Vol. 1 No. 37

Goodwin, Procter & Hoar LLP, a firm of over 350 lawyers, has one of the largest financial services practices in the United States. We have created the Financial Services Alert as a service to advise our clients and other financial institutions to 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 indepth 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.

Developments of Note

Conference of State Bank Supervisors Develops Uniform Interstate Application

The Conference of State Bank Supervisors ("CSBS"), in conjunction with representatives of the state and federal bank regulatory agencies, developed a Uniform Interstate Application/Notice form that is intended to permit state-chartered banks operating across multiple states to file a single application form with state and federal regulators to establish, relocate or discontinue a branch, an ATM, or other place of business. The bank would only need to file the form with the bank's home state regulatory agency and primary federal regulator. The form requires, among other things: a description of the services to be offered, any insider benefits resulting from the transaction, and a statement as to why the transaction meets relevant standards for public convenience and advantages. Although the form declares that it meets the normal requirements of all state and federal bank regulatory agencies, it nonetheless suggests, and conversations with CSBS representatives confirm, that state and federal regulators should be contacted prior to the submission of the form to ensure its acceptability and to determine any special filing requirements.

OCC Updates Shared National Credit Program Guidance

The OCC issued a Banking Bulletin (98-21) updating its description of the Shared National Credit ("SNC") Program and replacing Bulletin 95-9. The SNC Program is an interagency program which receives data from banks regarding, and then reviews and assesses risks with respect to, large credit risks shared by multiple financial institutions. More specifically, a SNC currently is defined to include virtually any loan and/or formal loan commitment extended to a borrower by a supervised institution or any of its subsidiaries or affiliates which aggregates $20 million or more, and either (1) is shared by two or more institutions under a formal lending agreement; or (2) is sold in part to one or more institutions with the purchasing institution assuming a proportionate share of the credit risk. Effective December 31, 1998, this definition will be relaxed to include only credits that are shared by three or more institutions, or a portion of which is sold to two or more institutions which assume proportionate credit risks. "Supervised institutions" for these purposes include FDIC-insured banks, as well as bank holding companies and their nonbank subsidiaries and federally and state-licensed branches and agencies of foreign banks. The OCC Bulletin discusses the requirements to report data, the procedure by which the OCC reviews credits governed by the SNC Program, the scheduling of such reviews, the manner in which a SNC loan is rated, and how banks may appeal those ratings.

FHFB Proposes Expanding FHLB Standby Letter of Credit Authorization

The Federal Housing Finance Board ("FHFB") proposed a regulation codifying and amending its policies on Federal Home Loan Bank ("FHLB") standby letters of credit ("SLOCs") so as to allow members and eligible nonmember mortgagees to more easily obtain SLOCs. Historically, the FHFB has declared that the legal authority for FHLBs to provide SLOCs is derived from their authority to make secured advances, and thus its 1993 guidelines for SLOCs impose the strict limitations and requirements for advances upon SLOCs. However, the proposal declares that this authority is not based solely upon the authority to make advances, but rather also is incidental to other FHLB powers, and relaxes the requirements and limitations accordingly. Moreover, the proposal would allow members to obtain SLOCs for any of four broad purposes: (1) to facilitate residential housing finance; (2) to facilitate the financing of targeted economic development projects; (3) to assist with asset/liability management; or (4) to provide members with liquidity or other funding, and defines those terms broadly to permit SLOCs to be obtained in a much wider variety of circumstances. Furthermore, the proposal would expand the types of collateral that may be used for certain SLOCs to include, for example, state municipal bonds and a larger extent of real-estate related collateral. The proposal also would expand the ability of eligible nonmember mortgagees to obtain SLOCs. Comments on the proposal are due by August 6, 1998.

FTC Requests Comment on Year 2000 Consumer Finance Issues

The Federal Trade Commission ("FTC") is requesting comment on Year 2000 ("Y2K") consumer issues, including potential Y2K problems likely facing various segments of the consumer financial services industry, such as finance entities (i.e., non-federally chartered and non-federally insured entities), consumer reporting agencies (as defined in the Fair Credit Reporting Act), and other businesses involved in consumer financial services. The FTC is requesting information to avert unforseen Y2K problems and to evaluate appropriate remedies for potential problems. The questions on which the FTC seeks comment include the types of systems being used, the appropriate timing to correct any Y2K problems, the percentage of consumers likely to be affected by any problems, and how the problems may affect creditors' or lessors' compliance with federal consumer credit protection statutes. Comments on the request are due by June 22, 1998.

NASD Proposes Communications Rule Amendment and Issues Guidance

The NASD proposed to amend its Rule 2210 regarding communications with customers and the public, released an interpretive ruling permitting an NASD member to allow its institutional customers to electronically access NASDAQ's SelectNet System through the member's systems, and issued revised guidance on the supervisory and inspection obligations of members, particularly with respect to unregistered offices, as well as revised sanction guidelines.

Customer Communications. The NASD proposed amendments to its Rule 2210 to more fully address the distinctions between correspondence (i.e., materials prepared for delivery to a single customer rather than to multiple customers or the general public) and sales literature (i.e., materials distributed or made generally available to the public). The proposal is in part a response to several NASD disciplinary matters regarding the issue whether correspondence should be subject to Rule 2210's general advertising and disclosure rules. The proposal would subject correspondence to the provisions of Rule 2210 that prohibit misleading statements, but (unlike sales literature) generally not to the provisions of the Rule that mandate specific disclosures (e.g., recommendation disclosures). Comments on the proposal are due by May 29, 1998.

Customer Access to SelectNet. The NASD also issued an interpretive letter permitting an NASD member to allow its customers to themselves electronically route orders into Nasdaq's SelectNet System (which permits NASD member firms to enter buy or sell orders in Nasdaq securities) through the member's own systems. To enable customers to have this electronic access to the SelectNet System, the NASD member has to undertake to ensure that several conditions are met, including: (1) ensuring compliance with all SEC and NASD rules; (2) having in place written procedures that permit the member to effectively monitor and supervise the entry of customers' electronic orders as well as system-driven internal control features that automatically limit inappropriate orders; and (3) acknowledging that the NASD member remains responsible for all trading activities. The NASD also declared that it is in the process of formalizing these conditions in a Notice to Members that will make the benefits and requirements of the interpretation available more generally.

Supervisory Obligations and Sanction Guidelines. The NASD also issued Notices to Members that address member firm obligations to supervise associated persons, particularly those in unregistered offices (98-38), and that revise its sanction guidelines for various bodies that adjudicate disciplinary matters (98-39). As to the supervisory guidance, the NASD noted that members increasingly engage associated persons at offices that are neither designated as Offices of Supervisory Jurisdiction nor registered as branch offices (generally referred to as "unregistered offices"). The Notice highlights that the NASD's supervisory and inspection obligations apply to all associated persons, regardless of their location, compensation, employment arrangement, or registration status, and thus apply to associated persons at unregistered offices. In this regard, the member's supervisory responsibility includes educating associated persons working from unregistered offices as to their obligations to the firm and the public; maintaining regular and frequent contact with such individuals; and implementing appropriate supervisory practices. The Notice further declares that any member that currently does not have a regular schedule for inspecting unregistered offices should adopt one no later than September 1, 1998.

As to the sanction guidelines, in addition to providing ranges of monetary and nonmonetary sanctions, the revised guidelines more fully discuss the remedial nature of disciplinary sanctions, the tailoring of sanctions, when violations should be aggregated, and when restitution should be provided. In addition, the revised guidelines expand the coverage of previous NASD guidance to specifically address violations of Confidentiality Agreements, Forms U-4 and U-5, and other areas. Finally, the guidelines increase the high end fine ranges in several areas, including forgery, unauthorized trading, and net capital violations. The sanction guidelines become effective May 15, 1998.

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The contents of this publication are intended for informational purposes only and should not be construed as legal advice or legal opinion, which can be rendered properly only when related to specific facts. This document may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. (c)GPH LLP 1998