Table of Contents
Approved Broker Monitoring
Brokerage Selection Soft Dollars Basis- SEC § 28(e)(1)
Brokerage Selection on Deposit Basis - SEC §
Securities Transfer Agent's Medallion Program (STAMP Program)
Shareholder Communications Act of 1985
FDIC Part 344: Record Keeping and Confirmation Requirements for
Customer Securities Transactions
to the Regulation
of Securities Transactions
Policies and Procedures
Reporting of Personal Investment Transactions
Compliance with SEC Requirements
Statements for Registered Equity Securities - SEC 13(d) and SEC 13(g)
of Equity Holdings - SEC 13F
16 Statements for 10 percent or More Holders of Registered Stocks
Equity Securities - SEC Rule 144
Submission of Forms and Notices
A. Brokerage Placement
The Board of Director or trust committee should approve
policies regarding the selection and retention of securities dealers. The
FDIC Supervisory Statement Policy Statement on Investment Securities and
End-User Derivative Activities considers the selection of dealers, investment
bankers, and brokers particularly important in effectively managing risks.
Trust management should have sufficient knowledge about the securities
firm and the personnel with whom they are conducting business. At a
minimum, trust management should consider the following before selecting a
The ability of the securities dealer, its subsidiaries or affiliates
to fulfill commitments as evidenced by capital strength, liquidity, and
The dealer's general reputation for financial stability, and fair
and honest dealings with customers;
Information available from State or Federal securities regulators
and securities industry self-regulatory organizations, such as the National
Association of Securities Dealers, concerning any formal enforcement actions
against the dealer, its affiliates or associated personnel;
In those instances when an institution relies upon the advice of a
dealer's sales representative, the background of the sales representative with
whom the business will be conducted, in order to determine their experience and
A.1. Approved Broker Monitoring
The Board or a committee thereof should
approve the list of securities dealers used by the department. At least
annually, a committee, which should include representation by senior investment
officers and traders, should review the brokers used and forward
recommendations as to the continued use or termination of relationships based
on the following criteria:
Net cost or net realization from the trade,
Promptness and certainty of execution,
Experience and knowledge of the broker with a security, industry, or
Access to a security's sources of supply,
The broker's market making ability,
Financial stability and reputation.
The quality and quantity of investment
research furnished by outside firms and/or "soft dollar" arrangements
should be evaluated collectively by the department's research analysts, senior
investment officers, and traders. The recommendations as to the continued
use of the research providers should be forwarded to the Board or trust
committee. Based on the foregoing, the committee, or committees,
reviewing broker and investment research providers should also forward
recommendations on the allocation of broker and "soft dollar" commissions.
Limiting third-party brokerage services
to a single broker significantly limits the Board's and management's ability to
evaluate the quality of brokerage services. In such cases, the Board and
management must be able to demonstrate that the institution has established
adequate procedures for monitoring broker performance. The institution
should also be able to document that, despite limiting brokerage to a single
broker, the department is obtaining "best
execution" for discretionary transactions.
A.2. Internet Trading
Internet or electronic( "E") trading did
not exist a decade ago and has grown to an estimated over 10 million on-line
brokerage accounts by year-end 2000. Experience to date suggests that
Internet trading has actually increased the historical risks associated with
securities trading. The explosive growth of the Internet in general, and
Internet trading in particular, has given rise to:
Fraudulent and unregistered
Fraudulent investment schemes;
Fraudulent news stories; and
New methods of disseminating
erroneous reports on altered "website banners" pirated from legitimate
Fraudulent Internet investment schemes
attempt to entice investors into purchasing investments whose values are
inflated or worthless. In addition to investment scams, some on-line
investors may be susceptible to intrinsic on-line trading system
weaknesses. These weaknesses include the following:
Technological failures brought
on by overwhelming internet traffic on finite or outdated systems;
The inability to effect
transactions quickly enough to avoid volatile fluctuations in highly sought
The volume of which may be
fraudulently induced; failure to use "limit orders" to prevent the purchase of
securities at prices inflated by market volatility;
Failure to understand the
meaning of "best execution" broker practices;
Technological failures induced
by the investor's own equipment; and
The failure to recognize that
on-line "real-time" pricing can in actuality be 15 minutes old, or older, which
increases the likelihood that "market order" transactions may be executed at
prices vastly different than anticipated by the investor in a turbulent market.
Trades executed on-line are not
instantaneous. The transmission of a trade order over the internet merely
sends an order to the broker. The broker must then send the trade order
into the market for execution. This is essentially the same process which
occurs when investors place orders by phone. However, on-line investors
may be easily mislead into believing that they are executing an order at the
"real time" price appearing on their computer screen (a price which may be
stale). In a volatile market, on-line investors may end up with "market
order" trades executed at prices vastly different than expected. The
execution process may also be affected by heavy internet traffic, faulty
equipment, a broker's inadequate hardware or a slow internet provider,
telephone line failures, etc.
Broker Options in the
Execution of Trades:
Exchange listed securities - a broker
may send the order to the exchange floor, to another exchange (regional), or to
a firm which "makes a market" for the security. Some regional exchanges
and "market makers" pay brokers to place orders with them, which may increase
the cost of the executed price. This is called "payment for order flow."
The existence of market makers which pay for order flow may influence how a
broker directs a trade, and ultimately, the execution price.
Over-the-Counter (OTC) market securities
- a broker may send the order to a NASDAQ "market maker" which may also pay for
Limit Orders may be routed by the broker
to an Electronic Communications Network (ECN) - which matches buy and sell
orders at specified prices by computer.
In a process called "Internalization" -
the broker may execute the trade out of the firm's own trading inventory
position in the security.
NASD Regulation 2320 requires brokers to
seek the "best execution" which is reasonably available. In doing so,
brokers evaluate all orders received from all customers in light of conditions
existing at the time they are received, and then determine which markets,
market makers, or ECNs offer the most favorable terms of execution. Best
execution factors include the speed and likelihood of execution, not simply the
During highly volatile market
conditions, where there exist large order imbalances or significant price
fluctuations, firms which operate automated order execution systems are
permitted to implement special procedures to preserve the continuous execution
of orders, while reducing their own exposure to market risk. This may
include switching from automated mode to manual execution mode and routing
orders to other market makers. Some firms may provide partial executions,
and place the balance of an order in a queue which is operated in a first-in,
first-out, basis. These are only two methods available to a firm.
Regulations require that any algorithm system used be fair, consistent and
Investor Directed Trades:
Investors retain greater "direction" of
their executions by using "limit orders," and by (if permitted by their broker)
directing the broker to transmit the trade to a particular exchange, market
maker, or ECN. Some brokers charge additional fees for permitting
investors to direct a trade to a particular exchange or market maker.
All investors are entitled to
information concerning broker
on order flow payments, internalization and algorithm procedures during
volatile market conditions. On-line investors should be aware of these
policies. This is of
particular importance, as volatile markets, together with internal broker
practices and technological factors beyond the internet investor's control, may
significantly impact the execution price.
In 2000, North American Securities
Administrators Association issued the following guidance to assist on-line
Prior to opening an on-line account, obtain complete information
about the alternatives available for buying and selling securities, and how to
obtain account information if the broker's website cannot be accessed.
Recognize that the investor's computer is not directly linked to any
market and that orders are not instantaneously executed when entered on the
Obtain information from the firm to substantiate advertised claims
concerning the ease and speed of on-line trading.
Obtain information from the firm about significant website outages,
delays, and other interruptions to securities trading and account access.
Before trading, obtain information about entering and canceling
orders (market, limit, and stop loss), and the details and risks of margin
Determine whether the computer is displaying delayed or real-time
stock quotes, and when the information was last updated.
Review the firm's privacy and website security
policies, and whether the
investor's name may be used for mailing lists or other promotional activities.
Obtain clear information about sales commissions and fees, and any
conditions which may apply to advertised discounts.
Learn how to contact customer service representatives with on-line
Contact state securities agencies to verify the registration and
licensing status, and any disciplinary history of on-line firms and
representatives; and file complaints when appropriate.
The joint state regulatory issuance also
recommended the adoption of specific internet trading
policies. Before engaging
in on-line trading, trust management should adopt written internet trading
policies, including, but not
Requiring a due diligence investigation of internet brokers.
Inquiring among peer trust departments about their experience with
internet brokers, and obtaining other references.
Performing a due diligence review of the reasons for using internet
trading instead of regular brokerage accounts.
Requiring Board of Director or trust committee authorization of
internet trading practices. The Board or trust committee should review trust
management's documented justification for using internet brokers, including:
projected commission savings by trust customers, and
best execution protections.
Requiring periodic reporting to the trust committee, or other
operating committee, of usage of internet trading, including:
number and dollar volume of trades,
listing of trades which were executed at prices which were different
than "real time" price on internet sites,
trades which were not executed,
problems with internet brokers,
delays in order transmission due to hardware problems,
slow internet transmissions,
discrepancies between trade orders and confirmations,
Performing the following oversight functions by the Board, trust
committee, or other operating committee:
Periodic reviews of the quality and execution of internet trading,
Approval of the continued use of internet trading brokers,
Analysis of whether the use of internet brokers will result in
increased research costs, if internet broker does not provide investment
Analysis of the quality and availability of investment research
provided by internet brokers.
Specific controls to limit internet trading risk.
Prohibiting the use of internet for personal trading by employees.
Prohibiting officers and employees from trading for accounts off the
banking premises (or at home).
Prohibiting after-hours trading if the department has not
established specific controls governing after-hours trading.
These policies, and the suggestions
issued by state securities regulators, are all equally applicable to broker
selection and trading in general. Examiners should inquire into trust
management's due diligence policies and safeguards, and assess whether
sufficient measures have been taken to limit broker and securities trading
risk. Additional affirmative measures may be taken to protect the
institution and its customers by obtaining on-line broker information from the
SEC and NASD. The SEC's Enforcement Division website is
and may be used to obtain information about disciplinary actions against
broker/dealers, lodge complaints, and reference SEC customer awareness
information. The NASD's public disclosure website is at
provides broker background information and other useful investor
guidance. NASD's broker complaint website is linked via their homepage at
B. Securities Trading
Trust department investment policies and
procedures should prohibit research analysts, traders and/or portfolio managers
from trading for their own account through brokerage accounts maintained by the
trust department. Examiners should verify that the trust department's
accounts with brokerage firms are used only to effect transactions for trust
accounts or approved outside clients. If the bank has not established
policies or control procedures, the examiner should discuss the potential
hazards with management, and recommend adoption of policies and
procedures. The audit program should include procedures to detect misuse
of brokerage accounts.
In general, borrowing for the purpose of
investment is an improper activity for a trustee, except when purchasing
improved real estate. The bank as fiduciary should not maintain a margin
account with a broker unless specifically authorized by the terms of the
governing instrument and directed by a party having appropriate authority.
Examiners should be alert for any
involvement in speculative securities trading activities. Any speculative
transaction ordinarily evidences contravention of "prudent man" doctrines.
Churning is a term for excessive trading
in an account for the purpose of generating and maximizing broker commissions
and can occur in both discretionary and nondiscretionary accounts.
The practice is illegal and is among the most common claims made against
stockbrokers, investment advisers, and financial planners. In determining
whether churning has occurred, consideration should be given to the following:
the number and frequency of trades;
the amount of "in-and-out" trading; the amount of commissions
the investor's objectives and level of business sophistication; and
the degree of control the broker has over the account.
To be considered churning, the broker:
must have either explicit (discretionary accounts) or implied
control (non-discretionary accounts) over the account;
trading must be excessive in relation to the customer's objectives;
the broker must have acted with the intent to defraud or with
behavior that was reckless.
The broker's lack of or poor judgment
does not demonstrate intent to defraud or reckless behavior.
Furthermore, accounts with investment objectives of growth or speculation are
likely to have more frequent transactions than accounts with investment
objectives of long-term growth or income. Therefore, what may appear to
be churning in accounts should be reviewed in light of the investment
objectives of each account.
For a more detailed discussion on
broker selection, internet trading, and due diligence policies and practices,
A. Brokerage Placement.
Selection on Basis of Soft Dollars - SEC § 28(e)(1)
Section 28(e) was added to the
Securities Exchange Act of 1934 by the Securities Acts Amendments of
1975. This section provides "safe harbor" protection to the fiduciary
exercising investment discretion, provided certain conditions are met.
Under Section 28(e)(1), "No person . . . shall be deemed to
have acted unlawfully or to have breached a fiduciary duty
. . . solely by reason of his having caused the account to pay
. . . an amount of commission . . . in excess of
the amount of commission another . . . dealer would have charged
. . . if such person determined in good faith that such amount
of commission was reasonable in relation to the value of the brokerage and
research services provided . . . in terms of either that
particular transaction or his overall responsibilities with respect to the
accounts as to which he exercises investment discretion." Section 28(e)(3)
defines research and brokerage services. in order to qualify as research or
brokerage services, the services provided must:
Furnish advice, either
directly or through publications or writings, as to the value of
securities, the advisability of investing in purchasing, or selling
securities, and the availability of securities;
Furnish analyses and
reports concerning the issuer, industries, securities, economic factors
and trends, portfolio strategy, and the performance of accounts; or,
transactions and perform functions incidental thereto, such as clearance,
such as settlement and custody, or required in connection therewith by the
SEC, or a self-regulatory organization.
Note that transactions in
futures or for transactions done on a principal basis are not covered by the
Four requirements must generally be
satisfied to obtain "safe harbor" protection under Section 28(e):
The soft dollar goods and services must be provided by the
broker-dealer effecting the securities transaction,
The soft dollar goods and services must be provided to the party
holding investment discretion over the account,
The recipient of soft dollar goods and services must make a good
faith determination that the commissions paid are reasonable in relation to the
value of brokerage and research services provided, and
The goods and services provided for the soft dollars must qualify as
"brokerage and research" services.
Section 28(e) is a "safe harbor"
which affords "protection." It is not a regulation, and, therefore, cannot in
itself be violated. Any "violations" connected with transactions not
afforded the protections under Section 28(e), would be of the antifraud
provisions of federal securities laws. Also, while not specifically
addressed within Section 28(e), there exists a general fiduciary duty to seek
implies the best net price to the customer, together with accuracy
and speed of execution. It is not intrinsically linked with, nor does it
imply, the lowest brokerage commission.
Trust institutions which engage in soft-
dollar trading are required to disclose the research products and services it
obtains to the trust accounts paying soft-dollar commissions. In an
inspection report on soft-dollar practices released
September 22, 1998, the SEC stated that Section 28(e) "does not
shield a person who exercises investment discretion from, violations of
antifraud provisions of federal securities laws arising from churning an
account, failing to obtain the best price or best execution, or failing to make
required disclosure." Regarding full disclosure, the report provided,
"Disclosure is required whether the product or service acquired by the adviser
using soft dollars is inside or outside the safe harbor. Advisers are
required to disclose, among other things, the products and services through
soft dollar arrangements, regardless of whether the safe harbor applies." The
SEC has directed advisers that they ".need not list individually each product,
item of research, or service received, but rather .state the types of products,
research, or services obtained with enough specificity so that clients can
understand what is being obtained."
The SEC has also long taken the position
that "mixed use items," or products and services that provide both research and
non-research benefits (such as in-house computer networks used for other
purposes in addition to research), should be allocated between soft dollars and
hard-dollars. This requires institutions to allocate the costs associated
with these products and to pay for the non-research portion with their own
E.2.a., located in Section 8
for additional discussion of this topic. Refer to Securities and Exchange
Act of 1934 Release No. 34-23170,
"Section 28(e) and Soft Dollars", for a
discussion of the scope of Section 28(e).
D. Broker Selection on Basis
of Deposits - SEC § 28(e)(2)
The Justice Department has long viewed
the allocation of brokerage business by banks based upon the volume of demand
deposits maintained by a security dealer as reciprocity in violation of
antitrust laws. Reciprocity means the use by a company of its power as
the buyer of products or services to influence the sale of its own products or
Section 28(e)(2) of
the Securities Exchange Act of 1934 states "A person exercising investment
discretion . . . shall make such disclosure of his policies and
practices with respect to commissions that will be paid . . . at
such times and in such manner, as the appropriate regulatory agency, by rule,
may prescribe as necessary or appropriate in the public interest or for the
protection of investors." Although the Corporation does not require the
disclosure of brokerage policies and practices, examiners should review this
area to determine whether the bank is complying with its fiduciary duties in
the placement of brokerage business. Consequently, the type and amount of
deposit relationships maintained by brokerage firms used by trust departments
should be ascertained. Examiners should evaluate whether reciprocity (as
opposed to the quality of execution, research, cost, or other ancillary
services), may have played a role in the selection of brokers.
E. Best Execution
The SEC and the courts
have stressed the duty to obtain best execution. The term is usually
defined as seeking the most favorable terms for a customer transaction
reasonably available under the circumstances. Best execution does not
require that the lowest possible commission be obtained and the SEC has not
adopted regulations that require a trade to be executed within a set period of
should consider various qualitative and quantitative factors when determining
the quality of execution and should establish
and procedures to evaluate and demonstrate that trades are made using the
following criteria: The selection of broker/dealers should comply with
the FDIC Supervisory Policy Statement on Investment Securities and End-User
Derivative Activities. The points to consider in determining best
execution should consist of research provided if any, best price, speed of
execution, certainty of execution, access to initial public offerings,
recordkeeping, and the commission rate or spread. These general criteria
do not endorse or prohibit on-line transactions.
The SEC has brought
enforcement proceedings against investment advisors and those actions have been
centered in transactions involving soft dollars, cross trade, affiliated
trades, and advisors' failure to disclose execution practices. Failure to
use best execution procedures, may violate the antifraud provisions under
officers can verify that a particular investment is registered with the SEC via
the SEC's EDGAR system. The NASD can provide information on brokers and
dealers, such as disciplinary information. States have securities
regulators that can provide information and accept complaints for various
causes, including but not limited to poor or inappropriate execution, and
broker/dealer licensing status, and fraud.
F. Securities Settlement Practices
when the transaction is completed by the exchange of securities and money
between the buyer and seller. On settlement date, the buyer receives the
securities in either book-entry or definitive (physical) form, and a change in
ownership is recorded.
The settlement period
is the time between trade date and settlement date. Since 1995, most
trades of U.S. government and federal agency securities settle the day after
the trade date, which is known as next-day settlement. The standard for
corporate debt and equities, American Depository Receipts (ADRs), and municipal
securities has been three days. However, an initiative is underway to
ultimately allow for straight-through processing (STP), in real-time with
multiple currencies. In order for STP to occur, various actions must be
implemented, and includes, but is not limited to the following:
/Foreign Exchange -Implications to foreign investors trading U.S. issued
and Regulatory - Rule changes to accommodate STP improvements
Processing - Automated payment process
Securities - Eliminate the movement of physical securities
Lending - Implement the Automated Recall Management Systems (ARMS) to
improve level of STP in the stock loan recall process
trade matching - For fixed income securities
The following is a
more detailed explanation of current settlement practices based on the type of
Transactions involving U. S. Treasury
and Agency obligations are typically in book-entry form, rather than in
physical certificate form. Book-entry is an electronic registration,
transfer, and settlement system that enables the rapid and accurate
registration and transfer of securities with concurrent cash settlement.
Book-entry reduces handling costs and quickens transaction completion. U. S.
Treasury and Agency book-entry securities are delivered and cleared over the
Federal Reserve Wire System (Fedwire) on a delivery versus payment basis.
Acceptance of the security automatically debits the payment amount from the
buyer's account and credits it to the seller's account. The payment and
securities involved are transferred over the Fedwire system. The Federal
Reserve Bank of New York maintains the book-entry custody system. All
depository banks are eligible to maintain book-entry accounts at their Federal
Reserve District Bank, provided that they also maintain a funds account with
that Federal Bank.
settlement procedures are more complex than those for government, corporate,
and municipal bonds. The Bond Market Association developed the Uniform
Practices for the Clearance and Settlement of Mortgage-Backed Securities and
Other Related Securities (hereinafter, "Uniform Practices") to establish
industry standards for mortgage securities settlements. Since the Uniform
Practices are updated frequently, trust management engaged in mortgage and
asset-backed securities transactions should keep abreast of current settlement
Corporate and municipal debt securities
are available in book-entry and registered, definitive form. Book-entry
corporate and municipal bonds settle through the Depository Trust Company
processing and recordkeeping systems have improved the trade and settlement
time and have reduced failed trades. However, failed trades may occur due
to the following reasons
The buyer rejects the
delivery due to not being in good delivery form or the records of the buyer and
seller not matching. The primary reason for this problem is a lack of
The buyer recognizes
the trade, but it is in a different dollar amount.
The buyer rejects the
transaction due to incorrect maturity date, interest rate, or series.
If the receiving party
accepts delivery (upon payment) and discovers that it was not a good delivery,
then the buyer can correct the error by reclamation. In the reclamation
process, the buyer returns the securities with an explanation to the seller
(who has already received payment). The seller is obligated to return the
payment, if the claim is valid. Either party may make a reclamation, if
information is discovered after delivery, which, if known at the time of
delivery, would have caused the delivery not to constitute good delivery.
However, reclamation must be made within the stated time limitations
established by the Bond Market Association.
If a trade has a settlement date between
a record date and a payable date, delivery of the securities must be
accompanied by a due bill. A due bill is a document delivered by a seller
of a security to a buyer evidencing that any principal and interest or
dividends received by the seller past the record date will be paid to the buyer
by the seller upon submission of the due bill for redemption. The record date
is the date for determining who will be paid principal, dividends or interest
on an issue. Book-entry messages are considered acceptable due bill
substitutes for securities transferred over Fedwire (Treasury), DTC (Corporates
and Municipals), or PTC (GNMA). Due bills and book-entry messages cease
to be valid after 60 days from their issue date. A trust department may
experience considerable delays in attempting to recover payments without the
use of a due bill, which result in the accumulation of significant principal
and interest receivable accounts. If delivery and payment on a trade
occur after a record date and on or after a payable date, delivery of the
securities must be accompanied by a check for the principal, dividend or
Securities Transfer Agent's Medallion Program (STAMP Program)
The Securities and
Exchange Commission created a universal signature guarantee program that
consists of a stamp that serves as a signature by an eligible institution, such
as a bank, brokerage, or trust company, that participates in the program.
The purpose is to ensure that the person signing the certificate or irrevocable
stock or bond power form is the owner or authorized agent. The program
also standardizes the signature guarantee by assigning a standard format and
numbering system. The latter identifies the financial institution.
The stamp is an ink impression applied to a certificate that allows good
delivery form. It is not the same as a notary, which attests to the
authenticity of documents and contracts and signatures of testator and
H. Shareholder Communications Act
This Act gives the SEC jurisdiction to
regulate the proxy processing of all entities exercising fiduciary powers,
including trust departments. The Act is implemented primarily by
which can be found in Appendix D. The purpose of this regulation is to ensure that beneficial owners of
securities are provided proxy materials and other corporate communications
within specified time periods. Refer to Operations
and Internal Controls - Shareholder Communication Act for
additional information and guidance.
I. Proxy Voting
As a function of equity ownership, a
fiduciary has the duty to cast proxy votes for shares of stock held in a
discretionary capacity. A policy should be developed which establishes the
department's position with regard to voting on routine, as well as
controversial, issues. The policy should also establish voting and
investing in the employer securities that are
registered with the SEC, participants must be
given full voting rights for stock allocated to their accounts. In
addition, the DOL has opined in a letter ruling dated September 28, 1995, that fiduciaries of ESOP in which participating
employees are covered by a collective bargaining agreement must pass through
decisions concerning tender offers or proxy voting to the plan's participants
and vote as directed.
maintained by employers whose securities are
not registered with the SEC are
required to pass through voting rights to participants with stock allocated to
their accounts only for the following purposes: Corporate mergers or
consolidations; recapitalizations, reclassifications, liquidations,
dissolutions, or, the sale of substantially all assets. Furthermore, the
plan may authorize the trustees to vote allocated stock based on a one vote per
participant basis, rather than number of shares basis.
Employer stock held in a suspense
account, i.e., not yet allocated to participants, may be voted by the trustee,
in accordance with their duty to plan participants and beneficiaries.
J.1. FDIC Part 344: Record Keeping and
Confirmation Requirements for Customer Securities Transactions
The purpose of Part 344 is to
ensure that customers for whom state nonmember banks effect securities
transactions are provided adequate information concerning a transaction, and
that banks maintain adequate records and controls with respect to securities
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. The regulationdoes not
apply to trust company subsidiaries of FDIC
insured banks. The regulation parallels the securities recordkeeping
regulations of the other Federal financial institution regulators (FRB
Regulation H, and OCC 12 CFR 12, OTS 563). The requirements are
nearly identical to those contained in those regulations. FDIC examiners
conducting concurrent examinations with these regulators may rely on their
findings with respect to customer securities recordkeeping and confirmation
Part 344 applies to transactions
(business and consumer) made by the bank as a whole, and is not department
specific. Therefore, to determine if exceptions may apply,
all transactions subject to the regulation should be totaled. Transactions
may include sweep transactions made from deposit customers in the Commercial
Department to mutual funds, all nondeposit securities products and variable
annuities bought or sold, and transactions made within the Trust Department,
for example. Unless one of two general exceptions to the regulation
apply, a bank executing securities transactions for customers is subject to all
of the requirements of Part 344. The regulation, however, provides
specific requirements for trust department accounts.
The term "security" includes stocks,
bonds, mutual funds, repurchase agreements, variable annuities, and other
investments outlined in the regulation in Section 344.3(m). The term
security does not include a deposit or
share account in a Federally or state insured depository institution; a loan
participation; a letter of credit or other form of bank indebtedness incurred
in the ordinary course of business; currency; 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; units of a collective investment fund; interest in a
variable amount (master) note of a borrower of prime credit; or U. S. Savings
"Customer" as defined in
Section 344.3(g) includes any person or account, including agency, trust,
estate, guardianship, committee, or other fiduciary account for which a bank
effects or participates in effecting the purchase or sale of securities. The
term 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
securities that are the subject of the transaction.
.1.a. Exceptions to the Regulation
Low Activity Banks
Section 344.2(a)(1) provides that banks
which, over the prior three calendar years, execute an average of fewer than
200 securities transactions per calendar year are exempt from the some of the
recordkeeping requirements of 344.4(a)(2) through 344.4(a)(4) and the written
policy and procedure requirements of 344.8(a)(1) through (3). All
transactions in U.S. Government and agency securities, as defined in
Section 344.3(i),are excluded when calculating the number of
transactions. The recordkeeping requirements of Section 344.4 do not
apply to banks effecting fewer than 500 government securities brokerage
transactions per year. However, mutual fund, repurchase agreement, and
variable annuity transactions are included when calculating the number of
Banks which exceed the
200 securities transaction threshold are referred to as "high activity"
banks in this material.
Transactions with a Broker/Dealer
Section 344.2(a)(5) exempts securities
transactions from the requirements of the regulation if those transactions were
effected for a bank customer by a registered broker/dealer. This exemption also
applies when the broker/dealer is a dual employee. The exemption is
applicable as long as: (1) the broker/dealer is "fully disclosed" to the
customer, and (2) the bank customer has a direct contractual agreement
with the broker/dealer. The term "fully disclosed" means that the
broker/dealer's name (and not the bank's) appears on account documents,
confirmations, statements, etc.
Section 344.2(b) requires that a bank
executing securities transactions for its customers is responsible for
maintaining, directly or indirectly, an effective system of records and
controls to ensure safe and sound operations. The records and systems must
clearly and accurately reflect the information required by Part 344, and
provide an adequate basis for an audit.
Section 344.4 requires the
maintenance of certain records. Two sets of records are required. The
first set of requirements applies to all
banks providing such services, while the second set applies only to
"high activity" banks.
Mandatory Basic Records for All
Pursuant to Section 344.4(a)(1),
securities transaction records must be maintained for at least three years and
be in a chronological order. The account or customer name for which the
transaction was effected, a description of the securities, the purchase or
sales price, trade date, and the name of the broker/dealer or other person the
securities were purchased from or sold to should be maintained as.
Otherwise, under Section 344.4(b), the regulation does not require either the
use of specific forms or the creation of specific recordkeeping systems.
The records may be maintained in hard copy, automated, or electronic format,
but must be "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 by
this section. Thus, a bank subject to all of the recordkeeping
requirements noted below may, if it chooses, maintain one computer system for
all of the required information.
Pursuant to Section 344.4(a)(5), written
notifications are required by Section 344.5 and 344.6. The notification
may take the form of a broker/dealer's confirmation or a confirmation from the
bank that includes specific items. Section 344.6(b) permits trust
departments to elect an alternative notification procedures, when the
department exercises investment discretion other than in an agency capacity,
whereby the grantor, or if there is no such person, then the beneficiary, and
gives or sends to such person written notification within a reasonable amount
of time. A fee may be charged for providing this information. For
agency accounts, where the trust department exercises investment discretion,
the department will provide the customer with an itemized statement no less
frequently than once every three months. The statement will specify the
funds and securities in the custody or possession at the end of the period, and
all debits, credits, and transactions in the customers' account during the
"High Activity" Recordkeeping
All banks exceeding the 200-securities
transaction threshold must maintain the following in addition to the
requirements for all banks previously outlined:
For each customer, account records reflecting all purchases and
sales of securities, and all receipts and disbursements of cash
A separate memorandum (order ticket) for each order to purchase or
sell securities (whether executed or canceled). The memorandum must include:
(i) the account name(s), (ii) whether the transaction(s) was a market
order, limit order, or subject to special instructions, (iii) the time the
order was received by the person responsible for effecting the transaction,
(iv) the time the order was placed with the broker/dealer, or if there was
no broker/dealer, the time the order was executed or canceled, (v) the
price at which the order was executed, and (vi) the broker/dealer utilized
A record of all broker/dealers selected by the bank, and the amount
of commissions paid or allocated to each broker during the calendar year
Records required by Part 344 must
be retained for at least three years after the date of the transaction.
All trust departments must follow the
minimum guidelines of Section 344.5 in complying with the confirmation
requirements. However a trust department may, optionally, comply with
Section 344.6 for all or some of its accounts. Section 344.6 is an
alternative approach which provides an exemption from most of the confirmation
requirements. Examiners should note that trust department accounts generally
comply under Section 344.6. The following discusses the general
requirements first, and then the exemptive provisions of Section 344.6.
The bank must provide customers with
information (a confirmation) regarding securities transactions effected for
their accounts by either of the following types of notification:
A copy of the broker/dealer's confirmation and, if any remuneration
is to be received by the bank, a statement of the source and amount of the
remuneration (refer below for special remuneration provisions). If the
confirmation is sent from the bank, it must be sent within one business day
from the bank's receipt of the broker/dealer's confirmation.
[Section 344.5(a)]; or
A written notification (bank confirmation) disclosing specified
items of information about the transaction. [Section 344.5(b)] The
confirmation may be sent to the customer by mail, FAX, or electronically.
The bank may elect to have the
broker/dealer send the confirmation directly to the customer with either of
these options. [Section 344.5(a)(1)]
If the broker/dealer's confirmation is
not sent to the customer, the bank must provide the following in its
the name of the bank, (2) the name of the customer, (3) the capacity in which
the bank is acting (as principal or agent - see below), (4) the date and time
of execution (or the fact that the time of execution will be furnished within a
reasonable time upon request), the identity, price, and number of shares of
securities purchased/sold, (5) the source and amount of any remuneration
received by any broker/dealer or by the bank in connection with the
transaction, and (6) the name of broker/dealer used or the name of the person
from whom the securities were purchased/sold. [Section 344.5(b)(1) through
(7)] The regulation also requires specific disclosures for transactions in debt
securities [Section 344.5(b)(8) through (12)]. These requirements
generally parallel the contents of the confirmations that broker/dealers must
provide customers under SEC Rule 10b-10.
If the bank is acting as a "principal,"
it is selling or buying the security to the customer, in effect setting the
purchase or sale price internally. If the bank is acting as an "agent," it is
acting only as an intermediary between its customer and a third party.
Disclosure must be made to the customer as to which capacity the bank is acting
Special Remuneration Provisions
Normally, the customer pays the
broker/dealer a commission, and sometimes an additional bank fee, for executing
a securities transaction. In addition to the direct commissions and fees paid
by the customer, the bank may receive remuneration from outside sources, such
as a broker/dealer or a mutual fund.
Under both of the general methods of
complying with the confirmation requirements, the existence of any additional
remuneration received (or to be received) by the bank from outside sources must
be disclosed to the customer. [Section 344.5(b)(6)(i)] In general, the
source and the amount of such remuneration must be disclosed. In three
situations, however, the regulation provides an alternative approach:
When a prior written agreement between the bank and the customer
provides for different treatment;
When the bank acts in a principal capacity for transactions
involving government or municipal securities;
When the transaction involves open end mutual funds (where the
amount of the bank's remuneration may be based on the number and/or amount of
transactions over a given period which has not yet expired), if the customer
has been provided a current prospectus which discloses all current fees, loads,
and expenses at or before completion of the transaction.
In these three instances,
Section 344.5(b)(6)(ii) provides that a bank may elect not to disclose the
source and amount, if the customer's confirmation indicates that the bank will
furnish the information within a reasonable period after the customer's written
Exemptive Provisions for
Confirmations in Section 344.6
Section 344.6 permits a different
approach from the general confirmation rules above. The exemptive provisions
basically provide that the trust customer may agree to waive the general
confirmation provisions outlined above. This exemption differs according to the
type of account.
In discretionary fiduciary accounts (trusts, estates, guardianships,
etc., but excluding collective investment funds), the customer may agree to the
receipt of transaction information within a "reasonable" time frame other than
that specified in the regulation. This alternative arrangement may be a part of
the text of the trust agreement. The bank may charge a "reasonable" fee for
furnishing such information. [Section 344.6(b)]
In such discretionary fiduciary accounts, the "customer" is the person having
the right to terminate the account. If no such person exists, anyone with a
vested interest in the account is the "customer."
In discretionary agency accounts, the bank must mail an itemized
statement to the customer not less than once every three months. The statement
must provide a detail of investments in the account, together with uninvested
cash balance(s). It must also show all transactions during the statement
period. [Section 344.6(c)]
If the customer requests, the bank is required to provide written notification
conforming with Section 344.5. In such instances, the confirmation must be
provided "within a reasonable time." The bank may charge a "reasonable" fee for
furnishing these confirmations.
The term "reasonable," when applied to the time to provide
confirmations as above, has not been interpreted to date. It must be applied in
light of: (i) any provisions of the instrument, (ii) state law and
regulation (if any), and (iii) the facilities and capabilities of the
The term "reasonable," when applied to the fees which may be charged
as above, has not been interpreted to date either. It must be applied in light
of: (i) any provisions of the instrument, (ii) state law and
regulation (if any), and (iii) the bank's pricing for equivalent
statements, such as deposit or loan statements.
In all nondiscretionary accounts (fiduciary and agency accounts, but
excluding dividend reinvestment and similar periodic plans), the customer may
opt to waive the confirmation.
The agreement (or separate disclosure statement), however, must clearly
indicate that the customer may receive a confirmation within regulatory time
frames at no additional cost. [Section 344.6(a)] The waiver must be
sufficiently prominent that the customer realizes what is being waived. It may
be either a separate disclosure document or included in the body of the trust
agreement. If included in the agreement, the waiver may not be buried in
"boiler plate" text. The waiver should be positively affirmed by the customer
with a separate signature or initials, or by having the customer check a box.
In cash management sweep accounts, the bank must provide the
customer a written statement for each month in which a purchase or sale of a
security is effected in a customer's account. If no transactions occur in the
account, a written statement must be provided to the customer at least
quarterly. [Section 344.6(d)]
On December 22, 1998, the FDIC Legal Division issued an
interpretation which provides that the monthly statement requirement in
344.6(d) for sweep accounts does not apply to sweeps performed for fiduciary
and agency accounts in trust departments. The monthly statement requirement
applies only to sweeps from retail deposit accounts of the commercial bank.
However, if sweeps for the retail deposit accounts are routed through the trust
department, the monthly statement requirement would apply. They would not be
exempted merely because they were routed through the trust department.
Sweeps into repurchase agreements collateralized by government
securities fall under U.S. Treasury Department regulations for government
securities dealers, which require a daily confirmation [subject to the
requirements of 17 CFR 403.5(d)] and do not permit the monthly/quarterly
statement of Section 344.6(d).
Collective investment funds may follow the same provisions as in OCC
Regulation 9.18(b)(6). [Section 344.6(e)]
Periodic plans (such as stock purchase or dividend reinvestment
plans) must provide the customer written statements at least quarterly.
The statement must detail the asset holdings of the account, charges and
commissions paid by the customer, and all account transactions. The bank may
charge a "reasonable" fee for providing this information.
Retail bank customers may not waive the receipt of confirmations or
statements, even by written agreement.
.1.d. Settlement of
Except under limited circumstances
described in Section 344.7, a bank should not effect or enter into a contract
for the purchase or sale of a security that provides for the payment of funds
and delivery of securities later than the third business day after the date of
the contract unless agreed upon by the parties at the time of the transaction.
This portion of the regulation parallels SEC Rule 15c6-1 which established
three business days instead of five as the standard settlement time frame.
Written Policies and Procedures
Section 344.8 requires that a bank
executing securities transactions for its customers establish certain specified
written policies and procedures. Two levels of policies are provided for in the
regulation. The first applies to any bank providing such services, while the
second applies only to "high activity" banks.
Mandatory Written Policy
All banks executing securities
transactions for their customers must establish written policies and procedures
for the crossing of buy and sell orders on a fair and equitable basis where
applicable and permitted under local law. [Section 344.8(a)(4)]
"High Activity" Bank Policies
Section 344.8(a)(1) through (3)
requires that banks exceeding the 200-securities transaction threshold [Section
344.2(a)(1)] maintain written policies and procedures governing:
The supervision of traders or others who transmit orders or execute
transactions in securities for customers;
The supervision of all officers and employees who process orders for
notification or settlement purposes, or perform back office functions with
respect to securities transactions; and
Fair and equitable allocation of securities and prices to accounts
when orders for the same security are received at approximately the same time.
Officer/Employee Reporting of Personal Investment Transactions
Section 344.9 requires bank
officers and employees who make investment recommendations or decision for the
accounts of customers, participate in such determination, or obtain information
concerning which securities are being purchased, sold, or recommended must
report to the bank within 10 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
regulation does not require that the bank or trust department have written
policy or procedures to ensure appropriate disclosure and only requires
disclosure when transactions meeting the requirements are present.
Similar policies and procedures are required for national banks
(12 CFR 12) and state member banks [FRB Regulation H,
Quarterly reports are required from bank
officers and employees who make or participate in the making of investment
recommendations or decisions for the accounts of customers, or who obtain
information concerning which securities are being purchased or sold.
Bank directors are not covered by this provision. However, bank
directors who are also officers of the bank are required to file the reports,
Reports are required when transactions made by the covered officers
and employees (or on their behalf) aggregate to more than $10,000 during the
calendar quarter. All transactions in U.S. Government and agency securities
[defined in Section 344.3(i)], and all mutual fund shares, are excluded
when calculating the $10,000 threshold. The same securities are also excluded
from the reporting requirement.
Reports must be provided to the bank within 10 days after the end of
each calendar quarter.
Personal investment transaction reports are required whether or not
the bank falls under the 200 securities transaction threshold exemptions of
Reports are required only if transactions have occurred. There is no
requirement for "no-activity" reports to be filed by covered officers and
employees with the bank.
The regulation does not specify with
whom the reports are to be filed, but positions appropriate to each bank's
organizational structure, such as the internal auditor, ethics office, or
corporate secretary would be appropriate. Whatever position is chosen, it must
have sufficient authority to effect corrections.
The purpose of these reports is to
provide the institution with a mechanism for monitoring and identifying certain
violations, conflicts of interest, self-dealing, violations of its own employee
ethics code, and unethical actions. When properly monitored, the reports should
aid in deterring and detecting the following personal investment transactions
of covered bank investment insiders:
fraudulent, deceptive and manipulative acts,
improper use of material inside information, and
other abusive practices.
The report should identify the
individual who is filing the report, and identify and describe each transaction
being reported. [Section 344.9(a)(3)] If the $10,000 per quarter
transaction threshold for any covered individual is met, all transactions
(other than those exempt from the reporting requirements) must be reported, not
merely those in excess of $10,000 per quarter.
Reports must contain certain details of
the transaction(s), including the date(s) of the transactions, the type of
transaction (purchases, sales, etc.) and an identification of the securities
purchased or sold. While not required by the regulation, certain additional
information is helpful in describing the securities and the transaction(s).
This information includes: (1) the number of shares or the principal
dollar amount of each transaction, (2) the price at which the transaction
was effected, and (3) the name of the broker, dealer, or bank with or
through which the transaction was effected. The absence of this additional
information, however, should neither be scheduled as a violation nor
While not covered by
Part 344, the bank should review the reports filed and investigate
any indications of potential violations, exceptions and unethical conduct. The
following illustrate transactions that should be of concern to the bank:
"front running" -
A practice where an
investment manager purchases securities for his/her own personal interest
prior to an anticipated purchase of the same securities by the accounts
for which he/she acts as investment manager. For example, the money
manager may purchase securities for his/her personal account ahead of a
purchase of the same securities by institutional accounts, since the
purchase of a large block of securities could cause the price of the
securities to increase.
"insider trading" - transactions where an individual uses nonpublic
material inside information (covered by the SEC's Rule 10b5-1), typically
concerning the condition of a company or impending announcements (mergers,
takeovers, profits/losses, new products, product recalls, etc.) which may
materially affect the price of a company's stock, to benefit personally
from investment transactions (refer also to
Section 8. D. Material Public Information),
"scalping" - trading for small gains over a short period of time,
usually within a day. In some cases, this involves taking advantage of very
narrow spreads in volatile markets. "Scalping" may be indicative of trading
securities with advance knowledge of portfolio changes (particularly with
respect to very large portfolios, usually the trust department's entire
discretionary portfolio), or knowledge of material inside information.
transactions with the institution's fiduciary accounts, and
compliance with the provisions of the bank's code of ethics that
restrict or otherwise require the reporting of securities trading by the bank's
investment management staff for their personal benefit. Practices typically
covered by an investment code of ethics include:
clearance in advance of personal trades;
delays of "x" period before buying or selling a security recently
traded for discretionary trust accounts;
restrictions on short-term trading, such as requiring the holding of
a stock for a designated period of time before taking a profit, perhaps
dependent on whether a security is held in discretionary trust portfolios or
recent trades in such securities;
selling short or investing in options on stocks, bonds and
commodities held in trust accounts;
prohibitions against purchases of initial public offerings (IPOs),
which are often hard to get and may be easily "flipped" for a quick profit; and
improper placement of personal investment transactions through the
institution's brokerage accounts.
Examiners should not only ascertain that
the required policies exist and the reports are filed, but also that the
reports are reviewed by an appropriate bank official and that adequate
follow-up action is taken as warranted.
If a bank acts as investment advisor to
a mutual fund, the bank must also comply with SEC Rule 17j-1, as
promulgated under the Investment Company Act of 1940 [17 CFR Section
270.17j-1], in addition to Part 344. Rule 17j-1 generally requires the
same quarterly disclosures as Part 344, except:
All transactions must be reported; there is no $10,000 filing
Directors are covered by the report, as they are considered "access
persons" under the SEC rule; and
The reports must be covered in the mutual fund's code of ethics.
[Note that a model code of ethics has been prepared by the Investment
. Compliance with SEC Requirements
Securities and transactions in
securities are largely governed by Federal law. The following discussion
addresses some important aspects of securities regulation which are relevant to
trust departments. Special reports or notices may need to be filed in those
accounts holding equity securities which are registered under Federal
securities laws. These requirements may apply to the trust department as a
whole, to individual trust accounts, and to individual transactions. Others
apply to the selection of brokers, the placement of brokerage transactions, and
mutual fund 12b-1 fees.
.1. Marketable Securities
Section 12 of the Securities and
Exchange Act of 1934 (Act) required that equity securities (common stock)
issued by corporations with 500 or more shareholders and $1 million or
more in assets be registered in order to be traded on a national securities
exchange. The SEC's Rule 12g-1 (17 CFR 240.12g-1), which was issued
subsequent to Section 12, increased the asset size threshold to $10 million in
FDIC Part 335 implements the law
governing stock issued by FDIC-supervised banks. This regulation incorporates
the SEC's asset size threshold of $10 million.
The following list recaps various
requirements involving equity securities. A more extensive discussion of each
requirement is included after the listing. When applicable, examiners should
verify compliance with the requirements.
If the bank controls more than 5 percent of a registered company's
outstanding stock, it must file notices under Section 13 of the Securities
Exchange Act of 1934. Refer to the discussion in
below, under the caption 13D and 13G, Acquisition Statements
for Registered Equity Securities.
If the bank has discretion over $100 million or more in stocks and
convertible bonds, it must file quarterly 13F reports under SEC regulations.
Refer to the discussion under Quarterly SEC 13F Equity reports in
If a "person" controls 10 percent or more of a registered company's
outstanding stock, a filing under Section 16 of the Securities Exchange Act of
1934 may be required. Refer to
SEC Rule 144 governs the sale of restricted securities. Refer
may search the SEC EDGAR database to determine whether a bank (or anyone or
entity) has submitted any required filing with the SEC at the following
K.1.a. Acquisition Statements for
Registered Equity Securities - SEC 13(d) and SEC 13(g)
As with any investor, bank trust
departments must file Acquisition Statements when required by Federal
securities law. Acquisition statements are required only for equity securities
and are required only under certain circumstances.
Section 13(d)(1) of the Securities
Exchange Act of 1934 (Act) requires that persons holding a "beneficial
ownership" in certain types of equity securities file a notice ("acquisition
statement") with the SEC when such "beneficial ownership" exceeds 5
percent of the total outstanding shares of a covered equity security. Two
types of notices are involved, more generally referred to as Schedules 13D and
13G under Federal securities law. Schedule 13G imposes similar, but less
burdensome, requirements than Schedule 13D. Refer to the discussion of
"beneficial ownership" below.
Purchasers of equity securities issued
by entities (including national and state member banks, thrifts and bank
holding companies) that are not FDIC-supervised state nonmember banks follow
SEC requirements. SEC Rule 13d-1 (17 CFR 240.13d-1) implements
Sections 13(d)(1) and 13(g)(1) of the Act regarding acquisition
Purchasers of equity securities issued
by nonmember banks and registered under Part 335 of FDIC's Rules and
Regulations must follow requirements equivalent to those in Section 13 of
the Act. FDIC Section 335.331 requires compliance with SEC Sections 13(d)
and 13(e) of the Exchange Act. FDIC acquisition statements are the same
as the acquisition statements required by the Securities Exchange Act of 1934.
For bank trust departments, "beneficial
ownership" involves the department's total holdings of any covered equity
security where the bank: (1) has investment discretion over more than 5
percent of the total outstanding shares, or (2) has voting authority
over more than 5 percent of the total outstanding shares. Note:
"beneficial ownership" is defined in SEC Rule 13d-3 [17 CFR 240.13d-3].
It is important to note that the 5
percent threshold may be exceeded by the bank in its fiduciary capacity if
it possesses any vestige of discretionary investment power or voting power.
Neither of these powers must actually be exercised by the fiduciary. In
fact such powers could be delegated to another interested party. If the bank as
fiduciary has the authority to exercise either of these powers and has such
powers over an aggregate exceeding 5 percent of a registered equity
security, it must file the acquisition statements.
From the above, it is clear that such
conditions are not met by: (1) nondiscretionary accounts where the bank
has no voting authority or no investment authority, (2) custodial
accounts, or (3) investment advisory accounts where the bank acts as
custodian and does not manage the assets.
13D Acquisition Statements
13D filings are transaction-based
reports that, typically, will not apply to trust departments. They are filed
primarily when stock is being accumulated to obtain a controlling interest.
Most trust department holdings are of a passive investment nature.
When a transaction occurs resulting in
the control of a covered equity security in excess of the 5
percent beneficial ownership threshold, a 13D filing is required. Every
time the beneficial ownership changes one percent or more, the change is
considered a material change, and an amended 13D filing is required. A 13D
Acquisition Statement must be filed within 10 days with: (1) the
issuer of the security by certified or registered mail, (2) each exchange
where the security is traded, and (3) the SEC or the primary Federal bank
regulator for publicly held bank securities.
More than one 13D filing may be
On July 1st, a trust
department's beneficial ownership holdings of ABC Company's registered stock
increases to greater than 5 percent of the outstanding stock. The 5 percent threshold has
been exceeded and, therefore, a 13D filing is generally required.
On September 15, the
department's beneficial ownership holdings decrease by less than 1 percent,
resulting in an assumed 5.5 percent position. Generally, no filing is required
because no material change in ownership has occurred.
On November 15th the
department's holdings rise again, this time exceeding 8 percent of outstanding
stock. An amendment to Schedule 13D is required because a material change of
ownership of outstanding stock has occurred since its previous filing.
13G Abbreviated Statements
13G filings are year-end reports of
equity security holdings that often apply to trust departments. If the
securities are not held for the purpose of exercising control (or as part of a
related transaction, such as a takeover), but rather are for passive investment
purposes, a short-form Schedule 13G may be filed instead of the 13D. The same 5
percent threshold must be exceeded, but it is applied only as of the
calendar year-end. A Schedule 13G must be filed by February 14 of the
following calendar year-end with the same entities as a Schedule 13D.
If there is no change from one year end
to the next, no new 13G filing is required. However, if there is any change
from one year-end to the next, a new 13G filing would be required. If there is
a change of agency (e.g., due to a change from FDIC-registered bank stock
to SEC-registered holding company stock), a new 13G filing would be required,
even if there had been no change in beneficial ownership from one year-end to
K.1.b. Reports of Equity Holdings -
This report applies to institutional
investors, including trust departments, that exercise investment discretion
over $100 million or more of equity securities (or securities convertible
SEC Rule 13f-1 securities include
equities "traded on a national securities exchange or quoted on the automated
quotation system of a registered securities association" [e.g., NASDAQ - ed.].
The Rule also states that filers may rely on the most recent SEC-released list
of all required 13F securities.
Reports are filed with the SEC using the
format of SEC Form 13F, which is required by SEC Regulation 240.13f-1
(Rule 13f-1). A sample 13F form is shown in SEC Regulation 249.325.
For each security held, the report:
identifies the issuer, gives the CUSIP Number, and shows the market value and
number of shares held. The number of shares reported is then broken down into
two categories: investment discretion and voting authority. Under each
category, the number of shares is further divided into three categories: sole
authority, shared authority, and "other" discretionary authority.
Both the SEC Rule and Section 13f-1
of the Securities Exchange Act of 1934 require that copies of reports covering
banks be filed with the primary Federal banking regulator. Thus, state
nonmember banks filing individually must provide the FDIC with a copy of their
13F reports, as must holding companies whose 13F reports include the securities
holdings of state nonmember banks.
SEC Rule 13f-1 and a copy of a
printed Form 13F are in the FDIC's Rules and Regulations service in Volume
III under the Miscellaneous Statutes and Regulations tab. The SEC's Division of
Investment Management has issued a publication "Frequently Asked Question About
Form 13F", which can be accessed on the internet at
. Once in the
website, go to Divisions, Investment Management, Frequently Asked Questions
about 13f. The website cannot be accessed directly.
Section 16 Statements for 10 percent or More Holders of Registered
» Not Applicable to Trust
Section 16(a) of the Securities
Exchange Act of 1934 generally requires that certain filings be made with the
SEC for "persons" that have 10 percent or more "beneficial ownership" in
stocks that are registered under Federal securities laws. The Act is
implemented by SEC Rule 16a-3.
In a no-action letter to CS Holding
(January 16, 1992), however, the SEC indicated that bank trust departments
will not be deemed to be beneficial owners "of securities held for the benefit
of third parties or in customer or fiduciary accounts where such securities are
held in the ordinary course of business without the purpose or effect of
changing or influencing control of the issuer."
K.2. Restricted Equity Securities
- SEC Rule 144
In general, as promulgated under Section
4 of the Securities Act of 1933, Rule 144 (SEC regulation 230.144) provides
that in order for securities to be sold without a formal registration:
the securities must have been beneficially owned for at least two
the number of shares sold in any three-month period must not exceed
the greater of 1 percent of the total outstanding securities of the same
class, or the average weekly trading volume for the class of securities during
the four-week period preceding the sale, and
the securities must be sold either in a broker's transaction or in
transactions directly with a market maker.
In addition, adequate information
regarding the issuer must be available to the public and a Notice of Sale
(Form 144) must be filed with the SEC. No report to the SEC is required if
less than 500 shares are sold in any three-month period and the sales price
does not exceed $10,000..
On February 20, 1997, the SEC issued
Release No. 33-7390, which amended Rule 144 to reduce the holding periods for
restricted securities (i.e., those securities issued in private
placements under certain conditions) that are covered by Rule 144. Effective
April 29, 1997:
the holding period requirement applicable to the resale of limited
amounts of such restricted securities by any person will be reduced from two
years to one year, and
the holding period applicable to the resale of unlimited amounts of
restricted securities held by non-affiliates is reduced from three years to two
Regulation S provides both an
issuer-distributor safe harbor (Rule 903) and a resale safe harbor (Rule 904)
for offshore sales of securities. To qualify for either safe harbor, Regulation
S requires that: (i) the offer or sale must be made in an "offshore
transaction" and (ii) the offer or sale must not involve any "directed selling
efforts" in the United States. "Offshore transaction" is defined in Rule
902(h)(1)(i) as those in which an offer is not made to a person in the United
States, and (ii) either the buyer must be outside the United States (or the
seller must reasonably believe that the buyer is) or the transaction is
executed, for purposes of Rule 903, on or through a physical trading floor of
an established foreign securities exchange, or for purposes of Rule 904, in, on
or through the facilities of a "designated offshore securities market," which
is either one of an enumerated list of foreign securities exchanges or one that
meets a set of criteria set forth in Rule 902. "Directed selling efforts" is
defined in Rule 902(c) to include those that are "undertaken for the purpose
of, or that could be reasonably expected to have the effect of, conditioning
the market in the United States" for the related securities (e.g.,
Submission of Forms and Notices
Since 1999, many forms, notices, and
reports filed under various securities laws and regulations must be filed
Under SEC Regulation S-T (17 CFR 231.10 - .601) the
SEC requires the electronic submission of all reports, statements, and
schedules filed pursuant to:
Sections 12(b) and 12(g) of the Securities Exchange Act of 1934;
the Trust Indenture Act of 1939 (other than applications for
exemptive relief filed pursuant to section 304 and section 310 of that Act);
Sections 13, 14, and 15(d) of the Securities Exchange Act of 1934;
Sections 8, 17, 20, 23(c), 24(e), 24(f), and 30 of the Investment
Company Act of 1940; and
the Public Utility Act.
The rule also permits, but does not require, the electronic filing
of Form 144, where the issuer of the securities is subject to 13 or 15(d) of
the Exchange Act. Otherwise, Form 144 should be filed in paper
format. However, some notices are required to be submitted in paper copy
only, including, but not limited to: filings pursuant to Regulations A, D, and
E; Form F6; and annual reports required by section 313 of the Trust Indenture
Act of 1939.
"Temporary Hardship Exemption" hardcopy filings are permitted under
Regulation S-T (Rule 201), for unanticipated technical difficulties.
"Continuing Hardship Exemption" hardcopy filings are also permitted under
Regulation S-T (Rule 202), if the filings cannot be submitted electronically
without "undue burden and expense."
Under the revised reporting requirements of 17
CFR 249.325, banks which
electronically submit Form 13F may submit a copy of the form to their
banking agencies either: (a) in hardcopy; or (b) electronically, if the
agency is capable of receiving the filings in electronic format (the FDIC
currently receives this form in hardcopy).