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Home > News & Events > Inactive Financial Institution Letters 




Inactive Financial Institution Letters 


[Federal Register: May 24, 1996 (Volume 61, Number 102)]
[Proposed Rules]               
[Page 26135-26140]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 344

RIN 3064-AB74

 
Recordkeeping and Confirmation Requirements for Securities 
Transactions

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is 
considering whether and how to amend its regulations governing 
recordkeeping and confirmation requirements for securities transactions 
by state nonmember banks. The agency's present regulation was adopted 
in 1979 and has remained essentially unchanged since that time. The 
FDIC is undertaking a review of this regulation with the goal of 
modernizing its requirements to, among other things, reflect the 
supervisory role played by other Federal agencies charged with 
supervision of securities transactions. The agency is soliciting 
comment on a number of issues that have been identified. The responses 
will be used to aid the FDIC in developing a proposed amendment for 
public comment.

DATES: Comments must be received by June 24, 1996.

ADDRESSES: Comments should be directed to 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-402, 1776 F Street, NW, Washington, DC 20429, on 
business days between 8:30 am and 5:00 pm or sent by facsimile 
transmission to FAX number 202/898-3838. Internet: Comments@FDIC.gov. 
Comments will be available for inspection and photocopying in the FDIC 
Public Information Center, room 100, 801 17th Street, NW, Washington, 
DC 20429, between 9:00 am and 5:00 pm on business days.

FOR FURTHER INFORMATION CONTACT: Curtis Vaughn, Examination Specialist, 
Division of Supervision, (202) 898-6759; John Harvey, Review Examiner 
(Trust), Division of Supervision (202) 898-6762; Patrick J. McCarty, 
Counsel, Legal Division (202) 898-8708; or Gerald Gervino, Senior 
Attorney, Legal Division (202) 898-3723. Federal Deposit Insurance 
Corporation, 550 17th St., N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

Background

Section 303 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (CDRI Act)

    The FDIC is conducting a systematic review of its regulations and 
written policies. Section 303(a) of the CDRI Act (12 U.S.C. 4803(a)) 
requires that each Federal banking agency review its regulations to 
streamline them to improve efficiency, reduce unnecessary costs and 
eliminate unwarranted constraints on credit availability. Section 
303(a) also requires the Federal banking agencies to work jointly to 
make uniform all regulations and guidelines implementing common 
statutory or supervisory policies. As part of the section 303 process, 
the FDIC published in December of 1995 a notice in the Federal Register 
describing the section 303 requirements and inviting the general public 
and interested parties to comment on FDIC regulations and policy 
statements. 60 FR 62345 (December 6, 1995).
    On July 24, 1979 the FDIC and the other Federal banking agencies 
promulgated regulations addressing recordkeeping and confirmation 
requirements for securities transactions effected by banks. See 44 FR 
43261 (July 24, 1979) (FDIC), 44 FR 43252 (July 24, 1979 (OCC) and 44 
FR 43258 (July 24, 1979) (FRB). These regulations were, and are, 
virtually identical. With the exception of two amendments, the FDIC's 
part 344 has remained unchanged since it was promulgated in 1979. See 
45 FR 12777 (February 27, 1980), 60 FR 7111 (February 7, 1995).
    The FDIC wishes to review its recordkeeping and confirmation 
requirements for securities transactions in part 344 with the purposes 
of section 303 of the CDRI in mind. The Office of the Comptroller of 
the Currency (OCC) and the Board of Governors of the Federal Reserve 
System (FRB) have already proposed amendments to their regulations 
concerning recordkeeping and confirmation requirements for securities 
transactions by national and state member banks, respectively. See 60 
FR 66517 (December 22, 1995) and 60 FR 66759 (December 26, 1995). 
Before drafting and publishing a proposed regulation, the FDIC wishes 
to receive public comment on several basic issues underlying the 
purposes of part 344. The FDIC requests comments at this stage of 
regulatory review to assist development of a specific proposal.

[[Page 26136]]

Summary of Concerns

    Part 344 sets forth the recordkeeping and confirmation requirements 
with respect to securities transactions effected for the customers of 
state nonmember banks. State nonmember banks are required to keep four 
types of records (1) Chronological records of original entry containing 
an itemized daily record of all purchases and sales, (2) Account 
records for each customer, (3) Separate order tickets for each 
transaction, and (4) A record of all broker/dealers used and the 
commissions paid. Section 344.3(a) through (d). Banks must keep these 
records for at least three years. Section 344.3.
    Part 344 addresses both the ``form'' and ``timing'' of notification 
to customers for whom the bank has effected a securities transaction. 
Sections 344.4 through 344.5. Banks may provide one of two different 
types of notification forms to the customer. Both notification forms 
are required to contain such basic information as the name of the 
customer, the identity, price and number of shares or units of the 
security purchased or sold by the customer, the source and amount of 
any remuneration to be received by the broker/dealer and the bank 
(unless such remuneration is determined by a prior written agreement 
between the bank and the customer), and the name of the broker/dealer 
used. Banks are again required to retain copies of the notification 
form which is provided to customers for at least three years. Id.
    As a general rule, banks are required to mail the notification form 
to customers within five business days of the transaction. Section 
344.5. If a broker/dealer is used, the bank has 5 business days from 
the date of receipt of the broker/dealer's confirmation to mail 
notification to the customer. Id. Banks are permitted, however, to use 
alternate time of notification procedures depending upon the type of 
account involved. Section 344.5(a) through (e). The time of 
notification periods vary greatly from ``as promptly as possible'' 
after the transaction for periodic plans to annual statements for 
collective investment funds. Section 344.5(e) and (d), respectively.
    Part 344 also requires banks effecting securities transactions for 
customers to establish written policies and procedures regarding 
securities trading. Section 344.6 Such policies and procedures must 
address supervision of officers and employees who place orders and 
execute transactions, allocation of securities and prices to accounts 
when orders are received at approximately the same time, the crossing 
of buy/sell orders, and the reporting of personal securities 
transactions by bank officers and employees who participate in or make 
investment recommendations or decisions for customer accounts.
    The purpose of the FDIC implementing recordkeeping and confirmation 
requirements for securities transactions is to ensure that purchasers 
of securities in transactions effected by an insured nonmember bank are 
provided adequate information concerning the transactions. The 
regulations also are designed to ensure that insured nonmember banks 
maintain adequate records and controls with respect to securities 
transactions for their customers.
    As the financial marketplace has grown, new delivery systems for 
bank customer's securities transactions have emerged. This array of 
delivery systems has led to the overlap of jurisdiction between the 
Federal banking agencies and the Federal securities regulators. The 
FDIC supports minimizing overlapping jurisdiction through a concept 
referred to as ``functional regulation''. In order for functional 
regulation to work properly, it is important that securities 
transactions do not go unregulated and leave customers unprotected. As 
currently written, part 344 overlaps existing securities regulation in 
certain areas. Although this overlap ensures that securities 
transactions for bank customers are adequately covered in relation to 
confirmation and recordkeeping requirements, it can create a 
competitive imbalance for banks, create customer confusion, regulatory 
uncertainty and additional costs to banks.

Delivery Systems

    There are a variety of ways in which banks play a role in 
delivering securities brokerage services to their customers. Customers 
of banks may engage in securities transactions by either dealing 
directly with the bank or by dealing with a third party who has 
contracted with the bank to conduct securities transactions for, or 
through, the bank. Third parties may operate on bank premises using 
their own employees, or use persons who are dual employees of the bank 
and the third party. Third party providers may operate both on and off 
the bank's premises with the bank receiving remuneration for 
transactions originating from the bank. Other third party providers 
operate solely off bank premises. The bank may or may not receive 
remuneration for referring customers to the provider.
    Categories of third party providers also vary by whether or not the 
provider is affiliated with the bank and the type of affiliation. Third 
party providers may be owned by the bank, while in other situations the 
bank and third party provider are commonly owned or have common 
officers or directors. In other cases, the bank may be an advisor to a 
mutual fund sponsored by a third party.
    Within the bank itself, the institution may be engaged in retail 
recommendation and sale of securities, or the bank may be engaging in 
accommodation transactions only for customers of the bank. A limited 
number of banks operate municipal and government securities dealer 
departments separately registered under government securities 
regulations or regulations of the Municipal Securities Rulemaking Board 
(MSRB). Where there is sufficient demand, banks may engage in private 
banking for their higher income customers. In areas where capital 
markets are not well established, banks may engage in the sale of their 
own stock or the stock of their affiliates.
    Historically banks have been most commonly involved in securities 
transactions through their Trust Departments. These transactions occur 
both when the bank has some fiduciary responsibility and when the bank 
is acting as an agent or custodian. A bank may have no investment 
discretion, partial investment discretion or full investment discretion 
over its trust accounts. Trust Departments often sponsor collective 
investment funds for their customers. They may also act as the 
customers' agent under a periodic investment plan, such as a stock-
purchase plan or a dividend reinvestment plan. Each situation presents 
different customer needs relative to confirmation and recordkeeping 
requirements related to securities transactions.

Request for Comment

    The FDIC is seeking comment from interested parties concerning the 
applicability of part 344 to securities transactions conducted under 
each of these delivery systems. Specifically, if the transactions under 
a specific delivery system are covered by another regulatory system, 
what coverage should an FDIC regulation provide, if any? Additionally, 
the FDIC seeks comment on whether other delivery systems, i.e., 
dedicated phone lines to broker/dealers and mutual fund complexes, or 
internet sites, should be considered in deciding on the scope of 
coverage of part 344. Commenters are asked to identify types of 
securities transactions which by their unique characteristics should be

[[Page 26137]]

exempted, either completely or in part, from the requirements of part 
344. The OCC and FRB proposals do not approach the delivery systems and 
regulatory coverage issues in the same manner as the FDIC.

Effecting a Transaction

    The recordkeeping and confirmation requirements of part 344 are 
generally triggered when a bank effects a securities transaction on 
behalf of a customer. The regulation does not define the term 
``effecting a securities transaction''. The term was borrowed from the 
Federal Securities laws, where it is quite common but also not defined. 
See Securities and Exchange Act of 1934, 15 U.S.C. 78o(a)(1), (c)(1)(A) 
through (B), Government Securities Act, 15 U.S.C. 78o-5(a)(1)(B)(i), 
(a)(4) and (b)(1), and SEC Rule 10b-10(a), 12 CFR 240.10b-10(a). The 
FDIC has taken a broad view of the term to include not only those 
situations in which securities transactions are effected by bank 
employees but also those situations in which third parties who are 
located on bank premises conduct the transactions for the bank and the 
bank receives transaction based compensation in connection with the 
transactions. This is so even if the transaction takes place off bank 
premises. The FDIC is considering various alternatives in defining the 
term ``effecting a securities transaction'' and seeks comment as to how 
the term should be defined. If securities transactions are conducted by 
third parties, should such transactions be excluded from the 
definition? If so, how should such exclusion/exemption be drawn? If 
specific bank activities or certain types of delivery systems should be 
exempted from the definition, what factors should be considered in 
determining which bank activities and delivery systems should be 
exempted? The OCC and FRB proposals do not address the definition or 
scope of the term ``effecting a securities transaction'' issue.

Retail Sales Through Trust Departments

    As noted above, historically banks have been involved in securities 
activities through their Trust Departments. Trust Departments have 
accounting systems, internal controls and investment expertise with 
respect to securities transactions due to their investment management 
activities for trust clients. Banks may, however, be directing 
customers with retail securities transactions to their Trust 
Departments, even though such customers have no formal trust agreement 
with the bank. The FDIC specifically requests comment on whether this 
situation is commonplace in the industry and to what extent the 
requirements of part 344 should apply to such retail securities 
transactions for nontrust customers. The OCC and FRB proposals do not 
specifically address the retail sales through bank Trust Department 
issue.

Disclosure of the Source and Amount of Remuneration

    Members of the public, including bank customers, normally pay 
commissions or sales loads when buying or selling securities through a 
registered broker/dealer which has no association with a bank. The 
securities transactions effected by the bank may be somewhat different 
in that the bank may share in that commission or load or the bank may 
charge a fee in addition to the usual commission or load. In order to 
make this difference clear to those customers who purchase or sell 
securities through their bank, part 344 requires that the bank disclose 
the source and amount of its remuneration. The regulation does not 
distinguish between those commissions or loads which the bank shares 
with another party (but the total cost to the customers remains the 
same) and fees which may be added by the bank to those commissions or 
loads.
    As banks have become more heavily involved in effecting securities 
transactions for their customers, it has come to the FDIC's attention 
that there are practical problems concerning the timely disclosure of 
the source and amount of the bank's remuneration. Many insured 
nonmember banks have entered into what are commonly known as 
``networking agreements'' with registered broker/dealers. Under these 
agreements the broker/dealer typically leases space on the bank's 
premises to sell securities. In some instances banks receive a fixed 
monthly payment plus a portion of the commissions which varies 
depending upon the volume of sales over a given period. The result is 
that in some situations banks are unable to determine and disclose the 
total amount of their remuneration within the general 5 business day 
time frame provided for under Sec. 344.5.
    On March 21, 1995, the FDIC Board of Directors granted a limited 
waiver of the remuneration disclosure requirement contained in 
Sec. 344.4 based on the timing problem identified above. The waiver 
extends to any insured state nonmember bank which receives transaction-
based compensation on a regular basis with respect to securities 
transactions effected for customers. The waiver is subject to the 
provisos that (1) no additional fees are added by the bank other than 
those described in the prospectus (if the securities are sold under a 
prospectus); (2) the sale is made by a registered broker/dealer subject 
to rules and supervision of the National Association of Securities 
Dealers (NASD) and the Securities and Exchange Commission (SEC); and 
(3) the sale is conducted in a fashion which meets the requirements of 
the NASD and SEC. The waiver does not relieve banks of the obligation 
to disclose the source of their remuneration. Nor does the waiver apply 
in the case of (1) services provided in a fiduciary capacity, or (2) 
services for which a flat fee has been paid which includes securities 
brokerage.
    At the time the waiver was granted, the FDIC committed to working 
with the other Federal banking agencies to find an acceptable solution 
to the timing of the remuneration disclosure problem. The FDIC's 
current waiver differs from the position reflected in the OCC's 
proposal in that the FDIC continues to require that banks disclose the 
source of their remuneration and that the FDIC waiver extends to all 
securities transactions and not just to mutual fund transactions.
    In attempting to keep customers who purchase securities on the 
premises of a bank informed of potential conflicts of interest, the 
FDIC has taken the position that the customer should be aware of the 
fact that the bank has a financial interest in the transaction. Thus, 
the FDIC has concluded that in all cases, the source of the 
remuneration should be disclosed. The timing of that disclosure may be 
important in determining how much burden this requirement places on the 
bank.
    We note that the SEC's position regarding the disclosure of the 
source and amount of remuneration is much more limited than that under 
which the FDIC is currently operating. Pursuant to SEC Rule 10b-10, 
broker/dealers are required to disclose the source and amount of 
remuneration at or before completion of a transaction only when the 
broker/dealer is (1) participating in the distribution of a securities 
issuance or (2) participating in a tender offer. See 17 CFR 240.10b-
10(a)(7)(iv). Otherwise, the broker/dealer is required to provide only 
a notice which states that the source and amount of other remuneration 
will be furnished ``upon the written request of the customer.'' Id. 
With respect to the sale of mutual funds, the SEC is considering 
changing a long standing no action position on the broker/dealer 
disclosure of source and remuneration. See Investment Company 
Institute, SEC No-Action Letter, 1994 WL 131068 (S.E.C.) (March 16, 
1994).

[[Page 26138]]

Since 1979 the SEC's position has been that a broker/dealer does not 
need to disclose on confirmations the source and amount of remuneration 
received on the sale of open end management company shares if a 
prospectus with current fees, loads and expenses is provided to the 
customer. See Investment Company Institute, SEC No-Action Letter, 
[1979] Fed. Sec. L. Rep. (CCH) P82,041 (Mar. 19, 1979). Should the SEC 
change its position, broker/dealers would be required to provide 
confirmations which disclose both the source and amount of remuneration 
received on confirmations rather than relying upon the disclosure 
provided in the prospectus.
    The FDIC specifically requests comments concerning the need for 
disclosure of the source of remuneration and, if necessary, when that 
disclosure should be made. In addition, the FDIC requests comment on 
the circumstances under which a bank should disclose the amount of the 
remuneration and, if necessary, the timing of these disclosures. If 
disclosures concerning the amount of remuneration are made, should 
there be a differentiation concerning disclosure of the bank's portion 
of loads and commissions normally charged and those fees which may be 
charged in excess of normal commissions and loads? If FDIC mandated 
disclosures are necessary, how should these disclosures interrelate 
with similar disclosures required under the Federal Securities laws? 
The OCC and FRB proposals do not address all of the issues raised 
herein.

Definition of Security

    In part 344, the term ``security'' is defined in order to determine 
the scope of the regulation's coverage. Section 344.2(e). The 
definition is crafted specifically for the purposes of this regulation 
and does not mirror the definition of ``security'' in the Federal 
Securities laws. Specifically, there are eight exemptions to the 
definition of ``security'':
    (1) A deposit or share account in a federally insured depository 
institution;
    (2) A loan participation;
    (3) A letter of credit or other form of bank indebtedness incurred 
in the ordinary course of business;
    (4) Currency;
    (5) Any note, draft, bill of exchange, or bankers acceptance which 
has a maturity at the time of issuance of not exceeding nine months, 
exclusive of days of grace, or any renewal thereof the maturity of 
which is likewise limited;
    (6) Units of a collective investment fund;
    (7) Interests in a variable amount (master) note of a borrower of 
prime credit; and
    (8) U.S. Savings Bonds.
    The FDIC specifically requests comment on the adequacy of the 
definition of the term ``security'' currently used in part 344 and if 
there are other exceptions which should be made to the definition. 
Comment is invited concerning the practicability of using the 
definition of ``security'' which is used in the Securities Exchange Act 
of 1934, 15 U.S.C. 78c(a)(10).

Other Definitions

    The OCC and FRB proposals add definitions of ``asset-backed 
security'', ``completion of the transaction'', ``crossing of buy and 
sell orders'', ``debt security'', ``government security'' and 
``municipal security'' to their respective regulations. The new 
definitions are based on definitions contained in the Federal 
Securities laws and the SEC's confirmation rule, Rule 10b-10, 17 CFR 
240.10b-10, and are necessary for applying the proposed confirmation 
disclosure and three day settlement requirements. Rule 15c6-1, 17 CFR 
240.15c6-1. The definitions of the above terms contained in the OCC and 
FRB proposals are:
    ``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.
    ``Completion of the transaction effected by or through a bank'' 
shall mean:
    (1) 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
    (2) 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 bank makes payment into the 
account of the customer.
    ``Crossing of buy and sell orders'' shall mean a security 
transaction in which the same banks acts as agent for both the buyer 
and the seller.
    ``Debt security'' 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. 80a-1 et 
seq., shall not be included in this definition.
    ``Government security'' shall mean:
    (1) A security that is a direct obligation of, or obligation 
guaranteed as to principal and interest by, the United States;
    (2) 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;
    (3) 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 SEC; or
    (4) Any put, call, straddle, option, or privilege on a security as 
described in paragraph (1), (2), or (3) of this definition 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 
through an automated quotation system operated by a registered 
securities association.

    ``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.

    The FDIC is considering using identical definitions in revising 
part 344 and requests comment concerning these definitions. 
Specifically, the FDIC wishes to know if these definitions should be 
expanded in any manner or if they exclude transactions which should be 
covered by the scope of the definition. The FDIC proposal is consistent 
with the OCC and FRB proposals on the new definitions.

[[Page 26139]]

Exceptions

    Under the current regulation, certain requirements concerning 
recordkeeping and securities trading policies and procedures do not 
apply to banks having an average of less than 200 securities 
transactions per calendar year for customers over the prior three-
calendar-year period, exclusive of transactions in U.S. Government and 
Federal agency obligations. Section 344.7(a). The FDIC specifically 
requests comment concerning the continued appropriateness of this 
exemption and whether the current 200 transaction limit should be 
raised, and if so, what transaction or dollar limit should be adopted. 
Commenters are requested to address whether any increase in the 
threshold would (1) result in any material diminution in the 
protections to investors, and (2) how the applicability of and 
compliance with the Department of Treasury's Government Securities 
Dealer regulations would be affected. The OCC and FRB proposals do not 
address all the Government Securities trading issues raised herein.
    Since part 344 was originally implemented, regulation of government 
securities has changed as a result of the enactment of the Government 
Securities Act of 1986 (Government Securities Act). 15 U.S.C. 78o-5. 
Under this statute, the Department of the Treasury has authority over 
government securities transactions (including United States Treasury 
securities and securities issued or guaranteed by Federal government 
agencies and government-sponsored enterprises). State nonmember banks 
which are government securities brokers and dealers are not required to 
follow certain recordkeeping requirements established by the Department 
of the Treasury regulations because they are subject to part 344. 
Consistent with the requirements of the Government Securities Act, 
state nonmember banks that conduct fewer than 500 government securities 
brokerage transactions per year would not have to comply with certain 
recordkeeping requirements of part 344 if the exemption contained in 
the Government Securities Act is carried over to the FDIC's regulation. 
See 17 CFR 401.3(a). The FDIC specifically requests comment if there is 
a need to adopt this exemption in its regulations. The FDIC proposal is 
consistent with the OCC and FRB proposals on this issue.

Safe and Sound Operations

    As noted above, both the FRB and the OCC have issued proposed 
amendments to their regulations relating to recordkeeping and 
confirmation requirements for securities transactions. Those proposed 
amendments include a provision concerning safe and sound operations. 
See proposed Sec. 208.24(h) of the FRB's regulations and 
Sec. 12.1(c)(3) of the OCC's regulations. The provisions would require 
that a bank 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. The provisions are intended to emphasize the 
importance of effective internal controls with respect to all 
securities transactions. The FDIC requests comment on the desirability 
of adding this type of provision to its regulation.

Settlement of Securities Transactions

    In October 1993, the SEC adopted a securities settlement rule, 
effective June 7, 1995, requiring the payment of funds and delivery of 
most securities by the third business day after the date of the 
contract (T+3). Rule 15c6-1, 17 CFR 240.15c6-1. Many banks effecting 
customer securities transactions use a clearing broker which would be 
subject to the T+3 rule. In these situations securities transactions 
for bank customers would routinely settle within three days. However, 
some banks may clear and settle their securities trades directly. For 
this reason, the FDIC is considering revising part 344 to include a 
separate T+3 settlement requirement that tracks the language of the 
SEC's securities settlement rule. Alternatively, the FDIC could cross-
reference the language of the SEC rule.
    The FDIC seeks comment on the need for and the effect of adopting 
the T+3 securities settlement requirement and specifically invites 
comment on the feasibility of alternate approaches to implement the T+3 
settlement cycle. The FDIC's position is consistent with the OCC and 
FRB proposals on this issue.

Securities Transactions for Banks

    The FDIC seeks comment on how part 344 affects small banks which 
use the services of other banks to buy and sell securities for their 
own account. Small banks are active buyers and sellers of U.S. 
Government and Municipal securities for their own accounts. It is not 
clear what effect, if any, part 344's recordkeeping, disclosure and 
settlement requirements have had on the banks which are the securities 
customers of other banks. The FDIC solicits comments from the banks 
which are consumers of other bank's securities services on what 
concerns they have and what improvements can be made to part 344. The 
OCC and FRB proposals do not address the bank as customer issues raised 
herein.

Sweep Accounts and Confirmations

    It has now become commonplace for banks to offer ``sweep accounts'' 
to retail, commercial and trust customers. These ``sweep accounts'' are 
cash management services which permit customers to earn interest on 
otherwise idle cash balances. Sweep accounts automatically ``sweep'' 
excess cash out of a checking or non interest bearing deposit account 
into a money market mutual fund as frequently as every day after the 
close of business at the bank. The ``sweep'' is triggered by the amount 
of cash in the deposit account, which can be set by the depositor. The 
``sweep'' may also be reversed so that shares in the money market 
mutual fund are redeemed and cash is deposited into the checking or non 
interest bearing account at certain times or when certain dollar limits 
are reached. Banks receive a fee for the ``sweep'' service.
    The FDIC notes that ``sweep accounts'' bear some similarities to 
``periodic plans,'' which is a defined term under part 344. See 
Sec. 344.1(d). Under the current part 344, banks which are effecting 
securities transactions under periodic plans are required to provide 
confirmations to customers ``as promptly as possible after each 
transaction. * * * `` See Sec. 344.5(e). The SEC permits broker/
dealers, under certain conditions, to send confirmations for sweep 
transactions out of brokerage accounts into money market mutual funds 
to be provided on a quarterly basis. See 12 CFR Sec. 240.10b-10(b). The 
OCC and FRB have proposed amending their regulations to permit banks to 
provide confirmations for periodic plan transactions on a quarterly 
basis. The FDIC supports such a change, as it will reduce regulatory 
burden for banks and will harmonize securities and banking regulation.
    The FDIC requests comment on whether the definition of ``periodic 
plans'' in part 344 needs to be revised to specifically include ``sweep 
accounts'' or whether the term and activity is sufficiently distinct to 
warrant its own definition. In addition, the FDIC solicits comment 
regarding whether all ``sweep accounts'' should receive such treatment 
or just ``sweep accounts'' which invest in certain types of securities, 
e.g., money market mutual funds, and under certain conditions, e.g., no 
sales commission is charged for either purchases or sales. The FDIC 
also requests comment on whether ``sweep

[[Page 26140]]

accounts'' raise any issues peculiar to bank Trust Departments. The OCC 
and FRB proposals do not specifically address the ``sweep account'' 
issues identified herein.

Reporting of Personal Trading

    Part 344 currently requires certain bank officers and bank 
employees engaged in or aware of the investment decisions or 
recommendations for customer accounts to provide quarterly reports 
regarding their personal trading of securities. Section 344.6(d). The 
regulation does not require reporting of personal trading where the 
securities transactions aggregate $10,000 or less during the calendar 
quarter. The SEC has a similar reporting requirement for principal 
underwriters and investment advisers of registered investment companies 
under the Investment Company Act of 1940. See SEC Rule 17j-1, 12 CFR 
270.17j-1. The SEC Rule does not provide an exemption for securities 
transactions involving in the aggregate $10,000 or less. The FDIC 
requests comments on whether the exemption from reporting personal 
trading by bank officers and employees engaged in or aware of the 
investment decisions or recommendations for customer accounts in 
section 344.6(d) is appropriate. Additionally, the FDIC requests 
comment on whether all bank directors, as opposed to just those bank 
directors who are also officers or employees of the bank, should be 
required to report on their personal trading. The OCC and FRB proposals 
do not address the personal trading issues raised herein.

Additional Comment

    The FDIC is interested in receiving any additional comments 
regarding part 344 which the public feels should be taken into account 
as the agency undertakes to modernize the regulation.

    By Order of the Board of Directors.

    Dated at Washington, DC, this 14th day of May, 1996.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 96-12928 Filed 5-23-96; 8:45 am]
BILLING CODE 6714-01-P

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