Electronic Confirms For Banks/Depository Institutions
October 27, 1997
Mr. Gren Blackall
Senior Vice President and Chief Information Officer
Bremer Financial Services, Inc.
445 Minnesota Street
St. Paul, Minnesota 55101-2107
Dear Mr. Blackall:
This is in response to your letter of May 19, 1997, concerning the written hold-in-custody confirmation requirement in the regulations, promulgated by the Department of the Treasury (“Department”), implementing the Government Securities Act of 1986, as amended (“GSA”)./1/ This requirement applies to financial institutions that retain custody of government securities that are the subject of repurchase agreement transactions (“hold-in-custody repos”) between the financial institution and a counterparty. Specifically, you ask if Bremer Financial Services, Inc. (“the Bank”) may use electronic mail to deliver daily confirmations sent to overnight hold-in-custody repo customers. To provide further guidance to financial institutions, this letter will also address electronic storage of records and electronic delivery/storage for custodial depository institutions.
Based on your letter and subsequent conversations with you, we understand the facts of your request to be as follows. The Bank is a subsidiary of Bremer Financial Corporation, a $3 billion holding company with 14 First American Bank National Association financial institutions located in Minnesota, North Dakota, and Wisconsin. The Bank provides management and support services for Bremer Financial Corporation. The financial institutions are supervised by the Office of the Comptroller of the Currency.
Under your proposal, customers of the Bank will approve one of three methods for receiving confirmations -- postal mail, facsimile (“fax”), or electronic mail (“e-mail”). If e-mail is the method selected by the customer, the Bank will require that the e-mail account be owned by that customer (i.e., company or individual) and that the customer will check this e-mail account as part of its regular business day. Customers will not have the ability to waive the right to receive a confirmation. You state that all confirmations, regardless of the method of receipt selected by the customer, will contain all of the information as required by the GSA regulations as specified under 17 CFR § 403.5(d)(2)(i). Additionally, all confirmations, regardless of the method of receipt selected by the customer, will be sent out automatically before the start of the business day following the day of the transaction.
In the event that an e-mail is unsuccessfully delivered, an alternative delivery method (i.e., postal mail or fax) would be used. You also state that the unsuccessful delivery of an e-mail can be determined by the Bank by means of a rejected message sent from the Internet and that confirmations sent to a non-existing address are returned within minutes. The Bank will retain historical records of all confirmations for at least three years. If a customer revokes the initial decision to receive a confirmation by e-mail, the confirmation will be converted to the fax or postal mail method.
You also represent that providing daily confirmations electronically will reduce costs for both the Bank and its customers; the brokerage industry is moving towards this medium; and this method of delivery is requested by the Bank's customers because it requires less cumbersome paper and processing, while enabling them to “download” the confirmation into other electronic systems, thereby avoiding the need to re-enter the information. In addition, you state that Section 2 (9) of the Securities Act of 1933 specifies a “written” confirmation to include “printed, lithographed, or any means of graphic communication,” and that it is your interpretation that an e-mail message is a form of “graphic communication.”
Section 403.5(d)(1)(ii) of the GSA regulations states that a financial institution that retains custody of government securities that are the subject of a hold-in-custody repo transaction between the financial institution and the counterparty shall confirm in writing the specific securities that are the subject of the transaction. The confirmation must be issued at the end of the day (i.e., delivered no later than the opening of the next business day) in which the transaction was initiated and at the end of any other day during which other securities are substituted if the substitution results in a change to issuer, maturity date, par amount, or coupon rate specified in the previous confirmation. It should be noted that for sweep hold-in-custody repo transactions, a confirmation must be issued each day since sweep repos give rise to a new repo transaction daily. The Department issued an interpretive letter in July 1992 permitting the issuance of fax confirmations as an acceptable means of issuing written hold-in-custody repo confirmations under the GSA rules./2/
Electronic Delivery of Information
The subjects of electronic transmission of information and electronic storage of information have recently been addressed by the appropriate regulatory agencies for banks (“ARAs”) and by the Securities and Exchange Commission (“SEC”) for broker-dealers subject to their rules./3/ While each ARA has addressed these issues separately, and somewhat differently, each ARA permits the electronic transmission of confirmations for securities transactions and other types of written notifications.
Specifically, the Office of the Comptroller of the Currency (“OCC”) states in its final rule amendments to 12 CFR Part 12 (the Interpretations section at § 12.102)/4/: “(a) In appropriate situations, a national bank may satisfy the 'written' notification requirement under §§ 12.4 and 12.5 through electronic communications. Where a customer has a facsimile machine, a national bank may fulfill its notification delivery requirement by sending the notification by facsimile transmission. Similarly, a bank may satisfy the notification delivery requirement by other electronic communications when: (1) The parties agree to use electronic instead of hard-copy notifications; (2) The parties have the ability to print or download the notification; (3) The recipient affirms or rejects the trade through electronic notification; (4) The system cannot automatically delete the electronic notification; and (5) Both parties have the capacity to receive electronic messages. (b) The OCC would consider the permissibility of other situations using electronic notifications on a case-by-case basis.”
As previously noted, in addition to the final rule amendments issued by the OCC, the Board of Governors of the Federal Reserve System (“the Board”) and the Federal Deposit Insurance Corporation (““FDIC”) have also issued final rules addressing, among other subjects, the use of electronic media for the delivery of confirmations and storage of information. These final rules provide standards or guidelines that banks subject to their supervision must follow./5/ In general, the Department views the standards established by the ARAs for transmitting electronic confirmations, including via e-mail, as appropriate for banks that are subject to the hold-in-custody confirmation requirement of the GSA rules.
Accordingly, pursuant to 15 U.S.C. 78o-5(b), we interpret the provisions of 17 CFR 403.5(d)(1)(ii) to mean that financial institutions may use an electronic medium, such as e-mail, to satisfy the requirement of issuing confirmations to their customers for hold-in-custody repo transactions, provided the financial institutions comply with the conditions specified in the applicable provisions at 12 CFR concerning electronic confirmations and issued guidelines related thereto. In addition, the Department views certain of the ARAs' standards as particularly important for all financial institutions that intend to issue electronic confirmations for hold-in-custody repos involving government securities. Accordingly, financial institutions wishing to use electronic media for delivering hold-in-custody repo confirmations to customers must also: (1) obtain the customer's agreement prior to delivering confirmations electronically; and (2) be prepared to provide paper copies of confirmations should the customer request them -- even if the customer initially consented to the receipt of electronic confirmations.
It is also important to note that an unsuccessful electronic transmission of a confirmation would not relieve the financial institution of its obligation to deliver the required confirmation to the customer. Delivery of the confirmation, which must be issued by the end of the transaction day (i.e., prior to opening the next business day), would still need to be accomplished by other appropriate means (i.e., postal mail or fax). This treatment is consistent with the Department's July 1992 interpretation on confirmations issued by fax./6/
Electronic Storage of Records
The Department also recognizes that evolving technologies will continue to provide economic and time saving advantages by expanding the scope of a financial institution's recordkeeping options. In addressing the medium of storage, the ARAs have established virtually identical standards for making and maintaining electronic records. Under the OCC's recently adopted final rule: “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. Record maintenance may include the use of automated or electronic records provided the records are easily retrievable, readily available for inspection, and capable of being reproduced in a hard copy.”/7/ The Department believes these standards are appropriate for financial institutions that are subject to the GSA recordkeeping rules.
Under § 404.4 of the GSA rules,/8/ which addresses records to be maintained and preserved by financial institutions that have filed, or are required to file, notice as government securities broker-dealers, compliance by such financial institutions with the recordkeeping requirements issued by their ARAs under 12 CFR,/9/ together with certain additional specified GSA provisions, constitutes compliance with the GSA recordkeeping regulations. Accordingly, compliance by such entities with the conditions specified in the applicable provisions at 12 CFR concerning electronic storage and issued guidelines related thereto (and other specified GSA provisions), constitutes compliance with the GSA recordkeeping rules.
Electronic Delivery/Storage for Custodial Depository Institutions
Part 450 of the GSA rules/10/ sets out the regulations applicable to depository institutions that hold government securities as custodians for a customer. These rules essentially defer to the ARAs' rules with respect to the manner of issuing confirmations and safekeeping receipts.
Section 450.4(b)(1) requires a depository institution that is a custodian of government securities to issue a confirmation or a safekeeping receipt for each security held for a customer except securities that are the subject of hold-in-custody repos (which are already subject to the hold-in-custody repo confirmation requirements of § 403.5(d)). The provision specifies that ““the confirmation may be supplied to the customer in any manner that complies with applicable Federal banking regulations.” Depository institutions subject to this Part may therefore transmit confirmations and safekeeping receipts electronically provided they: (1) adhere to the conditions specified in the applicable provisions at 12 CFR regarding electronic confirmations and issued guidelines related thereto; and (2) follow the same standards viewed by the Department as particularly important for financial institutions conducting hold-in-custody repos (as specified earlier in this letter under the Electronic Delivery of Information section, e.g., obtaining the customer's agreement).
Records required under § 450.4(c) may be maintained electronically, provided depository institutions follow the conditions applicable to financial institutions set forth in this letter under the Electronic Storage of Records section.
This interpretation, with respect to hold-in-custody repo confirmations transmitted by e-mail, is premised upon the specific facts and representations as you have described them, without necessarily agreeing or disagreeing with your legal conclusions. Any change in the facts or circumstances from what you have represented could lead to a change to this interpretation.
We have consulted with the staffs of the OCC, the Board, and the FDIC in considering the issues in this letter. This letter is being sent to each of these agencies as guidance. A similar interpretive letter that applies to registered government securities broker-dealers is also being sent to the SEC, the New York Stock Exchange, and the National Association of Securities Dealers Regulation, Inc.
Pursuant to 17 CFR 400.2(c)(7)(i), this letter and your incoming correspondence will be made immediately available to the public.
Richard L. Gregg
/1/ 15 U.S.C. 78o-5. See 17 CFR Chapter IV.
/2/ See letter from Richard L. Gregg, Commissioner, Bureau of the Public Debt, Department of the Treasury, to Mr. Richard S. Allen, Senior Vice President, First Interstate Bank of Oregon, N.A. (July 2, 1992).
/3/ See final rules issued by the respective ARAs: 12 CFR Part 12 for banks supervised by the Office of the Comptroller of the Currency, 61 FR 63958 (December 2, 1996); 12 CFR Part 208 for banks supervised by the Board of Governors of the Federal Reserve System, 62 FR 9909 (March 5, 1997); and 12 CFR Part 344 for banks supervised by the Federal Deposit Insurance Corporation, 62 FR 9915 (March 5, 1997). Also, see releases issued by the Securities and Exchange Commission: Securities Act Release No. 33-7233 (October 6, 1995), 60 FR 53458 (October 13, 1995); Securities Act Release No. 33-7288 (May 9, 1996), 61 FR 24644 (May 15, 1996); and Securities Exchange Act Release No. 34-38245 (February 5, 1997), 62 FR 6469 (February 12, 1997).
/4/ See final rule issued by the Office of the Comptroller of the Currency, 61 FR 63969 (December 2, 1996). NOTE: 12 CFR §§ 12.4 and 12.5 set forth requirements for national banks effecting securities transactions for customers to provide certain notifications of transactions.
/5/ See final rules issued by the Board of Governors of the Federal Reserve System, 61 FR 9911 (March 5, 1997) and the Federal Deposit Insurance Corporation, 62 FR 9919 (March 5, 1997).
/6/ See supra note 2.
/7/ See final rule issued by the Office of the Comptroller of the Currency, 61 FR 63966 (December 2, 1996).
/8/ 17 CFR Section 404.4 (Records to be Made and Preserved by Government Securities Brokers and Dealers that are Financial Institutions).
/9/ 12 CFR Part 12 for banks supervised by the Office of the Comptroller of the Currency; 12 CFR Part 208 for banks supervised by the Board of Governors of the Federal Reserve System; and 12 CFR Part 344 for banks supervised by the Federal Deposit Insurance Corporation.
/10/ 17 CFR Part 450 (Custodial Holdings of Government Securities by Depository Institutions). See § 450.1(a) for a full statement of the applicability of these regulations.