BC - 182
BANKING ISSUANCE
Comptroller of the Currency
Administrator of National Banks
Type:  Banking Circular
Subject:  Issuance of "Due Bills" to Customers Purchasing  Securities

TO:  Chief Executive Officers of all National Banks, Deputy Comptrollers,
     District Administrators and all Examining Personnel

SUMMARY

The purpose of this banking circular is to caution national banks as to
the implications under the federal securities and national banking laws of
certain practices involving "due bills" in securities transactions, and to
set forth guidelines concerning the proper use of "due bills." In
particular, national banks are cautioned that they must advise their
securities customers of all material facts in connection with the issuance
of "due bills", and that "due bill" activities should be conducted in
compliance with the requirements of Regulation D.

BACKGROUND

A "due bill" is an obligation that results when a bank sells any asset
(including a security) and receives payment, but does not deliver the
security or other asset. A "due bill" can also result from a promise to
deliver an asset in exchange for value received. Outstanding "due bill"
obligations, whether written or unwritten, are required to be reported as
borrowings by the issuing bank in its Report of Condition, Schedule RC,
item 16, under the caption "Other Borrowed Money." Conversely, when the
reporting bank is the holder of a "due bill," the outstanding due bill
obligation of the seller is required to be reported as a loan to that
party. (See 1984 Instructions to the Reports of Condition and Income:
Interim Supplement to the Glossary.)

Under the national banking laws, national banks generally are authorized
to act as brokers or dealers in the purchase and sale by their customers
of U.S. government securities, and Federal agency securities. When a bank
sells such a security to a customer, collects the proceeds and fails to
deliver the security, a "due bill" exists in favor of the paying customer.
The customer, however, typically receives a confirmation from the bank
stating that a security has been purchased by the customer. See 12 CFR
Part 12. "Due bills" outstanding more than three business days are subject
to transaction account reserve requirements under Regulation D -- Reserve
Requirements of Depository Institutions, promulgated by the Board of
Governors of the Federal Reserve System, unless the "due bill" is fully
collateralized by securities similar to those securities that are the
subject of the "due bill" transaction. See 12 CFR § 2O4.2(a)(1)(iv).

POLICY

This Office believes it appropriate to remind national banks which issue
securities "due bills" to customers of the legal obligation to disclose to
these customers all material facts and circumstances concerning the
failure of the bank to deliver promptly the securities purchased. In
addition, national banks should not accept and use in their operations
customer funds remitted for security purchases without advising customers
that (i) securities have not been purchased promptly for their accounts
and (ii) their funds are being used by the bank. In no cases should such
funds be used in operations if the securities purchased by their customers
are deliverable at settlement, unless full disclosure of all material
facts is made to customers and the bank complies fully with Regulation D.

National banks are reminded that, with respect to their securities
transactions, they are subject to the antifraud provisions of the federal
securities laws. See, e.g., Section 17(a) of the Securities Act of 1933
(15 U.S.C. § 77q(a)); Section 10(b) of the Securities Exchange Act of 1934
(15 U.S.C. § 78j(b)) and Rule 10b-5 promulgated thereunder by the SEC (17
C.F.R. § 240.10b-5). Further, if a bank undertakes to act as a broker or
dealer in securities and to hold itself out to the Public as such, it is
required to adhere to high standards of professional conduct in these
activities. In this regard, banks should be aware that a firm in the
business of acting as a broker or dealer impliedly represents that it will
deal fairly with its securities customers. This implied representation
includes the representation that a securities transaction placed by a
customer with a broker-dealer will be consummated promptly unless there is
a clear understanding to the contrary. See, Securities and Exchange
Commission ("SEC"), Securities Act Release Nos. 9459 (January 14, 1972);
8363 (July 29, 1968); and 6778 (April 16, 1962).

The issuance or a "due bill" by a bank constitutes a failure to consummate
promptly a securities transaction for a customer. This failure is material
information which must be disclosed to the customer. Accordingly, a bank
dealer which accepts a customer's securities purchase funds or order,
under circumstances where the dealer is unable to consummate the
transaction promptly, must advise the customer of this fact. If it fails
to do so, it is failing to disclose to the customer material information
concerning the customer's securities purchase; such conduct may constitute
a violation of the antifraud provisions of the federal securities laws
noted above.

In addition, if a national bank knowingly takes a customer's securities
purchase funds and uses those funds in its general operations, instead of
effecting promptly the customer's purchase order, it similarly must advise
the customer of this fact. If the bank fails to do so, it compounds its
failure to disclose material information to its customer and may be
engaged in a fraudulent securities practice known as "bucketing". Further,
a "due bill" which is created for the account of a customer, under
circumstances where the security which is the subject of the "due bill"
can be obtained and delivered at settlement, should not be treated as a
bona fide "due bill" within the meaning of the transaction account reserve
requirements of Federal Reserve Board Regulation D; hence, appropriate
transaction account reserves must be established upon the creation of such
a "due bill."

In the view of this Office, however, "due bill" transactions where the
underlying security can be delivered at settlement are not an appropriate
banking practice and should be discontinued, unless the bank is prepared
to make prompt and full disclosure of all material facts and circumstances
to the customer, and comply with Regulation D. Absent such disclosure and
compliance, the issuance of "due bills" by national banks is to be limited
to those situations where a security purchased by a customer cannot be
delivered by the bank to the customer at settlement, notwithstanding a
diligent, good faith effort by the bank to secure that security for the
customer.

In view of the foregoing, national banks are advised that the policy of
this Office with respect to securities "due bills" is as follows:

o In order to satisfy their disclosure obligations under the federal
securities laws, national banks are required to make full written
disclosure of all material facts and circumstances concerning any "due
bills" created as to securities purchased by their customers. Such
disclosure must be made in a timely manner, i.e., within one business day
of the creation of a "due bill" or as soon as a bank becomes aware that it
will not effect delivery of the security at settlement, whichever is
sooner. This disclosure ordinarily would include:

  * a description of the nature of the transaction; 

  * a notice of the rights and liabilities of both parties to the
    transaction, including who is entitled to any interest on the
    underlying security;

  * the reasons for the due bill;

  * a description of the collateral (if any);

  * a statement indicating that to the extent the market value of the
    collateral is insufficient, the customer may be an unsecured creditor
    of the bank; and

  * a statement that describes what continuing steps the bank is taking to
    effect delivery of the security.

o Banks are to issue "due bills" only in those situations where the bank,
despite a diligent good faith effort, is unable to deliver the security
purchased by the customer at settlement, unless prompt and full disclosure
of all material facts (including but not limited to the fact that the bank
is taking customers' purchase funds and using these funds in the bank's
operations instead of purchasing the securities ordered) is made to
affected customers, and the bank complies fully with Regulation D.

o Under no circumstances shall a bank send a "due bill" customer any
document (such as a safekeeping receipt) which has the potential to
mislead the customer into believing that a security has been acquired for
the customer's account, until such time that the actual security is
delivered for the account of the customer.

o In order to ensure their continuing compliance with relevant provisions
of the federal  securities and national banking laws, banks are advised to
adopt written policies and procedures concerning the use of "due bills."

In sum, the improper use by banks of "due bills" or the failure to make
adequate disclosure to customers in connection with "due bill"
transactions may result in, among other things, violations of the
antifraud provisions of the federal securities laws, and deposit reserve
deficiencies within the meaning of Regulation D. The obligation to make
full disclosure in connection with "due bill" activities becomes all the
more important where "due bills" are created in sales to retail securities
customers who may not fully understand the nature and significance of
these transactions. This office has taken and will take enforcement action
against banks which fail to make adequate disclosure, or make misleading
disclosure, concerning "due bill" transactions, or or otherwise misuse
"due bills". Further, this Office will carefully consider public
disclosure of any enforcement actions taken with respect to "due bill"
transactions pursuant to its general authority to disclose publicly
enforcement actions taken with respect to national banks.

ORIGINATING OFFICES

Questions regarding this banking circular may be directed to the
Investment Securities Division, (202) 447-1901 or the Securities and
Corporate Practices Division, (202) 874-4660.

H. Joe Selby
Senior Deputy Comptroller
for Bank Supervision

Date: March 27, 1984