Contents

Developments of Note

1. Goodwin Procter and RMA to Conduct Webinar on Basel IA

2. FDIC Amends Rule Authorizing FDIC – Insured Banks without Trust Powers to Offer Additional Tax-Advantaged Accounts

3. SEC Issues Guidance Relating to Rule 3a-6

4. Seventh Circuit Holds that a Bank’s Request for a Consumer’s Credit Report in Connection with Assignment of Contract by Automobile Dealer did not Violate FCRA

5. OCIE Director Provides Update on SEC Examination Program

Other Items of Note

6. FinCEN Announces Issuance of Two Final Rules Requiring Certain Insurance Companies to Establish AML Program and File SARs

7. FDIC Implements Relationship Manager Program

Developments of Note

Goodwin Procter and RMA to Conduct Webinar on Basel IA

The comment period for the Advance Notice of Proposed Rulemaking on Basel IA (discussed in the October 11, 2005 issue of the Alert) will run through January 18, 2006. Goodwin Procter has partnered with the RMA to conduct a webinar on the specifics of Basel IA and the industry response. The webinar will take place on Friday, November 4, 2005 from 12:00 - 1:30 p.m. EST. For more information, please contact us by e-mail at: basel@goodwinprocter.com.

FDIC Amends Rule Authorizing FDIC – Insured Banks without Trust Powers to Offer Additional Tax-Advantaged Accounts

The FDIC amended an interpretive rule (12 C.F.R. § 333.101(b), the "Amended Rule") that authorizes FDIC-insured state nonmember banks that do not exercise trust powers ("Banks") to offer, without prior FDIC consent, certain self-directed, tax-advantaged Individual Retirement Accounts ("IRAs") and Keogh Plan Accounts. The Amended Rule permits Banks to offer the following additional tax-advantaged products without FDIC consent: (1) Coverdell Education Savings Accounts; (2) Roth IRAs; (3) Health Savings Accounts; and (4) other similar accounts with tax-incentive features. The Amended Rule retains the requirements that a Bank’s duties must be custodial or ministerial, that the funds in the account be invested in the Bank’s own time or savings deposits or in assets directed by the Bank’s customer, and that the Bank’s acceptance of such accounts be consistent with applicable state law. The Amended Rule was effective October 18, 2005, but the FDIC seeks comment on the Amended Rule on or prior to January 17, 2006.

SEC Issues Guidance Relating to Rule 3a-6

The staff of the SEC’s Division of Investment Management (the "Staff") issued a No-Action Letter responding to a request for guidance on the meaning of the term "substantial" for purposes of determining whether a foreign bank may rely on rule 3a-6(b) under the Investment Company Act of 1940, as amended (the "1940 Act") to make public offerings of its securities in the United States without registering as an investment company under the 1940 Act. In order to rely on Rule 3a-6(b), a foreign bank must be: (i) organized under the laws of a country other than the United States and regulated as such by that country’s government or an agency thereof; (ii) engaged substantially in commercial banking activity; and (iii) not operated for the purposes of evading the provisions of the 1940 Act. Rule 3(a)-6(b)(2) defines "engaged substantially in commercial banking activity" to mean "engaged regularly in, and deriving a substantial portion of its business from, extending commercial and other types of credit and accepting demand and other types of deposits, that are customary for commercial banks in the country in which the head office of the banking institution is located."

In the No-Action Letter, the Staff indicated that in order to satisfy the "substantial" standard provided in the rule, the banking activities in which a foreign bank engages must be more than nominal. The Staff declined, however, to establish any particular minimum percentage of either the bank’s liabilities (in the case of deposits) or assets or revenues (in the case of credit extensions). Instead, the Staff outlined a four part test to be satisfied by the foreign bank, which requires the bank to: (a) be authorized to accept demand and other types of deposits and to extend commercial and other types of credit; (b) hold itself out as engaging in, and to engage in, each of those activities on a continuous basis, including actively soliciting depositors and borrowers; (c) engage in both deposit taking and credit extension at a level sufficient to require separate identification of each in publicly disseminated reports and regulatory filings describing the bank’s activities; and (d) engage in either deposit taking or credit extension as one of the bank’s principal activities. The Staff noted that other factors may also support a conclusion that a foreign bank derives a substantial portion of its business from extending commercial and other types of credit and accepting demand and other types of deposits, and that it may be possible for a foreign bank to satisfy this standard even when it does not satisfy all elements of the four-part test.

Seventh Circuit Holds that a Bank’s Request for a Consumer’s Credit Report in Connection with Assignment of Contract by Automobile Dealer did not Violate FCRA

The United States Court of Appeals for the Seventh Circuit (the "Seventh Circuit") affirmed a lower court’s decision that a bank did not violate the Fair Credit Reporting Act ("FCRA") when it requested a consumer’s credit report without the consumer’s knowledge or specific consent in a case where an automobile dealer attempted to assign a tentative financing arrangement to the bank. The credit application with the consumer did not mention the fact that third-party lenders unknown to the consumer might order copies of the consumer’s credit reports as part of their evaluation as to whether to extend credit. The Seventh Circuit determined that FCRA authorized the bank’s request for a credit report in these circumstances as, in accordance with Section 1681b(a)(3)(A) of FCRA, the bank "intended to use the information in connection with a credit transaction involving the consumer." Stergiopoulos v. First Midwest Bancorp, Inc., 2005 U.S. App. Lexis 2997 (10/25/05).

OCIE Director Provides Update on SEC Examination Program

In a speech at the Greater Cincinnati Mutual Fund Association Directors’ Workshop, Laurie Richards, Director of the SEC’s Office of Compliance Inspections and Examinations ("OCIE"), generally reviewed the "nuts and bolts" of the OCIE’s on-site examination practices including "entrance interviews" conducted with a firm’s chief compliance officer and other senior management personnel. Ms. Richards stated that the purpose of entrance interviews is twofold. First, entrance interviews help examiners understand a firm’s operations so that an examination can focus on the firm’s most significant activities. Second, entrance interviews help examiners understand how a firm’s compliance controls prevent and detect problems.

Ms. Richards also discussed the OCIE’s "risk-based targeting" approach to examinations. In particular, Ms. Richards noted two key features of risk-based targeting. First, Ms. Richards emphasized that risk-based targeting generally limits "routine" examinations to "highest-risk" firms (e.g., large firms or firms with weak controls). Second, Ms. Richards reiterated that risk-based targeting emphasizes key areas of review for OCIE examiners conducting on-site reviews (e.g., securities allocations, best execution, disclosure accuracy, privacy protection and business continuity). (For a more detailed discussion, please refer to the September 27, 2005 Alert discussing a GAO Report on risk-based targeting and the examination process and the October 19, 2004 Alert summarizing another speech by Ms. Richards on the same topic.) Please click on the Next Page & Previous Page links at the end of this article to view the above-mentioned Alerts respectively.

Ms. Richards finally highlighted the role of e-mail review in examinations. Ms. Richards acknowledged that the OCIE understands the costs associated with the production of e-mail and that the OCIE has taken steps to apply a selective, risk-based approach to e-mail review. Nevertheless, Ms. Richards indicated that e-mail, unlike other books and records, provides an "unvarnished truth" that she feels is crucial to obtaining confidence in a firm and its compliance controls. Rule 204-2(g)(3) under the Advisers Act and Rule 31a-2(f)(3) under the Investment Company Act require advisers and funds that maintain electronic records to establish and enforce procedures to safeguard those records, including annual reviews of the adequacy of those procedures and the effectiveness of their implementation. The SEC staff has previously indicated that it expects to provide guidance on e-mail retention requirements for funds and advisers. Ms. Richards emphasized that firms should have a reasonable system for maintaining required records. Specifically, Ms. Richards noted that if a firm "relies on individual employees to not push the delete button," examiners will ask why the firm believes that such a procedure is reasonably designed to work in practice.

Other Items of Note

FinCEN Announces Issuance of Two Final Rules Requiring Certain Insurance Companies to Establish AML Program and File SARs

The Financial Crimes Enforcement Network ("FinCEN") announced the issuance of two final rules concerning anti-money laundering ("AML") compliance requirements for insurance companies. One final rule requires certain insurance companies (generally those that issue or underwrite permanent life insurance policies, annuity contracts or other insurance products with cash value or investment features, but not including group life insurance policies and group annuity contracts) to establish an AML program. The other final rule makes such insurance companies subject to suspicious activity reporting requirements. Insurance companies covered by the final rules must: (1) develop and implement their AML program within 180 days after publication of the applicable final rule in the Federal Register; and (2) file suspicious activity reports with respect to transactions that occur subsequent to the 180th day after the publication of that final rule in the Federal Register. Goodwin Procter will publish a more detailed summary of the two final rules (and a frequently asked questions supplement provided by FinCEN) in a future issue of the Alert.

FDIC Implements Relationship Manager Program

The FDIC announced that it had implemented, effective September 30, 2005, a Relationship Manager Program ("RMP") for all FDIC – supervised financial institutions (each an "FI"). Under the RMP, each FI is assigned a relationship manager who serves as a local point-of-contact in order to strengthen lines of communication between the FI and the FDIC. The FDIC stated that the RMP is also expected to improve the FDIC’s coordination, continuity and effectiveness of its supervisory process.

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