United States: Financial Services Alert

The FRB issued a supervisory letter (SR 01- 6, the "Letter") to domestic financial and bank holding companies with consolidated assets of $10 billion or more that encourages those institutions to enhance their public disclosure by utilizing the recommendations of the Working Group on Public Disclosure (the "Working Group"): The Working Group is a private sector group chaired by Walter Shipley, retired chairman of Chase Manhattan Bank (see Alert of January 16, 2001).

The Working Group recommended, among other things, that: disclosures should balance quantitive and qualitive elements and reflect information that is consistent with a bank’s risk management process; disclosures should explain how risk within a bank changes over time; certain market risk disclosures previously made on an annual basis should now be made quarterly; and banks should enhance their disclosures about credit concentrations and the credit quality of their portfolios. The FRB concluded that implementation of the Working Group’s recommendations would be beneficial because it would "enhance the transparency of well- managed institutions."

The Massachusetts Division of Banks (the "Division") issued opinions about out-of-state banks operating loan production offices (" LPOs") in Massachusetts and out-of-state Internet banks transacting business with Massachusetts residents.

LPOs. The Division determined (00- 159) that an out-of-state bank that wished to establish LPOs to originate mortgage and other loans to Massachusetts consumers would not be conducting unauthorized banking business in the Commonwealth and thus would not violate Massachusetts General Laws Chapter 167, Section 37 (" Section 37") (which prohibits a foreign corporation from transacting business in the Commonwealth under any name or title that contains, among other things, any of the words "bank," "banking" or "bankers" or soliciting deposits or transacting other business in the Commonwealth, unless authorized to do so under Massachusetts law). In another opinion (00- 166) the Division concluded that, although an out-of-state bank may establish an LPO in the Commonwealth under its own name without any license or regulatory approval, a subsidiary of such a bank would need to have a mortgage lender’s license to so operate.

Internet Banks. The Division also published an opinion (99- 140) concerning an out-of-state Internet bank originating consumer loans, establishing savings accounts and certificates of deposit, and issuing credit cards for Massachusetts residents by mail. The bank was seeking authority to do business from the Massachusetts Secretary of State.The Division concluded that because the bank did not have a physical presence in the Commonwealth, Section 37 was inapplicable.

Mandatory arbitration provisions contained in many contracts of employment are enforceable under the Federal Arbitration Act (the "FAA") the US Supreme Court (the "Supreme Court") ruled on March 21, 2001. The case interprets Section 1 of the FAA, which excludes "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce" from coverage under the FAA.Agreeing with the majority of Appeals Courts to consider this issue, the Supreme Court ruled that the Section 1 exclusion only applies to seamen, railroad workers and other transportation workers. The Supreme Court applied canons of statutory interpretation in holding that Section 1 does not exclude contracts of employment for employees in other industries.

As a result of this decision, it is now clear that most employment contracts with arbitration provisions are not excluded from coverage under the FAA. However, this decision does not mean that arbitration provisions will be enforced in all circumstances. Courts will still engage in an analysis of whether or not an arbitration agreement is in an otherwise enforceable contract. Moreover, courts will examine issues of adequacy of consideration and unconscionability, for example, before ruling that arbitration provisions are binding on employees. Circuit City Stores, Inc. v. Adams, No. 99- 1379 (March 21, 2001).

Eleventh Circuit Rules Arbitration Clauses Enforceable Even If Enforcement Precludes TILA Class Action

The Eleventh Circuit Court of Appeals held that an arbitration clause in a loan agreement was enforceable even if the clause precluded the bringing of a class action under the federal Truth in Lending Act (" TILA"). The Eleventh Circuit Court had previously held that the arbitration clause defeated the remedial purposes of TILA and was unenforceable because of the potentially high costs of pursuing arbitration, but the US Supreme Court reversed that decision.Because of that reversal, the Eleventh Circuit Court stated that "[ a] ccording to the Supreme Court, the last time this case was before us we made the mistake of giving too little weight to the FAA’s pro -arbitration policy. We decline to make the same mistake again." The decision aligns the Eleventh Circuit Court on this point with the Third Circuit Court (as reported in the July 13, 1999 Alert), although the Eleventh Circuit Court declined to expressly rule on the issue of whether classwide arbitration is available only if that remedy is expressly provided for in the arbitration agreement. Randolph v. Green Tree Financial Corp. – Alabama (2001 WL 245727 (11 th Cir. (Ala.)).

The OTS issued an interim rule (the "Interim Rule") that repealed a statutory liquidity requirement for thrifts that had previously required each thrift to maintain an average daily balance of liquid assets at a level set by the OTS of no less than 4% nor more than 10% of the thrift’s liquidity base. The OTS had set the standard for all thrifts at 4%. The elimination of this requirement implements a recent amendment to the Home Owners’ Loan Act and makes the liquidity requirements imposed on thrifts more closely resemble those applied to other depository institutions. The OTS continues to require each thrift to maintain sufficient liquidity to assure its safe and sound operation. Comments on the Interim Rule are due to the OTS no later than May 14, 2001.

The OTS issued a final rule (OTS 2001 – 15) that authorizes thrifts to adopt a bylaw, preapproved by the OTS, regarding the integrity of directors. The preapproved bylaw precludes individuals who, among other things, are under indictment for or have been convicted of certain crimes or are subject to a cease and desist order issued by a banking agency, from serving as a member of a thrift’s Board of Directors.