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FIL-20-97 Attachment

[Federal Register: March 5, 1997 (Volume 62, Number 43)]

[Rules and Regulations]

[Page 9915-9923]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr05mr97-2]


 

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FEDERAL DEPOSIT INSURANCE CORPORATION


 

12 CFR Part 344


 

RIN 3064-AB74



 

Recordkeeping and Confirmation Requirements for Securities

Transactions


 

AGENCY: Federal Deposit Insurance Corporation.


 

ACTION: Final rule.


 

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

its regulations governing the procedures for recordkeeping and

confirmation requirements with respect to effecting securities

transactions for customers of an insured state nonmember bank or a

foreign bank having an insured branch (Bank). The final rule updates,

clarifies and streamlines the FDIC regulations and reduces unnecessary

regulatory costs and other burdens. The final rule also reorganizes and

clarifies the regulation in areas where it previously was confusing. In

addition, the FDIC has incorporated significant interpretive positions

and updated 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: Effective date. The final rule is effective April 1, 1997. Early

compliance. These revisions may be followed immediately by the affected

party.


 

FOR FURTHER INFORMATION CONTACT: Miguel D. Browne, Manager--Risk Policy

Development, (202) 898-6789; Keith A. Ligon, Chief, Policy Unit, (202)

898-3618; and John F. Harvey, Review Examiner (Trust), Securities,

Capital Markets and Trust Branch, Division of Supervision (202) 898-

6762; and Patrick J. McCarty, Counsel, Regulations and Legislation

Section, Legal Division, (202) 898-8708.


 

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. 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 1979.1

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\1\ 1 See 12 CFR 208.8(k), 44 FR 43258 (July 24, 1979) (FRB

regulation); 12 CFR part 12, 44 FR 43254 (July 24, 1979)(OCC

regulation).

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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 and streamline their

regulations to improve efficiency, reduce unnecessary costs and

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.

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

rulemaking (60 FR 66517) 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 OCC published its final rule on

December 2, 1996. See 61 FR 63958. 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. On December 24, 1996, the

FDIC published a notice of proposed rulemaking (61 FR 67729) to amend

part 344 to address various market developments and regulatory changes,

and reduce regulatory burden, where possible. Consistent with Section

303 of CDRI, the FDIC reviewed the OCC rule and the FRB proposal in

connection with the preparation of its notice of proposed rulemaking.

The FDIC has endeavored to create a rule that is uniform with the other

agencies. As part of that effort, the staff of the FDIC has been in

contact with the staffs of the FRB and the OCC in connection with the

drafting of the final rule. The FDIC's final rule is closer in

structure, definitions, language and form to the FRB's proposal than

the OCC's final rule, however, all of the agencies' rules are

substantively very similar.


 

Comments Received and Changes Made


 

The FDIC received six comments on the proposal. One comment came

from a bank, one from a bank holding company and four comments came

from trade associations representing banks, investment companies and

accountants. In general, the commenters strongly supported the proposal

as promoting uniformity among the Federal bank regulatory agencies,

reducing regulatory burdens as well as addressing recent developments

in the securities market. Most commenters specifically supported the

provision of the proposal that excluded from the scope of part 344

customer transactions conducted directly with a broker/dealer where the

customer has a written account agreement with the broker-dealer and the

broker-dealer is fully disclosed to the customer. This change would

exclude from part 344's coverage commonly utilized contractual

relationships between banks and broker/dealers whereby the broker/

dealers conducts securities transactions on bank premises, known as

networking arrangements.

In addition, certain of the commenters requested specific changes

to the proposal. The FDIC has considered each of the comments carefully

and has made a number of changes in response to the comments received.

Overall, the final rule adopts most of the changes to part 344 as

proposed by the FDIC although certain changes have been made in an

attempt to increase uniformity with regard to recordkeeping and

confirmation requirements among the federal banking regulatory

agencies. The section-by-section discussion of this preamble describes

the final regulation


 

[[Page 9916]]


 

and identifies and discusses the comments received and changes made to

certain sections of the proposal.


 

Section-by-Section Discussion


 

Purpose and Scope. (Section 344.1)


 

The purpose of part 344 is twofold: to ensure that purchasers of

securities from Banks are provided with certain necessary information

about the transaction; and to ensure that Banks engaging in such

transactions maintain adequate records and controls with respect to

such transactions. In general, part 344 applies to securities

transactions effected by Banks on behalf of customers unless the

transaction is specifically exempted in Sec. 344.2, such as, to a

limited extent, transactions in government securities and transactions

in municipal securities conducted by Banks that are not registered as

municipal securities dealers with the SEC.


 

Exceptions. (Section 344.2)


 

The final rule provides five exceptions from the requirements of

certain provisions of part 344. The specific exceptions, which are

unchanged from the proposal, are: (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 first

four exceptions already exist in part 344. The proposal added the

exemption covering certain securities transactions with a broker/

dealer. In order for the exception to apply, the broker/dealer must be

fully disclosed to the customer and the customer must have a direct

contractual agreement with the broker/dealer, that is, a signed account

agreement. This exception makes clear that under the circumstances

described dual employee arrangements are not subject to part 344. This

exemption is similar to that found in the OCC's rule. See 12 CFR

Sec. 12.1(c)(2)(v). The rule also clarifies that even though certain

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.

In connection with the broker/dealer networking exception, the FDIC

requested comment on whether part 344 should apply to banks which

impose surcharges or additional fees on customers in addition to the

transaction volume compensation they normally receive under a

networking agreements. The only comment received on this issue

indicated support for requiring banks to disclose to customers that

such surcharges or additional fees were being imposed. It is the FDIC's

understanding that these type of surcharges and additional fees are not

common, however, the FDIC expects banks to disclose the imposition of

these surcharges or fees to customers and will monitor this area to

determine if further supervisory action is necessary.

The FDIC received comment on the small number of securities

transactions exceptions. This exception applies to banks effecting an

average of fewer than 200 securities transactions per year for

customers over the prior three calendar year period and excepts the

bank from certain record maintenance requirements as well as the need

to establish most required written policies and procedures. One

commenter proposed that this limited transactions exemption be expanded

to allow a Bank to effect 500 rather than 200 transactions in

securities that are neither municipal securities or government

securities. In light of the FDIC's desire for uniformity of its

recordkeeping and disclosure requirements with those of the other

Federal banking regulators and the lack of a compelling basis by the

commenter to make the suggested change, the FDIC has determined to

maintain the exemption for limited transactions at an average of 200 of

such transactions per year.


 

Definitions. (Section 344.3)


 

Section 344.3 sets forth the definitions of 13 terms used in the

rule. The FDIC's advance notice of proposed rule making described six

new definitions--``asset-backed security'', ``completion of the

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

``government security'' and ``municipal security.'' The proposal added

two additional new definitions: ``bank'' and ``cash management sweep

account''. The proposed definitions are the similar to those proposed

by the FRB. The OCC's final rule also uses the same terms, but the

structure and language used are somewhat different. The final rule

adopts the definitions as set forth in the proposal with the following

minor modifications in response to comments received

As proposed, 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 received two comments on its proposed definition

of a ``cash management sweep account'' found at Sec. 344.3(c). One

commenter expressed appreciation for the clarity provided by having a

separately defined term; the other raised concern that while the FDIC

proposes to treat cash management sweep accounts in a manner identical

to the OCC, an additional definition may cause uncertainty. The OCC

defined a cash management sweep account within its definition of

``periodic plan''. For the reasons stated in the proposed rulemaking

2, the FDIC believes that there are benefits to separately

defining the term ``cash management sweep account''. Furthermore, we do

not foresee confusion resulting from the distinction used in the OCC's

regulation. With respect to cash management sweep accounts, both the

OCC's and the FDIC's rules will require monthly statements to be

furnished to a customer for each month in which a security is purchased

or sold, but not less than quarterly.

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\2\ 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 believes it is not appropriate to

include sweep accounts in the definition of periodic plans.

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The FDIC has amended the definition of the term ``security'' at

Sec. 344.3(m) so that it conforms to the definition used by the other

federal banking regulatory agencies. The new definition more closely

tracks the definition of ``security'' in the Securities Exchange Act of

1934. See 17 U.S.C. 78a et seq. No substantive change in the definition

or meaning of the term ``security'' is intended from the definition of

the term as published in the FDIC's proposal and the term as used in

the existing regulation. The FDIC is conforming where possible the

terms of part 344 with the rules of the other federal banking

regulatory agencies so that any regulatory burden resulting from the

use of different terminology can be minimized.


 

[[Page 9917]]


 

Recordkeeping. (Section 344.4)


 

Section 344.4 sets forth the requirements for maintenance of

records of securities transactions by Banks or a third party service

provider for the Bank. The 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. The FDIC

received no comments on this section, and therefore it is being adopted

as proposed.


 

Content and Timing of Customer Notification. (Section 344.5)


 

Section 344.5 of the regulation identifies the information that a

Bank must provide to a customer at or before the completion of a

securities transaction. When a broker/dealer is utilized in a

transaction, Banks have the option of either having a broker/dealer

that executes a transaction for the Bank send a confirmation directly

to the Bank's customer or choosing to forward a copy of the broker/

dealer confirmation to the Bank customer when it is received. Banks

opting to have confirmations sent directly to their customers by the

broker/dealer are ultimately responsible for the timely delivery of

confirmations as well as accurate disclosure of all information

required therein. The FDIC received several comments concerning this

section of the proposal. One commenter supported the provision allowing

notices to be furnished to customers via facsimile or other electronic

means. The FDIC notes its intent that references--in Sec. 344.5 as well

as Sec. 344.6--to the ``give'' or ``send'' notices includes notice

provided via facsimile or other electronic transmission.

Several commenters had concerns with the partial exemption to the

customer notification requirement of the source and amount of

remuneration received by a Bank from a third party. The source and

amount of remuneration that the Bank receives, other than from its

customer, must be disclosed to the extent required under paragraph

(b)(6) of Sec. 344.5. Paragraph 344.5(b)(6) describes three

circumstances in which a Bank need only disclose to a customer that the

Bank has received remuneration from a third party and that the Bank

will provide such information upon the written request of the customer.

If a transaction falls within one of the three enumerated exceptions in

Sec. 344.5(b)(6)(i), a simple disclosure that the Bank received

remuneration from a third party and that the source and amount of such

remuneration received by the Bank from a third party is available upon

written request of the customer will satisfy the disclosure

requirements of Sec. 344.5(a)(2). One commenter indicated that the rule

could be read so that Sec. 344.5(a)(2) would vitiate the exemption

under Sec. 344.5(b)(6)(ii). The FDIC does not agree. As discussed,

Sec. 344.5 (a)(2) is clear that notice need be provided only to the

extent that such notice would be required under Sec. 344.5(b)(6),

including any notice based on the request of a customer as permitted in

paragraph (b)(6)(ii).

Another commenter suggested that the Sec. 344.5(b)(6)(ii) partial

exemption to the customer notification requirement regarding

remuneration to the Bank by a source other than the customer be

extended to permit a Bank not to disclose this information to the

customer at all. The commenter expressed the belief that the specific

source of such remuneration would not be of interest to the majority of

customers. After consideration, the FDIC has determined not to change

the rule from its proposed form. The final rule will reduce regulatory

burden because a Bank is required to provide amount and source of

remuneration information only upon specific written request by the

customer. It is also noted that the final rule is consistent with

similar rules of the other federal banking regulatory agencies.

Moreover, because the Bank will only need to provide such information

to customers who affirmatively request it, the burden on the Bank

should be minimal, particularly if--as the commenter suggests--third

party remuneration to the Bank is not of interest to a majority of

customers.

In addition, we note that the ``source and amount of remuneration''

issue which led to the FDIC issuing a partial waiver of part 344 in

1995 3 has been resolved in the final rule. Previously, a literal

reading of part 344 could have required a Bank to disclose the

remuneration it obtained from a broker/dealer that dealt directly with

the customer even if the Bank's remuneration was solely based on the

broker/dealer's volume of transactions with Bank customers. Due to the

impossibility of providing such disclosure to customers at the time of

the transaction, the FDIC had granted a partial waiver of the

requirements of part 344. Id. The FDIC now exempts for the scope of

part 344 those securities transactions where the customer has a direct

contractual agreement with a fully disclosed broker/dealer. See 12 CFR

Sec. 344.2(a)(5). This exemption will remove from part 344's scope

most, if not all, networking arrangements between registered broker/

dealers and financial institutions. Banks will not be obligated to

disclose the source and amount of remuneration since the customer is

actually a customer of the broker/dealer, not the Bank, and will

receive a confirmation from the broker/dealer as required by SEC

regulations.

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\3\ See ``Waiver of Burdensome Disclosures for Certain

Securities Transactions for Bank Customers'', FDIC Financial

Institutions Letter 29-95 (April 7, 1995).

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Notification by Agreement; Alternative Forms and Times of Notification.

(Section 344.6)


 

In addition to the standard notification requirements in

Sec. 344.5, the final regulation, in Sec. 344.6, generally authorizes a

Bank, in cases in which it does not exercise investment discretion, to

enter into a written agreement with its customer for an alternative

arrangement as to the time and content of written notification. Section

344.6 also sets forth alternative forms and times of notification 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 FDIC has added language

to the final regulation amending the requirements for certain cash

management sweep accounts set forth in Sec. 344.6(d) in order to ensure

that banks are aware that if they retain custody of securities that are

the subject of a hold-in-custody repurchase agreement, they are subject

to certain Treasury Department regulations governing confirmation

requirements with respect to government securities transactions.

The FDIC received one comment regarding the financial disclosure

required for collective investment fund accounts in Sec. 344.6(e)

suggesting that such disclosure be required to be made only by

independent auditors in accordance with generally accepted auditing

standards. The final rule allows either independent public accountants

or internal auditors responsible only to the board of directors of the

bank to prepare the financial information. The FDIC notes that

Sec. 344.6(e) is identical to language used in the OCC's rule and the

FRB's proposal. Moreover, the potential benefits resulting from the

mandated use of external auditors does not outweigh the costs

associated with


 

[[Page 9918]]


 

imposing such a regulatory burden upon the industry. Banks should be

allowed the flexibility to effect the required disclosure through the

use of external auditors as suggested by the commenter, or internal

auditors that are responsible to only the board of directors. The final

regulation adopts the language of the proposal.


 

Settlement of Securities Transactions. (Section 344.7)


 

The proposal provided for a settlement period of T+3 and requires

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

receipt. These requirements are being adopted in the final rule without

change. The requirements are identical to those of the SEC and the

other federal banking regulatory agencies and were generally supported

by the commenters. One commenter suggested cross-referencing the rules

of the Securities and Exchange Commission governing the settlement

period for securities transactions into part 344 so that regulatory

amendments by the SEC would automatically amend the FDIC's regulations.

The FDIC has determined not to incorporate citations to the SEC's

settlement regulations. Rather, the FDIC will review any regulatory

amendments by the SEC on a case-by-case basis to determine whether such

changes would be appropriate for Banks. The FDIC received no other

comments on this section, and therefore it is being adopted as

proposed.


 

Securities Trading Policies and Procedures. (Section 344.8)


 

Section 344.8 of the final regulation requires Banks to establish

written policies and procedures assigning supervisory responsibility

for personnel engaged in different aspects of the trading process.

Specifically, this section addresses orders and execution of trades,

the equitable allocation of securities and prices for accounts and the

crossing of buy and sell orders. In addition, Sec. 344.8(a)(2) requires

the separation of order and execution functions from the traditional

back office clearing functions in order to ensure that Banks maintain

adequate internal controls for securities trading. The FDIC received no

comments on this section, and therefore it is being adopted as

proposed.


 

Personal Securities Trading Reported by Bank Officers and Employees.

(Section 344.9)


 

The proposal relocated to Sec. 344.9 without substantive change the

personal trading reporting requirements for certain officers and

employees. The notice of proposed rulemaking also included a new

requirement that certain directors report their transactions in

securities. As proposed, Sec. 344.9(a) would have required Bank

directors, under certain limited and specified circumstances, to report

a limited number of transactions in securities. The OCC's rule and the

FRB's proposal do not specifically address the issue of director

reporting requirements in this area.

As proposed, the reporting requirements of Sec. 344.9 would have

applied equally to directors, officers, or employees who have access to

information in such a fashion so as to enable the person to gain an

improper advantage or abuse the information obtained. The reporting

requirement would not extend to individuals who routinely obtain such

information but are never in a position to abuse it.

The two comments received on the provision indicated uncertainty as

to the scope and application of this provision of the proposed rule.

One commenter indicated the rule could be interpreted more broadly than

anticipated, and another comment indicated a reading more narrow than

intended. Given the different interpretations of the proposed changes,

it is clear that additional clarification is required if the FDIC were

to retain the requirement. Upon review, the FDIC believes that

additional revision to the proposed regulatory language would be

necessary to accomplish the FDIC's intent. The FDIC recognizes that

implementing the proposed amendatory language could result in reports

being submitted by individual directors who are not intended to be

subject to the reporting requirements. Other directors may innocently

fail to report who are intended to be subject to the rule. Accordingly,

in order to not unnecessarily increase the burden of regulatory

reporting requirements, and in a continuing effort to maintain

uniformity in the reporting requirements imposed by the federal banking

regulators, the final rule does not contain specific reporting

requirements for directors. The FDIC will, in consultation with the

other federal banking regulators, study the issue of employee, officer,

and director disclosures further and address the issue in a future

rulemaking as appropriate. Any changes to the reporting requirements to

be imposed upon bank directors, if proposed in the future, will be

implemented following appropriate notice and comment.


 

Waivers. (Section 344.10)


 

This section maintains the current provision that enables the FDIC

to waive any provision of part 344 for good cause. No comments were

received on this provision and it is being adopted as proposed.


 

Effective Date


 

This regulation will become effective on April 1, 1997 in

accordance with the requirements of the Paper Work Reduction and

Regulatory Improvement Act (PWRRIA). Section 302(b) requires that the

effectiveness of new rules be delayed until the beginning of the

following calendar quarter in order to give depository institutions

adequate time to adjust to new requirements, such as in this instance,

the T+3 settlement requirement. Nevertheless, as permitted by Section

302 of the PWRRIA, 12 U.S.C. 4802, banks may comply with the final rule

before the effective date. In particular, the FDIC would not object to

a Bank immediately taking advantage of Sec. 344.2(a)(5) of the final

rule that exempts transactions in which a bank receives remuneration

from a registered broker dealer so long as the broker/dealer is fully

disclosed to the bank customer and the bank customer has a direct

contractual agreement with the broker/dealer may be utilized.


 

Regulatory Flexibility Act


 

Under section 605(b) of the Regulatory Flexibility Act (RFA) (5

U.S.C. 605(b)), the final regulatory flexibility analysis otherwise

required under section 604 of the RFA (5 U.S.C. 604) 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 in the Federal Register

along with its general notice of proposed rulemaking or at the time of

publication of the final rule.

The Board of Directors has concluded after reviewing the final

regulation that it will not have a significant economic impact on a

substantial number of small institutions. The Board of Directors

therefore hereby certifies pursuant to section 605 of the RFA that the

regulation will not have a significant economic impact on a substantial

number of small entities within the meaning of the RFA. The FDIC

anticipates that the final rule will result in a net benefit to all

banks regardless of size due to the clarification provided by the rule.

Small banks, in particular should be benefited by these changes. Most

banks with total assets of under


 

[[Page 9919]]


 

$100 million are not engaged 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 adopted.


 

Small Business Regulatory Enforcement Fairness Act


 

The Small Business Regulatory Enforcement Fairness Act of 1996

(SBREFA) (Public Law 104-121) provides generally for agencies to report

rules to Congress and for Congress to review rules. The reporting

requirement is triggered when agencies issue a final rule as defined by

the Administrative Procedure Act (APA) at 5 U.S.C. 551. Because the

FDIC is issuing a final rule as defined by the APA, the FDIC will file

the reports required by SBREFA.

The Office of Management and Budget (OMB) has determined that this

final revision to part 344 does not constitute a ``major rule'' as

defined by SBREFA.


 

Paperwork Reduction Act


 

The collection of information contained in this final rule has been

reviewed and approved by the OMB under control number 3064-0028

pursuant to section 3504(h) of the Paperwork Reduction Act of 1980 (44

U.S.C. 3501 et seq.). Comments on the collections of information should

be directed to the OMB, Paperwork Reduction Project (3064-0028)

Washington, D.C. 20503 Attention: Desk officer for the Federal Deposit

Insurance Corporation, with copies of such comments to be sent to

Steven F. Hanft, Office of the Executive Secretary, room F-400, Federal

Deposit Insurance Corporation, 550 17th Street, NW, Washington, D.C.

20429.

The collection of information requirements in this final rule are

found in 12 CFR 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 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.


 

List of Subjects in 12 CFR Part 344


 

Banks, banking, Reporting and recordkeeping requirements,

Securities.

For the reasons set forth above, the FDIC hereby revises 12 CFR

part 344 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 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 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


 

[[Page 9920]]


 

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 (26 U.S.C.).

(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 effects or participates in effecting the purchase or sale of

securities, but does not include a broker, dealer, bank acting as a

broker or a dealer, issuer of the securities that are the subject of

the transaction or a person or account having a direct, contractual

agreement with a fully disclosed broker/dealer.

(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.

(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 26

U.S.C. 103(c)(2)) the interest on which is excludable from gross income

under 26 U.S.C. 103(a)(1) if, by reason of the application of paragraph

(4) or (6) of 26 U.S.C. 103(c) (determined as if paragraphs (4)(A), (5)

and (7) were not included in 26 U.S.C. 103(c), paragraph (1) of 26

U.S.C. 103(c) does not apply to such security.

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

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 note, stock, treasury stock, bond,

debenture, certificate of interest or participation in any profit-

sharing agreement or in any oil, gas, or other mineral royalty or

lease, any collateral-trust certificate, preorganization certificate or

subscription, transferable share, investment contract, voting-trust

certificate, and any put, call, straddle, option, or privilege on any

security or group or index of securities (including any interest

therein or based on the value thereof), or, in general, any instrument

commonly known as a ``security''; or any certificate of interest or

participation in, temporary or interim certificate for, receipt for, or

warrant 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 indebtedness incurred

in the ordinary course of business;

(4) Currency;

(5) Any note, draft, bill of exchange, or bankers acceptance which

has a maturity at the time of issuance of not exceeding nine months,

exclusive of days of grace, or any renewal thereof the maturity of

which is likewise limited;

(6) Units of a collective investment fund;

(7) Interests in a variable amount (master) note of a borrower of

prime credit; or

(8) U.S. Savings Bonds.


 

[[Page 9921]]


 

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 canceled), 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 canceled;

(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 or send, 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 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,


 

[[Page 9922]]


 

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

(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 statement, in the same form as required under

paragraph (f) of this section, 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. Notwithstanding the provisions of this paragraph (d), banks

that retain custody of government securities that are the subject of a

hold-in-custody repurchase agreement are subject to the requirements of

17 CFR 403.5(d).

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

annually give or send 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

(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.


 

[[Page 9923]]


 

(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;

(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;

(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 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) Exempt transactions. Excluded from this reporting requirement

are:

(1) Transactions for the benefit of the officer or employee over

which the officer or employee has no direct or indirect influence or

control;

(2) Transactions in registered investment company shares;

(3) Transactions in government securities; and

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

during the calendar quarter.

(c) 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 officers and employees may fulfill their reporting

requirement under paragraph (a) 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.


 

By Order of the Board of Directors.


 

Dated at Washington, D.C., this 25th day of February, 1997.


 

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Deputy Executive Secretary.

[FR Doc. 97-5425 Filed 3-4-97; 8:45 am]

BILLING CODE 6714-01-P

Last Updated: March 24, 2024