[Federal Register Volume 62, Number 43 (Wednesday, March 5, 1997)]
[Rules and Regulations]
[Pages 9915-9923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5425]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 344
RIN 3064-AB74
Recordkeeping and Confirmation Requirements for Securities
Transactions
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Final rule.
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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is amending
its regulations governing the procedures for recordkeeping and
confirmation requirements with respect to effecting securities
transactions for customers of an insured state nonmember bank or a
foreign bank having an insured branch (Bank). The final rule updates,
clarifies and streamlines the FDIC regulations and reduces unnecessary
regulatory costs and other burdens. The final rule also reorganizes and
clarifies the regulation in areas where it previously was confusing. In
addition, the FDIC has incorporated significant interpretive positions
and updated various provisions to address market developments and
regulatory changes by other regulators that affect requirements for
recordkeeping and confirmation of securities transactions by Banks.
DATES: Effective date. The final rule is effective April 1, 1997. Early
compliance. These revisions may be followed immediately by the affected
party.
FOR FURTHER INFORMATION CONTACT: Miguel D. Browne, Manager--Risk Policy
Development, (202) 898-6789; Keith A. Ligon, Chief, Policy Unit, (202)
898-3618; and John F. Harvey, Review Examiner (Trust), Securities,
Capital Markets and Trust Branch, Division of Supervision (202) 898-
6762; and Patrick J. McCarty, Counsel, Regulations and Legislation
Section, Legal Division, (202) 898-8708.
SUPPLEMENTARY INFORMATION:
Background
In 1979, the FDIC adopted part 344 to require Banks under its
jurisdiction to establish uniform procedures and recordkeeping and
confirmation requirements with respect to effecting 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 344'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. See 44 FR 43261 (July
24, 1979). The Board of Governors of the Federal Reserve System (FRB)
and the Office of the Comptroller of the Currency (OCC) also adopted
regulations substantially identical to part 344 in 1979.1
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\1\ 1 See 12 CFR 208.8(k), 44 FR 43258 (July 24, 1979) (FRB
regulation); 12 CFR part 12, 44 FR 43254 (July 24, 1979)(OCC
regulation).
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The FDIC and the other federal banking agencies are required by
section 303 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (CDRI) to review and streamline their
regulations to improve efficiency, reduce unnecessary costs and
eliminate unwarranted constraints on credit availability. 12 U.S.C.
4803(a). Section 303(a) also requires the federal banking agencies to
work jointly to make uniform all regulations and guidelines
implementing common statutory or supervisory policies.
On December 22, 1995, the OCC published a notice of proposed
rulemaking (60 FR 66517) 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 OCC published its final rule on
December 2, 1996. See 61 FR 63958. The FRB published a substantially
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, as well as issues which the OCC and FRB
proposals did not address. See 61 FR 26135. On December 24, 1996, the
FDIC published a notice of proposed rulemaking (61 FR 67729) to amend
part 344 to address various market developments and regulatory changes,
and reduce regulatory burden, where possible. Consistent with Section
303 of CDRI, the FDIC reviewed the OCC rule and the FRB proposal in
connection with the preparation of its notice of proposed rulemaking.
The FDIC has endeavored to create a rule that is uniform with the other
agencies. As part of that effort, the staff of the FDIC has been in
contact with the staffs of the FRB and the OCC in connection with the
drafting of the final rule. The FDIC's final rule is closer in
structure, definitions, language and form to the FRB's proposal than
the OCC's final rule, however, all of the agencies' rules are
substantively very similar.
Comments Received and Changes Made
The FDIC received six comments on the proposal. One comment came
from a bank, one from a bank holding company and four comments came
from trade associations representing banks, investment companies and
accountants. In general, the commenters strongly supported the proposal
as promoting uniformity among the Federal bank regulatory agencies,
reducing regulatory burdens as well as addressing recent developments
in the securities market. Most commenters specifically supported the
provision of the proposal that excluded from the scope of part 344
customer transactions conducted directly with a broker/dealer where the
customer has a written account agreement with the broker-dealer and the
broker-dealer is fully disclosed to the customer. This change would
exclude from part 344's coverage commonly utilized contractual
relationships between banks and broker/dealers whereby the broker/
dealers conducts securities transactions on bank premises, known as
networking arrangements.
In addition, certain of the commenters requested specific changes
to the proposal. The FDIC has considered each of the comments carefully
and has made a number of changes in response to the comments received.
Overall, the final rule adopts most of the changes to part 344 as
proposed by the FDIC although certain changes have been made in an
attempt to increase uniformity with regard to recordkeeping and
confirmation requirements among the federal banking regulatory
agencies. The section-by-section discussion of this preamble describes
the final regulation
[[Page 9916]]
and identifies and discusses the comments received and changes made to
certain sections of the proposal.
Section-by-Section Discussion
Purpose and Scope. (Section 344.1)
The purpose of part 344 is twofold: to ensure that purchasers of
securities from Banks are provided with certain necessary information
about the transaction; and to ensure that Banks engaging in such
transactions maintain adequate records and controls with respect to
such transactions. In general, part 344 applies to securities
transactions effected by Banks on behalf of customers unless the
transaction is specifically exempted in Sec. 344.2, such as, to a
limited extent, transactions in government securities and transactions
in municipal securities conducted by Banks that are not registered as
municipal securities dealers with the SEC.
Exceptions. (Section 344.2)
The final rule provides five exceptions from the requirements of
certain provisions of part 344. The specific exceptions, which are
unchanged from the proposal, are: (1) Banks conducting a small number
of securities transactions; (2) certain government securities
transactions; (3) certain municipal securities transactions; (4)
securities transactions conducted by a foreign branch of a bank; and
(5) certain securities transactions with a broker/dealer. The first
four exceptions already exist in part 344. The proposal added the
exemption covering certain securities transactions with a broker/
dealer. In order for the exception to apply, the broker/dealer must be
fully disclosed to the customer and the customer must have a direct
contractual agreement with the broker/dealer, that is, a signed account
agreement. This exception makes clear that under the circumstances
described dual employee arrangements are not subject to part 344. This
exemption is similar to that found in the OCC's rule. See 12 CFR
Sec. 12.1(c)(2)(v). The rule also clarifies that even though certain
transactions are excepted from compliance with all, or certain
sections, of part 344, the FDIC expects a Bank conducting securities
transactions for its customers to maintain effective systems of records
and controls to ensure safe and sound operations.
In connection with the broker/dealer networking exception, the FDIC
requested comment on whether part 344 should apply to banks which
impose surcharges or additional fees on customers in addition to the
transaction volume compensation they normally receive under a
networking agreements. The only comment received on this issue
indicated support for requiring banks to disclose to customers that
such surcharges or additional fees were being imposed. It is the FDIC's
understanding that these type of surcharges and additional fees are not
common, however, the FDIC expects banks to disclose the imposition of
these surcharges or fees to customers and will monitor this area to
determine if further supervisory action is necessary.
The FDIC received comment on the small number of securities
transactions exceptions. This exception applies to banks effecting an
average of fewer than 200 securities transactions per year for
customers over the prior three calendar year period and excepts the
bank from certain record maintenance requirements as well as the need
to establish most required written policies and procedures. One
commenter proposed that this limited transactions exemption be expanded
to allow a Bank to effect 500 rather than 200 transactions in
securities that are neither municipal securities or government
securities. In light of the FDIC's desire for uniformity of its
recordkeeping and disclosure requirements with those of the other
Federal banking regulators and the lack of a compelling basis by the
commenter to make the suggested change, the FDIC has determined to
maintain the exemption for limited transactions at an average of 200 of
such transactions per year.
Definitions. (Section 344.3)
Section 344.3 sets forth the definitions of 13 terms used in the
rule. The FDIC's advance notice of proposed rule making described six
new definitions--``asset-backed security'', ``completion of the
transaction'', ``crossing of buy and sell orders'', ``debt security'',
``government security'' and ``municipal security.'' The proposal added
two additional new definitions: ``bank'' and ``cash management sweep
account''. The proposed definitions are the similar to those proposed
by the FRB. The OCC's final rule also uses the same terms, but the
structure and language used are somewhat different. The final rule
adopts the definitions as set forth in the proposal with the following
minor modifications in response to comments received
As proposed, the term ``cash management sweep account'' would cover
any prearranged, automatic transfer of funds above a certain dollar
level from a deposit account to purchase a security or securities or
any prearranged, automatic redemption or sale of a security or
securities when a deposit account drops below a certain dollar level
with the proceeds being transferred into a deposit account. The term
would only cover transactions involving the purchase or sale of
securities. The FDIC received two comments on its proposed definition
of a ``cash management sweep account'' found at Sec. 344.3(c). One
commenter expressed appreciation for the clarity provided by having a
separately defined term; the other raised concern that while the FDIC
proposes to treat cash management sweep accounts in a manner identical
to the OCC, an additional definition may cause uncertainty. The OCC
defined a cash management sweep account within its definition of
``periodic plan''. For the reasons stated in the proposed rulemaking
2, the FDIC believes that there are benefits to separately
defining the term ``cash management sweep account''. Furthermore, we do
not foresee confusion resulting from the distinction used in the OCC's
regulation. With respect to cash management sweep accounts, both the
OCC's and the FDIC's rules will require monthly statements to be
furnished to a customer for each month in which a security is purchased
or sold, but not less than quarterly.
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\2\ Sweep accounts are different in kind from typical periodic
plans such as dividend reinvestment plans (DRIPs) and automatic
investment plans. Sweep accounts do not normally invest in
securities at the regular intervals (i.e. monthly or quarterly) as
do DRIPs and automatic investment plans. Second, sweep accounts are
a significant product/service in their own right which account for
several billions of dollars worth of transactions on a daily basis
and probably exceed the dollar volume in traditional periodic plans.
Due to these differences, the FDIC believes it is not appropriate to
include sweep accounts in the definition of periodic plans.
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The FDIC has amended the definition of the term ``security'' at
Sec. 344.3(m) so that it conforms to the definition used by the other
federal banking regulatory agencies. The new definition more closely
tracks the definition of ``security'' in the Securities Exchange Act of
1934. See 17 U.S.C. 78a et seq. No substantive change in the definition
or meaning of the term ``security'' is intended from the definition of
the term as published in the FDIC's proposal and the term as used in
the existing regulation. The FDIC is conforming where possible the
terms of part 344 with the rules of the other federal banking
regulatory agencies so that any regulatory burden resulting from the
use of different terminology can be minimized.
[[Page 9917]]
Recordkeeping. (Section 344.4)
Section 344.4 sets forth the requirements for maintenance of
records of securities transactions by Banks or a third party service
provider for the Bank. The 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. The FDIC
received no comments on this section, and therefore it is being adopted
as proposed.
Content and Timing of Customer Notification. (Section 344.5)
Section 344.5 of the regulation identifies the information that a
Bank must provide to a customer at or before the completion of a
securities transaction. When a broker/dealer is utilized in a
transaction, Banks have the option of either having a broker/dealer
that executes a transaction for the Bank send a confirmation directly
to the Bank's customer or choosing to forward a copy of the broker/
dealer confirmation to the Bank customer when it is received. Banks
opting to have confirmations sent directly to their customers by the
broker/dealer are ultimately responsible for the timely delivery of
confirmations as well as accurate disclosure of all information
required therein. The FDIC received several comments concerning this
section of the proposal. One commenter supported the provision allowing
notices to be furnished to customers via facsimile or other electronic
means. The FDIC notes its intent that references--in Sec. 344.5 as well
as Sec. 344.6--to the ``give'' or ``send'' notices includes notice
provided via facsimile or other electronic transmission.
Several commenters had concerns with the partial exemption to the
customer notification requirement of the source and amount of
remuneration received by a Bank from a third party. The source and
amount of remuneration that the Bank receives, other than from its
customer, must be disclosed to the extent required under paragraph
(b)(6) of Sec. 344.5. Paragraph 344.5(b)(6) describes three
circumstances in which a Bank need only disclose to a customer that the
Bank has received remuneration from a third party and that the Bank
will provide such information upon the written request of the customer.
If a transaction falls within one of the three enumerated exceptions in
Sec. 344.5(b)(6)(i), a simple disclosure that the Bank received
remuneration from a third party and that the source and amount of such
remuneration received by the Bank from a third party is available upon
written request of the customer will satisfy the disclosure
requirements of Sec. 344.5(a)(2). One commenter indicated that the rule
could be read so that Sec. 344.5(a)(2) would vitiate the exemption
under Sec. 344.5(b)(6)(ii). The FDIC does not agree. As discussed,
Sec. 344.5 (a)(2) is clear that notice need be provided only to the
extent that such notice would be required under Sec. 344.5(b)(6),
including any notice based on the request of a customer as permitted in
paragraph (b)(6)(ii).
Another commenter suggested that the Sec. 344.5(b)(6)(ii) partial
exemption to the customer notification requirement regarding
remuneration to the Bank by a source other than the customer be
extended to permit a Bank not to disclose this information to the
customer at all. The commenter expressed the belief that the specific
source of such remuneration would not be of interest to the majority of
customers. After consideration, the FDIC has determined not to change
the rule from its proposed form. The final rule will reduce regulatory
burden because a Bank is required to provide amount and source of
remuneration information only upon specific written request by the
customer. It is also noted that the final rule is consistent with
similar rules of the other federal banking regulatory agencies.
Moreover, because the Bank will only need to provide such information
to customers who affirmatively request it, the burden on the Bank
should be minimal, particularly if--as the commenter suggests--third
party remuneration to the Bank is not of interest to a majority of
customers.
In addition, we note that the ``source and amount of remuneration''
issue which led to the FDIC issuing a partial waiver of part 344 in
1995 3 has been resolved in the final rule. Previously, a literal
reading of part 344 could have required a Bank to disclose the
remuneration it obtained from a broker/dealer that dealt directly with
the customer even if the Bank's remuneration was solely based on the
broker/dealer's volume of transactions with Bank customers. Due to the
impossibility of providing such disclosure to customers at the time of
the transaction, the FDIC had granted a partial waiver of the
requirements of part 344. Id. The FDIC now exempts for the scope of
part 344 those securities transactions where the customer has a direct
contractual agreement with a fully disclosed broker/dealer. See 12 CFR
Sec. 344.2(a)(5). This exemption will remove from part 344's scope
most, if not all, networking arrangements between registered broker/
dealers and financial institutions. Banks will not be obligated to
disclose the source and amount of remuneration since the customer is
actually a customer of the broker/dealer, not the Bank, and will
receive a confirmation from the broker/dealer as required by SEC
regulations.
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\3\ See ``Waiver of Burdensome Disclosures for Certain
Securities Transactions for Bank Customers'', FDIC Financial
Institutions Letter 29-95 (April 7, 1995).
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Notification by Agreement; Alternative Forms and Times of Notification.
(Section 344.6)
In addition to the standard notification requirements in
Sec. 344.5, the final regulation, in Sec. 344.6, generally authorizes a
Bank, in cases in which it does not exercise investment discretion, to
enter into a written agreement with its customer for an alternative
arrangement as to the time and content of written notification. Section
344.6 also sets forth alternative forms and times of notification for
certain specific types of accounts. These are: (1) accounts in which
the bank exercises investment discretion in other than an agency
capacity; (2) accounts in which the bank exercises investment
discretion in an agency capacity; (3) cash management sweep accounts;
(4) transactions for a collective investment fund account; and (5)
transactions for a periodic plan account. The FDIC has added language
to the final regulation amending the requirements for certain cash
management sweep accounts set forth in Sec. 344.6(d) in order to ensure
that banks are aware that if they retain custody of securities that are
the subject of a hold-in-custody repurchase agreement, they are subject
to certain Treasury Department regulations governing confirmation
requirements with respect to government securities transactions.
The FDIC received one comment regarding the financial disclosure
required for collective investment fund accounts in Sec. 344.6(e)
suggesting that such disclosure be required to be made only by
independent auditors in accordance with generally accepted auditing
standards. The final rule allows either independent public accountants
or internal auditors responsible only to the board of directors of the
bank to prepare the financial information. The FDIC notes that
Sec. 344.6(e) is identical to language used in the OCC's rule and the
FRB's proposal. Moreover, the potential benefits resulting from the
mandated use of external auditors does not outweigh the costs
associated with
[[Page 9918]]
imposing such a regulatory burden upon the industry. Banks should be
allowed the flexibility to effect the required disclosure through the
use of external auditors as suggested by the commenter, or internal
auditors that are responsible to only the board of directors. The final
regulation adopts the language of the proposal.
Settlement of Securities Transactions. (Section 344.7)
The proposal provided for a settlement period of T+3 and requires
Banks to send broker/dealer confirmations within one business day of
receipt. These requirements are being adopted in the final rule without
change. The requirements are identical to those of the SEC and the
other federal banking regulatory agencies and were generally supported
by the commenters. One commenter suggested cross-referencing the rules
of the Securities and Exchange Commission governing the settlement
period for securities transactions into part 344 so that regulatory
amendments by the SEC would automatically amend the FDIC's regulations.
The FDIC has determined not to incorporate citations to the SEC's
settlement regulations. Rather, the FDIC will review any regulatory
amendments by the SEC on a case-by-case basis to determine whether such
changes would be appropriate for Banks. The FDIC received no other
comments on this section, and therefore it is being adopted as
proposed.
Securities Trading Policies and Procedures. (Section 344.8)
Section 344.8 of the final regulation requires Banks to establish
written policies and procedures assigning supervisory responsibility
for personnel engaged in different aspects of the trading process.
Specifically, this section addresses orders and execution of trades,
the equitable allocation of securities and prices for accounts and the
crossing of buy and sell orders. In addition, Sec. 344.8(a)(2) requires
the separation of order and execution functions from the traditional
back office clearing functions in order to ensure that Banks maintain
adequate internal controls for securities trading. The FDIC received no
comments on this section, and therefore it is being adopted as
proposed.
Personal Securities Trading Reported by Bank Officers and Employees.
(Section 344.9)
The proposal relocated to Sec. 344.9 without substantive change the
personal trading reporting requirements for certain officers and
employees. The notice of proposed rulemaking also included a new
requirement that certain directors report their transactions in
securities. As proposed, Sec. 344.9(a) would have required Bank
directors, under certain limited and specified circumstances, to report
a limited number of transactions in securities. The OCC's rule and the
FRB's proposal do not specifically address the issue of director
reporting requirements in this area.
As proposed, the reporting requirements of Sec. 344.9 would have
applied equally to directors, officers, or employees who have access to
information in such a fashion so as to enable the person to gain an
improper advantage or abuse the information obtained. The reporting
requirement would not extend to individuals who routinely obtain such
information but are never in a position to abuse it.
The two comments received on the provision indicated uncertainty as
to the scope and application of this provision of the proposed rule.
One commenter indicated the rule could be interpreted more broadly than
anticipated, and another comment indicated a reading more narrow than
intended. Given the different interpretations of the proposed changes,
it is clear that additional clarification is required if the FDIC were
to retain the requirement. Upon review, the FDIC believes that
additional revision to the proposed regulatory language would be
necessary to accomplish the FDIC's intent. The FDIC recognizes that
implementing the proposed amendatory language could result in reports
being submitted by individual directors who are not intended to be
subject to the reporting requirements. Other directors may innocently
fail to report who are intended to be subject to the rule. Accordingly,
in order to not unnecessarily increase the burden of regulatory
reporting requirements, and in a continuing effort to maintain
uniformity in the reporting requirements imposed by the federal banking
regulators, the final rule does not contain specific reporting
requirements for directors. The FDIC will, in consultation with the
other federal banking regulators, study the issue of employee, officer,
and director disclosures further and address the issue in a future
rulemaking as appropriate. Any changes to the reporting requirements to
be imposed upon bank directors, if proposed in the future, will be
implemented following appropriate notice and comment.
Waivers. (Section 344.10)
This section maintains the current provision that enables the FDIC
to waive any provision of part 344 for good cause. No comments were
received on this provision and it is being adopted as proposed.
Effective Date
This regulation will become effective on April 1, 1997 in
accordance with the requirements of the Paper Work Reduction and
Regulatory Improvement Act (PWRRIA). Section 302(b) requires that the
effectiveness of new rules be delayed until the beginning of the
following calendar quarter in order to give depository institutions
adequate time to adjust to new requirements, such as in this instance,
the T+3 settlement requirement. Nevertheless, as permitted by Section
302 of the PWRRIA, 12 U.S.C. 4802, banks may comply with the final rule
before the effective date. In particular, the FDIC would not object to
a Bank immediately taking advantage of Sec. 344.2(a)(5) of the final
rule that exempts transactions in which a bank receives remuneration
from a registered broker dealer so long as the broker/dealer is fully
disclosed to the bank customer and the bank customer has a direct
contractual agreement with the broker/dealer may be utilized.
Regulatory Flexibility Act
Under section 605(b) of the Regulatory Flexibility Act (RFA) (5
U.S.C. 605(b)), the final regulatory flexibility analysis otherwise
required under section 604 of the RFA (5 U.S.C. 604) is not required if
the head of the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities
and the agency publishes such certification in the Federal Register
along with its general notice of proposed rulemaking or at the time of
publication of the final rule.
The Board of Directors has concluded after reviewing the final
regulation that it will not have a significant economic impact on a
substantial number of small institutions. The Board of Directors
therefore hereby certifies pursuant to section 605 of the RFA that the
regulation will not have a significant economic impact on a substantial
number of small entities within the meaning of the RFA. The FDIC
anticipates that the final rule will result in a net benefit to all
banks regardless of size due to the clarification provided by the rule.
Small banks, in particular should be benefited by these changes. Most
banks with total assets of under
[[Page 9919]]
$100 million are not engaged in securities activities in a manner
covered by this regulation. Rather, a small bank typically will use
either a registered broker/dealer who has rented space on the bank's
premises in what is commonly referred to as a ``networking
arrangement'' or an ``introducing broker'' who will refer a customer to
a dealer that can effect the desired transaction, both of which
situations are outside the scope of part 344 as adopted.
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) (Public Law 104-121) provides generally for agencies to report
rules to Congress and for Congress to review rules. The reporting
requirement is triggered when agencies issue a final rule as defined by
the Administrative Procedure Act (APA) at 5 U.S.C. 551. Because the
FDIC is issuing a final rule as defined by the APA, the FDIC will file
the reports required by SBREFA.
The Office of Management and Budget (OMB) has determined that this
final revision to part 344 does not constitute a ``major rule'' as
defined by SBREFA.
Paperwork Reduction Act
The collection of information contained in this final rule has been
reviewed and approved by the OMB under control number 3064-0028
pursuant to section 3504(h) of the Paperwork Reduction Act of 1980 (44
U.S.C. 3501 et seq.). Comments on the collections of information should
be directed to the OMB, Paperwork Reduction Project (3064-0028)
Washington, D.C. 20503 Attention: Desk officer for the Federal Deposit
Insurance Corporation, with copies of such comments to be sent to
Steven F. Hanft, Office of the Executive Secretary, room F-400, Federal
Deposit Insurance Corporation, 550 17th Street, NW, Washington, D.C.
20429.
The collection of information requirements in this final rule are
found in 12 CFR 344.2(b), 344.4(a), 344.5 (a) and (b), 344.8, and
344.9. The collections consist of recordkeeping requirements,
Secs. 344.2(b) and 344.4(a); the provision of written confirmations,
Secs. 344.5 (a) and (b) and 344.6; the establishment of written
policies and procedures for placing orders and executing trades as well
as back office functions, Sec. 344.8; the reporting of personal
securities trading by certain bank officers and employees, Sec. 344.9.
The likely respondents/recordkeepers are state nonmember insured banks.
Estimated average annual burden hours per respondent/recordkeeper:
19.43 hours.
Estimated number of respondents and/or recordkeepers: 5,663 state
nonmember insured banks.
Estimated total annual reporting and recordkeeping burden: 109,818
hours.
Start-up costs to respondents: None.
Records under this part are to be maintained for at least three
years.
List of Subjects in 12 CFR Part 344
Banks, banking, Reporting and recordkeeping requirements,
Securities.
For the reasons set forth above, the FDIC hereby revises 12 CFR
part 344 to read as follows.
PART 344--RECORDKEEPING AND CONFIRMATION REQUIREMENTS FOR
SECURITIES TRANSACTIONS
Sec.
344.1 Purpose and scope.
344.2 Exceptions.
344.3 Definitions.
344.4 Recordkeeping.
344.5 Content and time of notification.
344.6 Notification by agreement; alternative forms and times of
notification.
344.7 Settlement of securities transactions.
344.8 Securities trading policies and procedures.
344.9 Personal securities trading reporting by bank officers and
employees.
344.10 Waivers.
Authority: 12 U.S.C. 1817, 1818 and 1819.
Sec. 344.1 Purpose and scope.
(a) Purpose. The purpose of this part is to ensure that purchasers
of securities in transactions effected by a state nonmember insured
bank (except a District bank) or a foreign bank having an insured
branch are provided adequate information regarding transactions. This
part is also designed to ensure that banks subject to this part
maintain adequate records and controls with respect to the securities
transactions they effect.
(b) Scope; general. Any security transaction effected for a
customer by a bank is subject to this part unless excepted by
Sec. 344.2. A bank effecting transactions in government securities is
subject to the notification, recordkeeping, and policies and procedures
requirements of this part. This part also applies to municipal
securities transactions by a 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.
Sec. 344.2 Exceptions.
(a) A bank effecting securities transactions for customers is not
subject to all or part of this part 344 to the extent that they qualify
for one or more of the following exceptions:
(1) Small number of transactions. The requirements of
Secs. 344.4(a) (2) through (4) and 344.8(a) (1) through (3) do not
apply to a bank effecting 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.
(2) Government securities. The recordkeeping requirements of
Sec. 344.4 do not apply to banks effecting fewer than 500 government
securities brokerage transactions per year. This exemption does not
apply to government securities dealer transactions by banks.
(3) Municipal securities. This part does not apply to transactions
in municipal securities effected by a 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.
(4) Foreign branches. Activities of foreign branches of a bank
shall not be subject to the requirements of this part.
(5) Transactions effected by registered broker/dealers. (i) This
part does not apply to securities transactions effected for a bank
customer by a registered broker/dealer if:
(A) The broker/dealer is fully disclosed to the bank customer; and
(B) The bank customer has a direct contractual agreement with the
broker/dealer.
(ii) This exemption extends to bank arrangements with broker/
dealers which involve bank employees when acting as employees of, and
subject to the supervision of, the registered broker/dealer when
soliciting, recommending, or effecting securities transactions.
(b) Safe and sound operations. Notwithstanding this section, every
bank effecting securities transactions for customers shall maintain,
directly or indirectly, effective systems of records and controls
regarding their customer securities transactions to ensure safe and
sound operations. The records and systems maintained must clearly and
accurately reflect the information required under this part and provide
an adequate basis for an audit.
Sec. 344.3 Definitions.
(a) Asset-backed security means a security that is serviced
primarily by the cash flows of a discrete pool of receivables or other
financial assets, either fixed or revolving, that by their terms
convert into cash within a finite time period plus any rights or other
assets designed to assure the servicing
[[Page 9920]]
or timely distribution of proceeds to the security holders.
(b) Bank means a state nonmember insured bank (except a District
bank) or a foreign bank having an insured branch.
(c) Cash management sweep account means a prearranged, automatic
transfer of funds above a certain dollar level from a deposit account
to purchase a security or securities, or any prearranged, automatic
redemption or sale of a security or securities when a deposit account
drops below a certain level with the proceeds being transferred into a
deposit account.
(d) Collective investment fund means funds held by a bank as
fiduciary and, consistent with local law, invested collectively:
(1) In a common trust fund maintained by such bank exclusively for
the collective investment and reinvestment of monies contributed
thereto by the bank in its capacity as trustee, executor,
administrator, guardian, or custodian under the Uniform Gifts to Minors
Act; or
(2) In a fund consisting solely of assets of retirement, pension,
profit sharing, stock bonus or similar trusts which are exempt from
Federal income taxation under the Internal Revenue Code (26 U.S.C.).
(e) Completion of the transaction means:
(1) For purchase transactions, the time when the customer pays the
bank any part of the purchase price (or the time when the bank makes
the book-entry for any part of the purchase price, if applicable),
however, if the customer pays for the security prior to the time
payment is requested or becomes due, then the transaction shall be
completed when the bank transfers the security into the account of the
customer; and
(2) For sale transactions, the time when the bank transfers the
security out of the account of the customer or, if the security is not
in the bank's custody, then the time when the security is delivered to
the bank, however, if the customer delivers the security to the bank
prior to the time delivery is requested or becomes due then the
transaction shall be completed when the bank makes payment into the
account of the customer.
(f) 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.
(g) Customer means any person or account, including any agency,
trust, estate, guardianship, or other fiduciary account for which a
bank effects or participates in effecting the purchase or sale of
securities, but does not include a broker, dealer, bank acting as a
broker or a dealer, issuer of the securities that are the subject of
the transaction or a person or account having a direct, contractual
agreement with a fully disclosed broker/dealer.
(h) 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; provided, however, that
securities issued by an investment company registered under the
Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq., shall not be
included in this definition.
(i) 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 (i) (1), (2), or (3) of this section other than
a put, call, straddle, option, or privilege that is traded on one or
more national securities exchanges, or for which quotations are
disseminated through an automated quotation system operated by a
registered securities association.
(j) 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.
(k) Municipal security means a security which 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, or any
municipal corporate instrumentality of one or more States or any
security which is an industrial development bond (as defined in 26
U.S.C. 103(c)(2)) the interest on which is excludable from gross income
under 26 U.S.C. 103(a)(1) if, by reason of the application of paragraph
(4) or (6) of 26 U.S.C. 103(c) (determined as if paragraphs (4)(A), (5)
and (7) were not included in 26 U.S.C. 103(c), paragraph (1) of 26
U.S.C. 103(c) does not apply to such security.
(l) Periodic plan means any written authorization for a 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. Periodic plans
include dividend reinvestment plans, automatic investment plans, and
employee stock purchase plans.
(m) Security 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. The
term security does not include:
(1) A deposit or share account in a federally or state insured
depository institution;
(2) A loan participation;
(3) A letter of credit or other form of bank indebtedness incurred
in the ordinary course of business;
(4) Currency;
(5) Any note, draft, bill of exchange, or bankers acceptance which
has a maturity at the time of issuance of not exceeding nine months,
exclusive of days of grace, or any renewal thereof the maturity of
which is likewise limited;
(6) Units of a collective investment fund;
(7) Interests in a variable amount (master) note of a borrower of
prime credit; or
(8) U.S. Savings Bonds.
[[Page 9921]]
Sec. 344.4 Recordkeeping.
(a) General rule. A 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) A separate memorandum (order ticket) of each order to purchase
or sell securities (whether executed or canceled), which shall include:
(i) The accounts for which the transaction was effected;
(ii) Whether the transaction was a market order, limit order, or
subject to special instructions;
(iii) The time the order was received by the trader or other bank
employee responsible for effecting the transaction;
(iv) The time the order was placed with the broker/dealer, or if
there was no broker/dealer, time the order was executed or canceled;
(v) The price at which the order was executed; and
(vi) 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. 344.5 and 344.6.
(b) Manner of maintenance. Records may be maintained in whatever
manner, form or format a bank deems appropriate, provided however, 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. Records may be maintained in hard copy, automated or
electronic form provided the records are easily retrievable, readily
available for inspection, and capable of being reproduced in a hard
copy. A bank may contract with third party service providers, including
broker/dealers, to maintain records required under this part.
Sec. 344.5 Content and time of notification.
Every bank effecting a securities transaction for a customer shall
give or send, by mail, facsimile or other means of electronic
transmission, to the customer at or before completion of the
transaction one of the types of written notification identified below:
(a) Broker/dealer's confirmations. (1) A copy of the confirmation
of a broker/dealer relating to the securities transaction. A bank may
either have the broker/dealer send the confirmation directly to the
bank's customer or send a copy of the broker/dealer's confirmation to
the customer upon receipt of the confirmation by the bank. If a bank
chooses to send a copy of the broker/dealer's confirmation, it must be
sent within one business day from the bank's receipt of the broker/
dealer's confirmation; and
(2) If the bank is to receive remuneration from the customer or any
other source in connection with the transaction, a statement of the
source and amount of any remuneration to be received if such would be
required under paragraph (b)(6) of this section; or
(b) Written notification. A written notification disclosing:
(1) Name of the bank;
(2) Name of the customer;
(3) Whether the bank is acting as agent for such customer, as agent
for both such customer and some other person, as principal for its own
account, or in any other capacity;
(4) The date and time of execution, or the fact that the time of
execution will be furnished 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) The amount of any remuneration received or to be received,
directly or indirectly, by any broker/dealer from such customer in
connection with the transaction;
(6)(i) The amount of any remuneration received or to be received by
the bank from the customer, and the source and amount of any other
remuneration received or to be received by the bank in connection with
the transaction, unless:
(A) Remuneration is determined pursuant to a prior written
agreement between the bank and the customer; or
(B) In the case of government securities and municipal securities,
the bank received the remuneration in other than an agency transaction;
or
(C) In the case of open end investment company securities, the bank
has provided the customer with a current prospectus which discloses all
current fees, loads and expenses at or before completion of the
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 (b)(6)(i) (A), (B), or (C) 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 broker/dealer utilized; or where there is no
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;
(8) In the case of a transaction in a debt security subject to
redemption before maturity, a statement to the effect that the debt
security may be redeemed in whole or in part before maturity, that the
redemption could affect the yield represented and that additional
information is available 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,
provided however, that this shall not apply to a transaction in a debt
security that either has a maturity date that may be extended by the
issuer thereof, with a variable interest payable thereon, or is an
asset-backed security that represents an interest in or is secured by a
pool of receivables or other financial assets that are subject
continuously 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,
[[Page 9922]]
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; provided however, that this
paragraph (b)(10) shall not apply to a transaction in a debt security
that either has a maturity date that may be extended by the issuer with
a variable interest rate payable thereon, or is an asset-backed
security that represents an interest in or is secured by a pool of
receivables or other financial assets that are subject continuously 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 are subject
continuously 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 of the fact 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.
Sec. 344.6 Notification by agreement; alternative forms and times of
notification.
A bank may elect to use the following alternative notification
procedures if the transaction is effected for:
(a) Notification by agreement. Accounts (except periodic plans)
where the bank does not exercise investment discretion and the bank and
the customer agree in writing to a different arrangement as to the time
and content of the written notification; provided however, that such
agreement makes clear the customer's right to receive the written
notification pursuant to Sec. 344.5 (a) or (b) at no additional cost to
the customer.
(b) Trust accounts. Accounts (except collective investment funds)
where the bank exercises investment discretion in other than in an
agency capacity, in which instance the bank shall, upon request of the
person having the power to terminate the account or, if there is no
such person, upon the request of any person holding a vested beneficial
interest in such account, give or send to such person the written
notification within a reasonable time. The bank may charge such person
a reasonable fee for providing this information.
(c) Agency accounts. Accounts where the bank exercises investment
discretion in an agency capacity, in which instance:
(1) The bank shall give or send to each customer not less
frequently than once every three months an itemized statement which
shall specify the funds and securities in the custody or possession of
the bank at the end of such period and all debits, credits and
transactions in the customer's accounts during such period; and
(2) If requested by the customer, the bank shall give or send to
each customer within a reasonable time the written notification
described in Sec. 344.5. The bank may charge a reasonable fee for
providing the information described in Sec. 344.5.
(d) Cash management sweep accounts. A bank effecting a securities
transaction for a cash management sweep account shall give or send its
customer a written statement, in the same form as required under
paragraph (f) of this section, for each month in which a purchase or
sale of a security takes place in the account and not less than once
every three months if there are no securities transactions in the
account. Notwithstanding the provisions of this paragraph (d), banks
that retain custody of government securities that are the subject of a
hold-in-custody repurchase agreement are subject to the requirements of
17 CFR 403.5(d).
(e) Collective investment fund accounts. The bank shall at least
annually give or send to the customer a copy of a financial report of
the fund, or provide notice that a copy of such report is available and
will be furnished upon request to each person to whom a regular
periodic accounting would ordinarily be rendered with respect to each
participating account. This report shall be based upon an audit made by
independent public accountants or internal auditors responsible only to
the board of directors of the bank.
(f) Periodic plan accounts. The bank shall give or send to the
customer not less than once every three months a written statement
showing:
(1) The funds and securities in the custody or possession of the
bank;
(2) All service charges and commissions paid by the customer in
connection with the transaction; and
(3) All other debits and credits of the customer's account involved
in the transaction; provided that upon written request of the customer,
the bank shall give or send the information described in Sec. 344.5,
except that any such information relating to remuneration paid in
connection with the transaction need not be provided to the customer
when the remuneration is paid by a source other than the customer. The
bank may charge a reasonable fee for providing information described in
Sec. 344.5.
Sec. 344.7 Settlement of securities transactions.
(a) A 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 shall 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; or
(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 shall 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 bank participating in the
offering. A 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.
[[Page 9923]]
(d) For purposes of paragraphs (a) and (c) of this section, the
parties to a contract shall be 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.
Sec. 344.8 Securities trading policies and procedures.
(a) Policies and procedures. Every bank effecting securities
transactions for customers shall establish written policies and
procedures providing:
(1) Assignment of responsibility for supervision of all officers or
employees who:
(i) Transmit orders to or place orders with broker/dealers; or
(ii) Execute transactions in securities for customers;
(2) Assignment of responsibility for supervision and reporting,
separate from those in paragraph (a)(1) of this section, with respect
to all officers or employees who process orders for notification or
settlement purposes, or perform other back office functions with
respect to securities transactions effected for customers;
(3) For the fair and equitable allocation of securities and prices
to accounts when orders for the same security are received at
approximately the same time and are placed for execution either
individually or in combination; and
(4) Where applicable, and where permissible under local law, for
the crossing of buy and sell orders on a fair and equitable basis to
the parties to the transaction.
Sec. 344.9 Personal securities trading reporting by bank officers and
employees.
(a) Officers and employees subject to reporting. Bank officers and
employees who:
(1) Make investment recommendations or decisions for the accounts
of customers;
(2) Participate in the determination of such recommendations or
decisions; or
(3) In connection with their duties, obtain information concerning
which securities are being purchased or sold or recommend such action,
must report to the bank, within ten business days after the end of the
calendar quarter, all transactions in securities made by them or on
their behalf, either at the bank or elsewhere in which they have a
beneficial interest. The report shall identify the securities purchased
or sold and indicate the dates of the transactions and whether the
transactions were purchases or sales.
(b) Exempt transactions. Excluded from this reporting requirement
are:
(1) Transactions for the benefit of the officer or employee over
which the officer or employee has no direct or indirect influence or
control;
(2) Transactions in registered investment company shares;
(3) Transactions in government securities; and
(4) All transactions involving in the aggregate $10,000 or less
during the calendar quarter.
(c) Alternative report. Where a bank acts as an investment adviser
to an investment company registered under the Investment Company Act of
1940, the bank's officers and employees may fulfill their reporting
requirement under paragraph (a) of this section by filing with the bank
the ``access persons'' personal securities trading report required by
(SEC) Rule 17j-1, 17 CFR 270.17j-1.
Sec. 344.10 Waivers.
The Board of Directors of the FDIC, in its discretion, may waive
for good cause all or any part of this part 344.
By Order of the Board of Directors.
Dated at Washington, D.C., this 25th day of February, 1997.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 97-5425 Filed 3-4-97; 8:45 am]
BILLING CODE 6714-01-P
