Full text of Federal Reserve Bank of New York Circulars : 8455. Proposed Amendments to Regulation H

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FEDERAL RESERVE BANK
OF NEW YORK
r Circular No

L

84551

November 13, 1978

J

PROPOSED AM ENDM ENTS TO R EG U LA TIO N H
Establishment of Uniform Standards for Bank Recordkeeping and
Procedures in Making Securities Transactions

owd

CoHr^n:<?d.'

Following is the text of a statement issued by the Board of Governors of the Federal Reserve
System on their own behalf and on behalf of the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation:
The Federal bank regulators today
proposed regulatory revisions establishing uni­
form standards for bank recordkeeping, confirmation and other procedures in making securities transactions
for trust department and other bank custom ers:
The agencies, named above, requested comment by December 18, 1978. Their proposals represented a
revision, in the light of comment received, of proposals published early this year.
The agencies' original proposals were made subsequent to a study by the Securities and Exchange C om ­
mission on bank securities activities and respond to certain recommendations in the S E C report.
The revised proposals of the agencies* include the following uniform provisions:

Banks would be required to maintain for three years the following records concerning securities transac­
tions :
1. Itemized daily records of purchases and sales.
2. Account records for customers.
3. A separate record of each order to purchase or sell securities.
C(3M/i7*M<2?f071.'
Alternative confirmation requirements are provided
involved.

depending on the type of customer relationships

W here the bank utilizes a broker the revised proposals would give banks the option of sending customers
their own confirmation, or a copy of the broker's confirmation within five days from the time the bank executes
the transaction or receives confirmation from the broker.
In certain cases, confirmation would not be required where the customer and the bank agree to a different
arrangement.
In the case of accounts where the bank exercises investment discretion as an agent for a customer, the
revised proposals require quarterly statements to the customer.
Confirmation requirements would not apply to transactions in U .S . government securities or securities of
Federal agencies or of States and municipalities.
Poh'ciTs* awJ
Banks making securities transactions for customers would be required to establish written policies and
procedures including the follow in g:
1. Assignment of responsibility for supervising employees involved in securities transactions.
2. Provision for fair and equitable allocation of securities and prices to accounts when orders for the same
security are received for execution at approximately the same time.

i The Comptroller s proposals would establish a new Part 12 of the Comptroller's regulations affecting national banks. The
Federal Reserve's proposals would amend its Regulation H, affecting State chartered member banks. The proposals of the FDIC
would amend its proposed regulation, Part 344, affecting State chartered nonmember banks.
(O V E R )




3. Provision for fair and equitable matching of buy and sell orders from different customers.
4. Requirements for bank employees involved in securities transactions for customers to report their own
securities transactions quarterly.
A bank that is in compliance with rules of the Municipal Securities Rulemaking Board with respect to trans­
actions m municipal securities would be considered in compliance with the recordkeeping and confirmation
requirements proposed by the agencies.
In addition to the exemption for these activities of banks subject to the regulations of the Municipal Securi­
ties Rulemaking Board, a new section of the revised proposal w o u ld :
— Exem pt the securities activities of foreign branches of banks from requirements of the regulation;
— Exem pt banks that normally make only small numbers of securities transactions for customers from cer­
tain recordkeeping requirements. The Comptroller and the F D I C would exempt banks making an aver­
age of 50 or less transactions a year over the three prior calendar years. The Federal Reserve would
exempt those with less than 200 such transactions a year.
The agencies determined not to take further action in regard to regulatory requirements concerning best
execution and competency and testing standards for bank employees engaged in ejectin g securities transac­
tions. The agencies believe that traditional trust and agency provisions make clear the obligations of banks to
use reasonable care to obtain the best terms for customers. Bank examinations provide a means for regulators
to assess the competence of employees making securities transactions.

Printed below is the text of the Board's proposed amendments to its Regulation H. Comments
on the proposal should be submitted by December 18 and may be sent to our Bank Regulations and
Consumer Affairs Department.
PAUL A. VoLCKER,

FE D E R A L RESER VE SYSTEM
[R eg. H ; D ocket N o. R -0142]
M em bership State B anking Institutions in the Federal Reserve System
R*cordk*eping owd Confirmation Rwgwbataants
for Certain S*cvrlti*t Transaction* Effected
by State Member Banks
A G E N C Y : Board of Governors of the
Federal Reserve System.
A C T IO N : Republication of proposed
rule.
S U M M A R Y : On January 31. 1978, the
Board of Governors of the Federal Re­
serve System published for comment
proposed amendments ot its regula­
tion H <12 CFR 208) to require that
State member banks that effect cer­
tain securities transactions for custom­
ers provide confirmations of and main­
tain records with respect to such
transactions (43 FR 5006). Commenta­
tors were also invited to consider
whether and to what extent regula­
tions should be promulgated concern­
ing: (1) Best execution of securities
transactions and (2) competency and
testing requirements for bank employ­
ees. The comment period was ex­
tended (43 FR 12720) and ended May
1, 1978. Similar proposals were also
published for comment by the Comp­
troller of the Currency and the Feder­
al Deposit Insurance Corporation.
A substantial number of critical, but
useful, comments were received by the
Board expressing significant concerns
regarding the feasibility of the pro­
pose^ amendments. As a result, the




Board determined to revise the pro­
posed amendments to its regulation H
in light o f the comments received and
to republish the amendments for addi­
tional comment. Information setting
forth estimated costs of implementa­
tion of the proposed amendment is
also being requested. The Board has
determined to take no further action
at this time regarding the promulga­
tion of regulations concerning best ex­
ecution of securities transactions, and
competency and testing requirements
of bank employees.
DATE: Comments must be received on
or before December 18, 1978.
AD D R E SS: Secretary of the Board of
Governors of the Federal Reserve
System. 20th & Constitution Avenue
N W ., Washington, D.C. 20551. All ma­
terial submitted should be in writing
and should refer to docket No. R -0142.
Such material will be available for
public inspection during the regular
hours of the Office o f the Secretary at
the above address.
FO R
FU R T H E R
C O N TA CT:

IN F O R M A T IO N

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.
(2 )

SU P P LE M E N TA R Y IN FO R M A TIO N :
The original proposal to amend regu­
lation H has been substantially revised
as a result of the numerous comments
which were received. The most signifi­
cant revision of the amendment as
originally proposed pertains to the
confirmation requirements. However,
substantial revisions to the record­
keeping portion of the proposed
amendments have also been made.
The following is a summary of the sig­
nificant revisions which are proposed.
W ith respect to the proposed record­
keeping requirements, the Board has
taken into consideration the many
comments which have been received
expressing the concern that these re­
quirements, as proposed, would be bur­
densome and costly due to: (1) The
length of time for which the required
records would be kept; and (2) the va­
riety of records which would be re­
quired to be maintained. In order to
reduce the volume of records which a
State member bank would be required
to maintain, the Board has proposed
to decrease the number of years re­
quired for ^retention. Although the
original proposal was silent with re­
spect to the number of years for which
copies of.confirmations must be main­
tained, it is now proposed that the
number of years for which all required
records, including copies of confirma­
tions, must be maintained be reduced
from 6 years to 3 years.

In further response to these con ­
cern?. and in consideration o f those
com m ents expressing the view that
the
recordkeeping
requirements
should be less onerous for smaller
banks, the Board has proposed to
exem pt from certain o f the record­
keeping requirements those banks
which effect an average o f fewer than
200 securities transactions per year.
Thus, such banks .that effect a nom i­
nal num ber o f securities transactions
would be required, pursuant to these
proposed regulations, to maintain sig­
nificantly fewer records.
In addition to these revisions to the
recordkeeping requirements, several
oth er significant changes have been
proposed with respect to recordkeep­
ing. T h e revised proposal would delete
the requirement for maintaining a
chronological record o f all receipts
and deliveries o f securities and o f re­
ceipts and disbursements o f cash.
However, this inform ation would still
be required to be maintained in ac­
count records o f customers. T h e regu­
lations as revised would also change
the requirement for including on the
order ticket the time the order was ex­
ecuted to the time the order was
placed with the broker/dealer, where
a broker/dealer has been utilized.
W here a brok er/dealer is not used, the
time o f execution would still be re­
quired. A further proposed revision
would permit banks to maintain rec­
ords o f only those broker/dealers for
whom the bank has exercised discre­
tion in selecting the broker/dealer to
effect a particular securities transac­
tion for its customers, rather than to
require that a record be kept o f all
broker/dealers used by the bank to
effect such transactions. In addition,
and in connection with this revision, a
newly proposed provision would also
require that a record be kept o f the
amount o f commissions paid or allo­
cated to each such broker during the
calendar year.
W ith respect to the proposed con fir­
mation requirements there have been
two m ajor revisions. T he first pertains
to the length o f time within which a
member bank must provide a custom er
with a confirm ation o f a securities
transaction which has been effected
for that customer. As revised, the pro­
posal would require that where a
broker/dealer is utilized, the confirm a­
tion would be furnished within 5 busi­
ness days from the date the bank re­
ceives the broker/dealer confirm ation,
rather than 5 business days from the
date o f the transaction. However,
where there is no broker/dealer uti­
lized, the confirm ation would be fu r­
nished to the custom er within 5 busi­
ness days from the date of the trans­
action. The second major revision to
the confirmation requirements sub­
stantially diminishes the number of
confirmations which member banks
would be required to furnish The re­
vised proposal reflects the concern, as
expressed by many o f the comments^
tors, that the customer should have
the right to request not to receive the
confirmation. Thus, in those cases
where the bank does not exercise in­




vestment discretion, the bank and the
customer can agree to alternative ar­
rangements. In those cases where the
bank exercises investment discretion,
in other than an agency capacity^ no
confirmation would be required except
upon request. The confirmation re­
quirements have been similarly liber­
alized for other types of accounts. It
should also be noted that as an alter­
native <,o furnishing a separate bank
confirmation containing certain speci­
fied information, the revised proposal
provides that the bank may furnish
the customer with a copy of the
broker/dealer confirmation supple­
mented by certain additional informa­
tion.
In addition to the changes which
have been made with respect to the re­
cordkeeping and confirmation require­
ments, a new section has been added
to the regulation which contains the
exceptions from requirements of this
proposal. Two of the exceptions con­
tained in this section are newly pro­
posed by this revised proposal. These
new exceptions represent a further
significant revision to the original pro­
posal. The exception for banks having
an average of fewer than 200 securities
transactions per year has previously
been discussed. It should be noted that
although such banks would be exempt
from certain of the recordkeeping re­
quirements, these banks would never­
theless be subject to the confirmation
requirements and other provisions of
the regulation, wherever applicable. In
addition, activities of foreign branches
of State member banks would be
exempt from the requirements of this
regulation.
In connection with its original pro­
posal. the Board also requested com­
ment regarding the need for regula­
tions requiring best execution of secu­
rities transactions and imposing com­
petency and testing requirements for
bank employees engaged in effecting
securities transactions. Based on com­
ments received, the Board has decided
to take no further action in this area
at this time.
As to the best execution require­
ment. the Board believes that tradi­
tional trust and agency principles al­
ready make clear the obligation of
banks to use reasonable care in effect­
ing securities transactions to obtain
the best terms possible for customers.
Because of the numereous and highly
subjective considerations involved in
meeting this obligation, the Board be­
lieves that the term "best execution"
cannot be reasonably defined by regu­
lation and that any attempt to do so
would limit the flexibility of banks in
complying with such principles and
would unfairly impose upon all banks
a detailed stand&rd of performance
that may not be appropriate to, or
adequately reflect, thbir individual cir­
cumstances or the needs of their cus­
tomers. It is further observed that the
regulations presently applicable to
broker/dealers, through which most
securities transactions of banks are ef­
fected, contain little more than a
simple restatement of the traditional
agency principle.

(3)

Regarding competency and testing
requirements, the Board believes that,
even if sufficient statutory authority
were deemed to exist to promulgate
regulations in this Urea, it would be in­
appropriate to establish a costly and
elaborate scheme for testing the com­
petence of individuals associated with
only one small aspect of total banking
activity. The Board recognizes the
need for specific training of bank per­
sonnel engaged in effecting securities
transactions in operation of the securi­
ties market and of the requirements of
the securities lawB. As the SEC final
report itself recognizes, however, the
level of training and knowledge that is
required will vary depending on the
volume and size of the transactions ef­
fected. The bank examination process
has traditional been effectively used
to detect and remedy personnel weak­
nesses and the Board believes that
continued reliance on the examination
process, augmented by increased ex­
aminer training in the requirements of
the Federal securities laws, will be
more effective in assuring an appropri­
ate level of competence than prescrib­
ing a generalized uniform test that
may or may not be relevant to a par­
ticular situation.
To aid in consideration of this pro­
posal by the Board, interested persons
are invited to submit relevant data,
views, comments or arguments. The
Board is specifically requesting infor­
mation concerning the projected costs
of implementing the proposed amend­
ments. Information should be sepa­
rately furnished as to projected star­
tup costs and continuing costs and, to
the extent feasible, these estimates
should be allocated between the re­
cordkeeping and confirmation require­
ments. Unit transaction costs should
be furnished if possible, indicating, if
known, variances in such costs, de­
pending on volume of transactions.
1.
Pursuant to sections 9 and 11 of
the Federal Reserve Act (12 U.S.C.
321, 249(a) and (B) and section 8(b)(1)
et seq. of the Federal Deposit Insur­
ance Act (12 U.S.C. 1818(b)) the Board
proposes to amend regulation H (12
CFR 208) by adding a paragraph (k) to
§ 208.8 as set forth below:
$ 208.8
*

Banking practices.
*

*

*

*

(k) Recondkeeptwy end con/trynafion
certain tecMrtfie* transactions <//ectcd by State member banks. (1) Defi­
nitions. For purposes of this para­
graph (kX
(i)
"Customer" shall mean any
person or account, including any
agency, trust, estate, guardianship,
committee or other fiduciary account,
for which a State member bank effects
or participates in effecting the pur­
chase or sale of securities, but shall
not include a broker, dealer, dealer
bank or Issuer of the securities which
are the subject of the transactions;
(ii) "Periodic plan" means any writ­
ten authorization for a State member
bank acting as agent to purchase or
sell for a customer a specific security
or securities, in specific amounts (cal­
0/

culated in security units or dollars) or
to the extent of dividends and funds
available, at specitfic time intervals
and setting forth the commission or
charges to be paid by the customer in
connection therewith or the manner
of calculating them;
(iii) "Collective investment fund"
means funds held by a State member
ban t as fiduciary and, consistent with
local law, invested collectively (A) in a
common trust fund maintained by
such bank exclusively for the collec­
tive investment and reinvestment of
monies contributed thereto by the
bank in its capacity as trustee, execu­
tor, administrator, guardian, or custo­
dian under the Uniform Gifts to
Minors Act, or (B) 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;
(iv) "Security" means any interest or
instrument commonly known as a "s e ­
curity", whether in the nature of debt
or equity, including any stock, bond,
note, debenture, evidence of indebted­
ness or any participation in or right to
subscribe to or purchase any of fhe
foregoing. Th e term ' security" does
not include (A) a deposit or share ac­
count in federally insured depositary
institution, (B) a loan participation,
(C)
letter of credit or other form of
bank indebtedness incurred in the or­
dinary course of business. (D ) curren­
cy, (E) any note, draft, bill of ex­
change, or bankers acceptance which
has a maturity at the time of issuance
qf not exceeding nine months, exclu­
sive of days of grace, or any renewal
thereof the maturity of which is like­
wise limited, (F) units of
collective
investment fund, or (G ) interests in a
variable amount (master) note of a
borrower of prime credit;
(v) A bank shall be deemed to exer­
cise "investment discretion" with re­
spect to an account if, directly or indi­
rectly, the bank (A ) is authorized to
determine what securities or other
property shall be purchased or sold by
or for the account, or (B) makes pur­
chased or sold by or for the specific ac­
count even though some other person
may have responsibility for such in­
vestment decisions.
(2)
RecortMceepitty.
Every
State
member bank effecting securities
transactions for customers shall main­
tain the following records with respect
to such transactions for at least 3
years:
(i) Chronological records of original
entry containing an itemized daily
record of all purchases and sales of se­
curities. The records of original entry
shall show the account for which each
such transaction was effected, the de­
scription of the securities, the unit
and aggregate purchase or sale price
(if any), the trade date and the name
or other designation of the broker/
dealer or other person from whom
purchased or to whom sold;
(ii) Account records for each custom­
er which shall reflect all purchases
and sales of securities, all receipts and
deliveries of securities, and all receipts

a

a




a

and disbursements of cash with re­
utilized; or, where there is no broker/
spect to transactions in securities for
dealer, the name of the person from
such account and all other debits and
whom the security was purchased or
credits pertaining to transactions in
to whom it was sold, or the fact that
securities.
such information will be furnished
(iii) A separate memorandum (order
within a reasonable time upon written
request.
ticket) of each order to purchase or
sell securities (whether executed or
Provided, however That the require­
cancelled), which shall include:
ments of this paragraph (k)(3) shall
(A) The account for which the trans­
not be applicable to transactions in (1)
action was effected;
securities issued or guaranteed as to
(B) W hether the transaction was a
principal or interest by the United
market order, limit order, or subject to
States; (2) Federal agency obligations;
special instructions;
or (3) municipal securities as defined
(C) The time the order was received
in section 3(aX29) of the Securities
by the trader or other bank employee
Exchange Act of 1934.
responsible for effecting the transac­
(4)
Time o / noit/icafioH. The time
tion;
for mailing or otherwise furnishing
(D ) The time the order was placed
the written notification described in
with the broker/dealer, or if there was
paragraph (kX3) of this section shall
no broker/dealer, the time the order
be 5 business days from the date of
was executed or cancelled;
the transaction, or if a broker/dealer
(E) The price at which the order was
is utilized, within 5 business days from
the receipt by the bank of the broker/
executed; and
(F ) The broker/dealer utilized;
dealer's
confirmation,
unless
the
transaction is effected for:
(iv) A record of all broker/dealers se­
(i) Accounts (except periodic plans)
lected by the bank to effect securities
where the bank does not exercise in­
transactions and the amount of com­
vestment discretion and the bank and
missions paid or allocated to each such
the customer agree in writing to a dif­
broker during the calendar year.
(3)
Form o/noft/TcaMon. Every State ferent arrangement; provided, howev­
er, that such agreement makes clear
member bank effecting a securities
the customer's right to receive the
transaction for a customer shall main­
written notification within the above
tain for at least 3 years and, except as
prescribed time period at no additional
provided in paragraph (k)(4) of this
cost to the customer;
section, shall mail or otherwise fur­
(ii) Accounts (except collective in­
nish to such customer either of the
vestment funds) where the bank exer­
following types of notifications:
cises investment discretion in other
(i) (A) a copy of the confirmation of
than an agency capacity, in which in­
a broker/dealer relating to the securi­
stance the bank shall, upon request of
ties transaction; and (B) if the bank is
the person having the power to termi­
to receive remuneration from the cus­
tomer or any other source in connec­ nate the account or, if there is no such
person, upon the request of any
tion with the transaction, and the Re­
person holding a vested beneficial in­
muneration is not determined pursu­
terest in such account, mail or other­
ant to a prior written agreement be­
wise furnish to such person the writ­
tween the bank and the customer, a
ten notification within a reasonable
statement of th e source and the
time. The bank may charge a reason­
amount of any remuneration to be re­
able fee for providing this informa­
ceived; or
tion.
(ii) A written notification disclosing
(iii) Accounts, where the bank exer­
(A ) The name of the bank;
cises investment discretion in an
(B) The name of the customer;
agency capacity, in which instance (A )
(C) W hether the bank is acting as
the bank shall mail or otherwise fur­
agent for such customer, as agent for
nish to each customer not less fre­
both such customer and some other
quently than once every 3 months an
person, as principal for its own ac­
itemized statement which shall specify
count, or in any other capacity;
the funds and securities in the custody
(D ) The date and time of execution
(or the fact that the time of execution or possession of the bank at the eno of
will be furnished, within a reasonable such period and all debits, credits and
time, upon written request of such transactions in the customer's account
customer), and the Identity, price and during such period, and (B ) if request­
number of shares or units (or principal ed by the customer, the bank shall
amount in the case of debt securities) mail or otherwise furnish to each such
of such security purchased or sold by customer within a reasonable time the
writtem notification described in para­
such a customer;
(E) The amount of any remunera­ graph (k)(3) of this section.
(iv) A collective investment fund, in
tion received or to be received, directly
or indirectly, by any broker/dealer which instance the bank shall at least
from such customer in connection annually furnish the customer a copy
of a financial report of the fund, or
with the transaction;
(F) The source and amount of any provide notice that a copy of such
remuneration received or to be re­ report is available and will be fur­
ceived by the bank from the customer nished upon request, to each person to
or any other source in connection with whom a regular periodic accounting
the transaction, unless remuneration would ordinarily be rendered with re­
is determined pursuant to a written spect to each participating account.
agreement between the bank and the This report shall be based upon an
audit made by independent public ac­
customer; and
(G ) The name of the broker/dealer countants or internal auditors respon­

(4)

sible only to the board of directors of
the bank.
(v)
A periodic plan, in which in
stance the bank shall: A mail or other­
wise furnish to the customer after the
end of each quarterly period in which
a transaction was completed, a writ­
ten ! statement showing 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 account during such
period: or (B ) the bank shall mail or
otherwise furnish on a per transaction
basis within a reasonable time follow­
ing each transaction the information
described in paragraph (k)<3) of this
section, except that any such informa­
tion relating to remuneration paid in
connection with transactions in securi­
ties need not be provided to the cus­
tomer when paid by a source other
than the customer. The bank may
charge a reasonable fee for providing
this information. In the event the
bank elects (1) above, it shall, upon
written request from the customer,
supply the information described in
(2) above.
(5)
gecurMies fradinp policies end
procedures. Every State member bank




effecting securities transactions for a beneficial interest, except (A) trans­
customers shall establish written poli­ actions effected in any account over
which the bank officer or employee
cies and procedures providing:
(i) Assignment of responsibility for has no direct or indirect influence or
supervision of all officers op employees control, and (B) transactions in U.S.
who (A) transmit orders to or place Government or agency obligations.
orders with broker/dealers,,or (B) ex­ These reports shall be filed with the
ecute transactions in securities for cus­ bank within 10 days after the end of
each quarterly period in which any
tomers;
(ii) For the fair and equitable alloca­ such security transaction was effected
tion of securities and prices to ac­ and shall be retained by the bank for 3
counts when orders for the same secu­ years.
(6)
E.rcepfio?M. The following excep­
rity are received at approximately the
same time and are placed for execu­ tions to this paragraph (k) shall apply:
(i) The requirements of paragraphs
tion either individually or in combina­
(k)(2)(ii) through (k)(2)(iv) shall not
tion;
(iii) Where applicable, for the cross­ apply to banks having an average of
ing of buy and sell orders on a fair and less than 200 securities transactions
equitable basis to the parties to the per year for customers over the prior
3-calendar-year period;
transaction; and
(ii) Activities of a State member
(iv) That bank officers or employees
whose duties include account manage­ bank that are subject to regulations
ment or effecting securities transac­ promulgated by the Municipal Securi­
tions for customers, or who are direct­ ties Rulemaking Board shall not be
ly engaged in the management, direc­ subject to the requirements of this
tion or supervision of such officers or paragraph (k); and
(iii) Activities of foreign branches of
employees, must report to the bank,
all securities transactions made by a State member bank shall not be sub­
them or on their behalf, either at the ject to the requirements of this para­
bank or elsewhere, in which they have graph (k).

FE D E R A L REGtSTER, V O L 4 3 , W O. 2 1 2 — W E D N E S D A Y , W O V E N D E R 1, ! 9 7 t