it would be appropriate to modify 
these rules for registered banks.
    The objectives and legal basis for the rule are discussed in the 
supplementary information set forth above. As of December 10, 2002, 17 
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 September 30, 2002, only six 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 the final 
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 final 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, unless such collections are modified by 
the Board. As of December 10, 2002, there were 17 registered banks that 
will be subject to the final rule. Registered banks may request 
confidential treatment of any information submitted to the Board under 
the final 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 final rules to implement many 
of 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 final 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 Board's rule should 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 final 
rule is 7100-0091. The Federal Reserve has a continuing interest in the 
public's opinion of our collections of information. At any time, 
comments regarding any aspect of the collections of information 
required by the final rule, including suggestions for reducing burden, 
may be sent to: Jennifer J. Johnson, Secretary, Board of Governors of 
the Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551; and to the Office of Management and Budget, 
Paperwork Reduction Project (7100-0091), Washington, DC 20503.

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 that the 
final rule is presented in a simple and straightforward manner and is 
consistent with this ``plain language'' directive.

Effective Date of Rule

    The final rule will become effective on April 1, 2003. Because some 
of the provisions of the Sarbanes-Oxley Act to be administered and 
enforced by the Board had previously become effective, the Board made 
the interim rule effective immediately on publication in the Federal 
Register (i.e. September 13, 2002). The Board requested comment on all 
aspects of the interim rule and has carefully considered those comments 
in adopting this final rule.

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),

[[Page 4096]]

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, January 23, 2003.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 03-1922 Filed 1-27-03; 8:45 am]
BILLING CODE 6210-01-P