Vol. 1 No. 31

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

FRB Eases Section 20 Restrictions and Adopts Lagged Reserve Requirements

When the FRB eliminated many of its firewalls concerning securities affiliates of banks established pursuant to Section 20 of the Glass-Steagall Act (generally referred to as "Section 20 Subsidiaries"), it codified the remaining firewalls at 12 CFR § 225.200. One of those remaining requirements was that a Section 20 Subsidiary must comply with the Interagency Statement on Retail Sales of Nondeposit Investment Products ("Interagency Statement"), whether or not the Section 20 Subsidiary was selling products on the bank's premises. Several bank holding companies asked for relief from this requirement because providing the oral disclosures imposed by the Interagency Statement was burdensome when customers called brokers several times daily to solicit their views on various investments. In response to that request, the FRB eased this requirement to provide that a Section 20 Subsidiary is required only to provide a retail customer with the written disclosures required by the Interagency Statement when the customer opens an account. The Interagency Statement's ongoing requirements for disclosures during sales presentations and otherwise would no longer apply. The change became effective March 27, 1998.

Separately, the FRB finalized a proposal, described in the November 18, 1997 issue of the Alert, to move from a system of contemporaneous reserve requirements for institutions that report on a weekly basis to one in which reserves are maintained on a lagged basis. The new rule provides that the reserve balance maintenance period for these institutions will begin 30 days after the beginning of the two-week reserve computation period. The FRB noted that the current contemporaneous reserve requirements were becoming increasingly difficult to comply with, largely because of the implementation of retail sweep programs. The rule becomes effective with the reserve maintenance period beginning July 30, 1998. For that maintenance period, the required reserves and vault cash necessary to meet the reserve requirements will be based on the computation period that begins on June 30, 1998.

OTS Proposes Revisions to Change in Management Notice Requirements

The OTS proposed to amend its rules requiring certain federal savings associations and savings and loan holding companies to provide notice prior to the appointment or employment of directors and senior executive offices. The OTS proposal would more closely conform its rules to the changes made by the other federal bank regulatory agencies in response to a 1996 federal law change. The proposal would eliminate the notice required for management changes by federal savings associations chartered for less than 2 years, as well as for savings associations and savings and loan holding companies that have undergone a change in control within the previous 2 years. Instead, the notice would be required only if the institution is in "troubled condition," does not meet all capital requirements, or has received an OTS notice regarding the necessity of a filing. Comments on the proposal are due by May 26, 1998.

FRB Decreases General Partner Commitments

In connection with its approval of a bank holding company acquiring certain commodity pool operators, the FRB reconsidered the commitments it has generally required from bank holding companies seeking to be general partners in partnerships. The FRB eliminated many of these commitments and instead imposed only the following: (1) the holding company may not guarantee the obligations of the partnerships or the subsidiary acting as general partner or commodity pool operator, and also may not enter into any arrangement designed to protect any investor in the partnerships from loss; and (2) if the holding company reports the investment on other than a consolidated basis, when calculating its regulatory capital ratios it would include an amount of assets in the denominator equal to all liabilities of the partnerships, weighted at 100%. As to Glass-Steagall Act ("GSA") issues, the FRB stated that partnerships controlled by bank holding companies may, consistent with the GSA, offer partnership interests no more than four times per year.

SEC Issues Guidance on Offshore Internet Offerings

The SEC published an important release setting forth its views on the application of U.S. securities laws to Internet web sites that are used for the sales of securities and investment services, such as those maintained by many mutual fund companies. In effect, the SEC has recognized that the existence of an Internet web site accessible to U.S. investors will not necessarily give rise to a registration obligation under the U.S. securities laws. Under guidelines set forth in the release, the obligation to register securities under U.S. law will depend upon various facts and circumstances indicating whether Internet communications are targeted at U.S. investors. In some circumstances, password protected access or other procedures may be required to screen impermissible U.S. investors. The SEC indicates that it will impose more rigorous standards on Web sites maintained by unregistered U.S. issuers and by foreign issuers that seek to conduct private placements in the United States than on foreign issuers that do not seek any U.S. investors. The antifraud provisions of the U.S. securities laws will continue to apply broadly to any communication that has a jurisdictional connection with the United States.

SEC Proposes Requiring Broker Dealer Reports on Year 2000 Preparedness

The SEC proposed a temporary rule requiring certain registered broker-dealers ("brokers") to file two reports regarding Year 2000 preparedness. A broker with a minimum net capital requirement of $100,000 or more as of December 31, 1997 must file the first report no later than 45 days after the rule becomes effective. A second report must be filed by every broker with a minimum net capital requirement of $100,000 or more as of the fiscal year end in 1998, as well as by every broker that was required to file the first report, within 90 days after the broker's 1998 fiscal year end financial statements. The proposal also details the minimum disclosures required in the reports, including whether the board of directors has approved and funded a Year 2000 plan, whether the plan addresses all major computer systems throughout the world, what levels of management are involved, and the broker's progress resolving the Year 2000 issues. In addition, the proposal requires the second report to contain an attestation from an independent accountant as to whether there is a reasonable basis for the Year 2000 assertions made by the broker. Comments on the proposal are due by April 13, 1998.

SEC Approves NASD Order Audit Trail System

The SEC approved the NASD's establishment of an order audit trail system ("OATS"). OATS requires NASD member firms to record in electronic form and report to the NASD specified information about orders they have received to effect transactions in equity securities traded on the Nasdaq Stock Market. The purpose of OATS is to enable the NASD to construct an audit trail of data and improve its surveillance of the system. The rules also require NASD members to synchronize their business clocks with a reference source designated by the NASD so that the times of various events are recorded with a single reference point. The OATS will be implemented in three phases. In Phase I, which will begin on March 1, 1999, members must record specified information regarding to electronic orders received by Electronic Communications Networks and electronic orders received by trading departments of market makers. In Phase II, which will begin on August 1, 1999, the recording and reporting requirements generally will be effective for all electronic orders. Phase III, which begins on July 31, 2000, will impose the requirements upon all manual orders. As to clock synchronization, computer system clocks must be synchronized by August 7, 1998 and mechanical clocks by July 1, 1999.

DOL Seeks Comment on Cross-Trading

The Department of Labor ("DOL") has requested information to assist it in determining what safeguards and standards should be imposed as a condition to the grant of exemptive relief with respect to cross-trading between client accounts of an investment manager when at least one of such accounts holds plan assets subject to ERISA. Absent such an exemption, cross-trades between such client accounts would constitute a prohibited transaction under ERISA. In its notice, the DOL expresses various concerns regarding the potential for abuse in the context of cross-trades and requests information as to how exemptive relief can be structured to protect against any such abuses. In addition, the notice contains a list of specific questions and issues as to which responses are requested. Responses must be received by the DOL by May 19, 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