Financial Services Alert

Goodwin, Procter & Hoar LLP, a firm of over 450 lawyers, has one of the largest financial services practices in the United States. We have created the Financial Services Alert as a service to inform our clients and other financial services institutions about news of importance to the industry in a timely manner. Some issues of the Alert, such as this one, will principally summarize significant recent developments in financial services law and regulation. Other issues will provide more in-depth analysis about specific areas of financial services law. We hope that you will find the Financial Services Alert to be helpful. We welcome your suggestions for future topics of interest.

The FRB issued a supervision and regulation letter (SR00-14) (the "Letter") detailing enhancements to the Interagency Program for Supervising the U.S. operations of Foreign Banking Organizations ("FBO"), which is applicable to all foreign banks with a banking presence (e.g., branches, agencies, and subsidiary banks) in the U.S. The principal changes relate to updating and streamlining the strength of support assessment ("SOSA") process, informing FBOs and home country supervisors of foreign banks’ SOSA rankings, and creating a new combined assessment (a "ROCA" rating) for all of an FBO’s U.S. branches, agencies, and commercial lending companies. SOSA rankings reflect an assessment of an FBO’s ability to provide support for its U.S. operations, while the ROCA system represents the rating of risk management, operational controls, compliance and asset quality of an FBO’s U.S. activities. The principal enhancements include, in addition to an annual SOSA review: (1) updating the SOSA ranking whenever significant events occur that could have a material effect upon an FBO’s ability to maintain the safety and soundness of its U.S. operations; (2) streamlining the SOSA rankings from the current five designations to three designations; (3) improving communications with the FBO’s senior management and foreign countries by providing SOSA rankings to them; (4) assigning a combined ROCA rating for all of an FBO’s U.S. branches, agencies, and commercial lending companies, in addition to separate ROCA ratings for the FBO’s individual offices; (5) expanding the SOSA analysis to include an institutional overview of the FBO that documents critical factors such as structure, business, strategy and operations, funding and liquidity, and governance. The Letter also includes detailed guidelines for implementing the enhanced framework.

The Staff of the SEC’s Division of Investment Management (the "Staff") has recently granted no action relief to a technology services company (the "Company") that proposed to issue two series of "tracking stock," one designed to track the economic performance of a business group within the Company that engaged in venture financing activities (the "Venture Group") and another designed to track the economic performance of the Company’s remaining business groups. The Staff agreed that the Company’s proposal would not result in the creation of two separate issuers for purposes of the Investment Company Act of 1940 (the "1940 Act"), thereby potentially subjecting one or both of the newly created issuers to the 1940 Act’s regulation. The Company was concerned that, because of considerable securities holdings arising out of the ordinary course of its financing activities, the Venture Group, if treated as a separate issuer, would meet one of the 1940 Act’s definitions of investment company. Section 3(a)(1)(c) of the 1940 Act, in part, defines an "investment company" as any "issuer" that owns or proposes to acquire investment securities having a value exceeding 40 per cent of the value of the issuer’s total assets.

The Staff indicated that Prudential Insurance Company of America v. SEC, 326 F.2d 383, 387 (3d Cir. 1964), cert. denied, 377 U.S. 953 (1964) ("Prudential") sets forth the appropriate test for determining the existence of a separate issuer under Section 2(a)(22) of the 1940 Act. Under this test, a separate issuer may exist within an operating company if: (1) the operating company causes interests to be issued in a pool of assets that is legally segregated from the company’s other assets; (2) the assets in the pool are held primarily for the benefit of the interest holders as the sole measure of their investment participation; and (3) the interests in the pool do not confer significant rights in other assets of the operating company. Based on its analysis of a variety of tracking stock structures in addition to the Company’s, the Staff articulated a non-exclusive list of eleven factors relevant to the determination of whether the Prudential test had been met, and added that other analogous factors might also be relevant to an analysis under Prudential. In granting relief, the Staff also observed that tracking stock structures vary greatly in their relevant features, but emphasized that certain characteristics of the proposed structure had been given greater weight by the Staff when the Staff reached its conclusion that each element of the Prudential test had been met.

A recently enacted Massachusetts law, An Act Relative to the Management of Savings Banks and Tax Escrow Requirements of Certain Mortgages (the AAct@), changed certain savings bank corporate governance provisions and eliminated mortgage loan tax escrow requirements. With respect to savings banks, the Act (i) expanded the locations where meetings of the corporators, trustees and boards of investment may take place to include any location within the counties in which the bank has a branch office, (ii) clarified that a corporator shall not serve beyond the retirement age established by the bank=s by-laws, and (iii) eliminated the requirement that at least one vice president of the bank must serve as a trustee.

The Act also effectively eliminated all of the remaining mandatory mortgage loan real estate tax escrow requirements contained in Chapters 167E and 171 of the Massachusetts General Laws. The changes to the tax escrow requirements expand upon changes originally enacted as Chapter 19 of the Acts of 2000, which became effective May 2, 2000. In addition to repealing the tax escrow requirements, the Act also expressly provides that a Massachusetts chartered bank or credit union "required by a law in effect before the effective date of this Act to pay, at least quarterly, a proportionate part of the estimated real estate taxes and betterment assessment on the mortgaged real estate may waive the same with respect to any mortgage held by it which was executed before said effective date." The Act became effective October 26, 2000.

The OTS issued Interpretive Letter 2000-10 (the "OTS Interpretive Letter") declaring that a federal savings bank may offer its commercial deposit customers a "one way" sweep arrangement whereby funds above a preset level would automatically be swept from a demand deposit checking account into a money market deposit account ("MMDA") maintained at the thrift. The thrift would not automatically transfer funds in the other direction. The OTS Interpretive Letter describes the various types of deposit accounts permissible for commercial customers and focuses particularly upon the limit of 6 withdrawals for MMDAs. The OTS Interpretive Letter declares that, as the FDIC and FRB have both determined, a sweep into an MMDA is not problematic, but rather it is an automatic transfer out of an MMDA into a checking or other transaction account that may cause a concern about substituting MMDA funds for checking or other transaction account funds. Although beyond the scope of the request, the OTS Interpretive Letter also declares that the OTS would likely find permissible sweep arrangements that allow no more than 6 automatic monthly transfers from an MMDA to a linked checking account.

The OTS has issued a proposed regulation (the "Proposed Regulation," 2000-93) that would create a class of preapproved optional bylaw provisions that thrifts would be able to adopt by simply providing the OTS with notice of the adoption of a bylaw within 30 days after such action. The OTS states that the proposed change is intended to reduce the regulatory burden on thrifts by allowing for expeditious adoption of certain bylaws. The Proposed Regulation also includes a first proposed preapproved optional bylaw that would preclude from service on the thrift’s board of directors any individual who, among other things: (1) is under indictment or has been convicted of certain crimes involving dishonesty or breach of trust; (2) is subject to a cease and desist order entered (within the prior 10 years) by a banking agency and that relates to actions that involve dishonesty or breach of trust; or (3) committed a willful violation of (a) any law, rule or regulation governing banking, securities, commodities or insurance activities, or (b) a final cease and desist order of a banking, securities, commodities or insurance regulatory agency. The OTS states that adoption of the foregoing preapproved bylaw would enable a thrift to protect its business from "the adverse effects that are likely to result when the reputation of its board members does not elicit the public’s trust." Comments on the Proposed Regulation are due to the OTS no later than January 2, 2001.