OTS Issues Final Rule Reducing Regulatory Burden

Contents:

1. OTS Issues Final Rule Reducing Regulatory Burden

2. Federal District Court Dismisses Suits Relating to Funds’ Failure to Participate in Class Action Settlements

3. FDIC Releases Public Portion of Wal-Mart Bank Application

4. HUD Settles RESPA Proceeding Against Real Estate Agent

The OTS published a final rule (the "Final Rule") designed to reduce the regulatory burden on federal savings associations ("thrifts") in conducting their operations. In the branching context, the Final 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 Final Rule eliminates the requirement for OTS approval before a thrift approves loans and contracts, manages or sells OREO properties or conducts fiduciary activities. The OTS rejected in the Final Rule the suggestion of a commenter that another activity that an agency should be able to engage in without OTS approval is "deposit marketing and other activities in support of deposit business." The OTS stated that it wants an opportunity for prior review of new agency activities related to deposit – taking since that is a core activity of a branch.

The Final Rule also seeks to simplify application processing by harmonizing public notice requirements and adopting the higher threshold used by the other federal banking agencies to evaluate whether to hold a meeting if requested by a commenter. Under the Final Rule, the OTS will grant meetings only when it finds that written submissions "are insufficient to address facts and issues raised by an application, or [the OTS] otherwise determines that a meeting will benefit its decision – making process. [Furthermore,] The OTS may limit the issues to be considered at the meeting to issues the OTS decides are relevant or material." The Final 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 certain requirements relating to the reporting of changes of executive officers and directors of holding companies. The Final Rule becomes effective October 1, 2005.

In two separate proceedings, the U.S. District Court for the Northern District of Illinois dismissed for failure to state a claim upon which relief could be granted complaints filed by shareholders in two different families of mutual funds who alleged they had suffered losses because their funds had not participated in the settlement of securities class action suits in which the funds were eligible to participate. The defendants in each suit were the fund family’s directors and their advisers and affiliated entities. Each suit alleged violations of both Section 36(a) and Section 36(b) of the Investment Company Act of 1940, as amended. In addressing the plaintiffs’ claims under Section 36(a), which in general terms provides that the SEC may bring a court action against certain persons with respect to a "breach of fiduciary duty involving personal misconduct," each opinion relied primarily on the U.S. Supreme Court’s 2005 decision in Exxon Mobile Corp. v. Allapattah, Inc. to find that it would be improper to resort to legislative history to imply a private right of action in Section 36(a) when the statutory language is unambiguous in stating that Section 36(a) provides a right of action only for the SEC. The opinion in one of the two proceedings went on to state that the Section 36(a) claim before it should also be dismissed on the grounds that the prevailing case law has read the phrase "personal misconduct" in Section 36(a) to require some showing of self-dealing on the part of a defendant, not "general nonfeasance of a fiduciary duty." In addressing the respective plaintiffs’ claims under Section 36(b), both opinions cited the Seventh Circuit’s 2002 decision in Green v. Nuveen Advisory Corp. as holding that Section 36(b) actions must relate to a fund adviser’s compensation, not merely to the adviser’s decisions made in the course of performing its investment management function. In the absence of any allegations of impropriety in adviser compensation arrangements, the plaintiffs were found to have failed to state a claim under Section 36(b). Jacobs v. Bremmer, 378 F.Supp. 2d 861 (N.D.Ill.2005); Dull v. Arch, No. 05 C 140, 2005 WL 1799270 (N.D.Ill. July 27, 2005).

The FDIC has released the public portions of Wal-Mart’s application to establish a de novo Utah industrial bank, Wal-Mart Bank. The application was filed with the Utah Department of Financial Institutions on July 18 and with the FDIC on July 19. According to the application, Wal-Mart Bank will: (1) serve as sponsor to provide access for Wal-Mart to the ACH network for presenting, processing and settling electronically converted checks; (2) sponsor Wal-Mart with regional and national processing networks to present, process and settle on-line debit card transactions; (3) become a member of Visa and MasterCard network associations and sponsor Wal-Mart in order to present, process and settle point-of-sale credit card and signature debit card transactions; and (4) offer short-term CDs to section 501(c)(3) non-profit, charitable and educational organizations. Some community bankers and other critics have expressed concerns that approval of Wal-Mart’s application would pave the way for Wal-Mart to open branches in its stores and would erode the separation of banking and commerce. The bank will be located in Salt Lake City and will have local executive management and a majority of Utah-resident directors with no ties to Wal-Mart.

With respect to the CRA, Wal-Mart has requested an exception for the bank as a "special purpose bank" under interagency CRA regulations (e.g., 12 C.F.R. § 345.11(c)(3)), on the basis that the bank would not generally extend credit to the public. The bank states that it would be involved nevertheless in community development activities in the Salt Lake City area and the broader communities served by Wal-Mart Stores. Further details are contained in the business plan, which was not made publicly available.

The Department of Housing and Urban Development ("HUD") settled an administrative proceeding against a significant real estate broker (the "Broker") in which HUD asserted that the Broker paid higher real estate commissions and other incentives to the Broker’s sales agents for referring business to an affiliated title company (the "Title Company"). Section 8(a) of the Real Estate Settlement Procedures Act ("RESPA") prohibits the giving and receiving of any fee, kickback, or thing of value pursuant to any agreement or undertaking, oral or otherwise, so that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. HUD asserted that the Broker violated this restriction of RESPA by giving things of value to its sales agents for referrals to its Title Company, including: (1) giving higher sales commission splits to agents who referred business to the Title Company, (2) requiring agents to refer business to the Title Company in order to receive referrals of relocation business, (3) allowing only those agents who referred business to the Title Company to be paid their commission at settlement, and (4) giving prizes and other benefits to those agents who or which referred business to the Title Company. Without admitting guilt, the Broker paid $250,000 to settle the proceeding. Of perhaps broader interest, in announcing the settlement HUD declared that "HUD is taking a serious look at affiliated business arrangements to make certain that business practitioners don’t blur the lines between legitimate business relationships and those based on kickbacks and referral fees."

The FRB, FDIC and OCC jointly released the list of distressed and underserved nonmetropolitan middle-income geographies in which bank revitalization or stabilization activities will be eligible for "Community Development" consideration under the recently revised Community Reinvestment Act rules discussed in the July 26, 2005 Alert.

In response to the impact of Hurricane Katrina on investors and securities firms, the NASD issued a Notice to Members providing guidance to registered firms with offices located in areas affected by Katrina and detailing relief from certain regulatory requirements. In a press release, the SEC indicated that its Divisions and Offices that oversee publicly traded companies, accountants, mutual funds, brokerage firms and transfer agents, among others, are preparing relief measures that will include extensions of filing deadlines and suspension of requirements to deliver documents to hurricane-affected areas. This relief will also enable broker-dealers to provide access to accounts held at offices that are no longer operable.

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