[Federal Register Volume 61, Number 232 (Monday, December 2, 1996)]
[Rules and Regulations]
[Pages 63958-63969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30636]
[[Page 63957]]
_______________________________________________________________________
Part V
Department of the Treasury
_______________________________________________________________________
Office of the Comptroller of the Currency
_______________________________________________________________________
12 CFR Part 12
Recordkeeping and Confirmation Requirements for Securities
Transactions; Final Rule
Federal Register / Vol. 61, No. 232 / Monday, December 2, 1996 /
Rules and Regulations
[[Page 63958]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 12
[Docket No. 96-25]
RIN 1557-AB42
Recordkeeping and Confirmation Requirements for Securities
Transactions
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
amending its rule that prescribes recordkeeping and confirmation
requirements for securities transactions. The final rule is another
part of the OCC's Regulation Review Program to update and streamline
OCC regulations and eliminate unnecessary regulatory costs and other
burdens. The final rule reorganizes the OCC's regulation by placing
related subjects together, clarifies areas where the rule was
confusing, incorporates significant OCC interpretive positions, and
updates various provisions to address market developments and
regulatory changes by other regulators that affect requirements for
recordkeeping and confirmation of securities transactions by national
banks.
EFFECTIVE DATE: December 31, 1996.
FOR FURTHER INFORMATION CONTACT: Suzette H. Greco, Senior Attorney,
Securities and Corporate Practices Division (202) 874-5210; Joseph W.
Malott, National Bank Examiner, Capital Markets Division (202) 874-
5070; William L. Granovsky, National Bank Examiner, Fiduciary
Activities (202) 874-4861.
SUPPLEMENTARY INFORMATION:
Background
The OCC adopted 12 CFR part 12 on July 24, 1979 (44 FR 43252) to
require national banks to establish uniform procedures and records
relating to the handling of securities transactions for customers. The
requirements reflected in part the recommendations of the Securities
and Exchange Commission's (SEC) Final Report of the Securities and
Exchange Commission on Bank Securities Activities (June 30, 1977). Part
12's recordkeeping and confirmation requirements were patterned after
the SEC's rules applicable to broker/dealers and were intended to serve
similar purposes for banks involved in effecting customers' securities
transactions.1 The OCC amended part 12 on December 31, 1979 (44 FR
77137) to include additional suggestions recommended by commenters, and
the part became effective on January 1, 1980. The Board of Governors of
the Federal Reserve System (FRB) and the Federal Deposit Insurance
Corporation (FDIC) also adopted regulations substantially identical to
part 12 in 1979. See 12 CFR 208.8(k), 44 FR 43258 (July 24, 1979) (FRB
regulation); 12 CFR part 344, 44 FR 43261 (July 24, 1979) (FDIC
regulation).
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1 Brokers and dealers generally must register with the
SEC under the Securities Exchange Act of 1934. See 15 U.S.C.
78o(a)(1). Banks are excluded from the definitions of ``broker'' and
``dealer'' and thus are not subject to the registration provisions.
See 15 U.S.C. 78c(a) (4) and (5).
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On December 22, 1995, the OCC published a notice of proposed
rulemaking (60 FR 66517) (proposal) to revise 12 CFR part 12, the OCC's
Recordkeeping and Confirmation Requirements for Securities Transactions
regulation. The purpose of the proposal was to modernize part 12,
address various market developments and regulatory changes, and reduce
regulatory burden, where possible. The FRB published a substantively
similar yet somewhat differently worded proposed rule on December 26,
1995. See 60 FR 66759. The FDIC published an advance notice of proposed
rulemaking on May 24, 1996, soliciting comment on issues similar to
those raised in the OCC's and FRB's proposed rules, but has not yet
proposed a rule. See 61 FR 26135.
Comments Received and Changes Made
The OCC received ten comments on the proposal. The comment letters
included eight from banks and bank holding companies, one from a trade
association, and one on behalf of a mutual fund sponsor and
distributor. Commenters generally supported the proposal, but several
commenters requested changes. The OCC carefully considered each of the
comments and has made a number of changes in response to the comments
received.
Overall, the final rule adopts most of the changes to part 12 as
proposed by the OCC. The section-by-section discussion of this preamble
identifies and discusses the comments received and changes made to
certain sections of the proposal. A derivation table identifying
sections of former part 12 changed by the final rule is included at the
end of this preamble.
Section-by-Section Discussion
Authority, Purpose, and Scope (Sec. 12.1)
The proposal revised and expanded the scope section to clarify the
securities transactions to which part 12 applies and identify the types
of transactions that are subject to other regulatory requirements.
Generally, any national bank effecting a securities transaction for a
customer is subject to the requirements of part 12, unless the
transaction specifically is excepted. For example, part 12 requirements
apply to transactions in mutual funds as well as other securities.
National banks conducting government securities transactions for
their customers also are within the scope of part 12.2 Consistent
with regulations issued pursuant to the Government Securities Act of
1986, 15 U.S.C. 78o-5, part 12 (Sec. 12.1(c)(2)(ii)) exempts a national
bank that conducts fewer than 500 government securities brokerage
transactions per year from complying with the recordkeeping
requirements under Sec. 12.3. See 17 CFR 401.3(a)(2)(i) and
404.4(a).3 This exemption does not apply to government securities
dealer transactions by national banks, however.
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2 The Department of the Treasury, under its authority
pursuant to the Government Securities Act of 1986 (GSA), 15 U.S.C.
78o-5, has issued regulations in 17 CFR parts 400 through 405, 449,
and 450, applicable to many government securities transactions by
national banks (GSA regulations). The GSA regulations define the
terms ``government securities broker'' and ``government securities
dealer'' to include financial institutions. See 17 CFR 400.3 (k) and
(l). Part 404 of the GSA regulations provides specific recordkeeping
requirements for government securities brokers and dealers that are
financial institutions. See 17 CFR 404.4.
\3\ National banks, because they are subject to part 12
recordkeeping requirements, are not required to follow the
recordkeeping requirements of the GSA regulations at 17 CFR 404.2
and 404.3. See 17 CFR 404.4(a). National banks, however, must follow
other recordkeeping requirements under the GSA regulations. See 17
CFR 404.4 (a)(3), (b), and 450.4 (c), (d), and (f). Part 12
confirmation requirements apply to all government securities
transactions by national banks.
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The ``scope'' section (Sec. 12.1(c)(1)) also clarifies that a
national bank's transactions in municipal securities that are not
subject to the Municipal Securities Rulemaking Board's (MSRB) rules,
are subject to part 12.4 Thus,
[[Page 63959]]
under Sec. 12.1(c)(2)(iii), transactions in municipal securities
conducted by a national bank registered with the SEC as a ``municipal
securities dealer'' are exempt from part 12. However, municipal
securities brokerage transactions by a national bank not registered as
a municipal securities dealer are subject to part 12 requirements.
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\4\ The MSRB adopts rules with respect to transactions in
``municipal securities'' effected by brokers, dealers, and
``municipal securities dealers.'' See 15 U.S.C. 78o-4; Rules of the
MSRB, MSRB Manual (CCH) para. 3501 et seq. As defined in the
Exchange Act, a ``municipal securities dealer'' includes a bank, as
well as a ``separately identifiable department or division of a
bank,'' that is engaged in the business of buying and selling
municipal securities for its own account through a broker or
otherwise. See 15 U.S.C. 78c(a)(30). Under the SEC's regulatory
requirements, however, a bank need not register as a ``municipal
securities broker.'' See 15 U.S.C. 78c(a) (4) and (31).
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The proposal's ``scope'' section provided exceptions from part 12
requirements for: (1) Banks conducting a small number of securities
transactions; (2) certain government securities transactions; (3)
certain municipal securities transactions; and (4) securities
transactions conducted by a foreign branch of a national bank. The
proposal also clarified that notwithstanding the exceptions from part
12, the OCC expects a national bank conducting securities transactions
for its customers to maintain effective systems of records and controls
to ensure safe and sound operations.
Most commenters supported the clarifications to the proposed scope
section. With respect to the scope section as discussed in the
proposal's preamble, two commenters requested further clarification.
One commenter requested clarification of whether part 12 requires a
national bank to provide a confirmation of a trade placed by a customer
directly with a registered broker/dealer for settlement in the
customer's custodial account. In these circumstances, a national bank
need not provide a confirmation if the customer receives a confirmation
from the registered broker/dealer.
Another commenter suggested clarifying that part 12 generally would
not apply when dual employees are involved in a networking operation
with a registered broker/dealer. As noted in the proposal's preamble,
the OCC recognizes that a national bank may enter into various
arrangements with registered broker/dealers that permit the broker/
dealers to operate on the bank's premises. Part 12 generally does not
apply to securities transactions executed by these registered broker/
dealers for their customers. As registered broker/dealers, they already
are subject to the SEC's recordkeeping and confirmation rules.5
The OCC agrees that when a dual employee is performing work for and
under the control of a registered broker/dealer pursuant to an
arrangement between the bank and a registered broker/dealer, part 12
requirements do not apply. However, if the dual employee is performing
work for and under control of the bank, then the part 12 requirements
do apply. See Interpretive Letter No. 680 (July 26, 1995), reprinted in
[1994-95 Transfer Binder] Fed. Banking L. Rep. (CCH) 83628.
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\5\ As noted in the proposal, however, if the bank is using this
registered broker/dealer solely to clear securities transactions
effected by the bank for the bank's own customers, then the
requirements of part 12 do apply to the bank because the bank has
executed the transactions.
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Accordingly, the final rule adds a new provision
(Sec. 12.1(c)(2)(v)) clarifying that part 12 does not apply to
securities transactions effected by a broker or dealer registered with
the SEC, including securities transactions effected by a bank employee
when the employee is acting as an employee of an SEC-registered broker/
dealer. The final rule also adopts the amendments to the scope section
as proposed and revises Sec. 12.1(c)(1) to state more clearly that both
part 12 and 12 CFR part 9 govern fiduciary transactions effected by a
national bank.6
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\6\ The final rule also changes the caption of Sec. 12.1(c)(2)
from ``exemptions'' to ``exceptions'' to better reflect that
Sec. 12.1(c)(2) does not necessarily exempt the specified
transactions from all part 12 requirements.
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Definitions (Sec. 12.2)
The proposal added new definitions of asset-backed security,
completion of the transaction, crossing of buy and sell orders, debt
security, government security, and municipal security, and modified the
definitions of collective investment fund, customer, investment
discretion, periodic plan, and security.
Several commenters asked the OCC to make clarifications. One
commenter questioned whether the definition of customer includes a bank
when that bank acts as the fiduciary of an account and effects
transactions for that account. That is not the intent of part 12. While
both the former rule and the proposal define customer to include any
person or account (including fiduciary accounts) for which a national
bank makes or participates in making the purchase or sale of
securities, the account is the customer when the bank acts as fiduciary
and has investment discretion over the account. Accordingly, the final
rule clarifies that part 12 does not require that the bank notify
itself of a transaction.
Another commenter asked whether, for purposes of the notification
requirements for transactions involving periodic plans or employee
benefit plans, the customer is the plan trustee or the plan
participant. The OCC does not intend part 12 to require a bank acting
as a trustee of an employee benefit plan to provide notifications to
itself where the bank as trustee is the shareholder of record of the
securities being bought and sold. Generally, a written agreement
between the trustee and the participants governs these plans and
dictates the type of notifications required. The primary law governing
employee benefit plans and trusts is the Employee Retirement Income
Security Act of 1974 (ERISA), 29 U.S.C. 1001 et seq. The final rule
clarifies that the definition of customer does not include a bank as
trustee acting as shareholder of record for the purchase and sale of
securities.
Several commenters raised questions about the proposed definition
of investment discretion. The proposal, like the former rule, tracked
the definition of ``investment discretion'' in the Securities Exchange
Act of 1934, 15 U.S.C. 78c(a)(35). Under this definition, a bank
exercises investment discretion with respect to an account if the bank
directly or indirectly: (1) Is authorized to determine what securities
or other property to purchase or sell, or (2) makes decisions as to
what securities or other property to purchase or sell even though some
other person may have responsibility for these investment decisions.
The significance of a finding under part 12 that a bank exercises
investment discretion is that the bank then may choose from more
options when providing a customer with notice of a transaction. For
example, instead of complying with the generally applicable rule
requiring a bank to provide notification at or before completion of the
transaction, a bank exercising investment discretion in an agency
capacity may send an itemized statement to a customer every three
months.
Three commenters recommended revising the part 12 definition of
investment discretion to conform to the proposed definition of
investment discretion in 12 CFR part 9, the OCC's regulation governing
fiduciary powers of national banks.7 The final rule does not
substantively change the former part 12 definition of investment
discretion. Given that the broader definition of the term in part 12
serves to reduce burden on national banks by providing more flexibility
to banks in giving notices of securities transactions, the OCC believes
it appropriate to retain the definition as proposed. The OCC will
review the definition of investment discretion used in part 9 in the
course of adopting amendments to that rule.
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7 The OCC published a notice of proposed rulemaking on 12
CFR part 9 on December 21, 1995. See 60 FR 66163.
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[[Page 63960]]
Three commenters asked the OCC to clarify that the definition of
periodic plan also includes cash management sweep services, such as
arrangements where funds are transferred or ``swept'' out of a bank to
purchase money market mutual funds. Both the former and proposed rules
define periodic plan to include dividend reinvestment plans, automatic
investment plans, employee stock purchase plans, and other plans where
the bank has written authority to act as agent for the customer to
purchase and sell specific securities, in specific amounts, at specific
time intervals. Cash management services, whereby a bank will allow a
depositor to transfer or ``sweep'' all funds or all funds above a
specified amount from deposits into investment vehicles, often money
market mutual funds, on a daily basis and to automatically redeem
securities as needed, are not expressly included in the former or
proposed rules.
The OCC agrees with the views of the commenters that the definition
of periodic plan encompasses cash management sweep services. Many banks
today engage in cash management sweep services to allow customers to
earn an investment return on otherwise idle cash balances. The types of
cash management services banks offer vary and banks should take care to
comply with all applicable requirements with respect to any particular
arrangement. Accordingly, the final rule revises the definition of
periodic plan to specifically include these services. The final rule
also adopts a separate timeframe for notifications for cash management
sweep services, as discussed in Sec. 12.5.
Finally, one commenter urged the OCC to retain the exception in the
definition of security for letters of credit and other forms of bank
indebtedness incurred in the ordinary course of business. The proposed
definition closely tracks the definition of security in the Securities
Exchange Act of 1934, 15 U.S.C. 78c(a)(10), which does not explicitly
contain this exception. However, the final rule retains this exception,
because, upon further consideration, the OCC has concluded that this
exception avoids extending the regulation's coverage to transactions
where the requirements of part 12 are unnecessary.
Recordkeeping (Sec. 12.3)
The proposal provided that a national bank may maintain the records
required by Sec. 12.3(a) in any manner, if the records clearly and
accurately reflect the information required and provide an adequate
basis for auditing the information (Sec. 12.3(b)). This provision is
intended to give banks flexibility in the maintenance of records
required by part 12. The OCC requested comments addressing whether and
in what manner banks rely upon this provision. The OCC received two
comments on this issue. The commenters suggested that the OCC clarify
the extent to which a national bank may use electronic or automated
records.
The OCC recognizes that better and more affordable technology will
increase banks' interest in replacing paper files with electronic data
bases and filing systems. The OCC has no objection to a national bank
using an electronic or automated recordkeeping system as long as the
records are maintained in conformity with Sec. 12.3(b). Accordingly,
the final rule specifically permits the use of electronic or automated
records as long as the records are easily retrievable and readily
available for inspection and the bank has the capability to reproduce
the records in hard copy form.
Content and Time of Customer Notification (Sec. 12.4)
Under the proposal a national bank may give or send the required
written notification to a customer for whom the bank has effected a
securities transaction by providing either (1) a copy of a registered
broker/dealer's confirmation prepared for the bank and a statement
regarding remuneration, or (2) a bank-generated confirmation containing
essentially the same information as the SEC requires for registered
broker/dealer confirmations. The written notification conveys
information to the bank's customers about their securities
transactions, thereby giving them an opportunity to verify the terms of
their transactions and evaluate the accuracy of the bank's execution.
The proposal did not include former part 12's provision permitting
an additional five business days for a national bank to provide
notification to a customer by using a copy of the registered broker/
dealer's confirmation to the bank. The OCC, however, specifically
requested comments on the need for additional time by a national bank
opting to provide notification by using a copy of the registered
broker/dealer's confirmation.
The OCC received four comments on this issue. One commenter opposed
giving a bank additional time and stated that it was not necessary and
not conducive to a uniform regulatory environment. Three commenters
favored continuing to allow a bank additional time. In light of the
comments, the final rule retains the provision allowing a bank
additional time. However, the final rule changes the length of the
additional time allowed from five days to one day from receipt by the
bank of the registered broker/dealer's confirmation. The former
regulation's five-day period was based on the industry practice of
having the settlement of a securities transaction on the fifth business
day after the trade day (T+5). The industry now must settle most
securities transactions by the third business day after the trade day
(T+3). Given the advances in electronic technology for providing
confirmations and market developments, the OCC believes one additional
business day is sufficient for providing a customer a notification in
this manner. Accordingly, the final rule adopts this change in the time
of notification when a bank opts to provide notification by using a
copy of a registered broker/dealer's confirmation.
The OCC also requested comments on the adoption of the timeframe at
or before completion of the transaction for a national bank to provide
a written notification. Sending the notification at or before
completion of the transaction is consistent with the SEC's broker/
dealer confirmation rule. See Securities Exchange Act of 1934 Rule 10b-
10, 17 CFR 240.10b-10(a) (SEC Rule 10b-10). The SEC also defines
completion of the transaction similar to the proposed part 12
definition, generally meaning payment of funds and delivery of the
securities. See 17 CFR 240.10b-10(d)(2).
The OCC received four comments on this issue. One commenter
supported the adoption of this timeframe and two commenters expressed
concern about a bank's ability to provide the information so quickly.
Another commenter noted that in a typical custody arrangement,
customers employ an outside broker (e.g., a registered broker/dealer)
to make investments for them and the bank does not process any activity
on its customer's account records until it receives authorization from
the registered broker/dealer. However, the commenter interpreted the
proposal to mean that the bank must provide the customer a notification
within the T+3 timeframe. With respect to this last comment, the OCC
notes that part 12 does not apply when a registered broker/dealer is
effecting the securities transactions and the bank is acting only as
custodian.
The final rule adopts the timeframe at or before completion of the
transaction in order to reflect current securities industry practice.
This timeframe requires a national bank to give or send notification of
its customers' securities transactions in the same way as a
[[Page 63961]]
nonbank registered broker/dealer. The OCC believes this change promotes
consistency among regulators and keeps banks on a level playing field
with nonbank registered broker/dealers. The OCC also believes that the
additional day to provide the confirmation when using a copy of a
registered broker/dealer's confirmation will allow a bank adequate time
to provide a notification. Further, the OCC notes that the final rule
only requires the bank to give or send the notification by the
settlement of the securities transaction, i.e. the completion of the
transaction, and not that the customer must receive the notification by
settlement.
Consistent with SEC Rule 10b-10, the proposal added Sec. 12.4(b)
(8), (9), (10), and (11), requiring disclosure of yield information on
debt securities (renumbered in the final rule as Sec. 12.4(a) (8), (9),
(10), and (11)). The proposal also added Sec. 12.4(b)(12) requiring
disclosure that a debt security has not been rated by a nationally
recognized statistical rating organization, if that is the case
(renumbered in the final rule as Sec. 12.4(a)(12)).
The OCC sought comments on the applicability and need for these
disclosure requirements. Both commenters that addressed this issue
focused on the requirement for unrated debt securities, and both
supported including these requirements. One commenter stated that its
trade confirmation already shows ``NR'' for unrated securities. The OCC
recognizes that there are a variety of situations where certain
securities may be unrated. The disclosure is intended to alert
customers that they may wish to obtain further information or
clarification from the bank on the nature of these securities. For the
reasons stated in the proposal and in light of the comments, the final
rule adopts these additional disclosure requirements.
The proposal also requested comments on whether part 12 should
include a provision similar to SEC Rule 10b-10(c) stating the required
period of time for a national bank to furnish information pursuant to a
customer's request. SEC Rule 10b-10(c) requires broker/dealers to
furnish to customers requested information within five business days of
the receipt of the request, or within 15 business days if the broker/
dealer effected the transaction more than 30 days before the receipt of
the request. See 17 CFR 240.10b-10(c). Former part 12 did not contain a
similar provision. Two commenters addressed this issue and were opposed
to incorporating the SEC's standard. The commenters noted that
furnishing information pursuant to a customer's request ``within a
reasonable time'' is sufficient. The OCC agrees with the commenters.
Accordingly, the final rule does not contain this provision.
The proposal included a new provision concerning the disclosure of
other remuneration similar to that in the SEC's Rule 10b-10. See 17 CFR
240.10b-10(a)(2)(i)(D). Under proposed Sec. 12.4(b)(6) (renumbered in
the final rule as Sec. 12.4(a)(6)), a national bank may choose not to
disclose the source and amount of other remuneration to the bank, if
the bank: (1) Informs the customer in writing that it has received or
will receive other remuneration; and (2) the bank states that it will
furnish the source and amount of the other remuneration upon the
customer's written request.
The OCC received two comments supporting the inclusion of this
provision but suggesting further clarification. In light of these
comments, the final rule adopts the provisions on remuneration
disclosure as proposed with the following clarification. First, the
final rule clarifies that a notification by means of the written
statements permitted by Sec. 12.4(a)(6) is available only in lieu of
disclosing the source and amount of other remuneration, not in lieu of
disclosing the remuneration paid by the customer. Second,
Sec. 12.4(a)(6) reflects that the bank will furnish information
pursuant to a customer's request within a reasonable time.
Proposed Sec. 12.4(c), captioned ``Notification by agreement,''
retains the option in the former rule for the bank and the customer to
agree in writing to a different time and form of notification for a
securities transaction where the national bank does not exercise
investment discretion. The OCC received three comments on this issue.
Two commenters asked for clarification on the use of the notification
by agreement option. Another commenter suggested moving Sec. 12.4(c)
back to Sec. 12.5, the section on alternative forms and times of
notification, as under the former rule.
In response to these comments, the OCC notes that a bank does not
need to provide a notification under Sec. 12.4 (a) or (b) when using
the notification by agreement option, unless specifically requested by
the customer. The OCC has not substantively changed the notification by
agreement option and intends a national bank using this option to
provide notification in the same way as under the former part 12
provision. The final rule relocates the notification by agreement
option to Sec. 12.5(a) in an effort to further clarify Secs. 12.4 and
12.5.
Finally, in response to several commenters' suggestions for
stylistic changes intended to reduce confusion and enhance readability,
the final rule changes the name of the section, some introductory
language, and the captions. The final rule also reverses the order of
the notification options of Sec. 12.4(a) and Sec. 12.4(b) to emphasize
the information a bank must provide its customer in a notification
regardless of which type of notification under this section the bank
elects to provide.
Notification by Agreement; Alternative Forms and Times of Notification
(Sec. 12.5)
In addition to the notification requirements in Sec. 12.4, the
proposal also authorized alternative forms and times of notification
under Sec. 12.5 for certain specific types of transactions. These were:
(1) Transactions in which the bank exercises investment discretion in
other than an agency capacity; (2) transactions in which the bank
exercises investment discretion in an agency capacity; (3) transactions
for a collective investment fund; and (4) transactions for a periodic
plan. The OCC asked commenters to address the continuing need for the
alternative forms of notification.
Two commenters addressed this issue. One commenter expressed
support for the continued inclusion of the alternative forms of
notification. Another commenter suggested that Sec. 12.5(c) (regarding
notifications for collective investment fund transactions) was
unnecessary because banks follow the requirements of 12 CFR part 9, the
OCC's fiduciary regulation. The OCC agrees with this comment and has
revised the final rule to state simply that for collective investment
fund transactions a bank must follow the requirements of 12 CFR part 9.
The final rule also changes the name of the section, some introductory
language, and the captions in an effort to eliminate confusion and
enhance readability.
The proposal clarified that for Sec. 12.5 purposes generally, it is
the ``transaction'' that triggers the notification requirements, not
the type of account. The OCC requested comments about any effects of
the proposed change regarding alternative forms of notification based
upon types of transactions instead of types of accounts.
The OCC received one comment on this proposed change. The commenter
suggested that the type and form of notification should be negotiated
as part of the original agreement between the customer and the bank,
and that automated means then should be used
[[Page 63962]]
to comply with the notification requirements for all transactions in
the account. The commenter was concerned that the proposed change would
preclude this option of agreeing to the type and form of the
notification.
The OCC agrees with the commenter that the customer and the
national bank should have the option to determine the type and form of
notification initially with the account opening. The OCC does not
believe that the change set out in the proposal would preclude the
customer and the bank agreeing beforehand on the form and time of the
notification required. For example, a national bank effecting
securities transactions for an account in which the bank exercises
investment discretion may have an agreement with the customer to
provide a monthly account statement. The alternative notification
procedures set forth in Sec. 12.5 continue to permit the national bank
and the customer to agree in writing to another type and form of
notification. However, even though the national bank and the customer
may agree on the type and form of notification at the opening of the
account, the OCC views the ``transaction'' as triggering the part 12
notification requirements. The OCC does not intend for the proposed
change to substantively affect a national bank's compliance with the
part 12 notice requirements. Thus, the final rule adopts this change in
terminology that the transaction triggers the notification
requirements.
The proposed rule amended the notification time for periodic plan
transactions under Sec. 12.5(d) (renumbered in the final rule as
Sec. 12.5(e)) to not less than once every three months rather than
notification as promptly as possible after each transaction. One
commenter noted their support for this change in notification time. Two
other commenters specifically suggested the OCC clarify in the final
rule how the periodic plan notification requirements apply to cash
management sweep services. One commenter noted that a separate
confirmation requirement, for example, for every money market mutual
fund transaction in a sweep arrangement, would impose an unnecessary
paperwork burden on national banks and their customers and place banks
at a competitive disadvantage relative to nonbank registered broker/
dealers. Under the SEC's Rule 10b-10, broker/dealers must provide a
confirmation after the end of each monthly period for transactions in
money market mutual funds. See 17 CFR 240.10b-10(b)(2).
The OCC agrees that national banks offering cash management sweep
services should provide notification similar to that provided by
nonbank registered broker/dealers offering similar services. As
discussed in Sec. 12.2, the OCC has revised the definition of periodic
plan in the final rule to include cash management sweep services.
Section 12.5(e) in the final rule provides the timeframe for
notification for periodic plans. The final rule clarifies that, with
respect to cash management sweep services, the time for notification is
each month in which a purchase or sale of securities takes place in the
customer's deposit account and not less than once every three months if
there are no securities transactions in the account. The final rule
also adopts the change as proposed for other periodic plans, namely,
that the time for notification is not less than once every three
months. The OCC believes that these timeframes are consistent with
current industry practice and the SEC's notification requirements.
These timeframes also will serve to eliminate unnecessary regulatory
burden by reducing the number of required notifications.
The OCC reminds national banks engaging in cash management sweep
services that the securities involved in the sweep services remain
subject to any other applicable rules and regulations. In some
instances notification requirements other than those of part 12 may
apply. For example, a bank offering a sweep repurchase agreement
program involving government securities, commonly called a ``sweep
repo,'' may be subject to daily confirmation requirements under the
Government Securities Act of 1986 regulations, 17 CFR parts 400 through
405, 449, and 450. See OCC Advisory Letter 96-2 (March 22, 1996).
Fees (Sec. 12.6)
The proposal placed the former provisions in Secs. 12.4 and 12.5
regarding fees into a new Sec. 12.6. The OCC received no comments on
this section. The final rule adopts the section substantially as
proposed except that certain provisions are reordered.
Securities Trading Policies and Procedures (Sec. 12.7)
The proposal retained the requirement under Sec. 12.7(a)(1) that a
bank establish written policies and procedures assigning supervisory
responsibility for personnel engaged in different aspects of the
trading process. The proposal did not propose specific language
concerning the separation of supervisory responsibility for sales
activities and ``back room'' functions. The OCC received one comment
suggesting that the OCC include a specific reference to establishing
separate supervisory procedures and reporting lines for ``back room''
personnel. On reconsideration and in light of the recent developments
involving the lack of internal controls in certain highly publicized
cases,\8\ the final rule includes a provision (Sec. 12.7(a)(1)(iii))
that explicitly states the need for separate supervisory procedures for
back room functions.
---------------------------------------------------------------------------
\8\ See, e.g., David Brilliant, Tone at the Top: Boards and
Managers Must Ensure Quality Business and Controls, The Banker 26
(Nov. 1995); Out of Control: Greater Supervision is Urged by the
Report into the Barings Fiasco, The Banker 15 (Aug. 1995); Maureen
Duffy, Barings' Systems: The Blame Game, 12 Wall Street & Technology
16 (1995).
---------------------------------------------------------------------------
The OCC received several comments related to the filing of personal
trading reports by national bank officers and employees under proposed
Sec. 12.7(a)(4). One commenter recommended revising
Sec. 12.7(a)(4)(iii) to apply only to employees who perform the
securities trading functions for the bank. The OCC declines to narrow
the scope of the requirement in the final rule given the important
purpose behind the personal reporting requirement and recent concerns
in the securities industry on personal trading by insiders.\9\ This
requirement, which is similar to requirements under the securities laws
and regulations, addresses potential conflicts of interests between
bank personnel and customers and deters improper or illegal use of
information by bank insiders.
---------------------------------------------------------------------------
\9\ See, e.g., Division of Investment Management, SEC, Personal
Investment Activities of Investment Company Personnel (1994);
Investment Company Institute, Report of the Advisory Group on
Personal Investing (1994).
---------------------------------------------------------------------------
The proposal did not change the scope of former Sec. 12.6
(renumbered as Sec. 12.7 in the proposal). The OCC requires the filing
of a report from national bank officers or employees who make
investment recommendations or decisions for the accounts of customers,
participate in the determination of the recommendations or decisions,
or who, in connection with their duties, obtain information concerning
which securities are being purchased or sold or recommended for
purchase or sale. The OCC notes that these individuals do not have to
be regularly or frequently involved in the recommendation or decision-
making process or obtain information on a regular basis to be subject
to the reporting requirement. However, the mere fact that an officer or
employee learns of a securities transaction after it has been effected,
or an investment recommendation after it has been transmitted to a
customer, would not subject that officer or
[[Page 63963]]
employee to the reporting requirements of Sec. 12.7.
Another commenter requested that the OCC amend the requirement to
file personal trading reports ``within ten days'' so that it reads
``within ten business days'' to accommodate large banking
organizations. The suggested change is consistent with past informal
practices to which the OCC has not objected. Accordingly, the final
rule reflects this change.
Under Sec. 12.7(d), the proposal requested comment on clarifying
that a national bank acting as an investment adviser to an investment
company is subject to section 17 of the Investment Company Act, 15
U.S.C. 80a-17, and, in particular, the requirements of Rule 17j-1 of
the Investment Company Act, 17 CFR 270.17j-1 (SEC Rule 17j-1). The
additional provision in the proposal simply reminded banks of the
separate existing requirement under SEC Rule 17j-1. As noted in
Sec. 12.7(d), certain officers and employees of a national bank acting
as an investment adviser to an investment company must comply with a
reporting requirement regarding personal securities trading under both
part 12 and SEC Rule 17j-1.
The OCC received two comments addressing this issue. The commenters
suggested that the OCC clarify that filing one report with the bank
will suffice for purposes of both part 12 and SEC Rule 17j-1 if the
information required is the same. The OCC believes this would reduce
burden while enabling the OCC and the SEC to have access to the report.
Accordingly, the final rule permits national bank officers and
employees to file one report where the required information is the
same. Nonetheless, the OCC cautions national banks to recognize that
the part 12 requirements, in some respects, are broader than those
under the Investment Company Act because part 12 applies to investment
advisory activities by national banks whether the bank provides the
advice to an investment company or to another type of customer.
The final rule also includes a technical correction to Sec. 12.7(d)
to clarify that SEC Rule 17j-1 requires personal securities
transactions to be reported to the investment adviser and maintained
for review by the SEC.
Waivers (Sec. 12.8)
The proposal clarified that a national bank may file a written
request with the OCC for waiver of one or more of the requirements set
forth in Secs. 12.2 through 12.7, either in whole or in part. The OCC
received no comments on this section. The final rule adopts Sec. 12.8
as proposed.
Settlement of securities transactions (Sec. 12.9)
The proposal added Sec. 12.9 to establish a securities settlement
timeframe for national banks effecting or entering into contracts for
the purchase or sale of securities for customers. The OCC intends this
provision to parallel the SEC's adoption of the ``T+3'' securities
settlement timeframe. See Securities Exchange Act of 1934 Rule 15c6-1,
17 CFR 240.15c6-1; 58 FR 52891 (Oct. 13, 1993); 60 FR 26604 (May 17,
1995) (amendments to the rule). The OCC requested comment on the need
for and effect of adopting the T+3 securities settlement requirement
for national banks.
The OCC received one comment on this issue. The commenter pointed
out that many small banks do not have access to SEC rules and would
prefer to have part 12 specify the actual requirement. The commenter
also noted that incorporating the SEC's rule by reference would permit
banks to take advantage of any changes by the SEC immediately rather
than waiting for the OCC to amend part 12. After careful consideration
of this matter, the OCC decided that national banks would benefit more
from having immediate access to the text of the SEC's rule rather than
only having a cross-reference to the SEC's rule in the OCC's
regulation. For this reason, the final rule adopts Sec. 12.9 as
proposed.
Interpretations (Secs. 12.101 and 12.102)
The proposal added two interpretive rulings to part 12. The first
interpretation (Sec. 12.101) related to the disclosure of remuneration
for mutual fund transactions. Consistent with the SEC's practice, the
OCC stated it would allow a bank to fulfill its disclosure requirement
regarding the source and amount of remuneration for mutual fund
transactions by providing this information to the customer in a current
prospectus, at or before completion of the securities transaction.
The second interpretive ruling (Sec. 12.102) recognized the use of
electronic communications to satisfy part 12's customer notification
requirements. This would allow a national bank to send a customer
notification by facsimile transmission or by some other electronic
media under certain circumstances. Since the OCC published the
proposal, the SEC has issued further guidance for broker/dealers using
electronic media to deliver information to customers under the SEC's
confirmation rule, SEC Rule 10b-10, 17 CFR 240.10b-10. See Securities
and Exchange Commission Release No. 33-7288, 61 FR 24644 (May 15,
1996). The SEC's guidance supersedes its earlier guidance as cited in
the proposal. However, SEC Release No. 33-7288 retains a general
approach consistent with the OCC's proposed interpretive ruling.
The OCC received two comments strongly supporting the addition of
the interpretive rulings. Since the OCC's proposed interpretive rulings
are consistent with the SEC's approach, the final rule adopts the
interpretive rulings as proposed.
Derivation Table
[Only substantive modifications, additions and changes are indicated]
----------------------------------------------------------------------------------------------------------------
Revised provision Original provision Comments
----------------------------------------------------------------------------------------------------------------
Sec. 12.1(a)............................ Sec. 12.1(a).
Sec. 12.1(b)............................ Sec. 12.1(a).
Sec. 12.1(c)(1)......................... ....................................... Added.
Sec. 12.1(c)(2)(i)...................... Sec. 12.7(a).
Sec. 12.1(c)(2)(ii)..................... ....................................... Added.
Sec. 12.1(c)(2)(iii).................... Sec. 12.7(b).......................... Modified.
Sec. 12.1(c)(2)(iv)..................... Sec. 12.7(c).
Sec. 12.1(c)(2)(v)...................... ....................................... Added.
Sec. 12.1(c)(3)......................... ....................................... Added.
Sec. 12.1(b).......................... Removed.
Sec. 12.2(a)............................ ....................................... Added.
Sec. 12.2(b)............................ Sec. 12.2(a).
Sec. 12.2(c)............................ ....................................... Added.
[[Page 63964]]
Sec. 12.2(d)............................ ....................................... Added.
Sec. 12.2(e)............................ Sec. 12.2(b).......................... Modified.
Sec. 12.2(f)............................ ....................................... Added.
Sec. 12.2(g)............................ ....................................... Added.
Sec. 12.2(h)............................ Sec. 12.2(c).
Sec. 12.2(i)............................ ....................................... Added.
Sec. 12.2(j)............................ Sec. 12.2(d).......................... Modified.
Sec. 12.2(k)............................ Sec. 12.2(e).......................... Modified.
Sec. 12.3(b)............................ Sec. 12.3............................. Modified.
Sec. 12.4............................... Secs. 12.4, 12.5...................... Modified.
Sec. 12.5............................... Secs. 12.4, 12.5...................... Modified.
Sec. 12.6............................... Secs. 12.4, 12.5.
Sec. 12.7(a)............................ Sec. 12.6 (a), (b), (c), and (d).
Sec. 12.7(b)............................ Sec. 12.6(d).......................... Modified.
Sec. 12.7(c)............................ Sec. 12.6(d).......................... Modified.
Sec. 12.7(d)............................ ....................................... Added.
Sec. 12.8............................... 12.7(d).
Sec. 12.9............................... ....................................... Added.
Sec. 12.101............................. ....................................... Added.
Sec. 12.102............................. ....................................... Added.
----------------------------------------------------------------------------------------------------------------
Effective Date
The final rule takes effect on December 31, 1996. The OCC finds
good cause, pursuant to 5 U.S.C. 553(d)(3), for prescribing this year-
end effective date, because it will enable national banks to adjust
their practices to conform with the regulation at the beginning of a
calendar quarter. The final rule confers benefits on the public and
national banks by streamlining and clarifying current requirements
governing recordkeeping and confirmations for securities transactions.
Regulatory Flexibility Act
It is hereby certified that this final rule will not have a
significant economic impact on a substantial number of small entities.
Accordingly, a regulatory flexibility analysis is not required. This
final rule will have minimal economic impact on national banks,
regardless of size, since it reduces somewhat regulatory burden but
makes no material changes.
Executive Order 12866
The OCC has determined that this final rule is not a significant
regulatory action.
Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4, March 22, 1995, 109 Stat. 48 (Unfunded Mandates Act), requires
that an agency prepare a budgetary impact statement before promulgating
a rule that includes a Federal mandate that may result in the
expenditure by state, local, and tribal governments, in the aggregate,
or by the private sector, of $100 million or more in any one year. If a
budgetary impact statement is required, section 205 of the Unfunded
Mandates Act also requires an agency to identify and consider a
reasonable number of regulatory alternatives before promulgating a
rule. Because the OCC has determined that the final rule will not
result in expenditures by state, local, and tribal governments, or by
the private sector, of more than $100 million in any one year, the OCC
has not prepared a budgetary impact statement or specifically addressed
the regulatory alternatives considered. Nevertheless, as discussed in
the preamble, the rule has the effect of reducing somewhat regulatory
costs and other burdens, where possible.
Paperwork Reduction Act of 1995
The OCC invites comment on:
(1) Whether the collections of information contained in this final
rule are necessary for the proper performance of the agency's
functions, including whether the information has practical utility;
(2) The accuracy of the agency's estimate of the burden of the
information;
(3) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(4) Ways to minimize the burden of the information collections on
respondents, including the use of automated information collection
techniques or other forms of information technology; and
(5) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
Respondents/recordkeepers are not required to respond to these
collections of information unless they display a currently valid OMB
control number.
The collections of information contained in this final rule have
been approved by the Office of Management and Budget under OMB Control
No. 1557-0142 in accordance with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the collections of information should
be sent to the Office of Management and Budget, Paperwork Reduction
Project 1557-0142, Washington, DC 20503, with a copy to the Legislative
and Regulatory Activities Division (Attention: 1557-0142), Office of
the Comptroller of the Currency, 250 E Street, SW., Washington, DC
20219.
The collections of information in this final rule are found in 12
CFR 12.3 through 12.5 and 12.7 and 12.8. This information is required
by the OCC to establish an audit trail. That audit trail is used by the
OCC in its regulatory examinations as a tool to evaluate a bank's
compliance with the banking and securities laws and regulations, such
as the anti-fraud provisions of the Federal securities laws. Further,
the records provide a basis for adequate disclosure to customers who
effect securities transactions through national banks. Other
information provides a basis for the OCC to waive some or all of the
recordkeeping and confirmation requirements of 12 CFR part 12. The
[[Page 63965]]
respondents/recordkeepers are national banks.
Estimated average annual burden hours per respondent/recordkeeper:
The average burden will vary from two hours to more than 700 hours,
depending upon individual circumstances, with an estimated average of
53.5 hours.
Estimated number of respondents and/or recordkeepers: 1,047.
Estimated total annual reporting and recordkeeping burden: 56,019.
hours
Start-up costs to respondents: None.
List of Subjects in 12 CFR Part 12
National banks, Reporting and recordkeeping requirements,
Securities.
Authority and Issuance
For the reasons set out in the preamble, part 12 of chapter I of
title 12 of the Code of Federal Regulations is revised to read as
follows:
PART 12--RECORDKEEPING AND CONFIRMATION REQUIREMENTS FOR SECURITIES
TRANSACTIONS
Sec.
12.1 Authority, purpose, and scope.
12.2 Definitions.
12.3 Recordkeeping.
12.4 Content and time of notification.
12.5 Notification by agreement; alternative forms and times of
notification.
12.6 Fees.
12.7 Securities trading policies and procedures.
12.8 Waivers.
12.9 Settlement of securities transactions.
Interpretations
12.101 National bank disclosure of remuneration for mutual fund
transactions.
12.102 National bank use of electronic communications as customer
notifications.
Authority: 12 U.S.C. 24, 92a, and 93a.
Sec. 12.1 Authority, purpose, and scope.
(a) Authority. This part is issued pursuant to 12 U.S.C. 24, 92a,
and 93a.
(b) Purpose. This part establishes rules, policies, and procedures
applicable to recordkeeping and confirmation requirements for certain
securities transactions effected by national banks for customers.
(c) Scope--(1) General. Any security transaction effected for a
customer by a national bank is subject to this part, except as provided
by paragraph (c)(2) of this section. This part applies to a national
bank effecting transactions in government securities. This part also
applies to municipal securities transactions by a national bank that is
not registered as a ``municipal securities dealer'' with the Securities
and Exchange Commission. See 15 U.S.C. 78c(a)(30) and 78o-4. This part,
as well as 12 CFR part 9, applies to securities transactions effected
by a national bank as fiduciary.
(2) Exceptions--(i) Small number of transactions. The requirements
of Secs. 12.3(a)(2) through (4) and 12.7(a)(1) through (3) do not apply
to a national bank having an average of fewer than 200 securities
transactions per year for customers over the prior three calendar year
period. The calculation of this average does not include transactions
in government securities.
(ii) Government securities. The recordkeeping requirements of
Sec. 12.3 do not apply to national banks effecting fewer than 500
government securities brokerage transactions per year. This exception
does not apply to government securities dealer transactions by national
banks. See 17 CFR 404.4(a).
(iii) Municipal securities. This part does not apply to
transactions in municipal securities conducted by a national bank
registered with the Securities and Exchange Commission as a ``municipal
securities dealer'' as defined in title 15 U.S.C. 78c(a)(30). See 15
U.S.C. 78o-4.
(iv) Foreign branches. This part does not apply to securities
transactions conducted by a foreign branch of a national bank.
(v) Transactions effected by registered broker/dealers. This part
does not apply to securities transactions effected by a broker or
dealer registered with the Securities and Exchange Commission (SEC)
where the SEC-registered broker or dealer directly provides the
customer a confirmation; including, transactions effected by a national
bank employee when acting as an employee of an SEC-registered broker/
dealer.
(3) Safe and sound operations. Notwithstanding paragraph (c)(2) of
this section, every national bank conducting securities transactions
for customers shall maintain effective systems of records and controls
regarding their customer securities transactions to ensure safe and
sound operations. The systems maintained must clearly and accurately
reflect appropriate information and provide an adequate basis for an
audit.
Sec. 12.2 Definitions.
(a) Asset-backed security means a security that is primarily
serviced by the cashflows 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.
(b) Collective investment fund means any fund established pursuant
to 12 CFR 9.18.
(c) Completion of the transaction means:
(1) In the case of a customer who purchases a security through or
from a national bank, except as provided in paragraph (c)(2) of this
section, the time when the customer pays the bank any part of the
purchase price, or, if payment is made by a bookkeeping entry, the time
when the bank makes the bookkeeping entry for any part of the purchase
price;
(2) In the case of a customer who purchases a security through or
from a national bank and who makes payment for the security prior to
the time when payment is requested or notification is given that
payment is due, the time when the bank delivers the security to or into
the account of the customer;
(3) In the case of a customer who sells a security through or to a
national bank, except as provided in paragraph (c)(4) of this section,
if the security is not in the custody of the bank at the time of sale,
the time when the security is delivered to the bank, and if the
security is in the custody of the bank at the time of sale, the time
when the bank transfers the security from the account of the customer;
(4) In the case of a customer who sells a security through or to a
national bank and who delivers the security to the bank prior to the
time when delivery is requested or notification is given that delivery
is due, the time when the bank makes payment to or into the account of
the customer.
(d) Crossing of buy and sell orders means a security transaction in
which the same bank acts as agent for both the buyer and the seller.
(e) Customer means any person or account, including any agency,
trust, estate, guardianship, or other fiduciary account for which a
national bank makes or participates in making the purchase or sale of
securities, but does not include a broker, dealer, bank acting as a
broker or dealer, bank acting as the fiduciary of an account, bank as
trustee acting as shareholder of record for the purchase or sale of
securities, or issuer of securities that are the subject of the
transaction.
(f) Debt security means any security, such as a bond, debenture,
note, or any other similar instrument that evidences a liability of the
issuer (including any security of this type that is convertible into
stock or a similar security) and fractional or participation interests
in one or more of any of the foregoing. This
[[Page 63966]]
definition does not include securities issued by an investment company
registered under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et
seq.
(g) Government security means:
(1) A security that is a direct obligation of, or obligation
guaranteed as to principal and interest by, the United States;
(2) 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;
(3) 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
(4) Any put, call, straddle, option, or privilege on a security
described in paragraph (g)(1), (2), or (3) of this section, other than
a put, call, straddle, option, or privilege:
(i) That is traded on one or more national securities exchanges; or
(ii) For which quotations are disseminated through an automated
quotation system operated by a registered securities association.
(h) Investment discretion means that, with respect to an account, a
bank directly or indirectly:
(1) Is authorized to determine what securities or other property
shall be purchased or sold by or for the account; or
(2) 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 these investment decisions.
(i) Municipal security means:
(1) A security that is a direct obligation of, or an obligation
guaranteed as to principal or interest by, a State or any political
subdivision, or any agency or instrumentality of a State or any
political subdivision;
(2) A security that is a direct obligation of, or an obligation
guaranteed as to principal or interest by, any municipal corporate
instrumentality of one or more States; or
(3) A security that is an industrial development bond (as defined
in section 103(c)(2) of the Internal Revenue Code of 1954 (26 U.S.C.
103(c)(2) (1970)) (Code)) the interest on which is excludable from
gross income under section 103(a)(1) of the Code (26 U.S.C. 103(a)(1))
if, by reason of the application of paragraph (4) or (6) of section
103(c) of the Code (26 U.S.C. 103(c)) (determined as if paragraphs
(4)(A), (5), and (7) were not included in section 103(c) (26 U.S.C.
103(c)), paragraph (1) of section 103(c) (26 U.S.C. 103(c)) does not
apply to the security.
(j) Periodic plan means:
(1) A written authorization for a national 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. These plans include dividend
reinvestment plans, automatic investment plans, and employee stock
purchase plans.
(2) 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).
(k) Security: (1) Means 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, and 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), or, in general, 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;
(2) Does not mean currency; any note, draft, bill of exchange, or
banker's acceptance which has a maturity at the time of issuance not
exceeding nine months, exclusive of days of grace, or any renewal
thereof, the maturity of which is likewise limited; a deposit or share
account in a Federal or State chartered depository institution; a loan
participation; a letter of credit or other form of bank indebtedness
incurred in the ordinary course of business; units of a collective
investment fund; interests in a variable amount note in accordance with
12 CFR 9.18; U.S. Savings Bonds; or any other instrument the OCC
determines does not constitute a security for purposes of this part.
Sec. 12.3 Recordkeeping.
(a) General rule. A national bank effecting securities transactions
for customers shall maintain the following records for at least three
years:
(1) Chronological records. An itemized daily record of each
purchase and sale of securities maintained in chronological order, and
including:
(i) Account or customer name for which each transaction was
effected;
(ii) Description of the securities;
(iii) Unit and aggregate purchase or sale price;
(iv) Trade date; and
(v) Name or other designation of the broker/dealer or other person
from whom the securities were purchased or to whom the securities were
sold;
(2) Account records. Account records for each customer, reflecting:
(i) Purchases and sales of securities;
(ii) Receipts and deliveries of securities;
(iii) Receipts and disbursements of cash; and
(iv) Other debits and credits pertaining to transactions in
securities;
(3) Memorandum order. A separate memorandum (order ticket) of each
order to purchase or sell securities (whether executed or canceled),
including:
(i) Account or customer name for which the transaction was
effected;
(ii) Type of order (market order, limit order, or subject to
special instructions);
(iii) Time the trader or other bank employee responsible for
effecting the transaction received the order;
(iv) Time the trader placed the order with the broker/dealer, or if
there was no broker/dealer, time the order was executed or canceled;
(v) Price at which the order was executed; and
(vi) Name of the broker/dealer utilized;
(4) Record of broker/dealers. A record of all broker/dealers
selected by the bank to effect securities transactions and the amount
of commissions paid or allocated to each broker during the calendar
year; and
(5) Notifications. A copy of the written notification required by
Secs. 12.4 and 12.5.
(b) Manner of maintenance. The records required by this section
must clearly and accurately reflect the information required and
provide an adequate basis for the audit of the information. Record
maintenance may include the use of automated or electronic records
provided the records are easily retrievable, readily available for
inspection, and capable of being reproduced in a hard copy.
[[Page 63967]]
Sec. 12.4 Content and time of notification.
Unless a national bank elects to provide notification by one of the
means specified in Sec. 12.5, a national bank effecting a securities
transaction for a customer shall give or send to the customer either of
the following types of notifications at or before completion of the
transaction or, if the bank uses a registered broker/dealer's
confirmation, within one business day from the bank's receipt of the
registered broker/dealer's confirmation:
(a) Written notification. A written notification disclosing:
(1) Name of the bank;
(2) Name of the customer;
(3) Capacity in which the bank acts (i.e., as agent for the
customer, as agent for both the customer and some other person, as
principal for its own account, or in any other capacity);
(4) Date and time of execution, or a statement that the bank will
furnish the time of execution within a reasonable time upon written
request of the customer, and the identity, price, and number of shares
or units (or principal amount in the case of debt securities) of the
security purchased or sold by the customer;
(5) Amount of any remuneration that the customer has provided or is
to provide any broker/dealer, directly or indirectly, in connection
with the transaction;
(6) (i) Amount of any remuneration that the bank has received or
will receive from the customer, and the source and amount of any other
remuneration that the bank has received or will receive in connection
with the transaction; unless:
(A) The bank and its customer have determined remuneration pursuant
to a written agreement; or
(B) In the case of government securities and municipal securities,
the bank received the remuneration in other than an agency transaction.
(ii) 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 paragraph (a)(6)(i) of this section, 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;
(7) Name of the registered broker/dealer utilized; or where there
is no registered broker/dealer, the name of the person from whom the
security was purchased or to whom the security was sold, or a statement
that the bank will furnish this information within a reasonable time
upon written request from the customer;
(8) In the case of any 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 upon request;
(9) In the case of a transaction in a debt security effected
exclusively on the basis of a dollar price:
(i) The dollar price at which the transaction was effected; and
(ii) The yield to maturity calculated from the dollar price, unless
the transaction is for a debt security that either:
(A) Has a maturity date that may be extended by the issuer thereof,
with a variable interest payable thereon; or
(B) Is an asset-backed security that represents an interest in or
is secured by a pool of receivables or other financial assets that
continuously are subject to prepayment;
(10) In the case of a transaction in a debt security effected on
the basis of yield:
(i) 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 call price;
(ii) The dollar price calculated from the yield at which the
transaction was effected; and
(iii) 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 the represented yield, unless the transaction is
for a debt security that either:
(A) Has a maturity date that may be extended by the issuer thereof,
with a variable interest rate payable thereon; or
(B) Is an asset-backed security that represents an interest in or
is secured by a pool of receivables or other financial assets that
continuously are subject to prepayment;
(11) 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 continuously are
subject to prepayment, a statement indicating that the actual yield of
the asset-backed security may vary according to the rate at which the
underlying receivables or other financial assets are prepaid and a
statement that information concerning the factors that affect yield
(including at a minimum estimated yield, weighted average life, and the
prepayment assumptions underlying yield) will be furnished upon written
request of the customer; and
(12) 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; or
(b) Copy of the registered broker/dealer's confirmation. A copy of
the confirmation of a registered broker/dealer relating to the
securities transaction and, if the customer or any other source will
provide remuneration to the bank in connection with the transaction and
a written agreement between the bank and the customer does not
determine the remuneration, a statement of the source and amount of any
remuneration that the customer or any other source is to provide the
bank.
Sec. 12.5 Notification by agreement; alternative forms and times of
notification.
A national bank may elect to use the following notification
procedures as an alternative to complying with Sec. 12.4:
(a) Notification by agreement. A national bank effecting a
securities transaction for an account in which the bank does not
exercise investment discretion shall give or send written notification
at the time and in the form agreed to in writing by the bank and
customer, provided that the agreement makes clear the customer's right
to receive the written notification pursuant to Sec. 12.4 (a) or (b) at
no additional cost to the customer.
(b) Trust transactions. A national bank effecting a securities
transaction for an account in which the bank exercises investment
discretion other than in an agency capacity shall give or send written
notification within a reasonable time if a person having the power to
terminate the account, or, if there is no such person, any person
holding a vested beneficial interest in the account, requests written
notification pursuant to Sec. 12.4 (a) or (b). Otherwise, notification
is not required.
(c) Agency transactions. (1) A national bank effecting a securities
transaction for an account in which the bank exercises investment
discretion in an agency capacity shall give or send, not less than once
every three months, an itemized statement to each customer that
specifies the funds and securities in the custody or possession of the
bank at
[[Page 63968]]
the end of the period and all debits, credits and transactions in the
customer's account during the period.
(2) If requested by the customer, the bank shall give or send
written notification to the customer pursuant to Sec. 12.4 (a) or (b)
within a reasonable time.
(d) Collective investment fund transactions. A national bank
effecting a securities transaction for a collective investment fund
shall follow 12 CFR 9.18.
(e) Periodic plan transactions. (1) A national bank effecting a
securities transaction for a periodic plan (except for a cash
management sweep service) shall give or send to its customer not less
than once every three months, a written statement showing:
(i) The customer's funds and securities in the custody or
possession of the bank;
(ii) All service charges and commissions paid by the customer in
connection with the transaction; and
(iii) All other debits and credits of the customer's account
involved in the transaction.
(2) A national bank effecting a securities transaction for a cash
management sweep service or other periodic plan as defined in
Sec. 12.2(j)(2) shall give or send its customer a written statement, in
the same form as under paragraph (e)(1) of this section, 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 and regulations.
(3) Upon written request of the customer, the bank shall give or
send the information described in Sec. 12.4 (a) or (b), except that the
bank need not provide to the customer any information relating to
remuneration paid in connection with the transaction when the
remuneration is paid by a source other than the customer.
Sec. 12.6 Fees.
A national bank may charge a reasonable fee for providing
notification pursuant to Sec. 12.5(b), (c), and (e). A national bank
may not charge a fee for providing notification pursuant to Sec. 12.4
or Sec. 12.5 (a) and (d).
Sec. 12.7 Securities trading policies and procedures.
(a) Policies and procedures; reports of securities trading. A
national bank effecting securities transactions for customers shall
maintain and adhere to policies and procedures that:
(1) Assign responsibility for supervision of all officers or
employees who:
(i) Transmit orders to or place orders with registered broker/
dealers;
(ii) Execute transactions in securities for customers; or
(iii) Process orders for notification or settlement purposes, or
perform other back office functions with respect to securities
transactions effected for customers. Policies and procedures for
personnel described in this paragraph (a)(1)(iii) must provide for
supervision and reporting lines that are separate from supervision and
reporting lines for personnel described in paragraphs (a)(1) (i) and
(ii) of this section;
(2) Provide for the fair and equitable allocation of securities and
prices to accounts when the bank receives orders for the same security
at approximately the same time and places the orders for execution
either individually or in combination;
(3) Provide for the crossing of buy and sell orders on a fair and
equitable basis to the parties to the transaction, where permissible
under applicable law; and
(4) Require bank officers and employees to report to the bank,
within ten business days after the end of the calendar quarter, all
personal transactions in securities made by them or on their behalf in
which they have a beneficial interest, if the officers and employees:
(i) Make investment recommendations or decisions for the accounts
of customers;
(ii) Participate in the determination of the recommendations or
decisions; or
(iii) In connection with their duties, obtain information
concerning which securities are purchased, sold, or recommended for
purchase or sale by the bank.
(b) Required information. The report required under paragraph
(a)(4) of this section must contain the following information:
(1) The date of the transaction, the title and number of shares,
and the principal amount of each security involved;
(2) The nature of the transaction (i.e. purchase, sale, or other
type of acquisition or disposition);
(3) The price at which the transaction was effected; and
(4) The name of the registered broker, registered dealer, or bank
with or through whom the transaction was effected.
(c) Report not required. This section does not require a bank
officer or employee to report transactions if:
(1) The officer or employee has no direct or indirect influence or
control over the transaction;
(2) The transaction is in mutual fund shares;
(3) The transaction is in government securities; or
(4) The transactions involve an aggregate amount of purchases and
sales per officer or employee of $10,000 or less during the calendar
quarter.
(d) Additional reporting requirement. A national bank that acts as
an investment adviser to an investment company is subject to the
requirements of Securities and Exchange Commission (SEC) Rule 17j-1 (17
CFR 270.17j-1) issued under the Investment Company Act of 1940. SEC
Rule 17j-1 requires an ``access person'' of the investment adviser to
report certain personal securities transactions to the investment
adviser for review by the Securities and Exchange Commission. ``Access
person'' includes directors, officers, and certain employees of the
investment adviser. The reporting requirement under paragraph (a)(4) of
this section is a separate requirement from any applicable requirements
under SEC Rule 17j-1. However, an ``access person'' required to file a
report with a national bank pursuant to SEC Rule 17j-1 need not file a
separate report under paragraph (a)(4) of this section if the required
information is the same.
Sec. 12.8 Waivers.
A national bank may file a written request with the OCC for waiver
of one or more of the requirements set forth in Secs. 12.2 through
12.7, either in whole or in part. The OCC may grant a waiver from the
requirements of this part to any national bank, or any class of
national banks, with regard to a specific transaction or a specific
class of transactions.
Sec. 12.9 Settlement of securities transactions.
(a) A national bank shall not effect or enter into a contract for
the purchase or sale of a security (other than an exempted security as
defined in 15 U.S.C. 78c(a)(12), government security, municipal
security, commercial paper, bankers' acceptances, or commercial bills)
that provides for payment of funds and delivery of securities later
than the third business day after the date of the contract, unless
otherwise expressly agreed to by the parties at the time of the
transaction.
(b) Paragraphs (a) and (c) of this section do not apply to
contracts:
(1) For the purchase or sale of limited partnership interests that
are not listed on an exchange or for which quotations are not
disseminated through an automated quotation system of a registered
securities association;
[[Page 63969]]
(2) For the purchase or sale of securities that the Securities and
Exchange Commission (SEC) may from time to time, taking into account
then existing market practices, exempt by order from the requirements
of paragraph (a) of SEC Rule 15c6-1, 17 CFR 240.15c6-1(a), either
unconditionally or on specified terms and conditions, if the SEC
determines that an exemption is consistent with the public interest and
the protection of investors.
(c) Paragraph (a) of this section does not apply to contracts for
the sale for cash of securities that are priced after 4:30 p.m. Eastern
time on the date the securities are priced and that are sold by an
issuer to an underwriter pursuant to a firm commitment underwritten
offering registered under the Securities Act of 1933, 15 U.S.C. 77a et
seq., or sold to an initial purchaser by a national bank participating
in the offering. A national bank shall not effect or enter into a
contract for the purchase or sale of the securities that provides for
payment of funds and delivery of securities later than the fourth
business day after the date of the contract unless otherwise expressly
agreed to by the parties at the time of the transaction.
(d) For purposes of paragraphs (a) and (c) of this section, the
parties to a contract are deemed to have expressly agreed to an
alternate date for payment of funds and delivery of securities at the
time of the transaction for a contract for the sale for cash of
securities pursuant to a firm commitment offering if the managing
underwriter and the issuer have agreed to the date for all securities
sold pursuant to the offering and the parties to the contract have not
expressly agreed to another date for payment of funds and delivery of
securities at the time of the transaction.
Interpretations
Sec. 12.101 National bank disclosure of remuneration for mutual fund
transactions.
A national bank may fulfill its obligation to disclose information
on the source and amount of remuneration, required by Sec. 12.4, for
mutual fund transactions by providing this information to the customer
in a current prospectus, at or before completion of the securities
transaction. The OCC's view is consistent with the position of the
Securities and Exchange Commission (SEC) as provided in a no-action
letter dated March 19, 1979, which permits confirmations for mutual
funds to refer to the sales load disclosed in the prospectus. See
Letter to the Investment Company Institute, reprinted in [1979 Transfer
Binder] Fed. Sec. L. Rep. (CCH) 82041 (Mar. 19, 1979). The OCC would
reconsider its position upon any change in the SEC's practice.
Sec. 12.102 National bank use of electronic communications as customer
notifications.
(a) In appropriate situations, a national bank may satisfy the
``written'' notification requirement under Secs. 12.4 and 12.5 through
electronic communications. Where a customer has a facsimile machine, a
national bank may fulfill its notification delivery requirement by
sending the notification by facsimile transmission. Similarly, a bank
may satisfy the notification delivery requirement by other electronic
communications when:
(1) The parties agree to use electronic instead of hard-copy
notifications;
(2) The parties have the ability to print or download the
notification;
(3) The recipient affirms or rejects the trade through electronic
notification;
(4) The system cannot automatically delete the electronic
notification; and
(5) Both parties have the capacity to receive electronic messages.
(b) The OCC would consider the permissibility of other situations
using electronic notifications on a case-by-case basis.
Dated: November 22, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 96-30636 Filed 11-29-96; 8:45 am]
BILLING CODE 4810-33-P
