Government Securities Act Regulations: Recordkeeping

DEPARTMENT OF THE TREASURY

Office of the Under Secretary for Domestic Finance

17 CFR Part 404

Government Securities Act Regulations: Recordkeeping

AGENCY: Office of the Under Secretary for Domestic Finance, Treasury.

ACTION: Final Rule.

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SUMMARY: The Department of the Treasury (``Department'') is issuing in

final form an amendment to the recordkeeping rules in Sec. 404.4 of the

regulations issued under the Government Securities Act of 1986

(``GSA''). 17 CFR 404.4 of the GSA regulations requires financial

institutions that are government securities brokers or dealers to make

and preserve records. Specifically, the Department is amending

Sec. 404.4(a)(1) to clarify the applicability of the federal bank

regulatory agencies' rules, as adopted by the GSA rules, to financial

institutions and to conform with current recordkeeping rule revisions

being undertaken by the federal bank regulatory agencies.

EFFECTIVE DATE: This amendment is effective April 30, 1997.

FOR FURTHER INFORMATION CONTACT: Kerry Lanham or Kurt Eidemiller,

Government Securities Regulations Staff, Bureau of the Public Debt,

Department of the Treasury, at (202) 219-3632.

SUPPLEMENTARY INFORMATION:

I. Background

The Government Securities Act of 1986 (``GSA''), as amended 1

requires, among other things, that a financial institution that is a

government securities broker or dealer notify its appropriate

regulatory agency (``ARA'') of its status as such, thereby providing

for the regulation of its government securities business.2 In

1987, when the Department developed the GSA regulations affecting

financial institutions that are required to file notice as government

securities brokers or dealers (``bank broker-dealers''), it decided to

adopt the existing recordkeeping regulations of the federal bank

regulatory agencies.3 These rules are similar to the Securities

and Exchange Commission's recordkeeping requirements in Rule 17a-

3.4

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\1\ 15 U.S.C. 78o-5.

\2\ 15 U.S.C. 78o-5(a)(1)(B).

\3\ See 12 CFR Part 12 for national banks, which are regulated

by the Office of the Comptroller of the Currency (``OCC''); 12 CFR

Part 208 for state member banks of the Federal Reserve System, which

are regulated by the Board of Governors of the Federal Reserve

System (``Board''); and 12 CFR Part 344 for state banks that are not

members of the Federal Reserve System, which are regulated by the

Federal Deposit Insurance Corporation (``FDIC'').

\4\ 17 CFR 240.17a-3.

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The reason for relying on existing bank regulations was that those

financial institutions effecting government securities broker-dealer

transactions were already subject to a system of federal regulation and

supervision, which explicitly included recordkeeping requirements

relating to securities activities. Requiring those institutions to

follow another set of recordkeeping requirements was viewed as unduly

burdensome and did not promote the purposes of the GSA.5

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\5\ 52 FR 5675 (February 25, 1987).

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Section 404.4 of the GSA regulations provides that, for bank

broker-dealers, compliance with the recordkeeping rules of the bank

ARAs, together with additional GSA recordkeeping provisions,6

constitutes compliance with the GSA recordkeeping rules. However, the

respective ARAs' regulations provide for certain exemptions from, or

exceptions to, most of their recordkeeping rules based on a stated

transaction threshold. Specifically, the ARAs' regulations exempt banks

from most of the respective recordkeeping requirements if the bank

transacts a de minimis annual average number of transactions. The

regulations state, with minor variations, the following: ``The

requirements * * * shall not apply to banks having an average of less

than 200 securities transactions per year for customers over the prior

three calendar year period, exclusive of transactions in U.S.

government and federal agency obligations.'' 7 The ARAs have

interpreted this exemption as excluding government securities

transactions, meaning that government securities transactions are not

included in the

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exempted, or de minimis, transaction count.

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\6\ In addition to complying with the recordkeeping rules of its

ARA, a bank broker-dealer is required to maintain, among other

things, records pertaining to securities positions (17 CFR

404.4(a)(3)(i)(A)).

\7\ See 12 CFR 12.7(a); 12 CFR 208.8(k)(6)(i); and 12 CFR

344.7(a).

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However, paragraph 404.4(a)(1) of the GSA regulations, in adopting

the bank ARAs' recordkeeping rules for bank broker-dealers, contains

the following provision: ``* * * provided however, that the records

required to be made and kept by those regulations shall be made or kept

without regard to the exemptions for transactions in U.S. government or

Federal agency obligations provided in 12 CFR 12.7(a), 12 CFR

208.8(k)(6)(i), and 12 CFR 344.7(a).'' Since implementing the GSA

regulations, the Department has consistently interpreted this provision

to mean that a bank broker-dealer's government securities transactions

are included in the 200 securities transaction exemption threshold that

is provided by the ARA rules. This provision was intended to permit

bank broker-dealers that conduct government securities transactions to

take advantage of the de minimis exemption from the ARAs' recordkeeping

rules that was available to them for their other securities business.

Accordingly, the GSA regulations allow a bank broker-dealer to conduct

up to 200 government securities transactions, or a combination of up to

200 government and other securities transactions, per year without

having to comply with most of the bank ARAs' recordkeeping rules. It

has been the Department's view that, for purposes of this part, a bank

broker-dealer falling within these parameters is exempt from paragraph

404.4(a)(1) of the GSA recordkeeping rules.

As a result of the cross-referencing, there has been some confusion

about the applicability of the ARAs' exemption threshold to bank

broker-dealers' government securities transactions. The

interrelationship between the recordkeeping language of the ARAs' rules

and the GSA regulations often has been confusing and ambiguous. The

ARAs and the Department are working together to eliminate this

ambiguity and to provide for a clear, understandable and consistent

interpretation of the rules.

The ARAs have proposed revisions to their recordkeeping rules that

would conflict, in part, with the GSA recordkeeping requirements as

they are presently stated in section 404.4(a).8 This amendment to

the GSA regulations will help to eliminate any ambiguity or confusion

resulting from the interplay of the respective regulations. This final

rule amendment is intended to be published within the same timeframe as

those final rules that are being adopted by the Board and the OCC.

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\8\ See 60 FR 66517 (December 22, 1995) for the OCC's proposed

revisions and 60 FR 66759 (December 26, 1995) for the Board's

proposed revisions. It is the Department's understanding that the

FDIC also intends to address this same rule modification to ensure

consistent application and interpretation of the rules. The FDIC

published an Advance Notice of Proposed Rulemaking on this subject

on May 24, 1996 (61 FR 26135).

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As stated by the OCC in the preamble section of their proposed rule

revisions, ``Consistent with the GSA regulations, proposed

Sec. 12.1(c)(2)(ii) exempts a national bank that conducts fewer than

500 government securities brokerage transactions per year from

complying with the recordkeeping requirements under proposed (and

current) Sec. 12.3 * * * This exemption does not apply to government

securities dealer transactions by national banks, however.'' 9

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\9\ 60 FR 66518 (December 22, 1995).

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The Board has proposed a similar rule revision. As stated in the

preamble section to its proposed rules, ``A new Sec. 208.24(g)(2) would

clarify that State member banks that effect up to 500 government

securities brokerage transactions and are exempt from registration

under Department of the Treasury regulation 401.3(a)(2)(i), 17 CFR

401.3(a)(2), also are exempt from Sec. 208.24. This exemption would not

be available if a bank has filed notice or is required to file notice

indicating that it acts as a government securities broker or dealer.''

10

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\10\ 60 FR 66760 (December 26, 1995).

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In the rule proposals, both agencies also stated that they had been

advised by staff at the Bureau of the Public Debt, which is the

organization within the Department of the Treasury that is responsible

for administering the GSA regulations, that the staff was considering

amending the GSA recordkeeping rules. The purpose would be to clarify

any ambiguity with respect to the recordkeeping requirements for

financial institutions that conduct government securities transactions

resulting from the interplay of the GSA regulations with the ARA

recordkeeping requirements.

The final rules being adopted by the OCC and the Board, which are

virtually unchanged from the proposed rules, will increase the

exemption threshold to 500 government securities brokerage

transactions, which is consistent with the limited brokerage exemption

provided by the GSA regulations in Sec. 401.3 (17 CFR 401.3, Exemption

for financial institutions that are engaged in limited government

securities brokerage activities). The GSA limited brokerage exemption

provision basically states that a financial institution is not regarded

as acting as a government securities broker and is exempt from the

requirement to file notice as a government securities broker and from

most of the GSA regulations, including the recordkeeping requirements,

if it effects fewer than 500 government securities brokerage

transactions per year.11

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\11\ The GSA requirements of Part 450 (17 CFR Part 450)

concerning custodial holdings of government securities for customers

apply to all financial institutions.

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However, the OCC's and the Board's final rules contain additional

language that we view as contradictory to the intended applicability of

17 CFR 404.4(a) to bank dealers.12 The final rules state that the

de minimis exception does not apply to dealer transactions by national

banks (OCC) 13 or noticed financial institution government

securities brokers or dealers (Board).14 As a result, entities

engaging in government securities dealer transactions would be subject

to the bank ARA recordkeeping rules regardless of how many transactions

were conducted. As mentioned earlier, the Department views 17 CFR

404.4(a) as meaning that, for purposes of the GSA, bank broker-dealers

are not required to follow most of the ARAs' recordkeeping rules if

their annual government securities dealer transactions, or a

combination of their government and other securities transactions, are

less than 200. Given this difference in application of the GSA and

ARAs' rules, section 404.4 of the GSA regulations is being amended to

conform with the ARAs' rules and to make clear its intended

applicability.

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\12\ The OCC published its final rule on December 2, 1996. See

61 FR 63958 (December 2, 1996). The Board intends to publish its

final rule in January 1997.

\13\ 12 CFR 12.1(c)(2)(ii).

\14\ 12 CFR 208.24(g)(2).

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The Department is therefore amending paragraph 404.4(a)(1) of the

GSA regulations (17 CFR 404.4, Records to be made and preserved by

government securities brokers and dealers that are financial

institutions) with respect to bank broker-dealers that are subject to

bank regulatory agency recordkeeping rules by deleting the current

provision, ``provided however, that the records required to be made and

kept by those regulations shall be made or kept without regard to the

exemptions for transactions in U.S. government or Federal agency

obligations provided in 12 CFR 12.7(a), 12 CFR 208.8(k)(6)(i), and 12

CFR 344.7(a).'' As a result, in order to be in compliance with the GSA

recordkeeping rules at 17 CFR 404.4(a)(1), all bank

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broker-dealers will be required to follow the ARAs' recordkeeping rules

if even a single government securities dealer transaction is conducted.

II. Special Analyses

This final rule amendment does not meet the criteria for a

``significant regulatory action'' pursuant to Executive Order 12866.

The Administrative Procedure Act (``APA'') (5 U.S.C. 553) generally

requires that prior notice and opportunity for comment be afforded

before the adoption of rules by federal agencies. Inasmuch as this

final rule merely involves changes to conform with the rule revisions

currently being adopted by the federal banking regulatory agencies,

while not involving any substantive changes to the regulations, the

notice and comment provisions of the APA are unnecessary pursuant to 5

U.S.C. 553(b)(B).

As no notice and public comment are required for this rulemaking,

the provisions of the Regulatory Flexibility Act (5 U.S.C. 601, et.

seq.), do not apply.

The Paperwork Reduction Act (44 U.S.C. 3504(h)) requires that

collections of information be submitted to the Office of Management and

Budget for review and approval. Since this rule revision does not

include any new collection of information given the ARAs' current

interpretation and application of their recordkeeping requirements, the

Paperwork Reduction Act is inapplicable.

List of Subjects in 17 CFR Part 404

Banks, banking, Brokers, Government securities, Reporting and

recordkeeping requirements.

For the reasons set out in the preamble, 17 CFR Part 404 is amended

as follows:

PART 404--RECORDKEEPING AND PRESERVATION OF RECORDS

1. The authority citation for Part 404 continues to read as

follows:

Authority: 15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(2), (b)(4).

2. Section 404.4 is amended by revising paragraph (a)(1) to read as

follows:

Sec. 404.4 Records to be made and preserved by government securities

brokers and dealers that are financial institutions.

(a) * * *

(1) Is subject to 12 CFR part 12 (relating to national banks), 12

CFR part 208 (relating to state member banks of the Federal Reserve

System) or 12 CFR part 344 (relating to state banks that are not

members of the Federal Reserve System), or is a United States branch or

agency of a foreign bank and complies with 12 CFR part 12 (for

federally licensed branches and agencies of foreign banks) or 12 CFR

part 208 (for uninsured state-licensed branches and agencies of foreign

banks) or 12 CFR part 344 (for insured state licensed branches and

agencies of foreign banks);

* * * * *

Dated: January 16, 1997.

John D. Hawke, Jr.,

Under Secretary for Domestic Finance.

[FR Doc. 97-3834 Filed 2-14-97; 8:45 am]

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