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F E D E R A L R ES ERVE B A N K OF D A L L A S
DALLAS. TEXAS

75222

C i r c u l a r No. 78-38
A pril 6, 1978

MISUSE OF INSIDE INVESTMENT INFORMATION

TO ALL STATE MEMBER BANKS IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:

T h e Board of G o v e r n o r s of th e F e d e ra l R e s e r v e System has
is s u e d a policy statem ent c o n c e r n i n g the u s e of in s id e information by a
State m ember b a n k in connection with a n y d e c isio n o r recom m endation to
p u r c h a s e o r sell s e c u r i t i e s . It is th e B o a r d 's ju d g m e n t that th e u s e of
s u c h information c o n s titu te s an u n s a f e o r u n s o u n d b a n k in g p r a c t i c e .
Enclosed is a copy of th e p r e s s r e l e a s e a n d FEDERAL REGISTER
d ocu m ent.
Sincerely yo u rs ,
R o b e r t H . Boykin
F irs t Vice President

E n c lo s u re

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

cy.
o*-

FEDERAL
p r e s s

FOR IMMEDIATE RELEASE

RESERVE

r e l e a s e

March 20, 1978

T h e B oard of G o v e r n o r s of th e F e de ra l R e s e rv e Syste m today is s u e d a policy
s tatem e nt a l e r t i n g State m em ber b a n k s to p e n a ltie s that may a r i s e from the m is u s e of in­
s id e in v e s tm e n t info rm ation, a n d p r o v i d i n g ex am ples of s tep s that could be ta k e n to avoid
violation of F e d e ra l law in th is fie ld .
T h e B oard said th e policy sta te m e n t—w hic h is effective immediately— reflects
th e j u d g m e n t of th e B oard th a t m is u s e of material in s id e information in connection with
s e c u r i t i e s t r a n s a c t i o n s , o r re c om m e n dations a b o u t s u c h t r a n s a c t i o n s , c o n stitu te s an u n ­
safe a n d u n s o u n d b a n k in g p r a c t i c e .
A c c o r d i n g l y , th e statem e nt s a i d , the B oard " e x p e c ts each State m ember b a n k
e x e r c i s i n g in v e stm e n t d is c r e t io n for the a c c o u n ts of o t h e r s to a d o p t w ritt e n policies a n d
p r o c e d u r e s . . .to e n s u r e th a t material in s id e information in its p o s s e s s io n is not m i s u s e d . "
T h e policy statem e n t, affecting chiefly the o p e ra tio n s of t r u s t d e p a r tm e n ts of
State m em ber b a n k s , noted th a t F e d e ra l law g e n e r a l l y p r o h ib i ts the p u r c h a s e or sale of
s e c u r i t i e s b y p e r s o n s p o s s e s s i n g m aterial in s id e information abou t the s e c u r it ie s until the
inform ation th e y h a v e is d i s c l o s e d to th e p u b l i c . If the information c a n n o t be d is clo se d
p u b l i c l y b e c a u s e it w a s o b ta in e d in c o n fid e n ce , h o l d e r s of the information must a b s ta in
from t r a n s a c t i o n s o r reco m m end ations c o n c e r n i n g the s e c u r i t y involved until the informa­
tion is d i v u l g e d .
Violations of t h e s e la w s, th e statem ent no te d, could e x p o s e b a n k s to s e v e r e
financial p e n a l tie s a n d to c rim in a l c h a r g e s .
Information w a s d e fin e d a s b e in g " m aterial" w hen t h e r e is a su b sta n tia l likeli­
hood th a t a r e a s o n a b l e in v e s t o r would c o n s i d e r it im portant in d e c id in g w h e th e r to b u y ,
s e l l , o r hold s e c u r i t i e s .
T h e B oard said th a t in its o p in io n , the p r e v e n t i v e policies a n d p r o c e d u r e s
b a n k s s h o u ld a d o p t s h o u ld limit a c tiv itie s th a t a r e likely to r e s u l t in an im p r o p e r i n t e r ­
c h a n g e of material inform ation. T h e y sh o u ld a lso p r o v id e the b a n k with w ays to deal af­
firm a tiv e ly w ith s u c h information w h e n it comes into the p o s s e s s io n of b a n k p e rs o n n e l who
make in v e stm e n t d e c i s io n s for th e a c c o u n t of o t h e r s . T h e Board u r g e d each State member
b a n k to r e v ie w its policies a n d p r o c e d u r e s to make s u r e th e y would accom p lish th e se p u r ­
p o s e s , in th e p a r t i c u l a r c i r c u m s t a n c e s of the b a n k .
T h e B oard set fo rth the following ex am ples of p o s s ib le a p p r o a c h e s to th e d e v e l o p ­
ment of w r itt e n p o lic ie s a n d p r o c e d u r e s to a v o id the m is u se of m aterial in s id e information:

- 2 -

1.

Denial of a c c e s s b y t r u s t p e r s o n n e l to commercial c r e d i t file s ,
g o v e r n m e n t, a g e n c y , a n d municipal s e c u r i t i e s u n d e r w r i t i n g file s ,
and o t h e r p e r t i n e n t files.

2.

A p ro h ib itio n a g a i n s t a tte n d a n c e b y t r u s t p e r s o n n e l a t p r i v a t e meet­
ings with b a n k lending or u n d e r w r i t i n g p e r s o n n e l , e x c e p t w h e r e the
meeting is held solely to s e e k a new c u s t o m e r re la tio n s h ip .

3.

A p ro h ib itio n a g a i n s t p e r s o n n e l s e r v i n g sim u lta n e o u sly on a committee
a u th o r iz e d to make specific in v e stm en t d e c is io n s o r recom m endations
a n d a committee r e s p o n s i b l e for commercial le n d in g o r u n d e r w r i t i n g of
g o v e r n m e n t is s u e s .

4.

A r e q u i r e m e n t for a p ro m p t r e p o r t to m anagem en t by a n y t r u s t d e p a r t ­
ment, o r t r u s t d e p a r tm e n t e m ployee, of the r e c e i p t of in side information
they sh ould not h a v e , a n d , if m anagem ent d e te r m in e s th a t the informa­
tion is m a te ria l, p ro m p t o r d e r s to:
—Halt all b a n k tr a d in g of the in dicated s e c u r i t y , o r b a n k recom ­
mendations c o n c e r n in g it;
— Determine w h e t h e r th e information is va lid a n d h a s not been made
public ;
—R e q u e s t the i s s u e r or o t h e r a p p r o p r i a t e p a r t i e s to make p e r t i n e n t
information public;
—Seek legal a d v ic e , if th e information is not p u b lic ly d is c l o s e d , as
to w h a t e lse sh o u ld be do n e b e fore t r a d i n g in the s e c u r i t y , or
recom m endations c o n c e r n i n g it, a r e r e s u m e d .

5.

T h e p ro v is io n for e v e r y a c c o u n t, of a copy of the b a n k 's policies a nd
p r o c e d u r e s to the p e r s o n h a v in g p o w e r to te rm in a te th e b a n k ' s d i s ­
c r e t i o n a r y inve stm en t a u th o r ity o v e r the a c c o u n t, o r to the p e r s o n to
whom a n a c c o u n tin g would o r d i n a r i l y b e r e n d e r e d .

6.

Physical s e p a r a tio n of t r u s t a n d commercial b a n k len ding a n d i n v e s t­
ing p e r s o n n e l , a s c ir c u m s ta n c e s allow.
A copy of the B o a r d 's policy statem e nt is a tta c h e d .
- 0-

[6 2 1 0 -0 1 ]

[D ocket No. R 0148]
Policy S M m m i H C o n c a m in g U u o f In tid *
In fo rm a tio n

E x tra c t From
FEDERAL REGISTER,
VOL. 43, NO. 59,
M onday, March 27, 1978
p p . 12755 - 12756

AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Policy statement.
SUMMARY: This policy statement re­
flects the judgment of the Board of
Governors of the Federal Reserve
System that the use of material inside
information by any State member
bank in connection with any decision
or recommendation to purchase or sell
securities constitutes an unsafe and
unsound banking practice. Notifica­
tion is given that the Board of Gover­
nors expects each State member bank
exercising investment discretion for
the accounts of others to adopt writ­
ten policies and procedures suitable to
its particular circumstances to ensure
that such information in its possession
is not misused. Guidelines are pro­
vided to aid State member banks in
the development of such policies and
procedures.
EFFECTIVE DATE: March 17. 1978.
FOR FURTHER INFORMATION
CONTACT:
Robert S. Plotkin, Assistant Direc­
tor. 202-452-2782, or Robert A. Wallgren, Chief, Trust Activities Pro­
gram. 202-452-2717, Division of
Banking Supervision and Regula­
tion, Board of Governors of the Fed­
eral Reserve System, Washington,
D.C. 20551.
SUPPLEMENTARY INFORMATION:
This policy statem ent is issued pursu­
ant to the board's supervisory author­
ity over State member banks con­
tained in section 9 (12 U.S.C. 321) and
section 11 (12 U.S.C. 248(a)) of the
Federal Reserve Act and the Financial
Institutions Supervisory Act of 1966
(12 U.S.C. 1818(b)) and related provi­
sions of law.
S t a t e m e n t o f P o l i c y C o n c e r n i n g U se
o f In s i d e In f o r m a t i o n

Commercial banks may receive infor­
mation about their customers that is
not otherwise available to the public.
In many cases, customers about which
the bank possesses confidential infor­
mation are firms whose securities are
publicly traded. Full-service commer­
cial banks, being institutions that pro­
vide a diversity of services, may, at the
same time such confidential informa­
tion is in their possession, be effecting
purchases or sales of such securities
for trust customers and others and ad­
vising customers as to the purchase or
sale of such securities.
Where confidential information in
the possession of a person is “materi­
al” (i.e.. is of such nature that there is

a substantial likelihood that a reason­
able investor would consider it impor­
tant in deciding whether to buy. sell,
or hold securities). Federal securities
law generally prohibits the purchase
or sale of pertinent securities by such
person until the information is dis­
seminated to the public. A person in
possession of such material inside in­
formation must, before effecting
transactions in the affected security,
disclose to the public such information
or, if unable to do so (e.g., in order to
protect a corporate confidence), must
abstain from trading in or recommend­
ing such securities until the informa­
tion is disclosed. Similarly, divulging
confidential material inside informa­
tion only to one's customers who then
act on the basis of the information vio­
lates Federal securities law.
For a bank to purchase or sell, or
recommend the purchase or sale of, se­
curities on the basis of material inside
information in the bank’s possession
subjects the bank not only to injunc­
tive suits and criminal proceedings,
but also to civil damage suits by per­
sons on the other side of the transac­
tions. In such cases, liability may not
be limited to the persons on the other
side of the transactions, but conceiv­
ably could extend to all persons who
effected transactions in the securities
before the information became public;
thus potential liability could be sub­
stantial in terms of the amount of
damages that may be awarded.
Accordingly, the Board of Governors
will view the use of material inside in­
formation in connection with any deci­
sion or recommendation to purchase
or sell securities as an unsafe and un­
sound banking practice. Furthermore,
the Board expects each State member
bank exercising investment discretion
for the accounts of others to adopt
written policies and procedures, suit­
able to its particular circumstances, to
ensure that such information in its
possession is not misused.
Because the size and organizational
structure of individual banks that
engage in investment activities vary
widely, the Board does not believe
that it should, at this time, mandate
the specific content of policies and
procedures to be adopted. The Board
believes, however, that in general such
policies and procedures should limit
those types of activity that are likely
to give rise to an improper interchange
of material inside information and es­
tablish a course of action for the bank
to deal affirmatively with such infor­
mation that may come into the posses­
sion of personnel engaged in invest­
ment decision making for the accounts
of others. In this connection, the
Board urges each State member bank
to review its organizational structure
and methods of operation to ensure
that its policies and procedures are ap­
propriately tailored to its circum­

stances. System trust examiners will
be instructed to evaluate regularly the
adequacy of policies and procedures
adopted by individual banks.
Set forth below are examples of spe­
cific approaches to dealing with inside
information that State member banks
may wish to consider in the develop­
ment of policies and procedures for
their own use. Although more general­
ly applicable to larger banks, (i.e..
those managing assets for the ac­
counts of others with a market value
over $100 million), they may prove
useful to smaller banks as well.
E xamples

(1) Trust personnel (i.e., bank em­
ployees whose duties include the
making of investment decisions or rec­
ommendations for fiduciary or agency
accounts) should not have access to
commercial credit files, government,
agency, and municipal securities un­
derwriting files or such other files
that the bank can reasonably deter­
mine may contain material inside in­
formation;
(2) Trust personnel should not
attend private meetings between or
among personnel engaged in commer­
cial lending activities or in underwrit­
ing government, agency, and munici­
pal securities, on the one hand, and
bank customers on the other, except
where the sole purpose of the meeting
is to seek a new customer relationship;
(3) Officers, directors, or employees
of the bank should not serve simulta­
neously on any committee having re­
sponsibility for the making of invest­
ment decisions or recommendations
with respect to specific transactions
and any committee having responsibil­
ity for commercial lending or govern­
ment, agency, and municipal securities
underwriting activities, unless neces­
sary to the circumstances of the indi­
vidual bank;
(4) All trust department employees
should be advised to report promptly
to the management of the trust de­
partment suspected material inside in­
formation and, upon a determination
by that management that the infor­
mation is material, management
should promptly
(a) Halt all trading by the bank in
the security or securities of the perti­
nent issuer and all recommendations
thereof;
(b) Ascertain the validity and non­
public nature of the information with
the issuer of the securities;
(c) Request the issuer or other ap­
propriate parties to disseminate the
information promptly to the public, if
the information is valid and non­
public;
(d) In the event the information is
not publicly disseminated, notify the
bank's legal counsel and request advice
as to what further steps should be
taken, including possible publication

by the bank of the information, before
transactions or recommendations in
the securities are resumed.
(5) A copy of the bank's policies and
procedures should be furnished for
each fiduciary or agency account for
which the bank exercises investment
discretion to the person having the
power to terminate the account or, if
there is no such person, to the persons
to whom an accounting would ordi­
narily be rendered.
(6) Trust personnel should be sepa­
rated physically from commercial
lending personnel and government,
agency, and municipal securities un­
derwriting personnel to the extent ap­
propriate to the circumstances of the
individual bank.
Board of Governors of the Federal
Reserve System, March 17, 1978.
T

heodore

E . A l l is o n ,

Secretary of the Board.

[ F R D oc. 78-7952 F ile d 3-24-7 8 ; 8:45 a m ]


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102