12 CFR 208.111 - Obligations concerning institutional customers.

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§ 208.111 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 Board is adopting sales practice rules for the government securities market, a market with a particularly broad institutional component. Accordingly, the Board believes it is appropriate to provide further guidance to banks on their suitability obligations when making recommendations to institutional customers.

(b) The Board's Suitability Rule, § 208.37(d), 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 § 208.37(d). 8

8 The 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 J. Kaufman, Jr., 50 SEC 164 (1989).

(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 Board has identified certain factors that may be relevant when considering compliance with § 208.37(d). 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 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 § 208.37(d) 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 § 208.25(d) for a particular customer are fulfilled. 9 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.

9See footnote 8 in paragraph (d) of this section.

(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 Board will consider the dollar value of 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.

[Reg. H, 63 FR 37658, July 13, 1998. Redesignated at 65 FR 14814, Mar. 20, 2000. Redesignated further at 65 FR 75841, Dec. 4, 2000. Redesignated further at 75 FR 44688, July 28, 2010; 75 FR 44692, July 28, 2010; 78 FR 62284, Oct. 11, 2013; 80 FR 70672, Nov. 16, 2015]

This is a list of United States Code sections, Statutes at Large, Public Laws, and Presidential Documents, which provide rulemaking authority for this CFR Part.

This list is taken from the Parallel Table of Authorities and Rules provided by GPO [Government Printing Office].

It is not guaranteed to be accurate or up-to-date, though we do refresh the database weekly. More limitations on accuracy are described at the GPO site.

United States Code
U.S. Code: Title 12 - BANKS AND BANKING

§ 24 - Corporate powers of associations

§ 36 - Branch banks

§ 92a - Trust powers

§ 93a - Authority to prescribe rules and regulations

§ 248 - Enumerated powers

§ 321 - Application for membership

§ 322 - Determination on application

§ 323 - Stock in Federal reserve banks; method of payment

§ 324 - Laws applicable on becoming members

§ 325 - Examinations

§ 326 - Acceptance of examinations and reports by State authorities; special examinations

§ 327 - Surrender of stock and cancellation of memberships

§ 328 - Withdrawals from membership

§ 329 - Capital stock required as condition precedent to membership

§ 329a - Omitted

§ 330 - Laws applicable on becoming members; discounts for State banks

§ 331 - Certifying checks on State banks admitted as members

§ 332 - Depositaries of public money; financial agents; security required

§ 333 - Mutual savings banks; application and admission to membership in Federal Reserve System

§ 334 - Reports from affiliates; penalty for failure to furnish

§ 335 - Dealing in investment securities; limitations and conditions

§ 336 - Certificates of stock; representation of stock of other corporations

§ 337 - Repealed. Pub. L. 89–485, § 13(g), July 1, 1966, 80 Stat. 243

§ 338 - Examination of affiliates; forfeiture of membership on refusal of affiliate to give information or pay expense

§ 338a - Investments to promote public welfare and community development; limitation on investments

§ 371d - Investment in bank premises or stock of corporation holding premises

§ 461 - Reserve requirements

§ 481 - Appointment of examiners; examination of member banks, State banks, and trust companies; reports

§ 482 - Employees of Office of Comptroller of the Currency; appointment; compensation and benefits

§ 483 - Special examination of member banks; information of condition furnished to Board of Governors of the Federal Reserve System

§ 484 - Limitation on visitorial powers

§ 485 - Examination of Federal reserve banks

§ 486 - Waiver of requirements as to reports from or examinations of affiliates

§ 601 - Authorization; conditions and regulations

§ 611 - Formation authorized; fiscal agents; depositaries in insular possessions

§ 1814 - Insured depository institutions

§ 1816 - Factors to be considered

§ 1818 - Termination of status as insured depository institution

§ 1820 - Administration of Corporation

§ 1823 - Corporation monies

§ 1828 - Regulations governing insured depository institutions

§ 1831 - Separability of certain provisions of this chapter

§ 1831o - Prompt corrective action

12 U.S. Code § 1831p–1 - Standards for safety and soundness

12 U.S. Code § 1831r–1 - Notice of branch closure

§ 1831w - Safety and soundness firewalls applicable to financial subsidiaries of banks

§ 1831x - Insurance customer protections

§ 1833 - Repealed. Pub. L. 104–208, div. A, title II, § 2224(b), Sept. 30, 1996, 110 Stat. 3009–415

§ 1835a - Prohibition against deposit production offices

§ 1882 - Security measures

§ 2901 - Congressional findings and statement of purpose

§ 2902 - Definitions

§ 2903 - Financial institutions; evaluation

§ 2904 - Report to Congress

§ 2905 - Regulations

§ 2906 - Written evaluations

§ 2907 - Operation of branch facilities by minorities and women

§ 3105 - Authority of Federal Reserve System

§ 3310 - Establishment of Appraisal Subcommittee

§ 3331 - Purpose

§ 3332 - Functions of Appraisal Subcommittee

§ 3333 - Chairperson of Appraisal Subcommittee; term of Chairperson; meetings

§ 3334 - Officers and staff

§ 3335 - Powers of Appraisal Subcommittee

§ 3336 - Procedures for establishing appraisal standards and requiring use of certified and licensed appraisers

§ 3337 - Startup funding

§ 3338 - Roster of State certified or licensed appraisers; authority to collect and transmit fees

§ 3339 - Functions of Federal financial institutions regulatory agencies relating to appraisal standards

§ 3340 - Time for proposal and adoption of standards

§ 3341 - Functions of Federal financial institutions regulatory agencies relating to appraiser qualifications

§ 3342 - Transactions requiring services of State certified appraiser

§ 3343 - Transactions requiring services of State licensed appraiser

§ 3344 - Time for proposal and adoption of rules

§ 3345 - Certification and licensing requirements

§ 3346 - Establishment of State appraiser certifying and licensing agencies

§ 3347 - Monitoring of State appraiser certifying and licensing agencies

§ 3348 - Recognition of State certified and licensed appraisers for purposes of this chapter

§ 3349 - Violations in obtaining and performing appraisals in federally related transactions

§ 3350 - Definitions

§ 3351 - Miscellaneous provisions

§ 3905 - Accounting for fees on international loans

§ 3906 - Collection and disclosure of international lending data

§ 3907 - Capital adequacy

§ 3908 - Foreign loan evaluations

§ 3909 - General authorities

§ 5371 - Leverage and risk-based capital requirements

U.S. Code: Title 15 - COMMERCE AND TRADE
U.S. Code: Title 31 - MONEY AND FINANCE

Title 12 published on 11-May-2018 11:44

The following are ALL rules, proposed rules, and notices (chronologically) published in the Federal Register relating to 12 CFR Part 208 after this date.

  • 2018-05-25; vol. 83 # 102 - Friday, May 25, 2018
    1. 83 FR 24233 - Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for U.S. Global Systemically Important Bank Holding Companies and Certain of Their Subsidiary Insured Depository Institutions; Total Loss-Absorbing Capacity Requirements for U.S. Global Systemically Important Bank Holding Companies
      GPO FDSys XML | Text
      DEPARTMENT OF THE TREASURY, FEDERAL RESERVE SYSTEM, Office of the Comptroller of the Currency
      Notice; extension of comment period.
      Comments must be received by June 25, 2018.
      12 CFR Part 6