N.Y. Fed Stirs Up a Bureaucratic Nightmare

By Fein, Melanie L. | American Banker, June 6, 1995 | Go to article overview

N.Y. Fed Stirs Up a Bureaucratic Nightmare


Fein, Melanie L., American Banker


Though it hasn't been enforced, there's a law on the books that requires banks to report on hundreds of service arrangements with third-party service providers. Recently, however, the Federal Reserve Bank of New York stepped up its efforts to get state member banks to comply with the law's rigorous reporting requirements.

Melanie Fein, a law partner with Arnold & Porter in Washington, argues that the New York Fed's action could open up a Pandora's Plox for banks. Ms. Fein, who has numerous banking clients, urges that Congress repeal the law when considering regulatory reform legislation later this year.

A little-known dinosaur of bank regulation is about to come to life and wreak havoc on the industry.

it could be particularly onerous to banks actively involved in the mutual fund business that rely heavily on third-party service providers such as fund custodians, investment advisers, transfer agents, distributors, administrators, and the like. The measure would also apply to banks which are themselves providers of such services.

Section 7(c) of the bank Service Corporation Act requires banks and their affiliates to notify their federal banking regulator within 30 days after entering into a contract with a service provider.

The law further provides that such services shall be subject to regulation and examination by the appropriate federal banking agency to the same extent as if such services were being performed by the bank itself. Section 7(c) literally requires banks and their affiliates to report on hundreds of service arrangements with third-party service providers.

Banks generally have not filed such reports with banking regulators in the past, however, and the provision appears to have been largely ignored by the federal banking regulators as well.

Until now.

On March 29 the Federal Reserve Bank of New York announced that the provision's long liberation is over. It sent a notice to the chief executive officers of all state member banks in the second Federal Reserve district reminding them of the reporting requirement and requesting such banks to provide a listing of all current arrangements with third-party service providers. …

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