Goodwin, Procter & Hoar LLP, a firm of over 350 lawyers, has one of the largest financial services practices in the United States. We have created the Financial Services Alert as a service to advise our clients and other financial services institutions to news of importance to the industry in a timely manner. Some issues of the Alert, such as this one, will principally summarize significant recent developments in financial services law and regulation. Other issues will provide more in depth analysis about specific areas of financial services law. We hope that you will find the Financial Services Alert to be helpful. We welcome your suggestions for future topics of interest.

Developments of Note

US Supreme Court Lets Stand Ruling Against Compulsory Arbitration

The U.S. Supreme Court let stand a Ninth Circuit Court of Appeals ruling that under the Civil Rights Act of 1991 employers (including the securities firm at issue) may not require as a mandatory condition of employment that an employee waive his or her right to bring Title VII claims (concerning discrimination on the basis of race, sex, or national origin) in court and instead agree in advance to submit those disputes to binding arbitration.

In this case the Plaintiff, in connection with her employment as a broker-dealer, signed the NASD Form U-4, which currently requires broker-dealers to submit to mandatory arbitration for all disputes with their employers (including claims brought under Title VII). As is described in the June 23, 1998 Alert, effective January 1, 1999, the SEC approved the NASD's proposal to eliminate its Form U-4 arbitration requirement with respect to discrimination claims.

The Ninth Circuit did not preclude employees from willingly choosing to submit a dispute to arbitration and did not express an opinion as to whether an employee could be given a choice at the time of employment between arbitration or litigation to settle future disputes. Duffield v. Robertson Stephens Company.

FTC Issues Formal Interpretation of LLC H-S-R Reporting

The Premerger Notification Office of the Federal Trade Commission, with the concurrence of the Antitrust Division of the Department of Justice, issued a Formal Interpretation under the Hart-Scott-Rodino Act ("HSR") declaring the conditions under which the creation of, or acquisition of an interest in, a limited liability company ("LLC") will be reportable under the HSR.

The FTC previously had taken the position that the treatment of LLCs for reporting purposes would depend solely on whether the interest acquired by the LLC was more like a voting security interest (which may be reportable) or more like a partnership interest (which is not reportable). However, the FTC has modified that approach after determining that the use of LLCs has changed primarily from being a vehicle for start-up enterprises to being used now more frequently to combine competing businesses under common control.

Under the Formal Interpretation, the formation of an LLC which brings two or more pre-existing separately controlled businesses under common control (i.e., an interest entitling one party to 50% of the profits of the LLC or 50% of the assets of the LLC upon dissolution) is reportable if the HSR size-of-person and size-of-transaction requirements are satisfied.

Contributors to combinations of businesses in LLCs should report as if they were acquiring the assets to be contributed by the other contributors, and for these purposes the contribution to an LLC of an interest in intellectual property (e.g., a patent or know-how) which is exclusive against all parties including the grantor is treated as the contribution of a business whether or not the intellectual property has generated any revenues.

As to existing LLCs, any person acquiring a controlling interest in an existing LLC may be required to file because such a transaction may bring two or more separate businesses under a common control.

Whether a filing is necessary would depend on whether the acquiring person also has a business and whether the size-of-person and size-of-transaction criteria are met.

In addition, the FTC is also requesting comment on whether partnerships should be treated the same as LLCs with regard to formation, acquisition, or both. The formal interpretation becomes effective December 14, 1998, and comments may be submitted on the partnership issue by November 12, 1998.

OTS Issues Policy Statement on Privacy and Accuracy of Personal Customer Information

The OTS issued a "Policy Statement on Privacy and Accuracy of Personal Customer Information."

The Policy Statement declares that before collecting any information from a customer, the federal savings bank should describe how it will use his or her personal information, such as through a customer notice that explains: all intended uses of the information; whether the bank intends to give or sell the personal information to affiliated or unaffiliated parties; the affect of the customer declining to provide the information; a general description of the methods used to assure the confidentiality and accuracy of the information; and a phone number, e-mail address, or similar method of contact so that the customer can review the information, correct inaccurate and outdated information, and notify the bank of possible unauthorized access to or use of the information.

The Policy Statement also recommends that banks offer customers the choice to opt out of having information shared with nonaffiliated parties (the Fair Credit Reporting Act provides an opt-out right with affiliates).

The Policy Statement further discusses the safety and soundness standards to keep information secure and accurate, and states that a comprehensive security program: establishes controls to guard unauthorized access to databases; provides for employee training; protects customers during transmissions over public networks; creates proof that both the sender and receiver participated in a transaction; ensures the integrity and accuracy of the information; provides for correcting or updating information; and permits customers to review and correct any erroneous or outdated information.

The Policy Statement also declares that certain functions, such as account balance reconciliation and fund transfers, should be under dual employee control.

OTS Issues Guidance on Trust Preferred Securities

The OTS issued Thrift Bulletin 73, which principally discusses federal savings bank investments in trust preferred securities ("TPSs") (i.e., non-perpetual cumulative preferred stock issued by a wholly-owned trust subsidiary of a corporation, the revenue of which is exchanged for junior subordinated debentures issues by the parent corporation).

The OTS declares that it believes that TPSs that otherwise meet the requirements for investments in corporate debt securities set forth in the OTS regulations (i.e., saleable with reasonable promptness at fair market value; rated in one of the four highest categories by a nationally recognized investment rating service; and satisfies the general lending limit) are permissible investments for federal savings banks.

However, because of certain exceptional risks associated with TPSs, such as the ability to defer payments, the OTS declares that all associations should ensure that the investments in TPSs meet the following additional requirements: aggregate investments should be limited to 15% of total capital; no formal or informal reciprocal agreement or understanding with another issuer or broker to purchase the securities of another issuer should exist; investments should not be made in a security whose maturity can be unilaterally extended beyond 30 years; and only TPSs that are offered in public offering should be purchased.

If a federal savings bank wishes to invest more than 15% of its capital in TPSs, it must obtain prior approval from its OTS Regional Office. The Bulletin is effective immediately, and if a bank's investment in TPSs exceeds the 15% limitation it must submit a plan to the Regional Office to reduce the investment in a timely manner or request additional OTS investment authority.

OCC Amends Accounting Rule for Fees and International Loans

The OCC amended its rules concerning international lending activity to eliminate the discussion concerning the particular accounting method to be followed in accounting for various fees and international loans, and instead require that national banks follow generally accepted accounting principles ("GAAP") when accounting for the fees.

The OCC noted that since the previous rule was issued FASB has revised the GAAP rules with respect to fee accounting for international loans in a manner that accommodates the requirements of the federal law. The OCC highlighted that the amendment did not change the limitation imposed on fees in restructuring an international loan, the standards by which a bank recognizes loss on international assets affected by transfer risk, or the accounting treatment of transfer risk reserve.

The amendment becomes effective January 1, 1999.


The NASD updated its Order Audit Trail System ("OATS") FAQ to provide new questions and answers in response to member inquiries

Issues and questions addressed in the new FAQ include:
  • How do I know if I have to comply with NASD rules 6950-6957?;
  • If one or more third parties report order information on behalf of my firm how much of the compliance responsibility lies with my firm and how much lies with the third parties?;
  • When will I need to start reporting orders to OATS?;
  • Does the 90 second rule apply to OATS reporting?;
  • Will the NASD provide a list of the securities issues that must be reported to OATS?;
  • Am I allowed to use more than one-third party to transmit data to OATS?;
  • How do I determine the proper order receipt time for an order?; What is an electronic order?;
  • What types of changes are expected in the next version of the OATS Reporting Technical Specifications?; and how to find manufacturers for various of the products required by the OATS reporting system.

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