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F ederal Reserve Bank OF DALLAS ROBERT D. M c T E E R , J R . DALLAS, TEXAS 75265-5906 p re s id e n t AND CHIEF EXECUTIV E O F F IC E R March 31, 1997 Notice 97-28 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Final Amendments to Regulation H (Membership of State Banking Institutions in the Federal Reserve System) DETAILS The Board of Governors of the Federal Reserve System announced adoption of final amendments to Regulation H (Membership of State Banking Institutions in the Federal Reserve System). The amendments pertain to the recordkeeping and confirmation of certain securities transactions. The final amendments are effective April 1, 1997. ATTACHMENT A copy of the Board’s notice as it appears on pages 9909-15, Vol. 62, No. 43, of the Federal Register dated March 5, 1997, is attached. MORE INFORMATION For more information, please contact Daniel Kirkland at (214) 922-6256. For additional copies of this Bank’s notice, please contact the Public Affairs Department at (214) 922-5254. Sincerely yours, For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333 -4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) 9909 Rules and Regulations Federal Register Vol. 62, No. 43 W ednesday, M arch 5, 1997 FOR FURTHER INFORMATION CONTACT: FEDERAL RESERVE SYSTEM 12CFR Part 208 [Regulation H; D ocket No. R -0 90 9 ] Membership of State Banking Institutions in the Federal Reserve System; Recordkeeping and Confirmation of Certain Securities Transactions Effected by State Member Banks Board of Governors of the Federal Reserve System. ACTION: Final rule. AGENCY: The Board of Governors of the Federal Reserve System is adopting final amendments to Regulation H pertaining to the recordkeeping and confirmation of certain securities transactions. The amendments accommodate developments in recordkeeping, confirmation and settlement requirements for broker-dealers by adding certain yield-related confirmation disclosure requirements for transactions involving debt and asset-backed securities effected by State member banks for customers, and providing for three-day settlement of those transactions. The amendments also clarify that State member banks that effect de minimis government securities brokerage transactions and are exempt from registration under Department of the Treasury regulations, also are exempt from Regulation H. Finally, the amendments address the minimum recordkeeping requirements for State member banks exempt from the regulation, require State member banks to establish trading policies and procedures that separate the sales function from the back office function, liberalize the written notification requirements for periodic plans, and include several new definitions and language edits. DATES: Effective April 1,1997. SUMMARY: regulation. Adoption of the amendments will provide continued consistency among the regulations of the agencies and parity with securities industry practices in these important areas. As is the practice with respect to other notification practices of banks, the confirmation and notification requirements of § 208.24 can be satisfied by facsimile and, when the parties agree and the necessary safeguards are in place, via electronic means. Such safeguards should ensure correct delivery, the maintenance of confidentiality and security of the transmission, appropriate notice that the transmission is being sent, and evidence of delivery. In addition, a customer consenting to electronic delivery should still be able to request and obtain a written version of the information. Angela Desmond, Senior Counsel, or Susan Meyers, Senior Securities Regulation Analyst, (202) 452-2781. For users of Telecommunications Device for the Deaf (TDD), please contact Dorothea Thompson, (202/452-3544), Board of Governors of the Federal Reserve System, Washington, D.C. 20551. SUPPLEMENTARY INFORMATION: The amendments to § 208.24 are part of an interagency effort to update the respective regulations of the Board, the OCC and the FDIC (agencies) that were adopted in 1979 1 as part of a coordinated effort to provide guidance to banks effecting securities transactions for customers in trust departments and in other areas of the bank. The regulations are based on SEC recordkeeping and confirmation rules.2 Recognizing that a number of market and regulatory changes have occurred since the regulation was adopted, the Board, in consultation with the other agencies, published draft amendments for comment on December 26,1995.3 The draft amendments were designed to update the recordkeeping and confirmation requirements of Regulation H to conform with SEC rules, with pertinent Department of the Treasury regulations adopted under the Government Securities Act of 1986, 15 U.S.C. 78o-5, and with principles of safe and sound banking practices. The draft amendments also were consistent with the amendments published by the other agencies.4 After reviewing the comments, the Board has determined to adopt final amendments to Regulation H as described in the section-by-section summary below. The amendments are limited to § 208.24 (formerly § 208.8(k)) of Regulation H and are part of an ongoing comprehensive review of the The Board received twelve comment letters; seven were from Federal Reserve Banks, one from a trade association, three from banks, and one from a law firm. Eleven commenters expressed general support for the proposed amendments, and one bank expressed general concern with the complexity and burden of complying with the regulation. Six commenters stated that the proposed amendments would not have a significant cost or burden impact on banks. Several commenters offered constructive suggestions that were incorporated into the final amendments. In addition, certain organizational changes have been made to assure as much consistency as possible between the respective regulations of the agencies. A section-by-section summary of the final amendments noting changes from the amendments proposed for comment follows. 144 FR 43258 (July 24,1979). The OCC and the FDIC adopted similar rules on the same date, 12 CFR Part 12, 44 FR 43252 (July 24,1979) and 12 CFR Part 344, 44 FR 43261 (July 24, 1979), respectively. 2 SEC rule 10b-10,17 CFR 240.10b-10; rale 17a3, 17 CFR 240.17a-3; and rule 17a-4,17 CFR 240.17a-4, all adopted under the Securities Exchange Act. 3 60 FR 66759. 4The OCC published amendments for comment on December 22,1995, 60 FR 66517, and adopted final amendments on December 2,1996, 61 FR 63958. The FDIC published an advanced notice of rulemaking on its regulation on May 24,1996, 61 FR 26135 and published amendments for comment on December 24,1996, 61 FR 67729. Section 208.24(a) Exceptions and Safe and Sound Operations The exceptions previously found in current § 208.8(k)(6) and the new section related to safe and sound operations for banks exempt from § 208.24 have been combined into one subsection and moved to the front of the regulation, to § 208.24(a). This makes it easier for State member banks to determine whether they qualify for an exemption from the regulation, and if so, what recordkeeping procedures are expected. Summary of Comments and Section-bySection Summary of Final Amendments 9910 Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules and Regulations The Board is adopting the proposed language in § 208.24(a)(1)(B), which clarifies that State member banks that effect up to 500 government securities brokerage transactions and are exempt from registration under Department of the Treasury regulation 401.3(a)(2)(i), 17 CFR 401.3(a)(2), also are exempt from § 208.24. This exemption is not available if a bank has filed notice or is required to file notice indicating that it acts as a government securities broker or dealer. The Board also is adopting, with the support of the commenters, a provision on safe and sound operations for banks exempt from § 208.24. The provision codifies the longstanding interpretation of Board staff that principles of safety and soundness require such a bank to maintain effective systems of records and controls regarding customer securities transactions that reflect accurate information and are sufficient to provide an adequate basis for an audit of the information. Section 208.24(b) Definitions The amendments add definitions of: asset-backed security, completion of the transaction, crossing of buy and sell orders, debt security, government security, and municipal security. In general, the new definitions are based on definitions contained in the Securities Exchange Act, or in the SEC’s confirmation rule 10b-10, 17 CFR 240.10b— and are necessary for 10, applying the confirmation disclosure and the three-day settlement requirements. The definition of “security” has been amended to conform generally to the definition in section 3(a)(10) of the Securities Exchange Act, 15 U.S.C. 78c(a)(10), although the Board has retained the current exclusions from the definition in the final rule. The definition of “periodic plan” has been modified to include cash management sweep services or other prearranged automated transfers of funds from a deposit account to purchase a security in response to commenters seeking clarification how the transaction notification requirements for periodic plans apply to automatic sweep or transfer arrangements. Finally, the term “dealer bank” in the definition of “customer” has been replaced by the term “municipal securities broker or dealer” to clarify that a bank acting as a municipal securities broker is not a customer for purposes of § 208.24. Section 208.24(c) Recordkeeping The Board is adopting language in § 208.24(c) that clarifies that § 208.24 applies to government securities transactions effected for customers by State member banks and to municipal securities transactions effected by State member banks that are not registered as municipal securities dealers. All recordkeeping requirements are now located in § 208.24(c), and explanatory language that was at the end of the old recordkeeping section has been moved to the beginning of the rule to simplify the section. Section 208.24(d) Content and Time o f Notification Section 208.24(d) has been renamed to clarify its subject matter. Substantively, the amendments delete the old five business day requirement for confirmation delivery and provide that confirmations be given or sent to customers “at or by completion of the transaction,” defined as the payment and delivery of the securities in § 208.24(b). The proposed amendments would have deleted the extension of time for State member banks that choose to send confirmations from the executing broker to a customer rather than creating their own confirmations. In response to a commenter who stated that it may be difficult to meet the three-day delivery requirement in this situation, § 208.24(d) now provides that if a State member bank uses a broker-dealer’s confirmation, it must give or send the confirmation to its customer within one business day of the bank’s receipt of the confirmation. As proposed, the final amendments require confirmations to: (i) Contain a legend when the security is callable prior to maturity indicating that an early redemption could affect the yield stated on the confirmation and offering additional information on request (§ 208.24(d)(2)(viii)); (ii) disclose the yield and/or resulting dollar price of transactions involving debt securities and asset-backed securities (§ 208.24(d)(2) (ix) and (x)); and, (iii) indicate when a debt security, other than a government security, is unrated by a nationally recognized statistical rating organization (§ 208.24(d)(2)(xii)). These disclosures conform bank confirmations with those of brokerdealers under SEC rule 10b-10 and with longstanding practice in the municipal securities industry. The Board had requested comment whether it would be preferable to incorporate SEC rules 10b-10, 17a-3 and 17a-4 by reference for State member banks to refer to, rather than specify items of confirmation disclosure in the regulation. All of the comments received on this issue preferred the current approach, i.e., to specify the disclosures required to be contained on confirmations in the regulation. Section 208.24(d)(2)(vi) requires banks to disclose on confirmations the amount of any remuneration received by the bank on the transaction. In response to commenters who pointed out that SEC rule 10b-10(a)(2)(i)(D) provides more flexibility to brokers in this area, the final amendments provide that a State member bank may elect to disclose whether it has or will receive remuneration from a party other than the customer and offer to furnish the information within a reasonable time on request. Section 208.24(e) Notification by Agreement; Alternative Forms and Times Section 208.24(e) has been renamed to indicate that it deals with alternative arrangements for the delivery of notifications of securities transactions to customers. Substantive changes have been made to § 208.24(e)(5), pertaining to notifications of transactions in periodic plans, to conform more completely with securities industry requirements. Formerly, the regulation required that a notification be provided to a customer “as soon as possible after each transaction.” The Board is amending this requirement to require notification “not less than every three m onths” for all periodic plans other than cash management sweep accounts. As requested by two commenters, the final amendments provide that a notification of a transaction involving a cash management sweep service should be given or sent to a customer “for each month in which a securities transaction takes place but not less than every three months if there are no securities transactions.” 5 These amendments will provide more flexibility to State member banks in scheduling notifications in periodic plans and conform with SEC rule 10b-10(b)(2). Section 208.24(f) Settlement of Securities Transactions The amendments to § 208.24(f) update the regulation to require State member banks to settle transactions effected for customers within the “standard settlement cycle for broker-dealers in the United States” unless the parties agree to a different settlement date at the time of the transaction. The standard settlement cycle currently is three business days (T+3) after the trade date. 5 Notwithstanding the provisions of this paragraph, banks that retain custody of government securities that are the subject of a hold-in-custody purchase agreement are subject to the requirements of 17 CFR 403.5(d). Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules and Regulations The requirement applies to transactions valid OMB control number. The OMB in securities that would fall under SEC control number is 7100-0196. rule 15c6— 17 CFR 240.15c6-l, for 1, The collection of information broker-dealers, and brings banks into requirements in this regulation are line with the rest of the securities found in 12 CFR 208.24. This industry in this area. information is required to evidence The commenters were nearly split compliance with the requirements of with respect to the rule’s use of the term section 208.24 of Regulation H. The “standard settlement cycle for brokerrespondents are for-profit financial dealers in the United States” rather than institutions. Records must be retained specifying T+3 for sending customer for three years. confirmations. Four commenters favor No comments specifically addressing the approach taken in the rule, while the burden estimate were received. three commenters would specify T+3. The Board has determined to adopt the The proposed amendments would proposed language as it will avoid provide for only a minor addition in having to amend the regulation to reflect disclosure practices of state member expected future modifications to the banks, would not increase the banks’ standard settlement cycle. Moreover, the reporting requirements to the Federal same term is used in the Board’s Reserve, and would have a negligible Regulation T and has not engendered effect on respondent burden. The any confusion. estimated burden is 3 minutes per Section 208.24(g) Securities Trading response. There are 1,214 respondents Policies and Procedures and the number of their recordkeeping and notification occurrences varies with The amendments add the amount and type of securities § 208.24(g)(l)(iii) that requires State transactions. The total annual member banks to establish supervisory recordkeeping and disclosure burden for procedures and reporting lines for back these respondents is estimated to be office personnel that are separate from 165,520 hours. Based on an hourly cost those established to oversee personnel of $20, the annual cost to the public is accepting orders and effecting estimated to be $3,310,400. transactions. All comments received on this provision favored its adoption. Because the records would be With respect to filing notices of maintained at state member banks and personal securities transactions by bank the notices are not provided to the officers and directors under Federal Reserve, no issue of § 208.24(g)(4), the Board notes that confidentiality under the Freedom of affected individuals that file similar Information Act arises. reports under SEC rule 17j— 1,15 CFR The Federal Reserve has a continuing 270.17j— for investment advisers, do 1, interest in the public’s opinions of our not need to file a separate notice to collections of information. At any time, satisfy Regulation H requirements. comments regarding the burden Regulatory Flexibility Act estimate, or any other aspect of this collection of information, including The Board certifies that the final rule suggestions for reducing the burden, will have no significant economic impact on a substantial number of small may be sent to: Secretary, Board of Governors of the Federal Reserve entities. While the final rule adds certain confirmation disclosure System, 20th and C Streets, N.W., requirements, it also streamlines and Washington, DC 20551; and to the reduces other confirmation, Office of Management and Budget, recordkeeping and regulatory burdens Paperwork Reduction Project (7100for State member banks engaged in 0196), Washington, DC 20503. certain securities transactions for List of Subjects in 12 CFR Part 208 customers. Paperwork Reduction Act In accordance with section 3506 of the Paperwork Reduction Act of 1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.l), the Board reviewed the rule under the authority delegated to the Board by the Office of Management and Budget. The Federal Reserve may not conduct or sponsor, and an organization is not required to respond to, this information collection unless it displays a currently Accounting, Agriculture, Banks, banking, State member banks, Confidential business information, Crime, Currency, Federal Reserve System, Flood insurance, Mortgages, Reporting and recordkeeping requirements, Securities. For the reasons set out in the preamble, the Board amends 12 CFR Part 208 as set forth below: 9911 PART 208— MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (REGULATION H) 1. The authority citation for Part 208 continues to read as follows: Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461, 481-486, 601, 611, 1814, 1820(d)(8), 1823(j), 1828(o), 1831o, 1831p— 3105, 3310, 3331-3351, and 39061, 3909; 15 U.S.C. 78b, 781(b), 781(g), 78l(i), 7 8o^(c)(5), 78q, 7 8 q -l and 78w; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and 4128. § 208.8 [Am ended] 2. In § 208.8 paragraph (k) is removed and reserved. 3. A new § 208.24 is added to subpart A to read as follows: § 2 0 8 .2 4 Recordkeeping and confirm ation of certain securities transactions effected by State m em ber banks. (a) Exceptions and safe and sound operations. (1) A State member bank may be excepted from one or more of the requirements of this section if it meets one of the following conditions of paragraphs (a)(l)(i) through (a)(l)(iv) of this section: (1) De minimis transactions. The requirements of paragraphs (c)(2) through (c)(4) and paragraphs (e)(1) through (e)(3) of this section shall not apply to banks having an average of less than 200 securities transactions per year for customers over the prior three calendar year period, exclusive of transactions in government securities; (ii) Government securities. The recordkeeping requirements of paragraph (c) of this section shall not apply to banks effecting fewer than 500 government securities brokerage transactions per year; provided that this exception shall not apply to government securities transactions by a State member bank that has filed a written notice, or is required to file notice, with the Federal Reserve Board that it acts as a government securities broker or a government securities dealer; (iii) Municipal securities. The municipal securities activities of a State member bank that are subject to regulations promulgated by the Municipal Securities Rulemaking Board shall not be subject to the requirements of this section; and (iv) Foreign branches. The requirements of this section shall not apply to the activities of foreign branches of a State member bank. (2) Every State member bank qualifying for an exemption under paragraph (a)(1) of this section that conducts securities transactions for 9912 Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules and Regulations customers shall, to ensure safe and sound operations, maintain effective systems of records and controls regarding its customer securities transactions that clearly and accurately reflect appropriate information and provide an adequate basis for an audit of the information. (b) Definitions. For purposes of this section: (1) Asset-backed security shall mean a security that is serviced primarily by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period plus any rights or other assets designed to assure the servicing or timely distribution of proceeds to the security holders. (2) Collective investment fu n d shall mean funds held by a State member bank as fiduciary and, consistent with local law, invested collectively as follows: (i) In a common trust fund maintained by such bank exclusively for the collective investment and reinvestment of monies contributed thereto by the bank in its capacity as trustee, executor, administrator, guardian, or custodian under the Uniform Gifts to Minors Act; or (ii) In a fund consisting solely of assets of retirement, pension, profit sharing, stock bonus or similar trusts which are exempt from Federal income taxation under the Internal Revenue Code (26 U.S.C.). (3) Completion o f the transaction effected by or through a state member bank shall mean: (i) For purchase transactions, the time when the customer pays the bank any part of the purchase price (or the time when the bank makes the book-entry for any part of the purchase price if applicable); however, if the customer pays for the security prior to the time payment is requested or becomes due, then the transaction shall be completed when the bank transfers the security into the account of the customer; and (ii) For sale transactions, the time when the bank transfers the security out of the account of the customer or, if the security is not in the bank’s custody, then the time when the security is delivered to the bank; however, if the customer delivers the security to the bank prior to the time delivery is requested or becomes due then the transaction shall be completed when the banks makes payment into the account of the customer. (4) Crossing o f buy and sell orders shall mean a security transaction in which the same bank acts as agent for both the buyer and the seller. (5) Customer shall mean any person or account, including any agency, trust, estate, guardianship, or other fiduciary account, for which a State member bank effects or participates in effecting the purchase or sale of securities, but shall not include a broker, dealer, bank acting as a broker or dealer, municipal securities broker or dealer, or issuer of the securities which are the subject of the transactions. (6) Debt security as used in paragraph (c) of this section shall mean any security, such as a bond, debenture, note or any other similar instrument which evidences a liability of the issuer (including any security of this type that is convertible into stock or similar security) and fractional or participation interests in one or more of any of the foregoing; provided, however, that securities issued by an investment company registered under the Investment Company Act of 1940, 15 U.S.C. 80 a-l et seq., shall not be included in this definition. (7) Government security shall mean: (i) A security that is a direct obligation of, or obligation guaranteed as to principal and interest by, the United States; (ii) A security that is issued or guaranteed by a corporation in which the United States has a direct or indirect interest and which is designated by the Secretary of the Treasury for exemption as necessary or appropriate in the public interest or for the protection of investors; (iii) A security issued or guaranteed as to principal and interest by any corporation whose securities are designated, by statute specifically naming the corporation, to constitute exempt securities within the meaning of the laws administered by the Securities and Exchange Commission; or (iv) Any put, call, straddle, option, or privilege on a security as described in paragraphs (b)(7) (i), (ii), or (iii) of this section other than a put, call, straddle, option, or privilege that is traded on one or more national securities exchanges, or for which quotations are disseminated though an automated quotation system operated by a registered securities association. (8) Investment discretion with respect to an account shall mean if the State member bank, directly or indirectly, is authorized to determine what securities or other property shall be purchased or sold by or for the account, or makes decisions as to what securities or other property shall be purchased or sold by or for the account even though some other person may have responsibility for such investment decisions. (9) Municipal security shall mean a security which is a direct obligation of, or obligation guaranteed as to principal or interest by, a State or any political subdivision thereof, or any agency or instrumentality of a State or any political subdivision thereof, or any municipal corporate instrumentality of one or more States, or any security which is an industrial development bond (as defined in 26 U.S.C. 103(c)(2) the interest on which is excludable from gross income under 26 U.S.C. 103(a)(1), by reason of the application of paragraph (4) or (6) of 26 U.S.C. 103(c) (determined as if paragraphs (4)(A), (5) and (7) were not included in 26 U.S.C. 103(c)), paragraph (1) of 26 U.S.C. 103(c) does not apply to such security. (10) Periodic plan shall mean: (i) A written authorization for a State member bank to act as agent to purchase or sell for a customer a specific security or securities, in a specific amount (calculated in security units or dollars) or to the extent of dividends and funds available, at specific time intervals, and setting forth the commission or charges to be paid by the customer or the manner of calculating them (including dividend reinvestment plans, automatic investment plans, and employee stock purchase plans); or (11) Any prearranged, automatic transfer or sweep of funds from a deposit account to purchase a security, or any prearranged, automatic redemption or sale of a security with the funds being transferred into a deposit account (including cash management sweep services). (11) Security shall mean: (i) Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateraltrust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, for a security, any put, call, straddle, option, or privilege on any security, or group or index of securities (including any interest therein or based on the value thereof), any instrument commonly known as a “security”; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing. (ii) But does not include a deposit or share account in a federally or state insured depository institution, a loan participation, a letter of credit or other form of bank indebtedness incurred in the ordinary course of business, currency, any note, draft, bill of exchange, or bankers acceptance which Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules and Regulations has a maturity at the time of issuance of no broker/dealer, the time the order was not exceeding nine months, exclusive of executed or canceled; (v) The price at which the order was days of grace, or any renewal thereof the executed; and maturity of which is likewise limited, (vi) The broker/dealer utilized; units of a collective investment fund, (4) A record of all broker/dealers interests in a variable amount (master) selected by the bank to effect securities note of a borrower of prime credit, or transactions and the amount of U.S. Savings Bonds. (c) Recordkeeping. Except as providedcommissions paid or allocated to each in paragraph (a) of this section, every such broker during the calendar year; State member bank effecting securities and (5) A copy of the written notification transactions for customers, including required by paragraphs (c) and (d) of transactions in government securities, and municipal securities transactions by this section. (d) Content and time o f notification. banks not subject to registration as Every State member bank effecting a municipal securities dealers, shall securities transaction for a customer maintain the following records with shall give or send to such customer respect to such transactions for at least either of the following types of three years. Nothing contained in this notifications at or before completion of section shall require a bank to maintain the transaction or; if the bank uses a the records required by this paragraph broker/dealer’s confirmation, within one in any given manner, provided that the business day from the bank’s receipt of information required to be shown is the broker/dealer’s confirmation: clearly and accurately reflected and (1) A copy of the confirmation of a provides an adequate basis for the audit broker/dealer relating to the securities of such information. Records may be maintained in hard copy, automated, or transaction; and if the bank is to receive electronic form provided the records are remuneration from the customer or any other source in connection with the easily retrievable, readily available for transaction, and the remuneration is not inspection, and capable of being reproduced in a hard copy. A bank may determined pursuant to a prior written agreement between the bank and the contract with third party service customer, a statement of the source and providers, including broker/dealers, to the amount of any remuneration to be maintain records required under this received; or part. (2) A written notification disclosing: (1) Chronological records of original (i) The name of the bank; entry containing an itemized daily (ii) The name of the customer; record of all purchases and sales of (iii) Whether the bank is acting as securities. The records of original entry agent for such customer, as agent for shall show the account or customer for both such customer and some other which each such transaction was person, as principal for its own account, effected, the description of the or in any other capacity; securities, the unit and aggregate (iv) The date of execution and a purchase or sale price (if any), the trade statement that the time of execution will date and the name or other designation be;furnished within a reasonable time of the broker/dealer or other person from whom purchased or to whom sold; upon written request of such customer (2) Account records for each customer specifying the identity, price and number of shares or units (or principal which shall reflect all purchases and amount in the case of debt securities) of sales of securities, all receipts and suj:h security purchased or sold by such deliveries of securities, and all receipts customer; and disbursements of cash with respect (v) The amount of any remuneration to transactions in securities for such received or to be received, directly or account and all other debits and credits indirectly, by any broker/dealer from pertaining to transactions in securities; such customer in connection with the (3) A separate memorandum (order transaction; ticket) of each order to purchase or sell (vi) The amount of any remuneration securities (whether executed or received or to be received by the bank cancelled), which shall include: from the customer and the source and (i) The account(s) for which the amount of any other remuneration to be transaction was effected; received by the bank in connection with (ii) Whether the transaction was a the transaction, unless remuneration is market order, limit order, or subject to determined pursuant to a written special instructions; agreement between the bank and the (iii) The time the order was received customer, provided, however, in the by the trader or other bank employee responsible for effecting the transaction; case of Government securities and (iv) The time the order was placed municipal securities, this paragraph with the broker/dealer, or if there was (d)(2)(vi) shall apply only with respect 9913 to remuneration received by the bank in an agency transaction. If the bank elects not to disclose the source and amount of remuneration it has or will receive from a party other than the customer pursuant to this paragraph (d)(2)(vi), the written notification must disclose whether the bank has received or will receive remuneration from a party other than the customer, and that the bank will furnish within a reasonable time the source and amount of this remuneration upon written request of the customer. This election is not available, however, if, with respect to a purchase, the bank was participating in a distribution of that security; or with respect to a sale, the bank was participating in a tender offer for that security; (vii) The name of the broker/dealer utilized; or, where there is no broker/ dealer, the name of the person from whom the security was purchased or to whom it was sold, or the fact that such information will be furnished within a reasonable time upon written request; (viii) In the case of a transaction in a debt security subject to redemption before maturity, a statement to the effect that the debt security may be redeemed in whole or in part before maturity, that the redemption could affect the yield represented and that additional information is available on request; (ix) In the case of a transaction in a debt security effected exclusively on the basis of a dollar price: (A) The dollar price at which the transaction was effected; (B) The yield to maturity calculated from the dollar price; provided, however, that this paragraph (c)(2)(ix)(B) shall not apply to a transaction in a debt security that either has a maturity date that may be extended by the issuer with a variable interest payable thereon, or is an assetbacked security that represents an interest in or is secured by a pool of receivables or other financial assets that are subject to continuous prepayment; (x) In the case of a transaction in a debt security effected on the basis of yield: (A) The yield at which the transaction was effected, including the percentage amount and its characterization (e.g., current yield, yield to maturity, or yield to call) and if effected at yield to call, the type of call, the call date, and the call price; and (B) The dollar price calculated from the yield at which the transaction was effected; and (C) If effected on a basis other than yield to maturity and the yield to maturity is lower than the represented yield, the yield to maturity as well as 9914 Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules and Regulations the represented yield; provided, however, that this paragraph (c)(2)(x)(C) shall not apply to a transaction in a debt security that either has a maturity date that may be extended by the issuer with a variable interest rate payable thereon, or is an asset-backed security that represents an interest in or is secured by a pool of receivables or other financial assets that are subject to continuous prepayment; (xi) In the case of a transaction in a debt security that is an asset-backed security which represents an interest in or is secured by a pool of receivables or other financial assets that are subject continuously to prepayment, a statement indicating that the actual yield of such asset-backed security may vary according to the rate at which the underlying receivables or other financial assets are prepaid and a statement of the fact that information concerning the factors that affect yield (including at a minimum, the estimated yield, weighted average life, and the prepayment assumptions underlying yield) will be furnished upon written request of such customer; and (xii) In the case of a transaction in a debt security, other than a government security, that the security is unrated by a nationally recognized statistical rating organization, if that is the case. (e) Notification by agreement; alternative forms and times o f notification. A State member bank may elect to use the following alternative procedures if a transaction is effected for: (1) Accounts (except periodic plans) where the bank does not exercise investment discretion and the bank and the customer agree in writing to a different arrangement as to the time and content of the notification; provided, however, that such agreement makes clear the customer’s right to receive the written notification pursuant to paragraph (c) of this section at no additional cost to the customer; (2) Accounts (except collective investment funds) where the bank exercises investment discretion in other than an agency capacity, in which instance the bank shall, upon request of the person having the power to terminate the account or, if there is no such person, upon the request of any person holding a vested beneficial interest in such account, give or send to such person the written notification within a reasonable time. The bank may charge such person a reasonable fee for providing this information; (3) Accounts, where the bank exercises investment discretion in an agency capacity, in which instance: (i) The bank shall give or send to each customer not less frequently than once every three months an itemized statement which shall specify the funds and securities in the custody or possession of the bank at the end of such period and all debits, credits and transactions in the customer’s accounts during such period; and (ii) If requested by the customer, the bank shall give or send to each customer within a reasonable time the written notification described in paragraph (c) of this section. The bank may charge a reasonable fee for providing the information described in paragraph (c) of this section; (4) A collective investment fund, in which instance the bank shall at least annually furnish a copy of a financial report of the fund, or provide notice that a copy of such report is available and will be furnished upon request, to each person to whom a regular periodic accounting would ordinarily be rendered with respect to each participating account. This report shall be based upon an audit made by independent public accountants or internal auditors responsible only to the board of directors of the bank; (5) A periodic plan, in which instance the bank: (i) Shall (except for a cash management sweep service) give or send to the customer a written statement not less than every three months if there are no securities transactions in the account, showing the customer’s funds and securities in the custody or possession of the bank; all service charges and commissions paid by the customer in connection with the transaction; and all other debits and credits of the customer’s account involved in the transaction; or (ii) Shall for a cash management sweep service or similar periodic plan as defined in § 208.24(b)(10)(ii) give or send its customer a written statement in the same form as prescribed in paragraph (e)(i) above for each month in which a purchase or sale of a security takes place in a deposit account and not less than once every three months if there are no securities transactions in the account subject to any other applicable laws or regulations; (6) Upon the written request of the customer the bank shall furnish the information described in paragraph (c) of this section, except that any such information relating to remuneration paid in connection with the transaction need not be provided to the customer when paid by a source other than the customer. The bank may charge a reasonable fee for providing the information described in paragraph (d) of this section. (f) Settlement of securities transactions. All contracts for the purchase or sale of a security shall provide for completion of the transaction within the number of business days in the standard settlement cycle for the security followed by registered broker dealers in the United States unless otherwise agreed to by the parties at the time of the transaction. (g) Securities trading policies and procedures. Every State member bank effecting securities transactions for customers shall establish written policies and procedures providing: (1) Assignment of responsibility for supervision of all officers or employees who: (1) Transmit orders to or place orders with broker/dealers; (ii) Execute transactions in securities for customers; or (iii) Process orders for notification and/or settlement purposes, or perform other back office functions with respect to securities transactions effected for customers; provided that procedures established under this paragraph (g)(1)(iii) should provide for supervision and reporting lines that are separate from supervision of personnel under paragraphs (g)(l)(i) and (g)(1)(h) of this section; (2) For the fair and equitable allocation of securities and prices to accounts when orders for the same security are received at approximately the same time and are placed for execution either individually or in combination; (3) Where applicable and where permissible under local law, for the crossing of buy and sell orders on a fair and equitable basis to the parties to the transaction; and (4) That bank officers and employees who make investment recommendations or decisions for the accounts of customers, who participate in the determination of such recommendations or decisions, or who, in connection with their duties, obtain information concerning which securities are being purchased or sold or recommended for such action, must report to the bank, within ten days after the end of the calendar quarter, all transactions in securities made by them or on their behalf, either at the bank or elsewhere in which they have a beneficial interest. The report shall identify the securities purchased or sold and indicate the dates of the transactions and whether the transactions were purchases or sales. Excluded from this requirement are transactions for the benefit of the officer or employee over which the officer or Federal Register / Vol. 62, No. 43 / Wednesday, March 5, 1997 / Rules and Regulations employee has no direct or indirect influence or control, transactions in mutual fund shares, and all transactions involving in the aggregate $10,000 or less during the calendar quarter. For purposes of this paragraph (g)(4), the term securities does not include government securities. By order of the Board of Governors of the Federal Reserve System, February 27,1997. William W. Wiles, Secretary of the Board. [FR Doc. 97-5423 Filed 3 -4 -9 7 ; 8:45 am] BILLING CODE 6210-01-P 9915
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