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2000 - Rules and Regulations
{{4-30-97 p.3223}}
PART 368GOVERNMENT SECURITIES SALES PRACTICES
Sec. 368.1
Scope.
368.2
Definitions.
368.3
Business conduct.
368.4
Recommendations to customers.
368.5
Customer information.
368.100
Obligations concerning institutional customers.
Authority: 15 U.S.C.
78o--5.
SOURCE: The provisions of this Part 368 appear at 62 Fed. Reg.
13287, March 19, 1997, effective July 1, 1997, except as otherwise
noted.
§ 368.1 Scope.
This part is applicable to state nonmember banks and insured state
branches of foreign banks that have filed notice as, or are required to
file notice as, government securities brokers or dealers pursuant to
section 15C of the Securities Exchange Act (15 U.S.C. 78o--5) and
Department of the Treasury rules under section 15C
(17 CFR 400.1(d) and
part 401).
[Codified to 12 C.F.R.
§ 368.1]
§ 368.2 Definitions.
(a) Bank that is a government securities broker or dealer
means a state nonmember bank or an insured state branch of a
foreign bank that has filed notice, or is required to file notice, as a
government securities broker or dealer pursuant to section 15C of the
Securities Exchange Act (15 U.S.C. 78o--5) and Department of the
Treasury rules under section 15C (17 CFR 400.1(d) and part 401).
(b) Customer does not include a broker or dealer or a
government securities broker or dealer.
(c) Government security has the same meaning as this
term has in section 3(a)(42) of the Securities Exchange Act of 1934
(15 U.S.C. 78c(a)(42)).
(d) Non-institutional customer means any customer other
than:
(1) A bank, savings association, insurance company, or registered
investment company;
(2) An investment adviser registered under section 203 of the
Investment Advisers Act of 1940 (15
U.S.C. 80b--3); or
(3) Any entity (whether a natural person, corporation,
partnership, trust, or otherwise) with total assets of at least $50
million.
[Codified to 12 C.F.R.
§ 368.2]
§ 368.3 Business conduct.
A bank that is a government securities broker or dealer shall
observe high standards of commercial honor and just and equitable
principles of trade in the conduct of its business as a government
securities broker or dealer.
[Codified to 12 C.F.R.
§ 368.3]
§ 368.4 Recommendations to customers.
In recommending to a customer the purchase, sale or exchange of a
government security, a bank that is a government securities broker or
dealer shall have reasonable grounds for believing that the
recommendation is suitable for the customer upon the basis of the
facts, if any, disclosed by the customer as to the customer's other
security holdings and as to the customer's financial situation and
needs.
[Codified to 12 C.F.R. § 368.4]
{{4-30-97 p.3224}}
§ 368.5 Customer information.
Prior to the execution of a transaction recommended to a
non-institutional customer, a bank that is a government securities
broker or dealer shall make reasonable efforts to obtain information
concerning:
(a) The customer's financial status;
(b) The customer's tax status;
(c) The customer's investment objectives; and
(d) Such other information used or considered to be reasonable by
such bank in making recommendations to the customer.
[Codified to 12 C.F.R.
§ 368.5]
§ 368.100 Obligations concerning institutional customers.
(a) As a result of broadened authority provided by the Government
Securities Act Amendments of 1993 (15
U.S.C. 78o--3 and
78o--5), the FDIC is adopting
sales practice rules for the government securities market, a market
with a particularly broad institutional component. Accordingly, the
FDIC believes it is appropriate to provide further guidance to banks on
their suitability obligations when making recommendations to
institutional customers.
(b) The FDIC's suitability rule (§ 368.4) is fundamental to fair
dealing and is intended to promote ethical sales practices and high
standards of professional conduct. Banks' responsibilities include
having a reasonable basis for recommending a particular security or
strategy, as well as having reasonable grounds for believing the
recommendation is suitable for the customer to whom it is made. Banks
are expected to meet the same high standards of competence,
professionalism, and good faith regardless of the financial
circumstances of the customer.
(c) In recommending to a customer the purchase, sale, or exchange
of any government security, the bank shall have reasonable grounds for
believing that the recommendation is suitable for the customer upon the
basis of the facts, if any, disclosed by the customer as to the
customer's other security holdings and financial situation and needs.
(d) The interpretation in this section concerns only the manner in
which a bank determines that a recommendation is suitable for a
particular institutional customer. The manner in which a bank fulfills
this suitability obligation will vary, depending on the nature of the
customer and the specific transaction. Accordingly, the interpretation
in this section deals only with guidance regarding how a bank may
fulfill customer-specific suitability obligations under
§ 368.4. 1
(e) While it is difficult to define in advance the scope of a
bank's suitability obligation with respect to a specific institutional
customer transaction recommended by a bank, the FDIC has identified
certain factors that may be relevant when considering compliance with
§ 368.4. These factors are not intended to be requirements or the
only factors to be considered but are offered merely as guidance in
determining the scope of a bank's suitability obligations.
(f) The two most important considerations in determining the scope
of a bank's suitability obligations in making recommendations to an
institutional customer are the customer's capability to evaluate
investment risk independently and the extent to which the customer is
exercising independent judgement in evaluating a bank's recommendation.
A bank must determine, based on the information available to it, the
customer's capability to evaluate investment risk. In some cases, the
bank may conclude that the customer is not capable of making
independent investment decisions in general. In other cases, the
institutional customer may have general capability, but may not be able
to understand a particular type of instrument or its risk. This is more
likely to arise with relatively new
{{10-31-97 p.3225}}types of instruments, or those
with significantly different risk or volatility characteristics than
other investments generally made by the institution. If a customer is
either generally not capable of evaluating investment risk or lacks
sufficient capability to evaluate the particular product, the scope of
a bank's customer-specific obligations under § 368.4 would not be
diminished by the fact that the bank was dealing with an institutional
customer. On the other hand, the fact that a customer initially needed
help understanding a potential investment need not necessarily imply
that the customer did not ultimately develop an understanding and make
an independent investment decision.
(g) A bank may conclude that a customer is exercising independent
judgement if the customer's investment decision will be based on its
own independent assessment of the opportunities and risks, presented by
a potential investment, market factors and other investment
considerations. Where the bank has reasonable grounds for concluding
that the institutional customer is making independent investment
decisions and is capable of independently evaluating investment risk,
then a bank's obligations under § 368.4 for a particular customer are
fulfilled. 2
Where a customer has delegated decision-making authority to an agent,
such as an investment advisor or a bank trust department, the
interpretation in this section shall be applied to the agent.
(h) A determination of capability to evaluate investment risk
independently will depend on an examination of the customer's
capability to make its own investment decisions, including the
resources available to the customer to make informed decisions.
Relevant considerations could include:
(1) The use of one or more consultants, investment advisers, or
bank trust departments;
(2) The general level of experience of the institutional customer
in financial markets and specific experience with the type of
instruments under consideration;
(3) The customer's ability to understand the economic features of
the security involved;
(4) The customer's ability to independently evaluate how market
developments would affect the security; and
(5) The complexity of the security or securities involved.
(i) A determination that a customer is making independent
investment decisions will depend on the nature of the relationship that
exists between the bank and the customer. Relevant considerations could
include:
(1) Any written or oral understanding that exists between the
bank and the customer regarding the nature of the relationship between
the bank and the customer and the services to be rendered by the bank;
(2) The presence or absence of a pattern of acceptance of the
bank's recommendations;
(3) The use by the customer of ideas, suggestions, market views
and information obtained from other government securities brokers or
dealers or market professionals, particularly those relating to the
same type of securities; and
(4) The extent to which the bank has received from the customer
current comprehensive portfolio information in connection with
discussing recommended transactions or has not been provided important
information regarding its portfolio or investment objectives.
(j) Banks are reminded that these factors are merely guidelines
that will be utilized to determine whether a bank has fulfilled its
suitability obligation with respect to a specific institutional
customer transaction and that the inclusion or absence of any of these
factors is not dispositive of the determination of suitability. Such a
determination can only be made on a case-by-case basis taking into
consideration all the facts and circumstances of a particular
bank/customer relationship, assessed in the context of a particular
transaction.
(k) For purposes of the interpretation in this section, an
institutional customer shall be any entity other than a natural person.
In determining the applicability of the interpretation in this section
to an institutional customer, the FDIC will consider the dollar value
of
{{10-31-97 p.3226}}the securities that the
institutional customer has in its portfolio and/or under management.
While the interpretation in this section is potentially applicable to
any institutional customer, the guidance contained in this section is
more appropriately applied to an institutional customer with at least
$10 million invested in securities in the aggregate in its portfolio
and/or under management.
[Codified to 12 C.F.R. § 368.100]
[The page following this is 3235.]
1The interpretation in this section does not address the
obligation related to suitability that requires that a bank have
"* * * a reasonable basis' to believe that the recommendation
could be suitable for at least some customers." In the Matter
of the Application of F.J. Kaufman and Company of Virginia and
Frederick I. Kaufman, Jr., 50 SEC 164 (1989). Go Back to Text
2See footnote 1 in paragraph (d) of this section. Go Back to Text
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