Originally published November 23, 2004
The OTS published interim final rules, and proposed rules, designed to increase the flexibility of federal savings banks ("thrifts") in conducting their operations.
Interim Rule
. The interim rules focus on reducing the regulatory burden on thrifts. For example, in the branching context, the interim rule: (1) eliminates any prior approval requirement before a thrift re-designates a home or branch office; (2) generally permits highly rated (capital, CAMELS, CRA, and compliance) thrifts to change the location of a home or branch office, or even establish a new branch office, without an OTS application or notice (although public notice requirements still apply); and (3) eliminates the notice requirement for short-distance relocations. As to agency offices, the interim rule eliminates the requirement for OTS approval before they approve loans and contracts. The interim rule also seeks to simplify application processing by harmonizing public notice requirements and adopting the tougher standard used by the other federal banking agencies to evaluate whether to hold a meeting if requested by a commenter. The interim rule also makes certain other assorted changes, including (1) amending the nondiscriminatory advertising regulation to only require the equal housing logo when advertising for home (as opposed to credit card or commercial) loans, and eliminating the requirements relating to changes of executive officers and directors of holding companies. The interim rule becomes effective January 1, 2005, but comments will be accepted for 60 days after its publication in the Federal Register.Proposed Rule
. The proposed rule seeks to amend the OTS’ Community Reinvestment Act ("CRA") regulations to provide more flexibility to thrifts. The proposal would revise the definition of "community development" to increase the eligibility of activities in rural areas. Some commenters asserted that many projects do not qualify for community development treatment because they are not located in low-to-moderate income ("LMI") areas, or principally benefit people with mixed incomes. As a result, the proposal would expand the definition of community development to also include (1) community services for individuals in rural areas, and (2) activities that revitalize or stabilize rural areas. As a result, activities in rural areas would be covered even if the individuals or areas served are not LMI. The proposal does not define "rural," and also encourages activities in areas affected by national or other disasters.The proposal also seeks to provide additional flexibility to large retail thrifts on how they conduct their CRA activities. Currently, approximately 50% of the rating is dependent on lending, and 25% is dependent on each of services and investment. The proposal would not allow less than 50% weight on lending. However, as to the other 50%, the proposal would give large retail thrifts the ability to elect the weighting between the lending, services and investment tests (e.g., 80% lending, 10% services, 10% investment). The proposal notes this is intended to allow thrifts to focus on the specific needs of their communities. Alternatively, the proposal solicits comment on eliminating the investment test. Comments on the proposal are due 60 days after its publication in the Federal Register.
NASD Mutual Fund Task Force Issues Recommendations on Soft Dollars and Portfolio Transaction Costs
The NASD Mutual Fund Task Force formed in May 2004 (see the June 1, 2004 Alert for a discussion of the Task Force and its purposes - to view this please click on 'Next Page' link at bottom of page) issued a report (the "Report") with its observations and recommendations regarding (a) the scope and applicability of the safe harbor provided by Section 28(e) of the Securities Exchange Act of 1934, as amended ("Section 28(e)"), and (b) the disclosure of information regarding soft dollar activity and portfolio transaction costs to mutual fund boards and existing and potential mutual fund shareholders. The Report recommends that the SEC preserve the safe harbor afforded by Section 28(e). (In general terms, Section 28(e) protects an investment adviser from claims that it has breached its fiduciary duty by causing a discretionary client to pay more than the lowest available commission rate to a broker-dealer that provides brokerage and/or research services.) The Report does, however, recommend that the safe harbor be limited to (A) brokerage services and (B) the "intellectual content" of research, so as to exclude the means by which such content is provided. As to mixed use products, i.e., products whose uses fall both inside and outside the safe harbor, the Task Force recommends that the SEC consider limiting the protection of the safe harbor to products with a significant use within the safe harbor. To assist in board oversight of adviser soft dollar use, the Report urges the SEC to require that mutual fund boards receive a range of information on soft dollar activity. Although this information would include the dollar amount of research received from third parties, the Task Force did not reach a consensus on whether it is possible to provide the board with comparable information on proprietary research. A majority of the Task Force strongly objected to a recommendation that the SEC require an adviser to provide a fund board with an estimate of the dollar amount of Section 28(e)-eligible proprietary research and brokerage services obtained.
In addition to existing statement of additional information ("SAI") disclosure pursuant to Item 15(c) of Form N-1A relating to broker selection practices and the role of soft dollar research benefits in the selection process, the Task Force recommends that a fund's prospectus disclose (a) whether the fund obtains third-party research through soft dollars and (b) whether the fund obtains proprietary research through soft dollars. In addition, to the extent that current disclosure requirements do not address commission equivalents and other remuneration that is eligible for the Section 28(e) safe harbor, e.g. certain riskless principal transactions, those requirements should be modified or reinterpreted to do so. More broadly, the Task Force recommends that the SEC consider making compliance with Section 28(e) mandatory for all discretionary investment advisers, whether or not registered with the SEC, and that the SEC recommends to other regulators that they require all other discretionary investment managers not subject to SEC jurisdiction to comply with the standards of the safe harbor.
The Report also includes recommendations regarding information that should be provided to fund boards and shareholders to enable them to better evaluate transaction cost and execution quality. Fund boards should receive (A) an adviser’s policies and procedures for monitoring transaction costs and brokerage allocation; and (B) information concerning the reasonableness of all transaction costs, including commissions, commission equivalents, mark-ups and markdowns, market impact costs, opportunity costs, and other intangible trading costs. Form N-1A should require a fund's prospectus to include a brief narrative description of the various types of trading costs incurred by the fund, including commissions, markups and markdowns, market impact costs, and opportunity costs, along with a statement that a fund’s performance numbers, but not the prospectus fee table, reflect the foregoing trading costs. Fund prospectuses should also disclose (1) a fund’s portfolio turnover rate in close proximity to other information about the costs of portfolio transactions; (2) the percentage of the total dollar value of all transactions that were executed on a commission basis; (3) average commission paid per share; and (4) total commissions paid as a percentage of total net asset value. In addition, current SAI disclosure concerning total commissions should appear in the prospectus in chart form covering a five-year period where it should accompany the additional information recommended above. The Task Force decided against recommending quantitative disclosure of intangible transaction costs, such as market impact and opportunity costs, primarily because of concerns about lack of consensus on how these costs should be quantified.
OCC Issues Guidance on Enforcement of BSA and SAR Filing Requirements
The OCC issued a bulletin (OCC 2004-50, the "OCC Bulletin"), concerning OCC enforcement of the requirements that national banks ("Banks") establish and maintain a Bank Secrecy Act ("BSA") compliance program that provides for, among other things, filing, under appropriate circumstances, of suspicious activity reports ("SARs"). The OCC Bulletin states that, unlike other areas covered in OCC examinations of Banks, the OCC has a statutory mandate that directs it to issue a cease and desist order ("C&D") "whenever a [B]ank fails to establish and maintain a BSA compliance program" or fails to correct a problem concerning its BSA compliance program cited in a report of examination or supervisory correspondence. The OCC Bulletin states that a Bank must file a SAR if it knows, suspects or has reason to suspect: (1) that a transaction involves a federal criminal violation concerning insider activity in any amount; (2) a potential money laundering or BSA violation involving $5,000 or more, (3) a federal criminal violation for $5,000 or more, involving a known suspect; or (4) a federal criminal violation for $25,000 or more regardless of potential suspects. The OCC notes that it will cite a violation by a Bank for failure to file a SAR if there is evidence of the Bank’s bad faith, if the failure is significant or egregious or if the failure to file reflects a pattern or practice. The OCC reminds Banks of the broad BSA "safe harbor" that protects Banks against liability, including liability under the Right to Financial Privacy Act, for disclosure of customer financial information in connection with SAR filings. The OCC provides 6 examples of where citation of a violation and the issuance of an accompanying C&D are appropriate: (1) the Bank lacks a BSA compliance program that adequately covers all of the required program elements; (2) the Bank fails to implement a written BSA compliance program; (3) a Bank’s BSA compliance program has deficiencies "coupled with aggravating factors", such as highly suspicious activity suggesting money laundering, potential terrorist financing, a pattern of evading filing requirements, insider complicity, etc.; (4) a Bank fails to respond to supervisory criticisms of its BSA compliance program; (5) a Bank engages in systematic or pervasive BSA or recordkeeping violations, fails to respond to supervisory warnings of BSA deficiencies or continues a history of such violations, even when they are dissimilar to those the OCC cited in the past; and (6) a Bank engages in a single, nontechnical violation that indicates "a willful or reckless disregard" for BSA compliance requirements or creates a substantial risk of money laundering or terrorist financing.
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