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4000 - Advisory Opinions

Explanation of 12 C.F.R. Part 344 (Recordkeeping and Confirmation Requirements for Securities Transactions)


August 10, 1992

Gerald J. Gervino, Senior Attorney

You have asked us to clarify the scope and intention of Part 344 of our regulations, 12 CFR Part 344 (1992) ("Part 344"). Your concern appears to lie in the area of securities transactions effected by your trust department for trust customers, where the transactions are forwarded to a broker/dealer in the bank's nominee name, often known as "omnibus" orders.

You feel that the recordkeeping and confirmation requirements set by Part 344 are unnecessary and burdensome, since each of your trust accounts receives complete customer statements no less frequently than quarterly. You specifically feel that the process of breaking out confirmation notices to individual customers in the short time allowed for confirmations is particularly unnecessary.

Under Part 344 of our regulations the customer is entitled to confirmation information (notification) within several different time requirements. The applicable requirement varies with the kind of relationship that the bank has with its customer. Your letter suggests that you are thinking of the kinds of trust accounts where sections 344.5(b) or (d) are applicable.

The first of these provisions, section 344.5(b), governs the case where the bank exercises investment discretion (except as agent). This would include trusts where the bank assumes an active role in selecting securities for purchase or sale. In that case, the bank only has an obligation to supply notifications upon the request of the person having the power to terminate the account. If there is no person with this power, it must provide notifications upon the request of any person holding a vested beneficial interest in the account. The notification must be furnished within a reasonable time. The bank may charge a reasonable fee for this.

The second of these provisions, section 344.5(d) governs the case where the customer's funds have been invested in a collective investment fund of the bank. Only an audited annual report is required and customers need only be told that the report is available on request. These requirements are similar to the Comptroller of the Currency's rule for common trust funds, which many nonmember banks follow for federal income tax reasons. 12 CFR § 9.18 (1992).

Sections 344.5(c) and (e) cover more specialized situations where the bank has discretion as an agent, such as a managing agent, or manages a periodic plan, such as a dividend reinvestment plan. Section 344.5(e), allows as an alternative procedure, the furnishing of quarterly statements, as promptly as possible after a periodic plan transaction.

The opening language of section 344.5 imposes a five-business-day rule for the furnishing of notifications to a customer. This rule, by default, primarily governs the brokerage type business, where the bank is buying and selling securities for a customer without any discretion of its own. Since the bank is so often acting as a forwarding broker in this role, it might, as a practical matter, either forward, or ensure the forwarding of, broker confirmations or furnish its own version of a broker's confirmation. While the bank must ensure that its customer obtain the required information, the paperwork could be done largely by a clearing broker, who has received orders on a full disclosure basis.

Section 344.5(a) allows the time of notification to be altered by mutual agreement with the customer, if the customer is notified of his right to receive the notification at no additional cost to the customer. We would like to point out that in a discount brokerage transaction, the customer would at least receive the clearing broker's confirmation in a timely fashion, if the bank were not the introducing party. Forwarding securities brokerage orders on an omnibus basis would cut off the customer's information on a trade, unless the bank provides its own notification.

The five general types of requirements set forth above are quite different. The provision for discretionary trusts contained in section 344.5(b) may govern most purchases for discretionary trust accounts.

If you have any further questions or would like further explanation of our letter, please write or call us at (202) 898-3723.

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