South Africa: Financial Services Alert - 10 November 1998

Last Updated: 13 November 1998

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.

If you would like anyone else to receive issues of the Financial Services Alert, would like to receive any past issues, or would like the background materials for any of the matters discussed above, please contact Greg Lyons by telephone: Boston - (617) 570-1329 or DC - (202) 974-1032; facsimile: Boston - (617) 523-1231 or DC - (202) 331-9330; mail (Boston or DC office) or email Click Contact Link

The contents of this publication are intended for informational purposes only and should not be construed as legal advice or legal opinion, which can be rendered properly only when related to specific facts. This document may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. (c)GPH LLP 1998

For further information, please contact;

Greg Lyons
Goodwin, Procter & Hoar LLP
Exchange Place
Boston MA 02109
Tel: (617) 570-1000

300 Park Avenue

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.