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 box 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 advisors, 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 hibernation 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. Although the reserve bank's letter went to only those banks in the second district, it raises a significant question as to the scope of the reporting obligation of all banks everywhere. The letter states that Federal Reserve examiners will be looking for clearly written contracts, an evaluation of the perceived risks for each outsourced service, and the basis for the selection of the servicer, along with periodic updates indicating the viability of the servicer. The New York Fed appears to believe that section 7(c) gives it authority to examine any company that provides the above services to a bank. This might include mutual fund service providers, accountants, lawyers, bookkeepers, appraisers, loan collection agents, data processing firms, and others. The New York Fed's attempt to enforce the law on such a broad scale will impose enormous burdens and costs on the banking industry as well as on bank service providers. Its assertion of authority to examine third-party service providers represents a dramatic and unprecedented expansion of bank regulatory jurisdiction over hundreds, if not thousands, of non-regulated entities. It seems highly doubtful that Congress intended the Federal Reserve System to be examining accounting firms, computer processors, storage companies, and other nonbank providers of services. The New York Fed appears to have acted on its own initiative and no other Federal Reserve bank is undertaking a similar enforcement effort. With banking regulators and Congress seeking new ways of reducing the regulatory burden on banks and their new affiliates, an attempt to enforce the literal requirements of a long-dormant statutory provision that has little or no legitimate regulatory purpose suggests that the time has come to repeal it.
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