United States: Federal Banking Agencies Provide Consumers with Information on Internet Phishing
(Financial Services Alert - Developments of Note)

The FRB, FDIC, OCC, OTS and NCUA (the "Agencies") jointly issued a brochure (the "Brochure") that provides consumers with information concerning Internet "Phishing," i.e., the theft by Internet pirates of an individual’s confidential financial information such as account numbers, passwords and social security numbers. The Brochure states that one common form of Phishing scam involves the thief sending an e-mail to individuals that appears to be from their bank, thrift or credit union (often with the financial institution’s logo) and that requires the individual to verify immediately account information, with the threat that unlesss the individual verifies the information his or her account will be closed. No legitimate financial institution, state the Agencies, will ask its customers to verify account information online.

The Agencies advise consumers to combat Phishing by: (1) never providing personal financial information over the Internet or by phone unless the consumer has initiated the contact; (2) never clicking on a link provided in an e-mail that the consumer suspects is fraudulent; (3) not being intimidated by e-mails that threaten account termination if personal information is not provided; (4) verifying the legitimacy of a contact; (5) reviewing account statements regularly to see that all charges are correct; (6) reporting suspicious e-mails and phone calls to the Federal Trade Commission by calling 1-877-IDTHEFT; and (7) alerting the individual’s financial institution and placing fraud alerts on the consumer’s credit files.

Pursuant to the directive of the Financial Institution Reform Recovery and Enforcement Act, FIRREA, that the federal thrift lending limits should parallel those of national banks, the OTS issued Thrift Bulletin 79a ("TB 79a") stating that the OTS would apply a pilot lending program extending the lending limit for eligible community thrifts (the "Pilot Program") to the same extent as the OCC recently has extended its program for eligible community national banks. More specifically, under the Pilot Program, the OCC recently extended until June 11, 2007 a rule creating for eligible national banks (generally, community national banks that are in a safe and sound condition) the special higher lending limit for 1-4 family residential real estate loans and loans to small businesses, and the OCC also extended the Pilot Program to "small farm loans" (as defined in the Call Report). Please refer to the August 31, 2004 and June 26, 2001 Alerts for a more detailed description of the Pilot Program as implemented by the OCC.

TB 79a points out that the Pilot Program affects lending limits only and does not affect the percentage of assets or capital lending and investment limits of the Home Owners’ Loan Act. Moreover, for purposes of the Pilot Program, it is the state where the thrift has its home office that is relevant, not the state where the thrift has a branch or where the borrower is located. To apply for the benefits of the Pilot Program, eligible thrifts must submit to the OTS: (1) a certification that the thrift is eligible; (2) a copy of the board resolution approving the use of the special lending limits; and (3) a description of how the board will oversee the use of the special lending limits.

The AFL-CIO Office of Investment issued a report evaluating how the ten largest mutual fund families voted on executive compensation proposals by twelve S&P 500 companies regarded by the AFL-CIO as having excessive CEO pay and poor performance. Ten of the proposals reviewed were shareholder proposals while four were management proposals. For each vote, the report includes a brief case study that describes the company’s executive compensation arrangements and the issue on which shareholders were asked to vote. The report concluded that there was wide variation in how fund families voted on the proposals. Only two fund families voted against all four management proposals. There was only one proposal against which all the fund families surveyed voted. The report observed that in many cases the fund families reviewed cast their votes as a block but some did not always do so. The report identified business relationships between the fund families and the S&P 500 companies by reviewing data from Form 5500s required to be filed by corporate retirement plans. This review indicated that of the 120 proxy voting decisions reported in the survey, 25 involved a situation where the mutual fund adviser had a relationship with the soliciting portfolio company. The report calls for SEC rulemaking to require disclosure of these relationships.

The OTS issued Thrift Bulletin 82a ("TB 82a") to thrifts and their holding companies concerning management of risks associated with arrangements with both affiliated and unaffiliated entities that provide financial, operational and/or marketing support services to the thrift or thrift holding company. TB 82a provides a detailed discussion of thrift management’s responsibility for overseeing third party arrangements, including: (1) risk assessment; (2) due diligence; (3) contract review, which confirms that there is a written contract in place that sets forth the "duties, obligations, contingencies and responsibilities of the parties and ensures that third parties maintain adequate internal controls over activities;" (4) policies, procedures and controls; (5) periodic assessments of third party performance; and (6) documentation of the due diligence and periodic assessments. TB 82a also discusses the notice regarding significant third party arrangements that a thrift must file with the OTS within 30 days after the earlier of (a) the date it enters into a significant contract for services or (b) the date the third party actually provides services. TB 82a states that the OTS regards a contract as "significant" if the contract: (1) calls for an annual payment of more than 2% of the thrift’s capital; (2) involves a foreign service provider; or (3) involves information technology that is critical to the thrift’s daily operations. TB 82a concludes with a chart that lists OTS statutes, regulations, CEO letters, bulletins and handbooks that provide guidance on outsourcing arrangements and third party relationships.

The SEC has published for comment changes proposed by the NYSE to Section 303A ("Section 303A") of its Listed Company Manual, which was adopted as part of rulemaking required by the Sarbanes-Oxley Act of 2002. Please refer to the October 28, 2003 Alert for a discussion of this rulemaking. The proposed changes are based on Frequently Asked Questions posted on the NYSE’s website and its experience working with listed companies and their counsel on issues related to Section 303A. The majority of the proposed changes, like much of Section 303A (e.g., its independence requirements), do not apply to open-end and closed-end investment companies listed on the NYSE. The NYSE proposal does however add new Section 303A.12(c) to specifically require that listed open-end and closed-end investment companies submit Annual and Interim Written Affirmations to the NYSE. The NYSE states that this change is designed to clarify its intention to carry forward the written affirmation requirement currently found in Section 303 of its Listed Company Manual. The NYSE views the written affirmation requirement as a mechanism by which listed companies provide it with ongoing details of compliance or non-compliance with Section 303A. The NYSE also intends to amend the General Application section of its Listed Company Manual to specify that listed open-end investment companies (generally known as exchange traded funds or ETFs) will be required to submit the Annual and Interim Written Affirmations. The Interim Written Affirmation requirement applies to each time a change occurs to a listed company’s board or any of the committees subject to Section 303A. Comments on the proposed changes must be submitted to the SEC on or before September 29, 2004.

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