United States: FRB Finalizes Regulation CC Amendments to Implement Check 21
(Financial Services Alert - Developments of Note)

The FRB finalized amendments to Regulation CC that add a new subpart D, with commentary, to implement the Check Clearing for the 21st Century Act ("Check 21") and clarify some existing provisions of Regulation CC and its commentary. Under Check 21 and the amendments to Regulation CC ("Check 21 as implemented"), a check that meets Check 21’s requirements for (i) accuracy, (ii) legending, and (iii) warranty by the transferring, presenting or returning bank is made the legal equivalent of the original check for all purposes and all persons.

Check 21 as implemented includes provisions that will affect all banks, even those that do not choose to create substitute checks. For example, any bank that transfers, presents, or returns a substitute check for consideration would make the substitute check warranties and would be responsible for indemnifying any person that suffered a loss due to the receipt of a substitute check instead of the original check. In addition, if a consumer to whom a bank transfers a substitute check suffers a loss in connection with it, the bank may be required to provide expedited recrediting to the consumer’s account. Banks that provide substitute checks to consumers, either with their periodic account statements or otherwise, must provide a disclosure that describes substitute checks and substitute check rights. In spite of these universal requirements, however, warranties under Check 21 as implemented flow so that losses associated with a substitute check will ultimately be borne by the party that first transferred, presented, or returned the substitute check (called the "reconverting bank"). For example, if there is a duplicative check payment involving a substitute check, a substitute check indemnity claim, or a breach of the legal equivalence warranty, Check 21 as implemented places ultimate responsibility on the reconverting bank. For this purpose, the reconverting bank must always identify itself as such and must preserve the indorsements of parties that previously handled the check in any form.

The amendments are effective on October 28, 2004, except for (i) model form C-5A in Appendix C (form for disclosure to consumers that a substitute check is the legal equivalent of an original check and the circumstances under which the consumer may make a claim for expedited recrediting of the consumer’s account), which is effective immediately; and (ii) paragraph (4) of Appendix D (the requirement that all endorsements and bank identifications placed on an original check or substitute check be printed in black ink), which is effective on January 1, 2006.

In order to avoid insufficiently precise expense figures, the SEC adopted an amendment (the "Amendment") to Instruction 1(a) of Item 21(d)(1) of Form N-1A that requires mutual funds to round all figures in the table of expense examples that must appear in shareholder reports to the nearest cent rather than the nearest dollar as originally adopted. When it adopted the new shareholder report expense example requirements earlier this year, the SEC revised the initial investment amount to be $1,000 rather than $10,000 as originally proposed but failed to reconsider its rounding instruction. The technical amendment was effective beginning August 12. (The new shareholder report expense table requirements apply to reports for periods ended on or after July 9, 2004.)

The OTS announced a final rule to its regulations implementing the Community Reinvestment Act ("CRA") and the FDIC published for comment proposed amendments to its CRA regulations.

OTS. The OTS’ final rule, which is effective October 1, 2004, amends the definition of "small savings association" under its CRA regulations to mean a savings association with total assets of less than $1 billion (without regard to any holding company assets). The OTS stated that the final rule is consistent with its efforts to identify and reduce regulatory burden in that it will allow additional savings associations to qualify as small savings associations and thus to be subject to streamlined CRA examinations and reduced data collection and reporting burdens under the CRA. The final rule does not, however, also relieve small savings associations from other compliance requirements and obligations under the CRA.

FDIC. The FDIC’s proposal solicits additional comments as to whether the definition of "small bank" under its CRA regulations should be amended to include banks with total assets of up to $1 billion, independent of any holding company affiliation. Among other things, the FDIC also solicits comments on other amendments to its CRA regulations, including amendments to modify (i) the streamlined small bank performance standards to include as an additional component a mandatory community development activity criterion for banks with assets greater than $250 million and up to $1 billion and (ii) the definition of "community development" to emphasize a broader range of activities in rural areas. The FDIC stated that while none of the proposed amendments will diminish the obligations of insured depository institutions subject to CRA to identify and meet the credit needs of their communities, they will allow such institutions to focus on community development activities based on market opportunities and community needs, among other things. Comments must be received by the FDIC on or before September 20, 2004.

Unlike the OTS and the FDIC, the OCC did not issue a final rule or publish for comment proposed amendments to its CRA regulations. Rather, following the vote of the FDIC’s Board of Directors regarding the proposed amendments to the FDIC’s CRA regulations, the Comptroller of the Currency issued a statement stating that the OCC "remains committed to exploring means of relieving the regulatory burdens on community banks while supporting community reinvestment by these banks" and "will continue to work on an interagency basis with the FDIC and the Federal Reserve Board to develop uniform standards for the banking industry consistent with these goals."

The SEC re-opened for public comment a proposed rule (which was first published in November, 1999) under the Investment Advisers Act of 1940 (the "Advisers Act") that would address the application of the Advisers Act to broker-dealers offering full service brokerage (including advice) for an asset-based fee rather than more traditional fees. For a more detailed description of the proposal, please refer to the November 16, 1999 Alert. In re-opening the proposal the SEC noted the substantial number of comments that have been filed, as well as the lawsuit that has been initiated by a trade group, since the close of the comment period. The SEC is seeking comment on issues such as whether asset-based fees would more closely align interests of investors with brokerage firms, what would be the impact on brokers if the rule is not adopted, and if the rule is adopted should brokers who are not registered under the Advisers Act nonetheless be precluded from marketing fee-based accounts based on the quality of investment advice provided. The SEC only is opening the comment period until September 22, 2004, and then plans on reaching a decision on the proposal by year end.

The OCC finalized a regulation requiring a national bank to obtain OCC approval prior to changing substantially all of its assets either (1) through sales or other dispositions, or (2) having sold off substantially all of its assets, engaging in purchases or other acquisitions. In response to industry comment, the final rule clarifies that the rule does not apply to (1) changes a bank makes in response to specific OCC direction, or (2) a change in assets that is part of a bank’s ordinary securitization business. However, the OCC also clarified that the rule does apply to (1) stripped charters that are part of a Bank Merger Act transaction; (2) voluntarily liquidations extending more than a year; and (3) dormant charters that acquire assets through any means, including the bank’s own efforts. Finally, in response to industry comment, the preamble to the final rules makes clear that if both the new regulation and the OCC’s Significant Deviation Policy are potentially applicable, only the new regulation will apply. The OCC declined to set a bright line test for "substantially all assets." The new rule becomes effective October 1, 2004, and will apply to already dormant charters that acquire assets after the effective date.

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