Announcements

FEDERAL OPEN MARKET COMMITTEE receive noticeable and understandable information STATEMENT that is required by law in connection with obtaining consumer financial products and services. In addi- The Federal Open Market Committee decided, on tion, consistency among the regulations should facili- December 9, 2003, to keep its target for the federal tate compliance by institutions. Under most of the funds rate at 1 percent. consumer financial services and fair lending laws The Committee continues to believe that an accom- administered by the Board, consumers must be pro- modative stance of monetary policy, coupled with vided with disclosures that are ‘‘clear and conspicu- robust underlying growth in productivity, is provid- ous.’’ This standard is currently defined using similar ing important ongoing support to economic activity. but not identical language in the various regulations. The evidence accumulated over the intermeeting The proposed rules provide a more specific definition period confirmed that output was expanding briskly, for ‘‘clear and conspicuous’’ and include examples of and the labor market appeared to be improving mod- how to meet the standard. estly. Increases in core consumer prices were muted The Board is also proposing additional amend- and expected to remain low. ments to Regulation Z and the staff commentary that The Committee perceived that the upside and interprets and implements the regulation. An inter- downside risks to the attainment of sustainable pretive rule of construction would be added to growth for the next few quarters would be roughly clarify that the word ‘‘amount’’ represents a numer- equal. The probability of an unwelcome fall in infla- ical amount throughout Regulation Z. Proposed tion had diminished in recent months and appeared updates to the staff commentary provide guidance on almost equal to that of a rise in inflation. However, consumers’ exercise of rescission rights for certain with inflation quite low and resource use slack, the home-secured loans. The proposal also includes sev- Committee believed that policy accommodation eral technical revisions to the staff commentary. could be maintained for a considerable period. Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, APPROVAL OF FINAL RULE TO REGULATION Y Vice Chairman; Ben S. Bernanke; Susan S. Bies; J. Alfred Broaddus, Jr.; Roger W. Ferguson, Jr.; The Federal Reserve Board, on December 4, 2003, Edward M. Gramlich; Jack Guynn; Donald L. Kohn; announced its approval of a final rule to Regulation Y Michael H. Moskow; Mark W. Olson; and Robert T. (Bank Holding Companies and Change in Bank Parry. Control) that expands the ability of all bank holding companies, including financial holding companies, to process, store, and transmit nonfinancial data in connection with their financial data processing, storage, PROPOSED RULES PUBLISHED FOR PROVIDING and transmission activities. DISCLOSURES The rule became effective on January 8, 2004.

The Federal Reserve Board, on November 26, 2003, published proposed rules to establish more uniform PROPOSED RULE TO AMEND REGULATION CC standards for providing disclosures under five consumer protection regulations: B (Equal Credit Oppor- The Federal Reserve Board, on December 22, 2003, tunity); E (Electronic Fund Transfers); M (Consumer approved a proposed rule to amend Regulation CC Leasing); Z (Truth in Lending); and DD (Truth in (Availability of Funds and Collection of Checks) and Savings). its commentary to implement the Check Clearing for Establishing a more uniform standard, and defining the 21st Century Act (Check 21 Act). The Check 21 more specifically the standard for providing disclo- Act was enacted on October 28, 2003, and becomes sures, is intended to help ensure that consumers effective on October 28, 2004. 56 Federal Reserve Bulletin Winter 2004

To facilitate check truncation and electronic check ing the current state of the law while comment was exchange, the Check 21 Act authorizes a new nego- received. tiable instrument called a ‘‘substitute check’’ and The Board and the FTC also jointly proposed rules provides that a properly prepared substitute check is establishing a schedule of effective dates for other the legal equivalent of the original check for all provisions of the FACT Act that do not contain purposes. A substitute check is a paper reproduction effective dates. The joint proposed rules would estab- of the original check that can be processed just like lish March 31, 2004, as the effective date for provi- the original check. The Check 21 Act does not require sions of the FACT Act that do not require significant any bank to create substitute checks or to accept changes to business procedures. With respect to other checks electronically. provisions that likely entail significant changes to The Board’s proposed amendments: (1) set forth business procedures, the joint proposed rules would the requirements of the Check 21 Act that apply to make these provisions effective on December 1, banks; (2) provide a model disclosure and model 2004, to allow industry a reasonable time to establish notices relating to substitute checks; and (3) set forth systems to comply with the statute. bank endorsement and identification requirements for Comments on the joint interim final rules and substitute checks. The proposed amendments also proposed rules were due January 12, 2004. clarify some existing provisions of the rule and commentary. ANNUAL NOTICE OF ASSET-SIZE EXEMPTION THRESHOLD

COMMENTS REQUESTED ON INTERIM FINAL The Federal Reserve Board, on December 19, 2003, RULES TO THE FAIR AND ACCURATE published its annual notice of the asset-size exemp- TRANSACTIONS ACT OF 2003 tion threshold for depository institutions under Regu- lation C (Home Mortgage Disclosure). The Federal Reserve Board, on December 16, 2003, The asset-size exemption for depository institu- requested comment on interim final rules and pro- tions was raised to $33 million based on the annual posed rules to establish effective dates for certain percentage change in the consumer price index for provisions of the Fair and Accurate Transactions Act urban wage earners and clerical workers for the of 2003 (FACT Act) including provisions that pre- twelve-month period ending in November 2003. As empt state laws that regulate areas governed by the a result, depository institutions with assets of Fair Credit Reporting Act (FCRA). These regulations $33 million or less as of December 31, 2003, are are being issued jointly with the Federal Trade Com- exempt from data collection in 2004. An institution’s mission (FTC). exemption from collecting data in 2004 does not The recently enacted FACT Act amends the FCRA affect its responsibility to report the data it was and requires the Board and the FTC, within sixty required to collect in 2003. days of enactment, to adopt final rules establishing The Board also is publishing technical amend- the effective dates for provisions of the FACT Act ments to Regulation C and the staff commentary to that do not have a statutorily prescribed effective conform them to changes in the standards for defin- date. The agencies jointly adopted interim final rules ing metropolitan statistical area boundaries made by that established December 31, 2003, as the effec- the U.S. Office of Management and Budget. tive date for the preemption provisions of the FACT The adjustment and technical amendments became Act as well as provisions authorizing the agencies to effective January 1, 2004. adopt rules or take other actions to implement the The Home Mortgage Disclosure Act (HMDA) and FACT Act. the Board’s Regulation C require most depository The current preemption provisions of the FCRA institutions and certain for-profit, nondepository insti- expired on January 1, 2004. Adopting these rules as tutions to collect, report, and disclose data about interim final rules without advance public comment applications for, and originations and purchases or delay was intended to avoid delays that could of home purchase loans, refinancings, and home undermine the purpose of these provisions and cause improvement loans. Data reported include the type, confusion about the applicability of some state laws purpose, and amount of the loan; the ethnicity, race, in areas that the Congress has determined should be sex, and income of the loan applicant; and the loca- governed by uniform national standards. Adopting tion of the property. The purposes of HMDA include these rules would also have the effect of preserv- helping to determine whether financial institutions Announcements 57

are serving the housing needs of their communities future temporary disruption at a clearing bank; and and assisting in fair lending enforcement. (2) ensure that the Fixed Income Clearing Corpora- tion’s existing netting and guaranteed settlement services are used as much as practical. REPORT OF THE WORKING GROUP ON ¥ With the same objective, regulators should GOVERNMENT SECURITIES CLEARANCE AND review their authority to temporarily liberalize or SETTLEMENT suspend various regulations when such actions could contribute to the restoration of orderly markets or if The Federal Reserve Board, on January 7, 2004, compliance with such regulations may be unusually released the report of the private-sector Working costly during a temporary disruption. As an element Group on Government Securities Clearance and of their contingency planning, regulators should con- Settlement and endorsed its recommendations. sider in advance the costs and benefits of liberaliza- The Working Group, formed by the Board after the tion or suspension of such regulations. Likewise, they September 11, 2001, terrorist attacks in New York should review their authority to suspend trading or City, recommended nine steps to mitigate risks to the settlement activity and consider in advance the costs financial system from the interruption or termination and benefits of such measures. of the services of a clearing bank as the result of ¥ In the event of a temporary reduction in clearing either operational or non-operational problems. bank processing capacity, the following should occur: All of the major participants in the U.S. govern- (1) market participants should explore changes to the ment securities markets depend on one of two com- settlement cycle for U.S. government securities and mercial banks to settle their trades and facilitate limitations on collateral substitutions in repurchase financing of their positions. The terrorist attacks dem- transactions; (2) the Federal Reserve should consider onstrated ways that operational disruptions to a clear- altering the operating hours of the Fedwire system, ing bank’s services could disrupt the trading, clear- liberalizing the terms of its government securities ance, and settlement of government securities. Those lending program, and, when necessary and appropri- events also reinforced government officials’ long- ate, injecting additional liquidity into the market- standing concerns about the potential consequences place; and (3) consistent with their contingency plans, of voluntary or involuntary exit from the business by regulators should consider liberalizing or suspending either of the two clearing banks. relevant regulations when appropriate to mitigate The Working Group recommendations are the adverse effects on the trading and settlement of gov- following: ernment securities. ¥ Market participants and regulators should sup- ¥ Regulators should monitor and test implementa- port efforts, such as The Bond Market Association’s tion of the clearing banks’ plans to satisfy the regula- effort to enhance the value of its Emergency Subcom- tors’ sound practices and implementation timelines mittee, that would provide a source of real-time infor- for core clearing and settlement organizations as mation on the functioning of the government secu- described in the Interagency Paper on Sound Prac- rities clearance and settlement system and offer a tices to Strengthen the Resilience of the U.S. Finan- potential sounding board for actions being contem- cial System, issued April 8, 2003, by the Board, the plated by market participants, the Federal Reserve, Office of the Comptroller of the Currency, and the the SEC, the U.S. Department of the Treasury, or Securities and Exchange Commission (SEC). other regulators. ¥ The private sector should develop a secure and ¥ In the event of a permanent exit of a clearing resilient telecommunications infrastructure for clear- bank, every effort should be made to sell the exiting ance and settlement of U.S. government securities. bank’s clearing business to another well-qualified The official sector should support this effort. bank. ¥ Market participants, regulators, and others in the ¥ Additional work should be undertaken to further official sector should encourage further efforts to develop the concept of creating a new bank (New- reduce the specific threats posed by cyber-terrorism. Bank), a dormant entity, ready for activation in the ¥ To minimize the adverse effect of any temporary event that a clearing bank permanently exited and no reduction in clearing bank capacity, market partici- well-qualified bank steps forward. pants should act now to: (1) review their existing documentation for U.S. government securities The Board supports these recommendations and and repurchase transactions and seek to clarify plans to establish another private-sector working their obligations to counterparties in the event of a group to work on developing the NewBank concept. 58 Federal Reserve Bulletin Winter 2004

The Working Group, established by the Board in assets denominated in foreign currencies revalued to November 2002, was chaired by Michael Urkowitz, reflect current market exchange rates. Senior Adviser to Deloitte Consulting. Its members Total net income for the Federal Reserve Banks in included senior representatives of the two clearing 2003 amounted to $22.981 billion. Under the Board’s banks for government securities (J.P. Morgan Chase policy, each Reserve Bank’s net income after the and the Bank of New York), the Fixed Income Clear- statutory dividend to member banks and the amount ing Corporation, securities dealers, an interdealer necessary to equate surplus to paid-in capital is trans- broker, a custodian bank, a money market fund, The ferred to the U.S. Treasury. The statutory dividends to Bond Market Association, and the Investment Com- member banks in 2003 were $518 million. pany Institute. Staff of the Federal Reserve, the SEC, and the U.S. Treasury participated in the Working Group as observers and technical advisers. LAUNCH OF THE FISCAL IMPACT TOOL The Working Group was formed because of public comment offered in response to the Interagency The Federal Reserve Board, on January 12, 2004, White Paper on Structural Change in the Settlement announced the launch of a new informational of Government Securities: Issues and Options, issued resource designed to help community economic May 9, 2002, by the Board and the SEC. The White developers evaluate development proposals. The new Paper explored the merits of possible approaches to resource tool complements two additional Board structural change to existing clearing arrangements products that also seek to promote community devel- that would involve creation of some type of industry opment activities. utility to assume the critical functions of the clearing The Fiscal Impact Tool (FIT) is an automated banks. The public comments suggested that govern- system that analyzes the potential effect of economic ment policymakers should focus on mitigating risks development projects. The program, which is driven within the existing structure of two clearing banks by Excel software, estimates the effects of proposed rather than on fostering development of a utility. projects on local sales and property tax revenues and on costs to the local government. FIT is intended for use by economic and commu- FIGURES ON INCOME OF THE FEDERAL nity development professionals, primarily in small RESERVE BANKS and midsize communities. Using estimates that are based on user-provided information about the project, The Federal Reserve Board, on January 8, 2004, FIT can identify the general costs and benefits of released figures that indicate the Federal Reserve proposed projects. Alternatively, it can be used as an Banks distributed approximately $21.997 billion of aid in decisionmaking by providing information on their $23.792 billion total income to the U.S. Trea- the extent of financial support that a community or sury during 2003. region might want to provide when planning for Federal Reserve System income is derived prima- various development options. rily from interest earned on U.S. government securi- FIT is one of a series of new online resources ties that the Federal Reserve has acquired through for community developers. The Board’s Community open market operations. This income amounted to Affairs Office also created Lessons Learned: Com- $22.602 billion in 2003. Additionally, revenues from munity and Economic Development Case Studies—a fees for the provision of priced services to depository database that profiles the practices and programs used institutions totaled $887 million. The remaining in various communities to finance economic develop- income of $303 million includes earnings on foreign ment. Each case study identifies a problem, the solu- currencies, earnings from loans, and other income. tion, the results, the lessons learned, and contact The operating expenses of the twelve Reserve information for the project. In choosing the case Banks totaled $2.366 billion in 2003, including the studies to be highlighted in the database, consider- System’s net pension costs. In addition, the cost of ation is given to the transferability of the program to earnings credits granted to depository institutions other geographic areas and the potential for others to amounted to $121 million. Assessments against benefit from the lessons learned by the developers Reserve Banks for Board expenditures totaled implementing the program or project. $297 million and the cost of currency amounted to Finally, the Community Development Investments $508 million. web site is a source for information about Federal Net additions to income amounted to $2.481 bil- Reserve policies and guidelines that promote invest- lion, resulting primarily from unrealized gains on ment by bank holding companies and state member Announcements 59

banks in community development activities. The site Boston, Massachusetts, and San Francisco, Cali- features a regulatory overview, information on invest- fornia, on the proposal by Bank of America ment authority and procedures, and links to addi- Corporation, Charlotte, North Carolina, to merge tional resources. with FleetBoston Financial Corporation, Boston, Massachusetts. THE OSFI AND FEDERAL RESERVE BOARD The purpose of these meetings was to collect infor- ANNOUNCE AGREEMENT WITH THE CANADIAN mation relating to factors the Board is required to IMPERIAL BANK OF COMMERCE consider under the Bank Holding Company Act. These factors are the effects of the proposal on the The Office of the Superintendent of Financial Institu- financial and managerial resources and future pros- tions (OSFI) Canada and the Board of Governors of pects of the companies and banks involved in the the Federal Reserve System in the United States proposal, competition in the relevant markets, and announced, on December 22, 2003, that they have the convenience and needs of the communities to reached an agreement with the Canadian Imperial be served. Convenience and needs considerations Bank of Commerce (CIBC). The agreement is part of include consideration of the records of performance coordinated actions between the OSFI and U.S. reg- of Bank of America and FleetBoston under the Com- ulatory and enforcement authorities related to the munity Reinvestment Act. CIBC’s involvement in certain structured finance The specific dates, times, and locations of the transactions with the Enron Corporation, Houston, meetings were the following: Texas. The agreement with the OSFI and the Board is ¥ Boston—Wednesday, January 14, 2004, at specifically focused on the particular structured 9:00 a.m. EST, at the Federal Reserve Bank of Bos- finance transactions entered into by the CIBC with ton, 600 Atlantic Avenue, Boston, Massachusetts Enron and requires the CIBC to adopt remedial poli- 02106. cies and procedures, some of which are already in ¥ San Francisco—Friday, January 16, 2004, at place. The agreement covers certain types of com- 8:30 a.m. PST, at the Federal Reserve Bank of plex, structured, financial transactions, and year-end San Francisco, 101 Market Street, San Francisco, and quarter-end transactions, with U.S. corporations California 94105. registered under the Securities and Exchange Com- mission Act of 1934 and any affiliates. The U.S. Securities and Exchange Commission and the U.S. PUBLIC COMMENT SOUGHT ON WAYS TO Department of Justice also announced Enron-related IMPROVE PRIVACY NOTICES actions against the CIBC. As part of its supervisory action, the OSFI is Eight federal regulators, on December 23, 2003, separately requiring that the CIBC adopt similar announced an advance notice of proposed rulemak- enhanced reputational risk management policies in its ing (ANPR) requesting public comment on ways to worldwide operations. improve the privacy notices that financial institutions Created in 1987 by an Act of Parliament, the OSFI provide to consumers under the GrammÐLeachÐ has a mandate to protect the rights and interests of Bliley Act (GLB Act). depositors, policyholders, and pension plan mem- The ANPR describes various approaches that the bers; and to advance and administer a regulatory agencies could pursue to allow or require financial framework so as to contribute to public confidence in institutions to provide alternative types of privacy the Canadian financial system. notices that would be more readable and useful to The Federal Reserve, the U.S. central bank, shares consumers. It also seeks comment on whether differ- responsibility with other U.S. and state authorities in ences between federal and state laws pose any special overseeing the operations of foreign banking organi- issues for developing a short privacy notice. zations in the United States. Section 503 of the GLB Act requires financial institutions to provide a notice to each customer that PUBLIC MEETING HELD ON MERGER BETWEEN describes the institution’s policies and practices BANK OF AMERICA AND FLEETBOSTON regarding the disclosure to third parties of nonpublic FINANCIAL CORPORATION personal information. In 2000, the agencies published consistent final regulations that implement these pro- The Federal Reserve Board, on December 22, 2003, visions, including sample clauses that institutions announced that public meetings would be held in may use in privacy notices. However, the regulations 60 Federal Reserve Bulletin Winter 2004 do not prescribe any specific format or standardized The statement sets forth the agencies’ expectations wording for privacy notices. regarding the nature of controls that financial institu- The agencies do not propose the adoption of tions should have in place over investment advisory any specific action at this time to improve privacy activities and further provides that financial institu- notices. Instead, the agencies request input on what tions should notify and consult with their primary approaches would be most useful to consumers while federal regulator before, or in the event of an emer- taking into consideration the burden on financial gency, immediately after, providing financial support institutions. to an advised fund. The ANPR was developed jointly by the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Fed- APPOINTMENTS OF NEW MEMBERS AND eral Deposit Insurance Corporation, the Federal Trade DESIGNATION OF THE CHAIR AND VICE CHAIR Commission, the National Credit Union Administra- OF THE THRIFT INSTITUTIONS ADVISORY tion, the Office of the Comptroller of the Currency, COUNCIL the Office of Thrift Supervision, and the Securities and Exchange Commission. The Federal Reserve Board, on December 1, 2003, The agencies will evaluate the public comments on announced the names of four new members of its the ANPR with a view toward developing proposals Thrift Institutions Advisory Council (TIAC) and des- for appropriate interpretations or amendments to their ignated a new president and vice president of the respective regulations. In the event that the agen- council for 2004. cies decide to proceed, the agencies expect to do so The council is an advisory group made up of through proposed rulemaking. The agencies also twelve representatives from thrift institutions. The expect that consumer testing will be a key component panel was established by the Board in 1980 and in the development of any specific proposal. includes savings and loan, savings bank, and credit union representatives. The council meets three times each year with the Board of Governors to discuss AGENCIES ISSUE POLICY STATEMENT ON developments relating to thrift institutions, the hous- FINANCIAL SUPPORT TO ADVISED INVESTMENT ing industry, mortgage finance, and certain regulatory FUNDS issues. The new council president for 2004 is William J. The federal banking and thrift supervisory agencies Small, chairman and CEO, First Federal Bank, Defi- issued a policy statement on January 5, 2004, alerting ance, Ohio. The new vice president is D. Tad Lowrey, financial institutions to the safety and soundness and chairman, president, and CEO, Jackson Federal Bank, legal issues involved in providing financial support to Brea, California. investment funds advised by the institution or its The four new members, named for two-year terms subsidiaries or affiliates. that began January 1, 2004, are the following: The statement is prompted by recent market developments, including market volatility, the continued H. Brent Beesley, chairman and CEO, Heritage Bank, low-interest rate environment, and operational and St. George, Utah corporate governance weaknesses. It warns that investment advisory services can pose material risks Douglas K. Freeman, chairman and CEO, NetBank, to a financial institution’s liquidity, earnings, capital, Alpharetta, Georgia and reputation and can harm investors, if the associated risks are not effectively controlled. David H. Hancock, CEO, North American Savings Bank, To ensure safe and sound banking practices, the Grandview, Missouri policy statement makes clear that a financial institution should not inappropriately place its resources Roy M. Whitehead, president and CEO, Washington and reputation at risk for the benefit of the fund’s Federal Savings, Seattle, Washington investors and creditors. In addition, financial institutions should not violate the limits and requirements Other TIAC members whose terms continue contained in applicable legal requirements or in any through 2004 are the following: supervisory conditions imposed by the agencies, and should not create an expectation that they will prop Michael J. Brown, Sr., president and CEO, Harbor Federal up an advised fund. Savings Bank, Fort Pierce, Florida Announcements 61

Richard J. Driscoll, president, First Savings Bank, FSB, Anne Diedrick Arlington, Texas New York, New York Ms. Diedrick is a senior vice president for JP Morgan Curtis L. Hage, chairman and CEO, Home Federal Bank, Chase. She is an executive team member of the JPMorgan Sioux Falls, South Dakota Chase Community Development Group; the senior officer in charge of Community Reinvestment Act compliance Olan O. Jones, Jr., president and CEO, Eastman Credit at JPMorgan Chase Bank, Chase Manhattan Bank, USA, Union, Kingsport, Tennessee N.A., and J.P. Morgan Trust Company, N.A.; and the senior manager in charge of the JPMorgan Chase Cor- porate Fair Lending Unit. She is also responsible for the Kirk Kordeleski, president and CEO, Bethpage Federal Office of Strategic Alliances, which works with not-for- Credit Union, Bethpage, New York profit community development organizations.

George W. Nise, president and CEO, Beneficial Savings Hattie B. Dorsey Bank, Philadelphia, Pennsylvania Atlanta, Georgia Ms. Dorsey is the president and chief executive officer of the Atlanta Neighborhood Development Partnership, Inc., a not-for-profit corporation that promotes community revi- talization in Atlanta’s neighborhoods. Her experience is in PPOINTMENTS OF EW EMBERS AND A N M single-family and multifamily housing, community and DESIGNATION OF THE CHAIR AND VICE CHAIR economic development, regional equity, and public policy. OF THE CONSUMER ADVISORY COUNCIL Bruce B. Morgan The Federal Reserve Board, on January 9, 2004, Roeland Park, Kansas Mr. Morgan is chairman, president, chief executive officer, named nine new members to its Consumer Advisory and director of Valley State Bank. He is actively involved Council for three-year terms and designated a new in bank regulation, payments systems, and developing tech- chair and vice chair of the council for 2004. nologies that affect bank delivery of products and services. The council advises the Board on the exercise of Mr. Morgan serves on the Customer Advisory Commit- its responsibilities under the Consumer Credit Protec- tee of the Federal Reserve Bank of Kansas City and on the Payment and Technology Committee of the Independent tion Act and on other matters in the area of consumer Community Bankers of America. He is a former member financial services. The council meets three times a and past chairman of the Kansas State Banking Board. year in Washington, District of Columbia. Agnes Bundy Scanlan was designated chair; her Mary Jane Seebach term runs through December 2004. Ms. Scanlan is Newbury Park, California managing director and chief compliance officer for Ms. Seebach is executive vice president and chief compliance officer for Countrywide Financial Corporation. FleetBoston Financial. She oversees legal and regulatory compliance programs Mark Pinsky was designated vice chair; his term throughout the enterprise. Previously, Ms. Seebach worked on the council ends in December 2005. Mr. Pinsky is as regulatory counsel advising on state and federal con- president and chief executive officer for the National sumer credit laws for Countrywide Home Loans, The Community Capital Association. Money Store, and North American Mortgage Company, and as a senior attorney for the Federal Reserve Board. The nine new members are the following: Paul J. Springman Dennis L. Algiere Atlanta, Georgia Westerly, Rhode Island Mr. Springman is group executive, Predictive Sciences, for Mr. Algiere is senior vice president of Compliance and Equifax. He has responsibility for providing modeling, Community Affairs and the community reinvestment offi- analytical services, decisioning systems, and applications cer for The Washington Trust Company. He is responsible processing for clients. He has been involved in launching a for the bank’s compliance, community affairs, community new business line, ‘‘Consumer Direct,’’ to provide credit reinvestment, and Bank Secrecy Act programs. information, account monitoring alerts, and scoring analy- sis services to consumers. Sheila Canavan Berkeley, California Forrest F. Stanley Ms. Canavan is an attorney with a law practice that focuses Cleveland, Ohio on consumer litigation. Her litigation experience has Mr. Stanley is senior vice president and associate general involved state and federal consumer regulation, elder counsel for KeyBank. He has responsibility for all legal abuse, fraud, and unfair and unlawful business practices; matters affecting retail banking including mortgage, home and she has special expertise in matters relating to equity, credit and debit cards, privacy, the Community subprime lending and securitization of home mortgage Reinvestment Act, e-commerce, and the USA Patriot Act. products. Ms. Canavan represents consumers, often low- Mr. Stanley has also been director of two KeyBank subsid- income consumers, on credit transaction issues. iaries, Champion Mortgage Company and Key Bank, USA. 62 Federal Reserve Bulletin Winter 2004

He currently serves as chairman of the bank’s Fair Lending R. Charles Gatson, vice president, Midtown Community Executive Committee. Development Corporation, Kansas City, Missouri

Lori R. Swanson W. James King, president and chief executive officer, Com- St. Paul, Minnesota munity Redevelopment Group, Cincinnati, Ohio Ms. Swanson is solicitor general for the Office of the Minnesota Attorney General. She is responsible for civil Benjamin Robinson III, senior vice president and strategy litigation and oversees several divisions including Con- management executive, Bank of America, Charlotte, sumer Enforcement, Commerce, and Consumer Services. North Carolina She negotiated a first-of-its-kind settlement with a national bank in a lawsuit alleging violations of state consumer Diane Thompson, supervising attorney, Land of Lincoln protection laws and the Fair Credit Reporting Act based on Legal Assistance Foundation, Inc., East St. Louis, disclosure of personal financial information. Illinois

Council members whose terms continue through Clint Walker, general counsel and chief administrative 2004 are the following: ofﬁcer, Juniper Bank, Wilmington, Delaware

Janie Barrera, president and chief executive ofﬁcer, ACCION Texas, San Antonio, Texas RELEASE OF THE BEIGE BOOK

Kenneth P. Bordelon, chief executive officer, E Federal The Federal Reserve Board announced on Novem- Credit Union, Baton Rouge, Louisiana ber 21, 2003, that it would release the November Robin Coffey, vice president, Harris Trust and Savings Beige Book on Wednesday, November 26, 2003, Bank, Chicago, Illinois at noon EST because of the early closure of some financial markets. The November Beige Book was Thomas FitzGibbon, senior vice president, MB Financial previously scheduled for release on November 26, Bank, N.A., Chicago, Illinois 2003, at 2:00 p.m. EST. Larry Hawkins, president and chief executive officer, Unity National Bank, Houston, Texas RELEASE OF MINUTES OF DISCOUNT RATE Ruhi Maker, senior attorney, Public Interest Law Office of MEETINGS Rochester, Rochester, New York

Patricia McCoy, professor of law, University of Connecti- The Federal Reserve Board, on December 18, 2003, cut School of Law, Hartford, Connecticut released the minutes of its discount rate meetings from September 29, 2003, through October 27, 2003. Elsie Meeks, executive director, First Nations Oweesta Corporation, Kyle, South Dakota

Debra S. Reyes, president, Neighborhood Lending Part- PUBLICATION OF THE NOVEMBER 2003 UPDATE ners, Inc., Tampa, Florida TO THE COMMERCIAL BANK EXAMINATION MANUAL Benson Roberts, vice president for policy, Local Initia- tives Support Corporation, Washington, District of Columbia The November 2003 update to the Commercial Bank Examination Manual (Supplement Nos. 19 and 20), Hubert Van Tol, co-director, Fairness in Rural Lending, has been published and is now available. The new Sparta, Wisconsin update includes supervisory and examination guidance on the following subjects: Council members whose terms continue through 2005 are the following: 1. The Applicability of Corporate Governance Initia- tives to Nonpublic Banking Organizations. The section on Susan Bredehoft, senior vice president, compliance risk the internal control and audit function, oversight, and out- management, Commerce Bank, N.A., Cherry Hill, sourcing has been revised to incorporate the May 5, 2003, New Jersey Statement on Application of Recent Corporate Governance Initiatives to Nonpublic Banking Organizations. The state- Dan Dixon, group senior vice president, World Savings ment (issued by the Federal Reserve, the Ofﬁce of the Bank, FSB, Washington, District of Columbia Comptroller of the Currency, and the Ofﬁce of Thrift Supervision) responds to questions received regarding James Garner, senior vice president and general counsel, the way that small, nonpublic banking organizations are to North American Consumer Finance, Citigroup, Balti- comply with the corporate governance, auditing, and other more, Maryland requirements of the SarbanesÐOxley Act. Although the act Announcements 63

does not require small, nonpublic banking organizations to 12 CFR 359 and are discussed in this manual section. The strictly adhere to its provisions, the agencies expect these thirty-day prior-notice requirement for appointing any new banking organizations to ensure that their policies and directors or senior executive officers of state member banks procedures are consistent with applicable laws, regulations, and bank holding companies is also discussed. (See sec- and supervisory guidance and that they remain appropriate tion 32 of the FDI Act (12 USC 1831i) and Subpart H of for the organization’s size, operations, and resources. See Regulation Y (12 CFR 225.71). This notice requirement SR letter 03-8. also applies to any change in the responsibilities of any current senior executive officer who proposes to assume a 2. The Appropriate Use of the Federal Reserve′s Pri- different position. See SR letter 03-6. mary Credit Program in Effective Liquidity Management. The sections on asset and liability management have been 5. Transactions between Member Banks and Their revised to incorporate the July 25, 2003, Interagency Advi- Affiliates. The section on bank-related organizations is sory on the Use of the Federal Reserve’s Primary Credit revised to incorporate the examples found in Regulation W, Program in Effective Liquidity Management. The advisory ‘‘Transactions between Member Banks and Their Affili- presents information on the new Federal Reserve primary ates,’’ for the rule’s quantitative limits, collateral require- and secondary discount window programs. The advisory ments, valuations, exemptions, and timing of covered provides guidance on the appropriate use of primary credit transactions. Additional interim examination procedures in effective liquidity management. The board of directors are also included. and senior management of a depository institution are advised to consider the Federal Reserve’s primary credit 6. Fiduciary Activities. The introduction of the section program as part of their contingency funding plans and to on fiduciary activities has been revised to provide more provide for adequate diversified potential sources of funds examination guidance on the industry standards and exam- to satisfy liquidity needs, which includes planning for iner responsibilities. For a state member bank’s subsidiary certain significant liquidity events. The examination proce- that is engaged in fiduciary activities, the examiner should dures and internal control questionnaire were also revised. rely on the findings of the appropriate functional regulator See SR letter 03-15. that has the primary supervisory responsibility for evaluat- ing risks, hedging, and risk management. See SR letter 3. Insurance Sales Activities and Consumer Protection 00-13. A discussion is provided on the available reported in Sales of Insurance. New sections provide examiners’ supervisory information and analytical support tools guidance for (1) conducting risk assessments of state mem- that the examiner can use to evaluate a bank’s fiduciary ber bank insurance and annuity sales activities in accor- activities. dance with the Federal Reserve’s risk-focused supervisory approach and (2) examining a state member bank’s compli- The public may obtain the Manual and the updates ance with the Consumer Protection in Sales of Insurance (including pricing information) from Publications (CPSI) regulation, Subpart H of the Board’s Regulation H Fulfillment, Mail Stop 127, Board of Governors (12 CFR 208.81Ð86). Also discussed are a joint interpre- of the Federal Reserve System, Washington, DC tation and joint statement regarding the CPSI regulation. The CPSI regulation (effective October 1, 2001) imple- 20551 (or charge by facsimile at 202-728-5886). ments section 305 of the GrammÐLeachÐBliley Act The Manual is also available on the Board’s public (12 USC 1831x; the GLB Act). The regulation requires web site at www.federalreserve.gov/boarddocs/ certain disclosures in connection with the retail sale or supmanual/. solicitation of insurance products and annuities by a bank, by any other person at bank offices where retail deposits are accepted from the public, or by any person ‘‘acting on PUBLICATION OF THE DECEMBER 2003 UPDATE behalf of the bank.’’ The examination guidance provides a TO THE BANK HOLDING COMPANY comprehensive review of insurance and annuity sales ac- UPERVISION ANUAL tivities as they pertain to state member banks. Consistent S M with the GLB Act, the guidance incorporates applicable restrictions on examining a functionally regulated insur- The December 2003 update to the Bank Holding ance subsidiary of a state member bank. A glossary of Company Supervision Manual, Supplement No. 25, terms associated with insurance and annuity sales activi- has been published and is now available. The Manual ties is provided. Examination objectives, examination procedures, and an internal control questionnaire are also comprises the Federal Reserve System’s regulatory, provided. supervisory, and inspection guidance for bank holding companies. The new supplement includes the 4. Restrictions on Institutions in Troubled Condition. following subjects: The section on formal and informal corrective actions has been revised to discuss the existing restrictions on, and 1. The Applicability of Corporate Governance Initia- requirements for, severance payments made to institution- tives to Nonpublic Banking Organizations. The Manual’s affiliated-parties (so called ‘‘golden parachute payments’’). section on the 2003 ‘‘Interagency Policy Statement on the The restrictions originated from the Crime Control Act of Internal Audit Function and its Outsourcing’’ has been 1990, which added section 18(k) to the Federal Deposit revised to incorporate the May 5, 2003, Statement on Insurance Act (12 USC 1828(k); the FDI Act). The FDIC’s Application of Recent Corporate Governance Initiatives to regulations on golden parachute agreements are found in Nonpublic Banking Organizations. The statement (issued 64 Federal Reserve Bulletin Winter 2004

by the Federal Reserve, the Office of the Comptroller golden parachute payments (or any agreement to make any of the Currency, and the Office of Thrift Supervision) payment), found in 12 CFR 359, are discussed. The thirty- responds to questions received regarding the way that day prior-notice requirement for appointing any new direc- small, nonpublic banking organizations are to comply with tors or senior executive officers of state member banks and the corporate governance, auditing, and other requirements bank holding companies is also discussed. See section 32 of the SarbanesÐOxley Act. Although the act does not of the FDI Act (12 USC 1831i) and Subpart H of Regu- require small, nonpublic banking organizations to strictly lation Y (12 CFR 225.71). This notice requirement also adhere to its provisions, the agencies expect these banking applies to any change in the responsibilities of any current organizations to ensure that their policies and procedures senior executive officer who proposes to assume a different are consistent with applicable laws, regulations, and super- position. See SR letter 03-6. visory guidance and that they remain appropriate for the organization’s size, operations, and resources. See SR letter 03-8. 5. Nonbanking Activities. Certain new or revised sections of the Nonbanking Activities chapter provide supervi- 2. Insurance Sales Activities and Consumer Protection sory and inspection guidance or they discuss the Board’s in Sales of Insurance. New sections provide examiners authorizations or staff interpretations: with guidance on insurance sales activities and consumer a. Trust (Fiduciary) Activities. The trust services sec- protection in sales of insurance as the guidance pertains to tion is revised to discuss the oversight responsibilities of financial holding companies (FHCs), bank holding compa- the board of directors and senior management for operating nies (BHCs), or state member banks. Examiner guidance is the fiduciary activities of their financial holding company provided on (1) conducting risk assessments of BHCs or (FHC) or bank holding company (BHC) in a safe and state member bank insurance and annuity sales activities in sound manner. This oversight at the consolidated level is accordance with the Federal Reserve’s risk-focused super- important because the risks associated with financial activi- visory approach and (2) examining a state member bank’s ties as well as fiduciary activities can cross legal entities compliance with the new Consumer Protection in Sales and business lines. Relying on the examination findings of of Insurance (CPSI) regulation contained in Subpart H of the appropriate trust activities regulator, the examiner is to the Board’s Regulation H (12 CFR 208.81Ð86). The CPSI review and assess the internal policies, reports, and pro- regulation (effective October 1, 2001) applies only to fed- cedures and the effectiveness of the consolidated risk- erally insured depository institutions. It implements sec- management process for trust activities. The revision tion 305 of the GrammÐLeachÐBliley Act (the GLB Act; includes a discussion of the available reported supervisory 12 USC 1831x). The guidance provides a comprehensive information and analytical support tools that an examiner review of insurance and annuity sales activities as they can use to evaluate the trust services of the holding com- pertain to a BHC or bank and discusses the Federal pany and its subsidiaries. See SR letter 00-13. Reserve’s responsibility for enforcing a depository insti- b. Derivative Transactions as Principal. The section tution’s compliance with the CPSI regulation. Consistent on investment transactions as principal is revised to include with the GLB Act, the guidance incorporates applicable the Board’s June 27, 2003, approval of a Regulation Y restrictions on examining a functionally regulated subsidi- amendment (effective August 4, 2003) to permit BHCs to ary of a BHC or bank. A glossary of terms associated with (1) take and make delivery of title to commodities under- insurance and annuity sales activities is provided. Inspec- lying commodity derivative contracts on an instantaneous, tion objectives, inspection procedures, and an internal con- pass-through basis and (2) enter into certain commodity trol questionnaire are also provided. derivative contracts that do not require cash settlement or that specifically provide for assignment, termination, or 3. The Appropriate Use of the Federal Reserve’s Pri- offset before delivery. mary Credit Program in Effective Liquidity Management. c. Title Abstracting Activities for U.S.-Registered Air- The section on bank liquidity has been revised to incorpo- craft. The real estate title abstracting section (a nonbank- rate the July 25, 2003, Interagency Advisory on the Use of ing activity previously approved by Board order, which is the Federal Reserve’s Primary Credit Program in Effective based on section 4(c)(8) of the BHC Act—see Federal Liquidity Management. The advisory presents information Reserve Bulletin, vol. 81 (August 1995), pp. 805Ð07) on the new Federal Reserve primary and secondary dis- is revised to include an October 7, 2002, staff opinion on count window programs. The board of directors and senior BHC-conducted title abstracting activities for U.S.- management of BHCs and state member banks are advised registered aircraft. The title abstracting services are limited to consider the Federal Reserve’s primary credit program to (1) performing a title search of aircraft records and as part of their contingency funding plans and to provide (2) reporting factual information on the ownership history for adequate diversified potential funding sources to satisfy of the relevant aircraft and the existence of liens and liquidity needs, which includes planning for certain signifi- encumbrances affecting title to the aircraft. cant liquidity events. See SR letter 03-15. d. Limited Physical Commodity Trading Activities for FHCs. A new section is provided that is based on sec- 4. Restrictions on Institutions in Troubled Condition. tion 4(k) of the BHC Act, which discusses the Board’s The section on formal corrective actions has been revised October 2, 2003, approval of an FHC’s notice under sec- to discuss the existing restrictions on, and requirements for, tion 4 of the BHC Act to engage in physical commodity severance payments made to institution-affiliated-parties trading activities on a limited basis as an activity that is (so called ‘‘golden parachute payments’’). The restrictions complementary to the financial activity of engaging regu- originated from the Crime Control Act of 1990, which larly as principal in commodity derivative activities. (The added section 18(k) to the Federal Deposit Insurance Act effective date of the Board’s order was also October 2, (12 USC 1828(k); the FDI Act). The FDIC’s regulations on 2003.) Announcements 65

A more detailed summary of changes is included ing, Charlestown, West Virginia; and the Federal with the update package. The Manual and updates, Reserve Bank of Richmond. including pricing information, are available from Publications Fulfillment, Mail Stop 127, Board of The Federal Reserve Board, on December 18, Governors of the Federal Reserve System, Washing- 2003, announced the issuance of several enforcement ton, DC 20551 (or charge by facsimile: 202-728- actions involving Credit Lyonnais, S.A., a large 5886). The Manual is also available on the Board’s French bank with several U.S. offices. The actions public web site at www.federalreserve.gov/ relate primarily to Credit Lyonnais’s participation in boarddocs/supmanual/. the rehabilitation of the Executive Life Insurance Company of California, which was declared insol- ENFORCEMENT ACTIONS vent in 1991. The Federal Reserve’s actions included the following: The Federal Reserve Board, on November 21, 2003, announced the issuance of a final decision and order ¥ A civil money penalty of $100 million against of prohibition against Garfield C. Brown, Jr., a former Credit Lyonnais issued by consent. employee of Mellon Bank, N.A., Pittsburgh, Pennsyl- ¥ A consent cease and desist order against Credit vania. The order, the result of an action brought by Lyonnais designed to prevent future violations of the the Office of the Comptroller of the Currency, pro- Bank Holding Company Act. hibits Mr. Brown from participating in the conduct ¥ Initiation of a formal enforcement action against of the affairs of any financial institution or holding Jean Peyrelevade, the former chairman and chief company. executive officer of Credit Lyonnais, seeking to pro- hibit him from the U.S. banking industry, and assess- The Federal Reserve Board, on November 26, ing a $500,000 civil money penalty against him. 2003, announced the issuance of a consent order of Peyrelevade will have an opportunity to answer the assessment of a civil money penalty against The charges and request a hearing before an administra- Bank of Currituck, Moyock, North Carolina, a state tive law judge. member bank. The Bank of Currituck, without admit- ¥ A written agreement between Credit Agricole, ting to any allegations, consented to the issuance of the parent of Credit Lyonnais, and the Federal the order in connection with its alleged violations of Reserve Bank of New York in which Credit Agricole the Board’s Regulations implementing the National agrees to comply with the restrictions in the Credit Flood Insurance Act. Lyonnais cease and desist order. Credit Agricole, The order requires The Bank of Currituck to pay a which acquired Credit Lyonnais in June 2003, had no civil money penalty of $16,000, which will be remit- part in the conduct that led to these enforcement ted to the Federal Emergency Management Agency actions. for deposit into the National Flood Mitigation Fund. In addition to the Federal Reserve’s actions, the The Federal Reserve Board, on November 26, U.S. attorney in Los Angeles is announcing that 2003, announced the issuance of a consent order of Credit Lyonnais and several other entities and indi- assessment of a civil money penalty against the viduals have agreed to plead guilty to specific crimes Provident Bank, Cincinnati, Ohio, a state member related to their roles in the Executive Life matter, as bank. Provident Bank, without admitting to any alle- well as announcing an indictment against several gations, consented to the issuance of the order in other individuals involved in the matter, including connection with its alleged violations of the Board’s Peyrelevade. The Federal Reserve Board and the Regulations implementing the National Flood Insur- Federal Reserve Bank of New York investigated ance Act. the matter jointly with the U.S. Attorney’sOffice. The order requires Provident Bank to pay a civil The consent enforcement actions being announced money penalty of $34,100, which will be remitted by the Federal Reserve are part of a global accord to the Federal Emergency Management Agency for designed to address both the regulatory and criminal deposit into the National Flood Mitigation Fund. aspects of the Executive Life matter. The Federal Reserve is also working with the The Federal Reserve Board, on December 1, 2003, French banking supervisor to take joint action to announced the execution of a written agreement by require Credit Lyonnais and its parent to enhance and among the Putnam County Bank, Hurricane, their overall compliance programs. Completion of the West Virginia; the West Virginia Division of Bank- documentation for this action is expected shortly. 66 Federal Reserve Bulletin Winter 2004

The Federal Reserve’s consent action against overall compliance with applicable U.S. banking Credit Lyonnais resolves allegations that, beginning and financial laws, rules, and regulations. Credit in the early 1990s, Credit Lyonnais violated the Bank Lyonnais and Credit Agricole are also required to Holding Company Act by acquiring the company that enhance their general organizational infrastructure, as assumed Executive Life’s insurance underwriting well as policies and procedures, with respect to com- business through secret agreements that were con- pliance with U.S. laws and regulations, subject to the cealed from the Federal Reserve. The action also oversight of the Commission Bancaire and the Fed- resolves allegations that Credit Lyonnais intention- eral Reserve Board. ally misrepresented to the Federal Reserve the extent Credit Agricole, which acquired Credit Lyonnais of its ownership interests in a portfolio of junk bonds in June 2003, had no part in the conduct that led to that had been acquired from Executive Life, as well this enforcement action. as its substantial equity investment and other relation- ships with Artemis, S.A., a French company that The Federal Reserve Board, on January 9, 2004, subsequently acquired the successor insurance com- announced the issuance of an order of prohibition and pany and junk bond portfolio. In the Board’s order, an order to cease and desist against Scott Smolinski, Credit Lyonnais neither admits nor denies these a former vice president of the James Monroe Bank, allegations. Arlington, Virginia. The notice of charges issued against Peyrelevade, Mr. Smolinski, without admitting to any allega- who became the chief executive officer of Credit tions, consented to the issuance of the order based on Lyonnais after the acquisition of the insurance busi- his alleged participation in violations of law and ness, alleges that he took steps to further the alleged unsafe or unsound practices regarding identity theft, violations, engaged in unsafe and unsound practices falsification of bank records, misapplication of in not reporting the violations when he learned about bank funds, self-dealing, and violations of institu- them, and made false statements to Federal Reserve tional internal controls that resulted in losses and investigators about the scope of his knowledge of the other damage to the bank and personal gain to secret acquisition. Mr. Smolinski.

The Federal Reserve Board, on December 24, 2003, announced the execution of a written agree- CHANGES IN BOARD STAFF ment by and among Combanc, Delphos, Ohio; The Commercial Bank, Delphos, Ohio; the Ohio Division The Board of Governors has approved the promo- of Financial Institutions, Columbus, Ohio; and the tion of Fay Peters to director of the Management Federal Reserve Bank of Cleveland. Division. Ms. Peters was appointed to the official staff The Federal Reserve Board, on January 8, 2004, as deputy director of the Management Division in announced the issuance, together with the Commis- April 2003 and has served as acting director since sion Bancaire, the regulator of French banks, of a William R. Jones retired in August 2003. Ms. Peters consent enforcement action against Credit Lyonnais, joined the Federal Reserve System in 1982 as an S.A., a large French bank, and Credit Agricole, S.A., attorney in the Legal Department of the Federal its parent company. Reserve Bank of Boston. In 1988 she transferred to This action is the third one agreed to by Credit the Federal Reserve Bank of Minneapolis as assistant Lyonnais and its parent with respect to Credit general counsel and deputy equal employment oppor- Lyonnais’s participation in the rehabilitation of the tunity (EEO) officer. In 1999 she was promoted to Executive Life Insurance Company of California. vice president, with responsibilities for managing The Federal Reserve was working with the French the Bank’s facilities, protection, and administrative banking regulator on this joint action when the other services functions and advising Bank executives on enforcement actions were announced on Decem- EEO matters. Ms. Peters holds a B.S. in business ber 18, 2003. The other actions, among other things, administration from Northeastern University and a require specific remedial actions to address concerns J.D. from the Boston University School of Law. arising out of the Executive Life matter. The January 8 action by the Federal Reserve and The Board of Governors has approved the appoint- the Commission Bancaire requires that Credit ment of Peter J. Purcell as associate director and Lyonnais and Credit Agricole, as Credit Lyonnais’s chief technology officer for the System’s supervision parent, establish programs designed to ensure their function. Announcements 67

Mr. Purcell will coordinate Information Technol- tional technology services provider. He started his ogy (IT) support and development efforts for the career in information technology at the Federal System’s supervision function. Before joining the Reserve Bank of Boston. Mr. Purcell holds a B.B.A. Board, Mr. Purcell held IT management positions at from Nazareth College and an M.B.A. in manage- several banking organizations and was an interna- ment from Western Michigan University.