United States: OCC Rules State Lending Laws Not Preempted When National Bank Serves as Loan Pool Trustee
(Financial Services Alert - Developments of Note)

The OCC issued an interpretive letter ("Letter 1016") holding that federal law does not preempt state lending laws simply because the loans were purchased by national banks acting as trustees in connection with the issuance of mortgage-backed securities. A nonbank lender made the loans and sold them to the securitization trusts. When the national banks, acting as trustees, tried to foreclose on the loans the borrowers raised the New Jersey Consumer Fraud Act as a defense. The national banks asserted that the New Jersey law was preempted because it interfered with their ability to purchase loans. Letter 1016 states, however, that, in substance, the investors in the pools, rather than the national banks, are purchasing the loans. As a result, Letter 1016 found the OCC lending preemption rules do not apply in these circumstances. Moreover, Letter 1016 also did not find that the New Jersey law interferes with the banks’ ability to act as trustees. Accordingly, "federal law does not insulate the assets that the Banks hold in trust for the benefit of investors from state law requirements otherwise applicable to those assets."

The NASD amended its Rule 3110(f) ("Rule 3110(f)"), which governs predispute arbitration agreements (agreements between a broker-dealer and its customers to resolve disputes related to customer accounts through arbitration), to require member firms to provide customers with enhanced disclosure regarding, and clarification of their rights in, the arbitration process when entering into such agreements. The amendments to Rule 3110(f) are intended to address concerns expressed by investor groups regarding the inadequacy and lack of clarity of the disclosures currently required under the Rule. In addition to changes designed to make the required disclosure easier to understand, the amendments also: (i) clarify that customers must acknowledge receipt of an arbitration agreement at the time of signing; (ii) clarify the use of limiting conditions in arbitration agreements; (iii) require that firms provide a customer with a copy of an arbitration agreement within ten days of a request; and (iv) require that firms seeking to compel arbitration of claims filed in court must agree to arbitrate all claims in a complaint if a customer requests. The amendments go into effect on May 1, 2005. Agreements executed after April 30, 2005 will be governed by Rule 3110(f) as it has been amended. The requirement to provide a customer agreement upon request applies to all predispute arbitration agreements, including those entered into prior to May 1, 2005.

The OCC issued an interpretive letter ("Letter 1013") allowing national banks to buy and sell, for their own account, exchange traded units of beneficial interest in gold ("Gold Shares"), assuming the national bank has demonstrated to the examiner-in-charge that it has sufficient risk systems in place. Letter 1013 states that such activities are a logical extension of a national bank’s express authority to buy and sell gold. Moreover, Letter 1013 states that a national bank also may purchase Gold Shares based on the OCC regulatory authority for banks to purchase and sell interests in entities that hold bank-permissible assets. In fact, Letter 1013 provides that a national bank may hold unlimited interests in such entities, subject only to safety and soundness restrictions.

The Independent Directors Council issued a report discussing the annual board self-assessment requirement under the new fund governance rules applicable to registered funds relying on certain exemptive rules under the Investment Company Act of 1940, as amended. The report notes that the SEC staff has informally indicated a January 16, 2007 deadline for each board's first self-assessment under the new rules. (Other components of the new governance rules generally have a compliance deadline of January 16, 2006.) The report discusses how boards might conduct self-assessments, e.g.., by questionnaire and/or discussion, and identifies topics appropriate for board self-assessment, such as (a) board composition (b) board committees, (c) board meetings, (d) meeting materials, (e) oversight of multiple funds, (f) director compensation and (g) overall board effectiveness. The report lays out a number of specific questions addressing each of the foregoing topics and reviews relevant considerations. Assessment of individual board members receives a separate, less extensive treatment. The report concludes by encouraging boards to develop an action plan for any matters to be pursued as a result of a self-assessment, including a timeline and follow-through program that entails discussion at subsequent board meetings regarding the implementation of proposed changes.

The Division of Market Regulation ("DMR") of the SEC, in consultation with the Financial Crimes Enforcement Network ("FinCEN"), issued a No-Action Letter indicating that for purposes of implementing a Customer Identification Program ("CIP"), required under 31 CFR 103.122 (the "CIP Rule"), a broker-dealer may treat a registered investment adviser, as defined by sections 203 and 203A of the Investment Advisers Act of 1940, as if they were subject to an anti-money laundering program ("AML Program") under the United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (the "Patriot Act"). Specifically, the No-Action Letter provides that a broker-dealer may treat a registered investment adviser as if it is subject to an AML Program requirement for purposes of the reliance provision of the CIP Rule provided that all other requirements of the provision are met. Therefore, for purposes of its CIP, a broker-dealer may rely on a registered investment adviser to perform specified procedures if 1) reliance is reasonable under the circumstances; 2) the investment adviser is regulated by a Federal functional regulator; and, 3) the investment adviser enters into a contract with the broker-dealer requiring it to certify annually to the broker-dealer that it has implemented an AML Program, and that it will perform the specified requirements of the broker-dealer’s CIP. The relief granted by the No-Action Letter was scheduled to expire on February 12, 2005; however, on February 10, 2005 the DMR issued a letter extending the relief until the earlier of July 12, 2006, or the date upon which FinCEN promulgates final regulations requiring investment advisers to implement an AML Program.

Goodwin Procter Issues Client Alerts Concerning Federal Legislation Affecting Offshore Hedge Fund Deferred Arrangements (to view this article please click on the following link) http://www.mondaq.com/article.asp?articleid=31087 and Class Action (to view this article please click on the following link) http://www.mondaq.com/editorial/article.asp?aid=31081

These two Client Alerts concern recent federal legislation. The first Client Alert discusses amendments to the Internal Revenue Code that appear to affect incentive fee deferral arrangements for offshore hedge fund management. The second Client Alert describes the sweeping reform of the current class action litigation system (including new protections for consumer lenders and servicers) provided by the Class Action Fairness Act of 2005.

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