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[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