Goodwin, Procter & Hoar LLP, a firm of over 400 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 services 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
OTS Finalizes Capital Distribution Rule Amendments
The OTS finalized substantial amendments to its capital distribution rules. Under the previous rules, all federal savings banks were required either to provide notice to the OTS or apply for OTS approval before making any capital distribution. Noting the improvement in the capitalization of thrifts, the OTS finalized amendments to make its capital rules similar to those of other federal banking agencies. The rules, which cover virtually all capital distributions (including distributions in connection with corporate restructurings, but excluding stock dividends and deposit payments) provide for no notice, a notice, or an application in various circumstances.
The preamble to the final rules also clarify that dividends by wholly-owned subsidiaries are not considered capital distributions, while those by a less than wholly-owned entity generally would be considered capital distributions. A federal savings bank would not need to provide any notice prior to a distribution if
FRB Amends 1984 Section 23A Interpretation
The FRB relaxed its 1984 interpretation concerning the calculation of the quantitative limits for purposes of Section 23A of the Federal Reserve Act (limiting certain transactions between an insured bank and its nonbank affiliates) when a loan is made to an unrelated third party and is secured both by securities issued by an affiliate and other types of collateral. In the 1984 opinion, the staff declared that for purposes of the 23A quantitative limits the value of an extension of credit that is secured in any part by affiliate securities is the amount of the entire loan rather than merely the value of the affiliate securities pledged.
However, the FRB reconsidered this interpretation and determined that it is reasonable to reflect the fair market value of the nonaffiliate collateral in applying the quantitative limits of Section 23A to loans to an unaffiliated third party. More specifically, the FRB now believes that for purposes of Section 23A these mixed-collateral loans should be valued at the lesser of (1) the total value of the loan less the fair market value of nonaffiliate collateral, or (2) the fair market value of the affiliate shares used as collateral. The FRB interpretation emphasizes that securities issued by an affiliate remain unacceptable collateral for a loan or extension of credit to any affiliate.
New Bills Limiting Year 2000 Liability Introduced in Congress
Several new Year 2000 ("Y2K") -related bills have recently been introduced in Congress, at least two of which propose to limit liability in lawsuits filed as a result of Y2K computer failures. On January 6, 1999, Representative Don Manzullo (R-Ill.) introduced the Year 2000 Consumer Protection Plan Act of 1999 (H.R. 192), which would require plaintiffs in Y2K cases to prove by a preponderance of the evidence that a defendant acted unreasonably and caused foreseeable losses. The Consumer Protection Plan Act would make arbitration mandatory, limit pain and suffering damages, limit punitive damages to cases involving willful or wanton misconduct, and limit the time under which Y2K-related actions could be brought.
It would apply to most civil litigation arising under either state or federal law, but would not apply to actions brought in a regulatory, supervisory, or enforcement capacity by either state or federal authorities, or to actions that arise out of an express written contract between the parties. Notably, the Consumer Protection Plan Act provides that a director or officer of a corporation which is the defendant in a Y2K-related action would be "responsible" only if the director or officer failed to exercise due diligence in overseeing the direction of an act cited by the plaintiffs as a cause for the action. The bill was referred to the Committee on the Judiciary.
In the U.S. Senate, Senator John McCain (R-AZ) introduced the Y2K Act (S. 96) on January 19, 1999. The Y2K Act would generally limit liability in lawsuits filed as a result of Y2K problems to economic loss incurred by plaintiffs. The bill would also, among other things, require plaintiffs to give a potential defendant notice of the Y2K failure and an opportunity to cure, limit the amount of damages allowed against small business defendants, permit a good faith defense based on a defendant's efforts to mitigate the harm, and allow several, but not joint, liability among defendants. Physical injuries are not covered by the limitations on litigation in the Y2K Act. The Y2K Act was referred to the Committee on Commerce, Science and Transportation.
Massachusetts Adds State Law Penalties for Y2K Noncompliance
Massachusetts banking regulators have adopted new Y2K guidelines which establish minimum operational standards and provide a range of sanctions for noncompliant state-chartered financial institutions, including banks and credit unions. The Year 2000 Safety and Soundness Standards (209 CMR 51.00) ("Massachusetts Standards") track the federal Y2K banking guidelines promulgated by the FFIEC, but allow the state to impose additional penalties for noncompliance.
The Massachusetts Standards provide that sanctions may be imposed in a number of circumstances, including, for example, where "a report of examination conducted by the Division or a federal bank regulatory agency determines that a bank is not in compliance with the Federal Year 2000 Guidelines by virtue of receiving a 'Needs to Improve' or 'Unsatisfactory' rating during or after a mission-critical systems testing stage." Sanctions for violation of the Massachusetts Standards include, among others:
Treasury Requests Comment on Regulation Regarding Account Access at Banks Through Payment Service Providers
The federal Debt Collection Improvement Act of 1996 (the "Act") requires that, subject to waiver, all federal payments (i.e., federal wage, salary, retirement and benefit payments and vendor and expense reimbursements, but not tax payments) made after January 1, 1999 be made by electronic funds transfer. The Act also requires the Treasury to make certain that individuals required by the Act to receive payments electronically have an account with a financial institution, with access to such account at a reasonable cost and with equivalent consumer protections as are provided to other account holders at the institution. In response to that law, Treasury designed an Electronic Transfer Account ("ETA") through which any eligible individual may be offered an account in any federally-insured financial institution that enters into an ETA Financial Agency Agreement with Treasury.
However, ETAs are not mandatory, and certain banks have entered into arrangements with non-depository payment service providers, such as check cashers and currency dealers, whereby recipients of electronic federal payments deposited into a non-ETA account at the bank have access to those payments through the service providers. These arrangements typically involve the establishment of an account in the name of the recipient at the bank into which the payment is deposited followed by the transfer of the payment to a commingled account in the name of the payment service provider.
The Treasury has received a number of complaints regarding these provider arrangements, including that the arrangements could result in recipients being charged excessive fees to receive their funds and that the funds would not have federal deposit insurance or be subject to the consumer protection laws. Treasury is seeking comment as to whether rulemaking is appropriate with respect to these arrangements. Among the issues for which Treasury is seeking comment is whether it should regulate or prohibit arrangements between banks and payment service providers, and whether payment service providers should be subject to independent regulation. Comments are due by April 8, 1999.
If you would like anyone else to receive issues of the Financial Services Alert, would like to receive any past issues, or would like the background materials for any of the matters discussed above, or please contact Greg Lyons
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 1999
Developments of Note
OTS Finalizes Capital Distribution Rule Amendments
The OTS finalized substantial amendments to its capital distribution rules. Under the previous rules, all federal savings banks were required either to provide notice to the OTS or apply for OTS approval before making any capital distribution. Noting the improvement in the capitalization of thrifts, the OTS finalized amendments to make its capital rules similar to those of other federal banking agencies. The rules, which cover virtually all capital distributions (including distributions in connection with corporate restructurings, but excluding stock dividends and deposit payments) provide for no notice, a notice, or an application in various circumstances.
The preamble to the final rules also clarify that dividends by wholly-owned subsidiaries are not considered capital distributions, while those by a less than wholly-owned entity generally would be considered capital distributions. A federal savings bank would not need to provide any notice prior to a distribution if
- (1) it is eligible for expedited treatment under the OTS' application processing regulations
- (2) the total amount of all capital distributions (including the proposed distribution) for the calendar year does not exceed net income for that year plus retained net income for the preceding 2 years
- (3) the distribution will not violate any law or OTS directive
- (4) it will be well capitalized after the distribution
- (5) it is not a subsidiary of a savings and loan holding company
- (6) the distribution will not be used to retire stock or debt instruments that are included in capital. A notice would be required if any of the last 2 conditions listed above is not satisfied, and the institution is at least adequately capitalized. An application would be required if any of the first 3 is not satisfied or the institution would not be at least adequately capitalized. The notice or application, if required, may include a schedule seeking advance authority for up to 12 months of capital distributions. The rules become effective April 1, 1999.
FRB Amends 1984 Section 23A Interpretation
The FRB relaxed its 1984 interpretation concerning the calculation of the quantitative limits for purposes of Section 23A of the Federal Reserve Act (limiting certain transactions between an insured bank and its nonbank affiliates) when a loan is made to an unrelated third party and is secured both by securities issued by an affiliate and other types of collateral. In the 1984 opinion, the staff declared that for purposes of the 23A quantitative limits the value of an extension of credit that is secured in any part by affiliate securities is the amount of the entire loan rather than merely the value of the affiliate securities pledged.
However, the FRB reconsidered this interpretation and determined that it is reasonable to reflect the fair market value of the nonaffiliate collateral in applying the quantitative limits of Section 23A to loans to an unaffiliated third party. More specifically, the FRB now believes that for purposes of Section 23A these mixed-collateral loans should be valued at the lesser of (1) the total value of the loan less the fair market value of nonaffiliate collateral, or (2) the fair market value of the affiliate shares used as collateral. The FRB interpretation emphasizes that securities issued by an affiliate remain unacceptable collateral for a loan or extension of credit to any affiliate.
New Bills Limiting Year 2000 Liability Introduced in Congress
Several new Year 2000 ("Y2K") -related bills have recently been introduced in Congress, at least two of which propose to limit liability in lawsuits filed as a result of Y2K computer failures. On January 6, 1999, Representative Don Manzullo (R-Ill.) introduced the Year 2000 Consumer Protection Plan Act of 1999 (H.R. 192), which would require plaintiffs in Y2K cases to prove by a preponderance of the evidence that a defendant acted unreasonably and caused foreseeable losses. The Consumer Protection Plan Act would make arbitration mandatory, limit pain and suffering damages, limit punitive damages to cases involving willful or wanton misconduct, and limit the time under which Y2K-related actions could be brought.
It would apply to most civil litigation arising under either state or federal law, but would not apply to actions brought in a regulatory, supervisory, or enforcement capacity by either state or federal authorities, or to actions that arise out of an express written contract between the parties. Notably, the Consumer Protection Plan Act provides that a director or officer of a corporation which is the defendant in a Y2K-related action would be "responsible" only if the director or officer failed to exercise due diligence in overseeing the direction of an act cited by the plaintiffs as a cause for the action. The bill was referred to the Committee on the Judiciary.
In the U.S. Senate, Senator John McCain (R-AZ) introduced the Y2K Act (S. 96) on January 19, 1999. The Y2K Act would generally limit liability in lawsuits filed as a result of Y2K problems to economic loss incurred by plaintiffs. The bill would also, among other things, require plaintiffs to give a potential defendant notice of the Y2K failure and an opportunity to cure, limit the amount of damages allowed against small business defendants, permit a good faith defense based on a defendant's efforts to mitigate the harm, and allow several, but not joint, liability among defendants. Physical injuries are not covered by the limitations on litigation in the Y2K Act. The Y2K Act was referred to the Committee on Commerce, Science and Transportation.
Massachusetts Adds State Law Penalties for Y2K Noncompliance
Massachusetts banking regulators have adopted new Y2K guidelines which establish minimum operational standards and provide a range of sanctions for noncompliant state-chartered financial institutions, including banks and credit unions. The Year 2000 Safety and Soundness Standards (209 CMR 51.00) ("Massachusetts Standards") track the federal Y2K banking guidelines promulgated by the FFIEC, but allow the state to impose additional penalties for noncompliance.
The Massachusetts Standards provide that sanctions may be imposed in a number of circumstances, including, for example, where "a report of examination conducted by the Division or a federal bank regulatory agency determines that a bank is not in compliance with the Federal Year 2000 Guidelines by virtue of receiving a 'Needs to Improve' or 'Unsatisfactory' rating during or after a mission-critical systems testing stage." Sanctions for violation of the Massachusetts Standards include, among others:
- (1) suspension or removal of officers, directors or trustees
- (2) appointment of a conservator or receiver
- (3) taking possession and control of the bank or credit union.
Treasury Requests Comment on Regulation Regarding Account Access at Banks Through Payment Service Providers
The federal Debt Collection Improvement Act of 1996 (the "Act") requires that, subject to waiver, all federal payments (i.e., federal wage, salary, retirement and benefit payments and vendor and expense reimbursements, but not tax payments) made after January 1, 1999 be made by electronic funds transfer. The Act also requires the Treasury to make certain that individuals required by the Act to receive payments electronically have an account with a financial institution, with access to such account at a reasonable cost and with equivalent consumer protections as are provided to other account holders at the institution. In response to that law, Treasury designed an Electronic Transfer Account ("ETA") through which any eligible individual may be offered an account in any federally-insured financial institution that enters into an ETA Financial Agency Agreement with Treasury.
However, ETAs are not mandatory, and certain banks have entered into arrangements with non-depository payment service providers, such as check cashers and currency dealers, whereby recipients of electronic federal payments deposited into a non-ETA account at the bank have access to those payments through the service providers. These arrangements typically involve the establishment of an account in the name of the recipient at the bank into which the payment is deposited followed by the transfer of the payment to a commingled account in the name of the payment service provider.
The Treasury has received a number of complaints regarding these provider arrangements, including that the arrangements could result in recipients being charged excessive fees to receive their funds and that the funds would not have federal deposit insurance or be subject to the consumer protection laws. Treasury is seeking comment as to whether rulemaking is appropriate with respect to these arrangements. Among the issues for which Treasury is seeking comment is whether it should regulate or prohibit arrangements between banks and payment service providers, and whether payment service providers should be subject to independent regulation. Comments are due by April 8, 1999.
If you would like anyone else to receive issues of the Financial Services Alert, would like to receive any past issues, or would like the background materials for any of the matters discussed above, or please contact Greg Lyons
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 1999
