[Federal Register Volume 61, Number 81 (Thursday, April 25, 1996)]
[Proposed Rules]
[Pages 18470-18477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9919]
[[Page 18469]]
_______________________________________________________________________
Part II
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 13
Federal Reserve System
12 CFR Parts 208 and 211
Federal Deposit Insurance Corporation
12 CFR Part 368
_______________________________________________________________________
Government Securities Sales Practices; Proposed Rule
Federal Register / Vol. 61, No. 81 / Thursday, April 25, 1996 /
Proposed Rules
[[Page 18470]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 13
[Docket No. 96-09]
RIN 1557-AB52
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 211
[Regulations H and K, Docket No. R-0921]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 368
RIN 3064-AB66
Government Securities Sales Practices
AGENCIES: Office of the Comptroller of the Currency; Board of Governors
of the Federal Reserve System; Federal Deposit Insurance Corporation.
ACTION: Joint notice of proposed rulemaking.
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SUMMARY: The Comptroller of the Currency (OCC), Board of Governors of
the Federal Reserve System (Board), and the Federal Deposit Insurance
Corporation (FDIC)(collectively, Federal banking agencies or agencies)
are requesting comment on a proposed rule regarding the
responsibilities of banks that are government securities brokers or
dealers with respect to sales practices concerning government
securities. The proposed rule would establish standards concerning the
recommendations to customers and the conduct of business by a bank that
is a government securities broker or dealer. The agencies also propose
to adopt an interpretation concerning recommendations to institutional
customers with respect to government securities transactions.
DATES: Comments must be received by June 24, 1996.
ADDRESSES: Comments should be directed to:
OCC: Communications Division, Office of the Comptroller of the
Currency, 250 E Street, SW., Washington, DC 20219, Attention: Docket
No. 96-09; FAX number 202/874-5274 or internet address
regs.comments@occ.treasury.gov. Comments may be inspected and
photocopied at the same location.
Board: William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551, Attention: Docket No. R-0921, or delivered to
room B-2222, 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 Governor's
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 NW., Washington,
DC 20429. Comments may be delivered to Room F-400, 1776 F Street, NW.,
Washington, DC 20429, on business days between 8:30 a.m. and 5 p.m. or
sent by facsimile transmission to FAX number 202/898-3838 or via
Internet to: comments@fdic.gov. Comments will be available for
inspection and photocopying in room 7118, 550 17th Street, NW.,
Washington, DC 20429, 8:30 a.m. and 5:00 p.m. on business days.
FOR FURTHER INFORMATION CONTACT: OCC: Ellen Broadman, Director, or
Elizabeth Malone, Senior Attorney, Securities & Corporate Practices
Division (202/874-5210).
Board: Oliver Ireland, Associate General Counsel (202/452-3625), or
Lawranne Stewart, Senior Attorney (202/452-3513), Legal Division. For
the hearing impaired only, Telecommunication Device for the Deaf (TDD),
Earnestine Hill or Dorothea Thompson (202/452-3544).
FDIC: William A. Stark, Assistant Director (202/898-6972), Miguel
Browne, Deputy Assistant Director (202/898-6789), Dennis Olson, Senior
Financial Analyst (202/898-7212), Division of Supervision; Jeffrey M.
Kopchik, Counsel, (202/898-3872), Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street, N.W. Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION: The Government Securities Act Amendments of
1993 (Amendments) included a provision permitting the Federal banking
agencies to adopt sales practice rules for sales of government
securities by banks that have filed, or are required to file, notice as
government securities brokers or dealers. The Amendments also
authorized the National Association of Securities Dealers (NASD) to
adopt sales practice rules with respect to sales of government
securities by government securities broker/dealers that are members of
the NASD. See Pub.L. 103-202, section 106 (15 U.S.C. 78o-3 and 78o-5).
The NASD, acting under its new authority, has approved a proposal
to extend its Rules of Fair Practice, where appropriate, to activities
relating to government securities, and has forwarded the proposal to
the Securities and Exchange Commission (SEC) for approval.1 The
NASD proposal includes the extension to government securities
transactions of section 1 (NASD Business Conduct Rule) and section 2
(NASD Suitability Rule) of Article III of the NASD Rules of Fair
Practice (NASD Rules). At the same time, the NASD approved an
interpretation concerning suitability obligations to institutional
customers under section 2 (NASD Suitability Interpretation).2 This
interpretation addresses the responsibilities of brokers and dealers
under the NASD Suitability Rule with respect to recommendations to
institutional customers and also is subject to SEC approval.
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\1\ Amendments to the NASD proposal have been published for
comment by the SEC. 61 FR 11655 (March 21, 1996). The comment period
on this notice closes on April 22, 1996. The full NASD proposal was
published for comment by the SEC on October 24, 1995. 60 FR 54530.
\2\ Id. The NASD published its proposed interpretation for
comment on two occasions prior to its adoption. See NASD Notice to
Members 95-21 (April 1995) and NASD Notice to Members 94-62 (August
1994).
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The OCC, Board, and the FDIC are requesting comment on the adoption
of rules substantially similar to the NASD Business Conduct Rule and
the NASD Suitability Rule and on the adoption of an interpretation
substantially similar to the NASD Suitability Interpretation.3 The
agencies request comment on the application of such requirements to the
government securities transactions of banks that are required to file
notice under the provisions of the Government Securities Act (15 U.S.C.
78o-5(a)) and applicable Treasury rules (17 CFR 400.1(d) and 401).
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\3\ Should further amendments be made to the NASD proposal with
respect to the NASD Business Conduct or Suitability Rules or the
NASD Suitability Interpretation prior to final approval by the SEC,
the agencies will consider incorporating such amendments into the
final rule. Commenters therefore should consider any further
amendments to the NASD proposal in commenting on the agencies'
proposed rules.
Additionally, at the present time the agencies are not
considering the adoption of rules similar to other NASD Rules, as
the agencies believe that the standard established by the NASD
Business Conduct Rule is sufficiently broad that practices that
arise in connection with the government securities activities of
banks may be dealt with adequately under such a rule.
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The NASD Rules
The NASD Business Conduct Rule provides that ``[a] member, in the
conduct of his business, shall observe high standards of commercial
honor and just and equitable principles of trade.'' 4
[[Page 18471]]
The NASD Suitability Rule provides that, in recommending a transaction
to a customer, a member must have ``reasonable grounds for believing
that the recommendation is suitable for such customer upon the basis of
the facts, if any, disclosed by such customer as to his other security
holdings and as to his financial situation and needs.'' 5 The rule
also provides that, for customers that are not institutional customers,
the member must make reasonable efforts to obtain information
concerning the customer's financial and tax status and investment
objectives before executing a transaction recommended to the
customer.6 The NASD Suitability Rule applies only in situations
where a member makes a ``recommendation'' to its customer.
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\4\ NASD Rules of Fair Practice (NASD Rules), Article III,
section 1. The agencies do not propose to adopt any of the NASD's
specific interpretations of this rule.
\5\ NASD Rules, Article III, section 2(a).
\6\ NASD Rules, Art. III, section 2(b). For the purposes of
section 2, an institutional customer includes a bank, savings and
loan association, insurance company, registered investment company
or investment advisor, or any other entity with total assets of at
least $50 million. NASD Rules, Art. III, section 21. As part of the
revisions to the NASD Rules, this definition will be incorporated in
section 2.
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The NASD Suitability Interpretation
The NASD Suitability Interpretation identifies factors that may be
relevant when evaluating compliance with the NASD Suitability Rule with
respect to an institutional customer other than a natural person. The
interpretation sets forth the two most important considerations in
determining the scope of a government securities broker's or dealer's
responsibilities under the NASD Suitability Rule with respect to an
institutional customer. Those two considerations are (1) the customer's
capability to evaluate investment risk independently and (2) the extent
to which the customer exercises independent judgement in evaluating a
member's recommendation. The NASD Suitability Interpretation provides
that a government securities broker or dealer may be considered to have
met the requirements of the NASD Suitability Rule with respect to a
particular institutional customer where the government securities
broker or dealer has reasonable grounds to determine that the
institutional customer is capable of independently evaluating
investment risk and is exercising independent judgement in evaluating a
recommendation.
The NASD Suitability Interpretation sets forth certain factors for
brokers or dealers to apply in evaluating an institutional customer's
capacity to evaluate investment risk independently. Factors considered
relevant to this determination include the customer's use of
consultants or advisors, the experience of the customer generally and
with respect to the specific instrument, the customer's ability to
understand the investment and to evaluate independently the effect of
market developments on the investment, and the complexity of the
security involved. The interpretation stresses that an institutional
customer's ability to evaluate investment risk independently may vary
depending on the particular type of investment at issue. An
institutional customer with general ability to evaluate investment risk
may be less able to do so when dealing with new types of instruments or
instruments with which the customer has little or no experience.
The NASD Suitability Interpretation further provides that a
determination that an institutional customer is making an independent
investment decision depends on factors such as the understanding
between the member and its customer as to the nature of their
relationship, the presence or absence of a pattern of acceptance of the
member's recommendations, the customer's use of ideas, suggestions, and
information obtained from other market professionals, and the extent to
which the customer has provided the member with information concerning
its portfolio or investment objectives.
While the NASD Suitability Interpretation provides that these
factors would be considered relevant in evaluating whether a government
securities broker or dealer has fulfilled the requirements of the NASD
Suitability Rule with respect to any institutional customer that is not
a natural person, it further provides that the factors cited would be
considered most relevant for an institutional customer with at least
$10 million of assets in its securities portfolio or under management.
Rules Applicable to Banks
The agencies are requesting comment on whether they should adopt
rules substantially similar to the NASD Business Conduct Rule and
Suitability Rule and the NASD Suitability Interpretation for banks that
are government securities brokers or dealers in order to provide
standards with respect to government securities sales practices by such
banks. Compliance with such rules by a bank would be enforced
principally through the examination process on the basis of the
examiner's assessment of an institution's policies and procedures and
its adherence to those policies and procedures.7 The NASD Rules,
on the other hand, are enforced through complaints filed with, and
proceedings before, an NASD District Business Conduct Committee or
other NASD committee.8 The differences in the process by which
such rules would be applied to banks may raise questions as to whether
the rules should be modified to reflect the bank supervisory
structure.9
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\7\ The legislative history of the Government Securities Act
Amendments of 1993 provides no indication that Congress intended the
amendments included in section 106 of that act to create a private
right of action, and the agencies do not intend to create a private
right of action by a customer against a bank based on a violation of
the agencies' rule or interpretation. See Touche Ross & Co. v.
Redington, 442 U.S. 560 (1979).
\8\ See generally NASD Code of Procedure.
\9\ In this regard, the agencies note that the rules of the
Municipal Securities Rulemaking Board (MSRB) are enforced through
the bank examination process with respect to banks that are brokers
or dealers in municipal securities. The MSRB rules include
provisions that are similar to the NASD Business Conduct Rule and
Suitability Rule. See MSRB Rules G-17 and G-19.
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Request for Comments
The agencies request comment generally as to the need for and
desirability of the proposed rule and interpretation, and on the
following specific issues:
(1) Should the agencies adopt rules that are substantially similar
to the NASD Business Conduct Rule and the NASD Suitability Rule, or
would other rules be more appropriate? Under the NASD Suitability Rule,
a member must make recommendations based on any facts disclosed by the
customer as to the customer's other securities holdings, financial
situation and needs, but the member is required to request information
concerning financial and tax status and investment objectives only from
non-institutional customers. Should a bank, like an NASD member, be
required to request such information of non-institutional customers
before making a recommendation, or should a bank be able to base
recommendations on the customer's investment objectives alone, without
requesting or considering information concerning the customer's other
holdings and financial situation when such information has not been
volunteered? In the alternative, should the rule for banks be uniform
for both institutional and non-institutional customers?
(2) In considering whether an alternative to the NASD Rules would
be appropriate for banks operating as government securities brokers and
dealers, are there benefits to consistency among government securities
brokers and dealers that the agencies should
[[Page 18472]]
consider? Given the differences in enforcement mechanisms, will equal
treatment of customers be more likely to be achieved by a rule that is
consistent with the NASD rule or by an alternative rule?
(3) Does a rule substantially similar to the NASD Business Conduct
Rule provide a sufficiently clear standard for the conduct of sales of
government securities by a bank that is a government securities broker
or dealer, or is greater specificity preferable?
(4) The proposed rule, like the NASD Suitability Rule, does not
define the term ``recommendation.'' The agencies request comment as to
whether, given the differences in the nature of government securities
in comparison to equity and private debt securities, further guidance
is needed by banks on the activities that may be considered to
constitute a recommendation in connection with discussions concerning
government securities. In particular, is it sufficiently clear that the
provision of market observations, forecasts about the general direction
of interest rates, other descriptive or objective statements concerning
government securities or the government securities markets, or price
quotations would not be considered to constitute making a
``recommendation'' concerning a government security, absent other
conduct?
(5) Although the NASD has proposed to extend its Rules of Fair
Practice generally to transactions in government securities, the
agencies currently are considering only the adoption of rules similar
to the NASD Business Conduct Rule and Suitability Rule and the NASD
Suitability Interpretation for banks acting as government securities
brokers or dealers. Should the agencies consider adopting rules similar
to other sections of the Rules of Fair Practice or interpretations
similar to other NASD interpretations? 10 For example, should the
agencies consider adopting a rule or specific guidelines concerning
banks' supervision of government securities activities? 11
Explicit adoption of other sections of the NASD Rules would provide
more certainty on how the agencies will administer the Business Conduct
and Suitability Rules, but would limit the agencies' ability to apply
those rules flexibly to take into account potentially distinct aspects
of banks acting as government securities brokers or dealers.
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\10\ The agencies note that the NASD does not view all of its
Fair Practice rules and interpretations as applicable to government
securities transactions, and that the manner in which Section 4 is
to apply to such transactions remains under consideration. The
notice published by the SEC includes an amended summary list of the
NASD rules and interpretations and their applicability to
transactions in government securities. 61 FR 11655 (March 21, 1996).
\11\ Article III, section 27, of the NASD Rules addresses
supervision by NASD members, and requires the establishment and
maintenance of a system to supervise the activities of personnel
that is reasonably designed to achieve compliance with applicable
law and rules. In addition to requirements for the establishment of
written procedures, internal inspections, designation of persons
with supervisory responsibility, and investigation of qualifications
of personnel, the rule includes provisions that facilitate oversight
by the NASD.
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(6) Should a bank and its customer be permitted to establish the
standards applicable to the relationship between the customer and the
bank by agreement, effectively contracting out of the rule? The NASD
Suitability Interpretation provides that written and oral agreements
between the broker or dealer and an institutional customer will be
considered in determining whether the broker or dealer has fulfilled
its obligations under the NASD Suitability Rule. Is this sufficient, or
should the agencies include a more specific provision for bank
contracts? If so, should such a provision be limited to negotiated
contracts, contracts with institutional customers, or some other class
of contracts? For example, an exclusion could be provided for
negotiated contracts, with the presumption that a contract between a
bank and an institutional customer, or some class of institutional
customers, would be considered to be negotiated.
(7) Under the proposed rule, a customer that is not a bank, savings
and loan association, registered investment company, or registered
investment advisor, or that does not have total assets of at least $50
million is considered to be a ``non-institutional customer.'' Is $50
million in total assets an appropriate measure for determining which
entities should be considered to be institutional customers for the
purposes of the rule? Are other measures, such as the amount of
``assets under management'' more appropriate? For example, the NASD
Suitability Interpretation and the agencies' proposed interpretation
states that, while the interpretations are applicable to any customer
that is not a natural person, it is particularly relevant to customers
that have at least $10 million in securities in its portfolio or under
management. If such a measure is more appropriate, what amount of
assets in a portfolio or under management would be appropriate in
determining which entities should be treated as institutional customers
for the purposes of the rule? Should the agencies adopt a measure that
is uniform for both the rule and the interpretation?
A draft rule and interpretation based on the NASD Business Conduct
Rule and Suitability Rule and NASD Suitability Interpretation, but
modified in certain technical respects as needed to apply to banks,
follow.
Regulatory Flexibility Act
Under 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.
Pursuant to section 605(b) of the RFA, the OCC, Board, and the FDIC
each individually certifies that this proposed rule will not have a
significant economic impact on a substantial number of small entities.
As an initial matter, the proposed rule would apply only to those banks
that have given notice or are required to give notice that they are
government securities brokers or dealers under section 15C of the
Securities Exchange Act of 1934 (15 U.S.C. 780-5) and applicable
Treasury rules under section 15C (17 CFR 400.1(d) and 401), including
approximately 300 domestic banks and branches of foreign banks. Most
small banking institutions are not required to give notice under
section 15C, as Treasury rules provide exemptions for financial
institutions that engage in fewer than 500 government securities
brokerage transactions per year and for financial institutions with
government securities dealing activities limited to sales and purchases
in a fiduciary capacity. See 17 CFR 401.3 and 401.4. Other exemptions
from the notice requirements also are available. See 17 CFR Part 401.
Additionally, the agencies note that many banks conduct a
significant portion of their securities activities through subsidiaries
or affiliates that are registered broker-dealers. Securities activities
conducted in registered broker-dealers that are NASD members are
directly subject to the NASD Rules and would not be subject to the
agencies' proposed rule.
Paperwork Reduction Act
In accordance with section 3506 of the Paperwork Reduction Act of
1995
[[Page 18473]]
(44 U.S.C. 3506; see also 5 CFR 1320 Appendix A.1), the agencies have
reviewed the proposed rule and have determined that no collections of
information pursuant to the Paperwork Reduction Act are contained in
the proposed rule.
OCC Executive Order 12866 Statement
The OCC has determined that this joint proposed rule is not a
significant regulatory action as defined in Executive Order 12866.
OCC Unfunded Mandates Act of 1995 Statement
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act), requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in the expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. As discussed in the preamble,
the joint proposed rule sets forth sales practice responsibilities of
banks that are government securities brokers or dealers. The OCC has
therefore determined that the rule will not result in expenditures by
State, local, or tribal governments or by the private sector of more
than $100 million. Accordingly, the OCC has not prepared a budgetary
impact statement or addressed specifically the regulatory alternatives
considered.
List of Subjects
12 CFR Part 13
Government securities, National banks.
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Flood insurance,
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 368
Banks, banking, Government securities.
Office of the Comptroller of the Currency
12 CFR CHAPTER I
Authority and Issuance
For the reasons set out in the preamble, a new part 13 of chapter I
of title 12 of the Code of Federal Regulations is proposed to be added
to read as follows:
PART 13--GOVERNMENT SECURITIES SALES PRACTICES
Sec.
13.1 Scope.
13.2 Definitions.
13.3 Business conduct.
13.4 Recommendations to customers.
13.5 Customer information.
Interpretations
13.100 Obligations concerning institutional customers.
Authority: 12 U.S.C. 1 et seq., and 93a; 15 U.S.C. 78o-5.
Sec. 13.1 Scope.
This part applies to national banks that have filed notice as, or
are required to file notice as, government securities brokers or
dealers pursuant to section 15C of the Securities Exchange Act (15
U.S.C. 78o-5) and Department of Treasury rules under section 15C (17
CFR 401.1(d) and 401).
Sec. 13.2 Definitions.
(a) Bank that is a government securities broker or dealer means a
national bank that has filed notice, or is required to file notice, as
a government securities broker or dealer pursuant to section 15C of the
Securities Exchange Act (15 U.S.C. 78o-5) and Department of Treasury
rules under section 15C (17 CFR 401.1(d) and 401).
(b) Customer does not include a broker or dealer or a government
securities broker or dealer.
(c) Non-institutional customer means any customer other than:
(1) A bank, savings association, insurance company, or registered
investment company;
(2) An investment advisor registered under section 203 of the
Investment Advisors Act of 1940 (15 U.S.C. 80b-3); or
(3) Any entity (whether a natural person, corporation, partnership,
trust, or otherwise) with total assets of at least $50 million.
Sec. 13.3 Business conduct.
A bank that is a government securities broker or dealer shall
observe high standards of commercial honor and just and equitable
principles of trade in the conduct of its business as a government
securities broker or dealer.
Sec. 13.4 Recommendations to customers.
In recommending to a customer the purchase, sale or exchange of a
government security, a bank that is a government securities broker or
dealer shall have reasonable grounds for believing that the
recommendation is suitable for the customer upon the basis of the
facts, if any, disclosed by the customer as to the customer's other
security holdings and as to the customer's financial situation and
needs.
Sec. 13.5 Customer information.
Prior to the execution of a transaction recommended to a non-
institutional customer, a bank that is a government securities broker
or dealer shall make reasonable efforts to obtain information
concerning:
(a) The customer's financial status;
(b) The customer's tax status;
(c) The customer's investment objectives; and
(d) Such other information used or considered to be reasonable by
the bank in making recommendations to the customer.
Interpretations
Sec. 13.100 Obligations concerning institutional customers.
(a) Under Sec. 13.4, a bank that is a government securities broker
or dealer must have reasonable grounds for believing that a
recommendation to a customer concerning a government security is
suitable for the customer, based on any facts disclosed by the customer
concerning the customer's other security holdings and financial
situation and needs. The interpretation in this section identifies
factors that may be relevant when considering the bank's compliance
with Sec. 13.4 with respect to an institutional customer. These factors
are not intended to be requirements or the only factors to be
considered, but are offered merely as guidance in determining the scope
of a bank's obligations under Sec. 13.4.
(b) The two most important considerations in determining the scope
of a bank's obligation under Sec. 13.4 in making recommendations to an
institutional customer are the customer's capability to evaluate
investment risk independently and the extent to which the customer is
exercising independent judgement in evaluating a bank's recommendation.
A bank must determine, based on the information available to it, the
customer's capability to evaluate investment risk. In some cases, the
bank may conclude that the customer is not capable of making
independent investment decisions in general. In
[[Page 18474]]
other cases, the institutional customer may have general capability,
but may not be able to understand a particular type of instrument or
its risk. This is more likely to arise with relatively new types of
instruments, or those with significantly different risk or volatility
characteristics than other investments generally made by the customer.
If a customer is either generally not capable of evaluating investment
risk or lacks sufficient capability to evaluate the particular product,
the scope of a bank's obligation under Sec. 13.4 would not be
diminished by the fact that the bank was dealing with an institutional
customer. On the other hand, the fact that a customer initially needed
help understanding a potential investment need not necessarily imply
that the customer did not ultimately develop an understanding and make
an independent investment decision.
(c) A bank may conclude that a customer is exercising independent
judgement if the customer's investment decision will be based on its
own independent assessment of the opportunities and risks presented by
a potential investment, market factors and other investment
considerations. Where the bank has reasonable grounds for concluding
that the institutional customer is making independent investment
decisions and is capable of independently evaluating investment risk,
then a bank's obligations under Sec. 13.4 for a particular customer are
fulfilled. Where a customer has delegated decision-making authority to
an agent, such as an investment advisor or a bank trust department, the
interpretation in this section shall be applied to the agent.
(d) A determination of capability to evaluate investment risk
independently will depend on an examination of the customer's
capability to make its own investment decisions, including the
resources available to the customer to make informed decisions.
Relevant considerations could include:
(1) The use of one or more consultants, investment advisers, or
bank trust departments;
(2) The general level of experience of the institutional customer
in financial markets and specific experience with the type of
instruments under consideration;
(3) The customer's ability to understand the economic features of
the security involved;
(4) The customer's ability to independently evaluate how market
developments would affect the security; and
(5) The complexity of the security or securities involved.
(e) A determination that a customer is making independent
investment decisions will depend on the nature of the relationship that
exists between the bank and the customer. Relevant considerations could
include:
(1) Any written or oral understanding that exists between the bank
and the customer regarding the nature of the relationship between the
bank and the customer and the services to be rendered by the bank;
(2) The presence or absence of a pattern of acceptance of the
bank's recommendations;
(3) The use by the customer of ideas, suggestions, market views and
information obtained from other government securities brokers or
dealers or market professionals, particularly those relating to the
same type of securities; and
(4) The extent to which the bank has received from the customer
current comprehensive portfolio information in connection with
discussing recommended transactions or has not been provided important
information regarding its portfolio or investment objectives.
(f) These factors are guidelines that will be utilized to determine
whether a bank is in compliance with Sec. 13.4 with respect to a
specific institutional customer's transaction. The inclusion or absence
of any of these factors is not dispositive of the determination of
suitability. Such a determination can only be made on a case-by-case
basis taking into consideration all the facts and circumstances of a
particular bank/customer relationship, assessed in the context of a
particular transaction.
(g) For purposes of the interpretation in this section, an
institutional customer is any entity other than a natural person. In
determining the applicability of the interpretation in this section to
an institutional customer, the OCC will consider the dollar value of
the securities that the institutional customer has in its portfolio
and/or under management. While the interpretation in this section is
potentially applicable to any institutional customer, the guidance
contained in this section is more appropriately applied to an
institutional customer with at least $10 million invested in securities
in the aggregate in its portfolio and/or under management.
Dated: April 4, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
Federal Reserve System
Authority and Issuance
For the reasons set forth in the joint preamble, parts 208 and 211
of chapter II of title 12 of the Code of Federal Regulations are
proposed to be amended as follows:
12 CFR CHAPTER II
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(a), 248(c), 321-338a, 371d, 461,
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105,
3310, 3331-3351 and 3906-3909; 15 U.S.C. 78b, 78l(b), 781(g),
781(i), 78o-4(c)(5), 78o-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 to subpart A to read as follows:
Sec. 208.25 Government securities sales practices.
(a) Scope. This subpart is applicable to state member banks that
have filed notice as, or are required to file notice as, government
securities brokers or dealers pursuant to section 15C of the Securities
Exchange Act (15 U.S.C. 78o-5) and Department of Treasury rules under
section 15C (17 CFR 401.1(d) and 401).
(b) Definitions.--(1) Bank that is a government securities broker
or dealer means a state member bank that has filed notice, or is
required to file notice, as a government securities broker or dealer
pursuant to section 15C of the Securities Exchange Act (15 USC
Sec. 78o-5) and Department of Treasury rules under section 15C (17 CFR
401.1(d) and 401).
(2) Customer does not include a broker or dealer or a government
securities broker or dealer.
(3) Non-institutional customer means any customer other than:
(i) A bank, savings association, insurance company, or registered
investment company;
(ii) An investment advisor registered under section 203 of the
Investment Advisors Act of 1940 (15 U.S.C. 80b-3); or
(iii) Any entity (whether a natural person, corporation,
partnership, trust, or otherwise) with total assets of at least $50
million.
(c) Business conduct. A bank that is a government securities broker
or dealer
[[Page 18475]]
shall observe high standards of commercial honor and just and equitable
principles of trade in the conduct of its business as a government
securities broker or dealer.
(d) Recommendations to customers. In recommending to a customer the
purchase, sale or exchange of a government security, a bank that is a
government securities broker or dealer shall have reasonable grounds
for believing that the recommendation is suitable for the customer upon
the basis of the facts, if any, disclosed by the customer as to the
customer's other security holdings and as to the customer's financial
situation and needs.
(e) Customer information. Prior to the execution of a transaction
recommended to a non-institutional customer, a bank that is a
government securities broker or dealer shall make reasonable efforts to
obtain information concerning:
(1) The customer's financial status;
(2) The customer's tax status;
(3) The customer's investment objectives; and
(4) Such other information used or considered to be reasonable by
the bank in making recommendations to the customer.
3. A new Sec. 208.129 is added to Subpart B to read as follows:
Sec. 208.129 Obligations concerning institutional customers.
(a) Under Sec. 208.25(d), a bank that is a government securities
broker or dealer must have reasonable grounds for believing that a
recommendation to a customer concerning a government security is
suitable for the customer, based on any facts disclosed by the customer
concerning the customer's other security holdings and financial
situation and needs. The interpretation in this section identifies
factors that may be relevant when considering the bank's compliance
with Sec. 208.25(d) with respect to an institutional customer. These
factors are not intended to be requirements or the only factors to be
considered, but are offered merely as guidance in determining the scope
of a bank's obligations under Sec. 208.25(d).
(b) The two most important considerations in determining the scope
of a bank's obligation under Sec. 208.25(d) in making recommendations
to an institutional customer are the customer's capability to evaluate
investment risk independently and the extent to which the customer is
exercising independent judgement in evaluating a bank's recommendation.
A bank must determine, based on the information available to it, the
customer's capability to evaluate investment risk. In some cases, the
bank may conclude that the customer is not capable of making
independent investment decisions in general. In other cases, the
institutional customer may have general capability, but may not be able
to understand a particular type of instrument or its risk. This is more
likely to arise with relatively new types of instruments, or those with
significantly different risk or volatility characteristics than other
investments generally made by the customer. If a customer is either
generally not capable of evaluating investment risk or lacks sufficient
capability to evaluate the particular product, the scope of a bank's
obligation under Sec. 208.25(d) would not be diminished by the fact
that the bank was dealing with an institutional customer. On the other
hand, the fact that a customer initially needed help understanding a
potential investment need not necessarily imply that the customer did
not ultimately develop an understanding and make an independent
investment decision.
(c) A bank may conclude that a customer is exercising independent
judgement if the customer's investment decision will be based on its
own independent assessment of the opportunities and risks presented by
a potential investment, market factors and other investment
considerations. Where the bank has reasonable grounds for concluding
that the institutional customer is making independent investment
decisions and is capable of independently evaluating investment risk,
then a bank's obligations under Sec. 208.25(d) for a particular
customer are fulfilled. Where a customer has delegated decision-making
authority to an agent, such as an investment advisor or a bank trust
department, this interpretation shall be applied to the agent.
(d) A determination of capability to evaluate investment risk
independently will depend on an examination of the customer's
capability to make its own investment decisions, including the
resources available to the customer to make informed decisions.
Relevant considerations could include:
(1) The use of one or more consultants, investment advisers or bank
trust departments;
(2) The general level of experience of the institutional customer
in financial markets and specific experience with the type of
instruments under consideration;
(3) The customer's ability to understand the economic features of
the security involved;
(4) The customer's ability to independently evaluate how market
developments would affect the security; and
(5) The complexity of the security or securities involved.
(e) A determination that a customer is making independent
investment decisions will depend on the nature of the relationship that
exists between the bank and the customer. Relevant considerations could
include:
(1) Any written or oral understanding that exists between the bank
and the customer regarding the nature of the relationship between the
bank and the customer and the services to be rendered by the bank;
(2) The presence or absence of a pattern of acceptance of the
bank's recommendations;
(3) The use by the customer of ideas, suggestions, market views and
information obtained from other government securities brokers or
dealers or market professionals, particularly those relating to the
same type of securities; and
(4) The extent to which the bank has received from the customer
current comprehensive portfolio information in connection with
discussing recommended transactions or has not been provided important
information regarding its portfolio or investment objectives.
(f) These factors are guidelines that will be utilized to determine
whether a bank is in compliance with Sec. 208.25(d) with respect to a
specific institutional customer's transaction. The inclusion or absence
of any of these factors is not dispositive of the determination of
suitability. Such a determination can only be made on a case-by-case
basis taking into consideration all the facts and circumstances of a
particular bank/customer relationship, assessed in the context of a
particular transaction.
(g) For purposes of the interpretation in this section, an
institutional customer is any entity other than a natural person. In
determining the applicability of the interpretation in this section to
an institutional customer, the Board will consider the dollar value of
the securities that the institutional customer has in its portfolio
and/or under management. While the interpretation in this section is
potentially applicable to any institutional customer, the guidance
contained in this section is more appropriately applied to an
institutional customer with at least $10 million invested in securities
in the aggregate in its portfolio and/or under management.
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[[Page 18476]]
PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)
1. The authority citation for Part 211 is revised to read as
follows:
Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3101 et
seq., 3109 et seq.; 15 U.S.C. 78o-5.
2. Section 211.24 is amended by revising the section heading and
adding a new paragraph (g) to read as follows: Sec. 211.24 Approval of
offices of foreign banks; procedures for applications; standards for
approval; representative-office activities and standards for approval;
preservation of existing authority; reports of crimes and suspected
crimes; government securities sales practices.
* * * * *
(g) Government securities sales practices An uninsured state-
licensed branch or agency of a foreign bank that is required to give
notice to the Board under section 15C of the Securities Exchange Act of
1934 (15 U.S.C. 78o-5) and the Department of the Treasury rules under
section 15C (17 CFR 400.1(d) and 401) shall be subject to the
provisions of 12 CFR 208.25 to the same extent as a state member bank
that is required to give such notice.
By order of the Board of Governors of the Federal Reserve Board,
April 17, 1996.
William W. Wiles,
Secretary of the Board.
Federal Deposit Insurance Corporation
Authority and Issuance
For the reasons set out in the preamble, a new part 368 of chapter
III of title 12 of the Code of Federal Regulations is proposed to be
added to read as follows:
12 CFR CHAPTER III
PART 368--GOVERNMENT SECURITIES SALES PRACTICES
Sec.
368.1 Scope.
368.2 Definitions.
368.3 Business conduct.
368.4 Recommendations to customers.
368.5 Customer information.
368.100 Interpretations.
Authority: 15 U.S.C. 78o-5.
Sec. 368.1 Scope.
This part is applicable to state nonmember banks and insured state
branches of foreign banks that have filed notice as, or are required to
file notice as, government securities brokers or dealers pursuant to
section 15C of the Securities Exchange Act (15 U.S.C. 78o-5) and
Department of Treasury rules under section 15C (17 CFR 401.1(d) and
401).
Sec. 368.2 Definitions.
(a) Bank that is a government securities broker or dealer means a
state nonmember bank or an insured state branch of a foreign bank that
has filed notice, or is required to file notice, as a government
securities broker or dealer pursuant to section 15C of the Securities
Exchange Act (15 U.S.C. 78o-5) and Department of Treasury rules under
section 15C (17 CFR 401.1(d) and 401).
(b) Customer does not include a broker or dealer or a government
securities broker or dealer.
(c) Non-institutional customer means any customer other than:
(1) A bank, savings association, insurance company, or registered
investment company;
(2) An investment advisor registered under section 203 of the
Investment Advisors Act of 1940 (15 U.S.C. 80b-3); or
(3) Any entity (whether a natural person, corporation, partnership,
trust, or otherwise) with total assets of at least $50 million.
Sec. 368.3 Business conduct.
A bank that is a government securities broker or dealer shall
observe high standards of commercial honor and just and equitable
principles of trade in the conduct of its business as a government
securities broker or dealer.
Sec. 368.4 Recommendations to customers.
In recommending to a customer the purchase, sale or exchange of a
government security, a bank that is a government securities broker or
dealer shall have reasonable grounds for believing that the
recommendation is suitable for the customer upon the basis of the
facts, if any, disclosed by the customer as to the customer's other
security holdings and as to the customer's financial situation and
needs.
Sec. 368.5 Customer information.
Prior to the execution of a transaction recommended to a non-
institutional customer, a bank that is a government securities broker
or dealer shall make reasonable efforts to obtain information
concerning:
(a) The customer's financial status;
(b) The customer's tax status;
(c) The customer's investment objectives; and
(d) Such other information used or considered to be reasonable by
such bank in making recommendations to the customer.
Sec. 368.100 Interpretation.
(a) Under Sec. 368.4, a bank that is a government securities broker
or dealer must have reasonable grounds for believing that a
recommendation to a customer concerning a government security is
suitable for the customer, based on any facts disclosed by the customer
concerning the customer's other security holdings and financial
situation and needs. The interpretation in this section identifies
factors that may be relevant when considering the bank's compliance
with Sec. 368.4 with respect to an institutional customer. These
factors are not intended to be requirements or the only factors to be
considered, but are offered merely as guidance in determining the scope
of a bank's obligations under Sec. 368.4.
(b) The two most important considerations in determining the scope
of a bank's obligation under Sec. 368.4 in making recommendations to an
institutional customer are the customer's capability to evaluate
investment risk independently and the extent to which the customer is
exercising independent judgement in evaluating a bank's recommendation.
A bank must determine, based on the information available to it, the
customer's capability to evaluate investment risk. In some cases, the
bank may conclude that the customer is not capable of making
independent investment decisions in general. In other cases, the
institutional customer may have general capability, but may not be able
to understand a particular type of instrument or its risk. This is more
likely to arise with relatively new types of instruments, or those with
significantly different risk or volatility characteristics than other
investments generally made by the customer. If a customer is either
generally not capable of evaluating investment risk or lacks sufficient
capability to evaluate the particular product, the scope of a bank's
obligation under Sec. 368.4 would not be diminished by the fact that
the bank was dealing with an institutional customer. On the other hand,
the fact that a customer initially needed help understanding a
potential investment need not necessarily imply that the customer did
not ultimately develop an understanding and make an independent
investment decision.
(c) A bank may conclude that a customer is exercising independent
judgement if the customer's investment decision will be based on its
own independent assessment of the opportunities and risks presented by
a potential investment, market factors and other investment
considerations. Where
[[Page 18477]]
the bank has reasonable grounds for concluding that the institutional
customer is making independent investment decisions and is capable of
independently evaluating investment risk, then a bank's obligations
under Sec. 368.4 for a particular customer are fulfilled. Where a
customer has delegated decision-making authority to an agent, such as
an investment advisor or a bank trust department, the interpretation in
this section shall be applied to the agent.
(d) A determination of capability to evaluate investment risk
independently will depend on an examination of the customer's
capability to make its own investment decisions, including the
resources available to the customer to make informed decisions.
Relevant considerations could include:
(1) The use of one or more consultants, investment advisers or bank
trust departments;
(2) The general level of experience of the institutional customer
in financial markets and specific experience with the type of
instruments under consideration;
(3) The customer's ability to understand the economic features of
the security involved;
(4) The customer's ability to independently evaluate how market
developments would affect the security; and
(5) The complexity of the security or securities involved.
(e) A determination that a customer is making independent
investment decisions will depend on the nature of the relationship that
exists between the bank and the customer. Relevant considerations could
include:
(1) Any written or oral understanding that exists between the bank
and the customer regarding the nature of the relationship between the
bank and the customer and the services to be rendered by the bank;
(2) The presence or absence of a pattern of acceptance of the
bank's recommendations;
(3) The use by the customer of ideas, suggestions, market views and
information obtained from other government securities brokers or
dealers or market professionals, particularly those relating to the
same type of securities; and
(4) The extent to which the bank has received from the customer
current comprehensive portfolio information in connection with
discussing recommended transactions or has not been provided important
information regarding its portfolio or investment objectives.
(f) These factors are guidelines that will be utilized to determine
whether a bank is in compliance with Sec. 368.4 with respect to a
specific institutional customer's transaction. The inclusion or absence
of any of these factors is not dispositive of the determination of
suitability. Such a determination can only be made on a case-by-case
basis taking into consideration all the facts and circumstances of a
particular bank/customer relationship, assessed in the context of a
particular transaction.
(g) For purposes of the interpretation in this section, an
institutional customer is any entity other than a natural person. In
determining the applicability of the interpretation in this section to
an institutional customer, the FDIC will consider the dollar value of
the securities that the institutional customer has in its portfolio
and/or under management. While the interpretation in this section is
potentially applicable to any institutional customer, the guidance
contained in this section is more appropriately applied to an
institutional customer with at least $10 million invested in securities
in the aggregate in its portfolio and/or under management.
By order of the Board of Directors, dated at Washington, D.C.,
this 4th day of April, 1996.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 96-9919 Filed 4-24-96; 8:45 am]
BILLING CODES: 4810-33-P, 6210-01-P, 6714-01-P
