United States: OCC Approves Acquisition of Global Trade Management Services Business
(Financial Services Alert - Developments of Note)

The OCC issued a corporate decision ("Decision 2005-02") permitting a national bank to acquire a company engaged in global trade management services. More specifically, the company: (1) maintains a database of country-specific trade regulations, proposals and forms, and related information; (2) maintains a software application for managing trade transactions; (3) assists customers in managing their global trade operations, by providing, among other things, document preparation, advice on customs and duties, advice on suppliers and shippers as vendors, and vendor contract management; and (4) engages in trade management consulting, including compliance assessments designed to make a customer’s existing processes more efficient. The bank stated that it was acquiring the company because customers were demanding one-stop shopping for all their global trade requirements, including both financing and trade services.

Decision 2005-02 cited a variety of authorities in ultimately determining the bank’s acquisition of the company permissible. Decision 2005-02 found the database and software activities permissible because they constituted data processing activities involving economic data, and because the data the company generated was valuable in making banking and financial decisions. As to the document production, Decision 2005-02 found this permissible as the data is economic and banks historically have facilitated the completion of economic paperwork. The provision of customs and duties services, trade compliance information and advice, performance management advice on suppliers and shippers, and order and shipment tracking all were largely found permissible as various types of the recognized banking activity of offering financial and economic advice. Finally, Decision 2005-02 deemed the company assisting customers to manage their relationships with vendors and customs brokers to be permissible as an incidental power, i.e., an activity incidental to a banking activity that is necessary to competitively market a package of services. Decision 2005-02 also required the bank to demonstrate that it could perform the services in a safe and sound manner.

The NASD requested comment on two separate proposals that would affect NASD members’ communications policies and procedures.

Pre-Use Filing. In Notice to Members 05-25 the NASD proposed to amend its advertising rules to expand the 10-business day pre-use filing requirements to include: (i) the initial advertisement or item of sales literature concerning a type of security that the member has not previously offered, and (ii) all television, video, website video, radio or similar broadcasts of 15 seconds or longer. The proposed preuse filing requirement would not apply to the following types of sales material: (a) material concerning a type of security that the firm has previously offered; (b) material already subject to a filing requirement, such as mutual fund material; (c) correspondence and institutional sale material; and (d) material concerning securities previously traded in the secondary market, such as exchange listed securities. The comment period for this proposal expires on May 20, 2005.

Registered Principal Pre-Approval. In Notice to Members 05-27 the NASD requested comment on a proposal to require that a registered principal approve, prior to use, any correspondence, including email, that is sent to 25 or more existing retail customers within a 30-day calendar period. Under the current definition of the term set forth in NASD Rule 2211, "correspondence" includes any written or electronic mail message that a firm distributes to one or more of its existing retail customers and to fewer than 25 prospective retail customers within 30 calendar days. Currently, firms are not generally required to have a principal approve correspondence prior to use. The NASD’s proposal would not require firms to file correspondence with the NASD nor would it subject correspondence to all of the content standards applicable to advertisements. The comment period for this proposal expires on May 27, 2005.

The OCC issued an interpretive letter ("Letter 1024"), in which it clarified its position that a national bank that renews a loan to a bank insider violates Section 22(h)(2)(A) of the Federal Reserve Act and Regulation O thereunder if the loan either (1) is preferential or (2) involves more than the normal risk of repayment or presents other unfavorable features. The OCC states in Letter 1024 that a proposed loan to a bank insider must pass both tests because the purposes behind Regulation O were both to prevent preferential treatment of insiders and to prevent such insiders from exerting undue influence over a bank’s lending activities.

The SEC staff granted no-action relief to permit an open-end registered investment company (the "Fund") to engage an adviser (the "Successor Adviser") on an interim basis, without shareholder approval, to succeed an adviser (the "15a-4 Adviser") that the Fund had engaged, without shareholder approval, in reliance on Rule 15a-4 under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund engaged the 15a-4 Adviser when the Fund’s original adviser (the "Original Adviser") resigned. Forewarned of the Original Adviser’s plans to resign, the Fund had earlier made unsuccessful attempts to locate a suitable fund into which the Fund could be merged. Subsequent to engaging the 15a-4 Adviser, the Fund located such a fund (the "Acquiring Fund"), whose adviser was yet another investment manager (the "Successor Adviser"). By virtue of Rule 15a-4’s 150 day limit on the term of an interim agreement, the agreement with the 15a-4 Adviser (the "15a-4 Agreement") was set to terminate prior to the anticipated date of the Fund’s reorganization into the Acquiring Fund (the "Merger"). To address the gap period, the Fund wished to enter into an advisory agreement with the Successor Adviser (the "Transition Agreement") that would run from the termination of the 15a-4 Agreement until the consummation of the Merger. The SEC staff was initially contacted regarding noaction relief at a time when it would have been possible to seek prior shareholder approval of both the Transition Agreement and the Merger. In order to avoid the cost and potential confusion of seeking shareholder approval twice within a relatively short time period, relief was sought to allow the Fund to enter into the Transition Agreement without shareholder approval while still seeking shareholder approval of the Merger.

Characteristics of the Merger cited by the SEC staff included the following:

1. none of the expenses of the Merger would be borne by Fund shareholders; and
2. neither the Original Adviser nor any of its affiliates received or will receive, directly or indirectly money or any benefit from the Acquiring Fund, the Successor Adviser, the sponsor of the Acquiring Fund, the 15a-4 Adviser or any of their affiliates, in connection with any investment advisory agreement with the Fund.

Features of the Transition Agreement cited by the SEC staff included the following:

1. the Successor Adviser received no compensation or reimbursement of costs under the Transition Agreement;
2. aside from compensation, the Transition Agreement contained the same general terms and conditions as the agreements with the Original Adviser and 15a-4 Adviser; and
3. the Transition Agreement was approved by the Fund’s independent trustees at an in-person meeting.

The OCC issued an interpretive letter ("Letter 1023") permitting a national bank to provide certain advisory services in connection with independent messenger services. More specifically, the bank would: (1) manage the request for proposal process when the customer needs to hire a courier; (2) assist the customer to set-up service and coordinate deliveries; (3) monitor the performance of the courier by specific criteria; and (4) assist the customer to track and resolve problems. Letter 1023 determined that such services would be both part of the business of banking and incidental to the business of banking; particularly because the OCC has concluded that advisory and consulting services are an appropriate way for banks to exercise their core competencies. Letter 1023 noted that when acting in an advisory role, however, the bank should not actually engage in management or play a controlling role, but rather the customer should make all decisions. Letter 1023 also provides that this activity will not constitute branching, so long as it is clearly established by a third party in accordance with OCC precedent.

Goodwin Procter is pleased to host Hot Topics in Financial Services, a presentation of the New England chapter of the Association of Corporate Counsel. This event, which will be held on May 17, 2005 from 4:00 p.m. to 6:00 p.m., will focus on the regulatory and legislative landscape for financial services firms--banks, mutual funds, insurance companies, and broker-dealers. Corporate governance and merger questions, management and use of customer information in responsible ways and how to respond to regulators and law enforcement are issues faced by in-house counsel on a day-to-day basis. This seminar will explore hot topics for financial services companies by bringing together experienced corporate counsel and their law firm counterparts. To register in advance for this presentation, please contact Tammy Borowick at 617.570.8109 or via email at goodwinevents@goodwinprocter.com

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