[Federal Register Volume 61, Number 251 (Monday, December 30, 1996)]
[Proposed Rules]
[Pages 68824-68839]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32326]
[[Page 68823]]
_______________________________________________________________________
Part II
Department of the Treasury
Comptroller of the Currency
12 CFR Part 12
Federal Reserve System
12 CFR Parts 208 and 211
Federal Deposit Insurance Corporation
12 CFR Part 342
_______________________________________________________________________
Qualification Requirements for Transactions in Certain Securities,
Proposed Rule and Proposed Information Collection Comment Request;
Notice
Federal Register / Vol. 61, No. 251 / Monday, December 30, 1996 /
Proposed Rules
[[Page 68824]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 12
[Docket No. 96-29]
RIN 1557-AB42
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 211
[Docket No. R-0950]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 342
RIN 3064-AB85
Qualification Requirements for Transactions in Certain Securities
AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; Federal Deposit Insurance
Corporation.
ACTION: Joint notice of proposed rulemaking.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of
Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (banking agencies) propose to
adopt a qualification regulation for those banks that engage in bank-
direct retail sales or recommendations of certain securities through
their employees. Because banks are not required to register as a
broker-dealer under the Securities Exchange Act of 1934, as amended, 15
U.S.C. 78 et seq. (Securities Exchange Act), the proposed regulation
establishes requirements for banks and bank securities representatives
that are consistent with the professional qualification requirements
for broker-dealers and registered representatives under the Securities
Exchange Act and rules thereunder and the rules of the securities self
regulatory organizations (SSROs). The banking agencies invite comment
on all aspects of the proposal as well as on the specific issues
identified in the ``Section-by-Section Summary and Request for
Comment.''
In a separate document published elsewhere in this separate part of
the Federal Register as a companion Notice of Forms, the banking
agencies are proposing to adopt four forms to be used in connection
with the regulation: Form SB (Uniform Notice for Sponsoring Bank), Form
SBW (Uniform Notice for Sponsoring Bank Withdrawal), Form U-4B (Uniform
Application for Bank Securities Representative Registration or
Transfer), and Form U-5B (Uniform Termination Notice for Bank
Securities Representative Registration). The proposed forms are based
on the uniform forms used in the securities industry for broker-dealers
and their registered representatives. The use of these proposed forms,
along with this proposed regulation, will promote the safe and sound
operation of bank retail securities sales programs and customer
protection by standardizing the qualification requirements of bank
personnel engaged in the retail sale of certain securities.
DATES: Comments on the proposed regulation must be received by February
28, 1997.
ADDRESSES: Comments should be directed to:
OCC: Communications Division, Office of the Comptroller of the
Currency, 250 E Street, S.W., Washington DC 20219, Attention: Docket
No. 96-29. Comments will be available for public inspection and
photocopying at the same location. In addition, comments may be sent by
facsimile transmission to FAX number (202) 874-5274 or by Internet mail
to [email protected]
Board: William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th and Constitution Avenue, N.W., Washington,
D.C. 20551, Attention: Docket No. R-0950, or delivered to room B-2222
of the Eccles Building between 8:45 a.m. and 5:15 p.m. Comments may be
inspected in room MP-500 between 9:00 a.m. and 5:00 p.m. weekdays,
except as provided in Sec. 261.8 of the Board of Governors' rules
regarding availability of information, 12 CFR 261.8.
FDIC: Jerry L. Langley, Executive Secretary, Attention: Room F-402,
Federal Deposit Insurance Corporation, 550 17th Street, N.W.,
Washington, D.C. 20429. Comments may be hand delivered to Room F-402,
1776 F Street, N.W., Washington, DC 20429, on business days between
8:30 a.m. and 5:00 p.m. or transmitted by fax or the internet. The
FDIC's fax number is (202) 898-3838 and its Internet address is:
[email protected] Comments will be available for inspection and
photocopying in Room 100, 801 17th Street, NW, Washington, DC between
9:00 a.m. and 5:00 p.m. on business days.
FOR FURTHER INFORMATION CONTACT:
OCC: Joseph W. Malott, Examiner, Capital Markets (202) 874-5070,
and Joel Miller, Senior Attorney, Securities and Corporate Practices
(202) 874-5210.
Board: Howard Amer, Assistant Director, Division of Banking
Supervision and Regulation (202) 452-2958, and Angela Desmond, Senior
Counsel, Division of Banking Supervision and Regulation (202) 452-3497.
FDIC: William A. Stark, Assistant Director, Division of
Supervision, (202) 898-6972; Lisa D. Arquette, Senior Capital Markets
Specialist, Division of Supervision, (202) 898-8633; Ann Hume Loikow,
Counsel, Regulations and Legislation Section, Legal Division, (202)
898-3796; and Patrick J. McCarty, Counsel, Regulations and Legislation
Section, Legal Division, (202) 898-8708.
SUPPLEMENTARY INFORMATION:
Background
In recent years, sales of securities and other nondeposit
investment products on bank premises have increased as banks have made
these products available to retail customers either directly as brokers
1 or through third parties. As this business has evolved, both the
banking agencies and the banking industry have identified the need for
banks to manage the reputational and legal risks to banks that could
result from customer confusion, to disclose that these investment
products are not guaranteed by the bank or insured by the FDIC, and to
ensure that banks are aware of the application of the antifraud
provisions of the Federal securities laws if material misstatements or
omissions occur in connection with sales of securities on bank
premises. These concerns arise whether the bank is selling directly to
customers or whether SEC-regulated broker-dealers are selling on bank
premises.2
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\1\ Banks specifically are excluded from the definition of
``broker'' in section 3(a)(4) of the Securities Exchange Act, 15
U.S.C. 78c(a)(4), and may engage in brokerage transactions without
having to register with the Securities and Exchange Commission
(SEC).
\2\ It is estimated that approximately 87 percent of all sales
of securities on bank premises are effected by SEC-regulated broker-
dealers. See U.S. General Accounting Office, Report to Congressional
Requesters: Bank Mutual Funds Sales Practices and Regulatory Issues
GAO/GGD-95-210, at p. 52 (September 1995); U.S. General Accounting
Office, Report to Congressional Requesters: Banks' Securities
Activities--Oversight Differs Depending on Activity and Regulator,
GAO/GGD-95-214, at p. 25 (September 1995).
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To address these needs, in 1994, the banking agencies and the
Office of Thrift Supervision issued the Interagency Statement on Retail
Sales of Nondeposit Investment Products (Interagency Statement), which
sets forth guidelines for conducting sales of nondeposit investment
products, consistent with principles of safety and
[[Page 68825]]
soundness and customer protection.3 Among other things, the
Interagency Statement provides that banks that engage in the retail
recommendation or sale of securities should provide sales personnel
with training that is the substantive equivalent of that provided to
their securities industry counterparts.
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\3\ 5 Fed. Bnkg. L. Rep. (CCH) PP 70-001, et seq.; Federal
Reserve Supervisory Letter, SR 94-11(FIS) (February 17, 1994);
Federal Reserve Supervisory Letter, 95-46 (SPE) (September 14,
1995), interpreting the Interagency Statement; OCC Bulletin 94-13
(Nondeposit Investment Sales Examination Procedures) (February 24,
1994); OCC Bulletin 95-52 (Clarification of Interagency Guidelines)
(September 22, 1995); FDIC Financial Institutions Letter 9-94
(February 17, 1994); and FDIC Financial Institutions Letter 61-95
(September 13, 1995).
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Since adoption of the Interagency Statement, industry participants
have commented that it is difficult to measure their compliance with
the equivalent training requirement when there are no objective
measures of a bank salesperson's training comparable to that provided
by the securities industry professional qualifications examinations for
broker-dealer sales personnel. To address this issue, the banking
agencies approached the SSROs that own the examinations that pertain to
the sale of mutual funds 4 and general securities products 5
and requested that the SSROs make the Investment Company/Variable
Contracts Products Limited Representative Qualification Examination
(Series 6 Examination) and the General Securities Registered
Representative Examination (Series 7 Examination) available to bank
personnel. The SSROs agreed on the condition that the banking agencies
adopt regulations establishing registration and qualification
requirements analogous to those applicable to the securities industry.
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\4\ The National Association of Securities Dealers, Inc. (NASD).
\5\ The NASD, New York Stock Exchange, Inc. (NYSE), and
Municipal Securities Rulemaking Board (MSRB).
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Adoption of a qualifications regulation for banks and their
employees who 2make retail solicitations, recommendations, purchases,
or sales of securities will provide a number of benefits in addition to
ensuring compliance with the equivalent training requirements of the
Interagency Statement. The regulation will ensure that bank sales
representatives have adequate product and regulatory knowledge
pertaining to those securities being recommended and sold at the retail
level. This will promote the safe and sound operation of bank-
sponsored sales programs and enhance customer protection. The
regulation also will enhance the banking agencies' ability to identify
and restrict individuals who are subject to a statutory
disqualification and therefore not qualified under the securities laws
from soliciting, recommending, purchasing, or selling securities at the
retail level on behalf of banks.
Moreover, adoption of the proposed qualification requirements is
likely to facilitate individuals seeking to move between banks and
broker-dealers without losing their qualifications to sell certain
securities in either industry.6 This would create additional
efficiencies for banks and securities firms and opportunities for their
employees.
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\6\ Under current SSRO rules, a bank securities representative
seeking to move to a broker-dealer must request a waiver from the
examination requirements from his or her designated SSRO. To the
extent a bank securities representative seeks to engage in the
recommendation or sale of municipal securities, the MSRB's 90-day
apprenticeship requirement applies. See MSRB Rule G-3(a)(iii). To
the extent a bank securities representative seeks to become a
candidate for registration with an exchange, a training requirement
may be required. See, e.g., NYSE Rule 345.15(2).
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Accordingly, the banking agencies propose to adopt qualification
regulations that establish filing requirements for banks and
registration, testing, and continuing education requirements for bank
securities representatives that are analogous to the professional
qualification requirements for broker-dealers under the Securities
Exchange Act, and rules thereunder, and the rules of the SSROs. Any
filing required to be made to a banking agency will be made at the
NASD, which will maintain all information in its Central Registration
Depository (CRD), the national/state computer-based registry for
broker-dealers and securities personnel.
The proposed use of securities industry qualification examinations
and continuing education materials will not alter the statutory scheme
for banks or their brokerage activities. No SSRO, including the NASD,
obtains jurisdiction over any sponsoring bank or bank securities
representative as a result of the proposed rule or the submission of
filings to the appropriate Federal banking agency at the NASD. Legal
and supervisory authority over banks remains vested exclusively with
the appropriate Federal banking agency.
Authority to Issue Regulation
This rulemaking is authorized pursuant to the banking agencies'
statutory authority under section 8 of the Federal Deposit Insurance
Act (FDIA), 12 U.S.C. 1818, to prevent unsafe and unsound practices by,
and to adopt regulations defining safe and sound practices for, banks
under their respective jurisdictions.7 In addition, the banking
agencies have the authority to prescribe specific operational and
managerial standards, as deemed appropriate, pursuant to section 39p-
1(a)(2) of the FDIA, 12 U.S.C. 831p-1(a)(2).
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\7\ Independent Bankers Association v. Heimann, 613 F.2d 1164,
1168-69 (D.C. Cir. 1979), cert. denied, 449 U.S. 823; see also
National Petroleum Refiners Assoc. v. FTC, 482 F.2d 672, 680-81
(D.C. Cir. 1973), cert. denied, 415 U.S. 951 (1973).
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Section-by-Section Summary and Request for Comment
Definitions
Appropriate Qualification Examination.
The proposal defines ``appropriate qualification examination'' as
the Series 6 Examination or the Series 7 Examination, both of which are
administered by the NASD.
The Series 6 Examination is the appropriate qualification
examination for a bank employee engaged solely in covered transactions
of open-end investment company shares, original distribution closed-end
investment company shares, unit investment trusts, or variable
contracts, including variable life insurance contracts and variable
annuity contracts. The Series 7 Examination is the appropriate
examination for a bank securities representative who effects
transactions in other securities, such as equities and corporate bonds,
in addition to the products covered by the Series 6 Examination. A
person who passes the Series 7 Examination need not pass the Series 6
Examination.
Bank
The proposal defines ``bank'' as each institution regulated by the
banking agencies, respectively, but does not include affiliates,
subsidiaries, or foreign branches of such institutions. (``Foreign
branches'' located in any Territory of the United States, Puerto Rico,
Guam, American Samoa, the Trust Territory of the Pacific Islands, or
the Virgin Islands, however, are included in the definition of
``bank.'') Bank subsidiaries and affiliates engaged in securities sales
are already registered with the SEC and are subject to the rules and
requirements of the SEC and SSROs.
Bank Securities Representative
The proposal defines ``bank securities representative'' as any bank
officer, director, or employee (collectively, employee) who engages in
covered transactions or is designated as the supervisor of a bank
employee engaged
[[Page 68826]]
in covered transactions. Each employee seeking to qualify as a bank
securities representative must be sponsored by his or her employing
bank. A sponsoring bank must file proposed Form U-4B on behalf of its
employees. The Form U-4B includes an application for a bank employee to
take either the Series 6 or Series 7 Examination.
Under the section captioned ``Optional Designation as a Bank
Securities Representative,'' a bank also may choose to have legal,
compliance, and audit personnel take a qualification examination. Even
though those individuals are not engaged in retail sales or
recommendations of securities, for purposes of this regulation, they
will be deemed to be bank securities representatives if they pass a
qualification examination and will be required to comply with all the
other provisions of the regulation to maintain their registration.
Continuing Education
The proposal defines ``continuing education'' as the course of
study specified in the section captioned ``Continuing Education and
Training Requirements.'' These requirements correspond to SSRO
continuing education requirements applicable to registered
representatives.
Covered Product
The proposal defines ``covered product'' as having the same meaning
as ``security'' as defined at section 3(a)(10) of the Securities
Exchange Act, 15 U.S.C. 78c(a)(10). The definition specifically
excludes a government security as defined at section 3(a)(42) of the
Securities Exchange Act, 15 U.S.C. 78c(a)(42), because the government
securities markets already are subject to a comprehensive statutory and
regulatory scheme that addresses the concerns underlying the proposed
rule.8 The definition specifically states that deposits, as
defined in section 3(l) of the FDIA, 12 U.S.C. 1813(l), are not covered
products.
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\8\ See Section 15C of the Securities Exchange Act, 15 U.S.C.
78o-5, and SEC and Treasury rules adopted thereunder. In addition,
the banking agencies recently issued a notice of proposed
rulemaking, titled Government Securities Sales Practices, that would
establish standards concerning the recommendations to customers and
the conduct of business by a bank that is a government securities
broker or dealer. 61 FR 18470 (April 25, 1996).
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Covered Transaction
The proposal defines ``covered transaction'' as a retail
solicitation, recommendation, purchase, or sale of a covered product by
a bank through its employee regardless of the means through which the
solicitation, recommendation, purchase, or sale occurs.9 For
instance, a transaction that takes place via telephone, mail, or other
electronic means such as the Internet is included in the definition.
Sales personnel in a bank's dealer department who engage in covered
transactions (i.e., a retail solicitation, recommendation, purchase, or
sale of securities other than government or municipal securities) must
comply with this regulation. The term ``covered transaction'' does not
differentiate between those banks that engage in only occasional or a
limited number of covered transactions for a retail customer and those
banks that establish programs for the retail sale of covered products.
Therefore, consistent with the current requirements applicable to the
securities industry, all banks that engage in covered transactions,
regardless of frequency or volume, would be considered to be in the
business of effecting covered transactions and would be required to
comply with the regulation.10
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\9\ Under the Interagency Statement, bank employees located in
the routine deposit taking area are generally prohibited from
soliciting or recommending nondeposit investment products. Such
employees may, however, direct or refer bank customers to bank
securities representatives and may receive a fee from the bank for
such referral.
\10\ The scope of the regulation is intended to be the same as
that for SEC-regulated broker-dealers. If the SEC liberalizes the
registration or other professional qualification requirements for
such broker-dealers, the banking agencies will interpret the
regulation in a similar manner.
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Consistent with the scope of the Interagency Statement, the term
does not include a sale to a fiduciary account administered by a bank,
such as statutory and written trust accounts, employee benefit plans,
and other types of pension plans normally administered by a trust
department. Self-directed IRAs, certain types of Keogh accounts, and
other accounts where the customer retains investment discretion are,
however, included in the term. Sales of municipal securities by dealer
banks registered under section 15B of the Securities Exchange Act, 15
U.S.C. 78o0044, also are excluded because the bank and its sales
personnel already are subject to registration and professional
qualifications requirements under the Securities Exchange Act and the
rules of the MSRB.
Consistent with Rule 3a4-1 promulgated under the Securities
Exchange Act, 17 CFR 240.3a4-1, equity and debt offerings by banks of
their own securities, such as mutual-to-stock conversions, also are
excluded from the definition of ``covered transaction'' if the
securities offerings are consistent with the conditions set forth in
that Rule.11 These offerings tend to be infrequent and generally
are subject to special oversight by the banking agencies. Banks engaged
solely in the direct retail sale of their own securities are therefore
not required to become sponsoring banks. However, if a bank has filed
Form SB and becomes a sponsoring bank, it must use its bank securities
representatives to solicit, recommend or sell its own securities.
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\11\ The bank employee must not be subject to a statutory
disqualification under the Securities Exchange Act of 1934, may not
receive a commission or other remuneration for selling bank
securities, and may not be an associated person of a broker or
dealer. In addition, the bank employee must restrict his or her
offer and sale activities to certain groups or entities. Further,
the bank employee must perform primarily other substantial duties on
behalf of the bank, not be an associated person of a broker or
dealer within the last 12 months or participate in selling an
offering of any issuers securities more than once every 12 months.
Finally, a bank employee must restrict his or her activities to
preparing and delivering written communications or other means which
do not involve oral solicitations, responding to inquiries initiated
by a potential purchaser, and performing ministerial and clerical
work in effecting any transaction.
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Disciplinary Action
The proposal defines ``disciplinary action'' for purposes of this
regulation as an action resulting in: (1) an employee being ``subject
to disqualification;'' (2) a civil money penalty or fine of $5,000 or
more by the SEC or an SSRO; (3) a civil money penalty of $5,000 or more
by a banking agency pursuant to 12 U.S.C. 1818 for either a violation
of a securities law or regulation, or an unsafe or unsound practice
related to a covered transaction; (4) an agreement with the SEC, an
SSRO, or a banking agency in connection with a disciplinary proceeding;
or (5) an order by the SEC, an SSRO, or a banking agency to enter the
continuing education program.
Disciplinary actions must be reported on the forms referred to in
the companion Notice of Forms that is being published with this
proposal. Information on disciplinary actions will be available to the
public. Bank securities representatives that are subject to a
disciplinary action as defined under the regulation will be subject to
additional continuing education requirements that begin as of the date
of the disciplinary action. The ``$5,000 or more'' figure used in the
definition is consistent with the threshold used in the definition of
``disciplinary action'' in the SSRO rules.
NASD
The proposal defines ``NASD'' as the National Association of
Securities Dealers, Inc., which is an SSRO
[[Page 68827]]
registered under section 15A of the Securities Exchange Act, 15 U.S.C.
78o, and NASD Regulation, Inc., the regulatory subsidiary of NASD. The
NASD will accept filings and maintain in the CRD information filed with
the banking agencies under this regulation.
Sponsoring Bank
The proposal defines ``sponsoring bank'' as a bank that engages or
seeks to engage in the business of effecting covered transactions. A
bank that enters into an agreement with a registered broker-dealer
enabling registered representatives of the broker-dealer to engage in
covered transactions with bank customers, regardless of location, is
not a ``sponsoring bank,'' even though the broker-dealer may use dual
employees employed by both the bank and the broker-dealer.
Subject to Disqualification
The proposal defines the term ``subject to disqualification'' as
having the same meaning as ``statutory disqualification'' in section
3(a)(39) of the Securities Exchange Act, 15 U.S.C. 78c(a)(39).
Individuals who are subject to an order of removal, prohibition, or
suspension by a Federal banking agency pursuant to section 8 (e) or (g)
of the FDIA, 12 U.S.C. 1818 (e) or (g), or banks or individuals subject
to an order or temporary order pursuant to section 8 (b) or (c) of the
FDIA, 12 U.S.C. 1818 (b) or (c), that restricts their fiduciary or
securities activities at a depository institution or are subject to a
prohibition pursuant to section 19 of the FDIA, 12 U.S.C. 1829(a), are
also subject to disqualification. The definition, therefore, makes a
bank employee or sponsoring bank subject to disqualification if the
employee or bank has been barred, suspended, or enjoined from the
banking or securities industries; convicted of any felony in the past
10 years; convicted of a felony or misdemeanor involving the purchase
or sale of a security, or other financial crime (such as theft,
robbery, or misappropriation of funds); or restricted in his or her
employment pursuant to Section 19(a) of the FDIA, 12 U.S.C. 1829(a).
Qualification Requirements
Disqualifications
The proposal sets forth the qualification requirements for both
sponsoring banks and bank employees. A bank that is or becomes subject
to disqualification shall not engage in a covered transaction unless
the appropriate banking agency has granted the bank relief from being
subject to disqualification and permits the bank to engage in covered
transactions. This section also prohibits a bank employee who is, or
becomes, subject to disqualification from engaging in covered
transactions unless the employee's sponsoring bank has applied for and
obtained the banking agency's approval for that employee to act as a
bank securities representative.
Sponsoring Bank Notices
This section requires a bank seeking to engage in covered sales to
file a notice. A bank is required to file a completed Form SB 12
with the appropriate Federal banking agency at the NASD containing the
bank's name, address, bank identification number, and contact person.
Upon receipt of a Form SB, the sponsoring bank will be assigned a
unique CRD number for use on all of the filings required under the
proposed regulation. Banks that choose to terminate their status as
sponsoring banks must file the Form SBW with the appropriate banking
agency at the NASD.
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\12\ Form SB, Form SBW, Form U-4B, and Form U-5B are published
elsewhere in this separate part of the Federal Register
contemporaneously with the proposed regulation.
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Sponsoring Bank Requirements
This section requires a bank sponsoring an employee to act as a
bank securities representative to ensure that each employee engaged in
a covered transaction is not subject to disqualification and has passed
the appropriate qualification examination. A sponsoring bank also must
make independent inquiry regarding the background of each sponsored
employee. A sponsoring bank should, at a minimum, consult the
employee's employers from the last three years and should investigate
the good character, business repute, qualifications, and experience of
any person the bank intends to sponsor. The sponsoring bank also must
complete the designated portion of the Form U-4B and file it, along
with a fingerprint card for the employee with the appropriate Federal
banking agency at the NASD. The NASD in turn will submit the
fingerprint record cards to the Federal Bureau of Investigation for
review. A fingerprint card will be required each time an individual is
hired by a bank to act as a bank securities representative and will be
used to check whether the employee has a civil or criminal record that
could subject the individual to disqualification.13
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\13\ The securities industry is subject to fingerprinting
requirements under section 17f of the Securities Exchange Act, 15
U.S.C. 78q(f)(2), and Rule 17f-2 promulgated thereunder, 15 CFR
240.17f-2.
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A bank may not sponsor an employee to become a bank securities
representative if the individual is ``subject to disqualification''
unless the bank has applied for and received approval from the
appropriate banking agency for the individual to engage in covered
transactions. The banking agencies will consider, on a case-by-case
basis, whether it is in the public interest to authorize either a
sponsoring bank that, or a bank employee who, is, or becomes, subject
to disqualification to engage in covered transactions. The banking
agencies anticipate they will consider factors such as those detailed
in SEC Rules of Practice, Rule 193, 17 CFR 201.193 (Applications by
Barred Individuals for Consent to Associate), in their evaluation of
the particular facts and circumstances. The banking agencies seek
comment on whether additional factors should be considered for banks
and persons who are, or become, ``subject to disqualification.'' The
banking agencies may adopt various processes for considering these
applications.
With the exception of those bank employees sponsored under the
optional designation as a Bank Securities Representative provision, a
bank may not sponsor an employee to become a bank securities
representative if the bank does not intend for that individual to
engage in the solicitation, recommendation, purchase, or sale of
covered products or to supervise covered transactions.
A sponsoring bank is required to file a Form U-5B when a bank
securities representative ceases to be an employee of the bank for any
reason or ceases to engage in covered sales on behalf of the bank. A
bank must provide a copy of Form U-5B and subsequent amendments to the
employee.
A sponsoring bank is required to designate one or more individuals,
as necessary, to supervise the activities of its bank securities
representatives. A supervisor designated by a sponsoring bank need not
engage in covered sales but must comply with the qualification
requirements for bank securities representatives. Supervisors must take
and pass the appropriate qualification examination (either the Series 6
or Series 7 Examination) for the bank securities representatives they
supervise.
The banking agencies request comment on whether supervisors should
be required to take one of the securities industry supervisor's
(principal's) examinations. Commenters
[[Page 68828]]
are requested to discuss whether the General Securities Principal's
Examination (Series 24), which focuses on the management of an
investment banking or securities business, including supervision,
solicitation, conduct of business, and training of registered
representatives, is relevant or whether one of the other supervisor's
examinations (Series 26--Investment Company Products/Variable Contracts
Limited Principal; Series 28--Introducing Broker/Dealer Financial and
Operations Principal; or Series 8--General Securities Sales Supervisor
Examination, for example) would be more appropriate for individuals
supervising bank securities representatives whose activities and
product offerings are likely to be more limited.
Bank Securities Representative Requirements
This section requires a bank employee seeking to qualify as a bank
securities representative to complete designated portions of the Form
U-4B and submit this form and a fingerprint card to his or her
sponsoring bank. The employee then must pass the appropriate
qualification examination and the sponsoring bank must receive approval
from the appropriate Federal banking agency prior to the employee
engaging in covered transactions. Fingerprint cards and completed Forms
U-4B must be filed for employees transferring registration from another
sponsoring bank or securities firm but the employee will not have to
retake an examination. The Form U-4B requires disclosure of personal
and employment information, including whether the employee has been the
subject of any disciplinary action (as that term is defined in the
proposed regulation) or certain types of customer complaints involving
claims of greater than $5,000 or settlements of $10,000 or more. A bank
securities representative must advise his or her sponsoring bank within
30 days of an event that renders any information filed on a Form U-4B
or U-5B incomplete or inaccurate and must cooperate with the sponsoring
bank in filing an amendment to the Form.
Any employee who fails an examination will be permitted to retake
the test after a period of 30 days has elapsed from the date of the
prior examination, except that any employee who fails to pass an
examination three or more times in succession (and each additional time
thereafter) must wait 180 days from the date of the last attempt before
he or she may again retake the exam. A bank securities representative
who has not engaged in covered transactions for a period of two years,
or who has not supervised a bank sales representative for a period of
two years, must pass the appropriate examination before engaging in
covered transactions again. An employee engaged in legal, compliance,
internal audit, or similar responsibilities related to covered
transactions who has taken an examination pursuant to the optional
designation provision and who does not perform any of those functions
for a period of two years also must retake the examination before
engaging in covered transactions.
Examination Exemptions
This section establishes two exemptions from the examination
requirements. First, a bank employee who is qualified as a registered
representative pursuant to the rules of an SSRO at the time he or she
seeks to qualify as a bank securities representative will not have to
retake the examination. As noted earlier, however, a bank securities
representative seeking to transfer employment from a sponsoring bank to
a broker-dealer will have to apply to the appropriate SSRO for a waiver
from retaking any examinations required under applicable SSRO rules and
policies.
Second, a sponsoring bank may apply in writing to its appropriate
Federal banking agency on behalf of an employee for a waiver of the
examination requirement. Applications will be approved only in
exceptional cases where good cause is shown. In considering these
requests, the banking agencies may accept other evidence of an
employee's qualifications to act as a bank securities representative.
Advanced age, physical infirmity, or experience in fields ancillary to
the investment banking or securities business, would not individually
of themselves constitute sufficient grounds to waive the examination
requirement. The banking agencies intend to exercise their waiver
authority in a manner consistent with the waiver policies of the
SSROs.\14\ Any bank employee who is eligible for the examination
exemption under this paragraph still must satisfy all other
qualification, reporting and continuing education requirements of the
regulation. A bank securities representative who obtains an examination
waiver from a banking agency under this section and who subsequently
seeks to work in the securities industry may be required to take an
examination or apply to the appropriate SSRO for a waiver of that
examination requirement.
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\14\ See, e.g., NASD Membership and Registration Rule 1070
(Qualification Examinations and Waiver of Requirements), NASD Manual
(CCH), p. 3291.
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Approval of Bank Securities Representative Applications
This section prohibits a sponsoring bank from permitting an
employee to act as a bank securities representative until the
appropriate banking agency has notified the sponsoring bank that the
bank employee's Form U-4B application has been approved. The
appropriate banking agency will approve the registrations of bank
employees whose applications do not disclose grounds for
disqualification and who pass the appropriate qualification
examination. Registration may be revoked if, for example, the
fingerprint record identifies any action or item indicating that the
individual is subject to disqualification.
Grace Period
This section establishes a one-year grace period following the
adoption of the final rule for banks and bank employees to comply with
the regulation. The grace period will permit banks to file the required
notices and arrange for testing and registration of employees without
unduly interrupting bank operations. Any bank that is not in compliance
with the rule after the grace period expires must cease engaging in
covered transactions until the rule's requirements are met. Similarly,
any individual who engages in covered transactions who has not complied
with all testing and registration requirements by the end of the grace
period must cease all covered transaction activities until such
requirements are met.
Filing Requirements, Amendments, and Record Retention
This section requires all filings made with the banking agencies
under the regulation to be made at the NASD.15 The NASD ultimately
will maintain this filing information on its CRD, the computer-based
registry for broker-dealers and securities personnel. Information on
the CRD will be made available to the public on the same basis that the
NASD makes information regarding broker-dealers and registered
representatives available through its Public Disclosure Program.16
The
[[Page 68829]]
banking agencies expect that members of the public will be able to
inquire about the record of sponsoring banks and bank securities
representatives using the NASD's toll free telephone number or other
means that may become available for CRD inquiries.
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\15\ Filings submitted by mail should be sent to the NASD
address indicated on the Forms SB, SBW, U-4B and U-5B. When the
NASD's CRD becomes available to sponsoring banks, banks will either
be required to purchase personal computer software from the NASD to
make and access filings directly or will be required to utilize a
private service bureau or vendor to make electronic filings.
\16\ This information includes disclosure of any investment-
related consumer-initiated complaint or proceeding that: (1) alleges
compensatory damages of $5,000 or more, fraud, or wrongful taking of
property; or (2) was settled or decided against a sponsoring bank or
bank securities representative for $10,000 or more, or found fraud
or the wrongful taking of property. See Form U-4 (Uniform
Application for Securities Industry Registration or Transfer)
Question 22I.
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The NASD charges cost-based fees for processing all filings,
administering tests taken by bank employees, processing fingerprint
cards, and for access to the CRD. While the exact fees the NASD will
charge sponsoring banks have not yet been established, the banking
agencies anticipate that these fees will be consistent with those
levied by the NASD upon broker-dealers for comparable services.17
The NASD may also charge sponsoring banks an initial software
modification fee in order to provide banks access to the CRD.
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\17\ See generally Schedule A (Section 2) to the NASD By-Laws,
NASD Manual (CCH), pp. 1101-03. The NASD may also levy an initial
fee to defray the cost of modifying the CRD database for banks. An
additional nominal fee may also be collected by the NASD on behalf
of the MSRB to defray the MSRB's cost of developing questions for
the Series 7 Examination.
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This section also provides that all information submitted on any
filing made under the regulation must be true, current, complete, and
not misleading at the time and in light of the circumstances under
which it is reported. A sponsoring bank must submit an amended filing
within 30 days after it learns of any fact or circumstance that causes
a filing to be inaccurate or incomplete.
This section further establishes record retention requirements for
filings made under the regulation. A bank must retain copies of Forms
U-4B and U-5B filed on behalf of any bank employee for at least three
years after the employee ceases to act as a bank securities
representative or terminates his or her employment with the sponsoring
bank. A bank must retain copies of Forms SB and SBW and any
applications for waiver of being subject to disqualification for at
least three years after it files a Form SBW and terminates covered
sales.
The banking agencies welcome comment regarding the timing and
content of the proposed filing requirements, including the public
availability of information regarding sponsoring banks and their bank
securities representatives.
Optional Designation as a Bank Securities Representative
Consistent with SSRO rules, a bank may choose to sponsor an
employee engaged in legal, compliance, internal audit, or similar
responsibilities for covered transactions, or who provides
administrative support functions for bank securities representatives,
to take a qualification examination. Under these circumstances, the
employee must meet the registration, testing, reporting, and continuing
education requirements of a bank securities representative. As long as
the individual fills one of the enumerated positions or engages in
covered transactions for a sponsoring bank, the employee's registration
will remain active.
Applications by Banks and Bank Employees Subject to Disqualification
A bank may file a written application with the appropriate banking
agency seeking relief from a disqualification on behalf of itself or an
employee. The appropriate banking agency may permit the bank or the
employee to engage in covered transactions or act as a bank securities
representative if the bank demonstrates to the banking agency why
granting relief from a disqualification is consistent with safety and
soundness, the public interest, and the protection of investors. In
cases in which a disqualification results from an action brought under
12 U.S.C. 1818 or by operation of law under 12 U.S.C. 1829,
applications for relief must be sought pursuant to those sections.
Relief granted under this section will not result in the permanent
elimination of a disqualification but instead represents approval of a
sponsoring bank, or employment as a bank securities representative with
the sponsoring bank, under specified terms and conditions. For example,
if a bank obtains relief for an employee under this section and the
employee later becomes employed by another bank, that bank will have to
seek relief from disqualification on behalf of the employee and agree
to any special terms or conditions imposed by the appropriate Federal
banking agency. Any material change in the terms or conditions under
which relief is granted would require the sponsoring bank to seek
appropriate relief on behalf of the employee.
Continuing Education and Training Requirements
This section imposes continuing education requirements upon bank
securities representatives and sponsoring banks that are comparable to
requirements for broker-dealers.
Bank Securities Representative Requirements
The first subsection requires a bank securities representative to
complete the securities industry's computerized training program
``Regulatory Element'' covering securities regulation issues following
the individual's second, fifth, and tenth anniversaries of passing the
appropriate qualification examination. If an SSRO takes a disciplinary
action against an individual based upon activities prior to that person
becoming a bank securities representative, a banking agency takes a
disciplinary action against a bank securities representative, or an
individual is otherwise the subject of a disciplinary action, then the
bank securities representative must take the continuing education
training program within 120 days of the occurrence of a disciplinary
action and following the second, fifth, and tenth anniversaries of the
occurrence of a disciplinary action.18 The proposed regulation
requires a bank securities representative who does not comply with the
continuing education requirements to cease activities until the
representative meets the requirements.
---------------------------------------------------------------------------
\18\ This is consistent with comparable SSRO rules. See, e.g.,
NASD Membership and Registration Rule 1120(a)(3), NASD Manual (CCH)
pp. 3381-82.
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Sponsoring Bank Requirements
The second subsection incorporates the requirements of the SSROs'
``Firm Element'' and requires sponsoring banks to develop in-house
education programs appropriate to the size, structure, scope of
products offered, and the bank's policies and procedures for covered
transactions. These programs should address, at a minimum, the general
investment features of the products and services being offered as well
as associated risk factors, suitability and sales practice
considerations, and applicable regulatory requirements (including the
Interagency Statement). While a bank may choose to use commercial
training material and outside vendors to assist in meeting this
education requirement, the bank must ensure that the material or
program meets the content standards of the proposed rule.
Confidentiality of Qualification Examinations
This section requires banks and bank employees to maintain the
confidentiality of the professional qualification examinations and not
to
[[Page 68830]]
act in a manner that could compromise the integrity of an examination.
Paperwork Reduction Act
The banking agencies invite comment on:
(1) Whether the proposed collection of information contained in
this notice of proposed rulemaking is necessary for the proper
performance of each agency's functions, including whether the
information has practical utility;
(2) the accuracy of each agency's estimate of the burden of the
proposed information collection;
(3) ways to enhance the quality, utility, and clarity of the
information to be collected; and
(4) ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology.
Respondents/recordkeepers are not required to respond to this
collection of information unless it displays a currently valid Office
of Management and Budget (OMB) control number.
OCC: The collection of information requirements contained in this
notice of proposed rulemaking have been submitted to the OMB for review
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)). Comments on the collections of information should be sent to
the Office of Management and Budget, Paperwork Reduction Project (1557-
0142), Washington, DC 20503, with copies to the Legislative and
Regulatory Activities Division, Office of the Comptroller of the
Currency, 250 E Street, SW, Washington, DC 20219.
The collection of information requirements in this proposed rule
are found in Sec. 12.12 (c)(1)(iii), (c)(3), and (e)(2), Sec. 12.13 (c)
and (d), Sec. 12.15, and Sec. 12.16 (a)(4) and (b)(3).19 This
information is required to identify national banks as sponsoring banks,
to qualify bank employees to take the appropriate qualification
examination, and to terminate the status as a sponsoring bank or
licensed bank securities representative. The information also is
required to evidence compliance with the registration and information
collection requirements set forth in the proposed regulation. The OCC
will use the information to monitor the securities activities in
national banks and to assess the qualifications of a national bank
employee that wishes to become a bank securities representative. The
likely respondents/recordkeepers are national banks.
---------------------------------------------------------------------------
\19\ The Paperwork Reduction Act analysis of the required forms
appears in the companion Notice of Forms published by the banking
agencies elsewhere in this separate part of the Federal Register.
---------------------------------------------------------------------------
Estimated average annual burden hours per respondent/recordkeeper:
18 hours.
Estimated number of respondents: 120 national banks.
Estimated total annual reporting and recordkeeping burden: 2,184
hours.
Start-up costs to respondents: None.
Certain records pertaining to the sponsoring bank's filings are to
be maintained for the period of time respondent/recordkeeper serves as
a sponsoring bank, plus three years thereafter. Records pertaining to
bank employees are to be retained for not less than three years after
the employee terminates employment with the sponsoring bank or ceases
to act as a bank securities representative.
Board: In accordance with section 3506 of the Paperwork Reduction
Act of 1995 (44 U.S.C. Ch. 35; see also 5 CFR 1320 Appendix A Item 1),
the Board reviewed the proposed rule under the authority delegated to
the Board by the Office of Management and Budget. Send comments on the
collections of information to: the Office of Management and Budget,
Paperwork Reduction Project (7100-0282), Washington DC 20503, with
copies of such comments to be sent to Mary M. McLaughlin, Federal
Reserve Board Clearance Officer, Division of Research and Statistics,
Mail Stop 97, Board of Governors of the Federal Reserve System,
Washington DC 20551.
The requirements in this proposed collection of information will be
included in 12 CFR 208. This information collection is needed to
register state member banks (Form SB), to qualify certain bank
employees to take the appropriate qualification examination (Form U-
4B), and to terminate the bank's status as a registered bank (Form SBW)
or the employee's status as a licensed bank securities representative
(Form U-5B). The Federal Reserve will use the information to monitor
the securities sales activities of state member banks and to assess the
qualifications of state member bank employees to become registered bank
securities representatives. This information collection will be
mandatory. The likely respondents are state member banks. Small
businesses will not be affected.
The Federal Reserve may not conduct or sponsor, and an organization
(or a person) is not required to respond to, any collection of
information unless it displays a currently valid OMB control number.
The OMB control number for this information collection is 7100-0282.
The reporting burden imposed by the proposed rule is estimated to
be 18.2 hours per response. It is estimated that there will be 100
respondents/recordkeepers and a total of 1,820 hours of annual
paperwork burden. This burden represents the time needed to complete
the four proposed reporting forms: U-4B, U-5B, SB, and SBW. The
estimated burden is averaged over the estimated number of filings
during the first three years that the proposed rule will be in effect,
with most of the filings presumed to occur in the first year, as
qualification and registration programs are set up, and with the burden
for the second and third years representing estimated turnover in
registered bank securities representatives. The estimated burden is
further averaged over the size distribution of the likely respondents.
The burden associated with other requirements of the proposed rule is
discussed in a separate notice published in this issue.
FDIC: The collections of information contained in this notice of
proposed rulemaking have been submitted to the Office of Management and
Budget for review in accordance with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)). Comments on the collections of information
should be sent to the Office of Management and Budget, Paperwork
Reduction Project (1557-0142), Washington DC 20503, with copies of such
comments to be sent to Steven F. Hanft, Office of the Executive
Secretary, Room F-454, Federal Deposit Insurance Corporation, 550 17th
Street, N.W., Washington, DC 20429.
The collection of information requirements in this proposed rule
are found in 12 CFR 342.3(b), 342.3(c) (1) and (3), (e)(2), 342.4(c)
and (d), 342.6 and 342.7. The collections consist of notice filings for
the Sponsoring Bank as wells as registration applications on behalf of
the Bank Securities Representative, 342.3 (b) and (c); examination
exemption requests, 342.3(e); required amendments to Sponsoring Bank
notices and Bank Securities Representative registrations, 342.4(c);
records which the Sponsoring Bank must retain with respect to notice
filings, Bank Securities Representative registrations, applications for
relief from being ``subject to disqualification,'' and any amendments
or other filings submitted, 342.4(d); applications by Sponsoring Banks
for relief for itself or a Bank Securities Representative, from being
``subject to disqualification,'' 342.6; and continuing education
training programs by Sponsoring Banks and attendance/compliance by Bank
Securities Representatives with respect
[[Page 68831]]
to such continuing education requirements, 342.7.
The likely respondents/recordkeepers are insured nonmember banks.
Estimated average annual burden hours per respondent/recordkeeper:
18 hours.
Estimated number of respondents and/or recordkeepers: 70 state
nonmember banks.
Estimated total annual reporting and recordkeeping burden: 1260
hours.
Start-up costs to respondents: None.
Records are to be maintained for the period of time respondent/
recordkeeper serves as a sponsoring bank.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA)
(5 U.S.C. 605(b)), the initial regulatory flexibility analysis
otherwise required under section 603 of the RFA (5 U.S.C. 603) 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 and a succinct
statement explaining the reasons for such certification in the Federal
Register along with its general notice of proposed rulemaking.
The banking agencies hereby certify that the proposal will not have
a significant economic impact on a substantial number of small
entities. The proposal should result in a net benefit to all banks
regardless of size that elect to engage in securities activities
through licensed bank securities representatives, but the economic
impact on small banks will not be significant. Most banks with total
assets of under $100 million will not engage 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 or an ``introducing broker'' who will refer a customer
to a dealer that can effect the desired transaction. The few banks with
total assets under $100 million that choose to have employees licensed
under the proposal will incur costs associated with the securities
activities. However, a bank will incur these costs only if it elects to
engage in securities activities through bank securities
representatives.
Executive Order 12866
The OCC has determined that this proposal is not a significant
regulatory action as defined in Executive Order 12866.
Unfunded Mandates Reform Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4, 109 Stat. 48 (1995) (Unfunded Mandates Act), requires that
covered agencies prepare a budgetary impact statement before
promulgating a rule that includes any Federal mandate that may result
in the expenditure by State, local, and tribal governments, in the
aggregate, or by the private sector, of $100 million or more in any one
year. If a budgetary impact statement is required, section 205 of the
Unfunded Mandates Act also requires covered agencies to identify and
consider a reasonable number of regulatory alternatives before
promulgating a rule.
The OCC has determined that the proposal will not result in
expenditures by State, local, and tribal governments, or by the private
sector, of more than $100 million in any one year. Accordingly, the OCC
has not prepared a budgetary impact statement or specifically addressed
the regulatory alternatives considered.
List of Subjects
12 CFR Part 12
National banks, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Mortgages,
Reporting and recordkeeping requirements, Securities.
12 CFR Part 211
Exports, Federal Reserve System, Foreign banking, Holding
companies, Investments, Reporting and recordkeeping requirements.
12 CFR Part 342
Banks, banking, Reporting and recordkeeping requirements,
Securities.
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the joint preamble, part 12 of chapter
I of title 12 of the Code of Federal Regulations is proposed to be
amended to read as follows:
PART 12--RECORDKEEPING AND CONFIRMATION REQUIREMENTS FOR SECURITIES
TRANSACTIONS; QUALIFICATION REQUIREMENTS FOR TRANSACTIONS IN
CERTAIN SECURITIES
1. The part heading is revised to read as set forth above.
1a. The authority citation for part 12 is revised to read as
follows:
Authority: 12 U.S.C. 24, 92a, 93a, 1818, and 1831p-1(a)(2).
2. Sections 12.1 through 12.7 are designed as subpart A and a new
subpart heading is added to read as follows:
Subpart A--Recordkeeping and Confirmation Requirements for
Securities Transactions
3. In the first line of Sec. 12.1(a), the word ``part'' is changed
to ``subpart.''
4. In the introductory text to Sec. 12.2, the word ``part'' is
changed to ``subpart.''
5. In the introductory text to Sec. 12.7, the word ``part'' is
changed to ``subpart.''
6. A new subpart B, consisting of Secs. 12.10 through 12.17, is
added to read as follows:
Subpart B--Qualification Requirements for Transactions in Certain
Securities
Sec.
12.10 Scope.
12.11 Definitions.
12.12 Qualification requirements.
12.13 Filing requirements, amendments, and record retention.
12.14 Optional designation as a bank securities representative.
12.15 Applications by banks and bank employees ``subject to
disqualification.''
12.16 Continuing education and training requirements.
12.17 Confidentiality of qualification examinations.
Subpart B--Qualification Requirements for Transactions in Certain
Securities
Sec. 12.10 Scope.
This subpart is issued by the Comptroller of the Currency pursuant
to 12 U.S.C. 24, 93a, 1818 and 1831p-1(a)(2). It contains rules
prescribing operational and managerial standards for national banks,
and prescribes training and qualification requirements for bank
employees making retail solicitations, recommendations, purchases, or
sales of certain securities on behalf of a national bank. It applies to
all national banks that engage through bank employees in bank-direct
retail
[[Page 68832]]
solicitations, recommendations, purchases, or sales of certain
securities.
Sec. 12.11 Definitions.
For purposes of this subpart:
(a) Appropriate qualification examination means either the
Investment Company/Variable Contracts Products Limited Representative
Qualification Examination (Series 6 Examination) or the General
Securities Registered Representative Examination (Series 7
Examination), both of which are administered by the NASD. The Series 6
Examination is the appropriate qualification examination for a bank
employee engaged solely in covered transactions of open-end investment
company shares, original distribution closed-end investment company
shares, unit investment trusts, or variable contracts, including
variable life insurance contracts and variable annuity contracts. The
Series 7 Examination is the appropriate qualification examination for a
bank employee soliciting, recommending, purchasing, or selling any
other covered product.
(b) Bank means any national banking association, any District bank,
or any Federal branch or agency of a foreign bank. The term ``bank''
shall not include a branch of a bank located outside of any State, as
defined in section 3(a)(3) of the Federal Deposit Insurance Act, as
amended, 12 U.S.C. 1813(a)(3).
(c) Bank securities representative means any bank officer,
director, or employee (collectively referred to as ``employee'') who
engages in a covered transaction or is designated as the supervisor of
a bank securities representative who engages in a covered transaction.
(d) Continuing education requirements means the course of study
specified in Sec. 12.16.
(e) Covered product has the same meaning as ``security'' as defined
at section 3(a)(10) of the Securities Exchange Act, 15 U.S.C.
78c(a)(10). The term shall not include any product that is a deposit as
defined in section 3(l) of the Federal Deposit Insurance Act, 12 U.S.C.
1813(l), or any ``government security'' as defined at section 3(a)(42)
of the Securities Exchange Act, 15 U.S.C. 78c(a)(42).
(f) Covered transaction means a retail solicitation,
recommendation, purchase, or sale of a covered product by a bank
through its employee regardless of the means through which the
solicitation, recommendation, purchase, or sale occurs. The term shall
not include a covered transaction involving a fiduciary account
administered by a bank, a sale of a municipal security by a municipal
securities dealer bank registered under section 15B of the Securities
Exchange Act, 15 U.S.C. 78o-4, or a transaction by a bank in its own
securities consistent with the conditions set forth in Securities
Exchange Act Rule 3a4-1(a)(4), 17 CFR 240.3a4-1(a)(4).
(g) Disciplinary action means an action resulting in:
(1) An individual being ``subject to disqualification'' as defined
in this subpart;
(2) A civil money penalty or fine of $5,000 or more by the
Securities and Exchange Commission (SEC) or a securities self
regulatory organization (SSRO) as defined in section 3(a)(26) of the
Securities Exchange Act, 15 U.S.C. 78c(a)(26);
(3) A civil money penalty of $5,000 or more by a Federal banking
agency pursuant to section 8 of the Federal Deposit Insurance Act, 12
U.S.C. 1818, for a securities law violation, or an unsafe or unsound
practice related to a covered transaction;
(4) An agreement with the SEC, an SSRO, or Federal banking agency,
in connection with a disciplinary proceeding; or
(5) An order by the SEC, an SSRO, or a Federal banking agency to
enter the continuing education program.
(h) NASD means the National Association of Securities Dealers,
Inc., which is an SSRO registered under section 15A of the Securities
Exchange Act, 15 U.S.C. 78o, and NASD Regulation, Inc., the regulatory
subsidiary of the NASD.
(i) Sponsoring bank means a bank that engages in or seeks to engage
in the business of effecting covered transactions.
(j) Subject to disqualification means:
(1) Subject to a ``statutory disqualification'' as that term is
used in section 3(a)(39) of the Securities Exchange Act, 15 U.S.C.
78c(a)(39);
(2) Subject to an order of removal, prohibition, or suspension by a
Federal banking agency pursuant to 12 U.S.C. 1818(e) or (g);
(3) Subject to an order or temporary order pursuant to 12 U.S.C.
1818(b) or (c) that restricts the fiduciary or securities activities of
a bank or individual; or
(4) Subject to a prohibition pursuant to 12 U.S.C. 1829(a).
Sec. 12.12 Qualification requirements.
(a) Disqualifications. (1) A bank shall not engage in a covered
transaction if it is, or becomes, subject to disqualification, unless
it has applied for and received approval to engage in covered
transactions from the OCC pursuant to Sec. 12.15.
(2) No bank securities representative shall engage in a covered
transaction if he or she is, or becomes, subject to disqualification,
unless the bank that employs the bank securities representative has
applied for and received approval from the OCC pursuant to Sec. 12.15
for that person to qualify as a bank securities representative.
(b) Sponsoring bank notices. (1) A bank seeking to engage in
covered transactions shall file a completed Uniform Notice for
Sponsoring Bank (Form SB).
(2) A bank seeking to terminate its status as a Sponsoring Bank
shall file a Uniform Request for Sponsoring Bank Withdrawal (Form SBW).
(c) Sponsoring bank requirements. (1) A bank seeking to sponsor an
employee as a bank securities representatives shall:
(i) Make independent inquiry into the individual's employment
history, including contacting the employee's previous employers for the
past three years and investigating the character, business reputation,
qualifications, and experience of the individual;
(ii) Review, complete as appropriate, and file the Uniform
Application for Bank Securities Representative Registration or Transfer
(Form U-4B) and amendments thereto on behalf of the employee; and
(iii) File a fingerprint record for the employee.
(2) A bank may not sponsor an employee to qualify as a bank
securities representative or permit a previously qualified bank
securities representative to engage in covered transactions if the
individual is, or becomes, subject to disqualification unless the
sponsoring bank has applied and received approval for the individual to
engage in covered transactions from the OCC under Sec. 12.15. A bank
shall not sponsor an employee to qualify as a bank securities
representative if it does not intend for the employee to engage in or
supervise covered transactions or participate in one of the activities
enumerated in Sec. 12.14.
(3) A sponsoring bank shall file a Uniform Termination Notice for
Bank Securities Representative Registration (Form U-5B) when the
employment of a bank securities representative terminates or when a
bank securities representative ceases to engage in covered transactions
on behalf of the bank. The Form U-5B shall be filed within 30 days of
such termination or cessation and a copy of the Form U-5B, and of any
amendments to the Form U-5B, shall be provided concurrently to
[[Page 68833]]
the former bank securities representative.
(4) A sponsoring bank shall designate one or more bank securities
representatives, as necessary, to supervise the sponsoring bank's
covered transactions. A supervisor designated under this subpart shall
pass the appropriate qualification examination for any bank securities
representative(s) under his or her supervision.
(d) Bank securities representative requirements. (1) A bank
employee seeking to qualify as a bank securities representative shall
complete the Form U-4B, provide a fingerprint record, and pass the
appropriate qualification examination.
(2) A bank employee who is eligible for an examination exemption
under paragraph (e) of this section must complete a Form U-4B and
receive approval under paragraph (f) of this section prior to being
qualified as a bank securities representative.
(3) A bank employee who fails to pass the appropriate qualification
examination may take the examination again after a period of 30
calendar days has elapsed from the date of the prior examination.
However, any bank employee who fails to pass an examination three or
more times in succession may not take the examination until 180 days
has elapsed from the date of his or her last attempt to pass the
examination.
(4) A bank employee shall advise the sponsoring bank within 30 days
of any event or occurrence that causes any information on the Form U-4B
or Form U-5B to become inaccurate or incomplete and shall cooperate
with the sponsoring bank in filing an amendment to the relevant form.
(5) A bank securities representative who does not engage in or
supervise covered transactions for a period of two years must retake
and pass the appropriate qualification examination prior to acting as a
bank securities representative. A bank securities representative is
deemed to be engaging in covered transactions if the employee acts in
one of the capacities listed in Sec. 12.14.
(e) Examination exemptions. (1) A bank employee is not required to
take the appropriate qualification examination if he or she already has
qualified by taking that examination pursuant to the rules of an SSRO
and remains qualified as a registered representative.
(2) Upon written request from a sponsoring bank, the OCC may, in
exceptional cases and where good cause is shown, waive the appropriate
qualification examination requirement for a bank employee and may
accept other evidence of the employee's qualifications to act as a bank
securities representative. Advanced age, physical infirmity, or
experience in fields ancillary to the investment banking or securities
business generally are insufficient for the OCC to waive the
examination requirement.
(f) Approval of bank securities representative qualifications. No
sponsoring bank may permit any bank employee to, and no bank employee
shall, act as a bank securities representative until the OCC has
approved the bank employee's application for registration or transfer
on Form U-4B.
(g) Grace period. These qualification requirements apply to all
banks and bank employees with respect to covered transactions
transacted after [Date One Year After Effective Date of the Final
Rule]. Any bank or bank employee that is not in compliance with this
subpart after the grace period shall cease engaging in covered
transactions until the requirements are met.
Sec. 12.13 Filing requirements, amendments, and record retention.
(a) All filings required under this subpart shall be filed with the
OCC at the NASD.
(b) All information submitted on any filing required under this
subpart must be true, current, complete, and not misleading at the time
and in light of the circumstances under which it is reported.
(c) A bank shall file an amendment no later than 30 days after
learning of facts or circumstances causing a filing to be inaccurate or
incomplete.
(d)(1) A bank shall retain copies of all filings made on Forms U-4B
and U-5B, including amendments, for not less than three years after the
employee terminates employment with the sponsoring bank or ceases to
act as a bank securities representative.
(2) A bank shall retain copies of all filings made on Forms SB and
SBW and any applications under Sec. 12.15, including amendments, for
not less than three years after the bank terminates its status as a
sponsoring bank.
Sec. 12.14 Optional designation as a bank securities representative.
A bank may sponsor an employee who is engaged in legal, compliance,
internal audit, or similar responsibilities related to covered
transactions or who provides administrative support functions for a
bank securities representative, and who is not subject to
disqualification (unless a waiver is granted pursuant to Sec. 12.15),
to take either the Series 6 or Series 7 Examination. Such sponsored
employee must meet all filing and continuing education requirements in
order to be deemed to be a bank securities representative for purposes
of this subpart.
Sec. 12.15 Applications by banks and bank employees ``subject to
disqualification.''
A sponsoring bank may seek, by written application to the OCC on
behalf of itself or an employee, relief from being subject to
disqualification and permission to engage in covered transactions or to
qualify as a bank securities representative, as appropriate. The OCC
may, consistent with safety and soundness, the public interest, and the
protection of investors, grant such relief consistent with its
enforcement powers and on such terms and conditions as the OCC
considers necessary or appropriate.
Sec. 12.16 Continuing education and training requirements.
A bank securities representative and a sponsoring bank shall comply
with the following continuing education requirements:
(a) Bank securities representative requirements. (1) Each bank
securities representative shall complete, within 120 days of the
second, fifth, and tenth anniversaries of passing the appropriate
qualification examination, the Continuing Education Program
administered by the NASD.
(2) The required training intervals for bank securities
representatives who were registered with an SSRO prior to being
employed by the sponsoring bank are measured from the date of SSRO
registration. The bank securities representative requirements of the
continuing education requirement will be met as of the tenth
anniversary of a bank securities representative's registration with a
banking agency and/or SSRO, provided the bank securities representative
is not subject to paragraph (a)(4) of this section.
(3) If a bank securities representative has been subject to a
disciplinary action within the ten years prior to the effective date of
this subpart, or at any time since that effective date, the bank
securities representative must complete the Continuing Education
Program administered by the NASD within 120 days of the disciplinary
action and no later than the second, fifth, and tenth anniversaries of
the disciplinary action.
(4) Unless otherwise determined by the OCC, any bank securities
representative who does not complete the requirements within the
prescribed time frames may not perform any bank
[[Page 68834]]
securities representative duties. The OCC may, upon application and a
showing of good cause, allow additional time for a bank securities
representative to satisfy the Continuing Education program
requirements.
(b) Sponsoring bank requirements. (1) A sponsoring bank shall not
permit any employee to act as a bank securities representative unless
the employee has complied with the requirements set forth in paragraphs
(a)(1) through (a)(4) of this section.
(2) A sponsoring bank shall maintain a continuing education program
for its bank securities representatives. A sponsoring bank, at least
annually, shall evaluate and prioritize its training needs and develop
or update, as appropriate, a written training plan. The plan must take
into consideration the bank's size, organizational structure, and scope
of business activities. Programs used to implement a sponsoring bank's
training plan must be appropriate for the business of that bank and, at
a minimum, must cover the following matters concerning securities
products, services, and strategies offered by the bank:
(i) General investment features and associated risk factors;
(ii) Suitability and sales practice considerations;
(iii) Applicable regulatory requirements; and
(iv) Bank policies and procedures for covered transactions.
(3) A sponsoring bank shall administer its continuing education
programs in accordance with its annual evaluation and written plan and
must maintain records documenting the content of the programs and
completion of the programs by its bank securities representatives.
Sec. 12.17 Confidentiality of qualification examinations.
Every bank and bank employee shall maintain the confidentiality of
qualification examinations and shall not remove from an examination
center, reproduce, disclose, receive from or pass to any person, or use
for study or any other purposes, any portion of an examination, whether
of a present or past series, that would compromise the integrity of the
examinations, or use in any manner and at any time the questions or
answers to the examination.
Dated: December 10, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
Federal Reserve System
12 CFR Part 208
For the reasons set forth in the preamble, the Board proposes to
amend 12 CFR Parts 208 and 211 as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for part 208 is revised to read as
follows:
Authority: 12 U.S.C. 36, 248, 321-338a, 371d, 461, 481-486, 601,
611, 1814, 1816, 1818, 1823(j), 1828(o), 1831p-1, 1831p-1(a)(2),
1831r-1, 2901-2907, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C.
78b, 78l(b), 78l(g), 78l(I), 78o-4(c)(5), 78q, 78q-1, and 78w; 31
U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.
2. A new Sec. 208.25 is added at the end of Subpart A to read as
follows:
Sec. 208.25 Qualification requirements for transactions in certain
securities.
(a) Scope. This section contains rules prescribing operational and
managerial standards for state member banks, prescribes training and
qualification requirements for bank employees making retail
solicitations, recommendations, purchases, or sales of certain
securities on behalf of a state member bank. It applies to all state
member banks that engage through bank employees in bank-direct retail
solicitations, recommendations, purchases, or sales of certain
securities.
(b) Definitions. For purposes of this section:
(1) Appropriate qualification examination means either the
Investment Company/Variable Contracts Products Limited Representative
Qualification Examination (Series 6 Examination) or the General
Securities Registered Representative Examination (Series 7
Examination), both of which are administered by the National
Association of Securities Dealers, Inc. (NASD). The Series 6
Examination is the appropriate qualification examination for a bank
employee engaged solely in covered transactions of open-end investment
company shares, original distribution closed-end investment company
shares, unit investment trusts, or variable contracts, including
variable life insurance contracts and variable annuity contracts. The
Series 7 Examination is the appropriate qualification examination for a
bank employee soliciting, recommending, purchasing, or selling any
other covered product.
(2) Bank means any state member bank. The term bank shall not
include a branch of a bank located outside of any State, as defined in
section 3(a)(3) of the Federal Deposit Insurance Act, as amended, 12
U.S.C. 1813(a)(3).
(3) Bank securities representative means any bank officer,
director, or employee (collectively referred to as employee) who
engages in a covered transactions or is designated as the supervisor of
a bank securities representative who engages in a covered transaction.
(4) Continuing education requirements means the course of study
specified in paragraph (g) of this section.
(5) Covered product has the same meaning as ``security'' as defined
at section 3(a)(10) of the Securities Exchange Act, 15 U.S.C.
78c(a)(10). The term shall not include any product that is a deposit as
defined in section 3(l) of the Federal Deposit Insurance Act, 12 U.S.C.
1813(l), or any ``government security'' as defined at section 3(a)(42)
of the Securities Exchange Act, 15 U.S.C. 78c(a)(42).
(6) Covered transaction means a retail solicitation,
recommendation, purchase, or sale of a covered product by a bank
through its employee regardless of the means through which the
solicitation, recommendation, purchase, or sale occurs. The term shall
not include a such a transaction in a covered product to a fiduciary
account administered by a bank, a sale of a municipal security by a
municipal securities dealer bank registered under section 15B of the
Securities Exchange Act, 15 U.S.C. 78o-4, or a transaction by a bank in
its own securities consistent with the conditions set forth in
Securities Exchange Act Rule 3a4-1(a)(4), 17 CFR 240.3a4-1(a)(4).
(7) Disciplinary action means an action resulting in:
(i) An individual being subject to disqualification as defined in
paragraph (b)(10) of this section;
(ii) A civil money penalty or fine of $5,000 or more by the
Securities and Exchange Commission (SEC) or a securities self-
regulatory organization (SSRO) as defined in section 3(a)(26) of the
Securities Exchange Act, 15 U.S.C. 78c(a)(26);
(iii) A civil money penalty of $5,000 or more by a Federal banking
agency pursuant to section 8 of the Federal Deposit Insurance Act, 12
U.S.C. 1818, for a securities law violation, or an unsafe or unsound
practice related to a covered transaction;
[[Page 68835]]
(iv) An agreement with the SEC, an SSRO, Federal banking agency, in
connection with a disciplinary proceeding; or
(v) An order by the SEC, an SSRO, or a Federal banking agency to
enter the continuing education program.
(8) NASD means the National Association of Securities Dealers,
Inc., which is an SSRO registered under section 15A of the Securities
Exchange Act, 15 U.S.C. 78o, and NASD Regulation, Inc., the regulatory
subsidiary of the NASD.
(9) Sponsoring bank means a bank that engages in or seeks to engage
in the business of effecting covered transactions.
(10) Subject to disqualification means subject to:
(i) A ``statutory disqualification'' as that term is used in
section 3(a)(39) of the Securities Exchange Act, 15 U.S.C. 78c(a)(39);
(ii) An order of removal, prohibition, or suspension by a Federal
banking agency pursuant to 12 U.S.C. 1818 (e) or (g);
(iii) An order or temporary order pursuant to 12 U.S.C. 1818 (b) or
(c) that restricts the fiduciary or securities activities of a bank or
individual; or
(iv) A prohibition pursuant to 12 U.S.C. 1829(a).
(c) Qualification requirements--(1) Disqualifications. (i) A bank
shall not engage in a covered transaction if it is, or becomes, subject
to disqualification, unless it has applied for and received approval to
engage in covered transactions from the Board pursuant to paragraph (h)
of this section.
(ii) No bank securities representative shall engage in a covered
transaction if he or she is, or becomes, subject to disqualification,
unless the bank that employs the bank securities representative has
applied for and received approval from the Board pursuant to paragraph
h of this section for that person to qualify as a bank securities
representative.
(2) Sponsoring bank notices. (i) A bank seeking to engage in
covered transactions shall file a completed Uniform Notice for
Sponsoring Bank (Form SB).
(ii) A bank seeking to terminate its status as a Sponsoring Bank
shall file a Uniform Request for Sponsoring Bank Withdrawal (Form SBW).
(3) Sponsoring bank requirements. (i) A bank seeking to sponsor an
employee as a bank securities representative shall:
(A) Make independent inquiry into the individual's employment
history, including contacting the employee's previous employers for the
past three years and investigating the character, business reputation,
qualifications and experience of the individual;
(B) Review, complete as appropriate, and file the Uniform
Application for Bank Securities Representative Registration or Transfer
(Form U-4B) and amendments thereto on behalf of the employee; and
(C) File a fingerprint record for the employee.
(ii) A bank may not sponsor an employee to qualify as a bank
securities representative or permit a previously qualified bank
securities representative to engage in covered transactions if the
individual is, or becomes, subject to disqualification unless the
sponsoring bank has applied and received approval for the individual to
engage in covered transactions from the Board under paragraph (h) of
this section. A bank shall not sponsor an employee to qualify as a bank
securities representative if it does not intend for the employee to
engage in or supervise covered transactions or participate in one of
the activities enumerated in paragraph (e) of this section.
(iii) A sponsoring bank shall file a Uniform Termination Notice for
Bank Securities Representative Registration (Form U-5B) when the
employment of a bank securities representative terminates or when a
bank securities representative ceases to engage in covered transactions
on behalf of the bank. The Form U-5B shall be filed within 30 days of
such termination or cessation and a copy of the Form U-5B, and of any
amendments to the Form U-5B, shall be provided to the former bank
securities representative.
(iv) A sponsoring bank shall designate one or more bank securities
representatives to supervise the sponsoring bank's covered
transactions. A supervisor designated under this section shall pass the
appropriate qualification examination for any bank securities
representative(s) under his or her supervision.
(4) Bank securities representative requirements. (i) A bank
employee seeking to qualify as a bank securities representative shall
complete the designated sections of the Form U-4B, provide a
fingerprint record, and pass the appropriate qualification examination.
(ii) A bank employee who is eligible for an examination exemption
under paragraph (c)(5)(i) of this section must complete a Form U-4B and
receive approval under paragraph (c)(6) of this section prior to being
qualified as a bank securities representative.
(iii) A bank employee who fails to pass the appropriate
qualification examination may take the examination again after a period
of 30 calendar days has elapsed from the date of the prior examination.
However, any bank employee who fails to pass an examination three or
more times in succession may not take the examination until 180 days
has elapsed from the date of his or her last attempt to pass the
examination.
(iv) A bank employee shall advise the sponsoring bank within 30
days of any event or occurrence that causes any information on the Form
U-4B or Form U-5B to become inaccurate or incomplete and shall
cooperate with the sponsoring bank in filing an amendment to the
relevant form.
(v) A bank securities representative who does not engage in or
supervise covered transactions for a period of two years must retake
and pass the appropriate qualification examination prior to acting as a
bank securities representative. A bank securities representative is
deemed to be engaging in covered transactions if the employee acts in
one of the capacities listed in paragraph (e) of this section.
(5) Examination exemptions. (i) A bank employee is not required to
take the appropriate qualification examination if he or she already has
qualified by taking that examination pursuant to the rules of an SSRO
and remains qualified as a registered representative.
(ii) Upon written request from a sponsoring bank, the Board may, in
exceptional cases and where good cause is shown, waive the appropriate
qualification examination requirement for a bank employee and may
accept other evidence of the employee's qualifications to act as a bank
securities representative. Advanced age, physical infirmity, or
experience in fields ancillary to the investment banking or securities
business generally are insufficient for the Board to waive the
examination requirement.
(6) Approval of bank securities representative qualifications. No
sponsoring bank may permit any bank employee to, and no bank employee
shall, act as a bank securities representative until the Board has
approved the bank employee's application for registration or transfer
on Form U-4B.
(7) Grace period. These qualification requirements apply to all
banks and bank employees with respect to covered transactions
transacted after Date One Year After Effective Date of the Final Rule.
Any bank or bank employee that is not in compliance with this section
after the grace period shall cease engaging in covered transactions
until the requirements are met.
[[Page 68836]]
(d) Filing requirements, amendments, and record retention. (1) All
filings required under this section shall be filed with the Board at
the NASD.
(2) All information submitted under this section must be true,
current, complete, and not misleading at the time and in light of the
circumstances under which it is reported.
(3) A bank shall file an amendment no later than 30 days after
learning of facts or circumstances causing a filing to be inaccurate or
incomplete.
(4) A bank shall retain copies of all filings:
(i) Made on Forms U-4B and U-5B, including amendments, for not less
than three years after the employee terminates employment with the
sponsoring bank or ceases to act as a bank securities representative;
and
(ii) Made on Forms SB and SBW and any applications under paragraph
(f) of this section including amendments for not less than three years
after the bank terminates its status as a sponsoring bank.
(e) Optional designation as a bank securities representative. A
bank may sponsor an employee who is engaged in legal, compliance,
internal audit, or similar responsibilities related to covered
transactions or who provides administrative support functions for a
bank securities representative, and who is not subject to
disqualification (unless a waiver is granted pursuant to paragraph (f)
of this section), to take the appropriate qualification examination.
Such sponsored employee must meet all filing and continuing education
requirements of this section in order to be deemed to be a bank
securities representative for purposes of this section.
(f) Applications by banks and bank employees ``subject to
disqualification.'' A sponsoring bank may seek, by written application
to the Board on behalf of itself or an employee, relief from being
subject to disqualification and permission to engage in covered
transactions or to qualify as a bank securities representative, as
appropriate. The Board may, consistent with safety and soundness, the
public interest, and the protection of investors, grant such relief
consistent with its enforcement powers and on such terms and conditions
as the Board considers necessary or appropriate.
(g) Continuing education and training requirements. A bank
securities representative and a sponsoring bank shall comply with the
following continuing education requirements:
(1) Bank securities representative requirements. (i) Each bank
securities representative shall complete, within 120 days of the
second, fifth, and tenth anniversaries of passing the appropriate
qualification examination, the Continuing Education Program
administered by the NASD.
(ii) The required training intervals for bank securities
representatives who were registered with an SSRO prior to being
employed by the sponsoring bank are measured from the date of SSRO
registration. The bank securities representative requirements of the
continuing education requirement will be met as of the tenth
anniversary of a bank securities representative's registration with a
banking agency and/or SSRO, provided the bank securities representative
is not subject to paragraph (g)(1)(iv) of this section.
(iii) If a bank securities representative has been subject to a
disciplinary action within the ten years prior to the effective date of
this section, or at any time since that effective date, the bank
securities representative must complete the Continuing Education
Program administered by the NASD within 120 days of the disciplinary
action and no later than the second, fifth, and tenth anniversaries of
the disciplinary action.
(iv) Unless otherwise determined by the Board, any bank securities
representative who does not complete the requirements within the
prescribed time frames may not perform any bank securities
representative duties. The Board may, upon application and a showing of
good cause, allow additional time for a bank securities representative
to satisfy the Continuing Education program requirements of the bank
securities representative requirements.
(2) Sponsoring bank requirements. (i) A sponsoring bank shall not
permit any employee to act as a bank securities representative unless
the employee has complied with the requirements set forth in paragraph
(g)(1) of this section.
(ii) A sponsoring bank shall maintain a continuing education
program for its bank securities representatives. A sponsoring bank, at
least annually, shall evaluate and prioritize its training needs and
develop or update, as appropriate, a written training plan. The plan
must take into consideration the bank's size, organizational structure,
and scope of business activities. Programs used to implement a
sponsoring bank's training plan must be appropriate for the business of
that bank and, at a minimum, must cover the following matters
concerning securities products, services, and strategies offered by the
bank:
(A) General investment features and associated risk factors;
(B) Suitability and sales practice considerations;
(C) Applicable regulatory requirements; and
(D) Bank policies and procedures for covered transactions.
(iii) A sponsoring bank shall administer its continuing education
programs in accordance with its annual evaluation and written plan and
must maintain records documenting the content of the programs and
completion of the programs by its bank securities representatives.
(h) Confidentiality of qualification examinations. Every bank and
bank employee shall maintain the confidentiality of qualification
examinations and shall not remove from an examination center,
reproduce, disclose, receive from or pass to any person, or use for
study or any other purposes, any portion of an examination, whether of
a present or past series, that would compromise the integrity of the
examinations, or use in any manner and at any time, the questions or
answers to the examination.
PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)
1. The authority citation for Part 211 continues to read as
follows:
Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3101 et
seq., 3901 et seq.
2. Section 211.28 is amended as follows:
a. The section heading is revised;
b. Paragraphs (a) and (b) are redesignated as paragraphs (a)(1) and
(a)(2) respectively;
c. A heading is added to paragraph (a);
d. All references to ``paragraph (a)'' and ``paragraph (b)'' are
revised to read ``paragraph (a)(1)'' and ``paragraph (a)(2)''
respectively; and,
e. A new paragraph (b) is added.
The revisions and additions read as follows:
Sec. 211.28 Provisions applicable to state branches and agencies.
(a) Limitation on loans to one borrower--(1) Limitation. * * *
* * * * *
(b) Retail securities transactions--(1) Requirements. To the extent
that an uninsured state branch or a state agency is excluded from the
definition of ``broker'' under section 3(a)(4) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(4)) and engages in an activity
that would constitute a covered transaction as defined in Sec. 208.25
of the Board's Regulation H (12 CFR 208.25) for a state member bank,
the state branch or agency shall be subject to the
[[Page 68837]]
requirements of 12 CFR 208.25 in the same manner that such requirements
apply to a state member bank.
(2) Exception. Nothing in paragraph (b)(1) of this section is
intended to apply the requirements of 12 CFR 208.25 to the lawful
deposit-taking activities of an uninsured state branch or state agency.
By order of the Board of Governors of the Federal Reserve
System, December 11, 1996.
William W. Wiles,
Secretary of the Board.
Federal Deposit Insurance Corporation
12 CFR Part 342
Authority and Issuance
For the reasons set forth in the joint preamble, part 342 of title
12 of the Code of Federal Regulations is proposed to be added as
follows:
PART 342--QUALIFICATION REQUIREMENTS FOR TRANSACTIONS IN CERTAIN
SECURITIES
Sec.
342.1 Scope.
342.2 Definitions.
342.3 Qualification requirements.
342.4 Filing requirements, amendments, and record retention.
342.5 Optional designation as a bank securities representative.
342.6 Applications by banks and bank employees ``subject to
disqualification.''
342.7 Continuing education and training requirements.
342.8 Confidentiality of qualification examinations.
Authority: 12 U.S.C. 1818 and 1831p-1(a)(2)
Sec. 342.1 Scope.
This part is issued by the Federal Deposit Insurance Corporation
(the Corporation) pursuant to 12 U.S.C. 1818 and 1831p-1(a)(2). It
contains rules prescribing operational and managerial standards for
state nonmember insured banks (except a District bank) or a foreign
bank having an insured branch, and prescribes training and
qualification requirements for bank employees making retail
solicitations, recommendations, purchases, or sales of certain
securities on behalf of a state nonmember insured bank (except a
District bank) or a foreign bank having an insured branch. It applies
to all state nonmember insured banks (except a District bank) or a
foreign bank having an insured branch that engage through bank
employees in bank-direct retail solicitations, recommendations,
purchases, or sales of certain securities.
Sec. 342.2 Definitions.
For purposes of this part:
(a) Appropriate qualification examination means either the
Investment Company/Variable Contracts Products Limited Representative
Qualification Examination (Series 6 Examination) or the General
Securities Registered Representative Examination (Series 7
Examination), both of which are administered by the NASD. The Series 6
Examination is the appropriate qualification examination for a bank
employee engaged solely in covered transactions of open-end investment
company shares, original distribution closed-end investment company
shares, unit investment trusts, or variable contracts, including
variable life insurance contracts and variable annuity contracts. The
Series 7 Examination is the appropriate qualification examination for a
bank employee soliciting, recommending, purchasing, or selling any
other covered product.
(b) Bank means any State nonmember insured bank (except a District
bank) or a foreign bank having an insured branch. The term ``bank''
shall not include a branch of a bank located outside of any State, as
defined in section 3(a)(3) of the Federal Deposit Insurance Act, as
amended, 12 U.S.C. 1813(a)(3).
(c) Bank securities representative means any bank officer,
director, or employee (collectively referred to as ``employee'') who
engages in a covered transaction or is designated as the supervisor of
a bank securities representative who engages in a covered transaction.
(d) Continuing education requirements means the course of study
specified in Sec. 342.7.
(e) Covered product has the same meaning as ``security'' as defined
at section 3(a)(10) of the Securities Exchange Act, 15 U.S.C.
78c(a)(10). The term shall not include any product that is a deposit as
defined in section 3(l) of the Federal Deposit Insurance Act, 12 U.S.C.
1813(l), or any ``government security'' as defined at section 3(a)(42)
of the Securities Exchange Act, 15 U.S.C. 78c(a)(42).
(f) Covered transaction means a retail solicitation,
recommendation, purchase, or sale of a covered product by a bank
through its employee regardless of the means through which the
solicitation, recommendation, purchase, or sale occurs. The term shall
not include a covered transaction involving a fiduciary account
administered by a bank, a sale of a municipal security by a municipal
securities dealer bank registered under section 15B of the Securities
Exchange Act, 15 U.S.C. 78o-4, or a transaction by a bank in its own
securities consistent with the conditions set forth in Securities
Exchange Act Rule 3a4-1(a)(4), 17 CFR 240.3a4-1(a)(4).
(g) Disciplinary action means an action resulting in:
(1) An individual being ``subject to disqualification'' as defined
in this part;
(2) A civil money penalty or fine of $5,000 or more by the
Securities and Exchange Commission (SEC) or a securities self-
regulatory organization (SSRO) as defined in section 3(a)(26) of the
Securities Exchange Act, 15 U.S.C. 78c(a)(26);
(3) A civil money penalty of $5,000 or more by a Federal banking
agency pursuant to section 8 of the Federal Deposit Insurance Act, 12
U.S.C. 1818, for a securities law violation, or an unsafe or unsound
practice related to a covered transaction;
(4) An agreement with the SEC, an SSRO, or Federal banking agency,
in connection with a disciplinary proceeding; or
(5) An order by the SEC, an SSRO, or a Federal banking agency to
enter the continuing education program.
(h) NASD means the National Association of Securities Dealers,
Inc., which is an SSRO registered under section 15A of the Securities
Exchange Act, 15 U.S.C. 78o, and NASD Regulation, Inc., the regulatory
subsidiary of the NASD.
(i) Sponsoring bank means a bank that engages in or seeks to engage
in the business of effecting covered transactions.
(j) Subject to disqualification means:
(1) a ``Statutory disqualification'' as that term is used in
section 3(a)(39) of the Securities Exchange Act, 15 U.S.C. 78c(a)(39);
(2) An order of removal, prohibition, or suspension by a Federal
banking agency pursuant to 12 U.S.C. 1818(e) or (g);
(3) An order or temporary order pursuant to 12 U.S.C. 1818 (b) or
(c) that restricts the fiduciary or securities activities of a bank or
individual; or
(4) A prohibition pursuant to 12 U.S.C. 1829(a).
Sec. 342.3 Qualification requirements.
(a) Disqualifications. (1) A bank shall not engage in a covered
transaction if it is, or becomes, subject to disqualification, unless
it has applied for and received approval to engage in covered
transactions from the Corporation pursuant to Sec. 342.6.
(2) No bank securities representative shall engage in a covered
transaction if he or she is, or becomes, subject to disqualification,
unless the bank that employs the bank securities representative has
applied for and received approval from the Corporation
[[Page 68838]]
pursuant to Sec. 342.6 for that person to qualify as a bank securities
representative.
(b) Sponsoring bank notices. (1) A bank seeking to engage in
covered transactions shall file a completed Uniform Notice for
Sponsoring Bank (Form SB).
(2) A bank seeking to terminate its status as a Sponsoring Bank
shall file a Uniform Notice for Sponsoring Bank Withdrawal (Form SBW).
(c) Sponsoring bank requirements. (1) A bank seeking to sponsor an
employee as a bank securities representative shall:
(i) Make independent inquiry into the individual's employment
history, including contacting the employee's previous employers for the
past three years and investigating the character, business reputation,
qualifications, and experience of the individual;
(ii) Review, complete as appropriate, and file the Uniform
Application for Bank Securities Representative Registration or Transfer
(Form U-4B) and amendments thereto on behalf of the employee; and
(iii) File a fingerprint record for the employee.
(2) A bank may not sponsor an employee to qualify as a bank
securities representative or permit a previously qualified bank
securities representative to engage in covered transactions if the
individual is, or becomes, subject to disqualification unless the
sponsoring bank has applied and received approval for the individual to
engage in covered transactions from the Corporation under Sec. 342.6. A
bank shall not sponsor an employee to qualify as a bank securities
representative if it does not intend for the employee to engage in or
supervise covered transactions or participate in one of the activities
enumerated in Sec. 342.5.
(3) A sponsoring bank shall file a Uniform Termination Notice for
Bank Securities Representative Registration (Form U-5B) when the
employment of a bank securities representative terminates or when a
bank securities representative ceases to engage in covered transactions
on behalf of the bank. The Form U-5B shall be filed within 30 days of
such termination or cessation and a copy of the Form U-5B, and of any
amendments to the Form U-5B, shall be provided concurrently to the
former bank securities representative.
(4) A sponsoring bank shall designate one or more bank securities
representatives, as necessary, to supervise the sponsoring bank's
covered transactions. A supervisor designated under this part shall
pass the appropriate qualification examination for any bank securities
representative(s) under his or her supervision.
(d) Bank securities representative requirements. (1) A bank
employee seeking to qualify as a bank securities representative shall
complete the Form U-4B, provide a fingerprint record, and pass the
appropriate qualification examination.
(2) A bank employee who is eligible for an examination exemption
under paragraph (e) of this section must complete a Form U-4B and
receive approval under paragraph (f) of this section prior to being
qualified as a bank securities representative.
(3) A bank employee who fails to pass the appropriate qualification
examination may take the examination again after a period of 30
calendar days has elapsed from the date of the prior examination.
However, any bank employee who fails to pass an examination three or
more times in succession may not take the examination until 180 days
has elapsed from the date of his or her last attempt to pass the
examination.
(4) A bank employee shall advise the sponsoring bank within 30 days
of any event or occurrence that causes any information on the Form U-4B
or Form U-5B to become inaccurate or incomplete and shall cooperate
with the sponsoring bank in filing an amendment to the relevant form.
(5) A bank securities representative who does not engage in or
supervise covered transactions for a period of two years must retake
and pass the appropriate qualification examination prior to acting as a
bank securities representative. A bank securities representative is
deemed to be engaging in covered transactions if the employee acts in
one of the capacities listed in Sec. 342.5.
(e) Examination exemptions. (1) A bank employee is not required to
take the appropriate qualification examination if he or she already has
qualified by taking that examination pursuant to the rules of an SSRO
and remains qualified as a registered representative.
(2) Upon written request from a sponsoring bank, the Corporation
may, in exceptional cases and where good cause is shown, waive the
appropriate qualification examination requirement for a bank employee
and may accept other evidence of the employee's qualifications to act
as a bank securities representative. Advanced age, physical infirmity,
or experience in fields ancillary to the investment banking or
securities business generally are insufficient for the Corporation to
waive the examination requirement.
(f) Approval of bank securities representative qualifications. No
sponsoring bank may permit any bank employee to, and no bank employee
shall, act as a bank securities representative until the Corporation
has approved the bank employee's application for registration or
transfer on Form U-4B.
(g) Grace period. These qualification requirements apply to all
banks and bank employees with respect to covered transactions
transacted after Date one year after effective date of the Final Rule.
Any bank or bank employee that is not in compliance with this part
after the grace period shall cease engaging in covered transactions
until the requirements are met.
Sec. 342.4 Filing requirements, amendments, and record retention.
(a) All filings required under this part shall be filed with the
Corporation at the NASD.
(b) All information submitted on any filing required under this
part must be true, current, complete, and not misleading at the time
and in light of the circumstances under which it is reported.
(c) A bank shall file an amendment no later than 30 days after
learning of facts or circumstances causing a filing to be inaccurate or
incomplete.
(d)(1) A bank shall retain copies of all filings made on Forms U-4B
and U-5B, including amendments, for not less than three years after the
employee terminates employment with the sponsoring bank or ceases to
act as a bank securities representative.
(2) A bank shall retain copies of all filings made on Forms SB and
SBW and any applications under Sec. 342.6, including amendments, for
not less than three years after the bank terminates its status as a
sponsoring bank.
Sec. 342.5 Optional designation as a bank securities representative.
A bank may sponsor an employee who is engaged in legal, compliance,
internal audit, or similar responsibilities related to covered
transactions or who provides administrative support functions for a
bank securities representative, and who is not subject to
disqualification (unless a waiver is granted pursuant to Sec. 342.6),
to take the appropriate qualification examination. Such sponsored
employee must meet all filing and continuing education requirements in
order to be deemed to be a bank securities representative for purposes
of this part.
[[Page 68839]]
Sec. 342.6 Applications by banks and bank employees ``subject to
disqualification.''
A sponsoring bank may seek, by written application to the
Corporation on behalf of itself or an employee, relief from being
subject to disqualification and permission to engage in covered
transactions or to qualify as a bank securities representative, as
appropriate. The Corporation may, consistent with safety and soundness,
the public interest, and the protection of investors, grant such relief
consistent with its enforcement powers and on such terms and conditions
as the Corporation considers necessary or appropriate.
Sec. 342.7 Continuing education and training requirements.
A bank securities representative and a sponsoring bank shall comply
with the following continuing education requirements:
(a) Bank securities representative requirements. (1) Each bank
securities representative shall complete, within 120 days of the
second, fifth, and tenth anniversaries of passing the appropriate
qualification examination, the Continuing Education Program
administered by the NASD.
(2) The required training intervals for bank securities
representatives who were registered with an SSRO prior to being
employed by the sponsoring bank are measured from the date of SSRO
registration. The bank securities representative requirements of the
continuing education requirement will be met as of the tenth
anniversary of a bank securities representative's registration with a
banking agency and/or SSRO, provided the bank securities representative
is not subject to paragraph (a)(4) of this section.
(3) If a bank securities representative has been subject to a
disciplinary action within the ten years prior to the effective date of
this part, or at any time since that effective date, the bank
securities representative must complete the Continuing Education
Program administered by the NASD within 120 days of the disciplinary
action and no later than the second, fifth, and tenth anniversaries of
the disciplinary action.
(4) Unless otherwise determined by the Corporation, any bank
securities representative who does not complete the requirements within
the prescribed time frames may not perform any bank securities
representative duties. The Corporation may, upon application and a
showing of good cause, allow additional time for a bank securities
representative to satisfy the program requirements.
(b) Sponsoring bank requirements. (1) A sponsoring bank shall not
permit any employee to act as a bank securities representative unless
the employee has complied with the requirements set forth in paragraphs
(a)(1) through (a)(4) of this section.
(2) A sponsoring bank shall maintain a continuing education program
for its bank securities representatives. A sponsoring bank, at least
annually, shall evaluate and prioritize its training needs and develop
or update, as appropriate, a written training plan. The plan must take
into consideration the bank's size, organizational structure, and scope
of business activities. Programs used to implement a sponsoring bank's
training plan must be appropriate for the business of that bank and, at
a minimum, must cover the following matters concerning securities
products, services, and strategies offered by the bank:
(i) General investment features and associated risk factors;
(ii) Suitability and sales practice considerations;
(iii) Applicable regulatory requirements; and
(iv) Bank policies and procedures for covered transactions.
(3) A sponsoring bank shall administer its continuing education
programs in accordance with its annual evaluation and written plan and
must maintain records documenting the content of the programs and
completion of the programs by its bank securities representatives. A
bank may choose to use commercial training material and outside vendors
to assist in meeting this education requirement if it ensures that the
training material or program meets the content standards set forth in
paragraph (b)(2) of this section.
Sec. 342.8 Confidentiality of qualification examinations.
Every bank and bank employee shall maintain the confidentiality of
qualification examinations and shall not remove from an examination
center, reproduce, disclose, receive from or pass to any person, or use
for study or any other purposes, any portion of an examination, whether
of a present or past series, that would compromise the integrity of the
examinations, or use in any manner and at any time the questions or
answers to the examination.
By Order of the Board of Directors.
Dated at Washington, D.C., this 11th day of December, 1996.
Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 96-32326 Filed 12-27-96; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P
