TO: ALL BISA Members
FROM: Dick Starr, Chairman — Legislative, Regulatory & Compliance Committee
DATE: 11 July 2005
SUBJECT: Review of Recent LRC Conference in Washington, DC

The LRC Conference was held June 7-8 in the conference facilities of Morgan, Lewis & Bockius LLP in Washington, DC. This symposium is designed to be an interactive meeting for legal, compliance and executive officers of financial institutions Members of BISA and the firms that support them.

The keynote speaker for LRC 2005 was Scott Alvarez, General Counsel, Board of Governors of the Federal Reserve System. A copy of his presentation can be found here. He addressed Risk Management and compliance and the related topic focusing on the responsibility of bank holding companies to operate in a safe and sound manner that does ot threaten the viability of affiliated depository institutions. Rather than summarize his extensive comments, I suggest you visit the above-mentioned site for the complete text.

In the event that real estate powers are ever approved by the competing factions in Congress, it is uncertain who will be the regulator. Although The Gramm-Leach-Bliley Act, passed in 1999, envisioned real estate being financial in nature, numerous procedural interventions have prevented the final authorization for banks to conduct real estate businesses, and Mr. Alvarez answered questions regarding this and a variety of other issues.

The topic "Current Enforcement Activities and What you Need to Know" was designed to get full audience participation in a confidential setting. It was a very active session with many participants who appreciated the opportunity to question the panel. John Hartigan, BISA General Counsel and partner in Morgan, Lewis & Bockius was joined by Kevin Hurley, SVP and AGC of Wachovia Securities, LCC and by Dick Starr, BISA LRC Chairman, for this lively and informative session. We intend to repeat this format in San Francisco in September.

Linda S. Sundberg of the SEC’s Division of Market Regulation team with Jack Drogin of Morgan, Lewis & Bockius to discuss Reg B and the likelihood of its being implemented according to the September 30 schedule set forth by SEC Chairman Donaldson prior to his resignation. BISA has taken a very active role on the topic of "Chiefly Compensated" within the context of Reg B, and this ongoing discussion is a matter of serious interest to its bank members. There is little doubt this will be a major topic at the BISDA meeting in San Francisco in September. The new SEC Chairman, Chris Cox, may have other ideas and priorities. We will keep you apprised as this develops.

The SMART Act is one of the most controversial proposals since Gramm-Leach-Bliley in 1999. This legislation would create a semi-governmental entity to give Federal oversight to the insurance industry that has been governed by state insurance regulators pursuant to the McCarran Ferguson Act since 1945. Lawrence H. Mirel, Commissioner of Insurance, Securities & Banking for the District of Columbia, presented his views and those of the NAIC during the working lunch. The NAIC does not favor the SMART Act for many reasons, among them is the fact that state regulation is making progress toward the goals of uniform state regulation, and the existing system is not broken. Many insurance trade associations have thrown their support behind the SMART Act, but Congress has been busy with many other items and has pledged to hold additional hearings.

Patricia Gomez, Wells Fargo Investments LLC SVP-Director of Regulatory Affairs, and Beth Keisewetter of Morgan, Lewis & Bockius joined John Ayanian, Partner in Morgan, Lewis & Bockius, to discuss "BD Supervisor Rule Requirements." Again, the format engendered a very active, off-the-record Q&A. The content was right out of the day-to-day experience of the attendees and the panelists and included many actual examples of current issues and concerns. The first CEO certification to be executed December 1, 2005, is a major milestone in supervisory responsibility, and all broker-dealers are carefully attuned to the implications. The responsibility for executing the requirements for testing and verifying the written supervisory must be certified by a named principal(s). The materials distributed to attendees are proprietary to Morgan, Lewis & Bockius. These materials will also be available to attendees of the September conference.

Steve Stone, Managing Partner of Morgan, Lewis & Bockius’ Washington office gave a very detailed presentation regarding Increased Scrutiny of Fee & Compensation Arrangements. Steve’s examples were from actual cases and were focused on how fee compensation arrangements could influence the conduct of broker-dealer business and influence product offerings. The NASD and SEC continue to examine for practices that may influence investors’ decisions. There is still a lot of controversy over disclosure of compensation to the firm and who must make the disclosures in what materials. This will be a continuing item of interest.

In a program segment supported by extensive case law, Christian Bartholomew, Partner in Morgan, Lewis & Bockius, largely focused on case law illustrating the different outcomes for firms that fully cooperated with regulatory investigations and prosecution from those that took the "prove it" stance. Cooperation frequently seems to be the best approach, but the outcomes are not uniform and entirely consistent. There is little doubt Christian would advise any firm to avoid practices and policies that bring regulators to your doorstep with complaints in hand. Written policies, carefully adhered to and rigorously supervised are the keys to not needing litigation advice. But in the event you find your firm in this position, John’s illustrations can help you and your firm determine your best course of action.

The Litigation, Legislative and Regulatory Update was delivered by BISA Washington Counsel Kathleen Collins, Partner in Morgan, Lewis & Bockius. The Fed’s anti-tying initiative, the Bank Secrecy Act Examination Guidance, the controversial California Ninth Circuit case involving information sharing with affiliates, and the SMART Act provisions were just a few of the items covered in her extensive outline handout.

BISA is proud of the depth and breadth of its legislative, regulatory and compliance capabilities and we urge you to attend its sessions at each of the scheduled conferences. If the Legislative, Regulatory & Compliance Committee can assist you by participating in presentations to your bank executive management committees, please contact Richard D. Starr directly.