United States: Federal Appeals Court Upholds Preemption for National Bank Operating Subsidiaries
(Financial Services Alert - Developments of Note)

The U.S. Court of Appeals for the Second Circuit affirmed a district court decision, holding that the National Bank Act and OCC regulations preempt state regulation of a national bank operating subsidiary to the same extent that they preempt state regulation of the parent national bank. The decision is the first from a federal appeals court. Three other district courts have reached this same conclusion, each finding that a national bank operating subsidiary enjoys the benefits of federal preemption to the same extent as its parent national bank. Appeals in those three cases are pending in the Fourth, Sixth and Ninth Circuits. Goodwin Procter LLP participated in the preparation of an amicus brief filed with the Second Circuit on behalf of a consortium of industry trade associations (American Bankers Association, America’s Community Bankers, Consumer Bankers Association, Consumer Mortgage Coalition, and Financial Services Roundtable) in support of the preemption argument. Wachovia Bank and Wachovia Mortgage Corporation v. John P. Burke, in his official capacity as Banking Commissioner of the State of Connecticut, Docket No. 04-3770-cv (2nd Cir. July 11, 2005).

The SEC published a notice soliciting comments on proposed amendments to Rule G-21 of the Municipal Securities Rulemaking Board (the "MSRB") filed by the MSRB on June 2, 2005 (as discussed in the June 7, 2005 Alert). The proposed amendments are designed to further conform the advertisement rules relating to municipal fund securities (primarily interests in 529 college savings plans) to those applicable to mutual fund performance advertising pursuant to Rule 482 under the Securities Act of 1933, as amended. Under the proposal, brokers-dealers would be required to include in advertisements that contain performance data for municipal fund securities a phone number or Web address where investors may obtain performance data current to the most recent month-end, unless the data included in the advertisement is itself current to the most recent month-end. Comments on the proposed amendments are due to the SEC on or before August 1, 2005. The proposed amendments are expected to become effective as of December 1, 2005.

Acting Comptroller of the Currency, Julie L. Williams, made a presentation to the New York Bankers Association in which she discussed how the bank supervisory process for national banks "actually works." Ms. Williams began by stating that "the heart" of the bank supervisory process is to see that banks are operated in a safe and sound manner and are complying with law. The role of the OCC as bank supervisor also involves assuring that national banks have the powers they need to be able to operate effectively. The OCC, said Ms. Williams, has exclusive visitorial powers over national banks to assure that it has "comprehensive authority to examine, supervise, regulate and sanction a national bank and protect national banks from potential state hostility." The U.S. bank supervisory process, said Ms. Williams, is extensive and comprehensive and much is accomplished through "predominantly confidential" supervisory communications and other informal (rather than formal) means. The supervisory process "entails constant adjustments, corrections and remediations by banks based on the communications" between the bank and its supervisor. In practice, said Ms. Williams, the need to bring formal enforcement actions is "infrequent." The effectiveness or "toughness" of a bank supervisor should not be judged by the number of enforcement actions brought by the banking agency, stated Ms. Williams. "With the vast powers that bank supervisors wield," said Ms. Williams, "comes the responsibility not to rush to judgments," where "the ‘tough’ reaction sometimes can be the easy response." Rather, it is crucial that the bank supervisor take into account all of the relevant facts.

The SEC, FDIC and OTS issued an Investor Alert regarding mutual-to-stock conversions, highlighting key concepts that eligible depositors should be mindful of when participating in the initial public offering ("IPO") of a converting mutual bank or savings association. When a bank or savings association converts from mutual to stock form federal and state banking regulations require that the converting institution give its eligible depositors first priority to purchase stock in the IPO at a "subscription price" based on the company’s value prior to the conversion. To participate in the IPO, eligible depositors generally must pay the entire subscription price up front and must sign subscription agreements certifying that the eligible depositor is purchasing the shares for his or her own account and with no intention to resell the securities. Federal and state banking regulations prohibit a depositor from transferring his or her subscription rights. In their Investor Alert, the SEC, FDIC and OTS suggested that eligible depositors take the following steps to avoid "fraudsters" seeking to circumvent banking regulations and illegally participate in a mutual-to-stock conversion. First, understand that federal and state law prohibit an eligible investor from transferring his or her subscription rights in a mutual-tostock conversion to another person. Second, read and understand the prospectus and stock order forms carefully before subscribing to the offering. Third, be extremely cautious if anyone offers to loan you money to participate in the conversion. Fourth, watch out for opportunists. Fifth, be wary of individuals making guarantees, especially if they downplay the restrictions in the prospectus or stock order form, and finally, ask the bank or savings association if you have any questions about the transaction.

The Department of Justice, in response to concerns from the federal banking regulators and the financial services industry over the lack of consistency in the treatment of Bank Secrecy Act (the "BSA") compliance violations between law enforcement and the federal banking regulators, has amended its guidelines for money laundering prosecutions (the "Amended Guidelines"). The Amended Guidelines direct U.S. Attorneys to clear all criminal prosecutions of financial institutions for violations of the BSA with the Asset Forfeiture and Money Laundering Section ("AFML") of the Department of Justice’s Criminal Division. Requiring clearance by AFML of criminal prosecutions under the BSA extends a protection that was already in place for money laundering prosecutions under the criminal code and creates consistency in the treatment of financial institutions under the criminal code and the BSA. The issuance of the Amended Guidelines comes only two weeks after the issuance of the new Bank Secrecy Act Anti-Money Laundering Examination Manual (the "BSA Manual") by the federal banking regulators and the Financial Crimes Enforcement Network, and together with the BSA Manual should create an increased level of consistency and cooperation among law enforcement and the federal banking regulators relating to BSA violations. The BSA Manual was described in further detail in the July 12, 2005 issue of the Alert.

The NASD issued a Notice to Members (the "Notice") addressing the timeline for establishment of uniform processes designed to assist broker-dealers that engage in agency securities lending transactions in complying with existing rule requirements related to books and records, net capital and internal and supervisory controls. The timeline discussed in the Notice will require broker-dealers to be ready by the first quarter of 2006 to accept and retain data from agent lenders that will enable the Goodwin Procter LLP July 19, 2005 broker-dealers to monitor credit exposure and calculate capital requirements with respect to agency securities loans.

The SEC did not grant a motion by the U.S. Chamber of Commerce (the "Chamber") for a stay of the independent chair and 75 percent independent director provisions of fund governance requirements adopted by the SEC in July 2004, pending consideration by the U.S. Court of Appeals for the District of Columbia Circuit of the Chamber’s petition for review of the SEC’s June 29, 2005 reconsideration of those provisions. At its June 29 open meeting (see the July 5, 2005 Alert, the SEC voted 3-2 not to alter its prior adoption of the challenged requirements. The SEC’s June 29 reconsideration was in response to a remand by the Court arising out of an earlier petition by the Chamber for review of the July 2004 adoption of the same requirements. On the motion for a stay, the votes of the Commissioners (who now number only four following Chairman Donaldson’s resignation) tracked their votes regarding the June 29 reconsideration and so were evenly divided. The stay was, therefore, not granted.

The Basel Committee on Banking Supervision issued its final paper on trading-related exposures and the treatment of double default effects. The proposal was described in the April 19, 2005 Alert (click on 'Next Page' link at bottom of page to read). The final paper is located at http://www.bis.org/press/p050718.htm and will be discussed in a future Alert.

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