INSIDE INFORMATION—Policy Statement on Use of

Commercial banks may receive information about their customers that is not otherwise available to the public. In many cases, customers about which the bank possesses confidential information are firms whose securities are publicly traded. Full-service commercial banks, being institutions that provide a diversity of services, may, at the same time such confidential information is in their possession, be effecting purchases or sales of such securities for trust customers and others and advising customers as to the purchase or sale of such securities.

Where confidential information in the possession of a person is “material” (i.e., is of such nature that there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to buy, sell, or hold securities), federal securities law generally prohibits the purchase or sale of pertinent securities by such person until the information is disseminated to the public. A person in possession of such material inside information must, before effecting transactions in the affected security, disclose to the public such information or, if unable to do so (e.g., in order to protect a corporate confidence), must abstain from trading in or recommending such securities until the information is disclosed. Similarly, divulging confidential material inside information only to one’s customers who then act on the basis of the information violates federal securities law.

For a bank to purchase or sell, or recommend the purchase or sale of, securities on the basis of material inside information in the bank’s possession subjects the bank not only to injunctive suits and criminal proceedings, but also to civil damage suits by persons on the other side of the transactions. In such cases, liability may not be limited to the persons on the other side of the transactions, but conceivably could extend to all persons who effected transactions in the securities before the information became public; thus, potential liability could be substantial in terms of the amount of damages that may be awarded.

Accordingly, the Board of Governors will view the use of material inside information in connection with any decision or recommendation to purchase or sell securities as an unsafe and unsound banking practice. Furthermore, the Board expects each state member bank exercising investment discretion for the accounts of others to adopt written policies and procedures, suitable to its particular circumstances, to ensure that such information in its possession is not misused.

Because the size and organizational structure of individual banks that engage in investment activities vary widely, the Board does not believe that it should, at this time, mandate the specific content of policies and procedures to be adopted. The Board believes, however, that in general such policies and procedures should limit those types of activity that are likely to give rise to an improper interchange of material inside information and establish a course of action for the bank to deal affirmatively with such information that may come into the possession of personnel engaged in investment decision making for the accounts of others. In this connection, the Board urges each state member bank to review its organizational structure and methods of operation to ensure that its policies and procedures are appropriately tailored to its circumstances. System trust examiners will be instructed to evaluate regularly the adequacy of policies and procedures adopted by individual banks.

Set forth below are examples of specific approaches to dealing with inside information that state member banks may wish to consider in the development of policies and procedures for their own use. Although more generally applicable to larger banks, (i.e., those managing assets for the accounts of others with a market value over $100 million), they may prove useful to smaller banks as well.

1. Trust personnel (i.e., bank employees whose duties include the making of investment decisions or recommendations for fiduciary or agency accounts) should not have access to commercial credit files, government, agency and municipal securities underwriting files or such other files that the bank can reasonably determine may contain material inside information.

2. Trust personnel should not attend private meetings between or among personnel engaged in commercial lending activities or in underwriting government, agency and municipal securities, on the one hand, and bank customers on the other, except where the sole purpose of the meeting is to seek a new customer relationship.

3. Officers, directors, or employees of the bank should not serve simultaneously on any committee having responsibility for the making of investment decisions or recommendations with respect to specific transactions and any committee having responsibility for commercial lending or government, agency, and municipal securities underwriting activities, unless necessary to the circumstances of the individual bank.

4. All trust department employees should be advised to report promptly to the management of the trust department suspected material inside information and, upon a determination by that management that the information is material, management should promptly—

5. A copy of the bank’s policies and procedures should be furnished for each fiduciary or agency account for which the bank exercises investment discretion to the person having the power to terminate the account or, if there is no such person, to the persons to whom an accounting would ordinarily be rendered.

6. Trust personnel should be separated physically from commercial lending personnel and government, agency, and municipal securities underwriting personnel to the extent appropriate to the circumstances of the individual bank. STATEMENT of March 17, 1978.