[Federal Register Volume 61, Number 102 (Friday, May 24, 1996)]
[Proposed Rules]
[Pages 26135-26140]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12928]
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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: Advance notice of proposed rulemaking.
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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is
considering whether and how to amend its regulations governing
recordkeeping and confirmation requirements for securities transactions
by state nonmember banks. The agency's present regulation was adopted
in 1979 and has remained essentially unchanged since that time. The
FDIC is undertaking a review of this regulation with the goal of
modernizing its requirements to, among other things, reflect the
supervisory role played by other Federal agencies charged with
supervision of securities transactions. The agency is soliciting
comment on a number of issues that have been identified. The responses
will be used to aid the FDIC in developing a proposed amendment for
public comment.
DATES: Comments must be received by June 24, 1996.
ADDRESSES: Comments should be directed to Jerry L. Langley, Executive
Secretary, Attention: Room F-402, Federal Deposit Insurance
Corporation, 550 17th Street, NW, Washington, DC 20429. Comments may be
delivered to room F-402, 1776 F Street, NW, Washington, DC 20429, on
business days between 8:30 am and 5:00 pm or sent by facsimile
transmission to FAX number 202/898-3838. Internet: [email protected]
Comments will be available for inspection and photocopying in the FDIC
Public Information Center, room 100, 801 17th Street, NW, Washington,
DC 20429, between 9:00 am and 5:00 pm on business days.
FOR FURTHER INFORMATION CONTACT: Curtis Vaughn, Examination Specialist,
Division of Supervision, (202) 898-6759; John Harvey, Review Examiner
(Trust), Division of Supervision (202) 898-6762; Patrick J. McCarty,
Counsel, Legal Division (202) 898-8708; or Gerald Gervino, Senior
Attorney, Legal Division (202) 898-3723. Federal Deposit Insurance
Corporation, 550 17th St., N.W., Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
Background
Section 303 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (CDRI Act)
The FDIC is conducting a systematic review of its regulations and
written policies. Section 303(a) of the CDRI Act (12 U.S.C. 4803(a))
requires that each Federal banking agency review its regulations to
streamline them to improve efficiency, reduce unnecessary costs and
eliminate unwarranted constraints on credit availability. 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. As part of the section 303 process,
the FDIC published in December of 1995 a notice in the Federal Register
describing the section 303 requirements and inviting the general public
and interested parties to comment on FDIC regulations and policy
statements. 60 FR 62345 (December 6, 1995).
On July 24, 1979 the FDIC and the other Federal banking agencies
promulgated regulations addressing recordkeeping and confirmation
requirements for securities transactions effected by banks. See 44 FR
43261 (July 24, 1979) (FDIC), 44 FR 43252 (July 24, 1979 (OCC) and 44
FR 43258 (July 24, 1979) (FRB). These regulations were, and are,
virtually identical. With the exception of two amendments, the FDIC's
part 344 has remained unchanged since it was promulgated in 1979. See
45 FR 12777 (February 27, 1980), 60 FR 7111 (February 7, 1995).
The FDIC wishes to review its recordkeeping and confirmation
requirements for securities transactions in part 344 with the purposes
of section 303 of the CDRI in mind. The Office of the Comptroller of
the Currency (OCC) and the Board of Governors of the Federal Reserve
System (FRB) have already proposed amendments to their regulations
concerning recordkeeping and confirmation requirements for securities
transactions by national and state member banks, respectively. See 60
FR 66517 (December 22, 1995) and 60 FR 66759 (December 26, 1995).
Before drafting and publishing a proposed regulation, the FDIC wishes
to receive public comment on several basic issues underlying the
purposes of part 344. The FDIC requests comments at this stage of
regulatory review to assist development of a specific proposal.
[[Page 26136]]
Summary of Concerns
Part 344 sets forth the recordkeeping and confirmation requirements
with respect to securities transactions effected for the customers of
state nonmember banks. State nonmember banks are required to keep four
types of records (1) Chronological records of original entry containing
an itemized daily record of all purchases and sales, (2) Account
records for each customer, (3) Separate order tickets for each
transaction, and (4) A record of all broker/dealers used and the
commissions paid. Section 344.3(a) through (d). Banks must keep these
records for at least three years. Section 344.3.
Part 344 addresses both the ``form'' and ``timing'' of notification
to customers for whom the bank has effected a securities transaction.
Sections 344.4 through 344.5. Banks may provide one of two different
types of notification forms to the customer. Both notification forms
are required to contain such basic information as the name of the
customer, the identity, price and number of shares or units of the
security purchased or sold by the customer, the source and amount of
any remuneration to be received by the broker/dealer and the bank
(unless such remuneration is determined by a prior written agreement
between the bank and the customer), and the name of the broker/dealer
used. Banks are again required to retain copies of the notification
form which is provided to customers for at least three years. Id.
As a general rule, banks are required to mail the notification form
to customers within five business days of the transaction. Section
344.5. If a broker/dealer is used, the bank has 5 business days from
the date of receipt of the broker/dealer's confirmation to mail
notification to the customer. Id. Banks are permitted, however, to use
alternate time of notification procedures depending upon the type of
account involved. Section 344.5(a) through (e). The time of
notification periods vary greatly from ``as promptly as possible''
after the transaction for periodic plans to annual statements for
collective investment funds. Section 344.5(e) and (d), respectively.
Part 344 also requires banks effecting securities transactions for
customers to establish written policies and procedures regarding
securities trading. Section 344.6 Such policies and procedures must
address supervision of officers and employees who place orders and
execute transactions, allocation of securities and prices to accounts
when orders are received at approximately the same time, the crossing
of buy/sell orders, and the reporting of personal securities
transactions by bank officers and employees who participate in or make
investment recommendations or decisions for customer accounts.
The purpose of the FDIC implementing recordkeeping and confirmation
requirements for securities transactions is to ensure that purchasers
of securities in transactions effected by an insured nonmember bank are
provided adequate information concerning the transactions. The
regulations also are designed to ensure that insured nonmember banks
maintain adequate records and controls with respect to securities
transactions for their customers.
As the financial marketplace has grown, new delivery systems for
bank customer's securities transactions have emerged. This array of
delivery systems has led to the overlap of jurisdiction between the
Federal banking agencies and the Federal securities regulators. The
FDIC supports minimizing overlapping jurisdiction through a concept
referred to as ``functional regulation''. In order for functional
regulation to work properly, it is important that securities
transactions do not go unregulated and leave customers unprotected. As
currently written, part 344 overlaps existing securities regulation in
certain areas. Although this overlap ensures that securities
transactions for bank customers are adequately covered in relation to
confirmation and recordkeeping requirements, it can create a
competitive imbalance for banks, create customer confusion, regulatory
uncertainty and additional costs to banks.
Delivery Systems
There are a variety of ways in which banks play a role in
delivering securities brokerage services to their customers. Customers
of banks may engage in securities transactions by either dealing
directly with the bank or by dealing with a third party who has
contracted with the bank to conduct securities transactions for, or
through, the bank. Third parties may operate on bank premises using
their own employees, or use persons who are dual employees of the bank
and the third party. Third party providers may operate both on and off
the bank's premises with the bank receiving remuneration for
transactions originating from the bank. Other third party providers
operate solely off bank premises. The bank may or may not receive
remuneration for referring customers to the provider.
Categories of third party providers also vary by whether or not the
provider is affiliated with the bank and the type of affiliation. Third
party providers may be owned by the bank, while in other situations the
bank and third party provider are commonly owned or have common
officers or directors. In other cases, the bank may be an advisor to a
mutual fund sponsored by a third party.
Within the bank itself, the institution may be engaged in retail
recommendation and sale of securities, or the bank may be engaging in
accommodation transactions only for customers of the bank. A limited
number of banks operate municipal and government securities dealer
departments separately registered under government securities
regulations or regulations of the Municipal Securities Rulemaking Board
(MSRB). Where there is sufficient demand, banks may engage in private
banking for their higher income customers. In areas where capital
markets are not well established, banks may engage in the sale of their
own stock or the stock of their affiliates.
Historically banks have been most commonly involved in securities
transactions through their Trust Departments. These transactions occur
both when the bank has some fiduciary responsibility and when the bank
is acting as an agent or custodian. A bank may have no investment
discretion, partial investment discretion or full investment discretion
over its trust accounts. Trust Departments often sponsor collective
investment funds for their customers. They may also act as the
customers' agent under a periodic investment plan, such as a stock-
purchase plan or a dividend reinvestment plan. Each situation presents
different customer needs relative to confirmation and recordkeeping
requirements related to securities transactions.
Request for Comment
The FDIC is seeking comment from interested parties concerning the
applicability of part 344 to securities transactions conducted under
each of these delivery systems. Specifically, if the transactions under
a specific delivery system are covered by another regulatory system,
what coverage should an FDIC regulation provide, if any? Additionally,
the FDIC seeks comment on whether other delivery systems, i.e.,
dedicated phone lines to broker/dealers and mutual fund complexes, or
internet sites, should be considered in deciding on the scope of
coverage of part 344. Commenters are asked to identify types of
securities transactions which by their unique characteristics should be
[[Page 26137]]
exempted, either completely or in part, from the requirements of part
344. The OCC and FRB proposals do not approach the delivery systems and
regulatory coverage issues in the same manner as the FDIC.
Effecting a Transaction
The recordkeeping and confirmation requirements of part 344 are
generally triggered when a bank effects a securities transaction on
behalf of a customer. The regulation does not define the term
``effecting a securities transaction''. The term was borrowed from the
Federal Securities laws, where it is quite common but also not defined.
See Securities and Exchange Act of 1934, 15 U.S.C. 78o(a)(1), (c)(1)(A)
through (B), Government Securities Act, 15 U.S.C. 78o-5(a)(1)(B)(i),
(a)(4) and (b)(1), and SEC Rule 10b-10(a), 12 CFR 240.10b-10(a). The
FDIC has taken a broad view of the term to include not only those
situations in which securities transactions are effected by bank
employees but also those situations in which third parties who are
located on bank premises conduct the transactions for the bank and the
bank receives transaction based compensation in connection with the
transactions. This is so even if the transaction takes place off bank
premises. The FDIC is considering various alternatives in defining the
term ``effecting a securities transaction'' and seeks comment as to how
the term should be defined. If securities transactions are conducted by
third parties, should such transactions be excluded from the
definition? If so, how should such exclusion/exemption be drawn? If
specific bank activities or certain types of delivery systems should be
exempted from the definition, what factors should be considered in
determining which bank activities and delivery systems should be
exempted? The OCC and FRB proposals do not address the definition or
scope of the term ``effecting a securities transaction'' issue.
Retail Sales Through Trust Departments
As noted above, historically banks have been involved in securities
activities through their Trust Departments. Trust Departments have
accounting systems, internal controls and investment expertise with
respect to securities transactions due to their investment management
activities for trust clients. Banks may, however, be directing
customers with retail securities transactions to their Trust
Departments, even though such customers have no formal trust agreement
with the bank. The FDIC specifically requests comment on whether this
situation is commonplace in the industry and to what extent the
requirements of part 344 should apply to such retail securities
transactions for nontrust customers. The OCC and FRB proposals do not
specifically address the retail sales through bank Trust Department
issue.
Disclosure of the Source and Amount of Remuneration
Members of the public, including bank customers, normally pay
commissions or sales loads when buying or selling securities through a
registered broker/dealer which has no association with a bank. The
securities transactions effected by the bank may be somewhat different
in that the bank may share in that commission or load or the bank may
charge a fee in addition to the usual commission or load. In order to
make this difference clear to those customers who purchase or sell
securities through their bank, part 344 requires that the bank disclose
the source and amount of its remuneration. The regulation does not
distinguish between those commissions or loads which the bank shares
with another party (but the total cost to the customers remains the
same) and fees which may be added by the bank to those commissions or
loads.
As banks have become more heavily involved in effecting securities
transactions for their customers, it has come to the FDIC's attention
that there are practical problems concerning the timely disclosure of
the source and amount of the bank's remuneration. Many insured
nonmember banks have entered into what are commonly known as
``networking agreements'' with registered broker/dealers. Under these
agreements the broker/dealer typically leases space on the bank's
premises to sell securities. In some instances banks receive a fixed
monthly payment plus a portion of the commissions which varies
depending upon the volume of sales over a given period. The result is
that in some situations banks are unable to determine and disclose the
total amount of their remuneration within the general 5 business day
time frame provided for under Sec. 344.5.
On March 21, 1995, the FDIC Board of Directors granted a limited
waiver of the remuneration disclosure requirement contained in
Sec. 344.4 based on the timing problem identified above. The waiver
extends to any insured state nonmember bank which receives transaction-
based compensation on a regular basis with respect to securities
transactions effected for customers. The waiver is subject to the
provisos that (1) no additional fees are added by the bank other than
those described in the prospectus (if the securities are sold under a
prospectus); (2) the sale is made by a registered broker/dealer subject
to rules and supervision of the National Association of Securities
Dealers (NASD) and the Securities and Exchange Commission (SEC); and
(3) the sale is conducted in a fashion which meets the requirements of
the NASD and SEC. The waiver does not relieve banks of the obligation
to disclose the source of their remuneration. Nor does the waiver apply
in the case of (1) services provided in a fiduciary capacity, or (2)
services for which a flat fee has been paid which includes securities
brokerage.
At the time the waiver was granted, the FDIC committed to working
with the other Federal banking agencies to find an acceptable solution
to the timing of the remuneration disclosure problem. The FDIC's
current waiver differs from the position reflected in the OCC's
proposal in that the FDIC continues to require that banks disclose the
source of their remuneration and that the FDIC waiver extends to all
securities transactions and not just to mutual fund transactions.
In attempting to keep customers who purchase securities on the
premises of a bank informed of potential conflicts of interest, the
FDIC has taken the position that the customer should be aware of the
fact that the bank has a financial interest in the transaction. Thus,
the FDIC has concluded that in all cases, the source of the
remuneration should be disclosed. The timing of that disclosure may be
important in determining how much burden this requirement places on the
bank.
We note that the SEC's position regarding the disclosure of the
source and amount of remuneration is much more limited than that under
which the FDIC is currently operating. Pursuant to SEC Rule 10b-10,
broker/dealers are required to disclose the source and amount of
remuneration at or before completion of a transaction only when the
broker/dealer is (1) participating in the distribution of a securities
issuance or (2) participating in a tender offer. See 17 CFR 240.10b-
10(a)(7)(iv). Otherwise, the broker/dealer is required to provide only
a notice which states that the source and amount of other remuneration
will be furnished ``upon the written request of the customer.'' Id.
With respect to the sale of mutual funds, the SEC is considering
changing a long standing no action position on the broker/dealer
disclosure of source and remuneration. See Investment Company
Institute, SEC No-Action Letter, 1994 WL 131068 (S.E.C.) (March 16,
1994).
[[Page 26138]]
Since 1979 the SEC's position has been that a broker/dealer does not
need to disclose on confirmations the source and amount of remuneration
received on the sale of open end management company shares if a
prospectus with current fees, loads and expenses is provided to the
customer. See Investment Company Institute, SEC No-Action Letter,
[1979] Fed. Sec. L. Rep. (CCH) P82,041 (Mar. 19, 1979). Should the SEC
change its position, broker/dealers would be required to provide
confirmations which disclose both the source and amount of remuneration
received on confirmations rather than relying upon the disclosure
provided in the prospectus.
The FDIC specifically requests comments concerning the need for
disclosure of the source of remuneration and, if necessary, when that
disclosure should be made. In addition, the FDIC requests comment on
the circumstances under which a bank should disclose the amount of the
remuneration and, if necessary, the timing of these disclosures. If
disclosures concerning the amount of remuneration are made, should
there be a differentiation concerning disclosure of the bank's portion
of loads and commissions normally charged and those fees which may be
charged in excess of normal commissions and loads? If FDIC mandated
disclosures are necessary, how should these disclosures interrelate
with similar disclosures required under the Federal Securities laws?
The OCC and FRB proposals do not address all of the issues raised
herein.
Definition of Security
In part 344, the term ``security'' is defined in order to determine
the scope of the regulation's coverage. Section 344.2(e). The
definition is crafted specifically for the purposes of this regulation
and does not mirror the definition of ``security'' in the Federal
Securities laws. Specifically, there are eight exemptions to the
definition of ``security'':
(1) A deposit or share account in a federally 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; and
(8) U.S. Savings Bonds.
The FDIC specifically requests comment on the adequacy of the
definition of the term ``security'' currently used in part 344 and if
there are other exceptions which should be made to the definition.
Comment is invited concerning the practicability of using the
definition of ``security'' which is used in the Securities Exchange Act
of 1934, 15 U.S.C. 78c(a)(10).
Other Definitions
The OCC and FRB proposals add definitions of ``asset-backed
security'', ``completion of the transaction'', ``crossing of buy and
sell orders'', ``debt security'', ``government security'' and
``municipal security'' to their respective regulations. The new
definitions are based on definitions contained in the Federal
Securities laws and the SEC's confirmation rule, Rule 10b-10, 17 CFR
240.10b-10, and are necessary for applying the proposed confirmation
disclosure and three day settlement requirements. Rule 15c6-1, 17 CFR
240.15c6-1. The definitions of the above terms contained in the OCC and
FRB proposals are:
``Asset-backed security'' shall mean a security that is serviced
primarily by the cash flows of a discrete pool of receivables or other
financial assets, either fixed or revolving, that by their terms
convert into cash within a finite time period plus any rights or other
assets designed to assure the servicing or timely distribution of
proceeds to the security holders.
``Completion of the transaction effected by or through a bank''
shall mean:
(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.
``Crossing of buy and sell orders'' shall mean a security
transaction in which the same banks acts as agent for both the buyer
and the seller.
``Debt security'' shall mean any security, such as a bond,
debenture, note or any other similar instrument which evidences a
liability of the issuer (including any security of this type that is
convertible into stock or similar security) and fractional or
participation interests in one or more of any of the foregoing;
provided, however, that securities issued by an investment company
registered under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et
seq., shall not be included in this definition.
``Government security'' shall mean:
(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 SEC; or
(4) Any put, call, straddle, option, or privilege on a security as
described in paragraph (1), (2), or (3) of this definition 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.
``Municipal security'' shall mean a security which is a direct
obligation of, or obligation guaranteed as to principal or interest
by a State or any political subdivision thereof, or any agency or
instrumentality of a State or any political subdivision thereof, or
any municipal corporate instrumentality of one or more States, or
any security which is an industrial development bond.
The FDIC is considering using identical definitions in revising
part 344 and requests comment concerning these definitions.
Specifically, the FDIC wishes to know if these definitions should be
expanded in any manner or if they exclude transactions which should be
covered by the scope of the definition. The FDIC proposal is consistent
with the OCC and FRB proposals on the new definitions.
[[Page 26139]]
Exceptions
Under the current regulation, certain requirements concerning
recordkeeping and securities trading policies and procedures do not
apply to banks having an average of less than 200 securities
transactions per calendar year for customers over the prior three-
calendar-year period, exclusive of transactions in U.S. Government and
Federal agency obligations. Section 344.7(a). The FDIC specifically
requests comment concerning the continued appropriateness of this
exemption and whether the current 200 transaction limit should be
raised, and if so, what transaction or dollar limit should be adopted.
Commenters are requested to address whether any increase in the
threshold would (1) result in any material diminution in the
protections to investors, and (2) how the applicability of and
compliance with the Department of Treasury's Government Securities
Dealer regulations would be affected. The OCC and FRB proposals do not
address all the Government Securities trading issues raised herein.
Since part 344 was originally implemented, regulation of government
securities has changed as a result of the enactment of the Government
Securities Act of 1986 (Government Securities Act). 15 U.S.C. 78o-5.
Under this statute, the Department of the Treasury has authority over
government securities transactions (including United States Treasury
securities and securities issued or guaranteed by Federal government
agencies and government-sponsored enterprises). State nonmember banks
which are government securities brokers and dealers are not required to
follow certain recordkeeping requirements established by the Department
of the Treasury regulations because they are subject to part 344.
Consistent with the requirements of the Government Securities Act,
state nonmember banks that conduct fewer than 500 government securities
brokerage transactions per year would not have to comply with certain
recordkeeping requirements of part 344 if the exemption contained in
the Government Securities Act is carried over to the FDIC's regulation.
See 17 CFR 401.3(a). The FDIC specifically requests comment if there is
a need to adopt this exemption in its regulations. The FDIC proposal is
consistent with the OCC and FRB proposals on this issue.
Safe and Sound Operations
As noted above, both the FRB and the OCC have issued proposed
amendments to their regulations relating to recordkeeping and
confirmation requirements for securities transactions. Those proposed
amendments include a provision concerning safe and sound operations.
See proposed Sec. 208.24(h) of the FRB's regulations and
Sec. 12.1(c)(3) of the OCC's regulations. The provisions would require
that a bank maintain effective systems of records and controls
regarding customer securities transactions that reflect accurate
information and are sufficient to provide an adequate basis for an
audit of the information. The provisions are intended to emphasize the
importance of effective internal controls with respect to all
securities transactions. The FDIC requests comment on the desirability
of adding this type of provision to its regulation.
Settlement of Securities Transactions
In October 1993, the SEC adopted a securities settlement rule,
effective June 7, 1995, requiring the payment of funds and delivery of
most securities by the third business day after the date of the
contract (T+3). Rule 15c6-1, 17 CFR 240.15c6-1. Many banks effecting
customer securities transactions use a clearing broker which would be
subject to the T+3 rule. In these situations securities transactions
for bank customers would routinely settle within three days. However,
some banks may clear and settle their securities trades directly. For
this reason, the FDIC is considering revising part 344 to include a
separate T+3 settlement requirement that tracks the language of the
SEC's securities settlement rule. Alternatively, the FDIC could cross-
reference the language of the SEC rule.
The FDIC seeks comment on the need for and the effect of adopting
the T+3 securities settlement requirement and specifically invites
comment on the feasibility of alternate approaches to implement the T+3
settlement cycle. The FDIC's position is consistent with the OCC and
FRB proposals on this issue.
Securities Transactions for Banks
The FDIC seeks comment on how part 344 affects small banks which
use the services of other banks to buy and sell securities for their
own account. Small banks are active buyers and sellers of U.S.
Government and Municipal securities for their own accounts. It is not
clear what effect, if any, part 344's recordkeeping, disclosure and
settlement requirements have had on the banks which are the securities
customers of other banks. The FDIC solicits comments from the banks
which are consumers of other bank's securities services on what
concerns they have and what improvements can be made to part 344. The
OCC and FRB proposals do not address the bank as customer issues raised
herein.
Sweep Accounts and Confirmations
It has now become commonplace for banks to offer ``sweep accounts''
to retail, commercial and trust customers. These ``sweep accounts'' are
cash management services which permit customers to earn interest on
otherwise idle cash balances. Sweep accounts automatically ``sweep''
excess cash out of a checking or non interest bearing deposit account
into a money market mutual fund as frequently as every day after the
close of business at the bank. The ``sweep'' is triggered by the amount
of cash in the deposit account, which can be set by the depositor. The
``sweep'' may also be reversed so that shares in the money market
mutual fund are redeemed and cash is deposited into the checking or non
interest bearing account at certain times or when certain dollar limits
are reached. Banks receive a fee for the ``sweep'' service.
The FDIC notes that ``sweep accounts'' bear some similarities to
``periodic plans,'' which is a defined term under part 344. See
Sec. 344.1(d). Under the current part 344, banks which are effecting
securities transactions under periodic plans are required to provide
confirmations to customers ``as promptly as possible after each
transaction. * * * `` See Sec. 344.5(e). The SEC permits broker/
dealers, under certain conditions, to send confirmations for sweep
transactions out of brokerage accounts into money market mutual funds
to be provided on a quarterly basis. See 12 CFR Sec. 240.10b-10(b). The
OCC and FRB have proposed amending their regulations to permit banks to
provide confirmations for periodic plan transactions on a quarterly
basis. The FDIC supports such a change, as it will reduce regulatory
burden for banks and will harmonize securities and banking regulation.
The FDIC requests comment on whether the definition of ``periodic
plans'' in part 344 needs to be revised to specifically include ``sweep
accounts'' or whether the term and activity is sufficiently distinct to
warrant its own definition. In addition, the FDIC solicits comment
regarding whether all ``sweep accounts'' should receive such treatment
or just ``sweep accounts'' which invest in certain types of securities,
e.g., money market mutual funds, and under certain conditions, e.g., no
sales commission is charged for either purchases or sales. The FDIC
also requests comment on whether ``sweep
[[Page 26140]]
accounts'' raise any issues peculiar to bank Trust Departments. The OCC
and FRB proposals do not specifically address the ``sweep account''
issues identified herein.
Reporting of Personal Trading
Part 344 currently requires certain bank officers and bank
employees engaged in or aware of the investment decisions or
recommendations for customer accounts to provide quarterly reports
regarding their personal trading of securities. Section 344.6(d). The
regulation does not require reporting of personal trading where the
securities transactions aggregate $10,000 or less during the calendar
quarter. The SEC has a similar reporting requirement for principal
underwriters and investment advisers of registered investment companies
under the Investment Company Act of 1940. See SEC Rule 17j-1, 12 CFR
270.17j-1. The SEC Rule does not provide an exemption for securities
transactions involving in the aggregate $10,000 or less. The FDIC
requests comments on whether the exemption from reporting personal
trading by bank officers and employees engaged in or aware of the
investment decisions or recommendations for customer accounts in
section 344.6(d) is appropriate. Additionally, the FDIC requests
comment on whether all bank directors, as opposed to just those bank
directors who are also officers or employees of the bank, should be
required to report on their personal trading. The OCC and FRB proposals
do not address the personal trading issues raised herein.
Additional Comment
The FDIC is interested in receiving any additional comments
regarding part 344 which the public feels should be taken into account
as the agency undertakes to modernize the regulation.
By Order of the Board of Directors.
Dated at Washington, DC, this 14th day of May, 1996.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 96-12928 Filed 5-23-96; 8:45 am]
BILLING CODE 6714-01-P
