Federal Banking Agencies Propose Changes to Community Reinvestment Act Rules.

The FDIC, FRB, OCC and OTS (the "Agencies") jointly issued a Notice of Proposed Rulemaking (the "NPR"), concerning proposed revisions to the Agencies' regulations implementing the Community Reinvestment Act ("CRA"). The NPR states that the Agencies concluded that the existing CRA regulations are "essentially sound, but are in need of some updating to keep pace with changes in the financial services industry." First, to expand the number of financial institutions ("FIs") eligible for streamlined CRA examinations, the Agencies propose to amend the definition of "small institution" to mean an FI with total assets of less than $500 million (rather than the current $250 million), regardless of the size of its holding company. CRA examinations for a "small institution" focus on the FI's lending record and loan-to-deposit ratio, whereas larger FIs are evaluated through application of a three-pronged analysis that takes into account their lending, community investment and community services records. Second, the Agencies propose in the NPR to amend their CRA regulations to provide specifically that if an FI or its affiliates (if its affiliates are covered in the CRA examination) have engaged in predatory or abusive lending practices, such conduct will adversely affect the FI's CRA performance evaluation. Under the NPR, FIs are given the option of including all or none of their affiliates in their CRA examination, whereas under current rules an FI may choose which affiliates it will include in a CRA examination. The NPR lists illustrative examples of what the Agencies deem to be abusive practices (e.g., discrimination against loan applicants on a prohibited basis in violation of the Equal Credit Opportunity Act or the Fair Housing Act and violation of the "unfair and deceptive practices" provisions of Section 5 of the Federal Trade Commission Act). Third, the NPR proposes the disclosure of additional data in CRA public evaluations and CRA disclosure statements related to information on "loan originations and loan purchases, loans covered under the Home Ownership and Equity Protection Act and other high-cost loans and affiliate loans." In particular, the NPR provides that an FI's CRA disclosure statement must list retail and business loans by census tract rather than on the less onerous, currently used, aggregate basis. Comments on the NPR are due by April 6, 2004.

NASD Omnibus Account Task Force Submits Report to SEC on Mandatory Redemption Fees for Mutual Funds

A task force representing participants in the mutual fund omnibus account trading process, which was organized by the NASD at the SEC's request, submitted a report (the "Report") to the SEC last week. The Report discusses the various views of the task force participants on (a) how to successfully implement a mandatory redemption fee in an omnibus account environment, and (b) what other measures might deter abusive short-term trading in omnibus accounts. The Report notes a general consensus among the participants that in the omnibus account context (i) if mandated by the SEC, a redemption fee should be assessed at the recordkeeper (usually the intermediary) level based only on positions held through that intermediary; (ii) the fee should not be assessed on de minimis trades; (iii) funds or their transfer agents should have access to underlying investor trading activity to, at a minimum, audit application of redemption fees; and (iv) the SEC should establish the amount of, and the holding period for, any mandatory redemption fee. There was no general consensus on matters such as (1) how long the redemption fee holding period should be; (2) whether or not shareholder accounts at an intermediary should be aggregated for purposes of the redemption fee; (3) whether certain transactions, such as regular 401(k) contributions, should be exempt from the redemption fee; (4) whether the redemption fee should be assessed on a last-in, first-out or first-in, first-out basis; and (5) how to structure periodic reporting of underlying customer transactions by intermediaries. The Report notes that task force members generally concluded that redemption fees alone would not deter market timing abuses, absent a significant mandatory holding period. The task force considered various models for intermediaries to provide information on underlying trading activity to mutual fund transfer agents on an account-specific or a customer-specific basis with varying degrees of transparency. The Report also discusses means of preventing abusive short-term trading across accounts at different intermediaries and the possibility of creating a central clearing house of information on shareholders who have been denied trading privileges with a fund because of abusive short-term trading practices. The SEC is expected to review the Report in connection with considering whether to propose a mandatory redemption fee on short-term trades as well as other anti-mutual fund market timing measures at its open meeting on February 11, 2004.Fi nancial age 2

NASD Issues Notice Regarding Compensation, Fees and Expenses in Public Offerings of REITs, Direct Participation Programs and Closed-End Funds

The NASD published Notice to Members 04-07, "Regulation of Compensation, Fees and Expenses in Public Offerings of Real Estate Investment Trusts; Direct Participation Programs, including Commodity Pools; and Closed-End Funds" to request comments on proposed amendments to NASD Rules 2710 (Corporate Financing) and 2810 (Direct Participation Programs ("DPPs")) and to address the allocation of compensation and organization and offering expenses in the review of DPPs and Real Estate Investment Trust ("REIT") programs by NASD's Corporate Financing Department. Among the proposed amendments to Rules 2710 and 2810 are changes to prohibit commissions ("sales loads") on reinvested dividends in DPPs, REITs, and closed-end funds, although the NASD is requesting comments as to whether less liquid DPP and REIT programs may require NASD members to provide more services in connection with dividend reinvestment programs than a mutual fund (thereby justifying a load on reinvested dividends) and whether different rules should apply to reinvestment of a dividend representing a return of capital. The NASD is also proposing to amend Rules 2710 and 2810 to apply equal weighting and total production limitations to internal sales contests in connection with all public offerings governed by Rules 2710 and 2810, including DPPs, REITs, closed-end funds and debt and equity securities. The proposed limitations would be comparable to those that currently apply to internal sales contests for mutual funds and variable products. The NASD also clarified that NASD members may be reimbursed for bona fide due diligence costs that exceed the 0.5% limitation on such expenses in Rules 2710 and 2810, when the actual costs incurred exceed that limit. Such excess expenses may be allocated to organization and offering expenses ("O&O Expenses"), subject to the 4.5% limit on such expenses, if the NASD member or due diligence firm has presented the REIT or DPP sponsor a detailed, itemized invoice for such expenses. The NASD also announced that its Corporate Financing Department is modifying its review procedures so that any form of compensation, including salary and bonus, paid to a dual employee (an employee of a securities dealer/manager who is also a registered person and dual employee of an affiliated entity of a DPP or REIT, such as a program sponsor, property manager, etc.) would be allocated to the 10% limitation on underwriting compensation if any of the employee's compensation is contingent on or varies according to how much money is raised or the number of securities sold in the public offering. Generally, if the employee's compensation and related expenses are not based on the success of an offering, such expenses will be allocated to the issuer's O&O Expenses. Additional proposals relate to commodity DPPs and the "appropriate location" of training and education meetings. Comments on the proposed amendments must be received by March 12, 2004.

FDIC Expands Use of Streamlined Examinations Program for Smaller Banks

The FDIC issued a letter (FIL-13-2004) in which it expanded (effective with examinations that began during the week of February 2, 2004) the use of the FDIC's streamlined, risk-based, examination program "MERIT." MERIT stands for Maximum Efficiency, Risk-Focused, Institution-Targeted Examinations. Under the expanded program, well-rated banks with total assets of $1 billion or less (previously the limit was $250 million) will be eligible for streamlined examinations. To be deemed "well-rated" a bank must be well-capitalized, have component and composite ratings of 1 or 2 and, at the prior FDIC examination be deemed to have stable management and effective formal or informal loan grading systems. Moreover, a bank is not eligible for MERIT examinations if it: (1) recently experienced a change-in-control; (2) has significant adverse external factors e.g., a poor local economy; (3) was recently chartered, is a niche bank or is a bank with higher-risk lending or securitization programs; (4) has had a significant change in risk profile; or (5) has significant new business lines. The FDIC's MERIT examinations focus on the adequacy of bank's internal controls and on a review of the bank's internal and external audit programs. Examiners conducting a MERIT examination will devote significant attention to assessing the bank's risk management processes.

Other Item of Note

Additional Mutual Fund Reform Bill Introduced

Following recent hearings in the Senate Governmental Affairs Subcommittee on Financial Management, the Budget and International Security, Senators Peter G. Fitzgerald (R-Illinois), Carl Levin (D-Michigan) and Susan Collins (R-Maine) introduced The Mutual Fund Reform Act of 2004, which will be discussed in a future issue of the Alert.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. [c] 2004 Goodwin Procter LLP. All rights reserved.Goodwin Procter LLP, a firm of 500 lawyers, has one of the largest financial services practices in the United States.

Goodwin Procter LLP

Exchange Place

Boston

MA 02109

UNITED STATES

Tel: [phone]

Fax: [phone]

E-mail: [e-mail]

URL: www.goodwinprocter.com

(c) Mondaq Ltd, 2004 - Tel. [phone] - http://www.mondaq.com