Financial Services Alert

OCC Proposes Rules on Multi-State Fiduciary Activities
The OCC issued a proposal to codify and clarify its rulings on national bank multi-state trust operations (the "Codification"), and concurrently issued an advance notice of proposed rulemaking inquiring as to whether it should develop uniform national standards to govern the administration of private trusts and investment of private trust property (the "Uniform Standard").

Codification of Interpretations. As to the Codification, the proposal defines a trust office as an office at which a bank "acts in a fiduciary capacity" for purposes of 12 USC Section 92a ("Section 92a") by performing "core" fiduciary functions such as executing documents, opening accounts and making investment or distribution decisions. The proposal separately defines a trust representative office (a "TRO") as an office where a bank conducts no core fiduciary activities, but rather only performs ancillary services, such as marketing, answering questions, and acting as a liaison between customers and the bank. The Codification also declares that a bank may establish a trust office or TRO in any state, regardless of state law, and that in any state where a trust office is located the bank may conduct the eight statutorily enumerated fiduciary activities, as well as any other fiduciary activities permitted for banks in that state. Notably, if a bank conducts different components of the core fiduciary activities in different states, the Codification permits the bank and the customer to determine which state is the one where the bank is acting in a fiduciary capacity for purposes of Section 92a. The Codification also clarifies that, if state law requires a deposit of securities on a basis other than assets (such as an amount equal to a percentage of capital), then a bank operating on a multi-state basis may compute the amount required for the state on a pro rata basis, according to the proportion of fiduciary assets for which the bank is acting in a fiduciary capacity at offices in that state.

Proposed Uniform Standard. The proposal also seeks comment as to the adoption of a Uniform Standard. The Uniform Standard is intended to ease the burden of banks conducting interstate fiduciary activities by eliminating the need to comply with differing state laws as to, for example, investment standards and trustee compensation.

NY State Insurance Department Promulgates Privacy Regulations
The New York State Insurance Department (the "Department") promulgated regulations regarding the treatment of consumer financial and health information by licensees ("Licensees") of the Department (the "Regulation"). The Regulation is set forth at 12 N.Y. Comp. Codes R. & Regs. tit. 11 § 420 (2000). The Regulation implements Title V of the Gramm-Leach-Bliley Act of 1999, which directs certain federal agencies and all state insurance commissioners to issue "consistent and comparable" regulations protecting consumer privacy. Generally, the Regulation follows the model privacy regulations adopted by the National Association of Insurance Commissioners ("NAIC") (and discussed in the September 26, 2000 issue of the Alert), with the exception of four notable differences. Unlike the NAIC model, the Regulation: (1) provides that a consumer who has settled a claim can still have a "customer relationship" with the insurance company if the settlement is not a lump sum; (2) provides that Licensees may distribute privacy and opt-out notices through an affiliate or agent, but remain responsible for compliance; (3) requires Licensees to maintain a record of a consumer’s authorization to disclose nonpublic personal health information for 6 years; and (4) extends the time for compliance with the provisions regarding sharing of health information to December 31, 2001. Licensees must be in compliance with all financial information provisions by July 1, 2001.

SEC Adopts Rules Requiring Disclosure of Order Routing Practices and Execution Quality in the Equities Markets
The SEC adopted Rules 11Ac1-5 and 11Ac1-6, which will increase public disclosure of order routing and execution practices for equity securities. The Rules were originally proposed in SEC Release No. 34- 43084 (July 28, 2000), which was discussed in the August 8, 2000 edition of the Alert. Rule 11Ac1-5 has been adopted substantially as proposed, subject to certain technical modifications. The Rule requires equity "market centers" (securities exchanges, OTC market makers and alternative trading systems such as electronic communications networks) to make available to the public, in electronic form, monthly reports that include uniform statistical measures of execution quality categorized by individual security, type of order and order size. The Rule applies only to exchange-listed equities and equities listed in the National Market tier of NASDAQ.

Rule 11Ac1-6 requires broker-dealers that route orders on behalf of customers to make publicly available, primarily by posting on a free Internet website, quarterly reports that disclose the significant venues to which the broker-dealer has routed non-directed customer orders, i.e. orders for which the customer has not specified a routing. These reports must also disclose any material relationship between the broker-dealer and the market center, such as a profit-sharing or payment for order flow arrangement. Rule 11Ac1-6 also provides that a broker-dealer must disclose, upon customer request, certain information about the broker-dealer’s routing practices for the customer’s orders. Rule 11Ac1-6 does not, as originally proposed, require broker-dealer reports to discuss and analyze order routing practices and choices or disclose every venue to which customer orders have been routed. Rule 11Ac1-6 applies not only to the reported equity securities covered by Rule 11Ac1-5, but also to all NASDAQ Small Cap equities and listed options.

In the release adopting Rules 11Ac1-5 and 11Ac1-6 (the "Adopting Release") (SEC Release No. 34-43590 (November 17, 2000)), the SEC states that the Rules are not antifraud rules, nor do they create new duties under provisions of the federal securities laws.

The SEC also indicates that the information generated as a result of the Rules will not, by itself, be sufficient to support conclusions regarding a broker-dealer's compliance with its legal responsibility to obtain the best execution of customer orders. Rules 11Ac1-5 and 11Ac1-6 will become effective on January 30, 2001. Compliance with Rule 11Ac1-5 will take place in three phases, with the phase-in for the first group of securities beginning on April 2, 2001 and the third and final phase-in on October 1, 2001, after which the Rule will apply to all national market system securities. Market centers must make their first report under Rule 11Ac1-5 for April 2001, available by the end of May 2001. Broker-dealers must comply with Rule 11Ac1-6 for all covered securities on July 2, 2001. Accordingly, the first report, for the quarter beginning in July and ending in September, must be made publicly available by the end of October 2001. In addition, broker-dealers will be required to respond to customer requests for information on orders that were routed on July 2, 2001 and thereafter.

DOL Amends Underwriter Exemptions
The Department of Labor (the "DOL") issued an amendment (the "Amendment") to the so-called "underwriter exemptions" under the Employee Retirement Income Security Act of 1974 ("ERISA"). The Amendment is effective for transactions occurring on or after August 23, 2000. The underwriter exemptions are a series of over 45 individual prohibited transaction exemptions that provide relief for the origination and operation of certain asset pool investment trusts and the acquisition, holding and disposition of certain asset-backed pass-through certificates representing undivided interests in those investment trusts. As a practical matter, these exemptions define when an ERISA plan can invest in pass-through certificates issued by such investment trusts. The Amendment: (1) permits, for certain categories of transactions, the offering of "investment grade" mortgage-backed securities and asset-backed securities that are either senior or subordinated; (2) permits the use of eligible interest rate swaps (both ratings dependent and non-ratings dependent) under certain circumstances; (3) permits the use of yield supplement agreements which involve notional principal amounts; and (4) makes certain additional changes to reflect the DOL’s current interpretation of the underwriter exemptions.

FRB Creates Mock Online Bank Website

The FRB established a mock online bank website, called The Checkers Bank, to help banks avoid violations of consumer protection regulations. The Checkers Bank may be accessed at http://www.federalreserve.gov/tcb/.

Effective Date for SEC's Auditor Independence Rules

The SEC indicated that it expects its new auditor independence rules (as discussed in the November 28, 2000 issue of the Alert) to become effective February 5, 2001. Though certain provisions of the new rules are subject to later transition dates, proxy and information statements filed with the SEC after February 5 will need to comply with the disclosure requirements of the new rules.