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Home > News & Events > Inactive Financial Institution Letters 




Inactive Financial Institution Letters 


[Federal Register: April 25, 1996 (Volume 61, Number 81)]
[Proposed Rules]               
[Page 18469-18477]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[[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

[[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.
=======================================================================
-----------------------------------------------------------------------

[[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


Last Updated 07/17/1999 communications@fdic.gov