Recordkeeping and Confirmation Requirements for Securities Transactions

SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is issuing

for comment a notice of proposed rulemaking that would amend its

regulations governing recordkeeping and confirmation requirements for

securities transactions. The proposed rulemaking updates, clarifies and

streamlines the FDIC regulations and reduces unnecessary regulatory

costs and other burdens. The proposed rule reorganizes the regulation,

clarifies areas where the rule was confusing, incorporates significant

interpretive positions, and updates various provisions to address

market developments and regulatory changes by other regulators that

affect requirements for recordkeeping and confirmation of securities

transactions by banks.

DATES: Comments must be received by January 23, 1997.

ADDRESSES: Comments should be directed to Jerry L. Langley, Executive

Secretary, Attention: Room F-402, Federal Deposit Insurance

Corporation, 550 17th Street, N.W., Washington, D.C. 20429. Comments

may be hand delivered to Room F-402, 1776 F Street, N.W., Washington,

DC 20429, on business days between 8:30 a.m. and 5:00 p.m. or

transmitted by fax or the Internet. The FDIC's fax number is (202) 898-

3838 and its Internet address is: [email protected] Comments will be

available for inspection and photocopying in Room 100, 801 17th Street,

NW, Washington, DC between 9:00 a.m. and 5:00 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Miguel D. Browne, Deputy Assistant

Director, Division of Supervision, Securities, Capital Markets and

Trust Branch, (202) 898-6789; John F. Harvey, Review Examiner (Trust),

Securities, Capital Markets and Trust Branch, Division of Supervision,

(202) 898-6762; Patrick J. McCarty, Counsel, Regulations and

Legislation Section, Legal Division, (202) 898-8708, and Gerald

Gervino, Senior Attorney, Regulations and Legislation Section, Legal

Division, (202) 898-3723.

SUPPLEMENTARY INFORMATION:

Background

In 1979, the FDIC adopted Part 344 to require banks under its

jurisdiction to establish uniform procedures and recordkeeping and

confirmation requirements with respect to effecting securities

transactions for customers. The requirements reflected, in part, the

recommendations of the Securities and Exchange Commission's (SEC) Final

Report of the Securities and Exchange Commission on Bank Securities

Activities (June 30, 1977). Part 344's recordkeeping and confirmation

requirements were patterned after the SEC's rules applicable to broker/

dealers and were intended to serve similar purposes for banks involved

in effecting customers' securities transactions.1 See 44 FR 43261

(July 24, 1979). The Board of Governors of the Federal Reserve System

(FRB) and the Office of the Comptroller of the Currency (OCC) also

adopted regulations substantially identical to part 344 in 1979. See 12

CFR 208.8(k), 44 FR 43258 (July 24, 1979) (FRB regulation); 12 CFR part

344, 44 FR 43254 (July 24, 1979) (OCC regulation).

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\1\ Brokers and dealers generally must register with the

Securities and Exchange Commission under the Securities Exchange Act

of 1934. See 15 U.S.C. 78o(a)(1). Banks are excluded from the

definitions of ``broker'' and ``dealer'' and thus are not subject to

the registration provisions. See 15 U.S.C. 78c(a) (4) and (5).

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On December 22, 1995, the OCC published a notice of proposed

rulemaking (60 FR 66517) (OCC proposal) to revise 12 CFR part 12, the

OCC's Recordkeeping and Confirmation Requirements for Securities

Transactions regulation. The purpose of the proposal was to modernize

part 12, address various market developments and regulatory changes,

and reduce regulatory burden, where possible. The FRB published a

substantially similar yet somewhat differently worded proposed rule on

December 26, 1995. See 60 FR 66759. The FDIC published an advance

notice of proposed rulemaking on May 24, 1996, soliciting comment on

issues similar to those raised in the OCC's and FRB's proposed rules,

as well as issues which the OCC and FRB proposals did not address. See

61 FR 26135. The OCC published its final rule revising part 12 on

December 2, 1996. See 61 FR 63958.

The FDIC and the other federal banking agencies are required by

section 303 of the Riegle Community Development and Regulatory

Improvement Act of 1994 (CDRI) to review their regulations to

streamline them to improve efficiency, to reduce unnecessary costs and

to eliminate unwarranted constraints on credit availability. 12 U.S.C.

4803(a). 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 noted above,

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. These

regulations were virtually identical.

Consistent with section 303 of CDRI, the FDIC has reviewed the OCC

and FRB proposals and attempted to draft its notice of proposed

rulemaking in order that it will be nearly uniform with the other

proposals. We note at the outset that the FDIC would prefer a rule

which is uniform with the other agencies. The FDIC's proposed rule is

closer in structure, definitions, language and form to that of the

FRB's proposal than the OCC's final rule. The FDIC requests comment on

all aspects of the notice of proposed rulemaking.

Comments Received and Changes Made

The FDIC received 10 comments on the advance notice of proposed

rulemaking. The comment letters included four from banks and bank

holding companies, four from trade associations, and two from broker/

dealers. Commenters generally supported the proposed changes to part

[[Page 67730]]

344, but several commenters requested changes. One commenter stated

that it was imperative that the Federal banking agencies work together

to issue identical regulations governing securities confirmation and

recordkeeping requirements. The FDIC has carefully considered each of

the comments and has made several changes in response to the comments

received.

Overall, the notice of proposed rulemaking adopts many of the

changes to part 344 which were identified in the ANPR. The section-by-

section discussion in the preamble identifies substantive changes made

to certain sections of the existing rule.

Section-by-Section Discussion

Purpose and Scope (Sec. 344.1)

The notice of proposed rulemaking makes some very minor language

changes to the ``Purpose'' part of Sec. 344.1 to clarify which banks

are subject to the jurisdiction of the FDIC.

The ``Scope'' part of Sec. 344.1 has also been revised and

reorganized to clarify the types of securities transactions which are

generally subject to the regulation. Generally, any state nonmember

insured bank effecting a securities transaction for a customer is

subject to the requirements of part 344, unless the transaction

specifically is exempted.

Exceptions (Sec. 344.2)

The notice of proposed rulemaking relocates and expands the

``Exceptions'' section of part 344 from the end of the regulation to

near the beginning so that it will be clearer as to what types of

transactions are not subject to the regulation. The proposal provides

in paragraph (a) five exceptions for: (1) Banks conducting a small

number of securities transactions; (2) certain government securities

transactions; (3) certain municipal securities transactions; (4)

securities transactions conducted by a foreign branch of a bank; and

(5) certain securities transactions with a broker/dealer. The notice of

proposed rulemaking also clarifies that even though these types of

transactions are excepted from compliance with all or certain sections

of part 344, the FDIC expects a bank conducting securities transactions

for its customers to maintain effective systems of records and controls

to ensure safe and sound operations.

The FDIC is including in the notice of proposed rulemaking a new

exception (5) for certain securities transactions effected through

broker/dealers. The FDIC requested comment in the ANPR on whether part

344 ought to apply to securities transactions effected by broker/

dealers who have entered into ``networking arrangements'' with banks.

Most commenters believe that the FDIC's recordkeeping and confirmation

requirements should not apply to these type of bank operations with a

registered broker/dealer. Registered broker/dealers are already subject

to the SEC's recordkeeping and confirmation rules and are required to

provide their customers with confirmations similar to those which banks

must provide their customers under part 344.2 The FDIC has

determined that part 344 should not generally apply to securities

transactions effected by these registered broker/dealers where the bank

customer has in fact knowingly become a customer of the broker/dealer.

Language has been added to Sec. 344.2(a)(5) to establish a two-part

test. In order for the exception to apply: (A) The broker/dealer must

be fully disclosed to the customer and (B) the customer must have a

direct contractual agreement, e.g. a signed account agreement, with the

broker/dealer. The FDIC believes it is very important that the customer

understand that they are dealing with a broker/dealer and not the bank.

Banks which enter into networking arrangements with broker/dealers and

who do not want those securities transactions to be subject to Part 344

should take adequate steps to make sure that the two-part test is being

observed. Full disclosure by the broker/dealer to the bank customers is

consistent with the Interagency Statement on Retail Sale of Nondeposit

Investment Products.3 The FDIC also agrees that when an employee

of the bank is working for and under the control and supervision of a

registered broker/dealer while soliciting, recommending, purchasing or

selling securities to customers pursuant to a networking arrangement,

Part 344 requirements would not apply. Exception (5) has been drafted

to make it clear that dual employee arrangements are not subject to

Part 344.

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\2\ It is not unusual for a bank effecting a securities

transaction to forward orders to a registered broker/dealer for

execution and clearing. Under these circumstances, the requirements

of part 344 would apply because the bank is effecting the securities

transaction for its customer.

\3\ FDIC Financial Institutions Letter 9-94 (February 17, 1994);

and FDIC Financial Institutions Letter 61-95 (September 13, 1995).

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With respect to networking arrangements, the FDIC requests comment

regarding whether it is common for banks with networking arrangements

to receive separate surcharges or fees from bank customers in addition

to the transaction volume compensation they receive from the broker/

dealer. The FDIC would also like to receive comment on whether banks

which impose these additional surcharges or fees should be required to

comply with Part 344 or separately disclose those additional fees in

some other manner.

Definitions (Sec. 344.3)

The notice of proposed rule adds eight new definitions and requests

comment on modifying two existing definitions. Six of the definitions--

``asset-backed security,'' ``completion of the transaction,''

``crossing of buy and sell orders,'' ``debt security,'' ``government

security,'' and ``municipal security''--were identified in the ANPR and

are included unchanged in the notice of proposed rulemaking. The FDIC

has defined these terms the same way that the Federal Reserve has

proposed them. The OCC proposal has the same terms but the structure

and language used are somewhat different.

The FDIC is also proposing to add two new definitions; ``bank'' and

``cash management sweep account'' which weren't in the ANPR. With

respect to the term ``Bank,'' the FDIC proposes to define the term to

mean ``state nonmember insured bank (except a District bank) or a

foreign bank having an insured branch.'' This change is consistent with

the minor language modifications made to Sec. 344.1 and shortens the

regulation by eliminating the need to repeat ``state nonmember insured

bank (except a District bank) or a foreign bank having an insured

branch'' where ``Bank'' is currently found.

The other new definition would be ``Cash management sweep

account.'' The FDIC requested comment in the ANPR with respect to bank

``sweep account'' activities. Most commenters thought that part 344

should clarify how ``sweep accounts'' are treated under the rule. While

several commenters recommended that sweep accounts be included in the

definition of periodic accounts the FDIC has decided not to do so for

several reasons. First, the FDIC believes that sweep accounts are

different in kind from typical periodic plans such as dividend

reinvestment plans (DRIPs) and automatic investment plans. Sweep

accounts do not normally invest in securities at the regular intervals

(i.e; monthly or quarterly) as do DRIPs and automatic investment plans.

Second, sweep accounts are a significant product/service in their own

right which account for several billions of dollars worth of

transactions on a daily basis and probably exceed the dollar volume in

traditional periodic plans. Due to these differences, the FDIC

[[Page 67731]]

believes it is not appropriate to include sweep accounts in the

definition of periodic plans. Third, the FDIC believes that bank

customers with sweep accounts should receive confirmations more

frequently than periodic plan account holders. The FDIC is proposing

that banks be required to issue confirmations for sweep accounts at

least monthly, if there are securities transactions in the account, and

at least quarterly when there are no transactions. Quarterly

confirmations are proposed for periodic plans. The FDIC believes it

would be confusing if sweep accounts were to be included in the

definition of periodic plans and yet be subject to a more frequent

confirmation requirement. For these reasons, the FDIC is proposing a

separate definition for sweep accounts and requests comment on the

adequacy of such definition.

The term ``cash management sweep account'' would cover any

prearranged, automatic transfer of funds above a certain dollar level

from a deposit account to purchase a security or securities or any

prearranged, automatic redemption or sale of a security or securities

when a deposit account drops below a certain dollar level with the

proceeds being transferred into a deposit account. The term would only

cover transactions involving the purchase or sale of securities. The

FDIC requests comment on whether it is necessary to provide

clarification regarding reporting requirements where monies (interest,

dividends, etc.) earned on a security are deposited into a sweep

account. The FDIC also requests comment on whether the term ``cash

management sweep account'' is appropriate.

The FDIC notes that not all sweep accounts will be treated the same

under part 344. First, totally excluded from the coverage of part 344

would be sweep accounts which sweep from a deposit account into another

deposit account such as a money market deposit account (MMDA).

According to a recently published Federal Reserve study, billions of

dollars are being swept from noninterest bearing deposit accounts into

MMDAs.4 Since there is no purchase or sale of a security involved

in this type of sweep transaction, part 344 would not apply.

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\4\ Senior Financial Officer Survey May 1996, Division of

Monetary Affairs, Board of Governors of the Federal Reserve System

(August 8, 1996).

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While very similar to sweeps into MMDAs, sweep accounts which

automatically transfer idle cash from a deposit account into a money

market mutual fund would be subject to part 344. Shares of money market

mutual funds, or any other interest in an open-end investment company,

are ``securities'' within the Federal securities laws as well as the

definition of ``security'' in part 344. Sweep accounts which

automatically purchase or sell shares in money market mutual funds, or

any other mutual fund, would therefore be subject to the regulation. As

noted above, the FDIC is proposing in Sec. 344.6(d) that banks be

required to provide either monthly or quarterly statements to its

customers depending upon the frequency of securities transactions.

Banks would be required to provide notifications to customers at the

end of the month if a purchase or sale of a security has occurred in

their cash management sweep account. Banks would be required to provide

quarterly statements to cash management sweep account customers at a

minimum.

A third common type of sweep account offered by banks involves

transferring idle cash into a repurchase agreement on government

securities. This type of transaction is clearly within the scope of

part 344, since there is a security being purchased or sold.

However, government securities are subject to the Government

Securities Act of 1986, 15 U.S.C. 78o-5, and the rulemaking authority

of the Bureau of the Public Debt, Department of Treasury. The Treasury

Department requires broker/dealers and banks to provide next day

confirmations on hold in custody repurchase agreements on government

securities. See 17 CFR parts 400 through 405, 449, and 450. We note

that banks offering sweep transactions involving repurchase agreements

on government securities will be subject to more frequent confirmation

requirements than other sweep accounts under part 344.

The FDIC is also requesting comment on modifications to two

definitions. The FDIC proposes to modify the existing definition of

``customer'' to specifically exclude those persons and accounts who

enter into written agreements with fully disclosed broker/dealers for

securities transactions. This modification, which parallels the

proposed exception in Sec. 344.2(a)(5), is intended to make it clear

that bank customers who enter into written agreements with fully

disclosed broker/dealers, such as broker/dealers with networking

agreements with the bank, are not ``customers'' of the bank for

purposes of part 344.

The other proposed modification is to the term ``investment

discretion.'' The FDIC proposes to replace the word ``recommendations''

with the word ``decisions.'' The result would be to narrow the

definition of investment discretion to situations in which the bank

actually makes investment decisions with respect to a customer's

account as opposed to where the bank merely makes recommendations to

the customer. This change would conform the FDIC's definition to the

OCC and FRB's regulatory language as well as track the definition in

the Securities Exchange Act of 1934, as amended. 15 U.S.C. 78c(a)(35).

We note that the OCC proposed in December of 1995 a different

definition of the term ``investment discretion'' in connection with its

Trust Regulations. See 60 FR 66163. The FDIC requests comment on

whether an alternate definition should be considered.

Recordkeeping (Sec. 344.4)

With respect to recordkeeping, the notice of proposed rulemaking

makes several non-substantive changes. Section 344.4 (a) remains

identical in substance to the existing rule. The FDIC proposes to add

headings and paragraphs to make the rule easier to read. A new

paragraph (5) has been added to require banks to retain copies of all

written notifications which are provided. This is not a new

requirement, but is merely a relocation of the recordkeeping

requirement which is found in current Sec. 344.4.

The FDIC proposes to make similar changes to the section of the

rule regarding record maintenance. A new heading for Sec. 344.4(b),

entitled ``Manner of maintenance'' is proposed. Language has been added

which attempts to make it clear that banks do not have to maintain

their records in any particular form or format, as long as the records

are clear, and accurately reflect the information required under

Sec. 344.4(a). This provision is intended to give banks flexibility in

the maintenance of records required by part 344. The FDIC also

recognizes that better and more affordable technology will increase

banks' interest in replacing paper files with electronic data bases and

filing systems. The FDIC has no objection to a bank using an electronic

or automated recordkeeping system. Accordingly, the proposed rule

specifically permits the use of electronic or automated records as long

as the records are easily retrievable and readily available for

inspection and the bank has the capability to reproduce the records in

hard copy form. Further, the FDIC proposes to add language which makes

it clear that a bank using a third party service provider to maintain

the records would meet the rule's recordkeeping requirements.

[[Page 67732]]

Content and Time of Customer Notification (Sec. 344.5)

The FDIC is proposing to revise existing Sec. 344.4 ``Content and

time of customer notification'' in several material respects. The FDIC

has added language to the beginning of Sec. 344.5 to make it clear that

banks may provide the written confirmations required by mail, facsimile

or other electronic means. The SEC recently issued guidance to the

broker/dealer community regarding the delivery of confirmations by

electronic means. SEC Release No. 33-7288, 61 FR 24644 (May 15, 1996).

The FDIC recognizes that banks will want to, and should be permitted

to, use new confirmation delivery systems as technology advances. In

appropriate situations, a bank may satisfy the ``written'' notification

requirement through electronic communications. Where a customer has a

facsimile machine, a bank may fulfill its notification delivery

requirement by sending the notification by facsimile transmission.

Similarly, consistent with SEC guidance a bank may satisfy the

notification delivery requirement by other electronic communications

when the parties agree to use electronic instead of hard-copy

notifications; the parties have the ability to print or download the

notification; the recipient affirms or rejects the trade through

electronic notification; the system cannot automatically delete the

electronic notification; and both parties have the capacity to receive

electronic messages. The FDIC will consider granting banks permission

to use electronic confirmations in other situations depending upon

advances in technology and other regulatory developments.

In proposed Sec. 344.5(a)(1) the FDIC has added clarifying language

regarding the use of broker/dealer confirmations to satisfy the written

notification requirements. There has been some confusion regarding

direct mailing of broker/dealer confirmations to bank customers. The

FDIC has added language which would make it clear that banks have the

option of either (1) having a broker/dealer executing a transaction for

the bank to send a confirmation directly to the bank's customer or (2)

choosing to forward a copy of the broker/dealer confirmation to the

bank customer when it is received. The FDIC believes banks should have

the option of directing a broker/dealer to send a confirmation directly

to the bank's customer as this will improve bank service by

accelerating the delivery of confirmations to its customer. Banks using

this option are ultimately responsible for the timely delivery of

confirmations as well as accurate disclosure of all information

required therein.

Another significant change in proposed Sec. 344.5(a)(1) is the

shortening of the timeframe banks have for forwarding broker/dealer

confirmations to customers. Under existing Sec. 344.4, banks are

required to forward a broker/dealer's confirmation within five business

days of receipt. With the settlement period being shortened to T+3, see

proposed Sec. 344.7, and general improvement in communications, the

FDIC believes that shortening the timeframe for banks sending out

broker/dealer confirmations is justified. The proposed rule requires

banks to send broker/dealer confirmations within one business day of

receipt.

With respect to disclosure of other remuneration, the FDIC is

adding clarifying language to proposed Sec. 344.5(a)(2). Even when

banks use a broker/dealer confirmation, they must provide a statement

regarding the amount of any remuneration the bank will receive from the

customer or any other source in connection with the transaction. There

are certain exceptions--where there is a written agreement between the

bank and the customer, in government and municipal securities

transactions where the bank acts as a dealer, and in mutual fund

transactions where the customer receives a current prospectus. Proposed

paragraph (a)(2) is being revised to make it consistent with the

remuneration disclosure requirements found in paragraph (b)(6).

With respect to the content of the written notification issued by a

bank, the first seven requirements under the proposed rule are

virtually identical to the existing rule. Sec. 344.4(b)(1)-(7). The

FDIC has added new language to proposed paragraph (b)(6) regarding the

exceptions from the disclosure of remuneration requirement for mutual

fund transactions. Banks are not required to provide a statement

regarding the source and amount of other remuneration if the bank

provides the customer with a current prospectus which discloses all

current fees, loads and expenses at or before completion of the

transaction. This exception is consistent with current securities

industry practice which is based on a 1979 SEC No Action Letter. See

Letter to the Investment Company Institute, reprinted in [1979 Transfer

Binder] Fed. Sec. L. Rep. (CCH) 82041 (Mar. 19, 1979). The FDIC

believes adding this language to the text of the regulation will

provide clearer guidance to banks, their counsel and examiners in this

area.

The FDIC is proposing to add five confirmation disclosure

requirements for debt security transactions. See proposed

Sec. 344.5(b)(8)-(12). Paragraphs (b)(8)-(11) address yield information

disclosure, while paragraph (b)(12) requires disclosure that a debt

security has not been rated by a nationally recognized statistical

rating organization, if that is the case. These requirements are

consistent with those of the SEC's confirmation rule, Rule 10b-10. See

17 CFR 240.10b-10(a)(2)(i)(D).

Notification By Agreement; Alternative Forms and Times of Notification

(Sec. 344.6)

In addition to the notification requirements in proposed

Sec. 344.5, the regulation authorizes alternative forms and times of

notification under Sec. 344.6 for certain specific types of accounts.

These are: (1) Accounts in which the bank exercises investment

discretion in other than an agency capacity; (2) accounts in which the

bank exercises investment discretion in an agency capacity; (3) cash

management sweep accounts; (4) transactions for a collective investment

fund account; and (5) transactions for a periodic plan account. The

proposed rule makes very minor changes to the current Sec. 344.5. The

proposed rule revises the name of the section and adds headings in an

effort to eliminate confusion and enhance readability. The one major

change is the addition of a subsection addressing the notification

requirements for cash management sweep accounts.

Under proposed Sec. 344.6(a) a bank and its customer can agree, in

writing, to a different arrangement as to the time and content of

written notification to be received. This provision may be of benefit

to both banks and their customers in that it permits bank customers to

opt for periodic statements--monthly or quarterly--if they do not

desire to receive confirmations within 3 days of the transaction. Banks

may benefit by not having to produce as many confirmations for the same

account and/or not having to produce confirmations as quickly. The FDIC

would like to receive comment regarding the typical written

notification timeframes in standard bank account documents. The FDIC

would like to know if bank customers who sign bank account agreements

providing for alternate notification arrangements are aware of their

right to receive written notifications in as little as 3 days. Comment

is specifically requested as to

[[Page 67733]]

whether the FDIC should require banks to provide more disclosure to its

customers regarding when they are entitled to receive written

notifications. Commenters who support requiring additional disclosures

by banks should provide specific examples of the types or forms of

disclosure that are, or should be, made.

The FDIC proposes to add a new paragraph (d) to Sec. 344.6 to

address the notification requirements for cash management sweep

accounts. The FDIC believes that banks offering cash management sweep

accounts should provide notification similar to that provided by

registered broker/dealers offering similar services. As discussed under

Sec. 344.3, the FDIC has proposed a new definition ``cash management

sweep accounts''. Section 344.6(d) in the proposed rule provides the

timeframe for notification for cash management sweep accounts. The

proposed rule clarifies that, with respect to cash management sweep

accounts, the time for notification is each month in which a purchase

or sale of securities takes place in the customer's account and not

less than once every 3 months if there are no securities transactions

in the account. Under the SEC's Rule 10b-10, broker/dealers must

provide a confirmation after the end of each monthly period for

transactions in money market mutual funds. See 17 CFR 240.10b-10(b)(2).

As discussed above, Sec. 344.6(d) does not control the notification

requirements for cash management sweep accounts which sweep idle funds

into repurchase agreements on government securities. Confirmation

requirements for sweeps into repurchase agreements on government

securities are subject to the Government Securities Act of 1986 and the

Treasury Department regulations thereunder. The Treasury Department

regulations normally require next day confirmations on sweeps into hold

in custody repurchase agreements on government securities.

Under proposed Sec. 344.6(f) the FDIC is proposing to revise the

time frame for providing confirmations for periodic plan accounts. The

FDIC proposes to loosen the confirmation requirements for periodic

plans from ``as soon as possible'' to ``not less than once every three

months''. The FDIC believes that this timeframe is consistent with

current industry practice and the SEC's notification requirements. This

timeframe also will serve to reduce unnecessary regulatory burden.

Settlement of Securities Transactions (Sec. 344.7)

The FDIC's ANPR requested comment on the need for, and effect of,

adopting the T+3 securities settlement requirement for banks. The FDIC

was considering whether part 344 should adopt a provision which tracks

the SEC's securities settlement rule or whether part 344 should merely

cross reference the SEC's rule. We note that the FRB's proposal would

have required banks to comply with the standard settlement cycle

observed by the United States securities industry.5 While the

cross referencing of the SEC's settlement rule would provide uniformity

with the securities industry and avoid the time consuming task of the

FDIC amending part 344 when the SEC makes material changes to their

rule, the rule would not be clear on its face as to the settlement

requirements expected of banks. In addition, cross referencing would

require many small banks to have access to the SEC's rules and be aware

of current SEC interpretations of such rules. The notice of proposed

rulemaking sets forth a new section, Sec. 344.7, with a T+3 settlement

rule which tracks the SEC's settlement rule.6

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\5\ The text of the FRB's proposal is as follows: ``Settlement

of securities transactions. All contracts for the purchase or sale

of a security shall provide for completion of the transaction within

the number of business days in the standard settlement cycle for the

security followed by registered broker/dealers in the United States

unless otherwise agreed to by the parties at the time of the

transaction.'' See 60 FR 66764.

\6\ See Securities Exchange Act of 1934 Rule 15c6-1, 17 CFR

240.15c6-1; 58 FR 52891 (Oct. 13, 1993); 60 FR 26604 (May 17, 1995)

(amendments to the rule).

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Securities Trading Policies and Procedures (Sec. 344.8)

In the notice of proposed rulemaking the FDIC proposes to split the

existing Sec. 344.6 ``Securities trading policies and procedures'' in

two, separating the trading policies and procedures from the bank

personnel securities trading reporting requirements. New Sec. 344.8

would retain virtually unchanged paragraphs (a), (b) and (c) of the

existing Sec. 344.6 addressing orders and execution of trades, the

equitable allocation of securities and prices for accounts and the

crossing of buy and sell orders. The one substantive change to be found

in the proposal addresses the separation of order and execution

functions from the traditional back office clearing functions. See

proposed Sec. 344.8(a)(2). The FRB proposal raised this issue and the

FDIC believes, based on the recent highly publicized cases involving a

lack of internal controls for securities and commodities trading, that

such a provision is appropriate. The proposed rulemaking adds a new

provision which would require banks to adopt written policies and

procedures with separate supervisory procedures and reporting lines for

back office functions.

Personal Securities Trading Reporting by Directors, Officers and

Employees (Sec. 344.9)

The FDIC proposes to create a new Sec. 344.9 addressing personal

securities trading reporting by bank personnel. The FDIC believes that

a separate section is warranted. The FDIC proposes to relocate the

substance of paragraph (d) of existing Sec. 344.6 to new Sec. 344.9. In

addition, the FDIC is proposing to add two new paragraphs: one which

requires certain bank directors to report personal securities trading

and the other which identifies an alternate report which bank personnel

subject to the reporting requirement can use. New headings have been

added to identify more clearly the requirements of the section.

There are two substantive changes proposed to new Sec. 344.9. The

first substantive change proposed is to expand the scope of the

regulation to cover certain bank directors. The existing regulation

only applies to bank officers and employees even though bank directors

may be involved in making investment recommendations or decisions for

customer accounts. The proposed paragraph (b) would require those bank

directors who are (1) involved in making investment recommendations or

decisions for customer accounts or (2) participate in the determination

of such recommendations or decisions to provide the same quarterly

reports on personal securities trading which bank officers and

employees are required to provide. As a point of clarification,

individuals who are both officers and directors of a bank are subject

to the provisions and reporting requirement of paragraph (a).

This proposed reporting requirement would not apply to all bank

directors, nor would it necessarily require reporting by all the bank

directors who serve on the bank's investment or trust committee. For

example, the proposed reporting requirement would not apply to

directors who, through their position on the trust or investment

committee, approve or become aware of the trust department's general

asset allocation recommendations or those directors who approve of or

who know that the bank is recommending specific industries, sectors or

foreign markets. Directors who receive monthly or quarterly reports

detailing past trading activity in specific securities for

[[Page 67734]]

customer accounts wouldn't be subject to the proposed reporting

requirement because such information would not provide such directors

with any advantage for personal trading. For this reason the FDIC has

left out the provision requiring officers or employees who, in

connection with their duties, obtain information concerning which

securities are being purchased, sold or recommended. The FDIC requests

comment regarding whether this provision should be included in new

paragraph (b).

The proposed reporting requirement in new paragraph (b) would

apply, however, to those directors who actively participate in making

decisions or recommendations with respect to the purchase or sale of

specific securities (both debt and equity) for customer accounts prior

to transactions taking place. Directors who have such information could

possibly use such information to trade for their own gain. The FDIC

would like to remind bank directors, officers and employees that the

use of such information for personal trading is illegal and could

result in significant criminal and regulatory actions against the

individual as well as the bank.

The second substantive change identifies an alternate report for

personal securities trading. The proposed Sec. 344.9(a) and (b)

continue to provide that personal securities trading reports must be

filed with the bank within 10 business days 7 of the end of the

calendar quarter. New paragraph (d) clarifies that a bank director,

officer or employee may fulfill the reporting requirement under

proposed Sec. 344.9 (a) or (b) by providing a copy of the report

required under SEC Rule 17j-1. If a bank acts as an investment adviser

to an investment company registered under the Investment Company Act of

1940, the bank's directors, officers and employees--as ``access

persons''--would be required to comply with and file a personal

securities trading report with the bank. Proposed paragraph (d) makes

it clear that the Rule 17j-1 report, which is more detailed than the

report required under Sec. 344.9, will be accepted by the FDIC in lieu

of filing the Sec. 344.9 report. This proposed change is consistent

with the OCC's interpretative position published as part of their final

rule.

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\7\ The FDIC has added the word ``business'' to the regulation

to make it clear that the personal securities trading reports must

be filed within 10 business, as opposed to calendar, days after the

end of the calendar quarter. This is consistent with past

interpretations and merely serves to clarify existing regulatory

practice.

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Waivers (Sec. 344.10)

The notice of proposed rulemaking restates the FDIC's existing

waiver provision found in existing Sec. 344.8.

Paperwork Reduction Act

The collections of information contained in this notice of proposed

rulemaking have been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)). Comments on the collections of information should be

sent to the Office of Management and Budget, Paperwork Reduction

Project (3064-0028), Washington DC 20503, with copies of such comments

to be sent to Steven F. Hanft, Office of the Executive Secretary, Room

F-454, Federal Deposit Insurance Corporation, 550 17th Street, N.W.,

Washington, DC 20429.

The collection of information requirements in this proposed rule

are found in 12 CFR Secs. 344.2(b), 344.4(a), 344.5(a) and (b), 344.8,

and 344.9. The collections consist of recordkeeping requirements,

Secs. 344.2(b) and 344.4(a); the provision of written confirmations,

Secs. 344.5 (a) and (b) and 344.6; the establishment of written

policies and procedures for placing orders and executing trades as well

as back office functions, Sec. 344.8; the reporting of personal

securities trading by certain bank directors, officers and employees,

Sec. 344.9.

The likely respondents/recordkeepers are state nonmember insured

banks.

Estimated average annual burden hours per respondent/recordkeeper:

19.43 hours.

Estimated number of respondents and/or recordkeepers: 5,663 state

nonmember insured banks.

Estimated total annual reporting and recordkeeping burden: 109,818

hours.

Start-up costs to respondents: None.

Records under this part are to be maintained for at least three

years.

Regulatory Flexibility Act

Pursuant to 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.

The FDIC hereby certifies that the proposal will not have a

significant economic impact on a substantial number of small entities.

The proposal should result in a net benefit to all banks regardless of

size due to the streamlining and clarifications provided in the

proposed rule, but the economic impact on small banks will not be

significant. Most banks with total assets of under $100 million will

not engage in securities activities in a manner covered by this

regulation. Rather, a small bank typically will use either a registered

broker/dealer who has rented space on the bank's premises in what is

commonly referred to as a ``networking arrangement'' or an

``introducing broker'' who will refer a customer to a dealer that can

effect the desired transaction, both of which situations are outside

the scope of part 344, as proposed.

List of Subjects in 12 CFR Part 344

Banks, Banking, Reporting and recordkeeping requirements,

Securities.

Authority and Issuance

For the reasons set out in the preamble, the FDIC proposes to

revise Part 344 of title 12 of the Code of Federal Regulations to read

as follows:

PART 344--RECORDKEEPING AND CONFIRMATION REQUIREMENTS FOR

SECURITIES TRANSACTIONS

Sec.

344.1 Purpose and scope.

344.2 Exceptions.

344.3 Definitions.

344.4 Recordkeeping.

344.5 Content and time of notification.

344.6 Notification by agreement; alternative forms and times of

notification.

344.7 Settlement of securities transactions.

344.8 Securities trading policies and procedures.

344.9 Personal securities trading reporting by bank directors,

officers and employees.

344.10 Waivers.

Authority: 12 U.S.C. 1817, 1818 and 1819.

Sec. 344.1 Purpose and scope.

(a) Purpose. The purpose of this part is to ensure that purchasers

of securities in transactions effected by a state nonmember insured

bank (except a District bank) or a foreign bank having an insured

branch are provided adequate information regarding transactions. This

part is also designed to ensure that banks subject to this part

maintain adequate records and controls with respect to the securities

transactions they effect.

(b) Scope; General. Any security transaction effected for a

customer by a bank is subject to this part unless

[[Page 67735]]

excepted by Sec. 344.2. A bank effecting transactions in government

securities is subject to the notification, recordkeeping, and policies

and procedures requirements of this part. This part also applies to

municipal securities transactions by a bank that is not registered as a

``municipal securities dealer'' with the Securities and Exchange

Commission. See 15 U.S.C. 78c(a)(30) and 78o-4.

Sec. 344.2 Exceptions.

(a) A bank effecting securities transactions for customers is not

subject to all or part of this part 344 to the extent that they qualify

for one or more of the following exceptions:

(1) Small number of transactions. The requirements of

Secs. 344.4(a) (2) through (4) and 344.8(a) (1) through (3) do not

apply to a bank effecting an average of fewer than 200 securities

transactions per year for customers over the prior three calendar year

period. The calculation of this average does not include transactions

in government securities.

(2) Government securities. The recordkeeping requirements of

Sec. 344.4 do not apply to banks effecting fewer than 500 government

securities brokerage transactions per year. This exemption does not

apply to government securities dealer transactions by banks.

(3) Municipal securities. This part does not apply to transactions

in municipal securities effected by a bank registered with the

Securities and Exchange Commission as a ``municipal securities dealer''

as defined in title 15 U.S.C. 78c(a)(30). See 15 U.S.C. 78o-4.

(4) Foreign branches. Activities of foreign branches of a bank

shall not be subject to the requirements of this part.

(5) Transactions effected by registered broker/dealers. (i) This

part does not apply to securities transactions effected for a bank

customer by a registered broker/dealer if:

(A) The broker/dealer is fully disclosed to the bank customer; and

(B) The bank customer has a direct contractual agreement with the

broker/dealer.

(ii) This exemption extends to bank arrangements with broker/

dealers which involve bank employees when acting as employees of, and

subject to the supervision of, the registered broker/dealer when

soliciting, recommending, or effecting securities transactions.

(b) Safe and sound operations. Notwithstanding this section, every

bank effecting securities transactions for customers shall maintain,

directly or indirectly, effective systems of records and controls

regarding their customer securities transactions to ensure safe and

sound operations. The records and systems maintained must clearly and

accurately reflect the information required under this part and provide

an adequate basis for an audit.

Sec. 344.3 Definitions.

(a) Asset-backed security means 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.

(b) Bank means a state nonmember insured bank (except a District

bank) or a foreign bank having an insured branch.

(c) Cash management sweep account means a prearranged, automatic

transfer of funds above a certain dollar level from a deposit account

to purchase a security or securities, or any prearranged, automatic

redemption or sale of a security or securities when a deposit account

drops below a certain level with the proceeds being transferred into a

deposit account.

(d) Collective investment fund means funds held by a bank as

fiduciary and, consistent with local law, invested collectively:

(1) In a common trust fund maintained by such bank exclusively for

the collective investment and reinvestment of monies contributed

thereto by the bank in its capacity as trustee, executor,

administrator, guardian, or custodian under the Uniform Gifts to Minors

Act; or

(2) In a fund consisting solely of assets of retirement, pension,

profit sharing, stock bonus or similar trusts which are exempt from

Federal income taxation under the Internal Revenue Code (Title 26 of

the United States Code).

(e) Completion of the transaction means:

(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.

(f) Crossing of buy and sell orders means a security transaction in

which the same bank acts as agent for both the buyer and the seller.

(g) Customer means any person or account, including any agency,

trust, estate, guardianship, or other fiduciary account for which a

bank makes or participates in making the purchase or sale of

securities, but does not include a person or account having a direct,

contractual agreement with a fully disclosed broker/dealer, broker,

dealer, dealer bank or issuer of the securities that are the subject of

the transaction.

(h) Debt security means any security, such as a bond, debenture,

note, or any other similar instrument that evidences a liability of the

issuer (including any security of this type that is convertible into

stock or a 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.

(i) Government security means:

(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 Securities and

Exchange Commission; or

(4) Any put, call, straddle, option, or privilege on a security

described in paragraph (i) (1), (2), or (3) of this section 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.

[[Page 67736]]

(j) Investment discretion means that, with respect to an account, a

bank directly or indirectly:

(1) Is authorized to determine what securities or other property

shall be purchased or sold by or for the account; or

(2) Makes decisions as to what securities or other property shall

be purchased or sold by or for the account even though some other

person may have responsibility for these investment decisions.

(k) Municipal security means a security which is a direct

obligation of, or an obligation guaranteed as to principal or interest

by, a State or any political subdivision, or any agency or

instrumentality of a State or any political subdivision, or any

municipal corporate instrumentality of one or more States or any

security which is an industrial development bond (as defined in section

103(c)(2) of the Internal Revenue Code of 1954) the interest on which

is excludable from gross income under section 103(a)(1) of such Code

if, by reason of the application of paragraph (4) or (6) of section

103(c) of such Code (determined as if paragraphs (4)(A), (5) and (7)

were not included in such section 103(c), paragraph (1) of such section

103(c) does not apply to such security.

(l) Periodic plan means any written authorization for a bank acting

as agent to purchase or sell for a customer a specific security or

securities, in a specific amount (calculated in security units or

dollars) or to the extent of dividends and funds available, at specific

time intervals, and setting forth the commission or charges to be paid

by the customer or the manner of calculating them. Periodic plans

include dividend reinvestment plans, automatic investment plans, and

employee stock purchase plans.

(m) Security means any interest or instrument commonly known as a

security, whether in the nature of debt or equity, including any stock,

bond, note, debenture, evidence of indebtness or any participation in

or right to subscribe to or purchase any of the foregoing. The term

security does not include:

(1) A deposit or share account in a federally or state insured

depository institution;

(2) A loan participation;

(3) A letter of credit or other form of bank indebtness 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; or

(8) U.S. Savings Bonds.

Sec. 344.4 Recordkeeping.

(a) General rule. A bank effecting securities transactions for

customers shall maintain the following records for at least three

years:

(1) Chronological records. An itemized daily record of each

purchase and sale of securities maintained in chronological order, and

including:

(i) Account or customer name for which each transaction was

effected;

(ii) Description of the securities;

(iii) Unit and aggregate purchase or sale price;

(iv) Trade date; and

(v) Name or other designation of the broker/dealer or other person

from whom the securities were purchased or to whom the securities were

sold;

(2) Account records. Account records for each customer, reflecting:

(i) Purchases and sales of securities;

(ii) Receipts and deliveries of securities;

(iii) Receipts and disbursements of cash; and

(iv) Other debits and credits pertaining to transactions in

securities;

(3) A separate memorandum (order ticket) of each order to purchase

or sell securities (whether executed or cancelled), which shall

include:

(i) The accounts for which the transaction was effected;

(ii) Whether the transaction was a market order, limit order, or

subject to special instructions;

(iii) The time the order was received by the trader or other bank

employee responsible for effecting the transaction;

(iv) The time the order was placed with the broker/dealer, or if

there was no broker/dealer, time the order was executed or cancelled;

(v) The price at which the order was executed; and

(vi) The broker/dealer utilized;

(4) Record of broker/dealers. A record of all broker/dealers

selected by the bank to effect securities transactions and the amount

of commissions paid or allocated to each broker during the calendar

year; and

(5) Notifications. A copy of the written notification required by

Secs. 344.5 and 344.6.

(b) Manner of maintenance. Records may be maintained in whatever

manner, form or format a bank deems appropriate, provided however, the

records required by this section must clearly and accurately reflect

the information required and provide an adequate basis for the audit of

the information. Records may be maintained in hard copy, automated or

electronic form provided the records are easily retrievable, readily

available for inspection, and capable of being reproduced in a hard

copy. A bank may contract with third party service providers, including

broker/dealers, to maintain records required under this part.

Sec. 344.5 Content and time of notification.

Every bank effecting a securities transaction for a customer shall

give, send or have sent, by mail, facsimile or other means of

electronic transmission, to the customer at or before completion of the

transaction one of the types of written notification identified below:

(a) Broker/dealer's confirmations. (1) A copy of the confirmation

of a broker/dealer relating to the securities transaction. A bank may

either have the broker/dealer send the confirmation directly to the

bank's customer or send a copy of the broker/dealer's confirmation to

the customer upon receipt of the confirmation by the bank. If a bank

chooses to send a copy of the broker/dealer's confirmation, it must be

sent within one business day from the bank's receipt of the broker/

dealer's confirmation; and

(2) If the bank is to receive remuneration from the customer or any

other source in connection with the transaction, a statement of the

source and amount of any remuneration to be received if such would be

required under paragraph (b)(6) of this section; or

(b) Written notification. A written notification disclosing:

(1) Name of the bank;

(2) Name of the customer;

(3) Whether the bank is acting as agent for such customer, as agent

for both such customer and some other person, as principal for its own

account, or in any other capacity;

(4) The date and time of execution, or the fact that the time of

execution will be furnished within a reasonable time upon written

request of the customer, and the identity, price, and number of shares

or units (or principal amount in the case of debt securities) of the

security purchased or sold by the customer;

(5) The amount of any remuneration received or to be received,

directly or indirectly, by any broker/dealer from such customer in

connection with the transaction;

(6)(i) The amount of any remuneration received or to be received by

the bank

[[Page 67737]]

from the customer, and the source and amount of any other remuneration

received or to be received by the bank in connection with the

transaction, unless:

(A) Remuneration is determined pursuant to a prior written

agreement between the bank and the customer; or

(B) In the case of government securities and municipal securities,

the bank received the remuneration in other than an agency transaction;

or

(C) In the case of open end investment company securities, the bank

has provided the customer with a current prospectus which discloses all

current fees, loads and expenses at or before completion of the

transaction;

(ii) If the bank elects not to disclose the source and amount of

remuneration it has or will receive from a party other than the

customer pursuant to paragraph (b)(6)(i) (A), (B), or (C) of this

section, the written notification must disclose whether the bank has

received or will receive remuneration from a party other than the

customer, and that the bank will furnish within a reasonable time the

source and amount of this remuneration upon written request of the

customer. This election is not available, however, if, with respect to

a purchase, the bank was participating in a distribution of that

security; or, with respect to a sale, the bank was participating in a

tender offer for that security;

(7) Name of the broker/dealer utilized; or where there is no

broker/dealer, the name of the person from whom the security was

purchased or to whom the security was sold, or a statement that the

bank will furnish this information within a reasonable time upon

written request;

(8) In the case of a transaction in a debt security subject to

redemption before maturity, a statement to the effect that the debt

security may be redeemed in whole or in part before maturity, that the

redemption could affect the yield represented and that additional

information is available upon request;

(9) In the case of a transaction in a debt security effected

exclusively on the basis of a dollar price:

(i) The dollar price at which the transaction was effected; and

(ii) The yield to maturity calculated from the dollar price,

provided however, that this shall not apply to a transaction in a debt

security that either has a maturity date that may be extended by the

issuer thereof, with a variable interest payable thereon, or is an

asset-backed security that represents an interest in or is secured by a

pool of receivables or other financial assets that are subject

continuously to prepayment;

(10) In the case of a transaction in a debt security effected on

the basis of yield:

(i) The yield at which the transaction was effected, including the

percentage amount and its characterization (e.g., current yield, yield

to maturity, or yield to call) and if effected at yield to call, the

type of call, the call date and call price; and

(ii) The dollar price calculated from the yield at which the

transaction was effected; and

(iii) If effected on a basis other than yield to maturity and the

yield to maturity is lower than the represented yield, the yield to

maturity as well as the represented yield; provided however, that this

paragraph (b)(10) shall not apply to a transaction in a debt security

that either has a maturity date that may be extended by the issuer with

a variable interest rate payable thereon, or is an asset-backed

security that represents an interest in or is secured by a pool of

receivables or other financial assets that are subject continuously to

prepayment;

(11) In the case of a transaction in a debt security that is an

asset-backed security, which represents an interest in or is secured by

a pool of receivables or other financial assets that are subject

continuously to prepayment, a statement indicating that the actual

yield of the asset-backed security may vary according to the rate at

which the underlying receivables or other financial assets are prepaid

and a statement of the fact that information concerning the factors

that affect yield (including at a minimum estimated yield, weighted

average life, and the prepayment assumptions underlying yield) will be

furnished upon written request of the customer; and

(12) In the case of a transaction in a debt security, other than a

government security, that the security is unrated by a nationally

recognized statistical rating organization, if that is the case.

Sec. 344.6 Notification by agreement; alternative forms and times of

notification.

A bank may elect to use the following alternative notification

procedures if the transaction is effected for:

(a) Notification by agreement. Accounts (except periodic plans)

where the bank does not exercise investment discretion and the bank and

the customer agree in writing to a different arrangement as to the time

and content of the written notification; provided however, that such

agreement makes clear the customer's right to receive the written

notification pursuant to Sec. 344.5 (a) or (b) at no additional cost to

the customer.

(b) Trust accounts. Accounts (except collective investment funds)

where the bank exercises investment discretion in other than in an

agency capacity, in which instance the bank shall, upon request of the

person having the power to terminate the account or, if there is no

such person, upon the request of any person holding a vested beneficial

interest in such account, give or send to such person the written

notification within a reasonable time. The bank may charge such person

a reasonable fee for providing this information.

(c) Agency accounts. Accounts where the bank exercises investment

discretion in an agency capacity, in which instance:

(1) The bank shall give or send to each customer not less

frequently than once every three months an itemized statement which

shall specify the funds and securities in the custody or possession of

the bank at the end of such period and all debits, credits and

transactions in the customer's accounts during such period; and

(2) If requested by the customer, the bank shall give or send to

each customer within a reasonable time the written notification

described in Sec. 344.5. The bank may charge a reasonable fee for

providing the information described in Sec. 344.5.

(d) Cash management sweep accounts. A bank effecting a securities

transaction for a cash management sweep account shall give or send its

customer a written notification as described in Sec. 344.5 for each

month in which a purchase or sale of a security takes place in the

account and not less than once every three months if there are no

securities transactions in the account.

(e) Collective investment fund accounts. The bank shall at least

annually furnish to the customer a copy of a financial report of the

fund, or provide notice that a copy of such report is available and

will be furnished upon request to each person to whom a regular

periodic accounting would ordinarily be rendered with respect to each

participating account. This report shall be based upon an audit made by

independent public accountants or internal auditors responsible only to

the board of directors of the bank.

(f) Periodic plan accounts. The bank shall give or send to the

customer not less than once every three months a written statement

showing:

(1) The funds and securities in the custody or possession of the

bank;

(2) All service charges and commissions paid by the customer in

connection with the transaction; and

[[Page 67738]]

(3) All other debits and credits of the customer's account involved

in the transaction; provided that upon written request of the customer,

the bank shall give or send the information described in Sec. 344.5,

except that any such information relating to remuneration paid in

connection with the transaction need not be provided to the customer

when the remuneration is paid by a source other than the customer. The

bank may charge a reasonable fee for providing information described in

Sec. 344.5.

Sec. 344.7 Settlement of securities transactions.

(a) A bank shall not effect or enter into a contract for the

purchase or sale of a security (other than an exempted security as

defined in 15 U.S.C. 78c(a)(12), government security, municipal

security, commercial paper, bankers' acceptances, or commercial bills)

that provides for payment of funds and delivery of securities later

than the third business day after the date of the contract unless

otherwise expressly agreed to by the parties at the time of the

transaction.

(b) Paragraphs (a) and (c) of this section shall not apply to

contracts:

(1) For the purchase or sale of limited partnership interests that

are not listed on an exchange or for which quotations are not

disseminated through an automated quotation system of a registered

securities association; or

(2) For the purchase or sale of securities that the Securities and

Exchange Commission (SEC) may from time to time, taking into account

then existing market practices, exempt by order from the requirements

of paragraph (a) of SEC Rule 15c6-1, 17 CFR 240.15c6-1(a), either

unconditionally or on specified terms and conditions, if the SEC

determines that an exemption is consistent with the public interest and

the protection of investors.

(c) Paragraph (a) of this section shall not apply to contracts for

the sale for cash of securities that are priced after 4:30 p.m. Eastern

time on the date the securities are priced and that are sold by an

issuer to an underwriter pursuant to a firm commitment underwritten

offering registered under the Securities Act of 1933, 15 U.S.C. 77a et

seq., or sold to an initial purchaser by a bank participating in the

offering. A bank shall not effect or enter into a contract for the

purchase or sale of the securities that provides for payment of funds

and delivery of securities later than the fourth business day after the

date of the contract unless otherwise expressly agreed to by the

parties at the time of the transaction.

(d) For purposes of paragraphs (a) and (c) of this section, the

parties to a contract shall be deemed to have expressly agreed to an

alternate date for payment of funds and delivery of securities at the

time of the transaction for a contract for the sale for cash of

securities pursuant to a firm commitment offering if the managing

underwriter and the issuer have agreed to the date for all securities

sold pursuant to the offering and the parties to the contract have not

expressly agreed to another date for payment of funds and delivery of

securities at the time of the transaction.

Sec. 344.8 Securities trading policies and procedures.

(a) Policies and procedures. Every bank effecting securities

transactions for customers shall establish written policies and

procedures providing:

(1) Assignment of responsibility for supervision of all officers or

employees who:

(i) Transmit orders to or place orders with broker/dealers; or

(ii) Execute transactions in securities for customers; and

(2) Assignment of responsibility for supervision and reporting,

separate from those in paragraph (a)(1) of this section, with respect

to all officers or employees who process orders for notification or

settlement purposes, or perform other back office functions with

respect to securities transactions effected for customers; and

(3) For the fair and equitable allocation of securities and prices

to accounts when orders for the same security are received at

approximately the same time and are placed for execution either

individually or in combination; and

(4) Where applicable, and where permissible under local law, for

the crossing of buy and sell orders on a fair and equitable basis to

the parties to the transaction.

Sec. 344.9 Personal securities trading reporting by bank directors,

officers and employees.

(a) Officers and employees subject to reporting. Bank officers and

employees who:

(1) Make investment recommendations or decisions for the accounts

of customers;

(2) Participate in the determination of such recommendations or

decisions; or

(3) In connection with their duties, obtain information concerning

which securities are being purchased or sold or recommend such action,

must report to the bank, within ten business days after the end of the

calendar quarter, all transactions in securities made by them or on

their behalf, either at the bank or elsewhere in which they have a

beneficial interest. The report shall identify the securities purchased

or sold and indicate the dates of the transactions and whether the

transactions were purchases or sales.

(b) Directors subject to reporting. Bank directors who:

(1) Make investment recommendations or decisions for the accounts

of customers; or

(2) Participate in the determination of such recommendations or

decisions must report to the bank, within ten business days after the

end of the calendar quarter, all transactions in securities made by

them or on their behalf, either at the bank or elsewhere in which they

have a beneficial interest. The report shall identify the securities

purchased or sold and indicate the dates of the transactions and

whether the transactions were purchases or sales.

(c) Exempt transactions. Excluded from this reporting requirement

are:

(1) Transactions for the benefit of the director, officer or

employee over which the director, officer or employee has no direct or

indirect influence or control;

(2) Transactions in mutual fund shares;

(3) Transactions in government securities; and

(4) All transactions involving in the aggregate $10,000 or less

during the calendar quarter.

(d) Alternative report. Where a bank acts as an investment adviser

to an investment company registered under the Investment Company Act of

1940, the bank's directors, officers and employees may fulfill their

reporting requirement under paragraph (a) or (b) of this section by

filing with the bank the ``access persons'' personal securities trading

report required by (SEC) Rule 17j-1, 17 CFR 270.17j-1.

Sec. 344.10 Waivers.

The Board of Directors of the FDIC, in its discretion, may waive

for good cause all or any part of this part 344.

Dated at Washington, D.C., this 11th day of December, 1996.

By Order of the Board of Directors.

Federal Deposit Insurance Corporation.

Jerry L. Langley,

Executive Secretary.

[FR Doc. 96-32275 Filed 12-23-96; 8:45 am]

BILLING CODE 6714-01-P