Financial Services Alert

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

New Congress Re-introduces "Financial Modernization" Legislation

On January 6, 1999, Representative James A. Leach (R-IA), Chairman of the House Banking and Financial Services Committee introduced the "Financial Services Act of 1999" to, among other things, allow for modernization of the banking, securities and insurance industries. The provisions of the bill, designated H.R. 10, closely parallel Senate Banking Committee compromises reached last fall. Chairman Leach has indicated that H.R. 10 will be a top priority of the House Banking Committee. A counter-proposal is being circulated by Representative John J. LaFalce (D-NY), Ranking Minority member of the House Banking Committee. In the Senate, the new Chairman of the Senate Banking Committee, Phil Gramm (R-TX) announced his intentions to complete a financial modernization bill by the end of February. Notably, in the previous Congress Senator Gramm was instrumental in preventing the enactment of such legislation because he opposed the proposed legislation's Community Reinvestment Act ("CRA") provisions. In this regard, it has been reported that at the Senate Banking Committee's first meeting (on 1/19/99) ranking minority member Paul Sarbanes (D-MD) criticized Senator Gramm's intentions to reduce the scope of proposed legislation's CRA provisions and also suggested that Senator Gramm was promoting an "overly ambitious" schedule to move the legislation.

The following are highlights identified by the House Banking Committee as major provisions of H.R. 10:

Title I - Facilitating Affiliation Among Securities Firms, Insurance Companies, and Depository Institutions would,

(1) repeal the Glass-Steagall Act prohibitions on banks affiliating with securities firms, permitting holding companies to engage in securities underwriting and dealing without limitation, as well as sponsoring and distributing mutual funds.

(2) repeal Bank Holding Company Act prohibitions on insurance underwriting, allowing holding companies to underwrite and broker any type of insurance product.

(3) expand permissible nonbanking activities for holding companies from those "closely related to banking" to those that are "financial in nature"

(4) permit holding companies to offer new services and products that have not been found to be financial through a "developing basket," provided the holding company reasonably believes that such activities are financial and the activities do not exceed 5% of the holding company's gross revenues, total assets, and total capital.

(5) grandfather nonfinancial activities for companies that are predominantly financial (85% of revenues) for a 10-year period subject to certain conditions, which can be extended by the FRB for an additional 5 years.

(6) preempt State anti-affiliation laws that prevent banks from affiliating with financial companies.

(7) require holding companies that want to engage in financial activities to have their subsidiary depository institutions well capitalized and well managed and have a satisfactory CRA rating as of the time the holding company first seeks to engage in financial activities.

(8) eliminate the application process for companies to engage in financial activities that are listed in the statute or that have been approved by the FRB.

(9) authorize the FRB to impose prudential safeguards on transactions/relationships between a depository institution and an affiliate to avoid safety and soundness risks, avoid conflicts of interest, and protect the privacy of customers.

(10) incorporate functional regulation into holding company supervision by requiring the FRB to defer to the SEC and State securities regulators on interpretations of federal and state securities law and to state insurance regulators on interpretations of State insurance law.

(11) authorize national banks to underwrite municipal revenue bonds.

(12) authorize national bank operating subsidiaries to engage as agent in financial activities (e.g., acting as a travel agent and insurance agent (without the place of 5,000 restriction)).

Title II - Functional Regulation (Securities Activities), would

(1) replace the broad bank exemption from regulation as a broker-dealer under the Securities Exchange Act with more limited exemptions

(2) contain a list of banking products that banks can continue to offer even if the SEC determines that such products are securities

(3) adopt a new procedure for determining whether a product is a banking product or a security that may not be offered by the bank.

Title III - Insurance, would

(1) ensure State functional regulation of insurance

(2) clarify that national banks cannot underwrite insurance within the bank, except for those products which national banks were authorized to engage in as of January 1, 1997

(3) prohibit national banks from underwriting title insurance unless the national bank or its subsidiary were actively and lawfully engaged in doing so before the date of enactment of the proposed legislation

(4) provide for an expedited and equalized court proceeding ("without unequal deference") for disputes between State insurance and Federal regulators on whether a product is insurance for purposes of the ban on insurance underwriting within a national bank and whether State laws regulating bank insurance agency activities should be preempted; and (5) require the Federal banking agencies to adopt jointly consumer protection regulations regarding retail sales of insurance products by depository institutions;

Title IV - Unitary Savings and Loan Holding Companies, would

(1) provide that no company which became a unitary holding company after October 7, 1998 may engage in commercial activities.

(2) grandfather existing unitary holding companies and those companies that had filed an application to become a unitary holding company as of October 7, 1998. Existing unitary holding companies could not be acquired by new commercial firms.

SEC Requires Electronic Filing of Form 13F

The SEC amended its electronic filing rules (Regulation S-T) to mandate the electronic filing of Form 13F. Form 13F reports are filed by institutional investment managers to report holdings of certain accounts holding equity securities having a fair market value of at least $100 million and over which they exercise investment discretion. Previously, the SEC permitted Forms 13F to be filed in paper form because, unlike other EDGAR submissions, filers generally must structure Forms 13F reports using a special format. However, in the final rule the SEC is not applying the current detailed formatting requirements of Form 13F-E to the mandatory electronic submission of Form 13F reports. In addition, institutional investment managers must continue to file in paper form requests for confidential treatment of Form 13F report information as well as the report information for which the confidential treatment is requested. The SEC also amended Rule 13f-1 by requiring that each amendment to a Form 13F either restate the amended form in its entirety, or designate the amendment as containing only additions to the previously filed report and provide for sequential numbering of amendments. The final rule becomes effective February 18, 1999, with compliance mandatory by April 1, 1999.

NASD Publishes OATS Interpretive Letter

The NASD published an interpretive letter regarding the Order Audit Trail System ("OATS") reporting requirements for each modification of an order made by a trader using Instinet. The broker-dealer member requesting the interpretation stated that to achieve best execution a trader may have to modify the limit price in an order 10 or more times a minute, and thus it would be very burdensome to comply with the standard OATS obligation to file a Cancel/Replace Report and a Route Report for each modification. The NASD determined that the member need not file any report under those circumstances, noting that Instinet had represented it would file a Cancel/Replace report for each modification. However, the member would have to file a Cancel/Replace Report and a Route Report for each customer modification to an order.

OTS Imposes CRA Requirement on T. Rowe Price Application

The OTS announced that investment firm T. Rowe Price Associates, Inc. must comply with the CRA in order to be granted a thrift charter. T. Rowe Price had stated in the business plan submitted with its thrift application that it intended its thrift to take deposits, but not make loans. The OTS's announcement is notable because OTS regulations expressly declare that the CRA requirements do "not apply to special service savings associations that do not perform commercial or retail banking services by granting credit to the public in the ordinary course of business, other than as incident to their specialized operations."

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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 1999