Financial Services Alert

The federal banking agencies issued a proposed rule (the "Proposed Rule") setting forth consumer protection requirements applicable to retail sales, solicitations, advertisements or offers of insurance products by depository institutions. If adopted, the Proposed Rule would apply to such activities conducted by any person at an office or on behalf of a depository institution, including sales activities on a depository institution’s web site. However, the Proposed Rule would not apply to activities conducted by affiliates or even subsidiaries of depository institutions unless conducted at a branch or on behalf of the depository institution. The Proposed Rule would establish presumptions to determine whether a sale or solicitation is conducted on behalf of a depository institution. These include: (1) statements that the offer is made on behalf of the institution, (2) payment of commissions or fees to the institution, (3) use of the depository institution’s logo, and (4) sales or solicitations at an off premises site (such as a kiosk) that uses the depository institution’s name or logo.

The Proposed Rule would prohibit certain practices. A person covered by the Proposed Rule could not engage in any practice that would lead a consumer to believe that an extension of credit is conditional upon purchasing insurance from the institution or agreeing not to purchase insurance from someone else. The Proposed Rule would also prohibit misleading practices with respect to the uninsured nature or investment risk of insurance products. To further avoid the possibility of customer confusion, the Proposed Rule would require that insurance sales occur in areas segregated from deposit taking areas and that depository institutions provide disclosures similar to the types of disclosures required by the Interagency Policy Statement on Retail Sales of Nondeposit Investment Products. Depository institutions would also be required to disclose that the institution may not condition an extension of credit on the purchase of insurance from the institution. The required disclosures would have to be provided orally and in writing before completion of an insurance sale. The anti-tying disclosure would need to be given orally and in writing at the time that a consumer applies for an extension of credit in connection with which insurance may be solicited or sold. As to referrals, under the Proposed Rule, only licensed personnel could sell or offer insurance; however, tellers could refer customers to licensed personnel and receive a one-time, nominal fixed referral fee that does not depend upon whether the referral results in a sale. Comments on the Proposed Rule are due by October 5, 2000.

The FRB issued a Supervision and Regulation letter (SR00-13, the "Letter") detailing its contemplated framework for financial holding company ("FHC") supervision. The Letter notes that under the Gramm-Leach-Bliley Act of 1999 the FRB is responsible for the consolidated supervision of FHCs. Thus, the FRB will assess the holding company on a consolidated or group-wide basis with the primary objective of ensuring that the holding company does not threaten the viability of its bank subsidiaries. The supervisory activities of the FRB will fall into three broad categories: information gathering, assessments and supervisory cooperation, and promotion of safe and sound practices and improved disclosure. As to information gathering, the FRB will regularly assess an FHC’s centralized risk management control processes, perform limited targeted testing to verify that those risk management systems are adequate, and have periodic discussions with FHC senior management and the heads of business lines. As to ongoing supervision, the FRB is responsible for understanding the consolidated organization’s legal, organizational, and risk management structure, major business activities, and risk exposures and risk management systems. Although the FRB will rely to the fullest extent possible on reports that FHCs and their subsidiaries are required to file with existing authorities, it may require specialized reports from functionally regulated subsidiaries on certain occasions. Moreover, the FRB may examine a functionally regulated subsidiary when it has cause to believe that (1) the subsidiary poses a material risk to an affiliated bank, (2) the examination is necessary for the FRB to be adequately informed about the FHC’s systems for monitoring and controlling operational risks, or (3) the subsidiary is not in compliance with any law over which the FRB has jurisdiction. As to capital adequacy, the Letter notes that FHC’s are subject to the FRB’s holding company capital guidelines, and that the FRB will review an FHC’s internal risk assessment to evaluate consideration of present and future economic conditions, future business development plans, possible stress scenarios and internal risk control and audit procedures. As to intra-group exposures, the focus of the FRB will be on the potential impact of those exposures on bank subsidiaries. The FRB declares itself "uniquely positioned" to understand the combination of exposures within an organization, and to further its understanding will require all bank holding companies, including FHCs, to report regularly on their covered transactions with affiliates that are subject to Section 23A and 23B of the Federal Reserve Act. The FRB also may take enforcement action against a functionally regulated subsidiary if it believes it necessary to prevent or readdress an unsafe or unsound practice that poses a material risk to a bank, or to the domestic or international payment system. Finally, as to the promotion of sound practices and improved disclosures, the FRB declares that it will, consistent with safe and sound practices, participate in efforts to enhance disclosures that illuminate group-wide activities, risk exposures, risk management, control and intra-group exposures.

The SEC adopted Regulation FD to promote "full and fair disclosure" of material information by domestic public companies and to end selective disclosure. Selective disclosure occurs when issuers release material nonpublic information to selected persons, such as securities analysts or institutional investors, before disclosing the information to the general public. Regulation FD will be effective on October 23, 2000, but many public companies will wish to review its requirements and adopt policies and practices to comply before the effective date. Most likely to be affected will be disclosure policies, conference calls, conference presentations and other contacts with analysts and significant stockholders. Last week, for example, it was reported in the financial press that, in part because of uncertainty as to the manner in which Regulation FD will be applied, two publicly held bank holding companies each cancelled a previously scheduled conference call with analysts. Regulation FD requires public companies to publicly disclose material information simultaneously (in the case of intentional or reckless disclosure) or within the later of 24 hours or the opening of the next day’s trading (in the case of unintentional disclosure). The new rule applies to communications with (1) securities professionals and (2) security holders who might trade based on the information. Regulation FD applies to communications by the public company’s directors and executive officers, as well as investor relations officers and other staff who regularly communicate with the types of persons described above. It does not apply to communications with the media, rating agencies or customers and suppliers, or to parties subject to an express confidentiality agreement. Regulation FD does not require any specific form of public disclosure, but most companies will comply either by issuing a press release or by using Form 8-K. The SEC adopted specific liability limitations, but these do not eliminate anti-fraud liability under federal securities laws (including Rule 10b-5). The SEC will enforce Regulation FD through cease and desist proceedings, civil injunctions and/or cash penalties against public companies and officers and directors.

The Court of Appeals for the 11th Circuit (the "Court") ruled in favor of a bank holding company (the "BHC") which was charged, along with its banking subsidiaries, with having allegedly (and in violation of federal privacy statutes) improperly released to a grand jury BHC records of more than 1,000 international customers of the BHC, including records of the plaintiff. Coronado v. Bank Atlantic Bancorp, 11th Cir., No. 95-12108, Aug. 18, 2000. In 1995 the BHC became concerned that its international division was being used to facilitate money laundering activities and the BHC appropriately reported its suspicions to law enforcement officials. Law enforcement officials convened grand juries, which subpoenaed customer records from the BHC to investigate the BHC’s suspicions. Subsequently, the BHC claimed immunity from suit under the safe harbor provision of the federal Annunzio-Wylie Anti-Money Laundering Act (the "Act") because the disclosures of records by the BHC were made pursuant to grand jury subpoenas. The Court found that the BHC was presented with facially valid grand jury subpoenas from three federal grand juries investigating money laundering and that to impose liability on the BHC for complying with the subpoenas would "fly in the face of both [the Act’s] clear intent to encourage cooperation with money laundering investigations and the more general policy favoring the effective and expeditious discharge of the grand juries’ duties". The Court concluded that the safe harbor provisions of the Act provided a "very broad" immunity from suit that immunized the BHC from any lawsuit arising from the disclosures under every source of law except the U.S. Constitution (including e.g., the Electronic Communications Privacy Act and the Right to Financial Privacy Act). The Coronado case thus provides financial institutions with greater comfort that reports they make to law enforcement authorities with respect to possible violations of law will not expose the financial institution, or its directors, officers or employees, to liability.

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.