District Court Upholds Preemption with National Bank Operating Subsidiaries

The United States District Court for the District of Connecticut (the "District Court") granted summary judgment supporting a national bank's claim that its operating subsidiary was not subject to state licensing or related laws. The District Court determined that a national bank has authority to establish operating subsidiaries through its incidental powers, and that the Gramm-Leach-Bliley Act reaffirmed this authority. The District Court then applied the Chevron analysis to determine the reasonableness of the OCC's provision at 12 CFR 7.006, which specifies that "state laws apply to national bank operating subsidiaries to the same extent as those laws apply to the parent national bank." In response to the state banking commissioner's claim that 7.006 is not, unto itself, a preemption regulation (the OCC release publishing the rule highlighted that 7.006 merely "clarifies" the preemptive effect of federal law), the District Court declared that this "type of interpretation and extrapolation is precisely the type of interpretation with which an administrative agency is charged." The District Court then determined that Congress had not directly spoken on the issue and the preemption in this case was reasonable because "the Commissioner's threatened enforcement of the Connecticut statutes would interfere with two powers which the bank is authorized to exercise - the establishment of subsidiaries and the authority to engage in real estate lending." Finally, in response to the state's claim that a state has the right to enforce mortgage lending in its borders and that the national bank's request will give national banks a competitive advantage over their state counterparts, the District Court stated that what is involved is a policy rather than a legal issue and "Courts have repeatedly acknowledged that the [National Bank] Act's preemption of state law at times creates disparities between the national bank and state bank competitors, and may at times even create a competitive advantage in the national bank." Connecticut has announced that it will appeal the decision. Wachovia Bank, N.A. and Wachovia Mortgage Corporation v. John P. Burke, Banking Commissioner (May 25, 2004).

SEC Staff Addresses Use by Advisers of Independent Third Parties to Vote Client Proxies

In response to inquiries from a provider of proxy voting recommendations, the staff of the SEC's Division of Investment Management issued a letter (the "Staff Letter") discussing relevant considerations for investment advisers that rely on the recommendations of third parties to vote client proxies, among other matters. The Staff Letter notes that an adviser relying on a third party for proxy recommendations should take reasonable steps to verify, based on all the relevant facts and circumstances, that the third party is in fact independent of the adviser. A third party would generally be independent if the third party is free from influence or any incentive to recommend that proxies be voted in anyone's interest other than that of the adviser's clients. A third party generally could not be independent if it were an "affiliated person" of the adviser within the meaning of the Investment Company Act of 1940, as amended, or had any material business, professional...