PREFERRED AND CAPITAL PRODUCT DEVELOPMENT

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PREFERRED AND CAPITAL PRODUCT DEVELOPMENT Powered By Docstoc
					BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE TOKYO WASHINGTON, D.C.




        PREFERRED AND CAPITAL PRODUCT DEVELOPMENT
                                                    FOCUSING ON TIER 1 AND OTHER HYBRID CAPITAL PRODUCTS


                                                                                                                   April 2006
                                                      TABLE OF CONTENTS
                                                                                                                                               Page

INTRODUCTION 2005-2006 TIER 1 AND OTHER HYBRID ISSUES AND SELECTED
             DEVELOPMENTS ............................................................................................... i
CHAPTER 1                      TIER 1 CAPITAL PRODUCT PARAMETERS .........................................................1
CHAPTER 2                      PRODUCT DEVELOPMENT PRIOR TO THE 1988 BASLE ACCORD .......................5
CHAPTER 3                      THE 1988 BASLE ACCORD ...............................................................................7
CHAPTER 4                      THE BASLE RELEASES .....................................................................................8
CHAPTER 5                      INNOVATIVE TIER 1 CAPITAL PRODUCT DEVELOPMENT ................................14
CHAPTER 6                      TAX-DEDUCTIBLE NON-OPERATING SUBSIDIARY PREFERRED ......................16
CHAPTER 7                      PRE-TAX OPERATING SUBSIDIARY PREFERRED ...........................................111
CHAPTER 8                      MULTIPLE TAX BENEFIT SUBSIDIARY PREFERRED ......................................122
CHAPTER 9                      CAPITAL INSTRUMENTS ISSUED BY A BANK ................................................125
CHAPTER 10                     CAPITAL INSTRUMENTS ISSUED BY A BANK AND LINKED TO ANOTHER
                               INSTRUMENT ................................................................................................144
CHAPTER 11                     MANDATORY CONVERTIBLE OR EXCHANGEABLE SECURITIES ....................161
CHAPTER 12                     EUROPEAN INSURANCE COMPANY CAPITAL INSTRUMENTS .........................172
CHAPTER 13                     BANK AND INSURANCE COMPANY CAPITAL INSTRUMENT CDOS ................182
CHAPTER 14                     OTHER BANK PRODUCTS .............................................................................185
Appendix A –                   BASLE COMMITTEE AND U.S. REGULATORY INNOVATIVE TIER 1 CAPITAL
                               REQUIREMENTS
APPENDIX B –                   SELECTED U.S. BANK REGULATORY ISSUES APPLICABLE TO INNOVATIVE
                               CAPITAL SECURITIES OFFERINGS
APPENDIX C –                   FINAL REGULATION TO REVISE REGULATORY CAPITAL TREATMENT OF
                               RECOURSE ARRANGEMENTS, DIRECT CREDIT SUBSTITUTES AND RESIDUAL
                               INTERESTS IN ASSET SECURITIZATIONS
APPENDIX D –                   UK FSA GUIDELINES ON TIER 1 CAPITAL
APPENDIX E –                   USE OF TRUST STRUCTURES IN TIER 1 PREFERRED SECURITIES AND OTHER
                               CAPITAL MARKETS TRANSACTIONS – FOREIGN TRUST TAX ISSUES
APPENDIX F –                   2003 LAW TEMPORARILY REDUCES INDIVIDUAL INCOME TAX RATE ON U.S.
                               AND FOREIGN CORPORATE DIVIDENDS AND CAPITAL GAINS TO 15%

APPENDIX G –                   THE EU PROSPECTUS AND THE TRANSPARENCY DIRECTIVES
APPENDIX H –                   RATING AGENCY GUIDELINES
APPENDIX I –                   ERISA CONSIDERATIONS
APPENDIX J –                   NAIC HYBRID SECURITY CLASSIFICATION
APPENDIX K –                   SELECTED 2006, 2005, 2004, 2003, 2002 AND 2001 DEVELOPMENTS IN
                               CORPORATE AND SECURITIES LAWS, TAX AND ACCOUNTING
APPENDIX L –                   SIDLEY AUSTIN LLP PREFERRED AND CAPITAL SECURITIES GROUP
                               DIRECTORY
The affiliated firms, Sidley Austin LLP, a Delaware limited liability partnership, Sidley Austin LLP, an Illinois limited liability partnership, Sidley
Austin, an English general partnership and Sidley Austin a New York general partnership, are referred to herein collectively as Sidley Austin.


NY1 5828148V.13
                                             INTRODUCTION

                                 INCLUDING
    2005-2006 TIER 1 AND OTHER HYBRID ISSUES AND SELECTED DEVELOPMENTS
         This is the seventh annual edition of this book. The purpose of this book is to assist our
clients in developing and executing Tier 1 and other hybrid capital products. In recent years,
structured Tier 1 and other hybrid capital products have evolved to achieve broader goals, reach
more types of issuers and respond to changing regulatory, tax, accounting, credit rating, financial
and product market environments.

       An increasing number of Tier 1 capital products issued outside the United States are
being designed for offering primarily to investors in the issuer’s home market rather than in the
U.S., European or global capital markets. This presents new challenges for cross-border product
development, which until the last few years had been the primary forum for Tier 1 capital
product development and execution. We have tried to include in this book as many domestic and
regional Tier 1 issues as possible, as well as several domestic corporate hybrid transactions that
were structured to take advantage of recent rating agency developments.

       In addition to covering new developments and trends in Tier 1 capital product
development in this year’s edition, we have also included the following:

                  •   Appendix G —    The EU Prospectus and the Transparency Directives;
                  •   Appendix H —    Rating Agency Guidelines;
                  •   Appendix I —    ERISA Considerations; and
                  •   Appendix J —    NAIC Hybrid Security Classification.

Rating Agency Guidelines

        In February 2005 and January 2006, Moody’s Investors Service refined its comparative
framework for characterizing hybrid securities on a debt to equity continuum. Prior to the new
framework, Moody’s characterized most forms of innovative capital securities as being more like
debt than equity and, as such, generally gave little or no equity credit for those securities.1 After
reviewing its approach to assessing capital securities (as well as the behavior of loss absorption
features of certain capital securities relative to common equity), Moody’s decided to give
increased equity credit for certain capital security structures. Following Moody’s first release,
1
  Fitch Ratings, Moody’s and Standard & Poor’s use the concept of equity credit to explain the credit rating effect of
issuing a particular hybrid security relative to the effect of issuing common stock. For example, if issuing a certain
amount of common equity would cause a two notch upgrade, the issuing of a like amount of a security with 50%
equity credit would result in a one notch upgrade. Alternatively, an issuer would need to double the amount of the
particular security to achieve the two notch upgrade. The equity credit metrics set forth in the S&P, Moody’s and
Fitch publications are inferred from published scales that set forth typical equity credit metrics of various “hybrid”
securities issued by investment grade companies. The reader is advised that Fitch, Moody’s and S&P intend their
scales to be used only as a “communication device” and warn against reducing the analysis of hybrid securities to
formulas. According to Fitch, Moody’s and S&P, the determination of the rating implications of a particular
issuance for existing ratings varies with company specific circumstances and the size of the issuance relative to
existing capital structure.



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Fitch and S&P also refined their respective debt to equity continuums for capital securities to
clarify existing classifications and, in the case of Fitch, to allow for greater equity credit for
certain capital security structures.2 For the complete text of the revised rating agency
frameworks and related materials, please see new Appendix H – Rating Agency Guidelines.

        As discussed below, U.S. Bancorp (page 30, Chapter 6), Wachovia Corporation (page
168, Chapter 11) and Washington Mutual (page 116, Chapter 7), through three different
structures, raised Tier 1 capital that took advantage of Moody’s revised framework on equity
credit.

       Several U.S. corporations and other financial institutions took advantage of Moody’s
revised framework on equity credit and also issued hybrid securities in 2005 in the form of
“enhanced” trust preferred securities, including Lehman Brothers Holdings Inc., The Stanley
Works and Burlington Northern Santa Fe (page 30, Chapter 6).

National Association of Insurance Commissioners – Hybrid Security Classification

        In the United States, the National Association of Insurance Commissioners, or NAIC,
through its Securities Valuation Office, or SVO, regulates the investment activities of insurance
companies by, among other things, classifying hybrid securities that insurance companies hold
for investment purposes as falling in debt, preferred equity or common equity “baskets” and
assigning risk-based capital requirements based on such classification. SVO classification of
hybrid securities is a two step process. First, the SVO reviews five key contractual terms of the
relevant security (i.e., claim status, right to influence management, right to periodic payment,
agreement as to maturity and involuntary redemption) and makes a preliminary assessment of
how its characteristics compare relative to benchmark profiles for each basket. Second, the SVO
reviews how the security will behave under stress situations (i.e., whether it will act more like
debt or equity), the “synergy” of the contract provisions in their totality and any other matter that
is relevant to classification. Generally speaking, an SVO classification of a hybrid security as
common equity carries a 30.0% risk-based capital charge, as opposed to as little as a 0.3% risk-
based capital charge for debt or preferred equity. Trust preferred securities have historically
been classified as debt or preferred equity.

        Following Moody’s release of a refined comparative framework for characterizing hybrid
securities, several investment banks, including Lehman Brothers, developed security products
aimed at providing the ideal mix of rating agency, tax and regulatory treatment for bank,
insurance and corporate issuers. In August 2005, Lehman Brothers issued its Enhanced Capital
Advantaged Preferred Securities, or ECAPS (page 30, Chapter 6), which were the first trust


2
  Moody’s approach to equity credit does not distinguish between bank/insurance company and non-bank/insurance
company issuers (although, in recognition of bank and insurance regulators’ ability to restrict cash redemptions,
certain bank and insurance capital securities are given higher equity credit than corporate hybrid securities that have
identical loss-absorbing features). Unlike Moody’s, the equity credit analysis of Fitch and S&P for capital security
issuances by banks parallels the regulatory approach; i.e., such capital securities receive 100% equity credit but can
only constitute a portion of a particular bank’s adjusted total equity (e.g., 25%). S&P also uses this approach for
issuances of capital securities by insurance companies. For corporate hybrid securities (and in the case of Fitch,
issuances by insurance companies), Fitch and S&P generally follow the approach of Moody’s and assign equity
credit to a particular hybrid security based generally on its loss-absorbing features.
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preferred securities that achieved tax deductibility of interest payments and higher equity credit
from Moody’s.

         In March 2006, the SVO, after being referred the ECAPS transaction by the New York
State insurance regulator in the fall of 2005, decided to classify the ECAPS as common equity
rather than preferred equity. As a result of the decision, insurance companies that hold ECAPS
for investment purposes must now carry significantly more capital as compared with other types
of trust preferred securities held for investment purposes.

        On March 24, 2006, the SVO received a Notice of Appeal on its ECAPS decision and is
currently reviewing its decision. In subsequent conference calls, the SVO has indicated that it
will expedite the ECAPS appeal to the extent possible. The SVO, however, has not disclosed to
the market the basis for its classification of the ECAPS as common equity or provided definite
guidelines on hybrid classification for future issuances. The SVO has also indicated that, at the
suggestion of the New York State insurance regulator, it will likely undertake a review of other
hybrid security transactions by focusing on the most common hybrid structures. As the SVO’s
classification of hybrid securities is, for the time being, largely a subjective matter, the only way
to be certain about the classification of a particular hybrid security is to obtain pre-classification
from the SVO prior to issuance. For additional information on the ECAPS classification and the
classification of hybrid securities generally, please see Appendix J – NAIC Hybrid Security
Classification.

2005-2006 Analysis by Region

Asia

        The hybrid Tier 1 market for Asian banks during 2005 and the first quarter of 2006 was
significantly more active than that of 2004, driven in part by revised guidelines on Tier 1 capital
in countries such as Kazakhstan and the Philippines.

        In November 2005, the National Bank of Kazakhstan adopted several new banking
regulations, which, among other things, approved the inclusion of hybrid subordinated debt
obligations, issued either directly by a bank or through a non-operating subsidiary, in Tier 1
capital. Simultaneously with the adoption of the new regulations, Kazkommertsbank
proceeded with a subsidiary preferred transaction and, in doing so, became the first bank from
the former Soviet Union to issue hybrid Tier 1 securities (page 102, Chapter 6).

         In December 2005, the Monetary Board of Bangko Sentral ng Philippinas approved
guidelines based on the minimum features recommended by the Basel Committee regarding the
recognition of hybrid Tier 1 capital instruments as eligible Tier 1 or core regulatory capital of a
bank. The guidelines specify that the issuance of hybrid Tier 1 capital by a Philippine bank will
require the prior approval of the Monetary Board and will be subject to a maximum limit of 15%
of total Tier 1 capital. The Monetary Board will not allow Philippine banks that issue peso-
denominated hybrid Tier 1, upper Tier 2 and lower Tier 2 instruments to swap the proceeds into
foreign currency for the purpose of investing in foreign currency denominated instruments. In
March 2006, shortly after the release of the guidelines, Metropolitan Bank and Trust


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Company became the first Philippine bank to issue U.S. dollar denominated perpetual Tier 1
securities (page 132, Chapter 9).

        For the first time since 1998, Japanese banks entered the Tier 1 capital security markets,
with Resona Holdings Inc., Shinsei Bank Ltd, Mitsubishi UFJ Financial Group and Mizuho
Financial Group completing Tier 1 transactions in July 2005, February 2006 and March 2006,
respectively (page 82, Chapter 6). These recent Japanese Tier 1 transactions contain a number
of equity-like features not present in earlier Japanese Tier 1 securities.

        In December 2005, Chinatrust Commercial Bank became the first Taiwanese bank to
issue U.S. dollar denominated perpetual “upper” Tier 1 securities (page 132, Chapter 9). The
bank also issued upper Tier 2 capital securities in March 2005. Also in March 2005, Shinhan
Bank, a major banking subsidiary of Shinhan Financial Group Co., Ltd., one of Korea’s
largest financial services companies, issued 30-year Tier 1 hybrid securities, becoming only the
second Korean bank to do so (page 131, Chapter 9).

       Singapore and Malaysian banks were also active in issuing Tier 1 securities during 2005
and the first quarter of 2006, with Malaysian banks Southern Bank Berhad and AmBank (M)
Berhad and Singapore banks Overseas-Chinese Banking Corporation and United Overseas
Bank Limited each issuing non-cumulative guaranteed preferred through non-operating
subsidiaries (pages 88 and 91-92, Chapter 6).

Australia

        As discussed in the last edition of this book, in March 2005, National Australia Bank
Limited issued U.S. dollar denominated trust preferred securities redeemable for bank
preference shares using a structure that is similar to Westpac’s trust preferred securities structure,
but that employs subsidiary subordinated notes stapled to convertible debentures of the bank as
the feeder instruments (page 43, Chapter 6). In the first quarter of 2006, Commonwealth Bank
of Australia directly issued domestic Tier 1 securities (page 142, Chapter 9), as well as U.S.
dollar denominated trust preferred securities redeemable for bank preference shares using a
structure that is similar to the Westpac and National trust preferred securities structures, but that
employs subsidiary subordinated notes stapled to preference shares of the bank as the feeder
instruments (page 157, Chapter 10).

       In August 2005, the Australian Prudential Regulation Authority, or APRA, released a
discussion paper relating to the impact of the adoption of International Financial Reporting
Standards in Australia (and the resultant reclassification of certain debt and equity instruments)
on, among other things, innovative Tier 1 securities. In the discussion paper, APRA proposed to
amend its prudential standards and guidance notes on the measurement of capital beginning July
1, 2006 to:

          •       divide Tier 1 capital into “Fundamental Tier 1” and “Residual Tier 1”, the latter of
                  which includes the sub-category “Innovative Tier 1”. APRA would limit Residual
                  Tier 1 and Innovative Tier 1 to 25% and 15%, respectively, of net Tier 1 capital (with
                  effect from January 1, 2008, and with a possible two-year extension for ADIs
                  materially affected by the proposed changes);

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          •       allow authorized deposit-taking institutions, or ADIs, to directly issue Innovative Tier
                  1 capital instruments (SPV-issued instruments would still continue to be classified as
                  Innovative Tier 1 capital); and

          •       remove the current mandatory conversion requirements for directly issued capital
                  instruments eligible for inclusion as Innovative Tier 1 or Upper Tier 2 capital (APRA
                  intends to rely on the subordination requirements and on additional loss absorption
                  criteria that it proposes to include in its prudential standards).

        In April 2006, APRA released its response to the submissions it received regarding the
August 2005 discussion paper (the “Response to Submissions”). The Response to Submissions
largely reconfirmed the proposals contained in the August 2005 discussion paper, with the
following amendments:

          •       the additional loss absorption criteria for Innovative Tier 1 capital securities is
                  extended to non-innovative Residual Tier 1 and Tier 2 capital securities;

          •       in addition to non-cumulative, irredeemable preference shares, preference shares that
                  have the following features will be acceptable as non-innovative Residual Tier 1
                  capital:
                  – must be perpetual (i.e., irredeemable in the hands of the investor);

                  –   must be non-cumulative (payment-in-kind features are deemed to be cumulative);

                  –   must contain loss absorption characteristics;

                  –   must not contain step-ups or resets, but can contain clauses that change the basis
                      for the rate of dividend without changing the effective margin (i.e., fixed to
                      floating or floating to fixed securities are permitted, so long as they do not have a
                      step-up);

                  –   may contain open options for the issuer to call (i.e., where there is no specific call
                      date, but only where the call feature does not operate in conjunction with any
                      other feature that creates a de facto “tenor signal” to the market), subject to
                      APRA’s prior approval; and

                  –   may allow conversion to ordinary equity at the option of the issuer (subject to
                      APRA’s prior approval at the time of exercise). The rate of conversion must be
                      fixed at the time of issuance based on the market price of the ordinary shares at
                      the time of subscription for the issue;

          •       APRA will allow perpetual non-cumulative preference shares issued through stapled
                  security structures to be included as non-innovative Residual Tier 1 capital if the
                  stapled security has the following features:

                  –   either the preference share or the attaching note must be paid up;

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                  –   the preference share and the attaching note must not be traded separately and must
                      be stapled together unless and until an “unstapling event” occurs; and

                  –   the attaching note’s terms and conditions must mirror those of the preference
                      share such that the stapled note operates effectively as if it were the preference
                      share. Accordingly, the terms and conditions of the stapled note must not
                      compromise the Tier 1 qualities of the underlying preference share.

          •       capital securities involving SPVs will only be eligible as Innovative Tier 1 or Tier 2
                  capital.

        The Response to Submissions indicates that ADIs or general insurers who believe an
existing innovative instrument may qualify as a non-innovative instrument may apply to APRA
to have the issuance reclassified. The Response to Submissions also clarifies APRA’s thoughts
on so-called dividend stopper clauses and optional dividend provisions.

        APRA proposes to issue its new prudential standards for ADIs late in the second quarter
of 2006, which will come into effect on July 1, 2006 (with new Tier 1 capital limits to come into
effect on January 1, 2008).

Europe

         Bank regulators in several European countries revisited their guidelines on Tier 1 capital
over the course of 2005. The UK FSA narrowed the definition of “core” Tier 1 capital to
exclude perpetual non-cumulative preferred, which now fall in a separate (non-innovative)
category within Tier 1 capital. See the discussion of the UK FSA’s position in Appendix D – UK
FSA Guidelines on Tier 1 Capital. The Bank of Greece acted to decrease its limits on “lower”
(i.e., non step-up) and innovative Tier 1 capital securities as a percentage of total Tier 1 capital
from 30% and 15% to 25% and 10%, respectively. On July 29, 2005, the Bank of Spain
established that Spanish banks can issue Tier 1 securities with a step-up in an amount up to 15%
of total Tier 1 capital, subject to a limitation that such step-up securities cannot exceed 50% of
hybrid Tier 1 already outstanding.

        Overall, 2005 proved to be a fairly active year for European hybrid security issuers, with
much of the product development relating to corporate issuers. With respect to bank and
insurance company issuers, financial services company Zurich Financial Services issued
“enhanced” subsidiary preferred in January 2006, which were structured to take advantage
Moody’s revised framework on equity credit (page 96, Chapter 6). Other key product
developments in 2005 for bank and insurance company issuers included the issuances of
subsidiary Tier 1 securities in June and July 2005, respectively, by Irish banks Anglo Irish Bank
Corporation plc and EBS Building Society (page 102, Chapter 6) using new transaction
structures, the former of which was included as core Tier 1 capital.

        In Spain, Banco Santander Central Hispano became the first issuer of book-entry
securities, which constituted upper Tier 2 securities of the bank, into the United States under
Spain’s new tax regime. The Banco Santander Central Hispano transaction involved the use of
several new procedures developed to satisfy the requirements of the Spanish tax authorities while

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not conflicting with DTC’s procedures for book-entry securities. The new procedures were
designed to facilitate the collection of certain information concerning the identity and country of
residence of beneficial owners who are participants in DTC or hold their interests through
participants in DTC to determine whether such beneficial owners are entitled to receive
payments in respect of the securities free and clear of Spanish withholding taxes. In order to
comply with DTC’s procedures for book-entry securities, a third party intermediary is needed to
liaise between the issuer and DTC. Details of the procedures can be found in Chapter 6 – Simple
Subsidiary Structures – Spanish, French, Portuguese and Greek Bank Non-Operating Tax Haven
Company Subsidiary Non-Cumulative Preferred (since 1991) – 2003 Spanish Law.

          Direct Issue Tier 1 Instruments

       European banks that raised Tier 1 capital in 2005 and early 2006 through direct issues
include:

          •       from Denmark, Danske Bank and DLR Kredit A/S issued capital securities in
                  March and June 2005, respectively (page 131, Chapter 9);

          •       from France, Natexis Banques Populaires and Societe Generale issued capital
                  securities in January 2005, Credit Agricole issued capital securities in February and
                  November 2005, BNP Paribas issued capital securities in October 2005 and Dexia
                  issued capital securities in November 2005 (pages 131-132, Chapter 9);

          •       from the Netherlands, ING Group issued capital securities in June 2005 (page 131,
                  Chapter 9);

          •       from Sweden, Swedbank and IF Skadeforsakgring issued capital securities in
                  March and June 2005, respectively (page 131-132, Chapter 9); and

          •       from the United Kingdom, Barclays Bank issued preference shares in March (page
                  126, Chapter 9) and June 2005 and HBOS and Royal Bank of Scotland issued
                  capital securities in May and June 2005, respectively (page 135, Chapter 9).

         In an interesting non-product related development, in April 2006, UK insurer Standard
Life announced a bondholders’ consent solicitation relating to, among other things, two series of
its Tier 1 perpetual securities (the “MACS”). The bondholders’ consent solicitation requests
consent to changes in the terms of the MACS to allow Standard Life to move the MACS from
the current relevant issuing entity to a new UK holding company and to permit a capital
reduction in that holding company (as part of an accounting driven requirement) to create a
cushion of distributable reserves that will allow Standard Life to raise new public equity. The
proposed changes will not affect the regulatory treatment or terms of the MACS, and the
proposed structure is consistent with several market precedents. Such consent solicitations are
generally rare with respect to Tier 1 securities and the Standard Life solicitation may be of
particular interest to bank and insurance issuers looking to create holding company structures.




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          Subsidiary Tier 1 Instruments

        European banks and insurance companies that raised Tier 1 capital through a subsidiary
or other captive vehicle in 2005 and early 2006 include:

          •       from Austria, Bank Austria Creditanstalt and Erste Bank issued subsidiary
                  preferred in February and March 2005, respectively (page 54, Chapter 6);

          •       from France, Credit Agricole issued subsidiary preferred in February 2005 (page
                  62, Chapter 6);

          •       from Germany, Deutsche Bank issued subsidiary preferred in January 2005, Helaba
                  and West LB issued subsidiary preferred in May 2005 and Nord LB and Postbank
                  issued subsidiary preferred in June 2005 (pages 66-67, 71, Chapter 6);

          •       from Greece, Alpha Bank AE and EFG Eurobank issued subsidiary preferred in
                  February and October 2005, respectively (page 21, Chapter 6);

          •       from Ireland, Bank of Ireland issued both innovative and non-innovative subsidiary
                  preferred in February 2006 (page 102, Chapter 6);

          •       from Italy, Banca Popolare di Lodi issued subsidiary preferred in June 2005 (page
                  77, Chapter 6);

          •       from Portugal, Caixa Geral de Depositos issued subsidiary preferred in September
                  2005 (page 21, Chapter 6);

          •       from Spain, Banco Pastor issued subsidiary preferred in July 2005 (page 21,
                  Chapter 6);

          •       from Switzerland, UBS issued subsidiary preferred in April 2005 (page 55, Chapter
                  6); and

          •       from the United Kingdom, DePfa Bank and Investec issued subsidiary preferred in
                  June 2005 and Royal Bank of Scotland issued subsidiary preferred in December
                  2005 (page 102, Chapter 6).

United States

         On March 1, 2005, the U.S. Federal Reserve Board approved final regulations that allow
trust preferred securities of U.S. bank holding companies to be treated as Tier 1 capital,
notwithstanding that such securities are no longer treated as minority interests under U.S. GAAP
as a result of the FASB’s Interpretation No. 46. The regulations require no significant changes to
existing bank holding company trust preferred securities structures in order to achieve Tier 1
treatment. Trust preferred securities and other “restricted core [or Tier 1] capital elements” may
not exceed 25% (15% in the case of internationally active banking organizations) of a bank
holding company’s core capital elements, net of goodwill less any associated deferred tax
liability. Restricted core or Tier 1 capital elements include cumulative preferred stock, minority
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interests in nonbanking subsidiaries and qualifying trust preferred securities. In addition to
restricted core or Tier 1 capital elements, core or Tier 1 capital elements include common stock
and perpetual noncumulative preferred stock (including related surplus) and minority interests in
banking subsidiaries. Interestingly, mandatory convertible preferred securities are specifically
exempted from the 15% limitation for international active banking organizations, but are
included in a separate 25% limitation for those institutions. The quantitative limits of the final
regulations become effective as of March 31, 2009.

        On October 6, 2005, the Federal Reserve Board (the “FRB”), the Office of the
Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance Corporation (the
“FDIC”) and the Office of Thrift Supervision (the “OTS” and together with the OCC, the FRB
and the FDIC, the “Agencies”) jointly issued an ANPR (the “Basle IA ANPR”) proposing
revisions to the U.S. risk-based capital standards based upon Basle I. The Agencies have stated
they are considering increasing the number of risk-weight categories, permitting greater use of
external ratings as an indicator of credit risk for externally-rated exposures, expanding the types
of guarantees and collateral that may be recognized, and modifying the risk-weights associated
with residential mortgages. The Basle IA ANPR also discussed applying credit conversion
factors to certain types of commitments, assigning a risk-based capital charge to certain
securitizations with early amortization provisions, and assigning higher risk weight to certain
real estate, retail and commercial exposures and to loans that are 90 days or more past due or in
nonaccrual status. The Agencies are also considering revisions to Basle I that will apply to bank
holding companies with less than $500 million in assets.

       The Agencies also issued various releases throughout 2005 and early 2006 regarding
implementation of the Basel II risk-based capital requirements in the United States. For a
complete analysis of Tier 1 regulatory developments in the United States, see Chapter 4 – The
Basle Releases – Implementation of the Basle II Release – United States and Appendix A – Basle
Committee and U.S. Regulatory Innovative Tier 1 Capital Requirements.

      The most significant Tier 1 product developments among U.S. banks came from U.S.
Bancorp (page 30, Chapter 6), Wachovia Corporation (page 168, Chapter 11) and
Washington Mutual (page 116, Chapter 7).

        The U.S. Bancorp transaction structure largely resembled that of a standard trust
preferred deal but contained certain additional equity-like features (e.g., 60-year maturity,
mandatory deferral of distributions if the U.S. Bancorp is not in compliance with various
financial covenants, deferred interest must be paid with the proceeds from the sale of common
stock and/or perpetual non-cumulative preferred stock, deeper subordination than a standard trust
preferred deal, etc.) that allowed U.S. Bancorp to obtain tax deductibility, bank holding company
minority interest Tier 1 treatment and 75% equity credit from Moody’s.

        The Wachovia Corporation transaction involved mandatory convertible trust preferred
securities that were structured to obtain limited tax deductibility, Tier 1 treatment and 75%
equity credit from Moody’s. In connection with the transaction, on January 23, 2006, the Board
of Governors of the Federal Reserve issued a letter to Wachovia Corporation which confirmed
that trust preferred securities that convert into noncumulative perpetual preferred stock (instead
of common stock) constitute qualifying mandatory convertible preferred securities within the

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meaning of the Board’s Capital Guidelines. Accordingly, such securities would be exempt from
the 15% limitation on restricted core capital elements applicable to internationally active banking
organizations and are instead subject to the limitation that an internationally active banking
organization may include restricted core capital elements in Tier 1 capital up to 25% of Tier 1
capital so long as restricted core capital elements that exceed 15% of Tier 1 capital are in the
form of qualifying mandatory convertible securities.

      In March 2006, U.S. Bancorp raised Tier 1 capital through the issue of a synthetic
mandatory convertible security using Wachovia Corporation’s WITS structure (page 168,
Chapter 11).

        The Washington Mutual transaction involved tranches of preferred securities, one
issued by a Cayman Islands special purpose vehicle and one issued by a Delaware statutory trust,
that were mandatorily and conditionally exchangeable into depositary shares representing shares
of preferred stock of Washington Mutual. The assets of both issuers are instruments that
ultimately feed off an indirect U.S.-domiciled corporate subsidiary of Washington Mutual that is
a real estate investment trust or “REIT” for US tax purposes. The structure resembles a standard
exchangeable REIT preferred structured with additional equity-like features (perpetual, non-
cumulative, redemption only with replacement capital, etc.) that allow Washington Mutual to
pay investors out of pre-tax income, obtain holding company minority interest Tier 1 treatment
and obtain enhanced equity credit from Moody’s.

        In addition to the U.S. Bancorp, Wachovia Corporation and Washington Mutual
transactions, we estimate that, during 2005, at least 27 U.S. bank holding companies registered
and/or issued trust preferred and other capital securities directly into the market (page 30,
Chapter 6, page 116, Chapter 7 and page 168, Chapter 11). In addition to issuances by large
banks and bank holding companies, CDO pools of bank holding company trust preferred issues
continued to grow in popularity during 2005, with an estimated 12 mixed bank and insurance and
two bank-only trust preferred CDO offerings during the year (page 183, Chapter 13). Each pool
typically has over 20 issuers, primarily contains trust preferred issues (though may contain some
Tier 2 instruments) and allows smaller U.S. banks (and even some larger U.S. banks) to
efficiently access the innovative Tier 1 capital markets.

        During 2005, the European insurance industry also participated in the CDO market with
the sale of at least one CDO pool of insurance company subordinated debt.

Where you can find more information

        The following websites are helpful to those involved in the development and execution of
Tier 1 and other hybrid capital products. In some cases, access is limited to registered users.

          •       Basle’s capital guidelines for banking institutions and links to regulatory capital
                  guidelines of national bank regulators are available at http://www.bis.org;
          •       U.S. capital guidelines for insurance companies are available at http://www.naic.org;
          •       for UK capital guidelines for banking institutions and insurance companies, visit
                  http://www.fsa.gov.uk;


                                                      x
NY1 5828148V.13
                                                                                           INTRODUCTION


          •       treatment of capital instruments under U.S. generally accepted accounting principles
                  is discussed at http://www.aicpa.org/index.htm;
          •       information regarding the SVO and its classification analysis is available at
                  http://www.naic.org/svo/htm;
          •       treatment of capital instruments under international accounting standards and
                  international financial reporting standards is discussed at http://www.iasb.org;
          •       Fitch’s credit rating of capital instruments is available at http://www.fitchratings.com;
          •       Moody’s credit rating of capital instruments is available at http://www.moodys.com;
          •       S&P’s credit rating of capital instruments is available at
                  http://www2.standardandpoors.com;
          •       SEC-filed Tier 1 and other regulatory capital offerings can be found on the SEC’s
                  website, www.sec.gov; and
          •       general legal and regulatory information and Sidley contacts are available at
                  http://www.sidley.com.

       This book can be viewed on line at http://www.sidley.com/db30/cgi-
bin/pubs/PreferredCapPD.pdf.

       For other developments affecting Tier 1 capital products, see Appendix K – Selected
2006, 2005, 2004, 2003, 2002 and 2001 Developments in Corporate and Securities Laws, Tax
and Accounting.

Thanks

       As has been the case in past years, the Sidley team that works in this area has made a
huge effort to ensure this book will be a useful resource for our clients. Please feel free to
contact any of us if we can be of further assistance. Contact information for our Preferred and
Capital Securities Group is contained in Appendix L.

        Also, a special thanks to our former colleague, Adam Raucher, who, in making his last
contribution to all of our clients before leaving to join the hybrid capital group of one of them,
put an enormous amount of time into this year’s book.




                                                       xi
NY1 5828148V.13
                                                                  CHAPTER 1

                                       TIER 1 CAPITAL PRODUCT PARAMETERS


  Basic Contract Equity Products............................................................................................................. 1
  Capital Goals ......................................................................................................................................... 1
  Factors That Can Reduce the Cost of Capital ....................................................................................... 1
  Selected Product Development Tools ................................................................................................... 3
  Legal, Regulatory and Accounting Issues ............................................................................................. 3


• Basic Contract Equity Products

           Preferred stock, preference shares and similar equity securities

           Convertible debt and equity products

• Capital Goals

           Lowest possible cost

           Regulatory capital credit, in the case of banks

           ■ Innovative Tier 1 bank capital (generally, maximum 15% of total capital)

           ■ Other Tier 1 bank capital instruments (outside 15% basket)

           Rating agency credit

           ■ Maintain or lower overall cost of funding

           ■ Highest possible equity credit

           Improve return on common equity

           ■ No limited or delayed dilution to common equity

           ■ Leverage common equity

           Acquisition capital

           Capital hedge against foreign exchange risk

• Factors That Can Reduce the Cost of Capital

           Higher product credit rating

                                                                              1
NY1 5828148V.13
CHAPTER 1                                                        TIER 1 CAPITAL PRODUCT PARAMETERS


          Convertibility or exchangeability into common equity or other profit or gain participation
          features

          Broadest possible investor base assisted by, among other things:

          ■ Investment grade rated securities

          ■ Freely tradable securities

          ■ Debt treatment vs. equity treatment

          ■ Regulatory treatment for investment purposes

          ■ Internal bank legal investment rules

          ■ National Association of Insurance Commissioners or “NAIC” investment guidelines

          ■ Employment Retirement Income Security Act of 1974 or “ERISA” status

          ■ More investor tax benefits such as:

                  –   Dividends-received credits such as the UK Associated Tax Credit, the U.S.
                      dividends received deduction or “DRD”; 15% U.S. tax rate on dividends to retail
                      investors

                  –   Tax free or deferred income or capital gains

                  –   Withholding tax avoidance or credits

                  –   Avoidance of phantom income

          ■ A transaction structure that investors can easily understand

          ■ Simple tax reporting

                  –   Form 1099 for trusts and corporations vs. Form K-1 for partnerships

                  –   Avoid issuers that are foreign trusts for U.S. federal income tax purposes

                  –   Avoid issuers that are passive foreign investment companies or “PFICs” for U.S.
                      federal income tax purposes

                  –   Minimize complicated tax disclosure and tax reporting compliance requirements

          Issuer tax benefits such as:

          ■ Efficient allocation of available investor tax credits

          ■ Coupon tax deductibility


                                                       2
NY1 5828148V.13
CHAPTER 1                                                     TIER 1 CAPITAL PRODUCT PARAMETERS


          ■ Coupon payments out of pre-tax dollars (e.g., by a tax-exempt vehicle such as a real
            estate investment trust or “REIT”, or tax haven vehicle, or an off-balance sheet
            income stream)

          ■ Net operating loss or “NOL” absorption

          ■ Tax deconsolidation

          A transaction structure that can be cost-effectively established and operated

• Selected Product Development Tools

          Subsidiary vehicles, including trusts, partnerships, limited liability companies,
          corporations and tax-haven vehicles

          Orphan vehicles, such as hat-check trusts, charitable trusts, investment companies and
          depositary arrangements

          Guarantees (hard and soft), support agreements and exchange agreements

          Stapling and pairing

          Swaps, options, puts, calls, warrants, forwards, repurchase agreements, etc.

          Shifting, withering, deferral and subordination features

          Coupon, currency, redemption and liquidation preference conversion features

          Pledge and collateral arrangements

• Legal, Regulatory and Accounting Issues

          Capital regulations of the applicable primary regulator

          Tax and stamp duty regulations – maximize issuer and investor tax benefits, minimize
          transaction costs

          ■ Jurisdiction(s) where the bank wants tax benefits

          ■ Investors’ jurisdictions

          ■ Conduit issuer and instrument jurisdictions

          Accounting

          ■ Whether an entity is a subsidiary or not for consolidated minority interest treatment

          ■ Shareholders’ equity, mezzanine capital or debt treatment for the instrument



                                                   3
NY1 5828148V.13
CHAPTER 1                                                   TIER 1 CAPITAL PRODUCT PARAMETERS


          ■ Regulatory treatment impact

          ■ Hedging accounting issues

          Corporate, partnership and trust laws and regulations

          Corporate authority

          ■ Product flexibility

          ■ Tax matters

          ■ Compliance costs

          ■ Rating agency impact

          Securities laws and regulations

          ■ Registration, prospectus delivery, marketing, trading and disclosure requirements

          ■ Ongoing reporting requirements

          Mutual fund laws and regulations, including the U.S. Investment Company Act of 1940
          or “1940 Act”

          Commodities and futures laws and regulations

          Secured transactions laws, such as the Uniform Commercial Code or “UCC”

          Legal investment laws and guidelines, such as ERISA, bank regulatory and NAIC
          investment guidelines, gambling and bucket shop laws, etc.

          Foreign exchange, foreign investment and licensing laws and regulations

          Stock exchange listing requirements for listed securities and conduit instruments




                                                  4
NY1 5828148V.13
                                                               CHAPTER 2

                  PRODUCT DEVELOPMENT PRIOR TO THE 1988 BASLE ACCORD

  Adjustable Preferred Stock.................................................................................................................... 5
  Auction, Remarketed and other Money Market Preferred Stock .......................................................... 5
  Stapled or Paired Shares........................................................................................................................ 5


• Adjustable Preferred Stock

           Early floating rate preferred security

• Auction, Remarketed and other Money Market Preferred Stock

           First sold in United States in 1984 by American Express

           Main features

           ■ Reduced pricing volatility of fixed and floating rate preferred through

                  –    issuer creditworthiness-based repricing at regular intervals and

                  –    regular liquidity points for investors

           ■ Often functional equivalent of commercial paper

           ■ Voting and non-voting

           Different uses

           ■ Lower coupons through tax credits such as the DRD and UK Associated Tax Credit

           ■ Lower effective cost of dividends by using up NOLs

           ■ Deconsolidating income or income producing assets for tax purposes

           ■ Leveraging the returns on closed-end funds and pension funds

                  –    Under the 1940 Act, 2 to 1 preferred/common permitted leverage vs. 3 to 1
                       debt/common permitted leverage

• Stapled or Paired Shares

           Auction, remarketed, adjustable, fixed rate and participating products

           Different uses


                                                                           5
NY1 5828148V.13
CHAPTER 2                                                          PRODUCT DEVELOPMENT PRIOR
                                                                     TO THE 1988 BASLE ACCORD

          ■ Saving domestic tax credits for domestic taxpayers

          ■ Paying dividends in pre-tax dollars (e.g., stapling REIT & non-REIT securities)

          ■ Paying dividends out of lower tax jurisdictions (e.g., Hong Kong & Australia pairing)

          ■ Shifting interest payment deductions to most useful jurisdiction




                                                 6
NY1 5828148V.13
                                              CHAPTER 3

                                      THE 1988 BASLE ACCORD
         The 1988 Basle Accord went into effect in March 1989 for all G-103 central banks, and
required banks to maintain capital equal to 8% of “risk-adjusted assets” by the end of 1992. The
major impetus for the 1988 Basle Accord was the concern that the capital of the world’s major
banks had become dangerously low after persistent erosion through competition. The goals of
the 1988 Basle Accord were to tailor regulatory capital adequacy requirements to the risk
inherent in a bank’s portfolio and to create incentives to hold more low-risk assets. Further, the
1988 Basle Accord sought to remove competitive inequalities in international banking that could
result if different countries imposed different regulatory capital standards.

        Under the 1988 Basle Accord, for the first time, capital was divided into Tier 1, or core
capital, and Tier 2, or supplementary capital. The definition of Tier 1 capital in the 1988 Basle
Accord is as follows:

          ■ permanent shareholders’ equity (common stock and perpetual non-cumulative
            preferred);

          ■ disclosed reserves (created or increased by appropriations of retained earnings or
            other surplus; e.g., share premiums, retained profit, general reserves and legal
            reserves); and

          ■ in the case of consolidated accounts, minority interests in the equity of subsidiaries
            which are less than wholly owned.

        This definition of Tier 1 capital does not include cumulative preferred. Also, prior to the
1998 Basle Release, the Basle Committee on Banking Supervision (“Basle Committee”) took the
position that only minority interests in operating subsidiaries should count as Tier 1 capital.




3
        The countries that make up the G-10 are Belgium, Canada, France, Germany, Italy, Japan, the Netherlands,
Sweden, Switzerland, the UK and the US.

                                                       7
NY1 5828148V.13
                                                               CHAPTER 4

                                                       THE BASLE RELEASES

  The 1998 Basle Release ........................................................................................................................ 8
  The Basle II Release............................................................................................................................ 10
  Implementation of the Basle II Release............................................................................................... 11


The 1998 Basle Release

         In an October 1998 release, the Basle Committee announced that it would consider it
acceptable for banks to issue certain “innovative capital instruments”, such as minority interests
in equity accounts of consolidated subsidiaries that take the form of special purpose vehicles
(“SPVs”), that could be included in Tier 1 capital as long as their underlying instruments satisfy
certain criteria. The Basle Committee encouraged each local regulator to develop specific
criteria for instruments that it would count as Tier 1 capital and affirmed that it expects banks to
meet the Basle minimum capital ratios without undue reliance on innovative instruments. In the
1998 Basle Release, the Basle Committee limits inclusion of “non-common equity Tier 1
instruments with any explicit feature – other than a pure call option – which might lead to the
instrument being redeemed” to a maximum of 15 percent of a bank’s Tier 1 capital. This 15%
basket is known in the market as the “innovative” or “hybrid” Tier 1 capital basket.

        In approving non-operating subsidiary preferred as Tier 1 capital, the 1998 Basle Release
represents a change in the position of the Basle Committee under the 1988 Basle Accord. This
change was prompted by pressure from the banking community, which sought a level playing
field among national bank regulators, several of which had at the time of the Release already
approved such preferred as Tier 1 capital, as well as a level playing field within their own
countries, where issuers from other industries were benefiting from the tax and other benefits of
innovative preferred instruments.

        In order to qualify as Tier 1 capital, the 1998 Basle Release requires minority interest
Tier 1 instruments to have the following equity-like characteristics:

           ■ issued and fully paid;

           ■ non-cumulative;

           ■ ability to absorb losses within the bank on a going-concern basis;

           ■ junior to depositors, general creditors and subordinated debt of the bank;

           ■ permanent;




                                                                           8
NY1 5828148V.13
CHAPTER 4                                                                       THE BASLE RELEASES


          ■ neither secured nor covered by a guarantee of the issuer or related entity or other
            arrangement that legally or economically enhances the seniority of the claim vis-à-vis
            bank creditors; and

          ■ callable at the initiative of the issuer only after a minimum of five years with
            supervisory approval and under the condition that it will be replaced with capital of
            same or better quality unless the supervisor determines that the bank has capital that
            is more than adequate to its risks.

       In addition, to qualify as Tier 1 capital, the minority interest instruments must fulfill the
following:

          ■ the main features of the instruments must be easily understood and publicly disclosed;

          ■ proceeds must be immediately available without limitation to the issuing bank or, if
            proceeds are immediately and fully available only to the issuing SPV, they must be
            made available to the bank (e.g., through conversion into a direct issuance of the bank
            that is of higher quality or of the same quality at the same terms) at a predetermined
            trigger point, well before serious deterioration in the bank’s financial position;

          ■ the bank must have discretion over the amount and timing of distributions on the
            instrument, subject only to prior waiver of distributions on the bank’s common stock,
            and banks must have full access to waived distributions; and

          ■ distributions can only be paid out of distributable items, and where distributions are
            pre-set, they may not be reset based on the credit standing of the issuer.

        According to the 1998 Basle Release, moderate step-ups in instruments issued through
SPVs are permitted in conjunction with a call option only if the moderate step-up occurs at a
minimum of ten years after the issue date and if it results in an increase over the initial rate that is
no greater than, at national supervisory discretion, either: (i) 100 basis points, less the swap
spread between the initial index basis and the stepped-up index basis; or (ii) 50% of the initial
credit spread, less the swap spread between the initial index basis and the stepped-up index basis.

        The terms of the instrument should provide for no more than one rate step-up over the life
of the instrument. The swap spread should be fixed as of the pricing date and reflect the
differential in pricing on that date between the initial reference security or rate and the stepped-
up reference security or rate.




                                                   9
NY1 5828148V.13
CHAPTER 4                                                                     THE BASLE RELEASES



The Basle II Release

        In a June 2004 release entitled “International Convergence of Capital Measurement and
Capital Standards: A Revised Framework” (the “Basle II Release”), the Basle Committee
announced that it would revise the 1988 Basle Accord. The Basle II Release established a set of
guidelines intended to provide new incentive for good risk management practices and is based on
the following three guideline principles or “pillars” that are meant to create incentives for banks
to enhance the quality of their control processes:

          ■ minimum capital requirements (“Pillar 1”);

          ■ supervisory review process (“Pillar 2”); and

          ■ market discipline and disclosure (“Pillar 3”).

        Pillar 1 represents a significant strengthening of the minimum capital requirements set
out in the 1988 Basle Accord. Under the Basle II Release, banks that engage in less complex
forms of lending and credit underwriting would be permitted to use a method of assessing the
credit quality of their borrowers based on external measures of credit risk (the “Standard
Method”). However, banks that engage in more sophisticated risk-taking and that have
developed advanced risk measurement systems may rely on methods of assessing the credit
quality of their borrowers based on such banks’ own measures of risk, subject to strict data,
validation and operational requirements (the “Advanced Method”). By aligning capital charges
more closely to a bank’s own measures of its exposure to credit and operational risk, Pillar 1
encourages banks to refine those measures and, at the same time, provides incentives in the form
of lower capital requirements for banks to adopt more comprehensive and accurate measures of
risk. Highlights of the minimum capital requirements of Pillar 1 are:

          ■ 15% limit on Tier 1 innovative instruments, with similar qualification standards as in
            the 1998 Basle Release;

          ■ 35% risk-weighting on claims secured by mortgages on residential property;

          ■ 100% risk-weighting on claims secured by mortgages on commercial property;

          ■ 75% risk-weighting on retail claims (in general);

          ■ a sliding scale of risk weights for past due loans depending on specific provisions for
            loan losses; and

          ■ a new treatment of operational risk which, depending on the use of the Standard
            Method or the Advanced Method, could result in an institution having to hold
            between 10 to 18% of the annual gross income of a business unit.

        Pillar 2 recognizes the necessity of exercising effective supervisory review over banks’
internal risk assessments. Supervisors will evaluate the activities and risk profiles of individual
banks to determine whether those organizations should hold higher levels of capital than the

                                                  10
NY1 5828148V.13
CHAPTER 4                                                                      THE BASLE RELEASES


minimum requirements set by Pillar 1 and whether there is the need for remedial actions.
Supervisors and banks are to engage in a “dialogue” about the banks’ processes for measuring
and managing risk, and supervisors will create implicit incentives for banks to develop sound
control structures and improve such processes.

         Pillar 3 uses market discipline and disclosure to motivate prudent management by
enhancing the degree of transparency in banks’ public reporting. Specific public disclosures are
set that banks must make in order to allow for greater transparency into the adequacy of their
capitalization.

        The Basle Committee released an updated version of Basle II in November 2005. This
revision incorporates changes to the capital requirements for exposures to certain trade-related
activities, including counterparty credit risk and the treatment of double default effects (i.e., the
risk that both a borrower and guarantor default on the same obligation), short-term maturity
adjustment and failed transactions, and also make improvements to the trading book regime.

Implementation of the Basle II Release


United States

        During 2004 and more recently on January 27, 2005, the Agencies issued several
interagency releases aimed at establishing the implementation process for the Basle II framework
in the United States. In the January 27, 2005 release, the Agencies set the following timeline of
events for the implementation of the Basle II framework:

          ■ mid-year 2005 – publication of a notice of proposed rulemaking and updated
            guidance;

          ■ mid-year 2006 – publication of final rule and updated guidance;

          ■ January 2007 – first opportunity for “parallel run”; and

          ■ January 2008 – effective date of final regulations.

        On September 30, 2005, the Agencies issued a joint press release announcing their
proposal to delay the implementation of Basle II in the United States by one year and the
expectation that a notice of proposed rulemaking would be available sometime during the first
half of 2006. Although the Agencies issued an advance notice of proposed rulemaking (“Basle II
ANPR”) in August 2003, the issuance of a notice of proposed rulemaking has been delayed due
to concerns resulting from a qualitative impact study (QIS4) conducted during late 2004 and
early 2005, assessing the potential impact of Basle II on U.S. banking institutions.

        On March 30, 2006, the Agencies issued for comment a joint notice of proposed
rulemaking that would implement Basle II risk-based capital requirements in the United States
for large, internationally active banking organizations (“Basle II NPR”). The framework
proposed by the Basle II NPR is intended to produce risk-based capital requirements that are

                                                  11
NY1 5828148V.13
CHAPTER 4                                                                     THE BASLE RELEASES


more risk-sensitive than the existing general risk-based capital rules, which are based on Basle I.
The proposed rule maintains the current Basle I minimum risk-based capital ratio requirements,
and the elements of Tier 1 and Tier 2 capital also generally remain unchanged. However, there
are differences between the current rules based on Basle I and the proposed rule in adjustments
made to Tier 1 and Tier 2 capital, including the treatment of nonfinancial equity investments,
allowance for loan and lease losses, gain-on-sale at the inception of securitization transactions,
and certain other high risk securitization exposures. The primary difference, however, is in the
methodologies used to calculate risk-weighted assets (the denominator component of the capital
ratios). Under the proposed rule, banks would use their internal risk measurement systems to
determine the inputs for calculating the risk-weighted asset amounts for (1) general credit risk
(includes wholesale and retail exposures), (2) securitization exposures, (3) equity exposures, and
(4) operational risk. Large, internationally active banks would be required to implement the
internal risk-based approach for determining capital requirements for credit risk and the AMA
approach for determining capital requirements for operational risk. Banks would also be subject
to supervisory review of their capital adequacy, certain public disclosure requirements regarding
their risk profile and capital adequacy, and supplemental supervisory reporting requirements as
determined by the Agencies.

        The Basle II NPR proposes a number of safeguards, including the requirement that a
bank satisfactorily complete at least a four consecutive calendar-quarter parallel run period,
beginning no sooner than January 1, 2008, before operating under the Basle II framework.
Following a successful parallel run, a bank would progress through three transitional periods,
each lasting at least one year, during which there would be temporary floors on potential declines
in risk-based capital requirements relative to the current rules under Basle I. A bank would need
approval from its primary federal supervisor to move to each new transitional period, and at the
end of the three transition periods, to fully implement Basle II risk-based capital rules.

        It is expected that Basel II risk-based capital guidelines will be mandatory only for the
largest U.S. money center banks. Another 10 to 12 banking institutions are also expected to
adopt Basel II voluntarily. For all other banks, the existing standard under Basle I will apply until
the revised Basle I, as amended to incorporate the concept of market risk (i.e., the risk of loss in
on and off-balance sheet positions arising from movements in market prices), is put in place. See
Appendix A – Basle Committee and U.S. Regulatory Innovative Tier 1 Capital Requirements.

European Union

        In July 2004, the European Commission released a proposal for a directive (the Capital
Requirements Directive (the “CRD”)) which incorporates the framework of the Basle II Release,
formally requiring the application of the principles of Basle II to EU financial institutions. On
September 28, 2005 the European Parliament voted to approve the Capital Requirements
Directive; the text of the CRD was formally approved by the Council of Economic and Finance
Ministers on October 11, 2005 and is now in agreed form. The CRD will apply to all EU banks
and investment firms but not to insurance companies. The capital requirements of Pillar 1 will
apply to all individual banks, which will be allowed to choose, depending on the level of
sophistication of the bank, between the Standard Method, the Advanced Method and an
intermediate method. The Standard Method and the intermediate method will be implemented at
the end of 2006, while the Advanced Method will be implemented at the end of 2007. It is

                                                 12
NY1 5828148V.13
CHAPTER 4                                                                  THE BASLE RELEASES


expected that the requirements of Pillar 2 will apply at a country-specific level, while Pillar 3
will apply at the EU level with the Committee of European Banking Supervisors taking a lead
role in promoting consistency among the regulations issued by the various EU member states’
supervising authorities.

     The final effective date for implementation of the CRD has been set by the European
Commission for the end of 2007.

Rest of the World

        It is expected that approximately 60 countries will adopt some or all of Basle II.
However, there are several inconsistencies with regards to the approach and timing of
implementation. Furthermore, it is also expected that Basle II will have a similar pattern of
implementation as the 1988 Basle Accord, which initially was applied only to internationally
active banks in the G10 countries and quickly became acknowledged as a benchmark measure of
a bank’s insolvency and is believed to have been adopted in some form in more than 100
countries.

          .




                                               13
NY1 5828148V.13
                                          CHAPTER 5

                  INNOVATIVE TIER 1 CAPITAL PRODUCT DEVELOPMENT
       Since the 1988 Basle Accord, the banking sector has assumed a leading role in the
development of innovative capital products. The 1988 Basle Accord contributed significantly to
the pace in the development of subsidiary preferred Tier 1 capital and alternatives that are less
complex or provide more benefits to banks or both. The Tier 1 capital products that have been
developed since the 1988 Basle Accord can be broken down into the following categories:

          ■ tax-deductible non-operating subsidiary preferred;

          ■ pre-tax operating subsidiary preferred;

          ■ multiple tax benefit subsidiary preferred;

          ■ capital instruments issued by a bank;

          ■ capital instruments issued by a bank linked to another instrument;

          ■ mandatory convertible or exchangeable securities; and

          ■ other products.

Tier 1 capital products in each of these categories that have been issued by banks and bank
holding companies since 1988 are discussed in the sections that follow this one.

        Tier 1 capital product development to date has focused primarily on non-dilutive, fixed
income, non-voting securities that raise capital at a lower cost than traditional common and, to
the extent available to the bank, preferred shares. However, a bank’s strategic requirements or
particular tax situation are instrumental in Tier 1 product selection and development. For
example, a bank might need “upper” Tier 1 capital to obtain more equity credit from Moody’s in
connection with an acquisition or due to recent significant losses. Another bank may need
“upper” Tier 1 capital because its 15% innovative capital basket is full. Also, a bank may want
an income tax deduction in a high tax jurisdiction where a branch or subsidiary has significant
taxable income, may have capital needs at a particular branch or subsidiary or may find it
otherwise more capital or tax efficient to raise capital through a particular branch or subsidiary.
Regulators such as the UK FSA, the German central bank and Australia’s APRA have been
considering the parameters for “upper” Tier 1 capital. For example, see Appendix D — UK FSA
Guidelines on Tier 1 Capital.

        One important benefit that subsidiary preferred and other innovative Tier 1 capital
instruments provide to many banks around the world is access to the potential benefits of
preferred and similar contract equity – cheap, non-participating equity leverage for the bank’s
common shareholder – like income only or limited partners in a partnership. Virtually all banks
can raise capital by issuing common or ordinary shares. This is not true with respect to preferred
and similar equity securities. For example:


                                                 14
NY1 5828148V.13
CHAPTER 5                                                                     INNOVATIVE TIER 1
                                                                  CAPITAL PRODUCT DEVELOPMENT
          ■ The statutory regimes in some countries, such as the United States, the UK, Ireland,
            Canada, Australia, New Zealand and Singapore, permit banks and other corporate
            entities established under the laws of those countries to issue preferred or similar
            equity securities that can be readily sold in the capital markets, although some of
            these regimes still may require voting or other features that the bank may not want to
            offer equity investors.

          ■ The statutory regimes in many other countries, particularly civil code countries such
            as those in continental Europe, to the extent they authorize preferred or similar equity
            securities, may not provide banks and other corporate entities with sufficient
            flexibility to issue instruments that can be readily sold in the capital markets. Many
            countries who find themselves in this situation, particularly those in continental
            Europe, have been amending their statutes in an attempt to address this problem. In
            2003, France adopted a new law that permits directly issued Tier 1 securities.

          ■ Even where there is sufficient statutory flexibility, many banks and other corporate
            entities have not included in their charters provisions that authorize the issuance of
            preferred or similar equity securities, and to do so would require common shareholder
            approval that management may not want to obtain or time does not permit.

        A primary purpose of Tier 1 capital products developed to date has been to lower a
bank’s cost of capital, in particular by introducing features that make the securities offered more
tax efficient. The costs of capital may apply to the instruments themselves – such as withholding
tax on dividends paid to foreign investors – or to the bank that issues them – such as having to
pay dividends out of profits after tax. Accordingly, the most important issues in the development
of Tier 1 capital products arise as these products must satisfy both the loss absorption and other
requirements of the bank regulators on the one hand and the tax, cost saving and other objectives
of the bank on the other. The tension between these two competing goals is exacerbated because
both the bank regulators and investors in the capital markets, where most of the Tier 1 capital
products are sold, require a tax analysis with a high degree of certainty – bank regulators
because, among other things, of the requirement that Tier 1 capital be permanent and investors
because of the pricing of the product.

        The complexity in the structure of a Tier 1 capital instrument is normally initiated by the
tax or other transaction benefits that the bank requires. However, to achieve those benefits, the
tax, securities and other laws and regulations, the accounting requirements and the investor
incentives described above more often than not are the primary reasons for the complexity of a
particular structure.




                                                  15
NY1 5828148V.13
                                                             CHAPTER 6

                  TAX-DEDUCTIBLE NON-OPERATING SUBSIDIARY PREFERRED

  Simple Subsidiary Structures .............................................................................................................. 19
  Complex Subsidiary Structures (since 1997) ...................................................................................... 34


        Tax-deductible non-operating subsidiary preferred has become the most common form of
innovative Tier 1 capital, particularly since the Basle Committee formally approved the
treatment of non-operating subsidiary preferred as minority interest Tier 1 capital in the 1998
Basle Release. The popularity of this structure is largely due to the fact that, once set up, it is
relatively easy to administer and the tax deductibility result for the bank is reasonably certain. If
there is a downside, it is the tendency for the structure to become complicated and difficult for an
investor to understand.

        The archetypal tax-deductible subsidiary preferred structure involves the sale of a bank
debt obligation to a tax-transparent subsidiary that provides the bank with an interest deduction
for tax purposes and minority interest treatment for accounting purposes. Where this subsidiary
is a partnership for U.S. tax purposes and is either a U.S.-domiciled subsidiary or a substantial
amount of the investors are located in the United States, the partnership subsidiary’s preferred
securities would normally be issued to a trust, which in turn would issue its securities to
investors. If the trust is treated as a subsidiary of the bank for accounting purposes, then the
securities the trust sells to investors, not the intervening partnership subsidiary’s preferred
securities, would be the minority interest Tier 1 capital of the bank.

       This type of preferred is sometimes called “trust preferred” because a trust is often, but
not always, the issuer of the securities purchased by investors. The primary benefit in offering
investors trust securities is to maximize the potential investor base. For example:

           ■ a trust generally enables investors to receive Form 1099 income tax reporting forms,
             rather than the more complicated Form K-1 required for entities (such as LLCs and
             general and limited partnerships) that are treated as or properly elect to be treated as
             partnerships for U.S. federal income tax purposes, thereby increasing the potential
             investor base; and

           ■ Euroclear and Clearstream may not deliver Form K-1’s to investors who hold through
             those clearing systems, whereas they will deliver Form 1099s.

        The use of a trust by a foreign bank, however, implicates the “foreign trust” rules under
the U.S. Internal Revenue Code of 1986, which impose burdensome reporting obligations and
significant penalties for non-compliance. Foreign banks have taken one of three approaches to
avoid these rules:

           ■ U.S. subsidiary: All common securities of the trust are held by a U.S. subsidiary (a
             U.S. person) of a foreign bank and the majority of trustees are U.S. persons.


                                                                        16
NY1 5828148V.13
CHAPTER 6                                                                             TAX-DEDUCTIBLE
                                                                   NON-OPERATING SUBSIDIARY PREFERRED

          ■ U.S. branch: All the common securities of the trust are held by a U.S. branch of a
            foreign bank (not a U.S. person) but (1) all the trustees and the sponsor, if any, are
            U.S. persons and (2) the interests in the trust are widely distributed for sale in the U.S.
            to U.S. persons.

          ■ Hat-check trust: Use of totally offshore custodial or depository arrangements known
            as “hat-check trusts.” In a typical hat-check structure, the underlying securities are
            held in a custodial or depository account and the beneficial owners (that is, investors)
            receive a “claim check” in the form of a custody receipt or certificate. The investors
            can remove the securities from the account at any time. This approach, however, is
            not appropriate where U.S. investors would or could hold the securities.

See Appendix E – Use of Trust Structures in Tier 1 Preferred Securities and Other Capital
Markets Transactions – Foreign Trust Tax Issues.

       The use of a trust may also cause problems for the bank in its home country. For
example, if the bank is domiciled in the UK and the trust is considered a subsidiary of the bank
for UK tax purposes, the debt instrument of the bank may be considered equity and interest
payments as dividends, and therefore not deductible by the bank, for UK tax purposes.

        Foreign banks have been significantly more active than U.S. banks in developing Tier 1
trust preferred products. In December 2000, the OCC approved the first trust preferred issue as
Tier 1 capital for any U.S. bank – an internal, non-capital driven issuance by Banc One. The
non-cumulative requirement of the Basle Accord makes structuring a tax-deductible Tier 1 trust
preferred significantly more difficult for U.S. banks than many foreign banks because the U.S.
federal income tax requirements for qualifying an instrument as debt are more onerous than those
of many other countries. Also, there has been less incentive for U.S. banks to develop
tax-deductible subsidiary products because the Federal Reserve Board has permitted cumulative
trust preferred stock to count as Tier 1 capital of bank holding companies since 1996.4 However,
U.S. banks and bank holding companies may become more interested in raising tax-deductible
bank subsidiary preferred or other bank-level capital:

          ■ as U.S. bank holding companies approach the 15 or 25% limit on Tier 1 credit for
            trust preferred and other restricted core capital elements; and

          ■ as the credit rating agencies focus on double leveraging of bank equity at the bank
            holding company level; and

          ■ with the adoption in 2005 of new guidelines for crediting hybrid capital instruments
            for rating purposes by Moody’s and, to a lesser extent, S&P and Fitch.




4
         See Appendix A for a discussion of the Federal Reserve Board’s final rules on trust preferred securities and
the definition of capital for US bank holding companies.
                                                         17
NY1 5828148V.13
CHAPTER 6                                                                          TAX-DEDUCTIBLE
                                                                NON-OPERATING SUBSIDIARY PREFERRED

        The loss absorption features of tax-deductible non-operating subsidiary preferred
transactions to date have included:

          ■ dividends or similar payments that are either non-cumulative or effectively
            non-cumulative through a deferral feature;

          ■ the subsidiary cannot wind up before the bank and, when it does, investors are only
            entitled to the amount they would be entitled to if they were holders of bank preferred
            – this is often used where the bank is not authorized to issue preferred at all or where
            the preferred the bank can issue is problematic (e.g., cannot be publicly sold, cannot
            be denominated in a foreign currency, cannot be redeemed as required by the market
            or the issuer, etc.);

          ■ the value of the indebtedness of the bank to the subsidiary is written down or the debt
            instruments themselves are transferred to the bank upon the occurrence of events
            specified by the bank’s primary regulator, in which case, although the subsidiary may
            continue to be the source of dividends, investors are generally forced to rely on the
            bank’s guarantee for payment upon the liquidation of the subsidiary and possibly
            dividends; and

          ■ the preferred is mandatorily exchanged into preferred or common shares of the bank
            upon the occurrence of events specified by the bank’s primary regulator; and

          ■ in the case of “enhanced” transactions:
                  –   deferred interest that has accrued on the debentures must be paid by the bank
                      holding company with the proceeds from the sale of its common stock and/or
                      perpetual non-cumulative preferred stock (i.e., if there is a stress event and the
                      bank holding company defers, then there will no impact on its liquidity);

                  –   unlike normal tax-deductible non-operating subsidiary preferred, in enhanced
                      transactions, interest on the debentures can be deferred for as long as a total of 10
                      or 12 years, but must be paid after five or seven years if the deferral period has
                      not yet ended with the proceeds from the sale of its common stock and/or
                      perpetual non-cumulative preferred stock of the bank or non-bank issuer. If a
                      “market disruption event” occurs, such that the bank or non-bank issuer is unable
                      to sell a sufficient amount of its securities to fund the repayment of the deferred
                      interest, then interest can be deferred for an additional five years without
                      triggering an event of default; and

                  –   certain enhanced issuances are deeply subordinated – U.S. Bancorp’s securities
                      rank junior to all debt and existing trust preferred.

        Set forth below is a chronological analysis of the Tier 1 trust preferred and other
tax-deductible non-operating subsidiary preferred that banks and bank holding companies have
issued to date.



                                                        18
NY1 5828148V.13
CHAPTER 6                                                                                    TAX-DEDUCTIBLE
                                                                          NON-OPERATING SUBSIDIARY PREFERRED


                                         SIMPLE SUBSIDIARY STRUCTURES


  Spanish, French, Portuguese and Greek Bank Non-Operating Tax-Haven Company
      Subsidiary Non-Cumulative Preferred (since 1991)..................................................................... 19
  Japanese Bank Non-Operating Tax Haven Trust Subsidiary Mandatory
      Convertible Non-Cumulative Preferred (1994 and 1996)............................................................. 27
  U.S. Bank Holding Company Non-Operating U.S. Trust Subsidiary
      Guaranteed Cumulative Preferred (normal issues since 1996; enhanced issues since 2005) ....... 29


• Spanish, French, Portuguese and Greek Bank Non-Operating Tax-Haven Company
  Subsidiary Non-Cumulative Preferred (since 1991)




                                                          Bank



            Preferred                      Loan of
                                                                        Common Shares
           Equivalent                     Proceeds
           Guarantee



                                               Tax Haven Company                                       Subordinated
                                                or Domestic LLC                                         Operating
                                                                                                        Company



                                    Proceeds                    Preference Shares




                                                   Investors




                                                               19
NY1 5828148V.13
CHAPTER 6                                                                 TAX-DEDUCTIBLE
                                                       NON-OPERATING SUBSIDIARY PREFERRED


          Selected issues

          ■ Banco Santander (Spanish) (1991)

          ■ Banco Bilbao (Spanish) (1991)

          ■ Banque Indosuez (French) (1991)

          ■ Credit Lyonnais (French) (1993)

          ■ Banco Comercial (Portuguese) (1993)

          ■ Banco Espirito Santo (Portuguese) (1993)

          ■ Banco Totta (Portuguese) (1993)

          ■ Banco Bilbao (Spanish) (1997)

          ■ Banco Santander Central Hispano (Spanish) (2000)

          ■ Banco Espirito Santo (Portuguese) (2000)

          ■ Banco Bilbao (Spanish) (2001)

          ■ Banco Espirito Santo (Portuguese) (2003)

          ■ National Bank of Greece (Greek) (2003)

          ■ Banco BPI, S.A. (Portuguese) (2003)

          ■ Banco Popular (Spanish) (2003)

          ■ Alpha Group (Greek) (2003)

          ■ Caja de Ahorros de Selamanca y Sovia (Caja Duero) (Spanish) (2003)

          ■ Banco Espirito Santo (Portuguese) (2004)

          ■ Banco Popular (Spanish) (2004)

          ■ Banco Santander Central Hispano (Spanish)( 2004)

          ■ Banco Commercial (Portuguese) (2004)

          ■ Caixa Geral de Depositos (Portuguese) (2004)

          ■ Piraeus Bank (Greek) (2004)


                                               20
NY1 5828148V.13
CHAPTER 6                                                                      TAX-DEDUCTIBLE
                                                            NON-OPERATING SUBSIDIARY PREFERRED

          ■ National Bank of Greece (Greek) (2004)

          ■ Banif Banc Internacional Do Funchal (Portuguese) (2004)

          Selected 2005 issues

          ■ Alpha Bank AE (Greek) (February 2005)

          ■ Banco Pastor (Spanish) (July 2005)

          ■ Caixa Geral de Depositos (Portuguese)(September 2005)

          ■ EFG Eurobank (Greek) (October 2005)

          This structure has also been used by non-banks.

          The French deals ceased in the early 1990’s due to tax law changes.

          Primary regulator capital treatment – bank minority interest Tier 1.

          Other transaction benefits

          ■ The interest paid by the bank on its loans from the issuer is deductible for Spanish,
            French, Portuguese or Greek tax purposes, as the case may be.

          ■ Enables the bank to issue preferred equivalents.

          Features

          ■ The issuer has historically been a tax haven-domiciled company that is a subsidiary of
            the bank for accounting purposes. A 2003 change in Spanish law has allowed some
            issuers (e.g., Banco Popular and Caja de Ahorros de Selamanca y Sovia) to use a
            Spanish limited liability company instead of an offshore vehicle to achieve the same
            tax result. See discussion below.

          ■ Bank loans generally are the issuer’s only assets.

          ■ The bank loans are debt for the bank’s domestic tax purposes but sufficiently equity
            like to avoid the U.S. tax payment and reporting requirements for passive foreign
            investment companies or “PFICs”.

          ■ Preferred dividends are non-cumulative, discretionary in the case of the Spanish and
            Portuguese banks and non-discretionary in the case of the French banks. In the Greek
            transactions, dividends on the preferred are mandatorily payable if the bank pays
            dividends on any of its securities that rank equally with or junior to the preferred, in
            which case it must pay dividends on the company preferred for one year following
            such payment.


                                                  21
NY1 5828148V.13
CHAPTER 6                                                                         TAX-DEDUCTIBLE
                                                               NON-OPERATING SUBSIDIARY PREFERRED

          ■ The bank guarantees the preferred in a manner that makes it the functional equivalent
            of preferred issued by the bank itself. Accordingly, guarantee payments include:

                  –   dividend payments if its prior year distributable profits are sufficient to pay such
                      dividend payments and dividends on instruments ranking equally with or senior to
                      the preferred, but only if the bank would not be limited in making payments under
                      capital adequacy regulations if it had itself issued the preferred;

                  –   the redemption price, subject to the foregoing with respect to any dividend
                      component; and

                  –   the liquidation amount payable on the preferred.

          ■ The guarantee ranks junior to all indebtedness of the bank and equal to the most
            senior preferred or preference shares of the bank.

          ■ The preferred’s liquidation payment is determined based on the assets of the issuer
            provided that, if the bank is being wound up at the same time, it is instead based on
            the assets of the bank.

          ■ The issuer must be wound up if the bank is wound up.

          ■ The issuer is 1940 Act exempt pursuant to Rule 3a-5 (finance subsidiary).

          ■ In the Caixa 2004 transaction, Caixa’s French operating subsidiary provided the
            guarantee of the securities.

          2003 Spanish Law

        In 2003 and 2004, the Spanish government enacted a series of new laws and regulations
that were designed to curb the use of tax haven-structured finance and otherwise put in place
additional protections against money laundering. The laws and regulations had the effect of
establishing an entirely new tax regime for capital market transactions (including the
deductibility for the issuer of any interest or other financial income arising from the issuance of
securities).

       To date, the following tax laws and regulations would apply for any transaction involving
a Spanish issuer or guarantor of Tier 1 securities:

     (a) of general application, Additional Provision Two of Law 13/1985, of May 25, on
         investment ratios, own funds and information obligations of financial intermediaries, as
         promulgated by Law 19/2003, of July 4, on legal rules governing foreign financial
         transactions and capital movements and various money laundering prevention measures,
         as well as Royal Decree 1778/2004, of July 30, establishing information obligations in
         relation to preferred securities and other debt instruments and certain income obtained by
         individuals resident in the European Union and other tax rules;



                                                       22
NY1 5828148V.13
CHAPTER 6                                                                    TAX-DEDUCTIBLE
                                                          NON-OPERATING SUBSIDIARY PREFERRED

     (b) for individuals resident for tax purposes in Spain which are subject to the Individual
         Income Tax (“IIT”), Royal Legislative Decree 3/2004, of March 5, promulgating the
         Consolidated Text of the Individual Income Tax Law, and Royal Decree 1775/2004, of
         July 30, promulgating the Individual Income Tax Regulations, along with Law 19/1991,
         of June 6, on the Net Wealth Tax and Law 29/1987, of December 18, on the Inheritance
         and Gift Tax;

     (c) for legal entities resident for tax purposes in Spain which are subject to the Corporate
         Income Tax (“CIT”), Royal Legislative Decree 4/2004, of March 5, promulgating the
         Consolidated Text of the Corporate Income Tax Law, and Royal Decree 1777/2004, of
         July 40, promulgating the Corporate Income Tax Regulations; and

     (d) for individuals and entities who are not resident for tax purposes in Spain and who are
         subject to the Non-Resident Income Tax (“NRIT”), Royal Legislative Decree 5/2004, of
         March 5, promulgating the Consolidated Text of the Non-Resident Income Tax Law, and
         Royal Decree 1776/2004, of July 30, promulgating the Non-Resident Income Tax
         Regulations, along with Law 19/1991, of June 6, on the Net Wealth Tax and Law
         29/1987, of December 18, on the Inheritance and Gift Tax.

        Whatever the nature and residence of the holder of Spanish Tier 1 securities, the
acquisition and transfer of those securities will be exempt from indirect taxes in Spain, i.e.,
exempt from Transfer Tax and Stamp Duty, in accordance with the Consolidated Text of such
tax promulgated by Royal Legislative Decree 1/1993, of September 24, and exempt from Value
Added Tax, in accordance with Law 37/1992, of December 28, regulating that tax.

        Of particular importance for non-domestic capital markets transactions issued by Spanish
entities is the withholding tax on account of IIT, CIT and NRIT. If the securities are not listed
on an organized market in an OECD country on any interest and distribution payment date,
interest payments to beneficial owners of the securities in respect of the securities will be subject
to withholding tax at the current rate of 15%, except in the case of beneficial owners which are:

               (a) resident in a Member State of the European Union other than Spain and which
do not obtain interest income on the Notes through a permanent establishment in Spain or a Tax
Haven (as defined by Royal Decree 1080/1991, of July 5);

                (b) a permanent establishment located in a European Union Member State of
residents of other European Union Member States which do not obtain the interest income on the
Notes through a permanent establishment in Spain or a Tax Haven (as defined by Royal Decree
1080/1991, of July 5); or

                (c) resident in a country which has entered into a convention for the avoidance of
double taxation with Spain which provides for an exemption from Spanish tax or a reduced
withholding tax rate with respect to interest payable to any beneficial owner. Individuals and
entities that may benefit from such exemptions or reduced tax rates would have to follow either
of the so-called “quick refund” or “standard” procedures in order to obtain a refund of the
amounts withheld.

                                                 23
NY1 5828148V.13
CHAPTER 6                                                                   TAX-DEDUCTIBLE
                                                         NON-OPERATING SUBSIDIARY PREFERRED

      Pursuant to Royal Decree 1080/1991, of July 5, the following are each considered to be a
Tax Haven:

Aruba                                                 Principality of Liechtenstein
British Virgin Islands                                Principality of Monaco
Cayman Islands                                        Republic of Cyprus
Channel Islands (Jersey and Guernsey)                 Republic of Lebanon
Falkland Islands                                      Republic of Liberia
Fiji Islands                                          Republic of Malta
Gibraltar                                             Republic of Nauru
Grand Duchy of Luxembourg Area (only as               Republic of Panama
    regards the income received by the                Republic of San Marino
    Companies referred to in paragraph 1 of           Republic of Seychelles
    the Protocol annexed to the Avoidance             Republic of Singapore
    of Double Taxation Treaty, dated 3rd              Republic of Trinidad and Tobago
    June 1986 entered into by Spain and               Republic of Vanuatu
    Luxembourg)                                       Saint Lucia
Grenada                                               Saint Vincent & the Grenadines
Hashemite Kingdom of Jordan                           Solomon Islands
Hong-Kong                                             Sultanate of Brunei
Islands of Antigua and Barbuda                        Sultanate of Oman
Isle of Man                                           The Bahamas
Jamaica                                               The Bermuda Islands
Kingdom of Bahrain                                    The Cook Islands
Macao                                                 The Island of Anguila
Marianas Islands                                      The Island of Barbados
Mauritius                                             The Republic of Dominica
Montserrat                                            Turks and Caicos Islands
Netherlands Antilles                                  United Arab Emirates
Principality of Andorra                               Virgin Islands (of the United States)

        In addition to the “quick refund” and “standard” procedures, the Spanish tax regime also
allows for “relief at source” procedures. The “relief at source” procedures are intended to
identify beneficial owners who are (i) corporations resident in Spain for tax purposes or (ii)
individuals or entities not resident in Spain for tax purposes, which do not act with respect to the
securities through a permanent establishment in Spain, and which are not resident in, and do not
obtain income deriving from the securities through, a country or territory defined as a Tax Haven
jurisdiction by Royal Decree 1080/1991, of July 5, as amended.

        These procedures are designed to facilitate the collection of certain information
concerning the identity and country of residence of the beneficial owners mentioned in the
preceding paragraph (who therefore are entitled to receive payments in respect of the securities
free and clear of Spanish withholding taxes) who are participants in DTC or hold their interests
through participants in DTC, provided that in each case, the relevant DTC participant is a central
bank, another public institution, an international organization, a bank, a credit institution or a
financial entity, including collective investment institutions, pension funds or insurance entities,

                                                 24
NY1 5828148V.13
CHAPTER 6                                                                     TAX-DEDUCTIBLE
                                                           NON-OPERATING SUBSIDIARY PREFERRED
and is resident either in an OECD country (including the United States) or in a country with
which Spain has entered into a double taxation treaty subject to a specific administrative
registration or supervision scheme (each, a “Qualified Institution”).

        Beneficial owners who are entitled to receive interest payments in respect of the
securities free of any Spanish withholding taxes but who do not hold their securities through a
Qualified Institution and holders of securities who hold certificated securities will have Spanish
withholding tax withheld from interest payments and other financial income paid with respect to
their securities at the then-applicable rate.

        In 2003 and 2004, a number of Spanish issuers issued either Spanish domestic issuances
or Eurozone-only issuances. However, no transactions were executed where the securities were
issued into the United States in book-entry form. The problem was the inability of DTC to carry
out certification procedures prior to each payment date.

        In 2005, Banco Santander Central Hispano made the first issuance of book-entry
securities under the new regime (although they were upper Tier 2 securities and as of the date of
this publication no Spanish issuer has yet to issue Tier 1 securities under the new regime) into
the United States pursuant to Rule 144A. In order to allow for “relief at source” procedures to
work for book-entry securities, a third party intermediary is needed to liaise between the issuer
and DTC. The introduction of a third party intermediary has led to the following acceptable
procedures with DTC and the Spanish tax authorities:

   (i)    At least five New York business days prior to each relevant record date of the security, a
          Spanish issuer must provide DTC with an announcement which will form the basis for
          the creation of a DTC “Important Notice” regarding the relevant interest or distribution
          payment and Spanish withholding tax exemption entitlement information. The
          “Important Notice” will be printed on DTC’s website and will include a summary of the
          relevant beneficial owner information collection procedures.

   (ii) Beginning on the first New York business day following each relevant record date
        through and including the close of business on the fourth New York business day prior to
        each relevant interest or distribution payment date (the “Standard Deadline”), DTC
        participants must enter information into the system of the third party intermediary
        regarding the beneficial owners holding interests in the securities through such
        participants. In addition, direct participants in DTC must make an election via the DTC
        Elective Dividend Service (“EDS”) confirming their aggregate positions that are exempt
        from Spanish withholding tax. Once complete beneficial owner information in respect of
        a participant’s holding in the securities has been entered into the system of the third party
        intermediary, the third party intermediary will produce fully completed forms of the
        certificates set forth as exhibits to Annex A to the offering memorandum (as required by
        the Spanish law). Each participant will then be required to (i) print, (ii) review, (iii) sign,
        and (iv) fax or send a PDF copy of the duly signed paper certificate to the third party
        intermediary by the Standard Deadline. The third party intermediary will submit all
        confirmed certifications to the issuer on the Standard Deadline. Participants in DTC must
        ensure that beneficial owner data entered into the system of the third party intermediary
        and EDS elections are synchronized and updated to reflect any changes to beneficial

                                                  25
NY1 5828148V.13
CHAPTER 6                                                                     TAX-DEDUCTIBLE
                                                           NON-OPERATING SUBSIDIARY PREFERRED
          ownership or DTC positions occurring prior to the relevant Standard Deadline. For this
          purpose, the third party intermediary must be able to accept revisions to beneficial owner
          information until 9:45 a.m. (New York time) and DTC will process changes to EDS
          elections until 10:15 a.m. (New York time) on the Standard Deadline. If at 10:15 a.m.
          (New York time) on the Standard Deadline, the beneficial owner information supplied by
          a participant to the third party intermediary, that participant’s EDS elections and its DTC
          positions are inconsistent in any respect, payments will be made net of Spanish taxes on
          the entire position held by such DTC participant.

   (iii) DTC and the third party intermediary will reconcile the beneficial owner information,
         EDS elections and DTC positions on the morning of each Standard Deadline. Based on
         this reconciliation, and acting on a best efforts basis, the staff at the third party
         intermediary will (until 9:45 a.m. (New York time)) warn participants of any
         inconsistencies. Participants will have the opportunity to revise the beneficial owner
         information they have submitted to the third party intermediary and submit new or
         amended tax certifications until 9:45 a.m. (New York time) and request DTC to amend
         EDS elections until 10:15 a.m. (New York time) on the morning of the relevant Standard
         Deadline in order to correct any inconsistencies.

   (iv) The issuer will make interest payments on the securities (net or gross of withholding, as
        the case may be) in accordance with the final paying agent report provided by DTC and
        the third party intermediary unless the issuer determines that there are inconsistencies
        with the tax certifications provided or that any of the information set forth therein is, to
        the issuer’s knowledge, inaccurate.




                                                  26
NY1 5828148V.13
CHAPTER 6                                                                              TAX-DEDUCTIBLE
                                                                    NON-OPERATING SUBSIDIARY PREFERRED
  • Japanese Bank Non-Operating Tax Haven Trust Subsidiary Mandatory Convertible
                      Non-Cumulative Preferred (1994 and 1996)


                                                                Bank




                                                                         49% Common Units
                                         Yen-denominated
                                         Mandatory
                                         Convertible
                                         Preference
                                         Shares                          Option to purchase
                                                                         51% Common Units




                             Soft                    Tax Haven Trust
                             Guarantee
                             of Units




                                                                 Yen-denominated
                                                                 Preference Share Units




                                                            Investors


          Selected early issues – Sakura Bank (1994 and 1996).

          Primary regulator capital treatment – bank Tier 1 capital.

          Other transaction benefits

          ■ Conversion feature results in a lower dividend rate on the bank preference shares than
            would otherwise be the case.

          ■ The preferred delays dilution of the common shares until the conversion date.

          Features

          ■ The issuer is a tax haven-domiciled trust that is a subsidiary of the bank for certain
            purposes.

          ■ Bank convertible preference shares are the issuer’s only assets.

          ■ The bank preference shares are mandatorily convertible into bank common stock on
            or after a specified period of time and are convertible at the option of the investor into
            bank common stock prior to such time.

                                                           27
NY1 5828148V.13
CHAPTER 6                                                                    TAX-DEDUCTIBLE
                                                          NON-OPERATING SUBSIDIARY PREFERRED
          ■ Dividends on the bank preference shares are subject to Japanese withholding tax.

          ■ The dividend withholding tax rate for U.S. holders was 15%, which could be used by
            a U.S. holder as a foreign tax credit subject to certain limitations.

          ■ The trust preferred are pass-through trust interests.

          ■ Soft guarantee – to the extent of legally available funds held by the issuer.

          ■ Dividends on the convertible bank preference shares are non-cumulative, subject to
            bank board of directors (interim dividend) or shareholder (annual dividend) approval,
            and may be declared or paid only to the extent of distributable profits of the bank.

          ■ Liquidation payment on the bank preference shares, and therefore the trust preferred,
            is determined by reference to the bank’s available assets.

          ■ The issuer is 1940 Act exempt pursuant to Rule 3a-5 (finance subsidiary).




                                                  28
NY1 5828148V.13
CHAPTER 6                                                                        TAX-DEDUCTIBLE
                                                              NON-OPERATING SUBSIDIARY PREFERRED
• U.S. Bank Holding Company Non-Operating U.S. Trust Subsidiary Guaranteed
  Cumulative Preferred (normal issues since 1996; enhanced issues since 2005)




                                                       Bank




                                                                  Common Securities in a
                                   Junior                         liquidation amount equal to
                                   Subordinated                   at least 3% of the Trust’s
                                   Debentures                     total capital




                                                  Delaware Trust

                  Soft
                  Guarantee
                  of Preferred
                  Securities
                                                          Preferred Securities




                                                   Investors




          Selected normal issues

          ■ BankBoston (1996)

          ■ HSBC Americas (1996)

          ■ NationsBank (1996)

          ■ Regions Financial Corporation (2001)

          ■ FleetBoston Financial Corporation (2001)

          ■ FleetBoston Financial Corporation (2002)

          ■ The Colonial BancGroup, Inc. (2002)

                                                  29
NY1 5828148V.13
CHAPTER 6                                                                     TAX-DEDUCTIBLE
                                                           NON-OPERATING SUBSIDIARY PREFERRED
          Selected 2005 and 2006 normal and enhanced issues

          ■ In 2005, at least 29 U.S. bank holding companies registered trust preferred and other
            capital security transactions with the SEC and/or issued SEC-registered trust
            preferred or other capital securities. In 2004 over 25, in 2003 over 20, in 2002 over
            40, and in 2001 over 20, U.S. bank holding companies registered trust preferred and
            other capital security transactions with the SEC and/or issued SEC-registered trust
            preferred or other capital securities. In addition, see Chapter 13 for a description of
            securitization transactions involving CDOs backed primarily by pools of bank trust
            preferred securities and other bank and insurance company capital instruments.

          ■ Lehman Brothers Holdings Inc. (August 2005) – non-bank issuer

          ■ The Stanley Works (November 2005) – non-bank issuer

          ■ Burlington Northern Santa Fe Corporation (December 2005) – non-bank issuer

          ■ U.S. Bancorp (December 2005)

          Primary regulator capital treatment - bank holding company minority interest Tier 1.

          Other transaction benefits

          ■ The interest on the bank holding company debentures held by the trust is deductible
            by the bank holding company for U.S. tax purposes.

          The Federal Reserve Board has treated this structure as Tier 1 capital for bank holding
          companies since 1996. As a result of FIN 46, trust preferred may no longer be regarded
          under U.S. GAAP and is no longer regarded by the SEC as a minority interest. The
          Federal Reserve Board announced on March 2, 2005 that trust preferred securities will
          continue to be considered as Tier 1 capital as long as certain requirements are met. See
          discussion below and in Appendix K – Selected 2006, 2005, 2004, 2003, 2002 and 2001
          Developments in Corporate and Securities Laws, Tax and Accounting.

          This structure had been used by U.S. non-banking institutions, particularly insurance and
          finance companies, utilities, oil & gas and other industrial companies, prior to the Federal
          Reserve Bank’s approval of the structure as Tier 1 capital.

          The cumulative and limited life features of this preferred are not favored by the Basle
          Committee under the 1988 Basle Accord or the 1998 Basle Release.

          Features of normal and enhanced issues

          ■ The issuer is a U.S.-domiciled trust that is a subsidiary of the bank for accounting
            purposes and qualifies as a pass-through grantor trust for U.S. tax purposes.

          ■ Bank holding company debentures are the issuer’s only assets.


                                                   30
NY1 5828148V.13
CHAPTER 6                                                                     TAX-DEDUCTIBLE
                                                           NON-OPERATING SUBSIDIARY PREFERRED
          ■ The preferred securities are pass-through trust interests.

          ■ Soft bank holding company guarantee – to the extent of amounts paid on the bank
            holding company debentures.

          ■ The interest on the debentures is deferrable for up to five years.

          ■ The debentures are junior subordinated indebtedness, but generally not an instrument
            that would qualify as upper Tier 2 capital.

          ■ The debentures have a maturity of 20 to 45 years.

          ■ Preferred distributions are cumulative, non-discretionary and tied to the income of the
            issuer, not the bank holding company.

          ■ The preferred’s liquidation payment is determined by reference to the issuer’s
            available assets.

          ■ Preferred holders have the right to proceed directly against the bank under the
            debentures for their pro rata claim if the bank defaults on its payment obligations
            under the debentures.

          ■ The issuer is 1940 Act exempt pursuant to Rule 3a-5 (finance subsidiary).

          Additional features of enhanced issues

          ■ Interest on the debentures can be deferred for as long as a total of 10 or 12 years, but
            must be paid after five years (or seven years, in the case of Lehman) if the deferral
            period has not yet ended with the proceeds from the sale of its common stock and/or
            perpetual non-cumulative preferred stock of the bank or non-bank issuer. If a
            “market disruption event” occurs, such that the bank or non-bank issuer is unable to
            sell a sufficient amount of its securities to fund the repayment of the deferred interest,
            then interest can be deferred for an additional five years without triggering an event
            of default.

          ■ Interest on the debentures, in the case of a non-bank issuer, is mandatorily deferred if
            the issuer is not in compliance with certain financial covenants (e.g., if the issuer’s
            retained cashflow to total debt ratio falls below 15% for the most recent fiscal
            quarter).

          ■ Deferred interest that has accrued on the debentures must be paid by the bank holding
            company with the proceeds from the sale of its common stock and/or perpetual non-
            cumulative preferred stock.

          ■ The debentures have a maturity of 30 years in the case of Lehman, 40 years in the
            case of Stanley, 50 years in the case of Burlington, and 60 years in the case of U.S.
            Bancorp (for certain structures, after a fixed period, Moody’s equity credit shifts to
            25%).

                                                   31
NY1 5828148V.13
CHAPTER 6                                                                     TAX-DEDUCTIBLE
                                                           NON-OPERATING SUBSIDIARY PREFERRED
          ■ Replacement capital covenant – the bank holding company or non-bank issuer
            contractually commits to one or more classes of its existing noteholders not to redeem
            the preferred or the debentures (and, in certain structures, not to allow the maturity of
            the debentures) unless, within 180 days prior to the date of redemption, it has first
            issued and sold securities that (i) have equity-like characteristics that are the same as,
            or more equity-like than, the debentures at that time and (ii) in the case of a bank
            holding company, qualify as Tier 1 capital of the bank holding company under the
            capital guidelines of the Federal Reserve.

          ■ Certain enhanced issuances are deeply subordinated – U.S. Bancorp’s securities rank
            junior to all debt and existing trust preferred.

          ■ The Lehman transaction also involves the use of an intermediate LLC that holds the
            debentures and issues its preferred (which have the benefit of a soft guarantee from
            Lehman) to the trust.

          ■ Issuer can obtain 50-75% equity credit from Moody’s.

          FASB Interpretation No. 46

        In January of 2003, the Financial Accounting Standards Board (“FASB”) issued
interpretation No.46 (“FIN 46”) that interprets Accounting Research Bulletin No. 51. FIN 46
addresses the consolidation of “variable interest entities” by business enterprises and requires
companies that control another entity to consolidate the controlled entity for financial purposes.
FIN 46 also implies, however, that a bank holding company’s trust preferred issuing trust
subsidiary should be de-consolidated from its parent for accounting purposes. This de-
consolidation means that the bank holding company and its trust subsidiary have a relationship
based exclusively on a debt interest. As a result of this new relationship, the trust preferred
securities are treated as a liability on the bank holding company’s consolidated balance sheets,
not as equity, and the “related expense [is] recorded as an interest expense on the income
statement rather than as a minority interest in the income of its [trust] subsidiary.”

       In December 2003, the FASB revised FIN 46, stating that trust preferred securities issued
by trust subsidiaries of bank holding companies must be de-consolidated as of December 31,
2003.

          The Federal Reserve Board’s Trust Preferred Regulations

        By no longer permitting trust preferred securities to be counted as minority interests, FIN
46 had the effect of undercutting a fundamental premise for the Federal Reserve Board’s
treatment of trust preferred securities as innovative Tier 1 capital of bank holding companies. In
May 2004, the Federal Reserve Board reacted to the adoption of FIN 46 by proposing new
regulations on the treatment of trust preferred securities as regulatory capital and the definition of
capital for bank holding companies.

        On March 1, 2005, the Federal Reserve Board approved final regulations that allow trust
preferred securities of U.S. bank holding companies to be treated as Tier 1 capital,
notwithstanding that they are no longer treated as minority interests under U.S. GAAP as a result
                                                   32
NY1 5828148V.13
CHAPTER 6                                                                   TAX-DEDUCTIBLE
                                                         NON-OPERATING SUBSIDIARY PREFERRED
of FIN 46. The regulations require no significant changes to existing bank holding company
trust preferred securities structures in order to achieve Tier 1 treatment. Trust preferred
securities and other “restricted core capital elements” may not exceed 25% (15% in the case of
internationally active banking organizations) of a bank holding company’s core capital elements,
net of goodwill less any associated deferred tax liability. Restricted core capital elements
include cumulative preferred stock, minority interests in nonbanking subsidiaries and qualifying
trust preferred securities. In addition to restricted core capital elements, core capital elements
includes common stock and perpetual noncumulative preferred stock (including related surplus)
and minority interests in banking subsidiaries. Interestingly, mandatory convertible preferred
securities are specifically exempted from the 15% limitation for internationally active banking
organizations, but are included in a separate 25% limitation for those institutions. The
quantitative limits of the final regulations will become effective as of March 31, 2009. See
Chaper 11 – U.S. Synthetic Mandatory Convertible Securities – Convertible for Preferred Stock
(since 2006) for a dicussion of the WITS transaction, which was structured to obtain Tier 1
treatment and fall outside the 15% limitation on restricted core capital elements applicable to
internationally active banks.

        On October 6, 2005, the Federal Reserve Board (the “FRB”), the Agencies jointly issued
an the Basle IA ANPR, which proposes several revisions to the U.S. risk-based capital standards
based upon Basle I. The Agencies have stated they are considering increasing the number of
risk-weight categories, permitting greater use of external ratings as an indicator of credit risk for
externally-rated exposures, expanding the types of guarantees and collateral that may be
recognized, and modifying the risk-weights associated with residential mortgages. The Basle IA
ANPR also discussed applying credit conversion factors to certain types of commitments,
assigning a risk-based capital charge to certain securitizations with early amortization provisions,
and assigning higher risk weight to certain real estate, retail and commercial exposures and to
loans that are 90 days or more past due or in nonaccrual status. The Agencies are also
considering revisions to Basle I that will apply to bank holding companies with less than $500
million in assets. For a complete analysis, see Appendix A – Basle Committee and U.S.
Regulatory Innovative Tier 1 Capital Requirements.




                                                 33
NY1 5828148V.13
CHAPTER 6                                                                                                      TAX-DEDUCTIBLE
                                                                                            NON-OPERATING SUBSIDIARY PREFERRED
                                                 COMPLEX SUBSIDIARY STRUCTURES
                                                          (SINCE 1997)


  Basic Structure .................................................................................................................................... 35
  Australian Bank Non-Operating U.S. LLC Subsidiary Guaranteed
       Exchangeable Non-Cumulative Preferred (since 1997)................................................................ 40
  Australian Bank Non-Operating Trust/Trust Subsidiary Convertible
       Guaranteed Non-Cumulative Preferred (since 1999).................................................................... 43
  Australian Bank Non-Operating Trust/Trust Subsidiary Convertible
       Guaranteed Non-Cumulative Preferred, Australian Market only (since
       2002) ............................................................................................................................................. 48
  Australian Bank Non-Operating Jersey Limited Partnership Subsidiary
       Guaranteed Non-Cumulative Preferred (since 2004).................................................................... 52
  Austrian and Swiss Bank Non-Operating Off-Shore Subsidiary
       Non-Cumulative Preferred (since 1999)....................................................................................... 54
  Dutch and Belgian Bank Non-Operating U.S. Trust/LLC Subsidiary
       Guaranteed Non-Cumulative Preferred (since 1998).................................................................... 56
  French Bank Non-Operating Subsidiary Guaranteed Non-Cumulative
       Preferred (since 2000)................................................................................................................... 60
  German Bank Non-Operating Subsidiary Non-Cumulative Preferred (since
       1999) ............................................................................................................................................. 66
  German, Luxembourg and Swiss Bank Non-Operating Tax Haven
       Subsidiary Preferred Issued through a Fiduciary Agreement (since
       2002) ............................................................................................................................................. 70
  Italian Bank Non-Operating U.S. Trust/LLC Subsidiary Non-Cumulative
       Preferred (since 1998)................................................................................................................... 76
  Japanese Bank Non-Operating U.S. LLC/Cayman Subsidiary
       Non-Cumulative Preferred (since 1998)....................................................................................... 81
  Korean Bank Non-Operating Subsidiary Guaranteed Cumulative Preferred
       (since 2002) .................................................................................................................................. 86
  Malaysian Bank Non-Operating Subsidiary Guaranteed Non-Cumulative
       Preferred (since 2005) .................................................................................................................. 88
  Singapore Bank Non-Operating Subsidiary Guaranteed Non-Cumulative
       Preferred (since 2001) .................................................................................................................. 91
  Swiss Bank or Financial Services Company Non-Operating U.S. Trust/LLC
       Subsidiary Guaranteed Non-Cumulative Preferred (normal issues since
       2000; enhanced issues since 2006) ............................................................................................... 95
  UK, Irish, South African and Kazakh Bank Non-Operating Partnership or
       Trust/Partnership Subsidiary Guaranteed Non-Cumulative Preferred
       (since 1999) .................................................................................................................................. 99
  U.S. Bank Holding Company and Irish Bank Non-Operating U.S.
       Trust/U.S. Trust Subsidiary Guaranteed Non-Cumulative Preferred
       (since 1999) ................................................................................................................................ 108
  U.S. National Bank Non-Operating U.S. Trust/LLC Subsidiary Guaranteed
       Non-Cumulative Preferred (since 2000)..................................................................................... 110




                                                                              34
NY1 5828148V.13
CHAPTER 6                                                                                      TAX-DEDUCTIBLE
                                                                            NON-OPERATING SUBSIDIARY PREFERRED
                                                     Basic Structure


       Support Agreement,
          if applicable
                                                            Soft Guarantees or Bank
Contingent Guarantee                                        Preferred Equivalent Guarantees
(Dutch banks)                          Bank




                                     US Branch



      Class A                                              Common
      Preferred                                         securities if
      Securities,      Debentures,                   subsidiary trust
      if any           loans or
                       deposits                Proceeds from
                                               issuance of
                                               Securities

                                                                                              Trust Preferred
                                                     Class B                                  Securities
                                                     Preferred Securities
                              LLC, Limited
                              Partnership or                                   Trust                                   Investors
                              Trust
                                                     Proceeds from                              Proceeds from
                                                     issuance of Class B                        issuance of Trust
                                                     Preferred Securities                       Preferred Securities




          The first transactions were 1997 Australian and 1998 Japanese Tier 1 capital
          non-operating U.S. LLC subsidiary structures, neither of which used a trust.

          In many respects, this structure is similar to that used for the Spanish and Portuguese
          non-operating tax haven corporate subsidiary non-cumulative preferred. For example,
          like those preferred, in many cases the U.S. trust/intermediate subsidiary preferred has the
          benefit of a guarantee that is the functional equivalent of bank preferred.

          Since the 1998 Basle Accord, this has become the most common Tier 1 capital format,
          and has been used by many banks because the intermediate vehicle and the bank
          guarantee in the structure provide sufficient flexibility for banks from a number of
          countries to satisfy the Tier 1 capital requirements of their primary regulator and to
          achieve the tax benefits they seek.



                                                               35
NY1 5828148V.13
CHAPTER 6                                                                           TAX-DEDUCTIBLE
                                                                 NON-OPERATING SUBSIDIARY PREFERRED
          The most popular intermediate subsidiary is a U.S.-domiciled LLC. For tax and
          accounting reasons discussed below, UK banks use a partnership rather than an LLC and,
          if the U.S. is not a significant market, a Jersey partnership instead of a trust.

          Australian banks have also used this structure, but used a trust instead of an LLC for tax
          reasons; the trust, as the intermediate subsidiary, was treated as a U.S. tax partnership.

          Primary regulator capital treatment – bank-consolidated and sometimes solo minority
          interest Tier 1 capital.

          Other transaction benefits

          ■ The interest or other payments on the instrument held by the intermediate subsidiary
            are deductible by the branch issuing the instrument for applicable income tax
            purposes.

          ■ The instrument provides a U.S. dollar-denominated capital hedge against the bank’s
            U.S. dollar-denominated assets.

          ■ Avoidance or minimization of withholding tax.

          Features

          ■ Generally, a trust is used to enable Form 1099 reporting and avoid Form K-1
            reporting. This not only provides an easier tax reporting form to investors, but
            facilitates trading on DTC, Euroclear and Clearstream. If a trust is used, the investors
            purchase the trust securities. If a trust is not used, investors purchase the securities of
            the LLC, partnership or trust entity that would otherwise be the intermediate
            subsidiary.

          ■ The trust is U.S.-domiciled

                  –   If the trust is a subsidiary of the bank for accounting purposes, generally the
                      common securities of the trust are held directly or indirectly by the bank and the
                      trust qualifies as a pass-through grantor trust for U.S. tax purposes.

                  –   If the trust is a hat-check trust (i.e., not a subsidiary of the bank for accounting
                      purposes), all the trust’s securities are held by investors and the trust qualifies
                      either as a pass-through grantor trust or a depositary arrangement for U.S. tax
                      purposes.

                  –   While the hat-check trust can be used in any of the transactions, the hat-check
                      trust is more likely to be used if:

                      –   a U.S. subsidiary trust would present a problem under the bank’s domestic tax
                          or other laws, as is the case with UK and Irish banks as described below; or



                                                        36
NY1 5828148V.13
CHAPTER 6                                                                           TAX-DEDUCTIBLE
                                                                 NON-OPERATING SUBSIDIARY PREFERRED
                      –   it is difficult for the bank to avoid characterization of the trust as a foreign
                          trust for U.S. federal income tax purposes.

          ■ The only assets of the trust are the preferred securities of the intermediate subsidiary
            and the guarantee of the partnership securities by the bank.

          ■ The trust is a non-discretionary conduit which distributes everything it receives to
            investors.

                  –   If the trust is a subsidiary of the bank, in many cases, upon the occurrence of
                      certain tax, 1940 Act or bank regulatory events that create a problem at the trust
                      level, the bank may liquidate the trust and distribute the partnership preferred
                      securities to investors.

                  –   If the trust is a hat-check trust, investors may withdraw the preferred securities of
                      the intermediate subsidiary underlying their trust preferred securities at any time.

          ■ Whether the intermediate subsidiary is an LLC, a partnership, a trust or another
            vehicle that can elect to be a partnership for U.S. tax purposes, treatment of the
            intermediate subsidiary as a partnership for U.S. federal income tax purposes is
            generally sought in order to provide the flexibility required to achieve Tier 1 capital
            treatment and the applicable tax benefits.

          ■ The intermediate subsidiary is U.S.-domiciled if it is an LLC or a trust, and may be
            either U.S.- or tax haven-domiciled if it is a partnership.

          ■ The intermediate subsidiary and the bank guarantee, if any, of the preferred securities
            of the intermediate subsidiary provide:

                  –   synthetic bank preferred (i.e., together they generally put investors in the place
                      they would be if they owned bank preferred); and

                  –   the flexibility necessary for the bank’s group to issue non-cumulative preferred
                      securities with the loss absorption characteristics required by the bank’s primary
                      regulator while obtaining an interest deduction on the instruments of the bank that
                      are held by the intermediate subsidiary.

          ■ The applicable tax laws where the bank seeks the tax deduction, the ability of the
            bank itself to issue preferred or similar securities, foreign exchange issues and other
            considerations will affect the mechanics of the intermediate subsidiary and the related
            subsidiary to accomplish the non-cumulative and loss absorption features required by
            the bank’s primary regulator. For example:

                  –   Whether and the extent to which the intermediate subsidiary is required to have
                      assets other than the bank’s instruments will depend primarily upon the substance
                      that the intermediate subsidiary is required to have under the tax analysis of the
                      jurisdiction where the bank seeks a tax deduction.


                                                         37
NY1 5828148V.13
CHAPTER 6                                                                          TAX-DEDUCTIBLE
                                                                NON-OPERATING SUBSIDIARY PREFERRED
                  –   The non-cumulative requirement for the preferred securities may be accomplished
                      by, among other things:

                      –   causing the interest on the debt to be non-cumulative, deferrable (perpetually
                          or with all deferred interest payable to the common security holder of the
                          intermediate subsidiary) or payable in a bank equity security upon the
                          occurrence and during the continuance of events specified by the bank’s
                          primary regulator;

                      –   giving the appropriate directors or officers of the intermediate subsidiary the
                          discretion to declare dividends on its preferred, with a requirement that any
                          income not distributed to preferred security holders be distributed to common
                          security holders; or

                      –   requiring dividends to be paid on the preferred of the intermediate subsidiary
                          generally, but prohibiting such dividends upon the occurrence and during the
                          continuance of events specified by the bank’s primary regulator, with a
                          requirement that any income not distributed to preferred security holders be
                          distributed to common security holders.

          ■ The loss absorption requirement for the preferred securities may be achieved, upon
            the occurrence of events required by the bank’s primary regulator, by:

                  –   writing down the bank instrument held by the intermediate subsidiary;

                  –   giving the bank, as direct or indirect holder of the common or another class of
                      securities of the intermediate subsidiary, the right to receive the bank instrument
                      held by the intermediate subsidiary or any proceeds from the disposition thereof
                      either upon the occurrence of such an event or upon the winding up of the
                      intermediate subsidiary (this approach requires a provision that the intermediate
                      subsidiary may only wind up if the bank winds up); or

                  –   exchanging the intermediate subsidiary’s preferred for preferred of the bank with
                      similar characteristics.

          ■ The bank guarantees of the trust and intermediate company preferred securities, if
            any, can be soft or hard.

                  –   The hard guarantee transactions generally focus investors on the guarantee, with
                      all required dividends, redemption and liquidation payments payable to investors
                      guaranteed or sourced through the guarantee.

                  –   The soft guarantees are essentially performance guarantees; the guarantee
                      depends on the availability of funds at the subsidiary level, and focus investors on
                      the underlying assets of the trust or the intermediate subsidiary, as the case may
                      be.



                                                       38
NY1 5828148V.13
CHAPTER 6                                                                          TAX-DEDUCTIBLE
                                                                NON-OPERATING SUBSIDIARY PREFERRED
                  –   It is possible to have a soft guarantee for the trust preferred and a hard guarantee
                      for the intermediate subsidiary’s preferred as the intermediate subsidiary is the
                      focus of the Tier 1 capital structuring.

                  –   Rule 3a-5 under the 1940 Act only requires bank guarantees for public offerings
                      by U.S. finance subsidiaries. Thus non-SEC registered and hat-check trust
                      preferred securities – which are simply not investment companies and do not
                      require the exemption afforded by Rule 3a-5 – need not be guaranteed by the
                      bank. Private transactions may also have the benefit of Rule 3a-7 under the 1940
                      Act (issuers of asset-back securities).

                  –   Although, since many of the trust preferred transactions have been private, a
                      guarantee is not required for purposes of Rule 3a-5, a guarantee is often used
                      because it is a convenient method of providing investors with the bank preferred
                      equivalent features that they expect with the additional comfort of the bank’s
                      enforceable obligation to guarantee payments or performance on or in respect of a
                      bank preferred equivalent security.

          ■ As mentioned above, the characteristics of the bank instruments in which the
            intermediate subsidiary invests depends to a large extent upon the tax regime in the
            jurisdiction where the bank seeks a tax deduction and the laws that apply to the bank
            instruments. Accordingly, the instruments might be:

                  –   debentures, loans, deposits, repurchase agreements, silent partnerships, etc.;

                  –   perpetual, limited life, withering, convertible from one currency into another, etc.;

                  –   cumulative or non-cumulative; and

                  –   in ranking upon a winding up of the bank or other borrower, equal or junior to
                      senior debt, junior debt, senior preferred or junior preferred.

          ■ If the bank wants capital in a currency that is different from the currency that it can
            raise through the issuance of the trust preferred, the intermediate subsidiary may enter
            into a swap so the bank debt would be denominated in the appropriate currency.

          ■ If the intermediate subsidiary invests in assets other than securities or other
            investments in the bank or the bank’s subsidiaries, those assets must satisfy the
            requirements of Rule 3a-5 under the 1940 Act to the extent applicable.

          ■ The trust and the intermediate subsidiary are 1940 Act exempt pursuant to Rule 3a-5
            (finance subsidiary). They may also be exempt pursuant to Rule 3a-7 under the 1940
            Act (issuers of asset-back securities) or Section 3(c)(7) of the 1940 Act (sales only to
            qualified purchasers).




                                                       39
NY1 5828148V.13
CHAPTER 6                                                                                                     TAX-DEDUCTIBLE
                                                                                           NON-OPERATING SUBSIDIARY PREFERRED
• Australian Bank Non-Operating U.S. LLC Subsidiary Guaranteed Exchangeable
  Non-Cumulative Preferred (since 1997)

                                                                       Issue Date

                                                                             Bank

                                                           Step-Up                                           Initial
                                                       Subordinated       Interest                           Common
                                                                          Payments          Proceeds
                                                        Debentures                                           Securities



                                                                         Initial Issuer
                                                                        Delaware LLC
                                  Performance
                                  Guarantee
                                                           Series A
                                                            Capital       Dividends         Proceeds
                                                          Securities




                                                                          Depositary



                                                                        Receipts




                                                                           Investors




                                                                       Year 20
                                                                                          Initial Issuer Put Right
                                                                                                  (Default)



            Bank                                                                                   Bank


                                                                                                               Interest
                  Common Securities                                                                            Payments

                                                                                       Performance
                                                                                       Guarantee
                                                                                                                           Series A
                                                                                                                          Redemption
                           Series A                                                                                          Price
                          Redemption
                             Price
            Initial                                                                               Initial                  Series A
                                                Depositary              OR                                                              Depositary
            Issuer                                                                                Issuer                  Redemption
                                                                                                                             Price

                                                                                                                            Series B
                                                                                                                            Capital
                                                                                                                           Securities
                                Series A
                                Redemption                                                 Series A                                        Series B
                                Price                                                       Capital                Dividends               Capital
                                                                                          Securities                                       Securities




          Investors                                                                                    Investors
                                                                            40
NY1 5828148V.13
CHAPTER 6                                                                                  TAX-DEDUCTIBLE
                                                                        NON-OPERATING SUBSIDIARY PREFERRED
                                                       Year 25

                                                                            Group

                   Bank
                                                                            Bank


                                                 Bank                                                       Perpetual
                              Dividends          Preference                           Final                 Subordinated
                                                 Shares            Performance                   Interest
                                                                                      Common                Debentures
                                                                   Guarantee                     Payments
                                                                                      Securities



                   Initial                                                 Initial               Final Issuer
                                          Depositary    OR
                   Issuer                                                  Issuer
                                                                                                            Series C
           Series B                                                              Series B                   Capital
            Capital                                                              Capital                    Securities
          Securities                            Bank                             Securities
                                                Preference                                           Depositary
                                                Shares                               Dividends

                                                                                                            Series C
                  Investors                                                                                 Capital
                                                                          Investors                         Securities

          Only issue –

          ■ St. George Bank (1997)

          Primary regulator capital treatment – bank minority interest Tier 1.

          Other transaction benefits

          ■ The interest on the bank debentures held by the LLC is deductible by the bank for
            Australian tax purposes.

          Features

          ■ There are two issuers, each of which is a U.S.-domiciled limited liability company
            that is a subsidiary of the bank and qualifies as a partnership for U.S. tax purposes.

          ■ The preferred of the initial issuer is replaceable upon mandatory redemption after 20
            years with a second series of preferred of the initial issuer unless the bank, with the
            applicable regulator’s approval, elects to distribute the cash proceeds to investors and
            terminate the structure. After 25 years, the second series of preferred will be
            exchangeable, at the bank’s option, into bank preference shares or preferred issued by
            the second issuer.




                                                              41
NY1 5828148V.13
CHAPTER 6                                                                        TAX-DEDUCTIBLE
                                                              NON-OPERATING SUBSIDIARY PREFERRED
          ■ The preferred is issued in the form of depositary receipts to minimize investor
            disruption that might be caused as the preferred is replaced through the life of the
            structure.

          ■ The preferred dividend rate is a fixed rate that steps up in years 20 and 25.

          ■ Preferred dividends must be paid if the issuer has legally available funds, but only

                  –   to the extent of the bank’s consolidated net income for the immediately preceding
                      fiscal year, less any dividends on bank shares or group pari passu shares during
                      the current fiscal year; and

                  –   if the payment is prohibited or limited by applicable law or regulation, by the
                      provisions of any group pari passu security or other instruments or agreements to
                      which the issuer or the bank is a party.

          ■ The preferred’s liquidation payment is determined by reference to the bank’s
            available assets provided that, if the bank is being wound up at the same time, it is
            instead based on the assets of the bank.

          ■ Bank subordinated debentures are the issuer’s only assets.

          ■ The interest rates and dates and the redemption dates and prices of the debentures are
            the same as the dividend rates and dates and the redemption dates and prices of the
            debentures.

          ■ Soft bank guarantee of payments on the preferred – to the extent the applicable issuer
            has legally available funds and has failed to make such payments.

          ■ Under the guarantees, the bank agrees that if any dividend is not paid, no dividend or
            other payment may be made on any share capital of the bank or its subsidiaries until
            such time as the issuer or the bank shall have paid full dividends for at least two
            semi-annual dividend periods.

          ■ The debentures are upper Tier 2 subordinated debt.

          ■ The debentures held by the initial issuer have a maturity of 25 years. The debentures
            held by the second issuer have no maturity.

          ■ Each issuer is 1940 Act exempt pursuant to Rule 3a-5 (finance subsidiary exemption).




                                                      42
NY1 5828148V.13
CHAPTER 6                                                                                                            TAX-DEDUCTIBLE
                                                                                                  NON-OPERATING SUBSIDIARY PREFERRED
• Australian Bank Non-Operating Trust/Trust Subsidiary Convertible Guaranteed
  Non-Cumulative Preferred (since 1999)


                                                                tee
                                                          Guaran                                  Investors

                                        Bank
                                                              Gu                   Trust
                                                                 ar   ant
                        Common                 Common                       ee Preferred                 Proceeds        Distributions
                        Securities             Securities                      Securities

                                                                  Common
                        Bank
          Guarantee




                                               Bank
                       Funding                Capital             Securities                      Capital Trust
                       Holdings              Holdings                                              (Delaware)
                                                               Distributions




                                                                                  Funding Trust

                                                                                  Securities
                                      Com



                                                                                  Preferred
                                                                                                        Proceeds        Distributions
                                     Sec mon
                                        urit
                                            ies
                                                                                                                                 P
                                                                                                  Funding Trust               Tr roce
                                                                                                                                us ed
                                                                                                   (Delaware)                      tP sf
                                                                                                                                      ref rom
                                               Interest                                                                                  err
                                                                                                                                             ed Fun
                                                                        on                                                  Pa                 Se din
                                                                     omm                                                      ym                 cu
                                                                 mC                                                              en                rit g
                      US Government                         s fro es                                                                ts                ies
                                                        ceed ecuriti                                          Proceeds from
                         Obligations                Pro     S
                                                                                                              Funding Trust
                       (if applicable)                                                                                                       Currency
                                                                                                                Preferred                       Swap
                                                                                      Convertible               Securities                    Provider
                                                                                      Debentures                                               (Bank)
                                                                                     (ADRs/Bank                                           (if applicable)
                                                                               Preference Shares/                                        cy
                                                                                                                                        en
                                                                                Ordinary Shares)                                    urr
                                                                                                                                n C est
                                                                                                                               g er
                                                                                                                           r ei            s
                                                                                                                         Fo Int ment
                                                                                        Offshore Bank Branch                     P ay



          Selected issues

          ■ Westpac (1999).

          ■ Commonwealth Bank of Australia (2003)

          ■ Westpac (2003)

          ■ National Australia Bank (2003)

          ■ Westpac (2004)

          Selected 2005 issues

          ■ National Australia Bank (March 2005)

          Primary regulator capital treatment – minority interest Tier 1 capital.


                                                                                   43
NY1 5828148V.13
CHAPTER 6                                                                     TAX-DEDUCTIBLE
                                                           NON-OPERATING SUBSIDIARY PREFERRED
          Other transaction benefits

          ■ The interest on the convertible debentures held by the funding trust is deductible by
            the bank’s branch or subsidiary for income tax purposes.

          ■ Enables the bank branch or subsidiary to issue preferred in U.S. dollars or pounds
            sterling and hedge the U.S. dollar or pounds sterling foreign exchange risk at head
            office.

          ■ Saves tax credits for the bank’s Australian shareholders

          ■ Avoids withholding tax on dividends paid to foreign investors.

          Features

          ■ The issuer is a U.S.-domiciled trust that is a U.S. subsidiary of the bank and qualifies
            as a grantor trust for U.S. tax purposes.

          ■ The intermediate subsidiary is a U.S.-domiciled trust that is a trust for Australian tax
            purposes and a subsidiary of the bank, and qualifies as a partnership or trust for U.S.
            tax purposes.

          ■ The common securities of the issuer, if any, are held by a U.S. corporate subsidiary of
            the bank.

          ■ The common securities of the intermediate trust subsidiary are held by an Australian
            or U.S. corporate subsidiary of the bank.

          ■ The issuer, whose only role is pro rata distributions from its assets, holds the
            preferred issued by the intermediate trust subsidiary and the bank’s guarantee thereof.

          ■ The intermediate trust subsidiary’s primary assets are convertible debentures issued
            by the bank’s branch and, in the case of National’s 2005 issue, subordinated notes of
            the bank’s subsidiary, in each case, the principal amount of which is equal to the
            liquidation preference of the intermediate trust subsidiary preferred. In some
            transactions, such as Westpac, the intermediate trust subsidiary also holds a nominal
            amount of other assets.

          ■ The convertible debentures, if any, are mandatorily convertible 50 years after the
            issue date into bank preference shares or depositary receipts representing bank
            preference shares with similar terms.

          ■ If the bank wants capital in a currency that is different from the currency that it raises
            through the issuance of the trust preferred, the intermediate subsidiary may enter into
            a swap so the bank debt is denominated in the appropriate currency.




                                                   44
NY1 5828148V.13
CHAPTER 6                                                                             TAX-DEDUCTIBLE
                                                                   NON-OPERATING SUBSIDIARY PREFERRED
          ■ Distributions on the intermediate trust subsidiary preferred are non-cumulative and
            are mandatorily payable unless interest on the convertible debentures or the
            subordinated notes is deferred. Interest may be deferred if:

                  –   the value of the U.S. dollars (1) if there is a currency swap, to be exchanged
                      pursuant to the currency swap or (2) to be paid on the convertible debentures, or,
                      in the case of National’s 2005 issue, the subordinated notes, together with the
                      aggregate amount of distributions paid or payable on or before that interest
                      payment date during the current fiscal year of the bank on (1) the intermediate
                      trust subsidiary preferred, other than distributions payable on the date
                      corresponding to that interest payment date, (2) any capital securities of the bank
                      or any of its subsidiaries to the extent of distributions on such securities funded by
                      instruments of the bank ranking equal with the convertible debentures, and (3)
                      any other share capital of the bank, would exceed the consolidated earnings of the
                      bank and its subsidiaries for the immediately preceding fiscal year of the bank; or

                  –   the payment of the interest payable on the convertible debentures or the
                      subordinated notes or the exchange of U.S. dollars pursuant to the currency swap,
                      if any, on any interest payment date, or the corresponding distributions, would be
                      prohibited or limited by applicable law, regulation or administrative decree or by
                      the provisions of any bank instruments ranking equally with the convertible
                      debentures or any other instruments or agreements to which the bank is subject.

          ■ Interest not paid to the trust or other intermediate trust subsidiary preferred holders as
            a result of the above are paid as a distribution to the common holder (or is otherwise
            recycled to the bank).

          ■ The intermediate trust subsidiary preferred’s liquidation payment is determined by
            reference to the issuer’s assets.

          ■ The intermediate trust subsidiary preferred mandatorily convert into bank preference
            shares or depositary receipts representing bank preference shares upon the conversion
            of the convertible debentures and the bank preference shares become dividend paying
            and are distributed to the holders of the trust subsidiary preferred in redemption
            thereof upon the occurrence of an assignment event, which will, in either case, occur
            in the following circumstances:

                  –   on the 50th anniversary of the issue date;

                  –   any date that the bank selects in its absolute discretion;

                  –   distributions, interest and/or dividends are not paid when due and payable (which
                      may be after an applicable grace period);

                  –   the bank branch defers any interest payment on the convertible debentures or the
                      subordinated notes;



                                                        45
NY1 5828148V.13
CHAPTER 6                                                                          TAX-DEDUCTIBLE
                                                                NON-OPERATING SUBSIDIARY PREFERRED
                  –   due to a change in law or regulation, the currency swap becomes illegal, if
                      applicable;

                  –   the bank fails to exchange U.S. dollars pursuant to the terms of the currency swap,
                      if applicable;

                  –   the bank ceases to wholly-own the issuer or the intermediate trust subsidiary;

                  –   certain events relating to the bank’s primary regulator, including:

                      (1) the bank’s primary regulator determines in writing that the bank has a Tier 1
                          capital ratio of less than 5% (or such lesser percentage as required by the
                          bank) or a total risk-based capital ratio of less than 8% (or such lesser
                          percentage as required by the bank) on a Level 1 or Level 2 basis, as
                          applicable;

                      (2) the bank’s primary regulator issues a written directive to the bank under
                          applicable banking regulations, legislation or guidelines for the bank to
                          increase its capital;

                      (3) the bank’s primary regulator appoints a statutory manager to the bank or
                          assumes control of the bank under Australian banking law or proceedings are
                          commenced for the winding-up of the bank; or

                      (4) the retained earnings of the bank fall below zero;

                  –   an event of default occurs under the subordinated notes or the convertible
                      debentures; and

                  –   the trust or the intermediate trust subsidiary is wound up.

          ■ The bank’s capital contribution to each of the issuer and the intermediate trust
            subsidiary is a nominal amount, e.g., U.S.$1,000, or there may not be a capital
            contribution.

          ■ The bank guarantees the trust and intermediate trust subsidiary preferred to the extent
            each has legally available U.S. dollar, pounds sterling or foreign currency funds
            available.

          ■ In some transactions, such as Commonwealth Bank’s 2003 issue, on the tenth
            anniversary following issuance, the holders may elect to exchange their trust
            preferred, whereupon the issuer will either deliver ordinary shares in exchange or
            cause a third party to purchase the trust preferred from the investors for the cash value
            of those shares.

          ■ Upon a winding up of the bank, the guarantee and the convertible debentures rank as
            junior subordinated indebtedness of the bank (or pari passu with the bank’s
            preference shares).

                                                       46
NY1 5828148V.13
CHAPTER 6                                                                   TAX-DEDUCTIBLE
                                                         NON-OPERATING SUBSIDIARY PREFERRED
          ■ Capital trust preferred and intermediate trust preferred holders have the right to
            proceed directly against the bank under the guarantees and the convertible debentures
            and any subordinated notes if the bank defaults on its payment obligations under the
            guarantees or the convertible debentures or any subordinated notes, as the case may
            be.

          ■ The issuer and the intermediate trust subsidiary are 1940 Act exempt by virtue of
            Rule 3a-5 (finance subsidiary).




                                                 47
NY1 5828148V.13
CHAPTER 6                                                                                 TAX-DEDUCTIBLE
                                                                       NON-OPERATING SUBSIDIARY PREFERRED
• Australian Bank Non-Operating Trust/Trust Subsidiary Convertible Guaranteed
  Non-Cumulative Preferred, Australian Market only (since 2002)



                                                               Investor



                                                FIRsTS              A$            A$
                                                                    Proceeds      Distributions


                                                               First Trust

                                                Preferred
                                                    Units           A$             A$
                          A$ Proceeds from the
                          Preferred Units/NZ$ Interest              Proceeds       Distributions
                          on the Convertible
                          Debentures
      Currency Swap
          (Bank)                                             Second Trust

                             A$ payments
                                                                   NZ$
                                                                   Convertible
                                                                   Debentures
                                                                   (Bank         NZ$ Interest
                                                                   Preference
                                                                   Shares)



                                                            NZ Bank Branch



          Only issue

          ■ Westpac (2002)

          Primary regulator capital treatment – bank level Tier 1.

          Other transaction benefits

          ■ Avoids withholding tax on dividends paid to foreign investors.

          ■ Avoids withholding tax on distributions paid to non-resident holders, who are not
            subject to Australian tax.

          ■ Enables the bank branch to issue preferred in Australian dollars and hedge the
            Australian dollar foreign exchange risk at head office.


                                                              48
NY1 5828148V.13
CHAPTER 6                                                                     TAX-DEDUCTIBLE
                                                           NON-OPERATING SUBSIDIARY PREFERRED
          ■ Ordinary share settlement features upon redemption or conversion.

          Product Name

          ■ Fixed Interest Resettable Trust Securities or “FIRsTs”

          Designed primarily as domestic Australian offering

          Features

          ■ The issuer trust is established for the sole purpose of issuing securities and acquiring
            the preferred units issued by the intermediary trust.

          ■ The intermediary trust is established solely for the purpose of holding the convertible
            debentures issued by the bank, entering into the currency swap with the bank, issuing
            the preferred units to the issuing trust and issuing an ordinary unit to a subsidiary of
            the bank.

          ■ A bank subsidiary holds one ordinary unit of the intermediary trust at the issue price
            of A$100 per unit.

          ■ Distribution payment dates and the next rollover date (the first rollover date is the
            fifth anniversary of the issue date) are reset on each rollover date to match the interest
            payment dates and rollover date notified by the bank as having been reset on the
            convertible debentures or, if the convertible debentures have converted into
            preference shares or alternative securities of the bank, the equivalent dates and
            rollover date reset by the bank on the bank’s preference shares or alternative
            securities.

          ■ The convertible debentures are mandatorily convertible 50 years after the issue date,
            or where the bank fails to pay interest on the convertible debentures within 21 days of
            an interest payment date, into bank’s preference shares with similar terms.

          ■ The convertible debentures convert automatically into bank’s ordinary shares upon
            the occurrence of certain regulatory events that trigger regulatory actions affecting the
            bank and on an event of default.

          ■ If interest is not paid on an interest payment date because the specially constituted
            committee appointed by the board of directors fails to declare the interest payable or
            because of a deferral condition, a calculation of that interest together with compound
            interest is made.

          ■ Preference shares of the bank are perpetual securities paying non-cumulative
            dividends.

          ■ Distributions on the securities issued and capital invested in the securities are not
            guaranteed by the bank.


                                                   49
NY1 5828148V.13
CHAPTER 6                                                                      TAX-DEDUCTIBLE
                                                            NON-OPERATING SUBSIDIARY PREFERRED
          ■ Distributions on the securities depend on whether interest is paid on the convertible
            debentures and the distribution of that interest through the intermediary trust and the
            issuing trust to holders of securities.

          ■ Holders of securities may elect to exchange some or all of its securities for cash or
            ordinary shares of the bank on each rollover date or upon a takeover of or scheme of
            arrangement involving the bank.

          ■ The bank has the option to redeem the securities it acquires from a holder on any
            rollover date or a takeover of or scheme of arrangement involving the bank.

          ■ The bank may elect to exchange the bank’s preference shares for cash or for the
            bank’s ordinary shares. The bank’s preference shares are automatically exchanged
            for the bank’s ordinary shares on certain regulatory events and on an event of default.

          ■ The bank may exchange all or a portion of the securities for cash subject to the
            following conditions and the approval of the bank’s regulator:

                  − at any time upon the occurrence of a tax event or regulatory event;

                  − after the first rollover date, at least 21 business days prior to any distribution
                    payment date, provided at that time a floating rate basis applies to the market
                    rate;

                  − at any time where holders request a meeting to approve an amendment to the
                    constitution or a change of the trustee and the bank has not given its consent;

                  − at any time when the ability of the intermediary trust trustee to redeem the
                    securities and the bank’s ability to acquire securities is or will be impaired or
                    removed; or

                  − at least 21 business days prior to any rollover date.

          ■ The bank may exchange, all or portion of the securities for ordinary shares of the
            bank subject to the following conditions:

                  − at any time upon the occurrence of a tax event or a regulatory event;

                  − after the first rollover date, at least 21 business days prior to any distribution
                    payment date, provided at that time a floating rate basis applies to the market
                    rate;

                  − at any time where holders request a meeting to approve an amendment to the
                    constitution or a change of the trustee and the bank has not given its consent;

                  − at any time when the ability of the intermediary trust trustee to redeem the
                    securities and the bank’s ability to acquire securities is or will be impaired or
                    removed; or
                                                   50
NY1 5828148V.13
CHAPTER 6                                                                     TAX-DEDUCTIBLE
                                                           NON-OPERATING SUBSIDIARY PREFERRED
                  − at least 21 business days prior to any rollover date.

          ■ The bank may require the issuing trust to redeem any securities that the bank acquires
            as a result of exchange of securities.

          ■ Securities will be automatically redeemed for ordinary shares of the bank upon
            certain regulatory events or on an event of default.

          ■ Holders of securities will have all of their securities redeemed by the intermediary
            trust trustee where, (1) the bank has exercised its redemption right to exchange
            convertible debentures for cash, (2) the bank redeems the preference shares or
            alternative securities for cash or (3) convertible debentures, preference shares or
            alternative securities are converted into ordinary shares.

          ■ The Australian dollar funds received by the intermediary trust on the issue of
            preferred units are swapped with the bank into New Zealand dollars.

          ■ Upon the winding up of the bank, the convertible debentures and any preference share
            into which they have been converted will rank equally with the bank’s ordinary
            shares.




                                                  51
NY1 5828148V.13
CHAPTER 6                                                                       TAX-DEDUCTIBLE
                                                             NON-OPERATING SUBSIDIARY PREFERRED
• Australian Bank Non-Operating Jersey Limited Partnership Subsidiary Guaranteed
  Non-Cumulative Preferred (since 2004)




                                                                   Investor


                                                                          Preferred
                                   Guarantee                              Securities   Distributions
                                                       Proceeds


                                                                  Jersey Limited
                                                                    Partnership




                                                                                        Interest
                                                  Proceeds               Convertible
                       Bank                                                             Payments
                                                                         Debentures




                                                             London Bank Branch



          Selected issues

          ■ Macquarie (2004)

          Primary regulator capital treatment – bank level Tier 1.

          Avoids withholding tax on distributions paid to foreign investors.

          Avoids withholding tax under the guarantee.

          Features

          ■ The issuer partnership is established for the sole purpose of raising finance for the
            banking group.

          ■ Preference shares of the bank are perpetual securities paying non-cumulative
            dividends.


                                                  52
NY1 5828148V.13
CHAPTER 6                                                                    TAX-DEDUCTIBLE
                                                          NON-OPERATING SUBSIDIARY PREFERRED
          ■ Proceeds from the issue of the preferred securities are used to purchase convertible
            debentures issued by the bank.

          ■ The convertible debentures are mandatorily convertible 45 years after the issue date,
            and are convertible or exchangeable into preference shares issued by the bank at the
            option of the bank.

          ■ The preferred shares are exchanged for bank’s preference shares upon the occurrence
            of certain regulatory capital, solvency and other triggering events.

          ■ Distributions on the preferred securities depend on whether interest is paid on the
            convertible debentures and the distribution of that interest through the issuing
            partnership to holders of securities.

          ■ The bank has the option to redeem the preferred securities upon a minimum of 30
            days notice to the holders.




                                                 53
NY1 5828148V.13
CHAPTER 6                                                                     TAX-DEDUCTIBLE
                                                           NON-OPERATING SUBSIDIARY PREFERRED
• Austrian and Swiss Bank Non-Operating Off-Shore Subsidiary Non-Cumulative
  Preferred (since 1999)




                                                                     Support
                                            Bank



         Non-Austrian                                Support
        Subsidiary Bank

                  Ordinary Shares
                                          Off-Shore             Preference Shares
                                            Jersey
                                          Subsidiary              Dividends




                                                     Proceeds                       Investors




          Selected issues

          ■ RZB (Jersey) (1999)

          ■ BAWAG (Jersey) (2000)

          ■ Erste (Jersey) (2000)

          ■ Hypo-Alpe-Adria (Jersey) (2001)

          ■ RZB (Jersey) (2003)

          ■ RZB (Jersey) (2004)

          ■ Bank Austria Creditanstalt (Cayman) (2004)

          Selected 2005 issues

          ■ Bank Austria Creditanstalt (Cayman) (February 2005)

          ■ Erste (Jersey) (March 2005)

                                                54
NY1 5828148V.13
CHAPTER 6                                                                   TAX-DEDUCTIBLE
                                                         NON-OPERATING SUBSIDIARY PREFERRED
          ■ UBS (Jersey) (April 2005)

          Features

          ■ Distributions not guaranteed, but the structures contain strong support arrangements,
            with direct recourse to the bank by investors through use of English law Deed Poll.

          ■ Use of wholly- or majority-owned intermediary subsidiary outside Austria, most
            typically Malta.

          ■ Potential for use of direct ownership and other on-lending arrangements.

          ■ Payments are non-cumulative and are only made out of distributable returns.
            Notwithstanding this, payments must be made if paid on other pari passu securities of
            the bank.




                                                 55
NY1 5828148V.13
CHAPTER 6                                                                                  TAX-DEDUCTIBLE
                                                                        NON-OPERATING SUBSIDIARY PREFERRED
• Dutch and Belgian Bank Non-Operating U.S. Trust/LLC Subsidiary Guaranteed
  Non-Cumulative Preferred (since 1998)


        Contingent
        Guarantee                                                                           Guarantee

                                      Bank




                                 LLC
                                 Common
                                 Securities
                                                   US Corporate
                                                    Subsidiary
                  Bank Branch




                                                                            Trust
                                                                            Common
                                              Initial                       Securities
                  US Corporate                Subordinated
                   Subsidiary                 Notes

                                                       Eligible Issuers


                                                   Proceeds from issuance
          LLC Class A
                                                   of LLC Securities
            Preferred
            Securities

                                                       LLC Class B                         Trust
                                                        Preferred                        Preferred
                                                        Securities                       Securities

                                     LLC                                     Trust                        Investors
                                                       Proceeds from                      Proceeds from
                                                      issuance of LLC                      issuance of
                                                           Class B                             Trust
                                                          Preferred                          Preferred
                                                          Securities                        Securities




                                                             OR


                                                             56
NY1 5828148V.13
CHAPTER 6                                                                                       TAX-DEDUCTIBLE
                                                                             NON-OPERATING SUBSIDIARY PREFERRED



                     Contingent
                                                                          Guarantee
                     Guarantee
                                                 Dutch Holding




                                                  Dutch Bank




                                       Initial           Proceeds from
                               Intercompany              LLC securities
                                    securities
                                                                                                 Trust
                                                                                                 Preferred
                                                           LLC Preferred                         Securities
                                                           Securities                                           Trust
                                                                                 Funding Trust                Preferred
                  LLC Common               LLC                                                                Security
                  Securities
                                                               Proceeds                          Proceeds      Holders


         U.S. Holding
          Company



                                  Trust Common Securities

          Selected issues

          ■ ABN AMRO (Dutch) (1998)

          ■ ABN AMRO (Dutch) (1999)

          ■ Rabobank (Dutch) (1999)

          ■ KBC Bank (Belgian) (1999)

          ■ ING Bank (Dutch) (2000)

          ■ ABN AMRO (Dutch) (2002)

          ■ ABN AMRO (Dutch) (2003)

          ■ ABN AMRO (Dutch) (2004)

          ■ Rabobank (Dutch) (2004)

                                                                 57
NY1 5828148V.13
CHAPTER 6                                                                        TAX-DEDUCTIBLE
                                                              NON-OPERATING SUBSIDIARY PREFERRED
          Primary regulator capital treatment – minority interest Tier 1 capital.

          Other transaction benefits

          ■ The interest on the bank debentures held by the LLC is deductible by the bank in the
            jurisdiction of the issuer of the debentures.

          ■ Enables the bank to issue preferred equivalent in U.S. dollars.

          Features

          ■ The issuer is a U.S.-domiciled trust that is either a U.S. subsidiary of the bank that
            qualifies as a grantor trust or a hat-check trust that qualifies either as a grantor trust or
            a depositary arrangement for U.S. tax purposes.

          ■ The intermediate subsidiary is a U.S.-domiciled limited liability company that is a
            subsidiary of the bank and qualifies as a partnership for U.S. tax purposes.

          ■ Investors receive Form 1099 tax reporting forms.

          ■ In the case of U.S. subsidiary trusts, the common securities are held by a
            U.S.-domiciled direct wholly-owned subsidiary of the bank.

          ■ The common securities and class A preferreds of the intermediate LLC subsidiary
            (which, except in the case of the winding up of the intermediate LLC subsidiary,
            rank junior to the class B preferreds held by the trust for the benefit of investors), are
            held by subsidiaries of the bank.

          ■ The issuer, whose only role is pro rata distributions from its assets, holds the class B
            preferred issued by the intermediate LLC subsidiary and the bank’s guarantee thereof.

          ■ The intermediate LLC subsidiary’s primary assets are debentures issued by the New
            York branch of the bank or other eligible issuers, as the case may be, the principal
            amount of which initially is, in each case, at least equal the liquidation preference of
            the class B preferred. The initial debentures mature in 20 years.

          ■ Dividends on the class B preferred are non-cumulative and are mandatorily payable if

                  –   the group’s approved annual accounts reflect that the group has earned group
                      distributable profits for the preceding year or

                  –   the bank or any other member of the group pays dividends on or redeems any
                      securities that rank equally with or junior to the preferred,

                  provided, notwithstanding the foregoing, such dividends are not payable if prohibited
                  by applicable Netherlands banking regulations.

          ■ Dividends not paid to the trust or other class B preferred holders as a result of the
            above are paid as a dividend to the common holder.
                                                      58
NY1 5828148V.13
CHAPTER 6                                                                         TAX-DEDUCTIBLE
                                                               NON-OPERATING SUBSIDIARY PREFERRED
          ■ The class B preferred’s liquidation payment is determined by reference to the
            intermediate LLC subsidiary’s assets, which could be depleted because, upon the
            winding up of the intermediate LLC subsidiary, the intermediate LLC subsidiary’s
            assets – including the debentures or deposits issued by the New York branch or other
            eligible issuers – are distributed to the class A preferred holder.

          ■ The bank’s capital contribution to the trust is nominal (€1,000), and to the
            intermediate LLC subsidiary varies from nominal to substantial, depending upon the
            tax analysis.

          ■ The intermediate LLC subsidiary’s primary assets are subordinated debentures issued
            by the New York branch and other legal eligible issuers, which has similar interest
            payment and redemption features as the class B preferred and the trust preferred.

          ■ The bank guarantees the class B preferred and, if the trust is a subsidiary trust, the
            trust preferred in a manner that makes the guarantee the functional equivalent of
            preferred issued by the bank itself. Accordingly, guarantee payments include:

                  –   dividend payments that the issuer or the intermediate LLC subsidiary, as the case
                      may be, is required to pay;

                  –   the redemption price, subject to the foregoing with respect to any dividend
                      component; and

                  –   the liquidation amount payable on the class B preferred and, if applicable, the
                      trust preferred.

          ■ The contingent guarantee exists due to some uncertainty under Dutch law about the
            enforceability of the guarantees.

          ■ Upon the winding up of the bank, the guarantee ranks junior to all indebtedness of the
            bank and equal with the bank’s obligations under the contingent guarantee and,
            effectively, with the most senior preferred of the bank.

          ■ The issuer must be wound up if the bank is wound up.




                                                       59
NY1 5828148V.13
CHAPTER 6                                                                            TAX-DEDUCTIBLE
                                                                  NON-OPERATING SUBSIDIARY PREFERRED
• French Bank Non-Operating Subsidiary Guaranteed Non-Cumulative Preferred (since
  2000)



                                 Bank



           Support
           Agreement



                               NY Branch


                      LLC                  Undated
                  Common       Proceeds    Subordinated
                  Securities               Note
                                                          LLC Preferred
                                                            Securities

                                 LLC                                                    Trust
                                                            Proceeds

                                                                            Trust
                                                                          Preferred                Proceeds
                                                                          Securities



                                                                                       Investors




                                                  OR




                                                     60
NY1 5828148V.13
CHAPTER 6                                                                        TAX-DEDUCTIBLE
                                                              NON-OPERATING SUBSIDIARY PREFERRED




                                                                      Bank


                  Exchange
                  Support
                  Agreement                             Dated
                                                     Subordinated
                                                        Notes                    Proceeds
                                 US Branch




                                               General
                                               Partnership
                                               Interest
                               UK Company
                                (General       Capital                UK LP
                                               Contribution
                                 Partner)



                                                                                 Proceeds



                                                                    Depositary
                                                                     (Limited
                                                                     Partner)



                                                                                 Proceeds


                                                                     Investors




          Selected issues

          ■ Societe Generale (2000)

          ■ Natexis Banque Populaires (2000)

          ■ BNP Paribas (2001)

          ■ Credit Lyonnais (2002)

          ■ BNP Paribas (2002)

          ■ BNP Paribas (2003)
                                               61
NY1 5828148V.13
CHAPTER 6                                                                      TAX-DEDUCTIBLE
                                                            NON-OPERATING SUBSIDIARY PREFERRED
          ■ Credit Agricole (2003)

          ■ Societe Generale (2003)

          ■ Natexis Banque Populaires (2003)

          ■ Confinoga (2003 and 2004)

          Selected 2005 issues

          ■ Credit Agricole (February 2005)

          Primary regulator capital treatment – minority interest Tier 1 capital.

          Other transaction benefits

          ■ The interest on the bank debentures held by the non-operating subsidiary is deductible
            by the bank for U.S. and French tax purposes, as the case may be.

          ■ Enables the bank to issue preferred equivalent in U.S. dollars or UK pounds sterling,
            as the case may be.

          Features – U.S. Trust/LLC Structure

          ■ The issuer is a U.S.-domiciled trust that is a hat-check trust and qualifies either as a
            grantor trust or a depositary arrangement for U.S. tax purposes.

          ■ The intermediate subsidiary is a U.S.-domiciled limited liability company that is a
            subsidiary of the bank and qualifies as a partnership for U.S. tax purposes.

          ■ Investors receive Form 1099 tax reporting forms.

          ■ The common securities of the intermediate LLC subsidiary (which rank junior to the
            company preferreds held by the trust for the benefit of investors) are held by the New
            York branch.

          ■ The issuer, whose only role is pro rata distributions from its assets, holds the
            preferred issued by the intermediate LLC subsidiary.

          ■ The intermediate LLC subsidiary’s primary assets are debentures issued by the bank
            or its New York branch, the principal of amount of which is at least equal to the
            liquidation preference of the company preferred.

          ■ Dividends on the company preferred are only mandatorily payable if the bank pays
            dividends on any of its securities that rank equally with or junior to the preferred;
            notwithstanding the foregoing, it must pay dividends on the company preferred for
            one year.



                                                   62
NY1 5828148V.13
CHAPTER 6                                                                         TAX-DEDUCTIBLE
                                                               NON-OPERATING SUBSIDIARY PREFERRED
          ■ Dividends not paid to the trust or company preferred holders as a result of the above
            are paid as a dividend to the common holder.

          ■ The company preferred’s liquidation payment is determined by reference to the
            company’s assets.

          ■ The bank’s capital contribution to the intermediate LLC subsidiary varies from
            nominal to substantial, depending upon the tax analysis.

          ■ The subordinated debentures issued by the bank has the same interest payment and
            redemption features as the company preferred.

          ■ The bank enters a support agreement relating to the company preferred in a manner
            that makes the support agreement the functional equivalent of preferred issued by the
            bank itself. Accordingly, the payments under the support agreement include:

                  –   dividend payments that the intermediate LLC subsidiary is required to pay;

                  –   the redemption price, subject to the foregoing with respect to any dividend
                      component; and

                  –   the liquidation amount payable on the company preferred.

          ■ Upon the winding up of the bank, the support agreement ranks junior to all
            indebtedness of the bank and equal with the most senior preferred of the bank, if any,
            and senior to all other share capital of the bank.

          ■ The issuer and the intermediate LLC subsidiary must be wound up if the bank is
            wound up.

          ■ One or more independent directors acting on behalf of preferred holders must approve
            certain actions, including the winding up of the intermediate LLC subsidiary that is
            not concurrent with the winding up of the bank.

          ■ Holders of a majority (by liquidation preference) of trust preferreds and company
            preferreds have the right to bring suit to enforce the support agreement if the bank
            defaults on its payment obligations under the debentures.

          ■ The issuer and the intermediate LLC subsidiary are 1940 Act exempt by virtue of
            Rule 3a-5 (finance subsidiary).

          ■ The subordinated debentures are undated and unsecured and rank pari passu with
            most other unsecured obligations of the New York branch, and will be cancelled or
            forgiven if a capital deficiency or bankruptcy event occurs.




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                                                               NON-OPERATING SUBSIDIARY PREFERRED
          Features – UK Limited Partnership/UK Limited Company Structure:

          ■ The issuer is a UK-domiciled limited partnership that is classified as a partnership for
            UK tax purposes.

          ■ The general partner of the issuer is a UK-domiciled private limited company that is a
            subsidiary of the bank.

          ■ 10-year fixed term floating rate.

          ■ The general partnership interests of the issuer are held by a UK subsidiary of the
            bank.

          ■ The depositary, who is the sole limited partner of the issuer, holds the partnership
            preferred securities of the limited partnership.

          ■ The limited partnership’s primary assets are debentures issued by the bank, the
            principal of amount of which is at least equal to the liquidation preference of the
            partnership preferred securities.

          ■ Dividends on the partnership preferred securities are only mandatorily payable if the
            bank pays dividends on any of its securities that rank equally with or junior to the
            preferred, in which case it must pay dividends on the company preferred for one year
            following such payment.

          ■ The subordinated debentures issued by the bank have the same interest payment and
            redemption features as the company preferred.

          ■ The bank enters an exchange and support agreement with the general partner relating
            to the partnership preferred securities in a manner that makes the exchange and
            support agreement the functional equivalent of preferred issued by the bank itself.
            Accordingly, the payments under the exchange and support agreement include:

                  –   mandatory distributions that the limited partnership is required to pay;

                  –   the redemption price, on the redemption date; and

                  –   the liquidation amount payable on the partnership preferred securities.

          ■ Upon the occurrence of one of the events described below, known as “Shift Events”,
            the bank will be entitled to call the bank debentures held by the limited partnership
            and, pursuant to the exchange and support agreement, the bank will pay to the limited
            partnership the amounts necessary to enable the limited partnership to make
            distributions on the partnership preferred securities or pay the redemption price
            thereof:




                                                       64
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                                                                 NON-OPERATING SUBSIDIARY PREFERRED
                  –   as a result of losses incurred by the bank, the total risk-based capital ratio of the
                      bank as reported by the bank or determined by the primary regulator falls below
                      the minimum requirements of the primary regulator;

                  –   proceedings are commenced for the winding up of the bank; or

                  –   the primary regulator determines that one of the events mentioned above will
                      occur in the near term.

          ■ Upon the winding up of the bank, the support agreement ranks junior to all senior
            indebtedness of the bank and senior to all other share capital of the bank.

          ■ The issuer and the general partner must be wound up if the bank is wound up.

          ■ Pursuant to an enforcement agreement, an enforcement agent is appointed to bring
            suit and take other action to enforce the limited partnership rights if the general
            partner fails to do so within 15 days of such enforcement rights arising.

          ■ The subordinated debentures are undated and unsecured and rank pari passu with
            most other unsecured obligations of the bank.




                                                        65
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                                                                                                        NON-OPERATING SUBSIDIARY PREFERRED
• German Bank Non-Operating Subsidiary Non-Cumulative Preferred (since 1999)


                                                                              Bank
                                                                               or
                                                                           Bank Branch
                                                                                                                                             Trust
                                    Company                                                                                                  Common
           Silent                   Common       Subordinated           Proceeds
   Participations                   Securities    Note (not in          (not in                    Class A                                   Securities
                          Initial
      (not in all)                                        all)          all)                       Preferred          Class B Preferred      (not in all)
                     Guarantee                                                     Support
                     (not in all)                                               Undertaking        Security           Securities (or as in                  Trust Preferred
                                                                                 (not in all)      (not in all)       Dresdner                              Securities (or, as
                                                                                                                      Partnership                           in Dresdner,
                                                                                                                      Interests)                            Certificates)
                                                                            LLC or                                                             Trust
                                                                            Limited                                                                                              Investors
                                                                                                                                             (not in all)
                                                                           Partnership                                                                        Proceeds

                                                                                                         Loan              Proceeds
                                                        Initial Debt                                   (not in all)        (not in all)
                                                        Obligations                 Proceeds
                                                         (not in all)               (not in all)
                                                                                                                           Bank
                                                                                                                         Tax Haven
                                                                                                                          Branch
                                                                             Bank
                                                                           Tax Haven
                                                                           Subsidiary
                                                                           (not in all)




             Selected issues

             ■ Dresdner Bank (1999)

             ■ Deutsche Bank (1999)

             ■ Hypo-und Vereinsbank AG (1999)

             ■ DePfa Deutsche Pfandbrief Bank (2000)

             ■ Hypo-und Vereinsbank AG (2002)

             ■ EuroHypo AG (2003)

             ■ Deutsche Bank (2003)

             ■ LB Kiel (RESPARC) (2003)

             ■ IKB Deutsche Industrie Bank (2004)

             ■ Postbank (2004)

             Selected 2005 issues

             ■ Deutsche Bank (January 2005)

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                                                            NON-OPERATING SUBSIDIARY PREFERRED
          ■ Postbank (June 2005)

          Primary regulator capital treatment – minority interest Tier 1 capital.

          Other transaction benefits

          ■ The interest on the bank debentures or deposits held by the non-operating subsidiary
            is deductible by the bank for German (in the case of head office debentures) purposes
            or the non-German jurisdiction where the branch is located.

          ■ Enables the bank to issue preferred equivalent in U.S. dollars in the United States or
            off-shore capital markets like Hong Kong.

          Features

          ■ In some cases, the issuer can be a U.S.-domiciled trust that is either a U.S. subsidiary
            of the bank that qualifies as a grantor trust or a hat-check trust that qualifies either as
            a grantor trust or a depositary arrangement for U.S. tax purposes.

          ■ The non-operating subsidiary has been a U.S.-domiciled limited liability company, or
            either a Hong Kong limited partnership or a German limited liability company, both
            of which would be a subsidiary of the bank and either of which would qualify as a
            partnership for U.S. tax purposes.

          ■ Where a hat-check trust is used, investors receive Form 1099 tax reporting forms.

          ■ Generally, in the case of U.S. subsidiary trusts, the common securities are held by the
            bank or a subsidiary or branch of the bank.

          ■ The common securities and class A preferreds of the non-operating subsidiary (the
            class A preferreds rank senior and the common securities rank junior to the class B
            preferreds held by the trust for the benefit of investors) can be held by the U.S. branch
            if the bank has a U.S. branch or, if not, by the bank or a subsidiary or branch of the
            bank. In some cases, such as Dresdner, there are no class A preferreds and the
            common securities have the attributes discussed herein for class A securities. In the
            LB Kiel transaction, the general partner was a Hong Kong joint venture comprising of
            the Bank (51%) and a Hong Kong charitable trust and the limited partner was a
            German limited liability company, which was not affiliated with the bank.

          ■ Where a hat-check trust is used, the issuer, whose only role is pro rata distributions
            from its assets, holds the class B preferred issued by the non-operating subsidiary.

          ■ The non-operating subsidiary’s primary assets are debentures issued by a
            non-German branch of the bank, or in the case of the 2003 LB Kiel deal, the primary
            assets were silent partnerships issued by the German bank, a support undertaking
            issued by a Luxembourg branch of the bank, and debentures issued by a non-German
            branch of the bank to provide funding if there is loss-absorption in the silent


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                                                                 NON-OPERATING SUBSIDIARY PREFERRED
                  partnership interests; the initial principal amount of any of these is at least equal to
                  the liquidation preference of the class B preferred.

          ■ Dividends on the class B preferred are generally mandatorily payable unless:

                  –   the bank does not have available distributable profits for the most recent
                      preceding fiscal year;

                  –   in some transactions, such as DePfa and Deutsche Bank, the bank is otherwise
                      prohibited by order of the bank’s primary regulator under applicable German
                      banking laws from making any distributions of its profits;

                  –   in some transactions, such as DePfa and Deutsche Bank, the intermediate LLC
                      subsidiary does not have operating profits at least equal to the amount of such
                      dividends;

                  –   in some transactions, such as Dresdner, the current notional value of each class B
                      preferred is not equal to the liquidation preference of such preferred; or

                  –   in some transactions, such as Dresdner, a Shift Event, as defined below, has
                      occurred and is continuing,

                  provided that, if the bank or any of its subsidiaries pays dividends on any securities
                  that rank equally with or junior to the preferred, notwithstanding the foregoing, it
                  must pay dividends on the class B preferred.

          ■ Dividends not paid to the trust or other class B preferred holders as a result of the
            above are paid as a dividend to the common holder.

          ■ The class B preferred’s liquidation payment is determined by reference to the
            intermediate LLC subsidiary’s assets, which generally will be depleted because, the
            intermediate LLC subsidiary’s assets – including debentures of a non-German branch
            of the bank – will have been distributed to the class A preferred holder.

          ■ In some transactions, such as Dresdner, upon the occurrence of one of the events
            below, known as “Shift Events”, the intermediate subsidiary waives its right to
            payments under the debentures if:

                  –   the board of managing directors of the bank determines that either the total or Tier
                      1 capital ratio of the bank has fallen below the minimum requirements of the
                      German Banking Act or the bank’s non-compliance with the foregoing capital
                      ratio requirements is immediately imminent;

                  –   the bank is declared insolvent or overindebted and insolvency proceedings are to
                      be commenced; or




                                                        68
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                                                               NON-OPERATING SUBSIDIARY PREFERRED
                  –   the German Banking Supervisory Authority either exercises its extraordinary
                      supervisory powers under the German Banking Act or announces its intention to
                      take such measures.

          ■ The bank or a non-German branch of the bank’s capital contribution to the trust, if
            there is a subsidiary trust, is nominal (e.g., €100) and to the non-operating subsidiary
            varies from nominal to substantial, depending upon the tax analysis.

          ■ In some transactions, such as Deutsche Bank and DePfa, the bank enters a support
            undertaking relating to the class B preferreds that is the functional equivalent of
            preferred issued by the bank itself. Accordingly, the support undertaking covers:

                  –   dividend payments that the intermediate LLC subsidiary is required to pay;

                  –   the redemption price, subject to the foregoing with respect to any dividend
                      component (in DePfa but not in Deutsche Bank); and

                  –   the liquidation amount payable on the class B preferred.

          ■ In DePfa and Deutsche Bank, upon the winding up of the bank, the support
            undertaking ranks junior to all indebtedness of the bank and equal with the most
            senior preference shares of the bank, if any, and senior to all other share capital of the
            bank. In LB Kiel, payments under the support undertaking are subordinated and rank
            pari passu with payments by the Bank under the silent partnership participation
            agreement.

          ■ In some transactions, such as Dresdner, the issuer must be wound up if the bank is
            wound up.

          ■ In some transactions, such as Dresdner, one or more independent directors acting on
            behalf of preferred holders must approve certain actions, including the winding up of
            the intermediate LLC subsidiary that is not concurrent with the winding up of the
            bank.

          ■ Trust preferred and class B preferred holders generally do not have the right to
            proceed directly against the bank under the debentures if the bank defaults on its
            payment obligations under the debentures.

          ■ The issuer and the intermediate subsidiary (if any) may be 1940 Act exempt by virtue
            of Rule 3a-5 (finance subsidiary).




                                                      69
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                                                                                          NON-OPERATING SUBSIDIARY PREFERRED
• German, Luxembourg and Swiss Bank Non-Operating Tax Haven Subsidiary
  Preferred Issued through a Fiduciary Agreement (since 2002)

The following diagram outlines the relationship between the bank, the intermediate subsidiary,
the issuer and the investors prior to transfer:

                                                                                                                        In v e sto r



                                                                         $                          F id u ciary
                          B ank                                                                     P referred s                            P ro ceed s

                                                        C lass A
                                                       P referred s



                                                                                                                          Issu e r




                                        L o an

                                                                                                     C lass B
                                $                                                                   P referred s

                                                                 In te rm ed ia te
         S ilen t C ap ital In terest                             S u b sid ia ry
                                                                                                                   P ro ceed s
   P ro ceed s




The following diagram outlines the relationship between the bank, the intermediate subsidiary
and the issuer after transfer:
                                                                                                             Investor



                                                                                               Fiduciary
                                               B ank                                           P referreds                       Proceeds




                                                                                                              Issuer




                                S ilent C apital Interest



                           Proceeds



                                                                                     70
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                                                                    NON-OPERATING SUBSIDIARY PREFERRED
OR

Alternatively, in the latest Swiss transaction, the following diagram outlines the relationship
between the bank, the intermediate subsidiary, the Fiduciary and the investors:

                                                                 Dividend
                                                                 payments
                                            Bank


                                 Proceeds
                                                                  Participating
                                                                     bonds


                       Proceed          Off-Shore

                                                   Class B       Dividend
                                 Proceeds          Shares        payments



                                       Fiduciary

                                                   Fiduciary
                                 Proceeds          certificate



                                       Investors




          Selected issues

          ■ LB Kiel (SPARC) (Germany) (2002)

          ■ EFG Private Bank (Swiss) (2004)

          Selected 2005 issues

          ■ Helaba (German) (May 2005)

          ■ West LB (German) (May 2005)

          ■ Nord LB (German) (June 2005)

          Primary regulator capital treatment – solo Tier 1 capital.




                                                        71
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                                                           NON-OPERATING SUBSIDIARY PREFERRED
          Other transaction benefits

          ■ Interest payments paid on the loan (prior to transfer) is deductible by the bank for
            German or Swiss tax purposes.

          ■ No withholding tax on dividend payments prior to transfer.

          ■ Enables the bank to issue preferred equivalent in U.S. dollars and euros.

          Features

          ■ The issuer is a fiduciary institution incorporated in Luxembourg that is unaffiliated
            with the bank raising Tier 1 capital, and it issues securities to investors in an
            investment structure under which the issuer purchases and holds class B preferred
            shares of a subsidiary of the bank and, in the case of the EFB Private Bank deal,
            directly of the bank, each on a fiduciary basis, as the case may be.

          ■ The subsidiary of the bank is an exempted company with limited liability registered
            and incorporated in an off-shore jurisdiction, such as the Cayman Islands or
            Guernsey.

          ■ The ordinary shares and class A preferreds of the intermediate subsidiary (the class A
            preferreds rank senior, and the ordinary shares rank junior, to the class B preferreds
            held by the bank subsidiary) are held by the bank.

          ■ In the German context, the issuer’s primary assets are either (prior to transfer of the
            silent partnership interest to the fiduciary in exchange for the class B preferred) the
            class B preferreds issued by the bank subsidiary or (after transfer of the silent
            partnership interest to the fiduciary in exchange for the class B preferred) a silent
            capital interest in the bank, in the form of a Stille Gesellschaft. The issuer makes pro
            rata distributions out of the dividends on the class B preferreds or the profit
            participation relating to the silent capital interest, as the case may be.

          ■ In the Swiss context, the issuer’s primary asset is the class B preferreds from both the
            intermediate subsidiary and the bank and the issuer makes pro rata distributions out of
            the dividend on both class B preferreds.

          ■ Dividend payments on the fiduciary securities will only be paid to the extent of
            available profits of the bank, which limit the dividend amounts payable on the assets
            held by the issuer.

          ■ The fiduciary securities represent the assets held by the issuer, which are either (prior
            to transfer) a pro rata interest in the class B preferreds or (after transfer) a pro rata
            interest in the silent capital interest.

          ■ The bank subsidiary’s primary assets are (1) a loan to the bank, which has the same
            interest payments as the class B preferreds and is funded with the proceeds of the


                                                  72
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                                                               NON-OPERATING SUBSIDIARY PREFERRED
                  class A preferreds purchased by the bank, and (2), in the German context, a silent
                  capital interest in the bank.

          ■ The bank enters an undertaking agreement relating to the class B preferreds that is a
            the functional equivalent of preferred issued by the bank itself. Accordingly,
            pursuant to the agreement, the bank undertakes to:

                  –   ensure that the bank subsidiary is in a position to pay the dividends on the class B
                      preferreds;

                  –   ensure that the bank subsidiary is in a position to pay an extraordinary dividend to
                      the issuer in the event that the bank redeems the silent capital interest prior to a
                      certain date; and

                  –   if a transfer occurs and the bank redeems the silent capital interest prior to a
                      certain date, pay investors an amount equal to what the extraordinary dividend
                      would have been if no such transfer had occurred.

          ■ The profit participation relating to the silent capital interests accrues unless:

                  – the bank’s annual unconsolidated balance sheet does not have, or the payment of
                    the profit participation would cause the bank to not have, a balance sheet profit
                    for the fiscal year to which the relevant profit participation relates;

                  –   there has occurred a “reduction” that has not yet been fully restored;

                  –   there is a regulatory intervention; or

                  –   payment thereof would lead to or increase an annual loss if the bank’s solvency
                      ratio is less than 9% on a solo or on a consolidated basis.

          ■ The holders of fiduciary securities generally do not have the right to proceed directly
            against (prior to transfer) the bank subsidiary if it defaults on its payment obligations
            under the class B preferreds, or (after transfer) the bank if it defaults on its payment
            obligations under the silent capital interest. However, if the fiduciary becomes
            obligated to take legal action against the bank subsidiary (prior to transfer) or the
            bank (after transfer) and fails to do so within a reasonable time, the holders may be
            entitled to institute a legal action against the bank subsidiary or the bank, as the case
            may be, in the fiduciary’s stead.

          ■ The issuer will redeem the fiduciary securities when (prior to transfer) the class B
            preferreds are redeemed or (after transfer) the silent capital interest is redeemed. The
            bank subsidiary will, unless the silent capital interest has already been redeemed,
            redeem the class B preferreds by way of a transfer of the silent capital interest to the
            issuer. The bank may redeem the silent capital interest after 10 years, but only after it
            gives at least 2 years’ prior notice and only if the solvency ratio sustainably exceeds
            9%.


                                                        73
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                                                                NON-OPERATING SUBSIDIARY PREFERRED
          ■ Silent partnerships (“Stille Beteiligungen”) are a specific form of capital contribution
            existing under German and Luxembourg law, similar to the concept of preference
            shares. The basic features of a silent partnership include:

                  –   Dated and perpetual, and subordinated;

                  –   Senior to common equity in any winding-up proceedings;

                  –   Silent partnership interests are normally tax deductible; and

                  –   Silent partnership interests are also subject to interest cancellation depending on
                      the performance of the issuer.

          ■ Section 10 of the German Banking Act permits the inclusion of silent partnership
            contributions in Tier 1 capital provided that the interest deferral is non-cumulative
            and the instrument can absorb losses (i.e., principal write-down). Indeed, loss
            absorption ranking pari passu with ordinary share capital of an issuer is a dispositive
            feature of any silent partnership Tier 1 issue. In contrast, equity is written down
            before Tier 1 preferred in the United Kingdom, Netherlands, Italy and Spain.

          ■ Despite heightened activity in the Tier 1 markets caused by the BIS clarification in
            October 1998, German Tier 1 requirements have mainly remained unchanged for
            some time. Even following the BIS clarification, the German regulators still allowed
            Tier 1 preferred to have a maturity date. German regulators were able to develop a
            compromise with BIS so that instead of Tier 1 products being referred to as
            “perpetual”, they will be referred to as “permanent”, which under German law
            interpretive releases by the German banking regulators effectively means having a
            maturity of five years or more.

          ■ Prior to the LB Kiel transaction, German withholding tax issues made a direct issue
            of non-innovative Tier 1 instruments impossible outside of the German domestic
            market. This was because German Landesbanks cannot not issue shares because they
            were public institutions. So the only means to raise Tier 1 capital was through silent
            partnerships/participations. Such instruments are subject to German withholding tax,
            which is unattractive for international investors. However, the need for German
            Landesbanks to raise capital internationally had become more acute now that the
            German government had decided to abolish state aid to state-owned banks (i.e.,
            Landesbanks). With the abolishment of those guarantees, raising finance in capital
            markets became more expensive. Hence, German Landesbanks needed to develop a
            way to issue inexpensive Tier 1 securities without international investors being
            subject to German withholding tax.

          ■ The LB Kiel issue was the first transaction that allowed a German state-owned
            Landesbank to raise Tier 1 capital in the international capital markets for the first
            time. It was also the first presumed non-innovative deal sold to individual investors.
            The issuer was able to get around the withholding tax issue by postponing the
            withholding tax for up to 12 years (10 years plus 2 years’ notice as mentioned above)

                                                       74
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                                                                   NON-OPERATING SUBSIDIARY PREFERRED
                  so that after the call date, there is an incentive for the issuer to either call the
                  securities or refinance.

          ■ The EFG Private Bank issue is principally the same as the LB Kiel issue with the
            following notable exceptions:

                  –   no withholding tax gross-up by the issuer;

                  –   the issuer’s sole assets are participating bonds directly issued by the bank (and
                      which qualify for Core Tier 1 treatment) and class B preferred issued by a
                      wholly-owned off-shore subsidiary of the bank. This subsidiary’s sole asset is a
                      subordinated note issued by the bank (on which the bank is able to receive its tax
                      deductions);

                  –   the participating bonds have loss-absorption (to qualify for Core Tier 1); and

                  –   the bank can convert the participating bonds into other forms of Tier 1-qualifying
                      securities or common shares.




                                                         75
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                                                                                     NON-OPERATING SUBSIDIARY PREFERRED
• Italian Bank Non-Operating U.S. Trust/LLC Subsidiary Non-Cumulative Preferred
  (since 1998)



                                                                     Bank



 Contingent Support Agreement
 (not in all)




                                              Bank Branch


                  Subordinated   Proceeds
                                               Derivative Contract



                      Note                                                        LLC Common
                                                                       Proceeds
                   or Deposit                                                     and, in some cases,
     Trust
 Common                                                                           LLC Class A                       Subordinated
                                   Premium
 Securities                                                                       Preferred Securities              Guarantee
                                                                                                         Proceeds   (not in Lodi and
                                                                                           Proceeds                 soft guarantee
                                                                                                                    in BCI)

                                                                     LLC                         Other
                                                                                                Eligible
                                                                                                Assets

                                                                                  LLC Class B Preferred
                                                                                  Securities
                                   Proceeds




                                                          Trust


                                                                                   Trust
                                 Proceeds                                          Preferred
                                                                                   Securities

                                               Investors


          Selected issues

          ■ Banca Commerciale Italiana (1998)

          ■ Intesa (1998)

          ■ Banca Lombarda (2000)


                                                                          76
NY1 5828148V.13
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                                                             NON-OPERATING SUBSIDIARY PREFERRED
          ■ Banca Popolare di Lodi (2000)

          ■ UniCredito (2000)

          ■ Sanpaolo IMI (2000)

          ■ Banca Popolare Commercia e Industria (2001)

          ■ Intesa BCI (2001)

          ■ Banca Popolare di Bergamo (2001)

          ■ Banca Popolare di Milano (2001)

          ■ Banca Monte dei Paschi di Siena (2001)

          ■ Banca Monte dei Paschi di Siena (2003)

          Selected 2005 issues

          ■ Banca Popolare di Lodi (June 2005)

          ■ Unicredito (October 2005)

          Primary regulator capital treatment – minority interest Tier 1 capital.

          Other transaction benefits

          ■ The interest on the bank debentures or deposits held by the LLC is deductible by the
            bank for Italian (in the case of head office debentures or deposits) tax purposes or, in
            the case of a branch, where the branch is located.

          ■ Enables the bank to issue preferred equivalent in U.S. dollars.

          ■ Rating agency equity credit (60% by S&P; possibly 50-75% by Moody’s and 80-
            100% by Fitch, depending on the structure).

          Features

          ■ The issuer is a U.S.-domiciled trust that is either a U.S. subsidiary of the bank that
            qualifies as a grantor trust or a hat-check trust that qualifies either as a grantor trust or
            a depositary arrangement for U.S. tax purposes.

          ■ The intermediate subsidiary is a U.S.-domiciled limited liability company that is a
            subsidiary of the bank and qualifies as a partnership for U.S. tax purposes.

          ■ Investors receive Form 1099 tax reporting forms.



                                                    77
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                                                                NON-OPERATING SUBSIDIARY PREFERRED
          ■ Generally, in the case of U.S. subsidiary trusts, the common securities are held by:

                  –   the U.S. branch or subsidiary of the bank if the bank has a U.S. branch or
                      subsidiary; or

                  –   if the bank does not have a U.S. branch or subsidiary, the intermediate LLC
                      subsidiary.

          ■ The common securities and class A preferreds of the intermediate LLC subsidiary
            (which rank senior to the class B preferred held by the trust for the benefit of
            investors) are held by the U.S. branch if the bank has a U.S. branch or, if not, by the
            bank or a subsidiary of the bank. In some cases, such as Banca Commerciale Italiana,
            Intesa and Lodi, there are no class A securities and the common securities have the
            attributes discussed herein for the class A securities.

          ■ 10-year fixed then floating dividend rate.

          ■ The issuer, whose only role is pro rata distributions from its assets, holds the class B
            preferred issued by the intermediate LLC subsidiary and the bank’s guarantee thereof.

          ■ The intermediate LLC subsidiary’s primary assets are debentures or deposits issued
            by the head office or a non-Italian branch, as the case may be, of the bank, the
            principal of amount of which is, in each case, at least equal the liquidation preference
            of the class B preferred. Depending on the U.S. or Italian tax position, the
            intermediate LLC subsidiary may have additional assets that are eligible assets for
            purposes of Rule 3a-5 under the 1940 Act.

          ■ Dividends on the class B preferred are mandatorily payable unless:

                  –   according to the most recently prepared and approved set of unconsolidated
                      annual accounts for the bank, the bank does not have net profits available for
                      paying a dividend on any class of its share capital and/or the bank has not
                      declared or paid dividends on any of its securities for the then current financial
                      year;

                  –   the bank is otherwise prohibited under applicable Italian banking laws from
                      declaring a dividend on any of its share capital; or

                  –   a Shift Event, as defined below, has occurred and is continuing,

                  provided that, if the bank pays dividends on any of securities that rank equally with or
                  junior to the preferred, notwithstanding the foregoing, it must pay dividends on the
                  class B preferred for one year.

          ■ Dividends not paid to the trust or other class B preferred holders as a result of the
            above are paid as a dividend to the common holder.



                                                       78
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                                                                 NON-OPERATING SUBSIDIARY PREFERRED
          ■ The class B preferred’s liquidation payment is determined by reference to the
            intermediate LLC subsidiary’s assets, which, following a Shift Event, other than, in
            some cases, the contingent support agreement, will be depleted because the
            intermediate LLC subsidiary’s assets – including the bank’s debentures or the
            intermediate LLC subsidiary’s deposits with the bank – will have been distributed to
            the class A preferred holder.

          ■ Following a Shift Event, class B preferred holders would rely on either the hard
            guarantee or contingent support agreement for payment.

          ■ Upon the occurrence of one of the events below, known as “Shift Events”, the class A
            securities are redeemed for the bank debentures held by the intermediate LLC
            subsidiary or the intermediate LLC subsidiary’s deposits in the bank, as the case may
            be:

                  –   as a result of losses incurred by the bank, the total risk-based capital ratio of the
                      bank as reported by the bank or determined by the Bank of Italy falls below the
                      minimum requirements of the Bank of Italy;

                  –   proceedings are commenced for the winding up of the bank; or

                  –   the Bank of Italy determines that one of the events mentioned above will occur in
                      the near term.

          ■ The bank’s capital contribution to the trust, if it is a subsidiary trust, is nominal (e.g.,
            $1,000), and to the intermediate LLC subsidiary varies from nominal to substantial,
            depending upon the tax analysis.

          ■ The intermediate LLC subsidiary’s primary assets are subordinated debentures issued
            by or a deposit with the bank, which has the same interest payment and redemption
            features as the class B preferred and the trust preferred. In the 1998 Intesa offering,
            the deposits in the bank held by the intermediate LLC subsidiary were credit-linked
            like the Japanese non-operating subsidiary deals.

          ■ The 1998 transactions and Lodi use a soft or no guarantee approach and a support
            agreement that provides the intermediate LLC subsidiary’s cash flow after a Shift
            Event to pay dividends and redemption and liquidation payments. The other
            transactions use a hard guarantee (San Paolo uses a hard guarantee and a support
            agreement).

          ■ Each of the hard guarantees and the support agreements attempt to put holders of the
            intermediate LLC subsidiary preferred holders in the position they would be in if they
            were preferred holders of the bank.




                                                        79
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                                                               NON-OPERATING SUBSIDIARY PREFERRED
          ■ In the hard guarantee, the bank guarantees the class B preferred and, generally if the
            issuer is a subsidiary trust, the trust preferred in a manner that makes the guarantee
            the functional equivalent of preferred issued by the bank itself. Accordingly,
            guarantee payments include:

                  –   dividend payments that the issuer or the intermediate LLC subsidiary, as the case
                      may be, is required to pay;

                  –   the redemption price, subject to the foregoing with respect to any dividend
                      component; and

                  –   the liquidation amount payable on the class B preferred and, if applicable, the
                      trust preferred.

          ■ In the soft guarantee, the bank guarantees payments on the class B preferred to the
            extent of available funds at the issuer or the intermediate LLC subsidiary, as the case
            may be.

          ■ Upon the winding up of the bank, the guarantee ranks junior to all indebtedness of the
            bank and either senior to all share capital of the bank or equal with the most senior
            preferred of the bank, if any, or senior to all other share capital of the bank.

          ■ The intermediate LLC subsidiary must be wound up if the bank is wound up.

          ■ One or more independent directors acting on behalf of preferred holders must approve
            certain actions, including the winding up of the intermediate LLC subsidiary that is
            not concurrent with the winding up of the bank.

          ■ Trust preferred and class B preferred holders generally have the right to proceed
            directly against the bank under the guarantees and the debentures or deposits if the
            bank defaults on its payment obligations under the debentures.

          ■ The issuer and the intermediate LLC subsidiary are 1940 Act exempt by virtue of
            Rule 3a-5 (finance subsidiary).




                                                       80
NY1 5828148V.13
CHAPTER 6                                                                                                TAX-DEDUCTIBLE
                                                                                      NON-OPERATING SUBSIDIARY PREFERRED
• Japanese Bank Non-Operating U.S. LLC/Cayman Subsidiary Non-Cumulative
  Preferred (since 1998)

                                             Common Stock

                  U.S. Subsidiary                                                                 Bank
                                              Proceeds from
                                              Common Stock




                                                                               Link redit-
                                                                                        ote
                                                        Proceeds from                                                             Support




                                                                                    ed N
                                Common                   Common and                                                             Agreement




                                                                                    lC
                                                   Preferred Securities




                                                                                etua
         Proceeds from          Securities




                                                                            Perp
              Common                                                                                          Interest Payments on
             Securities                                                                                       Perpetual Credit-
                                                                                                              Linked Note


                                                         Delaware LLC




                                 Proceeds from           Preferred             Distributions on
                            Preferred Securities         Securities            Preferred
                                                                               Securities




                                                           Investors




                                                                       OR

                    Bank Holding Company                                    Bank


                                                      Proceeds         100% ownership of              Subordinated Loan
                                                                       ordinary shares

                                                                       Intermediate
                                                                 Cayman/Japanese/U.S. SPV
                                        100%
                                        ownership
             Subordinated               of ordinary          Proceeds
             Guarantee                  shares                                                Preferred Shares

                                                                       Cayman Islands
                                                                  limited liability company


                                                             Proceeds                         Preferred Securities



                                                                            Investors



                                                                       81
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                                                               NON-OPERATING SUBSIDIARY PREFERRED
          Selected early issues

          ■ Industrial Bank of Japan (1998)

          ■ Fuji Bank (1998)

          Selected 2005 and 2006 issues

          ■ Resona Holdings Inc. (July 2005)

          ■ Shinsei Bank Ltd (February 2006)

          ■ Mitsubishi UFJ Financial Group (March 2006)

          ■ Mizuho Financial Group (March 2006)

          Primary regulator capital treatment – minority interest Tier 1 capital.

          Other transaction benefits

          ■ The interest on the bank instrument or loan held by the LLC or other intermediate
            SPV is deductible by the bank for Japanese tax purposes.

          ■ Enables the bank to issue preferred equivalent.

          Early transaction features

          ■ The issuer is a U.S.-domiciled limited liability company that is a subsidiary of the
            bank and qualifies as a partnership for U.S. tax purposes.

          ■ Investors receive Form K-1 tax reporting forms.

          ■ The issuer’s common securities are held by the bank through a U.S.-domiciled
            subsidiary.

          ■ 10-year fixed then floating dividend rate.

          ■ Dividends on the preferred are mandatorily payable unless:

                  –   the bank’s total or Tier 1 risk-based capital ratio declines below minimum
                      percentages required by Japanese banking regulations;

                  –   a liquidation proceeding is brought against the bank; or

                  –   the bank has suspended dividend payments on outstanding bank preferred Tier 1
                      securities,

                  provided that, if the bank pays dividends on any of its capital stock, notwithstanding
                  the foregoing, it must pay dividends on the preferred for two consecutive dividend

                                                      82
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                                                                NON-OPERATING SUBSIDIARY PREFERRED
                  periods thereafter, but only to the extent that interest payments are due on the
                  credit-linked note held by the issuer.

          ■ Dividends not paid to preferred holders as a result of the above are paid to the
            common holder.

          ■ The preferred’s liquidation payment is determined by reference to the issuer’s assets –
            i.e., the credit-linked note.

          ■ The bank’s capital contribution to the issuer is more than 10% of the issuer’s assets.

          ■ The issuer’s primary asset is a credit-linked note, which it purchases from the bank
            with the proceeds from the sale of its preferred to investors and its common to a
            subsidiary of the bank.

          ■ If the Japanese government (until year 10) or the U.S. treasury (after year 10) defaults
            on its payment obligations under the applicable reference security, no interest is
            payable on the credit-linked note unless and until such default is cured.

          ■ The bank does not issue a guarantee of the preferred. The guarantee is not required
            for Rule 3a-5 purposes because the transaction was not SEC-registered. Also, until
            1998, Japanese banks generally did not guarantee securities issued by offshore
            subsidiaries because to do so required the banks, under Japan’s foreign exchange
            laws, to obtain the approval of the Ministry of Finance. That requirement was
            rescinded effective April 1, 1998.

          ■ Under a support agreement, the bank agrees to provide funds to the issuer for the
            payment of dividends if the bank pays dividends to the holders of its capital stock, but
            only to the extent of the bank’s obligation to pay interest under the credit-linked note.

          ■ Upon liquidation of the bank, the credit-linked note will entitle the issuer to such
            amount of the assets of the bank as if the credit-linked note were the bank’s most
            senior preferred.

          ■ One or more independent directors acting on behalf of preferred holders must approve
            certain actions and can enforce the support agreement and the credit-linked note on
            behalf of the issuer upon the winding up of the bank. The independent directors must
            approve the winding up of the issuer other than a winding up in conjunction with the
            winding up of the bank.

          Recent transaction features

          ■ The issuer of the subsidiary preference securities is a company incorporated with
            limited liability in the Cayman Islands and is a wholly-owned subsidiary of the bank
            holding company. The intermediate subsidiary is a special purpose vehicle that is
            wholly-owned by the bank.



                                                       83
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                                                               NON-OPERATING SUBSIDIARY PREFERRED
          ■ The issuer uses the proceeds from the sale of its preferred securities to purchase
            preferred shares of the intermediate subsidiary. The intermediate subsidiary loans the
            proceeds from the sale of its preferred shares on a subordinated basis to the bank.

          ■ The preferred securities pay a fixed dividend rate for ten years and then convert to a
            floating dividend rate (e.g., three- or six-month LIBOR or EURIBOR) with a step-up
            thereafter.

          ■ Non-cumulative dividends on the preferred securities will be deemed due and payable
            on each dividend payment date unless a mandatory suspension event or an optional
            suspension event has occurred.

                  –   Mandatory Suspension Events: If (i) the bank holding company winds up or is
                      liquidated (or a similar event occurs) or if its capital ratios fall below the
                      regulatory minimum levels, then the bank holding company will deliver a notice
                      to the issuer and the intermediate subsidiary and such vehicles will pay no
                      dividends with respect to the preferred securities on that dividend payment date,
                      and (ii) if a distributable profits limitation or dividend limitation (i.e., if
                      distributable profits are less than the applicable dividend or if the bank holding
                      company makes a final and conclusive declaration to pay less than full dividends
                      on its preferred shares) is in effect, then the bank holding company will deliver a
                      suspension notice to the issuer and the intermediate subsidiary such vehicle will
                      pay no dividends or reduced dividends with respect to the preferred securities on
                      that dividend payment date.

                  –   Optional Suspension Events: If the bank holding company (i) has no outstanding
                      preferred shares and (ii) has not paid and has declared that it will not pay
                      dividends on any of its common stock for the most recently ended fiscal year,
                      then the bank holding company may, at its sole discretion, deliver a suspension
                      notice to each of the issuer and the intermediate subsidiary that such vehicle pay
                      no dividends or reduced dividends with respect to the preferred securities on the
                      relevant dividend payment date.

          ■ If the issuer receives payments on the preferred shares after the occurrence of a
            mandatory suspension event or an optional suspension event, then such payments will
            be paid to the holder of its ordinary shares (i.e., the bank holding company) and not
            the holders of its preferred securities.

          ■ If the bank holding company makes a final and conclusive declaration to pay less than
            the full amount of dividends on its preferred shares with respect to any fiscal year,
            then the amount of dividends the issuer and the intermediate subsidiary pay on its
            preferred securities on the dividend payment date in July of the calendar year in
            which that fiscal year ends and the next succeeding January will (to the extent not
            limited or prohibited by the distributable profits limitation and subject to the effect of
            any mandatory suspension event, if, and to the extent, applicable) be equal to an
            amount that represents the same proportion of full dividends on the preferred
            securities as the amount of dividends so declared on the bank holding company

                                                       84
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                                                               NON-OPERATING SUBSIDIARY PREFERRED
                  preferred shares with respect to that immediately preceding fiscal year bore to full
                  dividends on the bank holding company preferred shares. For this purpose, full
                  dividends will be treated as having been paid for a particular fiscal year even if no
                  interim dividend is paid on the bank holding company preferred shares if a full
                  dividend is paid after the end of the particular fiscal year. If the bank holding
                  company makes a final and conclusive declaration not to pay dividends on its
                  preferred shares with respect to a fiscal year, no dividends will be paid on the
                  preferred securities on the dividend payment dates that occur in July of the calendar
                  year in which that fiscal year ends and the next succeeding January.

          ■ The bank holding company guarantees, on a subordinated basis, all dividends and
            amounts payable on redemption and liquidation of the issuer (unless a mandatory
            suspension event has occurred or a suspension notice has been properly delivered
            with respect to an optional suspension event).

          ■ The preferred securities are not redeemable at the option of the holders. The
            preferred securities may be redeemed at the option of the issuer and with the consent
            of the Financial Services Agency of Japan either after a fixed period of time or if
            certain events occur (such as a change of law that requires the issuer, the intermediate
            subsidiary or the bank to pay additional amounts or that affects the capital treatment
            of the preferred securities under Japanese banking regulations). The preferred
            securities may be repurchased from holders by the issuer at the direction of the bank.

          ■ Upon a winding up of the bank, the subordinated guarantee (and therefore the
            preferred securities) effectively ranks equally in a liquidation with the most senior
            ranking preference shares of the bank holding company (and senior to the
            subordinated loan).

          ■ The issuer and the intermediate subsidiary are 1940 Act exempt pursuant to Rule 3a-5
            (finance subsidiary).




                                                      85
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                                                                NON-OPERATING SUBSIDIARY PREFERRED
• Korean Bank Non-Operating Subsidiary Guaranteed Cumulative Preferred (since
  2002)


                                                  Investor




                                Preferred                      Proceeds




                  Guarantee

                                            Wholly owned subsidiary
                                             of Bank (the Issuer)




                              Subordinated                    Proceeds
                                 Notes



                                                      Bank


          Only issue

          ■ Hana Bank (2002)

          Primary regulator capital treatment – bank level Tier 1.

          Product name

          ■ Tier One Preferred Securities or “TOPS”

          Designed primarily for an Asian offering.

          Preferred securities are issued from a wholly-owned subsidiary of the bank and are
          non-cumulative, perpetual preferred securities.

          The issuer’s activities are limited to (i) issuing the preferred, (ii) acquiring subordinated
          notes issued by the bank with the proceeds from the TOPS, and (iii) other activities
          reasonably incidental thereto.

          Fixed dividend rates converting to floating dividend rates in 10 years.

          Dividend payment obligations are deferred if payment would cause the bank to be
          insolvent or if the bank is a “distressed financial institution”.
                                                       86
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                                                          NON-OPERATING SUBSIDIARY PREFERRED
          On certain dates, the preferred may be redeemed for cash at the option of the issuer.

          The bank guarantees that if the issuer fails to make payment in full of any payments due
          in respect to the preferred, the bank will make the payment.

          The subordinated notes issued by the bank to the issuer will mature in 100 years but
          maturity will automatically extend for another 99 years so long as the preferred has been
          redeemed.

          Investors under the bank guarantee and the subordinated notes rank junior to all other
          debt holders and senior to ordinary share holders upon liquidation.




                                                  87
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                                                                     NON-OPERATING SUBSIDIARY PREFERRED
• Malaysian Bank Non-Operating Subsidiary Guaranteed Non-Cumulative Preferred
  (since 2005)
                                       Before Substitution Event



                                                        Bank



                                                                                                 Subordinated
                                        Proceeds                Subordinated                     Guarantee
                                                                Loan


                                                                      Subsidiary
                  100% ownership                                   Preference Shares
                  of ordinary shares
                                                                                         Investors
                                                                                       Investors
                                                    Labuan
                                                    limited              Proceeds
                                                    liability
                                                   company




                                        After Substitution Event

                                                      Bank


                                                                Substitute
                                                                Preference
                                                                Shares




                                                     Investors




          Selected 2005 and 2006 issues

          ■ Southern Bank Berhad (October 2005)

          ■ AmBank (M) Berhad (January 2006)

          Primary regulator capital treatment – bank Tier 1 capital.

          Other transaction benefits

                                                          88
NY1 5828148V.13
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                                                          NON-OPERATING SUBSIDIARY PREFERRED
          ■ The interest paid by the bank to the issuer on its subordinated loan is deductible for
            Malaysian tax purposes.

          Features

          ■ The issuer of the subsidiary preference shares is a company incorporated with limited
            liability in Labuan and is a wholly-owned subsidiary of the bank.

          ■ The issuer loans the proceeds from the sale of its subsidiary preference shares on a
            subordinated basis to the bank.

          ■ The subsidiary preference shares pay a fixed dividend rate for ten years and then
            convert to a floating dividend rate (three-month LIBOR) with a step-up thereafter.

          ■ Non-cumulative dividends on the subsidiary preference shares are payable on each
            dividend payment date if then declared due and payable by the board of directors of
            the issuer, unless the bank is restricted from making payments on its parity
            obligations (or under the subordinated guarantee) under Malaysian banking
            regulations (e.g., if such payments would breach the capital adequacy requirements
            applicable under Malaysian banking regulations or if the bank’s distributable profits
            and distributable reserves would not be sufficient to enable the bank to make such
            payments in full).

          ■ If the bank makes a payment on its ordinary shares or parity obligations, then the
            issuer is required, subject to applicable law, to pay an amount equal to the unpaid
            amount (if any) of dividends in respect of dividend periods (or part thereof) falling in
            the 12 months immediately preceding the date of such payment (or, in the case of
            AmBank, the next two or, after the first call date, four scheduled dividend payments).
            If the bank and the issuer are restricted by Malaysian banking regulations from
            making payments in respect of the subsidiary preference shares or the subordinated
            guarantee, then the bank cannot make payments on, or effect the redemption of, any
            of its ordinary shares or parity obligations.

          ■ If the issuer pays only a partial dividend or part of the liquidation payment (or the
            bank only makes a partial payment of such amounts under the subordinated
            guarantee) as a result of Malaysian banking regulations, but the bank has distributable
            reserves as of the relevant dividend determination date, then holders are entitled to
            receive the relevant proportion (i.e., the amount of distributable reserves divided by
            the sum of the full scheduled dividend to be paid and the full amount of distributions
            scheduled to be paid on parity obligations during the then-current fiscal year) of a
            guaranteed payment.

          ■ The bank guarantees, on a subordinated basis and subject to the same limitations on
            payment as the issuer, all dividends and amounts payable on redemption and
            liquidation of the issuer. An investment in the subsidiary preference shares is
            intended to provide holders with rights to dividends and liquidation preference as
            similar as possible to those to which they would have been entitled if they had
            purchased non-cumulative, non-voting perpetual preference shares issued directly by
                                                  89
NY1 5828148V.13
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                                                                NON-OPERATING SUBSIDIARY PREFERRED
                  the bank with economic terms equivalent to the subsidiary preference shares and the
                  subordinated guarantee, taken together.

          ■ The subsidiary preference shares are not redeemable at the option of the holders. The
            subsidiary preference shares may be redeemed at the option of the issuer and with the
            consent of Bank Negara Malaysia (“BNM”) either after a fixed period of time or if
            certain events occur (such as a change of law that impedes the ability of the bank to
            obtain deductibility of interest payments on the subordinated loan or that affects the
            capital treatment of the subsidiary preference shares under Malaysian banking
            regulations). A cash redemption by the issuer must be funded with the proceeds from
            an issue of its ordinary shares (or the subsidiary preference shares must be purchased
            from holders by the bank).

          ■ There is a mandatory substitution of bank preference shares (the “substitute
            preference shares”) for the subsidiary preference shares upon the first occurrence of
            any of the following “substitution events”:

                  –   the bank’s Tier 1 capital ratio falls below the then applicable minimum ratio;

                  –   the board of director’s of the bank has notified BNM that the bank’s Tier 1 capital
                      ratio is expected to fall below the then applicable minimum ratio in the near term;

                  –   proceedings have been commenced for a winding up of the bank;

                  –   BNM has assumed control of the bank under applicable Malaysian banking
                      regulations; or

                  –   in the case of Southern, the subsidiary preference shares have not been redeemed
                      in full on or prior to the maturity date of the subordinated loan or, in the case of
                      AmBank, an administrator of the bank has been appointed.

          ■ In addition, in lieu of redeeming the subsidiary preference shares for cash following a
            tax or regulatory event, at the option of the issuer, substitute preference shares may be
            substituted for the subsidiary preference shares as if the tax or regulatory event
            constituted a substitution event.

          ■ Following a breach by the bank of its payment obligations under the subordinated
            guarantee, a holder of subsidiary preference shares can bring a direct action against
            the bank to enforce the bank’s payment obligations under the subordinated guarantee.

          ■ Upon a winding up of the bank, the subordinated guarantee and the subordinated loan
            rank as subordinated indebtedness of the bank (and pari passu with the parity
            obligations).

          ■ The issuer is 1940 Act exempt pursuant to Rule 3a-5 (finance subsidiary).




                                                       90
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                                                                        NON-OPERATING SUBSIDIARY PREFERRED



• Singapore Bank Non-Operating Subsidiary Guaranteed Non-Cumulative Preferred
  (since 2001)

                                            Before Substitution Event

                                                          Bank




        100% ownership                                   Subordinated
        of ordinary shares       Proceeds                Note                        Subordinated   Provisionally
                                                                                     Guarantee      Allotted
                                                                                                    Substitute
                                                                                                    Preference
                                                                                                    Shares
                                                                  Subsidiary
                                                                  Preference
                                                                    Shares
                                            Cayman
                                             Islands                            Investors
                                             limited
                                             liability               Proceeds
                                            company




                                               After Substitution Event

                                                             Bank


                                                                   Substitute
                                                                   Preference
                                                                   Shares




                                                            Investors




          Selected early issues

          ■ The Development Bank of Singapore Ltd (2001; 2004 subordinated notes issuance)

          Selected 2005 issues

          ■ Oversea-Chinese Banking Corporation (January 2005)
                                                             91
NY1 5828148V.13
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                                                            NON-OPERATING SUBSIDIARY PREFERRED
          ■ United Overseas Bank Limited (December 2005)

          Primary regulator capital treatment – bank Tier 1 capital.

          Other transaction benefits

          ■ The interest paid by the bank to the issuer on its subordinated note is deductible for
            Singapore tax purposes.

          Features

          ■ The issuer of the subsidiary preference shares is a company incorporated with limited
            liability in the Cayman Islands and is a wholly-owned subsidiary of the bank.

          ■ The issuer loans the proceeds from the sale of its subsidiary preference shares on a
            subordinated basis to the bank.

          ■ The subsidiary preference shares pay a fixed dividend rate for ten years and then
            convert to a floating dividend rate (three-month LIBOR) with a step-up thereafter.

          ■ Non-cumulative dividends on the subsidiary preference shares are payable on each
            dividend payment date if then declared due and payable by the board of directors of
            the issuer, unless the bank is restricted from making payments on its parity
            obligations (or under the subordinated guarantee) under Singapore banking
            regulations (e.g., if such payments would breach the capital adequacy requirements
            applicable under Singapore banking regulations or if the bank’s distributable profits
            and distributable reserves would not be sufficient to enable the bank to make such
            payments in full).

          ■ The bank, as guarantor under the subordinated guarantee, can give notice to the issuer
            stating that the issuer shall pay no, or less than full, dividends in respect of a dividend
            payment date, in which case no, or less than full, dividends shall become due and
            payable (in the DBS transaction, notice can only be delivered if the bank does not
            intend to pay its next ordinary dividend).

          ■ If the issuer pays only a partial dividend or part of the liquidation payment (or the
            bank only makes a partial payment of such amounts under the subordinated
            guarantee) Singapore banking regulations, but the bank has distributable reserves as
            of the relevant dividend determination date, then holders are entitled to receive the
            relevant proportion (i.e., the amount of distributable reserves divided by the sum of
            the full scheduled dividend to be paid and the full amount of distributions scheduled
            to be paid on parity obligations during the then-current fiscal year) of a guaranteed
            payment.

          ■ The bank guarantees, on a subordinated basis and subject to the same limitations on
            payment as the issuer, all dividends and amounts payable on redemption and
            liquidation of the issuer. An investment in the subsidiary preference shares is
            intended to provide holders with rights to dividends and liquidation preference as

                                                   92
NY1 5828148V.13
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                                                                NON-OPERATING SUBSIDIARY PREFERRED
                  similar as possible to those to which they would have been entitled if they had
                  purchased non-cumulative, non-voting perpetual preference shares issued directly by
                  the bank with economic terms equivalent to the subsidiary preference shares and the
                  subordinated guarantee, taken together.

          ■ The subsidiary preference shares are not redeemable at the option of the holders. The
            subsidiary preference shares may be redeemed at the option of the issuer and with the
            consent of the Monetary Authority of Singapore (the “MAS”) either after a fixed
            period of time or if certain events occur (such as a change of law that impedes the
            ability of the bank to obtain deductibility of interest payments on the subordinated
            note or that affects the capital treatment of the subsidiary preference shares under
            Singapore banking regulations). The subsidiary preference shares may be
            repurchased from holders by the issuer at the direction of the bank.

          ■ There is a mandatory substitution of bank preference shares (the “substitute
            preference shares”) for the subsidiary preference shares upon the first occurrence of
            any of the following “substitution events”:

                  –   the bank’s Tier 1 capital ratio falls below the then applicable minimum ratio;

                  –   the board of director’s of the bank has notified the MAS that the bank’s Tier 1
                      capital ratio is expected to fall below the then applicable minimum ratio in the
                      near term;

                  –   proceedings have been commenced for a winding up of the bank;

                  –   the MAS has assumed control of the bank under applicable Singapore banking
                      regulations;

                  –   the MAS has exercised its powers to effect an exchange of the subsidiary
                      preference shares for substitute preference shares; or

                  –   the bank no longer controls the issuer.

          ■ In addition, in lieu of redeeming the subsidiary preference shares for cash following a
            tax or regulatory event, at the option of the issuer, substitute preference shares may be
            substituted for the subsidiary preference shares as if the tax or regulatory event
            constituted a substitution event.

          ■ Each of the bank’s substitute preference shares is “provisionally allotted” on the issue
            date and forms a unit with each subsidiary preference share such that the securities
            cannot be transferred or assigned separately prior to the occurrence of the substitution
            event.

          ■ Upon the occurrence of the substitution event, the provisionally allotted substitute
            preference shares are deemed to have been automatically issued.



                                                       93
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                                                        NON-OPERATING SUBSIDIARY PREFERRED
          ■ Following a breach by the bank of its payment obligations under the subordinated
            guarantee, a holder of subsidiary preference shares can bring a direct action against
            the bank to enforce the bank’s payment obligations under the subordinated guarantee.

          ■ Upon a winding up of the bank, the subordinated guarantee and the subordinated loan
            rank as subordinated indebtedness of the bank (and pari passu with the parity
            obligations).

          ■ The issuer is 1940 Act exempt pursuant to Rule 3a-5 (finance subsidiary).




                                                94
NY1 5828148V.13
CHAPTER 6                                                                                                       TAX-DEDUCTIBLE
                                                                                             NON-OPERATING SUBSIDIARY PREFERRED
• Swiss Bank or Financial Services Company Non-Operating U.S. Trust/LLC Subsidiary
  Guaranteed Non-Cumulative Preferred (normal issues since 2000; enhanced issues
  since 2006)

                                                                      Preferred Equivalent
                                                 Bank                      Guarantee



                                  Dividends          Common




                  Company                  Cayman Islands
                  Common                      Branch
                  Securities

                                  Subordinated                 Proceeds from
                                  Debentures                   issuance of
                                                               Company Securities
                                                    Interest




                                                                                                            Trust Preferred
                                                               Company                                      Securities
                                                               Preferred Securities
                                                                                         Hat-check
                                       LLC/Jersey or            Dividends
                                                                                                           Dividends                  Investors
                                         Guernsey                                          Trust
                                                                 Proceeds from                                Proceeds from
                                                                 issuance of Company                          issuance of Trust
                                                                 Preferred Securities                         Preferred Securities



                                                                         OR
                       Support Agreement
                                                  Financial Services
                                                  Holding Company




                                                   Insurance
                                                   Insurance
                                                   Company
                                                   Company
                                                         Bank
                                                   Holding
                                                   Holding
                                                   Company
                                                   Company




                                                       US Branch
                                                      US Subsidiary

                            LLC                                                           Trust
                          Common                                                      Common
                          Securities                                                  Securities

                                           Debentures                Proceeds from
                                                                     issuance of
                                                                     LLC Common
                                                                     and Preferred
                                                                     Securities

                                                                          LLC Preferred                           Trust Preferred
                                                                          Securities                              Securities
                                                  LLC, Limited
                                                    LLC
                                                  Partnership or                                   Trust                               Investors
                                                                                                                                         Investors
                                                  Trust                   Proceeds from                        Proceeds from
                                                                          issuance of Trust                    issuance of Trust
                                                                          Common and                           Preferred Securities
                                                                          Preferred Securities




                                                                            95
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CHAPTER 6                                                                     TAX-DEDUCTIBLE
                                                           NON-OPERATING SUBSIDIARY PREFERRED


          Selected normal issues

          ■ UBS (2000)

          ■ Credit Suisse (2000)

          ■ UBS (June 2001)

          ■ Credit Suisse (June 2001)

          Selected 2006 enhanced issue

          ■ Zurich Financial Services (January 2006) – non-bank issuer

          Primary regulator capital treatment – minority interest Tier 1 capital.

          Other transaction benefits

          ■ The interest on the debentures is deductible by the bank.

          Features of normal and enhanced issues

          ■ The issuer is a U.S.-domiciled hat-check trust that qualifies either as a grantor trust or
            a depositary arrangement for U.S. tax purposes.

          ■ The intermediate subsidiary is a U.S.-domiciled limited liability company that is a
            subsidiary of the bank and qualifies as a partnership for U.S. tax purposes.

          ■ Investors receive Form 1099 tax reporting forms.

          ■ The common securities of the intermediate LLC subsidiary (which rank senior to the
            class B preferreds held by the trust for the benefit of investors), are held by the
            Cayman Islands branch of the bank.

          ■ The issuer, whose only role is pro rata distributions from its assets, holds the
            company preferred issued by the intermediate LLC subsidiary and the bank’s
            guarantee thereof.

          ■ The intermediate LLC subsidiary’s primary assets are debentures issued by the
            Cayman Islands branch of the bank, the principal amount of which is at least equal
            the liquidation preference of the company preferred.

          ■ Dividends on the company preferred are mandatorily payable if the bank pays
            dividends on any of securities that rank equally with or junior to the preferred unless:

                  –   the bank is not in compliance with the Swiss Banking Commission’s minimum
                      capital adequacy requirements, or would not be in compliance because of
                      payment of dividends on the company preferreds;
                                                   96
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                                                                NON-OPERATING SUBSIDIARY PREFERRED
                  –   the bank does not have available distributable profits; or

                  –   the bank delivers a notice limiting dividends.

          ■ Dividends on the company preferreds and therefore those on the trust preferreds may,
            at the bank’s option, shift to the company common securities when no mandatory
            dividend payment amount is required to be paid on the company preferreds.

          ■ The class B preferreds’ liquidation payment is determined by reference to the issuer’s
            assets.

          ■ The subordinated debenture issued by the Cayman Islands branch of the bank has the
            same interest payment and redemption features as the company preferred and the trust
            preferred.

          ■ The bank guarantees the company preferred in a manner that makes the guarantee the
            functional equivalent of preferred issued by the bank itself. Accordingly, guarantee
            payments include:

                  –   dividend payments that the intermediate LLC subsidiary is required to pay;

                  –   the redemption price, subject to the foregoing with respect to any dividend
                      component; and

                  –   the liquidation amount payable on the class B preferred and, if applicable, the
                      trust preferred.

          ■ Upon the winding up of the bank, the guarantee and the debentures rank junior to all
            indebtedness of the bank, equal with the most senior preferred of the bank, if any, and
            senior to all other share capital of the bank.

          ■ The issuer must be wound up if the bank is wound up.

          ■ The intermediate LLC subsidiary is 1940 Act exempt by virtue of Rule 3a-5 (finance
            subsidiary). The issuer is not an investment company for purposes of the 1940 Act.

          Additional features of enhanced issues

          ■ Issuer is a U.S.-domiciled trust that is a subsidiary of the U.S. holding company
            subsidiary of the Swiss financial services holding company.

          ■ Intermediate issuer is a U.S.-domiciled subsidiary LLC of the U.S. holding company.

          ■ Distributions on the LLC preferred can be deferred for five years at the option of the
            issuer.

          ■ Distributions on the LLC preferred are mandatorily deferred if the issuer is not in
            compliance with certain financial covenants (e.g., negative net income for a four-
            fiscal quarter period).
                                                       97
NY1 5828148V.13
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                                                         NON-OPERATING SUBSIDIARY PREFERRED
          ■ Deferred distributions on the LLC preferred must be paid by the financial services
            holding company with the proceeds from the sale of its common stock.

          ■ The debenture has a maturity of 30 years, but the LLC can reinvest the proceeds from
            the debenture in other eligible debt securities of its parent or of a third party .

          ■ Replacement capital covenant – the managing member of the LLC commits not to
            redeem the LLC preferred without first having issued and sold securities that have
            equity-like characteristics that are the same as, or more equity-like, than the LLC
            preferred and the trust preferred securities (at the time of redemption).

          ■ Issuer can obtain 50-75% equity credit from Moody’s.




                                                 98
NY1 5828148V.13
CHAPTER 6                                                                             TAX-DEDUCTIBLE
                                                                   NON-OPERATING SUBSIDIARY PREFERRED
•    UK, Irish, South African and Kazakh Bank Non-Operating Partnership or
     Trust/Partnership Subsidiary Guaranteed Non-Cumulative Preferred (since 1999)




                            Bank

                                Common
                                Securities          General
                                                    Partner
                                                    Interest
             Bank
                         Offshore                                  UK/Offshore Partnership
           Preferred
           Equivalent
                          Bank
           Guarantee                             Distributions


                                                    Preferred Stock          Proceeds     Distributions




                                                                       Investors

                                                  OR

                                             Bank Preferred Equivalent Guarantee
                           Offshore
                            Bank
                                Common
                                Securities         General
                                                   Partner
                                                   Interest
                           Bank                                       US/UK Partnership
                                             Distributions

                                                       Preferred               Proceeds         Distribution
                                                        Stock                                   s
                        Bank Preferred Equivalent Guarantee              US Hat-check
                                                                            Trust

                                                       Preferred               Proceeds
                                                         Stock                                  Distributions


                                                                          Investors




                                                        99
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CHAPTER 6                                                                             TAX-DEDUCTIBLE
                                                                   NON-OPERATING SUBSIDIARY PREFERRED
                                                     OR


                                              Investors


                       Subordinated
                        Guarantee
        Bank                                                                      Limited Partnership Interests
                                                                                  assigned from Initial Limited
                                                                                             Partner


                              Distributions                     Proceeds




             General                 English Law                                      Initial Limited
             Partner              Limited Partnership                                     Partner


                       Subordinated Notes                       Proceeds




                              Subordinated Note Issuer


                                                     OR

                                                Kazakh Bank




                                Proceeds       Subordinated            Interest
                                                      Loan



                                                 Dutch limited
                                               liability company



                                                   Perpetual
                                                        Loan
                                                Participation
                                Proceeds                               Interest
                                                       Notes




                                                   Investors




                                                     100
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CHAPTER 6                                                                       TAX-DEDUCTIBLE
                                                             NON-OPERATING SUBSIDIARY PREFERRED
                                                      OR
                  Subordinated
                  Guarantee
                                                  Irish bank

                                   Permanent
                    Ownership      Interest Bearing     Interest   Proceeds
                    of a           Deferred Shares
                    majority of
                    voting
                    shares             Luxembourg limited liability
                                              company


                                   Capital      Distributions
                                   Securities                        Proceeds



                                      Irish limited liability company
                                                  (Issuer)


                                   Tier 1
                                   Securities
                                                        Interest     Proceeds
                                   (Notes)




                                                      Investors




          Selected issues

          ■ Halifax (Jersey partnership) (1999)

          ■ Abbey National (U.S. trust/partnership) (2000)

          ■ Lloyds (Jersey partnership) (2000)

          ■ Standard Chartered (U.S. trust/partnership) (2000)

          ■ HSBC (Jersey partnership) (three issues) (2000)

          ■ Bank of Scotland (2000)

          ■ HBOS (2001)

          ■ Bradford & Bingley (2002)

                                                  101
NY1 5828148V.13
CHAPTER 6                                                                     TAX-DEDUCTIBLE
                                                           NON-OPERATING SUBSIDIARY PREFERRED
          ■ Royal Bank of Scotland (2002)

          ■ HBOS (Jersey partnership) (2003)

          ■ Royal Bank of Scotland (U.S. trust/partnership) (2003)

          ■ HSBC (Jersey partnership) (2003)

          ■ DePfa Bank (UK partnership) (2003)

          ■ DePfa (UK partnership) (2004)

          ■ HSBC (Jersey partnership) (2004)

          ■ HBOS (Jersey partnership) (2004)

          ■ Royal Bank of Scotland (U.S. trust/partnership) (2004)

          ■ Allied Irish Bank (UK partnership) (2004)

          Selected 2005 and 2006 issues

          ■ DePfa Bank (UK partnership) (June 2005)

          ■ Investec (UK partnership) (June 2005)

          ■ Anglo Irish Bank Corporation plc (Irish bank/Irish limited liability company) (June
            2005) – see last diagram

          ■ EBS Building Society (Luxembourg limited liability company/Irish bank
            guarantor/Irish limited liability company) (July 2005) – see last diagram

          ■ Kazkommertsbank (November 2005)

          ■ Royal Bank of Scotland (U.S. trust/partnership) (December 2005)

          ■ Bank of Ireland (February 2006 – innovative and non-innovative transactions)

          Primary regulator capital treatment – minority interest innovative Tier 1 capital.

          Other transaction benefits

          ■ The interest on the subordinated notes is tax deductible.

          ■ If a trust is used, Form 1099 is available.




                                                  102
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                                                           NON-OPERATING SUBSIDIARY PREFERRED
          Features

          ■ If a trust is used, the trust preferred securities are issued from a special purpose trust
            vehicle. Each trust preferred security represents an undivided beneficial interest in
            the assets of the trust, which are non-cumulative, perpetual preferred securities issued
            by a separate partnership. The assets of the partnership will initially consist of
            subordinated notes of the bank.

          ■ The partnership holds subordinated notes issued by the bank and other eligible
            investments. If a trust is used, the holders of the trust preferred securities are not
            typically entitled to hold or enforce the subordinated notes or other eligible
            investments. Distributions on the partnership preferred securities are funded out of
            amounts received on the subordinated notes or other eligible securities.

          ■ Typically, the bank will provide a guarantee, on a subordinated basis, as to the
            distributions and amounts payable on redemption and liquidation of the trust or the
            partnership, depending on which structure is used. An investment in the trust or
            partnership preferred securities is intended to provide holders with rights to
            distributions and liquidation preference as similar as possible to those to which they
            would have been entitled if they had purchased non-cumulative, non-voting perpetual
            preference shares issued directly by the bank with economic terms equivalent to the
            trust or partnership preferred securities and the subordinated guarantees, taken
            together.

          ■ If a trust is used, the distributions on the trust preferred securities are made to the
            extent the partnership makes corresponding distributions on the same dates on the
            partnership preferred securities. Distributions on the partnership preferred securities
            are payable on each distribution payment date unless the bank notifies the general
            partner of the partnership that distributions will not be paid as a result of certain
            limitations on distributions under UK banking regulations (e.g., if distributions by the
            partnership would breach the capital adequacy requirements applicable under UK
            banking regulation or if the bank’s distributable profits and distributable reserves
            would not be sufficient to enable the bank to pay full dividends or other
            distributions).

          ■ Distribution rates on the partnership preferred securities are generally fixed for a
            period of time and thereafter will be payable at the sum of a fixed rate and an
            internationally-recognized floating rate (such as EURIBOR or LIBOR).

          ■ The bank will agree in the subordinated guarantees that if any distribution payable on
            the trust preferred securities or the partnership preferred securities has not been paid
            in full on the most recent distribution payment date, no dividends will be declared or
            paid on any junior share capital (typically meaning the ordinary shares of the bank,
            together with any other securities of any member of the bank as a group expressed to
            rank junior as to the right to dividends to the subordinated guarantees), unless and
            until distributions on the partnership preferred securities and the trust preferred
            securities have been paid in full.

                                                  103
NY1 5828148V.13
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                                                            NON-OPERATING SUBSIDIARY PREFERRED
          ■ The bank will further agree in the subordinated guarantees that if any distribution
            payable on the trust preferred securities or the partnership preferred securities for the
            most recent distribution period has not been paid in full, the bank will not redeem,
            purchase, reduce or otherwise acquire any share capital of the bank or any securities
            of any subsidiary of the bank ranking, as to the right of repayment of capital, equal
            with or junior to the subordinated guarantees, nor may it set aside a sinking fund for
            that purpose, unless and until distributions on the partnership preferred securities and
            the trust preferred securities have been paid in full.

          ■ The partnership preferred and the trust preferred securities are not redeemable at the
            option of the holders. Partnership preferred securities may be redeemed at the option
            of the partnership and with the consent of the UK FSA either after a fixed period of
            time or if certain events occur (such as a change of law that changes the tax status of
            the securities held by each of the entities in connection with this type of transaction or
            changes in capital treatment under UK banking regulation).

          ■ If a trust is used, the holders of the trust preferred securities may be given a right, at
            the end of a certain specified period, to require the bank to exchange the partnership
            preferred securities for the cash proceeds of a sale of ordinary shares of the bank.

          ■ The rights under the subordinated guarantees are subordinated to the rights and claims
            of all creditors (including, typically, depositors, general creditors and subordinated
            debt holders) of the bank and rights and claims of holders of shares or securities of
            the bank ranking senior to the subordinated guarantees.

          ■ The trust preferred securities, the partnership preferred securities and the
            subordinated guarantees taken together do not entitle the holders thereof to receive
            more than they would have been entitled to received had they been the holders of
            directly issued non-cumulative, non-voting preference shares of the bank.

          ■ The ranking of the partnership preferred securities is ordinarily senior to the general
            partnership interest and the priority limited partnership interest as to payment of
            distributions. To the extent that distributions are not payable on the partnership
            preferred securities, the excess amount of the interest received by the partnership on
            the subordinated notes or other eligible investments is distributed to the priority
            limited partner as holder of the priority limited partnership interest.

          ■ Upon dissolution of the partnership or trust, holders of the partnership preferred
            securities are typically entitled to receive a liquidation preference equal to their initial
            investment together with any due and accrued distribution and any additional
            amounts, out of the assets of the partnership available for distribution under
            applicable law. If, at the time of a liquidation distribution of the partnership, an order
            is made or an effective resolution is passed for the winding-up of the bank, the
            liquidation distribution payable per partnership preferred security will not exceed the
            amount per security that would have been paid as a liquidation distribution out of the
            assets of the bank had the partnership preferred securities been non-cumulative,
            non-voting preference shares issued directly by the bank with rights of participation

                                                   104
NY1 5828148V.13
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                                                                NON-OPERATING SUBSIDIARY PREFERRED
                  in the capital of the bank equivalent to the partnership preferred securities and the
                  subordinated guarantees, taken together.

          ■ Some transactions (e.g., Royal Bank of Scotland and DePfa) allow the partnership
            preferred securities to be replaced with directly issued capital securities or preference
            shares of the bank guarantor.

          ■ The Bank of Ireland’s Tier 1 transactions in early 2006 allowed the issuer to take
            advantage of both innovative and non-innovative (or core) capital issuances. The key
            difference between the two types of transactions were that the non-innovative deal,
            unlike the innovative deal, did not allow a tax call, had a lower step-up after the ten
            year no-call period, and limited the bank’s ability to redeem the limited partnership
            interests after the no-call period. One further interesting point on this transaction
            structure is that the preferred securities had to be issued to an initial limited partner
            and subsequently assigned to investors at time of closing due to the fact that Cede &
            Co. would not be a direct party to any of the transaction documents, including the
            limited partnership agreement.

          ■ Features of Kazkommertsbank transaction

                  –   The notes are perpetual securities. The Dutch limited liability company loaned
                      the proceeds from the sale of its notes to the bank on a subordinated basis and
                      granted noteholders a security interest over its rights in respect of the
                      subordinated loan. The subordinated loan ranks equally with present and future,
                      direct, unsecured perpetual and subordinated obligations of the bank and with any
                      Tier 1 capital of the bank (other than equity, including preference shares, which
                      rank junior). The notes, trust deed and subordinated loan are all governed by
                      English law.

                  –   Interest on the subordinated loan (and the notes) is mandatorily deferrable if, in
                      the opinion the applicable bank regulator, the bank, on an interest payment date, is
                      or, following such scheduled interest payment, would be in breach of minimum
                      capital adequacy ratio requirements. Mandatory deferral may be partial.

                  –   The subordinated loan also has a “capital payment stopper” provision, whereby
                      the bank is prevented from (A) declaring or paying most types of dividends in
                      respect of its share capital, (B) effecting the redemption of any of its share capital
                      or (C) making any proposal to its shareholders or voting or allowing any of its
                      subsidiaries to vote in favor of any of the actions in A or B if the bank
                      mandatorily defers payment of interest on the subordinated loan.

                  –   The following constitute events of default under the subordinated loan: (A) failure
                      to pay principal or interest (other than interest that is mandatorily deferred) within
                      ten days of the applicable payment date; (B) a winding up of the bank; or (C)
                      breach by the bank of the capital payment stopper. An event of default triggers
                      automatic repayment of the subordinated loan and redemption of the notes.


                                                       105
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                                                                 NON-OPERATING SUBSIDIARY PREFERRED
                  –   The subordinated loan is repayable by the bank if it is subject to withholding taxes
                      that it cannot avoid by taking reasonable measures. The bank also has the option
                      to repay the subordinated loan after ten years

                  –   The notes and the subordinated loan pay interest at a fixed rate for the first ten
                      years and then convert to a floating rate (there is a step-up at year ten).

          ■ Features of Anglo Irish and EBS transactions

                  –   The notes are perpetual securities and are secured by capital securities issued by a
                      Luxembourg limited liability company and the subordinated guarantee in respect
                      thereof (or, in the Anglo Irish transaction, by capital securities issued by the bank
                      directly) and an assignment of the issuer’s rights to payment in respect thereof
                      (the “Mortgaged Property”).

                  –   In EBS, the capital securities of the Luxembourg limited liability company, which
                      is a subsidiary of the bank, are issued in exchange for permanent interest bearing
                      deferred shares of the bank.

                  –   Interest on the notes is non-cumulative and is only payable to the extent the issuer
                      receives a distribution under the capital securities or, in EBS, in respect of the
                      subordinated guarantee.

                  –   Deferral Conditions: Neither the Luxembourg limited liability company nor the
                      bank guarantor will make a payment in respect of the capital securities:

                      –   if such payment, together with the amount of any distributions scheduled to be
                          paid to holders of parity securities, would exceed adjustable distributable
                          reserves; or

                      –   even if adjustable distributable reserves are sufficient:

                          •   if such payment in respect of the capital securities and/or the subordinated
                              guarantee and/or the parity securities would cause a breach of applicable
                              capital adequacy requirements;
                          •   to the extent the bank is not meeting minimum capital requirements and
                              solvency ratios as determined by the bank in its sole discretion;
                          •   if the bank resolved that no distribution should be made on an applicable
                              distribution payment date; or
                          •   if the applicable bank regulator has instructed the bank or the Luxembourg
                              limited liability company not to make such payment.
                  –   Subject to certain exceptions, the issuer may not, without the consent of the
                      trustee, incur other indebtedness or engage in any business other than those
                      generally related to the transaction (in EBS, the Luxembourg limited liability
                      company also may not incur additional indebtedness).


                                                       106
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                                                                 NON-OPERATING SUBSIDIARY PREFERRED
                  –   The capital securities also have a “distribution and capital stopper” provision,
                      whereby the bank, as guarantor or issuer of the capital securities, as applicable, is
                      prevented from declaring or paying distributions on, or effecting the redemption
                      of, instruments ranking pari passu with or junior to the subordinated guarantee or
                      the capital securities, as applicable, if the bank fails to make a payment in respect
                      of the subordinated guarantee or on the capital securities, as applicable (other than
                      proportionate payments on securities ranking pari passu in the case of a partial
                      payment on the notes).

                  –   If (A) the Luxembourg limited liability company or the bank is obliged to redeem
                      the capital securities but fails to do so, (B) proceedings for the liquidation,
                      winding up or dissolution of the Luxembourg limited liability company or the
                      bank are commenced, (C) the Luxembourg limited liability company or the bank
                      fails to make payments on or in respect of the capital securities (in Anglo Irish,
                      for a period of 14 days; in EBS, other than if such failure to pay is due to the
                      existence of one of the deferral conditions listed above), (D) the Luxembourg
                      limited liability company or the bank breaches the distribution and capital stopper
                      or (E) the Luxembourg limited liability company or the bank breaches any other
                      provision of the capital securities or the subordinated guarantee in a manner that,
                      in the opinion of the trustee, is materially prejudicial to the noteholders, then the
                      issuer shall notify the trustee, the paying agent and the noteholders and redeem
                      the notes.

                  –   The issuer shall also redeem the notes if it is subject to withholding or other tax in
                      respect of its income that it cannot otherwise reasonably avoid.

                  –   The capital securities are redeemable at the option of the Luxembourg limited
                      liability company or the bank on any distribution payment date ten years after the
                      issue date.

                  –   In the case of EBS, the capital securities can be substituted for substitute capital
                      securities (having the same general economic terms as the capital securities) if the
                      capital adequacy ratio of the bank falls below the minimum required level.

                  –   The issuer has no direct or indirect relationship with the Luxembourg limited
                      liability company or the bank.

                  –   The notes pay interest at a fixed rate for the first ten years and then convert to a
                      floating rate (there is a step-up at year ten).

                  –   The Anglo Irish securities count as core Tier 1 capital, while the EBS securities
                      were included as innovative Tier 1.

                  –




                                                       107
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                                                                                     NON-OPERATING SUBSIDIARY PREFERRED
• U.S. Bank Holding Company and Irish Bank Non-Operating U.S. Trust/U.S. Trust
  Subsidiary Guaranteed Non-Cumulative Preferred (since 1999)


                                                                   Soft Guarantees

                                       Bank




                        Junior
                  Subordinated                    Proceeds from
                                                                            Common
 Common             Debentures   Deferrable       issuance of
                                                                            Securities
 Securities          and Other   Interest         Asset
                     Permitted                    Securities
                   Investments
                                                                                                           Capital Preferred
                                                        Asset Preferred Securities                         Securities

                                                           Distributions                                 Distributions
                                    Asset Trust                                          Capital Trust                         Investors


                                                                                                           Proceeds from
                                                        Proceeds from issuance of                          issuance of Capital
                                                        Common and Capital                                 Preferred Securities
                                                        Preferred Securities


              Only issue

              ■ Allfirst (formerly First Maryland) (1999)

              Primary regulator capital treatment – minority interest Tier 1 capital.

              Other transaction benefits

              ■ The interest on the bank debentures or deposits held by the LLC is deductible by the
                bank for Irish (in the case of head office debentures or deposits) or U.S. (in the case
                of New York branch debentures) tax purposes.

              ■ Enables the bank to issue preferred equivalent in U.S. dollars.

              Features

              ■ The issuer is a U.S.-domiciled trust that is a U.S. subsidiary of the bank that qualifies
                as a grantor trust or a hat-check trust that qualifies either as a grantor trust or a
                depositary arrangement for U.S. tax purposes.

              ■ The intermediate subsidiary is a U.S.-domiciled trust that is a subsidiary of the bank
                and qualifies as a partnership for U.S. tax purposes.

              ■ Investors receive Form 1099 tax reporting forms.

              ■ The common securities of the capital trust subsidiary are held by the bank.



                                                                    108
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                                                          NON-OPERATING SUBSIDIARY PREFERRED
          ■ The common securities of the intermediate trust subsidiary (which rank senior to the
            preferred held by the trust for the benefit of investors) are held by the bank.

          ■ The issuer, whose only role is pro rata distributions from its assets, holds the class B
            preferred issued by the intermediate trust subsidiary and the bank’s guarantee thereof.

          ■ The intermediate trust subsidiary’s primary assets are debentures issued by the bank,
            the principal amount of which is greater than the liquidation preference of the
            preferred. The intermediate trust subsidiary has additional assets that are eligible
            assets for purposes of Rule 3a-5 under the 1940 Act. Interest on the debentures is
            deferrable for up to 20 quarters at the issuer’s discretion. The initial debentures
            mature in 30 years. The junior subordinated debentures are subordinate to all
            indebtedness of the bank.

          ■ Dividends on the preferred are non-cumulative and payable only if interest is not
            deferred.

          ■ Dividends not paid to trust or other class B preferred holders as a result of the above
            are paid as a dividend to the common holder.

          ■ The preferred’s liquidation payment is determined by reference to the issuer’s assets.

          ■ The bank’s capital contribution to the trust is nominal ($1,000), and to the
            intermediate LLC subsidiary was substantial for purposes of the U.S. tax analysis.

          ■ The bank guarantees the preferred and the trust preferred only to the extent funds are
            legally available in the respective vehicles.

          ■ Upon the winding up of the bank, the guarantee ranks junior to all indebtedness of the
            bank and equal with the debentures.

          ■ Trust preferred and class B preferred holders have the right to proceed directly
            against the bank under the guarantees and the debentures if the bank defaults on its
            payment obligations under the guarantees or the debentures.

          ■ The issuer and the intermediate LLC subsidiary are 1940 Act exempt by virtue of
            Rule 3a-5 (finance subsidiary).




                                                 109
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                                                         NON-OPERATING SUBSIDIARY PREFERRED
• U.S. National Bank Non-Operating U.S. Trust/LLC Subsidiary Guaranteed
  Non-Cumulative Preferred (since 2000)

          Only issue

          ■ Bank One (2000)

          This was not a public transaction. It was approved by the OCC in a letter to Bank One
          Corporation dated December 22, 2000, which was published in January 2001.




                                                110
NY1 5828148V.13
                                                              CHAPTER 7

                               PRE-TAX OPERATING SUBSIDIARY PREFERRED

  U.S. Bank Holding Company and Bank REIT Subsidiary
      Non-Cumulative Preferred (1996) .............................................................................................. 112
  U.S. and Canadian Bank REIT Subsidiary Exchangeable Non-Cumulative
      Preferred (normal since 1996; enhanced since 2006) ................................................................. 114
  French Bank Operating Subsidiary Non-Cumulative
      Preferred (since 1997)................................................................................................................. 120



        Operating subsidiary preferred or “OpCo preferred” was originally developed to address
the Basle Committee’s position prior to the 1998 Basle Release that, in order to count as Tier 1
capital, the subsidiary that issued equity securities to investors must be an operating company.
To date, U.S. banks have used this product over non-operating subsidiary preferred for a number
of reasons, including:

           ■ in addition to paying preferred dividends out of pre-tax profits, which is the result if
             the subsidiary qualifies as a real estate investment trust or “REIT” for U.S. federal
             income tax purposes, some banks save state tax on their income or assets by moving
             income earning assets to subsidiaries established in low or no state tax jurisdictions;

           ■ the tax analysis for this product is considered more certain.

On the other hand, the ongoing administration of the subsidiaries is complicated because they
have assets that require significant management. This may be particularly problematic for
foreign banks with U.S. branches who are required to manage the U.S.-based portfolio of its
subsidiary.

        With the exception of an early transaction, the loss absorption mechanism in the OpCo
preferred transactions is exchanging the subsidiary preferred for bank preferred or dividending or
otherwise transferring the subsidiary’s assets to the bank in the event that an event specified by
the bank’s primary regulator occurs.




                                                                       111
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                                                                                     SUBSIDIARY PREFRRED
• U.S. Bank Holding Company and Bank REIT Subsidiary Non-Cumulative Preferred
  (1996)


                                    Bank Holding Company




                     100%                                                 100%
                     Common Stock                                  Common Stock




                  Bank                                                               Bank


                                                  g
                                              icin          Advisory
                                        - serv ent
        100%                         Sub reem               Agreement
                                                                              100%
      Common                           Ag                                                      Mortgage
                                                                              Capital
        Stock                                                                                   Loans
                                                             Servicing        Stock
                                                            Agreement


             Company
                                                                              REIT



                                                                              Series A
                                                                              Preferred
                                                                              Shares




                                                                         Investors




                                                      112
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                                                                               SUBSIDIARY PREFRRED



          Less need due to the approval by the Federal Reserve Bank of bank holding company
          non-operating trust subsidiary preferred as Tier 1 and a revised Tier 1 analysis by U.S.
          bank regulators.

          Only issue

          ■ Chase Manhattan (1996)

          Primary regulator capital treatment - bank and bank holding company minority interest
          Tier 1 under early transaction structure; core bank capital under the recent transaction
          structure.

          Other transaction benefit – The issuer is not required to pay tax on income it distributes to
          shareholders. Accordingly, by contributing a portion of the bank’s assets to the issuer,
          the bank pays less taxes because the preferred dividends are paid out of profits before tax.

          Transaction features

          ■ The issuer is a U.S.-domiciled corporation that is a subsidiary of the bank for
            accounting and tax purposes and qualifies as a real estate investment trust or “REIT”
            for U.S. tax purposes.

          ■ Real estate interests are the issuer’s only assets.

          ■ The preferred dividends are cumulative, discretionary and tied to distributable profits
            of the issuer, not the bank or the bank holding company.

          ■ No guarantee or support agreement.

          ■ The preferred’s liquidation payment is determined by reference to the issuer’s
            available assets, not the bank’s.

          ■ The issuer is 1940 Act exempt pursuant to Section 3(c)(5)(C) (companies holding
            primarily interests in real estate).




                                                  113
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CHAPTER 7                                                       PRE-TAX OPERATING
                                                               SUBSIDIARY PREFRRED
• U.S. and Canadian Bank REIT Subsidiary Exchangeable Non-Cumulative Preferred
  (normal since 1996; enhanced since 2006)

                                    Bank or
                                  Bank Holding
                                   Company

                                                                Automatic
  Sub-servicing                                  Real Estate    exchange of Bank
                     Common
    Agreement                                    Interests      Preferred Shares
                       Shares
                                                                for Issuer Preferred
                                                                Shares



                                 REIT Issuer


                                         Preferred Shares




                                Investors




                                         114
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CHAPTER 7                                                                                PRE-TAX OPERATING
                                                                                        SUBSIDIARY PREFRRED



                                                          OR

                                                     (since 2006)



                                                     Bank Holding
                                                      Company                                     Conditional
                  Conditional
                                                                                                  Exchange
                  Exchange



                                                          Bank


                                       Assets
                                                                                100%
                                                                                Preferred
                                                          REIT                  Securities
                      Proceeds                                                                    Proceeds
                                                                    Assets
                                            100% Common
                                            Interest

                                                     Delaware LLC
                                                                              Fixed-to-Floating
                                    Fixed Rate LLC                            Rate LLC
                                    Preferred                                 Preferred
                                    Securities            Trust               Securities
                                                          Assets
                          Cayman SPV                                            Delaware Trust

                                       Cayman Preferred                                      Trust Securities
                        Proceeds       Securities                            Proceeds

                                Investors                                           Investors




          Less appeal for U.S. banks following Federal Reserve Bank’s approval of bank holding
          company non-operating subsidiary cumulative trust preferred as Tier 1.

          May be more appealing to U.S. banks if Federal Reserve Bank limits or controls Tier 1
          treatment of bank holding company non-operating subsidiary cumulative trust preferred

                                                          115
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                                                                                 SUBSIDIARY PREFRRED
          following adoption of FIN 46 and subsequent accounting treatment as a liability, not
          minority interest.

          Increased appeal for U.S. banks in recent years due to double leveraging and innovative
          capital basket limitations at the bank holding company.

          Selected issues

          ■ Chevy Chase (1996)

          ■ D&N Bank (1997)

          ■ National Bank of Canada (1997)

          ■ Bank of Nova Scotia (1997)

          ■ SunTrust (2000)

          ■ Huntington Preferred Capital (2001)

          ■ First Republic (2002)

          ■ Washington Preferred Funding Corporation (2002)

          ■ New York Community Bank (2003)

          ■ First Republic (2003)

          ■ Wachovia (2003)

          ■ Roslyn Bank (2003)

          ■ Novastar Financial (2004)

          ■ Capital Crossing Preferred Corporation (2004)

          Selected 2006 enhanced issue

          ■ Washington Mutual (March 2006) – using both a Delaware trust and Cayman Islands
            SPV

          Primary regulator capital treatment - bank minority interest Tier 1.

          Other transaction benefits include:

          ■ The issuer is not required to pay tax on income it distributes to shareholders.
            Accordingly, by contributing and maintaining a portion of the bank’s assets at the
            issuer, the bank pays less taxes because the preferred dividends are paid out of profits
            before tax.

                                                  116
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                                                                                   SUBSIDIARY PREFRRED
          ■ By moving assets to a low or no tax state, a U.S. bank in a higher tax state may avoid
            state income and other taxes on the assets contributed to the issuer and profits
            thereon.

          Features

          ■ The issuer is a U.S.-domiciled corporation that is a subsidiary of the bank or, in the
            case of Wachovia, a bank holding company for accounting purposes and qualifies as a
            REIT for U.S. tax purposes.

          ■ Real estate interests, initially mortgages contributed directly or indirectly by the bank,
            are the issuer’s only assets.

          ■ Preferred dividends are non-cumulative, discretionary and tied to the distributable
            profits of the issuer, not the bank.

          ■ No guarantee or support agreement.

          ■ The preferred’s liquidation payment is determined by reference to the issuer’s
            available assets.

          ■ The U.S. bank preferred is mandatorily exchangeable into bank preferred with similar
            dividend, redemption and liquidation preference terms if:

                  –   the bank becomes undercapitalized under the applicable regulator’s prompt
                      corrective action regulations;

                  –   the bank is placed in bankruptcy, reorganization, conservatorship or receivership;
                      or

                  –   the applicable federal regulator anticipates the bank becoming undercapitalized in
                      the near term.

          ■ The Canadian bank preferred is mandatorily exchangeable into bank preferred with
            similar dividend, redemption and liquidation preference terms if:

                  –   the bank fails to declare or pay dividends on any of its preferred shares;

                  –   the bank’s Tier 1 risk-based capital ratio falls below 4% or, in some cases, Tier 1
                      and total Tier 1 capital falls below 5% and 8%, respectively;

                  –   the Superintendent of Financial Institutions of Canada takes control of the bank or
                      proceedings for the winding up of the bank are commenced; or

                  –   the Superintendent anticipates the bank becoming undercapitalized in the near
                      term.

          ■ The issuer is 1940 Act exempt pursuant to Section 3(c)(5)(C) (companies holding
            primarily interests in real estate).
                                                      117
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                                                                             SUBSIDIARY PREFRRED
          Enhanced transaction features

          ■ There are two issuers - a Cayman Islands special purpose vehicle and a Delaware
            statutory trust - that invest the proceeds from the sale of their perpetual non-
            cumulative preferred securities in perpetual non-cumulative preferred securities of an
            intermediate finance subsidiary. The Cayman SPV and Delaware trust preferred
            securities are not exchangeable for one another.

          ■ The intermediate finance subsidiary is a Delaware LLC, which holds asset trust
            certificates. The asset trust certificates are backed by indirect interests in mortgages
            and mortgage-related assets (e.g., home equity loans) that have been placed in the
            asset trust, which were originated by the bank and held by the bank and an indirect,
            U.S.-domiciled corporate subsidiary that qualifies as a real estate investment trust or
            “REIT” for U.S. tax purposes. In exchange for receiving the assets, the Delaware
            LLC issues its preferred securities to the bank and its common securities to the REIT.
            The bank then sells the LLC’s preferred securities to the Delaware trust and the
            Cayman Islands special purpose vehicle for cash.

          ■ The trust preferred securities pay a fixed dividend rate for five years and then convert
            to a floating dividend rate (three-month LIBOR) with a step-up thereafter. The
            Cayman preferred securities pay only a fixed dividend rate.

          ■ Non-cumulative dividends on the LLC’s preferred securities are payable out of
            legally available funds on each dividend payment date if then declared due and
            payable by the board of managers of the LLC. Under certain circumstances, the OTS
            can choose to restrict the LLC’s ability to pay dividends on its preferred securities
            (thereby limiting the ability of the Cayman SPV and Delaware trust to pay dividends
            on their preferred securities) if it determines that the bank is operating with an
            insufficient level of capital.

          ■ If the LLC, the Cayman SPV or the Delaware trust fails to pay dividends on its
            preferred securities, then holders of the Cayman SPV and Delaware trust preferred
            securities can vote to remove the independent manager of the LLC.

          ■ The bank holding company also covenants that if full dividends on the Cayman SPV
            or Delaware trust preferred securities are not paid, then it will not declare or pay
            dividends with respect to, or redeem purchase or acquire, any of its equity capital
            securities during the next succeeding dividend period (except for dividends paid in
            connection with employee benefits or shareholders’ rights plans).

          ■ Automatic exchange - at the direction of the OTS, the Cayman SPV and Delaware
            trust preferred securities are automatically exchangeable for depositary shares
            representing 1/1000th of a share of the bank holding company’s Series I perpetual
            non-cumulative preferred stock. Conditional exchange - following certain events
            (e.g., if the bank becomes “undercapitalized” under applicable OTS regulations or is
            placed in receivership or if the OTS directs such exchange in anticipation of the
            bank’s becoming “undercapitalized”), the preferred securities are also automatically

                                                 118
NY1 5828148V.13
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                                                                               SUBSIDIARY PREFRRED
                  exchangeable, but for depositary shares representing a different series of the bank
                  holding company’s perpetual non-cumulative preferred stock. The bank holding
                  company covenants not to issue any preferred stock that would rank senior to the
                  preferred stock issuable on exchange for the Cayman SPV or Delaware trust preferred
                  securities.

          ■ The Cayman SPV and Delaware trust preferred securities are redeemable upon
            redemption of the LLC preferred securities. The LLC preferred securities are
            redeemable on any dividend payment date after five years at par, or earlier at a make-
            whole redemption price following the occurrence of a tax event (e.g., if the LLC, the
            Cayman SPV or the Delaware trust is required to withhold amounts from payments),
            a 1940 Act event (i.e., if there is significant risk that the LLC, the asset trust, Cayman
            SPV or Delaware trust is or will be considered an investment company that is
            required to register under the 1940 Act) or a regulatory capital event (i.e., if there is
            significant risk that the LLC preferred securities will no longer constitute core capital
            of the bank for purposes of the OTS’ capital regulations).

          ■ Replacement capital covenant – the bank holding company contractually commits to
            its existing debtholders not to redeem or repurchase, or permit a subsidiary to redeem
            or repurchase, the Cayman SPV or Delaware trust preferred securities, the LLC
            preferred securities or, after a conditional exchange, the depositary shares, unless,
            within 180 days prior to the date of redemption, the bank holding company or its
            subsidiaries issue equity securities and use the proceeds from such issuance to fund
            the redemption or repurchase.

          ■ No guarantee or support agreement.

          ■ The liquidation payment on the LLC’s preferred securities is determined by reference
            to the LLC’s available assets, not the bank’s.

          ■ The REIT is 1940 Act exempt pursuant to Section 3(c)(5)(C) (companies holding
            primarily interests in real estate); the issuer and the intermediate LLC subsidiary are
            1940 Act exempt by virtue of Rule 3a-5 (finance subsidiary).




                                                    119
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                                                                                 SUBSIDIARY PREFRRED
• French Bank Operating Subsidiary Non-Cumulative Preferred (since 1997)


                                              Bank


                          Mortgage-backed             Common
  Common                     securities and           Securities and
  Securities                 other eligible           Preferred Securities
                                     assets           Proceeds



                                              LLC



                          Series A
                          Preferred                        Proceeds
                          Securities




                                        Investors



          Selected early issues

          ■ Societe Generale (1997)

          ■ Banque Nationale de Paris (1997)

          ■ Natexis Banque Populaires (1998)

          Primary regulator capital treatment – bank minority interest Tier 1.

          Other transaction benefit – the issuer is not required to pay tax on income it distributes to
          shareholders. Accordingly, by contributing a portion of the assets of a U.S.-domiciled
          branch of the bank, the bank pays less U.S. taxes because the preferred dividends are paid
          out of profits before tax.

          Features

          ■ The issuer is a U.S.-domiciled limited liability company that is a subsidiary of the
            bank and qualifies as a partnership for U.S. tax purposes.

                                                     120
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                                                                                    SUBSIDIARY PREFRRED
          ■ Mortgage-backed securities and other eligible investments, which may include U.S.
            treasuries and short-term investments, are the issuer’s primary assets.

          ■ The issuer’s common securities are held by a U.S.-domiciled branch of the bank.

          ■ Preferred dividends are non-cumulative, discretionary and are tied to the distributable
            profits of the issuer or, following and during the continuance of a supervisory or shift
            event, to the payments made to the issuer by the bank under a support agreement
            between them.

          ■ The preferred’s liquidation payment is determined by reference to the issuer’s
            available assets or, following a supervisory or shift event, the bank’s available assets.

          ■ The issuer must be liquidated if the bank is liquidated.

          ■ Upon the occurrence of a supervisory or shift event, assets of the issuer are paid to the
            branch of the bank, as holder of the issuer’s common securities. Supervisory or shift
            event includes:

                  –   the bank’s total risk-based capital ratio or Tier 1 risk-based capital ratio declines
                      below the minimum percentages required by French banking regulations;

                  –   the bank becomes subject to insolvency, receivership or similar proceedings under
                      French law; or

                  –   the French Banking Commission determines that either of the foregoing would
                      apply in the near term.

          ■ The issuer is 1940 Act exempt pursuant to Rule 3a-7 (asset-backed securities) in the
            case of Banque Nationale de Paris or Section 3(c)(7) (sales only to qualified
            institutional purchasers) in the case of Societe Generale.




                                                       121
NY1 5828148V.13
                                                                   CHAPTER 8

                    MULTIPLE TAX BENEFIT SUBSIDIARY PREFERRED
• U.S. Trust/Limited Partnership Non-Operating Subsidiary Guaranteed
  Non-Cumulative DRD Preferred (since 2000)
                                                                        Fortis and Zurich

                                                      Limited Partner    General Partner

                             Bank Holding                                                    Operating
                              Company
                                                                                             Subsidiary




                                       Class C-1 Shares
                                                                                     Distributions on                LLC
                                                                Partnership
                  Class A                                                          Partnership Securities
                  Shares                                                           (up to the Maximum
                                                                                           Rate)                           Distributions on
                                                                                                                           LLC Preferred
                                                Dividends on
                                                Class C-1 Shares



                                                                                                                    Trust I



                                                                                                 Distribution on Trust
                                                                                                            Securities
                            US Subsidiary


                                                                                                                  Investors

                                                                          ABN AMRO


                                                                           100% Equity
                                       Bank

                                                                        Tax Haven Company
                                                  $0.67 mm
                                                   Limited                          $66 mm
                               100%               Partnership                       General
                            Common                  Interest                       Partnership
                              Shares                                                Interest



                                                                           Limited                    RegCaPS
                                                  Dividends               Partnership                                    Trust


                      US Operating Company
                                                                                                     Remittance



                                                                                                         Trust Capital
                                                                                                                                 Distributions
                                                                                                          Securities




                                                                                                                     Investors




                                                                              122
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                                                                              SUBSIDIARY PREFRRED
           Selected issues

          ■ Fortis (2000)

          ■ ABN AMRO (2000)

          ■ Zurich (February 2001)

          ■ Societe Generale (November 2001)

          Primary regulator capital treatment – Tier 1.

          Other transaction benefits

          ■ The holders of the trust preferreds that are U.S. corporations benefit from the 70%
            dividends-received deductions with respect to distributions on such securities.

          ■ The bank is entitled to an interest deduction or pre-tax payment benefit in its home
            country.

          Features

          ■ The trust preferreds are marketed only to U.S. corporations.

          ■ The issuer is a U.S.-domiciled trust that qualifies as a grantor trust for U.S. tax
            purposes.

          ■ One of the intermediate entities is a U.S.-domiciled partnership that qualifies as a
            partnership for U.S. tax purposes.

          ■ The issuer of the trust preferreds, whose only role is to pay pro rata distributions from
            its assets, holds directly or indirectly the class C preferreds issued by the partnership.

          ■ The partnership’s primary assets are the class C preferreds issued by a U.S. operating
            subsidiary of the bank. Dividends paid on the class C preferreds are entitled to the
            dividends-received deduction.

          ■ Distributions on the class C preferreds are non-cumulative and payable only to the
            extent that they do not cause the U.S. operating subsidiary’s net worth to be less than
            a specified dollar amount, which is adjusted by any amounts received for the issuance
            and sale of, or paid to purchase or redeem, any of its capital stock ranking pari passu
            with or senior to the class C preferreds.

          ■ If distributions are not paid, the U.S. operating subsidiary cannot pay dividends on
            any securities ranking junior to the class C preferreds.

          ■ If distributions are not paid in full, the U.S. operating subsidiary may only pay
            dividends ranking pari passu with the class C preferreds and only in the same
            proportion as a partial dividend on the class C preferreds.

                                                  123
NY1 5828148V.13
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                                                                            SUBSIDIARY PREFRRED
          ■ The securities are redeemable for cash or exchangeable for class C preferreds upon
            the occurrence of certain events.

          ■ No guarantee or support agreement.

          ■ The class C preferreds rank junior to indebtedness of the U.S. subsidiary.

          ■ The trust preferreds are perpetual and dividends thereon are non-cumulative.

          ■ In order to be exempt from Swiss withholding tax, in the case of Swiss companies, an
            investor must satisfy certain criteria and submit Swiss tax forms to the custodian
            holding the trust preferred on its behalf.




                                                124
NY1 5828148V.13
                                                                          CHAPTER 9

                                          CAPITAL INSTRUMENTS ISSUED BY A BANK

  UK and Irish Dividend Tax Credit Non-Cumulative Bank Preference Shares
      (since 1989) ................................................................................................................................ 125
  Luxembourg Bank Silent Partnership Securities (since January 1998) ............................................ 128
  French, Norwegian, Dutch, Belgian, Danish, Icelandic, Korean, Finnish,
      Philippine, Swedish, Spanish and Taiwanese Capital Securities (since
      1997) ........................................................................................................................................... 130
  UK, Belgian and Irish Perpetual Non-Cumulative Equity Settled Instruments
      (since 2000) ................................................................................................................................ 134
  Singapore Bank Non-Convertible Non-Cumulative Preference Shares (since
      2002) ........................................................................................................................................... 141
  Australian Bank Convertible Non-Cumulative Preference Shares, Australian
      Market only (since 2000)............................................................................................................ 142


        The simplest of non-common equity Tier 1 capital is preferred stock or preference shares
or other similar instruments issued by a bank. Many jurisdictions do not afford tax deductibility
to dividend or similar payments on these instruments, although Finland and Sweden appear to be
notable exceptions. As a result, these products have been developed to take advantage of other
benefits, tax and otherwise. Also, it is more likely that the applicable regulator, without
detracting from the Basle Committee’s position that common shareholders’ funds should be the
key element of capital, would not include these instruments in a bank’s 15% innovative Tier 1
capital basket.

• UK and Irish Dividend Tax Credit Non-Cumulative Bank Preference Shares (since
  1989)
                                                                                                                         Percentage of
                                                                                                                          Liquidation         Amount
                                                                                                                             Value           per Share

Dividend ..........................................................................................................          8.156%        $     2.039
Tax Credit (equal to one-third of the dividend)† .............................................                               2.719                .680
Total.................................................................................................................      10.875%        $     2.719
Withholding tax (15% of the sum of the dividend
    and the Tax Credit)...................................................................................                  (1.631)              (.408)
Cash receipt .....................................................................................................           9.244%        $     2.311
____________
† Based on 1989 UK rate

             Selected issues

             ■ Barclays Bank (UK) (1989)

             ■ Allied Irish Bank (Irish) (1989)


                                                                                      125
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CHAPTER 9                                                                  CAPITAL INSTRUMENTS ISSUED
                                                                                           BY A BANK

          ■ Royal Bank of Scotland (UK) (1989)

          ■ Royal Bank of Scotland (UK) (2000)

          ■ Royal Bank of Scotland (UK) (2001)

          ■ Anglo Irish Bank (Irish) (2001)

          ■ Standard Chartered Bank (UK) (2001)

          ■ Lloyd’s Bank (UK) (2002)

          ■ Royal Bank of Scotland (UK) (2004)

          ■ Barclays Bank (UK) (2004)

          Selected 2005 issues

          ■ Barclays Bank (UK) (March and June 2005)

          Primary regulator capital treatment – bank level “lower” Tier 1 (i.e., hybrid or
          innovative).

          Other transaction benefit – the dividend rate on the preference shares was lower because
          foreign investors are entitled to the UK Associated Tax Credit or the Irish Imputed Tax
          Credit, as the case may be, resulting in a higher net cash dividend than would otherwise
          be the case plus a foreign tax credit in respect of UK or Irish, as the case may be,
          withholding tax.

          Developments that have affected issuance of UK dividend tax credit preferred:

          ■ UK Associated Tax Credit phased out by the UK Inland Revenue.

          ■ UK Financial Services Authority (UK FSA) policy that a bank can only redeem a
            non-hybrid Tier 1 capital instrument with the proceeds from another non-hybrid
            Tier 1 capital instrument.

          Initially, the preference shares were issued in the form of ADRs to avoid UK or Irish, as
          the case may be, stamp duty. ADRs are no longer required to avoid such stamp duty.

          Features

          ■ Dividends are non-cumulative but generally mandatorily payable by the bank:

                  –   to the extent of the bank’s distributable profits and reserves; and

                  –   so long as payment doesn’t result in breach of the bank’s capital adequacy
                      requirements.


                                                       126
NY1 5828148V.13
CHAPTER 9                                                         CAPITAL INSTRUMENTS ISSUED
                                                                                  BY A BANK

          ■ The dividend rate is adjusted for changes in the UK Associated Tax Credit.

          ■ The dividend withholding tax rate for U.S. holders was 15%, which could be used by
            a U.S. holder as a foreign tax credit subject to certain limitations.

          ■ Liquidation payment on the bank preference shares is determined by reference to the
            bank’s available assets.




                                               127
NY1 5828148V.13
CHAPTER 9                                                                                         CAPITAL INSTRUMENTS ISSUED
                                                                                                                  BY A BANK

• Luxembourg Bank Silent Partnership Securities (since January 1998)

                                              Deutsche Bank Luxembourg S.A.
                                                       (the “Bank”)

                                          Profit           Fixed                 Profit
                                          Participations   Rate                  Participations
                        Fixed                              Contribution                            Floating
                        Rate                                                                       Rate
                        Participation                           Floating                           Contribution
                                                                Rate
                                                                Participation


                                                 Banque de Luxembourg S.A.
                                                      (the “Fiduciary”)


                                          Distributions    Proceeds              Distributions
                           Fixed
                           Rate                                                                    Proceeds
                                                                  Floating
                           Certificates                           Rate
                                                                  Certificates




                                                              Investors


          Selected issues

          ■ Deutsche Bank Luxembourg (1998)

          ■ Hypo-und Vereinsbank AG (1998)

          Primary regulator capital treatment - bank level Tier 1 and bank holding company Tier 1.

          Other benefits

          ■ Interest deduction at the bank level for distributions on the securities.

          ■ No Luxembourg withholding tax on dividend payments.

          10-year maturity

          Distributions are non-cumulative and payable to the extent of available distributable
          profits for the that fiscal year.

          Available distributable profits for a fiscal year means the bank’s total profits or losses for
          that year, and, at the bank’s discretion, distributable reserves.

          If distributions are not paid in full, the bank cannot pay cash distributions on its capital
          stock unless it pays four semi-annual distributions on the securities.



                                                                 128
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CHAPTER 9                                                              CAPITAL INSTRUMENTS ISSUED
                                                                                       BY A BANK

          The securities participate in the losses and, to the extent the participations have been
          written down, the profits of the bank.

          The securities can be redeemed early upon a regulatory event, but only at their initial
          contribution amount.

          The securities rank junior to creditors, equal with other silent partnership interests and
          senior to the share capital of the bank.




                                                   129
NY1 5828148V.13
CHAPTER 9                                                        CAPITAL INSTRUMENTS ISSUED
                                                                                 BY A BANK

• French, Norwegian, Dutch, Belgian, Danish, Icelandic, Korean, Finnish, Philippine,
  Swedish, Spanish and Taiwanese Capital Securities (since 1997)



        Bank
       holding                                                   Bank
      company                Support
                            Agreement
                            (not in all)




                                                                            Coupon
                                                                Payments    Payments
                                           Securities




                                                             Investors


          Selected issues

          ■ Meritabank (Finnish) (1997)

          ■ Nordbanken (Swedish) (1999)

          ■ Skandinaviska Enskilda Banken (Swedish) (1999)

          ■ Den Norske Bank (Norwegian) (2001)

          ■ Union Bank of Norway (Norwegian) (2002)

          ■ Eksportfinans (Norwegian) (2003)

          ■ ING Group (Dutch) (2003)

          ■ AB Svensk Exportkredit (Swedish) (2003)

          ■ SNS Bank (Dutch) (2003)

                                               130
NY1 5828148V.13
CHAPTER 9                                                        CAPITAL INSTRUMENTS ISSUED
                                                                                 BY A BANK

          ■ Caisse Nationale des Caisses d’Epargne (French) (2003)

          ■ KBC Bank (Belgian) (2003)

          ■ NIB (Dutch) (2003)

          ■ Korea First Bank (Korea) (2004)

          ■ Skandinaviska Enskilda Banken (Swedish) (2004)

          ■ Swedbank (Swedish) (2004)

          ■ Kaupthing Bank (Icelandic) (2004)

          ■ Jyske Bank (Danish) (2004)

          ■ Danske Bank (Danish) (2004)

          ■ ING Group (Dutch) (2004)

          ■ Compagnie Financiered u Credit Mutual (2004)

          ■ Caisse Nationale des Caisse d’Epargne (French) ( 2004)

          ■ Nordea Bank (Swedish) (2004)

          ■ Caisse Federale du Credit Mutuel Nord Europe (French) ( 2004)

          ■ Banesto (Spanish) (2004)

          ■ Sydbank (Danish) (2004)

          ■ Banque Federative Credit Mutual (French) (2004)

          Selected 2005 issues

          ■ Natexis Banques Populaires (French) (January 2005)

          ■ Societe Generale (French) (January 2005)

          ■ Danske Bank (Danish) (March 2005)

          ■ Shinhan Bank (Korea) (March 2005)

          ■ Swedbank (Swedish) (March 2005)

          ■ DLR Kredit A/S (Danish) (June 2005)

          ■ ING Group (Dutch) (June 2005)


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                                                                                        BY A BANK

          ■ IF Skadeförsäkring (Swedish) (June 2005)

          ■ BNP Paribas (French)(October 2005)

          ■ Dexia (French) (November 2005)

          ■ Credit Agricole (French) (February and November 2005)

          ■ Chinatrust Commercial Bank (Taiwan) (December 2005; upper Tier 2 capital
            securities issued in March 2005)

          ■ Metropolitan Bank and Trust Company (Philippines) (March 2006)

          Primary regulator capital treatment – bank level Tier 1.

          Other benefits

          ■ Interest deduction at the bank level for distributions on the securities.

          ■ No withholding tax on dividend payments.

          Perpetual maturity

          Distributions are non-cumulative and are payable in any fiscal year only to the extent of
          available distributable funds for that fiscal year.

          ■ Dutch and Belgian transactions used an Alternative Coupon Satisfaction Mechanism
            (in ordinary shares) for deferred coupon payments.

          Available distributable funds means the amount shown as such on the latest published
          annual accounts of the bank, adjusted for any subsequent profit or loss of the bank.

          In most of these transactions, if distributions are not paid in full, the bank cannot pay cash
          distributions on its capital stock unless it pays four semi-annual distributions on the
          securities.

          In some French transactions, dividends on the company preferred are only mandatorily
          payable if the bank pays dividends on any securities that rank equally with or junior to
          the preferred.

          In some of these transactions, the securities participate in the losses, and to the extent the
          participations have been written down, participate in profits of the bank by being written
          up pursuant to restoration allocations.

          The securities can be redeemed early upon certain events only at their principal amount.

          In some Swedish bank transactions, the shareholders of the bank can vote to convert the
          principal amount of the securities to satisfy losses at the bank, and to reinstate any
          reduction in the principal amount of the securities thereafter.

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                                                                                       BY A BANK

          The securities rank junior to creditors, equal with other silent partnership interests and
          senior to the share capital, including preferred, of the bank.

          In one of the 2004 Swedish deals (Swedbank) and 2005 Danish deals (Danske Bank), the
          issuer issued non-cumulative perpetual step-up capital securities and Perpetual Capital
          Investments, respectively, under its Euro MTN programme.

          The 2004 French transactions were issued off their Euro MTN programmes and were
          deeply subordinated fixed rate notes convertible into floating rate notes after one year.

          In the 2004 Belgian transaction, the issuer bank received the benefit of a support
          agreement from its parent holding company. The issuer was also able to convert the
          securities for upper Tier 2 securities upon the occurrence of certain events.




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                                                                                          BY A BANK

• UK, Belgian and Irish Perpetual Non-Cumulative Equity Settled Instruments (since
  2000)


                  Bank
                                                                              Bank


                                                                                        Common
                                            Subordinated   Subordinated                 Securities,
                                               guarantee   undated note                 Subordinated
                                                                                        undated note
                                                                                        payments
  RCI’s
                              Coupon
                  Proceeds    Payments                                         UK plc


                                         OR                               Preferred
                                                                                              Proceeds
                                                                          Securities




                  Investors                                               Investors




          Selected issues

          ■ Barclays Bank (2000)

          ■ Northern Rock (2000)

          ■ Allied Irish Bank (2001)

          ■ Abbey National (2001)

          ■ Bank of Ireland (2001)

          ■ Bank of Scotland (2001)

          ■ Fortis Bank (2001)

          ■ Royal Bank of Scotland (2001)

          ■ Abbey National (TOPIC)(2002)

          ■ Barclays (TONs) (2002)

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                                                                                      BY A BANK

          ■ Anglo Irish (TONIC)(2002)

          ■ Northern Rock (TONs)(2002)

          ■ Lloyds TSB (RCIs) (2002)

          ■ Anglo Irish Bank (TONICS) (2003)

          ■ Bank of Ireland (2003)

          ■ Alliance & Leicester plc (UK) (2004)

          ■ Fortis Bank (Belgian) (2004)

          Selected 2005 issues

          ■ HBOS (May 2005)

          ■ Royal Bank of Scotland (June 2005)

          Selected product names

          ■ Reserve capital instruments or “RCIs”.

          ■ Perpetual Regulatory Tier 1 Securities or “PROs”.

          ■ Tier One Notes or “TONs”.

          ■ Tier One Preferred Income Capital Securities or “TOPICs”.

          ■ Tier One Non-Innovative Capital Securities or “TONICs”.

          Primary regulator capital treatment – bank level Tier 1.

          ■ RCIs and PROs – Limited to 15% innovative Tier 1 basket.

          ■ TONs, TOPICs and TONICs – At time of issue were limited to 35% non-innovative
            Tier 1 basket. Currently, other than grandfathered transactions, are subject to 15%
            innovative Tier 1 limit. See below and Appendix D – UK FSA Guidelines on Tier 1
            Capital.

          Other benefits

          ■ Interest deduction at the bank level for distributions on the securities.

          ■ No withholding tax on dividend payments.




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                                                                                        BY A BANK

          Perpetual securities that have no maturity date are issued directly by the bank pursuant to
          a Trust Deed or Trust Indenture. Terms may vary from issue to issue but generally are as
          described below.

          Redemption can only be in whole and not in part at the option of the issuer, subject to
          prior consent of the appropriate banking regulatory overseer and to certain solvency
          thresholds being met for the six months prior to the proposed redemption. Redemption
          can also occur following a change of control event or a change in tax status of the RCIs
          or PROs (see below).

          Interest payments (“payments”) can vary from being a fixed rate for an initial period and
          then a variable rate thereafter to a fixed rate set above a published variable interest rate,
          such as LIBOR or EURIBOR. Other examples include a rate reset after a term of five
          years pegged to a published variable rate.

          These securities are subordinated to the claims of senior creditors (including upper and
          lower Tier 2) and rank pari passu with holders of the most senior class of preference
          shares.

          Payments are effectively cumulative (provided they are paid only out of proceeds of the
          issue of ordinary shares as described below or in liquidation proceedings). Payments
          generally may be deferred by the bank subject to certain qualifications, as follows:

          ■ payments will be mandatory to the extent that the bank pays on ordinary shares or
            pari passu preference shares;

          ■ except in the case of a mandatory payment, payments may be deferred at the bank’s
            election or option;

          ■ deferral of payment may be without any requirement to pay interest on the deferred
            amount if and so long as the bank determines that the bank was, or the payment
            would have resulted in the bank being, in noncompliance with applicable bank capital
            regulations or pre-determined contractual insolvency thresholds;

          ■ if the bank determines that it is not in compliance with applicable capital adequacy
            regulations, it must either defer payment or satisfy the payment with proceeds from
            the issuance of ordinary shares; and

          ■ if the bank is not making payments on pari passu preference shares, then payments
            must be deferred, except in the case of a mandatory payment.




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                                                                                      BY A BANK

          Deferral of interest payments can be at the option of the issuer, and does not require a
          trigger, although this is also true of many non-operating subsidiary trust preferred
          transactions. The issuer (in most cases the operating company subsidiary of the bank
          holding company) is able to defer coupons for any period of time, although neither the
          issuer nor its holding company is allowed to declare or pay a dividend during deferral,
          apart from final dividends already declared or a dividend paid by the issuer to the holding
          company. Deferral is in two forms:

          ■ General Deferral – at the option of the issuer. Coupon so deferred accrues at the
            prevailing interest rate plus a premium (as in Barclays’ original RCI deal, +2%) until
            paid.

          ■ Exceptional Deferral – when the issuer does, or is about to, breach its capital
            requirements. Deferral is only for one coupon period (i.e., one year) and there is no
            interest-on-interest. This exceptionally deferred payment has to be paid once the
            payment can be made without breaching the capital rules. Banking regulatory
            approval (such as the FSA) is required to make payment following exceptional
            deferral.

          Deferred coupons must be settled by the proceeds from the sale of ordinary shares, and
          RCI holders always get paid in cash. This process is called the “Alternative Coupon
          Satisfaction Mechanism” (“ACSM”). If there is an insufficiency of authorized, unissued
          shares to be sold, then the general deferred coupons bear interest at the coupon rate plus a
          premium (i.e., 2%), until the shares are authorized. If a “market disruption event” occurs,
          then the issuer can defer payment using the ACSM. In this case, the deferred payment
          will accrue interest at the same rate as the coupon should the disruption continue for 14
          days or more (i.e., no 2% penalty). In the case of securities issued with a guarantee (e.g.,
          Anglo Irish in 2003), there is an additional guarantee of the ACSM from the guarantor.

          The issuer and the holding company are “required to keep available for issue enough of
          its shares as it reasonably considers would be required to satisfy from time to time the
          next year’s coupon payments” using the ACSM.

          Some of these securities have a “step-up” upon the occurrence of certain tax or regulatory
          events and at the option of the issuer.

          These securities typically have a “dividend stopper” as well as a “capital stopper” feature.
          If the issuer defers payment for any reason, while any payment is deferred, neither the
          issuer nor the guarantor may (i) declare or pay a dividend or a distribution on any of their
          respective ordinary or preference shares or stock or other issued Tier 1 securities or (in
          the case of the guarantor) make any payment under a Tier 1 guarantee in respect of any
          such dividend or distribution (other than a final dividend declared by the holders of the
          ordinary stock of the guarantor before such payment is so deferred, or a dividend or a
          distribution or payment is made by the issuer to the guarantor, any holding company of
          the guarantor or to another wholly-owned subsidiary of the guarantor) or (ii) redeem,
          purchase or otherwise acquire any of their respective ordinary shares, ordinary stock or
          other Tier 1 securities (other than where such shares or stock are held by the issuer, the


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                                                                                      BY A BANK

          guarantor, any holding company of the guarantor or any wholly-owned subsidiary of the
          guarantor as well as certain other non-material carve-outs).

The UK FSA’s Historic Approach to RCIs and PROs:

          Prior to the first RCI issue, the UK FSA (the UK bank regulator) had agreed to allow
          stock settlement regarding repayment of principal at the call date on a number of other
          Tier 1 deals. It therefore had little scope to resist this feature for coupon payments,
          particularly since traditional UK preference shares have permitted payment in shares in
          lieu of deferral/suspension.

          The RCI deferral mechanism allows the issuer to eliminate cash interest payments if
          necessary and to ultimately capitalize these – coupons can be missed, and as fresh equity
          has to be issued to satisfy these missed coupon payments, there is no depletion of the
          issuer’s (i.e., the bank’s) own reserves. This meets the UK FSA requirement that if a
          dividend on Tier 1 preferred is non-cumulative, it is acceptable to pay the dividend in
          “scrip” to preserve the capital base of the bank. This is one reason why RCIs are allowed
          to count as regulatory Tier 1 capital. Another is that the UK FSA has received an
          accountant’s opinion on RCIs which stated that the proceeds “feed straight into reserves”
          (discussed in more detail below).

          In terms of regulatory limits on innovative capital, the treatment of RCIs effectively
          depends on the coupon structure; tax-deductibility alone does not make them innovative.
          RCIs with a step-up coupon are subject to the 15% limit for non-innovative (i.e., hybrid)
          Tier 1; callable RCIs without the step-up (such as retail preferred) would not
          automatically be subject to the 15% limit.

          When the RCIs were first issued, the UK FSA granted Tier 1 treatment to a direct issue
          only if it was accounted for within shareholders’ funds of the issuing bank. In the case of
          the Barclays’ issue, its auditors provided an opinion to the UK FSA that this was the case.
          Nevertheless, this approach came under the scrutiny of the UK Accounting Standards
          Board’s (ASB) Urgent Issues Task Force (UITF). Ultimately it was decided that these
          instruments should in fact be accounted for as debt and not equity by the ASB and the
          UK FSA now will not treat an instrument accounted for as a liability or a prospective or
          contingent liability as core Tier 1 capital. Thus, direct issues are still allowed to be
          counted as Tier 1 capital, whether accounted for as equity or debt, so long the ratio of the
          securities to bank capital remains above 4%.

Selected RCI and PROs matters

          ■ If at any time the securities cease to qualify as Tier 1 capital, the bank may, subject to
            the consent of the appropriate regulatory overseer, exchange the securities for or vary
            the term of the securities so they become Upper Tier 2 securities or, if such
            exchanged or varied securities do or would not qualify as Upper Tier 2 capital or
            certain other provisions apply and provided that certain solvency conditions are met,
            redeem all (but not some only) of the securities at their principal amount together
            with any outstanding payment obligations. The securities rank junior to creditors,


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                                                                                          BY A BANK

                  equal with senior preference shareholders and senior to all other shareholders of the
                  bank.

          ■ In certain issues there can be a guarantor (e.g., Bank of Ireland) whereby the
            investments are guaranteed on a subordinated basis by the guarantor. Payment of
            principal and/or interest in respect of the investments will be deemed to be due and
            payable in full for purposes of the guarantee notwithstanding that they are not in fact
            due and payable by the bank. This means that the rights and claims of the holders of
            the investments (including the guarantee provided thereunder) are subordinated to the
            claims of any senior creditors of the bank or the guarantor in that no payment in
            respect to the investments or the guarantee shall be due and payable except to the
            extent that the bank of the guarantor is solvent and could make such payment and still
            be solvent immediately thereafter.

          ■ RCI coupons are paid by the bank directly out of pre-tax income and thus, RCIs are
            tax-deductible instruments. This is so because although RCIs are issued directly out
            of the operating company, the UK tax authorities (Inland Revenue) still allows the
            coupons to be paid out of pre-tax income. RCIs are treated as debt for tax purposes,
            as they are directly issued and economically have the same terms as Upper Tier 2
            debt in that coupons are effectively cumulative.

          ■ RCIs and PROs are service marked names given to this type of Tier 1 capital security.
            Thus, there is the possibility that there will be more directly issued structures in the
            future under other names, when issues are lead-managed by investment banks that
            were not part of either RCI or PRO transactions. Nevertheless, while there are subtle
            differences depending on the particular deal, RCIs and PROs for all extensive
            purposes are the same type of security.

Selected TONs, TOPICs and TONICs Matters

       Barclays Bank PLC was the first to issue a non-innovative Tier 1 to institutional clients.
Although TONs have no step-up for the investor if the issue is not called at the first call date,
Barclays is forced to issue equity to pay the coupon going forward, and thus faces its own
“step-up” in financing costs. It should be noted that this only applies to the coupon and not the
principal value of the TONs.

          The salient features of this product are as follows:

          ■ perpetual, with a call in 30 years;

          ■ directly issued by Barclays Bank PLC and coupons are paid out of pre-tax income
            (i.e., tax deductible to the issuer);

          ■ no step-up in coupon rate;

          ■ if the issue is not called at the first call date, the issuer has to issue new equity to raise
            enough cash to pay the coupon. Investors always receive cash coupons;


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                                                                                       BY A BANK

          ■ coupons can be deferred, but are cumulative under regulatory events (not liquidation),
            and are paid when the issue is ultimately called; and

          ■ in winding-up, TONs holders rank pari passu with other classes of preference shares
            and RCIs and PROs. The claim in a winding up is limited to principal, and not
            deferred coupons.

         Although there is no step-up in coupon rate at the call date, there still is a strong incentive
to call the issue at the first call date. The rationale is that first, it will be an administrative
nuisance for the issuer to have to issue equity at every coupon date after the first call date, and
this issuance will also be anticipated by the market. The cost of equity will always be higher
than the cost of debt, so there will also be a cost incentive to the issuer to call the securities.
Thus, whereas there is no explicit step-up, there is an implicit step-up built in. Another incentive
for the issuer to call TONs is the general perception in the market of the issuer and its reputation
in the market.

        The UK Financial Services Authority (UK FSA) published a consultation paper (CP 155)
in mid-October 2002, “Tier 1 Capital for Banks: Update to IPRU (Banks)”, which set out,
among other things, proposed guidelines for UK bank issuances of “non-innovative” Tier 1
capital. The UK FSA invited comments until the end of January 2003. In November 2003, the
UK FSA issued a Policy Statement to CP 155, which was in response to the controversies
surrounding new Tier 1 issuances that relied on the UK FSA’s proposals contained in CP 155.
The UK FSA grandfathered the TONs, TONICs, and TOPICs deals done by UK banks during
2003 (although possibly not forever) but prohibited any further issuance of these types of deals
to be treated as Core Tier 1, even though they may be economically equivalent to preference
shares. For more information on recent developments in the UK FSA’s Tier 1 capital regulatory
regime, please see Appendix D – UK FSA Guidelines on Tier 1 Capital.




                                                  140
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                                                                                     BY A BANK

• Singapore Bank Non-Convertible Non-Cumulative Preference Shares (since 2002)



                                                 Bank




                                                                     Dividends
                                                    Proceeds
                        Preference
                        Shares




                                                Investors



          Only issue

          ■ Overseas – Chinese Banking Corporation (2002)

          Primary regulator capital treatment – bank level Tier 1.

          Designed primarily for Asian offerings.

          The preference shares are non-cumulative, non-convertible, perpetual issued by the bank
          that qualify as Tier 1 capital of the bank.

          The shares are redeemable at the option of the bank: (i) five years after the date of
          issuance thereof; (ii) ten years after the date of issuance thereof; and (iii) on each
          dividend date thereafter. In addition, the bank may redeem the preference shares upon
          the occurrence of a specified tax event or the occurrence of a specified special event.

          Subject to certain limitations, each shareholder shall be entitled to receive a
          non-cumulative preferential cash dividend based on the liquidation preference.


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                                                                               BY A BANK

• Australian Bank Convertible Non-Cumulative Preference Shares, Australian Market
  only (since 2000)



                                             Bank




                                                                Dividends
                                              Proceeds
                        Preference
                        Shares




                                            Investors



          Selected issues

          ■ Bank of Queensland (2000)

          ■ Commonwealth Bank of Australia (2001)

          ■ Suncorp-Metway (2001)

          ■ Commonwealth Bank of Australia (2003)

          Selected 2006 issue

          ■ Commonwealth Bank of Australia (March 2006)

          Selected product names

          ■ Preferred Exchangeable Resettable Listed Shares or “PERLS”



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                                                                                      BY A BANK

          ■ Reset Preference Shares or “RePS”

          Designed primarily as domestic Australian offerings.

          Primary regulator capital treatment – bank level Tier 1.

          Other transaction benefits

          ■ Franked Dividend. If the dividend on the preference shares are not franked to the
            specified level (e.g., 100%), investors will have the right to elect to exchange their
            preference shares on the next dividend payment date for ordinary shares or third party
            cash

          ■ After ten years, the issuer can reset the margin used in calculating the dividend rate
            and the dividend payment dates; the permission of the APRA may be required.

          The preference shares are perpetual and non-cumulative.

          If dividends are not paid on the preference shares, no dividends can be paid on the bank’s
          ordinary shares until four consecutive dividends are paid or an optional dividend is paid
          on the preference shares.

          The dividend is non-cumulative and payable quarterly in arrears. The dividend payable
          for each quarter is calculated based on the issue price, the dividend rate and the number
          of days in that quarter. A floating dividend rate is set at a percentage and is adjusted
          every quarter to reflect market movements in the 90 day bank bill rate.

          The preference shares may be converted into ordinary shares either automatically upon a
          takeover of or scheme of arrangement involving the issuer or at the bank’s election upon
          the occurrence of a regulatory event, tax event or acceleration event.

          Investors have the flexibility to exit their investments in the preference shares through an
          exchange election after five years upon a change in the margin used in calculating the
          dividend rate or, if the dividend is not fully franked, at the next dividend payment date,
          whereupon the issuer will either deliver ordinary shares in exchange or cause a third party
          to purchase the preference shares from the investors for the cash value of those shares.




                                                  143
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                                                            CHAPTER 10

                       CAPITAL INSTRUMENTS ISSUED BY A BANK AND LINKED
                                   TO ANOTHER INSTRUMENT


  Australian Bank Non-Cumulative Preference Shares Stapled to Subsidiary
     Access Share (1989) ................................................................................................................... 145
  Australian Bank Non-Dividend Paying Preference Shares Linked to Subsidiary
     Debt Securities (since 1998) ....................................................................................................... 147
  Australian Bank Non-Dividend Paying Preference Shares Stapled to Bank Debt
     Securities, Australian Market only (since 1999)......................................................................... 149
  Australian Bank Non-Dividend Paying Preference Shares Stapled to Subsidiary
     Debt Securities, Australian Market only (since 2003)................................................................ 151
  Australian Bank Non-Dividend Paying Preference Shares Stapled to Subsidiary
     Debt Securities (since 2003) ....................................................................................................... 156


       In these structures, the bank issues preferred securities to a third party, and satisfies the
carrying charges on the preferred or the instruments issued to fund the purchase of the preferred
with an instrument from another tax-effective source. These securities provide bank level, not
minority interest, Tier 1 and could be considered by the bank’s primary regulator to fall outside
the 15% innovative Tier 1 capital basket. However, these securities are difficult to structure to
achieve the desired tax effects.

        The first two Australian structures referred to below illustrate how a change in tax laws
can dramatically impact the complexity required to achieve the desired tax result in structuring a
Tier 1 capital transaction.




                                                                       144
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                                                              BANK AND LINKED TO ANOTHER INSTRUMENT
• Australian Bank Non-Cumulative Preference Shares Stapled to Subsidiary Access
  Share (1989)

                                             Bank                                                    Bank
                     Bank                  Subsidiary               Bank
                                                                                                   Subsidiary

                                Proceeds

  Preference
                   Dividends         Access
    Shares
                                     Share                                                             Dividends
                                                        OR


                  Depositary               Trust                     Depositary                      Trust
                                                                                       Dividends

      ADRs         Dividends    Proceeds
                                                                           Dividends


                    Investors                                        Investors


          Only issue

          ■ Westpac (1989)

          No other issues due to Australian tax law changes.

          Primary regulator capital treatment – bank level Tier 1 capital.

          Other transaction benefit – The dividends the bank pays to Australian taxpayers are tax
          exempt to the extent paid out of income on which the bank has paid Australian income
          tax. This structure enabled the bank to retain its Australian taxed income to pay
          dividends to its ordinary shareholders, who were predominantly Australian taxpayers,
          thereby reducing its cost of capital.

          The preference shares were issued in the form of ADRs listed on the New York Stock
          Exchange to avoid New South Wales, Australia stamp duty.

          Features

          ■ Dividends are non-cumulative and payable if and when declared by the board of
            directors:

                  – to the extent of the bank’s consolidated net income for the immediately preceding
                    fiscal year, less any share dividends during the current fiscal year; and



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                                                          BANK AND LINKED TO ANOTHER INSTRUMENT
                  – so long as payment doesn’t result in a breach of the bank’s capital adequacy or
                    other supervisory requirements.

          ■ In lieu of declaring and paying dividends on the preference shares, the bank can pay
            dividends received on an access share issued by a subsidiary of the bank. The
            subsidiary had significant retained unfranked income (i.e., real estate gains not
            subject to Australian taxation).

          ■ The dividend withholding tax rate for U.S. holders was 15%, which could be used by
            a U.S. holder as a foreign tax credit subject to certain limitations.

          ■ Liquidation payment on the bank preference shares is determined by reference to the
            bank’s available assets.




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                                                                        BANK AND LINKED TO ANOTHER INSTRUMENT
• Australian Bank Non-Dividend Paying Preference Shares Linked to Subsidiary Debt
  Securities (since 1998)



                                                            Investors


                                      Proceeds             Preferred           Dividend Payments
                                                           Securities

       Jersey                                                                                ADRs representing
      Charitable           Expense                                                           Bank Preference Shares
        Trust              Payments                       Trust
                                                                                                                          Bank
             Voting                                                                                      Indemnity Fee   Affiliate
                                                       Debt             Interest         Jersey
             Shares                Proceeds                                              Preference
                                                       Securities       Payments
                                                                                         Shares
        Jersey             Voting Shares
       Holding                                       U.K. Company                                        Collateral Agent
                            Dividends
       Company
                                                                                         ADRs Purchase
                                                        Jersey
   51%            49%              Proceeds             Preference                         Contract
  Voting          Voting                                Shares
  Shares          Shares                                                                              ADRs representing
                                                                                                      Bank Preference Shares
                                                    Jersey Subsidiary

                                                        ADRs representing
                                                        Bank Preference Shares                  Income Entitlements


                   Proceeds                         ADR Depositary


                                                        Bank Preference Shares
                                                                                     Capital
                                                                                     Contribution
                                                                                                          Distribution List
                                                          Bank

                                                                                           Distribution Loan
                                           Voting                    Voting Shares
                                                                                                                   Interest Payments
                                           Shares
                                                                                        Bank
                                                                                        Loan
                                                    Bank Subsidiary                                             US LLC
                                                                                        Interest
                                                                                       Payments


           Only issues

           ■ Australia and New Zealand Banking (1998)

           ■ National Australia Bank (1998)


                                                                147
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                                                        BANK AND LINKED TO ANOTHER INSTRUMENT
          Primary regulator capital treatment – bank level upper Tier 1 capital.

          Other transaction benefits

          ■ Interest payments to investors on preferred securities out of the Trust are deductible
            by the bank or its subsidiary.

          ■ Available investor tax credits saved for Australian ordinary shareholders.

          ■ Avoids Australian withholding tax on preference share dividends.

          The trust is a registered investment company under the 1940 Act.

          Bank preference shares convert into or are exchangeable for dividend paying preference
          shares and are distributed to investors upon the occurrence of any of the following events:

          ■ 49 years after issuance;

          ■ any time at the discretion of the bank;

          ■ failure to receive dividends in full on any dividend payment date;

          ■ any date when the Tier 1 or total capital adequacy ratios of the bank as reported by
            the bank or determined by its primary regulator falls below the statutory minimums
            and is not increased to such minimums within 90 days;

          ■ specified changes affecting the integrity of the transaction structure;

          ■ the winding up of the bank or any of the other structure companies or certain
            proceeding in furtherance thereof; or

          ■ the collateral agent fails to have a perfected security interest in the Jersey preference
            shares and ADRs representing the bank preference shares.

          The preference shares are perpetual and non-cumulative.




                                                  148
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                                                         BANK AND LINKED TO ANOTHER INSTRUMENT
• Australian Bank Non-Dividend Paying Preference Shares Stapled to Bank Debt
  Securities, Australian Market only (since 1999)



                                                  Bank




                                            New York Branch


                                       Stapled          Interest
                                                                     Proceeds
                                                                     from sale
                       Preference                                    of Income
                                                   Notes             Securities
                       Shares          Stapled




                                                 Investors




          Only issue

          ■ National Australia Bank (1999)

          Primary regulator capital treatment – bank level upper Tier 1 capital.

          Other transaction benefits

          ■ New York branch obtains an interest deduction on the notes, which are legal form
            debt for purposes of the branch tax rules.

          ■ Available investor tax credits saved for Australian ordinary shareholders.

          ■ Avoids Australian withholding tax on preference share dividends.

                                                  149
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                                                        BANK AND LINKED TO ANOTHER INSTRUMENT
          The notes are perpetual.

          So long as the notes are outstanding, interest is payable on the notes and no dividends are
          payable on the preference shares.

          Interest is non-cumulative and is not due and payable if:

          ■ the amount of interest payable on the notes on the interest payment date would exceed
            the bank’s distributable profits for the previous fiscal year (or such other amount
            determined by the bank’s primary regulator), less interest payments on the notes and
            dividend payments of any share capital of the bank and income entitlement payments
            on the bank’s TrUEPrS during the bank’s current fiscal year;

          ■ the payment would result in the Tier 1 or total capital ratio of the bank (as determined
            by the bank or the bank’s primary regulator) falling below regulatory required
            minimums; or

          ■ the bank’s primary regulator objects to the payment.

          If the bank fails to pay interest, no ordinary share dividends can be paid unless and until
          four consecutive interest payments are made.

          The preference shares are partly paid, but must be fully paid if there is an event of default
          under the notes. Mandatory delivery of the note to the bank constitutes paying up the
          preference shares.

          Events of default under the notes include:

          ■ failure to pay interest when due on the notes;

          ■ the Tier 1 or total capital ratio of the bank (as determined by the bank or the bank’s
            primary regulator) falls below the regulatory required minimum and is not restored to
            such required minimum within 90 days;

          ■ the bank is insolvent; or

          ■ certain events involving the liquidation or winding up of the bank.

          The preference shares are perpetual and non-cumulative.




                                                  150
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                                                          BANK AND LINKED TO ANOTHER INSTRUMENT
• Australian Bank Non-Dividend Paying Preference Shares Stapled to Subsidiary Debt
  Securities, Australian Market only (since 2003)



                                      Pre Conversion Event



                                                                             New Zealand
                  Bank
                                          Gu                                  Subsidiary
                                            ara
                                                  nte
                                                      e


                                            Stapled
            Preference shares                                            Interest bearing notes


                                             Units




                                             Trust




                           Trust                                    Proceeds from
                                          Distributions             Sale of Trust
                         Securities
                                                                    Securities



                                            Investors




                                              151
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CHAPTER 10                                                     CAPITAL INSTRUMENTS ISSUED BY THE
                                                         BANK AND LINKED TO ANOTHER INSTRUMENT



                                        Post Conversion Event


                                                                                New Zealand
                                                                                 Subsidiary


                   Bank
                                                                               Interest bearing
                                                   New Zealand                      notes
                                                    Subsidiary



            Dividend paying fully
            paid preference shares

                                                     Trust




                                             Investors



          Selected issue

          ■ Australia and New Zealand Banking Group Limited (2003)

          Primary regulator capital treatment – bank level Tier 1 capital

          ■ The trust securities, while treated as Tier 1 capital, are classified as loan capital of the
            bank.

          Other transaction benefits

          ■ The New Zealand subsidiary obtains an interest deduction on the notes, which are
            legal form debt for purposes of the New Zealand subsidiary.

          ■ Available investor tax credits saved for Australian ordinary shareholders.

                                                   152
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                                                        BANK AND LINKED TO ANOTHER INSTRUMENT
          ■ Avoids Australian and New Zealand withholding tax on distributions made on the
            trust securities.

          The notes and preference shares are stapled together and deposited as a unit into the trust
          and may not be separately traded. Each trust security corresponds to a unit.

          The bank guarantees payments on the notes on a subordinated basis.

          So long as no conversion event (as described below) has occurred, the preference shares
          will not pay dividends and the distributions made on the trust securities will be derived
          from interest payments paid to the trust by the New Zealand subsidiary or payments made
          by the bank pursuant to the guarantee.

          Interest is non-cumulative and is not due and payable on any interest payment date if:

          ■ the amount of interest payable on the notes on the interest payment date would exceed
            the bank’s distributable profits as at the record date for the interest payment;

          ■ the interest payment would result in the total capital adequacy ratio or Tier 1 capital
            ratio of the bank falling below regulatory required minimums; or

          ■ the bank’s primary regulator objects to the payment.

          If and so long as the New Zealand subsidiary fails to pay interest, the bank may not:

          ■ pay any dividends on any of its share capital;

          ■ repurchase, redeem or otherwise acquire any of its ordinary shares; or

          ■ pay any principal, premium or interest on, or repurchase or redeem any of its debt
            securities that rank equal with or junior to the guarantee.

          Events of default under the notes include certain events involving the liquidation or
          winding up of the bank or the New Zealand subsidiary.

          A conversion event with respect to a trust security will be the earliest occurrence of any
          of the following dates or events:

          ■ any date selected by the bank in its absolute discretion;

          ■ the business day prior to the fiftieth anniversary of issuance;

          ■ a redemption date with respect to the preference shares comprising a component of
            the related trust security;

          ■ the holder of the trust security elects to exchange the trust security for ordinary shares
            of the bank;



                                                  153
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                                                         BANK AND LINKED TO ANOTHER INSTRUMENT
          ■ failure of the trust to make a distribution due under the trust securities on or within
            seven business days of the relevant distribution date;

          ■ any date on which the primary regulator determines that the Tier 1 or total capital
            adequacy ratios of the bank have fallen below statutory minimums;

          ■ the issuance by the primary regulator of a written directive for the bank to increase its
            capital;

          ■ the appointment by the primary regulator of a statutory manager to the bank or the
            assumption by the primary regulator of control of the bank or commencement of
            proceedings for the winding up of the bank;

          ■ any date on which the retained earnings of the bank have fallen below zero; or

          ■ an event of default under the notes.

          Upon the occurrence of a conversion event with respect to a unit underlying a trust
          security:

          ■ the preference share comprising a component of the unit underlying the trust security
            will convert into a dividend paying instrument;

          ■ the note comprising a component of such unit will detach from the preference share
            and will be transferred by the trust to a subsidiary of the bank;

          ■ the trust security will be redeemed and, depending on the nature of the conversion
            event, the related preference share or cash or ordinary shares of the bank in respect
            thereof will be distributed to the holder; and

          ■ if the conversion event relates to all of the trust securities, the trust will be dissolved.

          Because the notes are not repayable prior to a conversion event, holders of trust securities
          will never be entitled to payment in respect of the principal of the notes.

          The preference shares may be redeemed by the bank for cash following the expiration of
          the applicable non-call period (i.e., 7 to 10 years following issuance).

          If the bank does not redeem the preference shares at the end of the non-call period or on
          any dividend payment date thereafter, holders will have the right to exchange each trust
          security for ordinary shares of the bank having a market value equal to U.S.$1,000 per
          trust security.

          On the fiftieth anniversary of issuance, each preference share outstanding following the
          conversion event on the immediately preceding business day will automatically be
          exchanged for ordinary shares of the bank having a market value equal to U.S.$1,000.



                                                   154
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                                                       BANK AND LINKED TO ANOTHER INSTRUMENT
          Holders of trust securities may withdraw the units represented by such trust security from
          the trust.




                                                 155
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                                                                   BANK AND LINKED TO ANOTHER INSTRUMENT
• Australian Bank Non-Dividend Paying Preference Shares Stapled to Subsidiary Debt
  Securities (since 2003)

                                    Pre Assignment or Conversion Event


                                                                                     New Zealand or UK
                        Bank
                                                 Gu                                     Subsidiary
                                                    ar   ant
                                                             ee



                                                   Stapled
                  Preference shares                                                  Interest bearing notes


                                                     Units




                                                     Trust




                                      Trust                               Proceeds from
                                                 Distributions            Sale of Trust
                                    Securities
                                                                          Securities



                                                   Investors




                                   Post Assignment or Conversion Event


                                                                                                New Zealand or UK
                                                                                                   Subsidiary
                                Bank



                                                                     Bank or Bank
                                                                     Subsidiary or
                                                                                                     Interest bearing
                                                                       Branch
                                                                                                          notes


                        Dividend paying
                      fully paid preference
                               shares



                                                           Trust




                                                     Investors




                                                           156
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                                                           BANK AND LINKED TO ANOTHER INSTRUMENT


          Selected issues

          ■ Australia and New Zealand Banking Group Limited (2003 and 2004)

          Selected 2006 issues

          ■ Commonwealth Bank of Australia (March 2006)

          Primary regulator capital treatment – bank level Tier 1 capital

          ■ The trust securities, while treated as Tier 1 capital, are classified as loan capital of the
            bank.

          Other transaction benefits

          ■ NZ or UK subsidiary obtains an interest deduction on the notes, which are legal form
            debt for purposes of the NZ or UK subsidiary.

          ■ Available investor tax credits saved for Australian ordinary shareholders.

          ■ Avoids Australian, NZ and UK withholding tax on distributions made on the trust
            securities.

          Features

          ■ The notes and preference shares are stapled together and deposited as a unit into the
            trust (which is a U.S.-domiciled trust that may be a subsidiary of the bank and
            qualifies as a grantor trust for U.S. tax purposes) and may not separately trade. Each
            trust security corresponds to a unit.

          ■ The bank guarantees payments on the notes on a subordinated basis.

          ■ Generally speaking, so long as no assignment or conversion event (as described
            below) has occurred, the preference shares will not pay dividends and the
            distributions made on the trust securities will be derived from interest payments paid
            to the trust by the NZ or UK subsidiary or payments made by the bank pursuant to the
            guarantee.

          ■ Interest is non-cumulative and is not due and payable on any interest payment date if:

                  – the amount of interest payable on the notes on the interest payment date would
                    exceed the bank’s distributable profits as at the record date for the interest
                    payment;

                  – the interest payment would result in the total capital adequacy ratio or Tier 1
                    capital ratio of the bank falling below regulatory required minimums; or

                                                     157
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                                                            BANK AND LINKED TO ANOTHER INSTRUMENT
                  – the bank’s primary regulator objects to the payment.

          ■ The preference shares may be redeemed by the bank for cash following the expiration
            of the applicable non-call period (i.e., 10 years following issuance or at any time upon
            certain tax or regulatory events negatively affecting the bank), which, in turn, triggers
            a redemption of the related trust securities. The trust securities may also be redeemed
            for “qualifying Tier 1 securities”, and the terms of the preference shares may be
            amended and such preference shares may be issued to holders of the trust securities in
            redemption thereof, in either case, in the event the trust securities and/or preference
            shares no longer qualify as Tier 1 capital.

          ■ If and so long as the NZ or UK subsidiary fails to pay interest, the bank may not:

                  – pay any dividends on any of its share capital;

                  – repurchase, redeem or otherwise acquire any of its ordinary shares; or

                  – pay any principal, premium or interest on, or repurchase or redeem any of its debt
                    securities that rank equal with or junior to the guarantee.

          ■ Events of default under the notes include certain events involving the liquidation or
            winding up of the bank or the NZ or UK subsidiary.

          ■ An assignment or conversion event with respect to a trust security will be the earliest
            occurrence of any of the following dates or events:

                  – any date selected by the bank in its absolute discretion;

                  – the business day prior to the maturity date;

                  – a redemption date with respect to the preference shares comprising a component
                    of the related trust security;

                  – if appropriate, the holder of the trust security elects to exchange the trust security
                    for ordinary shares of the bank;

                  – failure by the bank to pay a dividend on the preference shares within the
                    applicable grace period after the dividend payment date;

                  – if applicable, any date set for the repurchase of units by an entity nominated by
                    the bank if (i) there are insufficient funds to repurchase all the units to be
                    repurchased on such date or (ii) a holder of a unit which has been withdrawn from
                    the trust and is due to be repurchased is not paid on that repurchase date;

                  – any date set for the redemption of any preference shares if (i) the property trustee
                    has insufficient funds on deposit to redeem all of the preference shares called for
                    redemption or (ii) a holder of a unit which has been withdrawn from the trust and
                    which is due to be redeemed is not paid on that redemption date;

                                                      158
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                                                             BANK AND LINKED TO ANOTHER INSTRUMENT
                  – failure of the trust to make a distribution due under the trust securities, or for the
                    bank to make a payment under the trust guarantee, within the applicable grace
                    period after the relevant distribution date;

                  – failure by the NZ or UK subsidiary to make an interest payment under the notes,
                    or for the bank to make a payment under the notes guarantee, within the
                    applicable grace period after the relevant interest payment date;

                  – any date on which the primary regulator determines that the Tier 1 or total capital
                    adequacy ratios of the bank have fallen below statutory minimums;

                  – the issuance by the primary regulator of a written directive for the bank to
                    increase its capital;

                  – the appointment by the primary regulator of a statutory manager to the bank or the
                    assumption by the primary regulator of control of the bank or commencement of
                    proceedings for the winding up of the bank;

                  – any date on which the retained earnings of the bank have fallen below zero; or

                  – an event of default under the notes.

          ■ Upon the occurrence of an assignment or conversion event with respect to a unit
            underlying a trust security:

                  – the preference share comprising a component of the unit underlying the trust
                    security will convert into a (fully) dividend paying instrument;

                  – the note comprising a component of such unit will detach from the preference
                    share and will be transferred by the trust to the bank or a subsidiary of the bank;

                  – the trust security will be redeemed and, depending on the nature of the assignment
                    or conversion event, the related preference share, qualifying Tier 1 security or
                    cash or ordinary shares of the bank in respect thereof, will be distributed to the
                    holder; and

                  – if the assignment or conversion event relates to all of the trust securities, the trust
                    will be dissolved.

          ■ Because the notes are not repayable prior to a conversion event, holders of trust
            securities will never be entitled to payment in respect of the principal of the notes.

          ■ If the trust is a hat-check trust, holders of trust securities may withdraw the units
            represented by such trust security from the trust.




                                                       159
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                                                        BANK AND LINKED TO ANOTHER INSTRUMENT
          ■ Upon a winding up of the bank, the guarantee (and effectively the trust securities)
            rank as junior subordinated indebtedness of the bank (or pari passu with the bank’s
            preference shares).
          ■ Trust security holders have the right to proceed directly against the bank if the trust
            fails to pay a distribution within the applicable grace period.




                                                  160
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                                                              CHAPTER 11

                                               MANDATORY CONVERTIBLE
                                              OR EXCHANGEABLE SECURITIES


  Depositary Receipts Representing Pre-Paid Australian
     Bank Ordinary Share Forward Purchase Contracts
     (since 1998) ................................................................................................................................ 162
  U.S. Synthetic Mandatory Convertible Securities (since 2002)........................................................ 164
  U.S. Synthetic Mandatory Convertible Securities – Convertible for Preferred
     Stock (since 2006) ...................................................................................................................... 168




                                                                          161
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                                                                                                 EXCHANGEABLE SECURITIES
• Depositary Receipts Representing Pre-Paid Australian Bank Ordinary Share Forward
  Purchase Contracts (since 1998)

                                   Purchase Contracts

                                                              Purchase
              Bank                                            Contract
                                                               Agent
                                   Proceeds




                                                                          Purchase
                                                                          Contracts
       Receipts                                    Proceeds




                                                                                           US Treasury
                                                                                            Securities


                                                                                      Payments at maturity of       US
             Initial                                                                  US Treasury Securities
                                                              Custodian                                           Federal
            Purchaser              Proceeds
                                                                                                                Government
                                                                                           Proceeds




 Receipts               Proceeds




            Investors
                                          Distributions




            Direct issue of by bank under forward purchase contracts.

            Only bank issue to date

            ■ St. George Bank (1998)

            Primary regulator capital treatment – bank Tier 1 capital.

            Other transaction benefits

            ■ Not subject to 15% innovative basket limitation.

            ■ Prior to the contract settlement date, non-dilutive to the bank’s ordinary shares.

                                                                 162
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                                                                       EXCHANGEABLE SECURITIES
          ■ The cost of equity does not require the use of franking credits, which can instead be
            used with respect to dividends paid to holders of the bank’s ordinary shares.

          The depositary receipts were listed on the Winnipeg Stock Exchange to avoid New South
          Wales, Australia stamp duty.

          Features

          ■ Fixed semi-annual payments to investors from maturing U.S. treasuries held by the
            depositary for the benefit of receipt holders.

          ■ The number of bank ordinary shares to be purchased on the contract settlement date is
            dependent upon the ordinary share trading price and the U.S. dollar/Australian dollar
            exchange rate on that date, and is subject to a floor and a collar.

          ■ The purchase contracts settle three years after the date the receipts are issued.

          ■ The purchase contracts accelerate upon the occurrence of reorganization events such
            as winding up or takeover of the bank.

          ■ Holders of the receipts may withdraw the underlying purchase contracts and related
            forward purchase contracts at any time.

          The depositary is not an investment company for purposes of the 1940 Act because of the
          withdrawal feature.




                                                  163
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                                                                                             EXCHANGEABLE SECURITIES



     • U.S. Synthetic Mandatory Convertible Securities (since 2002)

          Each security consists of a stock purchase contract and a beneficial interest in a trust
          preferred security of the issuing bank holding company that collateralizes the holder’s
          obligation to purchase the underlying common stock of the issuing bank holding
          company on the stock purchase date.




                            Purchase
                                                                                          Junior
           Purchase         Contracts
                                           Bank                                        Subordinated
           Contract                                                                     Debentures
                                        Holding Co.
            Agent



                                                                      Proceeds from
                                                                      Remarketing at
                                                                        Settlement
                                   SPACES            Proceeds
 Contract         Purchase
Adjustment
                  Contracts
 Payments                                                                                   Trust Preferred
                                                                                              Securities
                                                                                                                   Delaware
                                                                                                                    Trust

                                                                            Collateral
                                        Underwriter
                                                                             Agent

                      Common
                       Stock at
                      Settlement



                                   SPACES            Proceeds                                           Trust Preferred Securities
                                                            Trust Preferred                                   at Settlement
                                                           Securities Subject
                                                               to Pledge
                                                                                       Proceeds from               Remarketing
                                         Investors                                     Remarketing at                Agent
                                                                                         Settlement
                                                                 Distributions



          Selected Issues

          ■ Capital One Financial Corporation (2002)

          ■ Provident Financial Group, Inc. (2002)

          ■ State Street Corporation (2003)

                                                                164
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                                                                          EXCHANGEABLE SECURITIES
          ■ Marshall & Ilsley Corporation (2004)

          Selected product name

          ■ Common SPACES

          ■ Primary regulator capital treatment – Tier 1 treatment for the synthetic mandatory
            convertible security. On March 1, 2005, the Board of Governors of the Federal
            Reserve System issued final regulations on trust preferred securities and the definition
            of capital. Such regulations, in part, exempt qualifying mandatory convertible
            preferred securities from the 15% limitation on restricted core capital elements
            applicable to internationally active banking organizations. For further information on
            this topic, please refer to Appendix A – Basle Committee and U.S. Regulatory
            Innovative Tier 1 Capital Requirements.

          Features of Marshall & Ilsley issue

          ■ Two components:

                  – a variable-rate purchase contract pursuant to which the investor agrees to
                    purchase from the issuer a number of shares of common stock which varies
                    depending on the share price of the common stock at the time of settlement; and

                  – a trust preferred security, or STACKS, representing an undivided beneficial
                    ownership interest in the assets of the issuer sponsored trust. The assets of the
                    trust consist solely of deferrable subordinated debt securities issued by the bank
                    holding company to the trust.

          ■ Deferrable quarterly payments on the variable-rate purchase contract that coincide
            with the periodic payments provided by the STACKS.

          ■ The STACKS are pledged to the collateral agent for the benefit of the issuer to secure
            the holder’s obligation to purchase the issuer’s common stock under the variable-rate
            purchase contract.

          ■ Accounted for using the treasury stock method such that there is no immediate
            dilution in earnings per share calculations.

          ■ The holder is permitted to hold the STACKS separately from the Common SPACES
            by substituting treasury securities for the STACKS as collateral for the holder’s
            obligation to purchase the issuer’s common stock on the stock purchase date pursuant
            to the purchase contract. Following any such substitution, the holder will hold a
            separate STACKS and a Stripped Common SPACES comprised of a stock purchase
            contract and an interest in the substituted treasury security.

          ■ The settlement rate of the Common SPACES is based upon the market price of the
            common stock at the time of pricing of the Common SPACES plus a premium. The


                                                     165
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                                                                          EXCHANGEABLE SECURITIES
                  variable settlement rate mechanism effectively collars the degree to which an investor
                  will participate in an appreciation of the issuer’s stock price.

          ■ On the stock purchase date, holders are issued the number of shares per purchase
            contract equal to the settlement rate. The proceeds from the successful remarketing
            of the STACKS are used to satisfy the holder’s payment obligations in respect of the
            stock purchase contracts unless the holder pays cash in satisfaction of the purchase
            obligation, in which case the holder receives upon settlement a number of shares of
            common stock equal to the settlement rate and a separate STACKS. If there is a
            failed remarketing, the stock purchase date is deferred for up to four quarterly periods
            until a successful remarketing or a failed final remarketing occurs.

          Features of State Street Issue

          ■ Primary regulator capital treatment – by collateralizing holders’ purchase obligations
            under the purchase contracts with treasuries rather than trust preferred securities and
            concurrently issuing the trust preferred to a separate investor base, enabled Tier 1
            treatment for trust preferred securities.

          ■ Selected product name - SPACES

          ■ Two components

                  – A PACES, consisting of:

                     – a fixed rate purchase contract pursuant to which the investor agrees to
                       purchase from the issuer a fixed number of shares of common stock at
                       settlement;

                     – a fractional ownership interest in a zero-coupon U.S. treasury strip that
                       matures on the settlement date of the fixed rate purchase contract in a dollar
                       amount at maturity equal to the purchase price of the common stock to be
                       purchased at settlement; and

                     – an ownership interest in a portfolio of zero-coupon U.S. treasury strips that
                       mature on a quarterly basis through the settlement date of the fixed rate
                       purchase contract which provides a quarterly income stream to the investor;
                       and

                     – a variable-share repurchase contract pursuant to which the investor agrees to
                       deliver to the issuer between zero and a fraction of one share of the issuer’s
                       common stock depending on the share price of the issuer’s common stock at
                       the time of settlement.

          ■ Deferrable quarterly payments on the fixed rate purchase contract and the variable
            rate repurchase contract that coincide with the periodic payments provided by the
            treasury portfolio.


                                                     166
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                                                                          EXCHANGEABLE SECURITIES
          ■ The fractional ownership interest in the zero-coupon U.S. treasury strip is pledged to
            the issuer to secure the holder’s obligation to purchase the issuer’s common stock
            under the fixed rate purchase contract.

          ■ One of the shares of common stock issuable pursuant to the fixed rate purchase
            contract component of the PACES is pledged to secure the holder’s obligation to
            deliver a fraction of a share under the variable rate repurchase contract.

          ■ The settlement rate of the SPACES, as is the case with a typical mandatory
            convertible, is based upon the market price of the common stock at the time of pricing
            of the SPACES plus a premium.

                  – Unlike the typical mandatory convertible structure, rather than a single purchase
                    contract with a varying settlement amount, there is a fixed rate purchase contract
                    pursuant to which the investor receives common stock and a variable rate
                    repurchase contract pursuant to which the investor may be required to deliver
                    between 0 and a fraction of a share, depending on the stock price at the time of
                    settlement.

                  – The settlement date for the variable rate repurchase contract is one calendar
                    quarter subsequent to the settlement date of the fixed rate repurchase contract.




                                                     167
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                                                                   EXCHANGEABLE SECURITIES



• Synthetic Mandatory Convertible Securities – Convertible for Preferred Stock (since
  2006)




          Selected 2006 issues

          ■ Wachovia Corporation (February 2006)

          ■ U.S. Bancorp (March 2006)

          Selected product name – WITS (or ITS)

          ■ Primary regulator capital treatment – On January 23, 2006, the Board of Governors of
            the Federal Reserve issued a letter to Wachovia Corporation which confirmed that
                                               168
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                                                                            EXCHANGEABLE SECURITIES
                  trust preferred securities that convert into noncumulative perpetual preferred stock
                  (instead of common stock) constitute qualifying mandatory convertible preferred
                  securities within the meaning of the Board’s Capital Guidelines. Accordingly, such
                  securities would be exempt from the 15% limitation on restricted core capital
                  elements applicable to internationally active banking organizations and are instead
                  subject to the limitation that an internationally active banking organization may
                  include restricted core capital elements in Tier 1 capital up to 25% of Tier 1 capital so
                  long as restricted core capital elements that exceed 15% of Tier 1 capital are in the
                  form of qualifying mandatory convertible securities.

          ■ Rating agency treatment – The structure is afforded “basket D” treatment by Moody’s
            Investors Service, Inc. Accordingly, the WITS attain 75% equity credit.

          ■ Each WITS is initially offered as a trust preferred security of an issuer sponsored trust
            corresponding to two underlying components:

                  – a fixed rate junior subordinated note issued by the bank holding company; and

                  – a 1/100th interest in a stock purchase contract pursuant to which the trust agrees
                    to purchase from the issuer one share of preferred stock of the issuer.

          ■ Deferrable quarterly contract payments on the purchase contracts and deferrable
            interest payments on the junior subordinated notes provide the funds to the trust with
            which to make quarterly distribution payments on the WITS.

          ■ The junior subordinated notes are initially pledged by the trust to the issuer to secure
            the trust’s obligation to purchase the issuer’s preferred stock under the purchase
            contracts.

          ■ The junior subordinated notes will be remarketed approximately one month in
            advance of the settlement date for the purchase contracts in order to raise proceeds to
            satisfy the trust’s payment obligation under the purchase contracts. Pending the
            purchase of the preferred stock on the settlement date, the proceeds of the
            remarketing are deposited in an interest bearing account with a banking subsidiary of
            the issuer.

                  – In connection with the remarketing,

                     – the interest rate of the junior subordinated notes will be reset to a level that
                       will enable the proceeds of the remarketing to be sufficient to satisfy the
                       payment obligation under the purchase contracts, and

                     – the issuer may elect to modify certain terms of the junior subordinated notes,
                       including the term to maturity and the date after which the junior subordinated
                       notes may be redeemed.

                         – Although the issuer may modify the maturity date and initial redemption
                           date of the junior subordinated notes, the junior subordinated notes may

                                                      169
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                                                                            EXCHANGEABLE SECURITIES
                             not mature or be subject redemption by the issuer on a date that is earlier
                             than approximately nine years following the original issuance of the WITS
                             (which is approximately four years following the scheduled remarketing
                             date).

                  – Following the remarketing,

                     – the junior subordinated notes may qualify as Tier 2 capital, and

                     – unless the issuer redeems the preferred stock, both the junior subordinated
                       notes and the preferred stock will remain outstanding.

          ■ The settlement date for the repurchase contracts is scheduled to occur approximately
            five years from the date of issue of the security.

                  – Because the settlement date for the purchase contracts occurs five years following
                    the issuance of the WITS rather than the more customary three year period for
                    other synthetic mandatory convertible securities, the structure provides significant
                    tax benefits to the issuer since the issuer is entitled to tax deductions in respect of
                    five rather than three years of interest payments on the junior subordinated notes.

                  – Because the settlement date is permitted to occur on a date that is beyond the
                    customary third anniversary of issuance, the security provides for early settlement
                    in the event of certain adverse financial events relating to the issuer.

                  – The settlement date can also be postponed for up to four quarterly periods in the
                    event that the junior subordinated notes are not successfully remarketed.

          ■ In the structure, holders of WITS may substitute U.S. Treasury Securities for junior
            subordinated notes as collateral to secure the purchase obligation under the purchase
            contract. In such case, for each such substitution, two other classes of trust preferred
            securities will be delivered to the holder:

                  – a trust preferred security that corresponds to the junior subordinated note that has
                    been released from the pledge; and

                  – a trust preferred security that corresponds to a purchase contract and the U.S.
                    Treasury Securities that the holder has substituted as collateral to secure the
                    purchase obligation under the related purchase contract.

          ■ Following the settlement date for the purchase contract, the preferred stock will
            comprise the assets of the trust.

                  – The preferred stock will pay noncumulative dividends at a floating rate, if, as and
                    when declared by the issuer’s board of directors.




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                                                                         EXCHANGEABLE SECURITIES
                     – Unlike interest payable on the junior subordinated notes, dividends payable on
                       the preferred stock will not be deductible for the issuer for U.S. federal
                       income tax purposes.

                  – The preferred stock will be redeemable by the issuer at any time following its
                    issuance (unless there has been an acceleration of the stock purchase contracts, in
                    which case the preferred stock will not be redeemable until approximately the
                    fifth anniversary from the original issuance of the WITS).

                     − Any redemption of the preferred stock will be subject to the prior approval of
                       the Board of Governors of the Federal Reserve.




                                                     171
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                  EUROPEAN INSURANCE COMPANY CAPITAL INSTRUMENTS


 UK and Dutch Perpetual Non-Cumulative Equity Settled Instruments (since 2004)........... 172
 French and German Undated Subordinated Callable Notes (since 2003)............................. 176
 UK Non-Operating Subsidiary Capital Securities (since 2004) ........................................... 178
 UK FSA Guidelines on Tier 1 Capital for Insurance Companies......................................... 180

•    UK and Dutch Perpetual Non-Cumulative Equity Settled Instruments (since 2004)




                                           Insurance Company




                                                                            Coupon
                                                     Proceeds
                        Direct Issue
                        Capital
                        Securities




                                                   Investors



          Selected issues

          ■ Aviva (UK) (2004)

          ■ Aegon (Dutch) (2004)


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                                                                             CAPITAL INSTRUMENTS
          Selected 2005 issues

          ■ Prudential plc (UK) (March 2005)

          ■ Old Mutual (UK) (March 2005)

          Primary regulator capital treatment – insurance level Tier 1.

          ■ Limited to 15% innovative Tier 1 basket.

          Other benefits

          ■ Interest deduction at the insurance company level for distributions on the securities.

          ■ No withholding tax on dividend payments.

          Perpetual securities that have no maturity date are issued directly by the insurance
          company pursuant to a Trust Deed or Trust Indenture. Terms may vary from issue to
          issue but generally are as described below.

          Redemption can only be in whole and not in part at the option of the issuer subject to
          prior consent of the appropriate regulatory overseer and to certain solvency thresholds
          being met for the six months prior to the proposed redemption. Redemption can also
          occur following a change of control event or a change in tax status.

          Interest payments (“payments”) can vary from being a fixed rate for an initial period and
          then a variable rate thereafter to a fixed rate set above a published variable interest rate,
          such as LIBOR or EURIBOR. Other examples include a rate reset after a term of five or
          ten years pegged to a published variable rate.

          These securities are subordinated to the claims of senior creditors (including upper and
          lower Tier 2) in that payments in respect of these securities are conditional upon the
          issuer being solvent at the time of payment and in that no payments are due except to the
          extent the issuer could make such payments and still be solvent immediately thereafter.

          The securities would rank pari passu with holders of the most senior class of preference
          shares with non-cumulative dividends.

          Payments generally may be deferred by the insurance company subject to certain
          qualifications, as follows:

                  ■ payments will be mandatory to the extent that the insurance company pays on
                    ordinary shares or pari passu preference shares;

                  ■ except in the case of a mandatory payment, payment may be deferred at the
                    insurance company’s election or option;

                  ■ deferral of payment may be without any requirement to pay interest on the
                    deferred amount if and so long as the insurance company determines that the

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                                                                              CAPITAL INSTRUMENTS
                     insurance company was, or the payment would have resulted in the insurance
                     company being in noncompliance with applicable insurance company capital
                     regulations or pre-determined contractual insolvency thresholds;

                  ■ if the insurance company determines that it is not in compliance with applicable
                    capital adequacy regulations, it must either defer payment or satisfy the payment
                    with proceeds from the issuance of ordinary shares; and

                  ■ if the insurance company is not making payments on pari passu preference shares
                    then payment must be deferred, except in the case of a mandatory payment.

          Deferral of interest payments can be at the option of the issuer, and does not require a
          trigger, although this is also true of many non-operating subsidiary trust preferred
          transactions. The issuer (in most cases the operating company subsidiary of the insurance
          company holding company) is able to defer coupons or any period of time, although
          neither the issuer nor its holding company is allowed to declare or pay a dividend during
          deferral, apart from final dividends already declared or a dividend paid by the issuer to
          the holding company. Deferral is in two forms:

                  ■ General Deferral – at the option of the issuer. Coupon so deferred accrues at the
                    prevailing interest rate plus a premium until paid.

                  ■ Exceptional Deferral – when the issuer does, or is about to, breach its capital
                    requirements. Deferral is only for one coupon period (i.e., one year) and there is
                    no interest-on-interest. This exceptionally deferred payment has to be paid once
                    the payment can be made without breaching the capital rules. Regulatory
                    approval (such as the UK FSA) is required to make payment following
                    exceptional deferral.

          The issuer and, to the extent there is a holding company guarantee, the holding company,
          are “required to keep available for issue enough of its shares as it reasonably considers
          would be required to satisfy from time to time the next year’s coupon payments” using
          the ACSM.

          These securities typically have a “dividend stopper” as well as a “capital stopper” feature.
          If the issuer defers payment for any reason, while any payment is deferred, neither the
          issuer nor the guarantor may (i) declare or pay a dividend or a distribution on any of their
          respective ordinary or preference shares or stock or other issued Tier 1 securities or (in
          the case of the Guarantor) make any payment under a Tier 1 guarantee in respect of any
          such dividend or distribution (other than a final dividend declared by the holders of the
          ordinary stock of the guarantor before such payment is so deferred, or a dividend or a
          distribution or payment is made by the issuer to the guarantor, any holding company of
          the guarantor or to another wholly-owned subsidiary of the guarantor) or (ii) redeem,
          purchase or otherwise acquire any of their respective ordinary shares, ordinary stock or
          other Tier 1 securities (other than where such shares or stock are held by the issuer, the
          guarantor, any holding company of the guarantor or any wholly-owned subsidiary of the
          guarantor as well as certain other non-material carve-outs).


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                                                                             CAPITAL INSTRUMENTS
          If (i) under the relevant rules and regulations, or as a result of a change thereto, the
          securities would not be capable of counting as cover for the minimum capital resources
          requirements applicable to the issuer under the applicable rules and regulations; or (ii) at
          any time the issuer is required under the applicable rules and regulations to have Tier 1
          Capital, these securities would no longer be eligible to qualify for inclusion in the Tier 1
          Capital of the issuer; or (iii) at any time the issuer is required under the applicable rules
          and regulations to have Tier 1 Capital and the issuer would be entitled to substitute the
          securities with preference shares, such substituted preference shares would no longer be
          eligible to qualify for inclusion in the Tier 1 Capital of the issuer, then the issuer may
          have the right to redeem all, but not some, of the securities or substitute at any time all
          (and not some only) the securities for other securities that would qualify as innovative
          Tier 1 Capital or Upper Tier 2 securities.




                                                   175
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                                                                        CAPITAL INSTRUMENTS
          •       French and German Undated Subordinated Callable Notes (since 2003)




                                            Insurance Company




                                                                     Interest
                                                   Proceeds
                             Undated
                             Callable
                             Notes




                                                 Investors



          Selected issues

          ■ AXA (French) (2003)

          ■ AXA (French) (2004)

          ■ Allianz (German) (2004)

          Selected 2005 issues

          ■ Assurances Générale de France (French) (February 2005)

          ■ Allianz (German) (February 2005)

          ■ Assurances Générale de France (February 2005)

          ■ Groupama (French) (June 2005)



                                                 176
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                                                                             CAPITAL INSTRUMENTS
          Primary regulator capital treatment – Core Tier 1.

          Other benefits

          ■ Interest deduction at the bank level for distributions on the securities.

          ■ No withholding tax on dividend payments.

          Perpetual maturity.

          Distributions are non-cumulative and are payable in any fiscal year only to the extent of
          available distributable funds for that fiscal year.

          Available distributable funds means the amount shown as such on the latest published
          annual accounts of the insurance company, adjusted for any subsequent profit or loss of
          the insurance company.

          In most of these transactions, if distributions are not paid in full, the insurance company
          cannot pay cash distributions on its capital stock unless it pays four semi-annual
          distributions on the securities.

          Securities can be issued under a Euro MTN programme.

          The securities have a loss-absorption feature in that if the issuer is insolvent and cannot
          increase its share capital to off-set the insolvency event, the board has the right to reduce
          the nominal amount of the securities to off-set its losses and thereafter to enable it to
          continue its business. Equally, if there is subsequently consolidated net income for at
          least two consecutive financial years following the insolvency event (and the loss-
          absorption event), the issuer must increase the nominal amount of the notes up to such
          maximum amount to the extent that any such reinstatement does not trigger the
          occurrence of another insolvency event.

          If the issuer determines that the securities no longer qualify for inclusion in the Tier 1
          Capital or core capital or if the securities are not eligible for the purposes of calculating
          the consolidated solvency margin of the issuer, then the issuer has the right to redeem the
          securities.




                                                   177
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                                                                                        CAPITAL INSTRUMENTS
          •       UK Non-Operating Subsidiary Capital Securities (since 2004)




                                               Insurance
                                               Company



    Becomes
    member by                                                   Subordinated Member’s
                                   Proceeds                     Account
    holding a
    policy



                                              Issuer (Member)




                                 Proceeds                           Mutual Assurance
                                                                    Capital Securities
                                                                    (“MACS”)




                                                 Investors




          Selected Issue (see also Chapter 6 – Tax-Deductible Non-Operating Subsidiary Preferred
          – Swiss Bank or Financial Services Company Non-Operating U.S. Trust/LLC Subsidiary
          Guaranteed Non-Cumulative Preferred (normal issues since 2000; enhanced issues since
          2006) for a discussion of the 2006 Zurich Financial Services transaction)

          ■ Standard Life (2004)

          Primary regulator capital treatment – Innovative Tier 1.

          Other transaction benefits

          ■ Payments under the member’s account and insurance policy is tax deductible to the
            insurance company.

          Features

          ■ The insurance policy is the issuer’s only asset.


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                                                                           CAPITAL INSTRUMENTS
          ■ The proceeds of the issuance of the securities are made available by the issuer to the
            insurance company under the SMA Agreement. The terms of the SMA Agreement
            with respect to principal amount, rate of interest, provisions for interest deferral and
            repayment match the corresponding terms of the securities.

          ■ The obligations of the insurance company under the SMA Agreement constitute
            direct, unsecured and unconditional obligations of the insurance company. However,
            all claims under the SMA Agreement will be subordinated in right of payment to all
            other insurance policy claims and no payment can be made or be due to be made in
            respect of amounts payable under the SMA Agreement unless all of the other
            insurance policy claims have been satisfied in full prior to such payment.

          ■ Interest on the securities is deferrable upon the occurrence of an insolvency event or
            if certain minimum coverage ratios are not fulfilled.

          ■ Interest is non-cumulative if either a mandatory or optional interest deferral event
            occurs. However, such deferred interest is capitalized into the principal amount of
            the securities, provided that such capitalization will not make the insurance company
            insolvent.

          ■ The insurance company also enters into a deed of indemnity and guarantee in respect
            of specific liabilities with the issuer (as well as the trustee and paying agents)
            whereby the insurance company would, among other things, guarantee to meet certain
            operating expenses associated with the operation of the issuer (but not payments of
            principal or interest or any other amounts in respect of the securities).




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                                                                           CAPITAL INSTRUMENTS



UK FSA Guidelines on Tier 1 Capital for Insurance Companies

        In July and August 2003, the UK FSA published two consultation papers, 190 and 195,
(“CP190” and “CP195”, respectively). CP190 covered enhanced capital requirements and
individual capital assessments for non-life insurers and CP195 covered enhanced capital
requirements and individual capital assessments for life insurers. CP 190 and CP 195 were
attempts to bring the UK FSA’s capital regulations for insurance companies more in line with
those for banks, building societies and investment firms. In June 2004, the UK FSA published
Policy Statement 04/16, which provided feedback on the responses received on CP190 and
CP195 and which contained “near final” rules and guidance to implement the new prudential
regime for insurers. This new prudential regime for insurers came into effect on December 2004
and is set out in the UK FSA’s Integrated Prudential Sourcebook (“PRU”).

        Chapter 2 of PRU identifies two categories, or tiers, of capital applicable to insurers: Tier
1 and Tier 2. Tier 1 capital is sub-divided into three categories: Core Tier 1, perpetual non-
cumulative preference shares and Innovative Tier 1. Tier 2 is sub-divided into upper and lower
Tier 2. The elements in Core Tier 1 can be included in a firm's regulatory capital without limit.
Lower tiers of capital are either subject to limits or require a waiver to be eligible for inclusion in
a firm’s capital resources. Examples of the types of capital that fall into the various tiers are set
out below.

       Tier 1 capital should be able to absorb losses, be permanent (cannot be redeemed at all or
can only be redeemed on a winding up of the firm), rank for repayment upon winding up after all
other debts and liabilities, and have no fixed costs.

          Core Tier 1 Capital

          The main components of Core Tier 1 capital are:

          ■ permanent share capital;

          ■ profit and loss account and other reserves;

          ■ share premium account;

          ■ externally verified interim net profits;

          ■ positive valuation differences; and

          ■ fund for future appropriations.

          Perpetual Non-cumulative Preference Shares

        Perpetual non-cumulative preference shares should be perpetual and redeemable only at
the issuer’s option. Any feature that, in conjunction with a call, would make a firm more likely
to redeem perpetual non-cumulative preference shares would normally result in classification as


                                                  180
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                                                                        CAPITAL INSTRUMENTS
an Innovative Tier One instrument. Such features would include a step-up, bonus coupon on
redemption or redemption at a premium to the original issue price of the share.

          Innovative Tier 1 Capital

        If a Tier 1 instrument is redeemable and is issued on terms that a reasonable person
would think that the issuer is likely to redeem it or the issuer is likely to have a substantial
economic incentive to redeem it, then it is an Innovative Tier 1 instrument. Innovative Tier 1
instruments include, but are not limited to, those incorporating a step-up or principal stock
settlement and cumulative coupons provided that such coupons, if deferred, are paid by the issuer
in the form of permanent share capital.

          Upper and Lower Tier 2 Capital

        A capital instrument must not form part of the Tier 2 capital of an insurer unless it meets
certain general conditions, including that the claims of creditors must rank behind those of all
unsubordinated creditors; the only events of default must be non-payment or the winding-up of
the firm; the remedies available in the event of non-payment must be limited to the winding up
of the firm; the debt must not become due and payable before its stated final maturity date (if
any) except on an event of default; creditors must waive their right to set off amounts they owe
the firm against subordinated amounts and the debt must be unsecured and fully paid up.

       A major distinction between upper and lower Tier 2 capital is that only perpetual
instruments may be included in upper Tier 2 capital, whereas dated instruments are included in
lower Tier 2 capital.

        In addition to the general conditions for Tier 2 capital listed above, upper Tier 2 capital
must meet certain additional conditions, including that the debt must have no fixed maturity date,
the contractual terms of the instrument must provide for the issuer to have the option to defer any
interest payment on the debt and the contractual terms of the instrument must provide for the
loss-absorption capacity of the debt and unpaid interest while enabling the issuer to continue its
business.

        Lower Tier 2 capital must meet general conditions for Tier 2 capital listed above and
have an original maturity of at least five years or have no fixed maturity date. Insurance lower
Tier 2 capital generally consists of long-term subordinated debt.




                                               181
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                                         CHAPTER 13

              BANK AND INSURANCE COMPANY CAPITAL INSTRUMENT CDOS
          Selected U.S. CDO issues (by sponsor/underwriter)

          ■ Salomon Smith Barney (1) (1999)

          ■ First Tennessee & Keefe Bruyette (1) (2000)

          ■ Salomon Smith Barney (1) (2000)

          ■ First Tennessee (3) (2001)

          ■ Sandler O’Neill & Barclays Capital (1) (2001)

          ■ Sandler O’Neill & Salomon Smith Barney (2) (2001)

          ■ Bear Stearns, Sandler O’Neill & Salomon Smith Barney (3) (2002)

          ■ First Tennessee & Keefe Bruyette (5) (2002)

          ■ Sandler O’Neill & Salomon Smith Barney (1) (2002)

          ■ Trapeza & CSFB (1)(2002)

          ■ Bear Stearns (2) (2003)

          ■ Citigroup (2) (2003)

          ■ Cohen & Merrill Lynch (2) (2003)

          ■ Dekania & Merrill Lynch (1) (2003)

          ■ First Tennessee & Keefe Bruyette (5) (2003)

          ■ Sandler O’Neill & Salomon Smith Barney (1) (2003)

          ■ Trapeza & CSFB (4) (2003)

          ■ Bear Stearns (2) (2004)

          ■ Cohen & Merrill Lynch (2) (2004)

          ■ Cohen, Merrill Lynch & Sandler O’Neill (1) (2004)

          ■ Citigroup (1) (2004)

          ■ Dekania & Merrill Lynch (1) (2004)


                                               182
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                                                                    CAPITAL INSTRUMENT CDOS
          ■ First Tennessee & Keefe Bruyette (4) (2004)

          ■ Morgan Stanley (1) (2004)

          ■ Stone Castle & Sandler (2) (2004)

          ■ Trapeza & CSFB (2) (2004)

          Selected European CDO issue (by sponsor/underwriter)

          ■ HSH Nordbank (Denmark) (1) (2004)

          Selected 2005 U.S. CDO issues (by sponsor/underwriter)

          ■ Taberna & Merrill Lynch (4) – comprised of REIT trust preferred, senior REIT debt
            securities and CMBS

          ■ FTN Financial Capital Markets (3) – comprised of mixed bank and thrift holding
            company and insurance company trust preferred, surplus notes and REIT trust
            preferred

          ■ Cohen & Merrill Lynch (3) – comprised of mixed bank and thrift holding company
            and insurance company trust preferred and surplus notes

          ■ Trapeza & CSFB – comprised of mixed bank and thrift holding company and
            insurance company trust preferred and surplus notes

          ■ Bear Stearns – comprised of bank and thrift holding company trust preferred and
            subordinated debt

          ■ Wachovia Securities – comprised of bank and thrift holding company trust preferred
            and subordinated debt

          ■ Greenwich Capital Partners – comprised of mixed bank and thrift holding company
            and insurance company trust preferred and surplus notes

          Selected 2005 European CDO issue (by sponsor/underwriter)

          ■ Dekania & Merrill Lynch – comprised of insurance company subordinated debt

          Benefits

          ■ Enables small banks and insurance companies to access the capital markets for
            innovative capital raisings.

          ■ Deeper primary and secondary markets for trust preferred and other regulatory capital
            instruments.

          ■ Minimizes issuer disclosure required for marketing or regulatory purposes.

                                                183
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                                                                  CAPITAL INSTRUMENT CDOS
          Features

          ■ Non-recourse notes issued by orphan vehicles.

          ■ Senior/subordinated structure.

          ■ Combination of primary and secondary market trust preferred and other regulatory
            capital, including Tier 2 instruments and surplus notes.

          ■ CDO issuer assets include bank capital instruments, insurance company capital
            instruments or both.




                                               184
NY1 5828148V.13
                                                   CHAPTER 14

                                           OTHER BANK PRODUCTS

  Australian Bank Banking Subsidiary Tracking Stock
     Exchangeable into Bank Ordinary Shares (since 1999).............................................................. 185


• Australian Bank Banking Subsidiary Tracking Stock Exchangeable into Bank
  Ordinary Shares (since 1999)


                                                                 Bank



                                                                     Ordinary Shares
                       Exchange
                         Bank
                       Ordinary
                       Shares for
                       NZ Shares                        NZ Bank Subsidiary



                                                     NZ                        Proceeds
                                                  Shares



                                                                Investors


          Only issue

          ■ New Zealand subsidiary of Westpac (1999)

          Primary regulator capital treatment – bank parent minority interest Tier 1 capital.

          Other transaction benefits

          ■ Ordinary share equivalent that saves Australian franking credits for Australian
            resident shareholders.

          ■ Enables the bank to stream New Zealand imputation credits to NZ shareholders.

                                                            185
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          ■ Potential benefits on transfer of proceeds to the bank.

          Features

          ■ Dividends on NZ shares are the NZ dollar equivalent of dividends on the bank’s
            ordinary shares.

          ■ Indirect voting rights equivalent to those of the bank’s ordinary shares.

          ■ Mandatory exchange for bank ordinary shares upon:

                  – winding up of the bank;

                  – takeover of the bank; or

                  – the bank ceases to control the NZ share issuer.

          ■ Exchangeable for bank ordinary shares at bank’s option if:

                  – adverse tax changes affecting the structure;

                  – the bank’s primary regulator ceases to accept the NZ shares as Tier 1;

                  – events preceding the winding up of the bank of the NZ share issuer;

                  – less than 15% of the NZ shares are held by third party investors; or

                  – the liquidation of the bank outside Australia.

          ■ Exchange for bank ordinary shares at investor’s option if:

                  – failure to pay an NZ dollar equivalent dividend when bank ordinary share
                    dividends are paid;

                  – support agreement or voting deed no longer effective;

                  – delisting of NZ shares from the New Zealand Stock Exchange;

                  – tax ruling changes that adversely affect NZ shareholders; or

                  – more than 30% of the bank’s ordinary shares are acquired by one party.

          ■ The exchanges are between the bank and the investor pursuant to an exchange deed
            by the bank.

          ■ The bank agrees in a support agreement to ensure the solvency of the NZ share issuer.




                                                     186
NY1 5828148V.13
APPENDIX A
                                     SIDLEY AUSTIN   LLP        BEIJING        GENEVA        SAN FRANCISCO
                                     787 SEVENTH AVENUE         BRUSSELS       HONG KONG     SHANGHAI
                                     NEW YORK, NEW YORK 10019   CHICAGO        LONDON        SINGAPORE
                                     212 839 5300               DALLAS         LOS ANGELES   TOKYO
                                     212 839 5599 FAX           FRANKFURT      NEW YORK      WASHINGTON, DC


                                                                FOUNDED 1866




                                                                                                 April 2006


                       BASLE COMMITTEE AND U.S. REGULATORY
                      INNOVATIVE TIER 1 CAPITAL REQUIREMENTS

               Capital has long been a matter of fundamental importance to financial institutions.
A strong capital position gives a financial institution the credibility needed to raise money from
lenders, depositors and investors and pursue new business opportunities. From a regulatory
standpoint, a bank’s capital position dictates the levels of permissible loans to a single borrower,1
investment in bank properties,2 and the extent of its banking and nonbanking activities.3 It is
therefore absolutely essential for a financial institution to maintain a satisfactory capital position
in order to meet the challenges and exploit the opportunities of today’s expanding financial
services environment.

               Innovative Tier 1 capital instruments, including trust and REIT preferred
securities, have become a particularly attractive alternative for U.S. financial institutions in
meeting regulatory capital requirements. This is primarily because of their hybrid nature – trust
preferred securities are considered equity for regulatory capital purposes while considered debt
for tax purposes and REIT preferred securities provide the parent with the ability to pay
preferred dividends in pre-tax dollars. With the increased popularity of financial institutions
issuing and investing in trust and REIT preferred securities, the banking regulators have
increasingly turned their attention toward the treatment of such instruments and similar
innovative Tier 1 capital instruments for both capital adequacy and investment purposes.

                This memorandum discusses Basle and U.S. regulatory requirements pertaining to
innovative Tier 1 capital instruments. Part I briefly explains the requirements of the capital
adequacy guidelines, as currently implemented by the Basle Committee on Banking Supervision
(“Basle Committee”) and followed by G-10 central banks, including the U.S. federal banking
regulators. Part I concludes with some observations on the proposed Basle II changes to these
guidelines. Part II reviews the current Basle and U.S. regulatory guidelines applicable to
innovative Tier 1 capital instruments. As noted in Part II, U.S. banking regulators have been
slow to follow the Basle Committee’s relaxed standards to permit treatment of noncumulative
trust preferred securities as Tier 1 bank capital.

I.     Capital Adequacy Guidelines

              The Federal Reserve Board (“FRB”), the Office of the Comptroller of the
Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of
Thrift Supervision (“OTS”) (the federal bank regulators) have all adopted risk-based capital



NY1 5320753V.12
APPENDIX A




guidelines4 primarily based upon the risk-based capital adequacy framework adopted by the
Basle Committee on Banking Supervision in 1988 (the “1988 Basle Accord”) (see Part II below).

                 With minor differences among the guidelines promulgated by the federal bank
regulators, all four guidelines incorporate a uniform method of evaluating the capital adequacy of
a banking organization.5 Determining whether a banking organization’s risk-based capital ratio
complies with the guidelines merely requires that its qualifying total capital be divided by its
risk-weighted assets.

               Qualifying total capital for banks and bank holding companies (including
financial holding companies) consists of both Tier 1 or core capital (shareholders’ equity,
retained earnings, noncumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries)6 and Tier 2 or supplementary capital (loan loss reserves,
cumulative perpetual preferred stock, hybrid capital instruments including certain mandatory
convertible debt, term subordinated debt and intermediate-term preferred stock having an
original weighted average maturity of at least five years). For bank holding companies,
qualifying Tier 1 capital also includes certain cumulative perpetual preferred stock, as described
below (see Part III.A).

                 The second step in calculating a banking organization’s risk-based capital ratio is
to determine the value of the bank’s risk-weighted assets. This requires calculating the risk-
weighted value of both on-and-off-balance sheet items. Depending upon the credit risk of the
obligor, the type of collateral involved, if any, and whether there is a guarantor, a bank asset may
be assigned to one of four broad risk categories: 0%, 20%, 50% and 100%.7 A bank’s off-
balance-sheet items are first multiplied by one of four credit conversion factors – 0%, 20%, 50%
or 100% -- before being assigned to an appropriate risk-weight category.8 Failure by a banking
organization to maintain compliance with the applicable guidelines could qualify as an unsafe
and unsound banking practice and result in the appropriate federal banking agency placing
restraints on its operations.

                In general, the federal bank regulators’ primary concern for elements included in
capital, whether Tier 1 or Tier 2, is that the capital be freely available to absorb current losses
while permitting the banking organization to function as a going concern. Tier 1 capital is
supposed to have absolute loss absorption capacity during times of financial difficulties. The
primary capital element that meets this requirement is, of course, common stock, as such stock is
permanent, paid “last,” and requires current payments from the banking organization only if such
payments are specifically provided for by management of the banking organization. Generally,
for preferred securities to qualify as Tier 1 capital, they should meet these criteria.




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II.    The Basle Capital Accord and Treatment of Innovative Capital Instruments

          A. Brief History

                The 1988 Basle Accord went into effect in March 1989 for all G-10 central
             9
countries, and required banks to maintain capital equal to 8% of “risk-adjusted assets” by the
end of 1992. The major impetus for the 1988 Basle Capital Accord was the concern that the
capital of the world’s major banks had become dangerously low after persistent erosion through
competition. Therefore, the goals of the Accord were to tailor regulatory capital adequacy
requirements to the risk inherent in a bank’s portfolio and to create incentives to hold more low-
risk assets. Further, the Accord sought to remove competitive inequalities in international
banking which would result from different countries imposing different regulatory capital
standards.

                The keystone of the 1988 Accord was its explicit link between a bank’s level of
risk and the amount of capital the Accord required it to maintain. Among other things, the 1988
Basle Accord set forth the constituents of “capital” and adopted a portfolio approach measure of
risk associated with bank assets (as discussed above).

                For the first time, capital was divided into Tier 1 or core capital and Tier 2 or
supplementary capital. Tier 1 capital was initially comprised of permanent shareholders’ equity
(common stock and perpetual non-cumulative preference shares) and disclosed reserves (created
or increased by appropriations of retained earnings or other surplus, e.g., share premiums,
retained profit, general reserves and legal reserves). In the case of consolidated accounts, this
also included minority interests in the equity of subsidiaries which are less than wholly owned.
This basic definition of capital excluded cumulative preference shares.

                  Under the 1988 Accord, Tier 2 capital was comprised of:

          (1).    undisclosed reserves consisting of that part of the accumulated after-tax surplus of
                  retained profits which banks in some countries may be permitted to maintain;

          (2).    loan-loss reserves held against future, presently unidentified losses;

          (3).    hybrid capital instruments, including cumulative preferred shares;10 and

          (4).    subordinated term debt.

              The 1988 Basle Accord has been supplemented a number of times, with most
changes dealing with the treatment of off-balance-sheet activities. A significant amendment was
enacted in October 1996, when the Committee introduced a measure whereby trading positions
in bonds, equities, foreign exchange and commodities were removed from the credit risk
framework and given explicit capital charges related to the bank’s open position in each
instrument.

                                                    3

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          B. 1998 Basle Release

                The only major amendment to date relating to the definition of “capital” came
after a long battle between bankers and bank regulators on October 22, 1998, when the Basle
Committee announced it would accept certain types of synthetic hybrid instruments as Tier 1
capital for the first time. In the October 1998 release, the Basle Committee announced that it
would consider it acceptable for banks to issue certain “innovative capital instruments,” which
the Committee limited to 15% of Tier 1 capital.11

               The primary impetus for the 1998 release was a 1996 decision of the FRB that
allowed banking holding companies (which are not subject to the Basle guidelines) to issue trust
preferred securities for Tier 1 capital (see Part III.A). Since banking groups in most other G-10
countries were not part of bank holding company structures, the Basle Committee’s hand was
pushed to change its rules for the sake of a level playing field.

              In order to protect the integrity of Tier 1 capital, the Basle Committee determined
that minority interests in equity accounts of consolidated subsidiaries that take the form of
special purposes vehicles (“SPVs”) should only be included in Tier 1 capital if the underlying
instruments have the equity-like characteristics of being:

          •       issued and fully paid;

          •       noncumulative;

          •       able to absorb losses within the bank on a going-concern basis;

          •       junior to depositors, general creditors and subordinated debt of the bank;

          •       permanent;

          •       neither secured nor covered by a guarantee of the issuer or related entity or other
                  arrangement that legally or economically enhances the seniority of the claim vis-à-vis
                  bank creditors; and

          •       callable at the initiative of the issuer only after a minimum of five years with
                  supervisory approval and under the condition that it will be replaced with capital of
                  same or better quality unless the supervisor determines that the bank has capital that
                  is more than adequate to its risks.

                     In addition, to qualify as a Tier 1 instrument the following conditions also must be
fulfilled:

          •       the main features of such instruments must be easily understood and publicly
                  disclosed;

                                                       4

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          •       proceeds must be immediately available without limitation to the issuing bank, or if
                  proceeds are immediately and fully available only to the issuing SPV, they must be
                  made available to the bank (e.g., through conversion into a direct issuance of the bank
                  that is of higher quality or of the same quality at the same terms) at a predetermined
                  trigger point, well before serious deterioration in the bank's financial position;

          •       the bank must have discretion over the amount and timing of distributions on the
                  instrument, subject only to prior waiver of distributions on the bank’s common stock,
                  and banks must have full access to waived distributions; and

          •       distributions can only be paid out of distributable items, and where distributions are
                  pre-set, they may not be reset based on the credit standing of the issuer.

                 According to the 1998 Basle release, moderate step-ups in instruments issued
through SPVs are permitted, in conjunction with a call option, only if the moderate step-up
occurs at a minimum of ten years after the issue date and if it results in an increase over the
initial rate that is no greater than, at national supervisory discretion, either: (i) 100 basis points,
less the swap spread between the initial index basis and the stepped-up index basis; or (ii) 50%
of the initial credit spread, less the swap spread between the initial index basis and the stepped-
up index basis.

                 The terms of the instrument should provide for no more than one rate step-up over
the life of the instrument. The swap spread should be fixed as of the pricing date and reflect the
differential in pricing on that date between the initial reference security or rate and the stepped-
up reference security or rate.

               It is not clear what, exactly, is to be included in the 15% basket. The Basle
Committee has left it up to the individual central banks to determine how to implement the
general ruling. For instance, there is enough leeway in the Basle Committee’s statement for any
non-common stock instruments to be included in the 15% basket because the announcement does
not explicitly state whether the 15% limit refers to all forms of SPVs, to dated or callable
instruments or to step-ups.

          C. Disclosure Guidelines

                On January 18, 2000, the Basle Committee issued a paper proposing guidelines
for the disclosures banks should make to advance the role of market discipline in promoting bank
capital adequacy. The three areas of proposed disclosure are (i) structure of capital, (ii) risk
exposures and (iii) capital adequacy. Among the Basle Committee’s recommendations are that
banks should publicly disclose summary information about investments in innovative, complex,
and hybrid capital instruments at least annually, because the characteristics of such instruments
may have a significant impact on the market’s assessment of the strength and integrity of a
bank’s capital.

                                                       5

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                As discussed below, the FRB has approved trust preferred securities as Tier 1
capital for bank holding companies subject to certain limitations. The OCC was the first federal
banking agency to follow the Basle Committee’s 1998 release, when it approved a capital
securities arrangement involving LLC preferred securities for national banks in October 2000
and another involving trust preferred securities for national banks in December 2000.

          D. Basle II

                In the ten years since the 1988 Basle Accord (“Basle I”) introduced an
unprecedented degree of conformity to the international banking regulatory world, a number of
dramatic developments in areas of globalization, technology, and innovation have occurred.
These developments have led to a world financial system that is far more complex than that
addressed by Basle I. Indeed, the increasing complexity has led to the realization that Basle I is
insufficiently structured to address recent developments in financial products, advances in risk
measurement and management practices, or precisely assess capital charges in relation to risk.12

                In June 2004, the Basle Committee issued a document entitled “International
Convergence of Capital Measurement and Capital Standards: A Revised Framework” (“Basle
II”). Basle II is comprised of three mutually reinforcing “pillars:” minimum regulatory capital
requirements, supervisory review, and market discipline. The Basle Committee intends that the
interplay between these pillars will: continue to promote safety and soundness and at least
maintain the current overall level of capital in the world financial system; continue to enhance
competitive equality; establish a more comprehensive approach to address risk; contain
approaches to capital adequacy that are appropriately sensitive to risk; and focus on
internationally active banks (although its underlying principles should be suitable for application
to all banking organizations).

               Pillar 1 modifies the Basle I definition of risk-weighted assets by requiring a
banking institution to calculate capital requirements for exposure to both credit risk and
operational risk (and market risk for institutions with significant trading activity).13

                Credit risk is calculated either according to the standardized approach (which is a
compilation of Basle I’s requirements) or the internal ratings-based (“IRB”) approach (which
relies on banking institution’s internal estimates of key risk drivers to derive capital
requirements). The IRB approach is further divided between two IRB methodologies: the
Foundation IRB Approach and the Advanced IRB Approach. The Foundation IRB Approach
relies upon both the input of certain risk components by supervisors and other risk components
provided by the banking institutions. The Advanced IRB Approach relies more upon the
banking institutions for the input of risk components. In each case the inputs are organized
according to formula designed to translate the risk inputs into specific capital requirements. A
banking institution will be allowed to use the standardized approach or either the Foundation
IRB Approach or the Advanced IRB Approach depending on its level of sophistication, with
smaller, less sophisticated institutions being allowed to use only the standardized approach.

                                                6

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                Operational risk is a new concept introduced by Basle II. Basle II defines
operational risk as the risk of losses resulting from inadequate or failed internal processes, people
and systems, or external events. Operational Risk is calculated according to one of three
different methodologies: the Basic Indicator Approach, the Standardized Approach and the
Advanced Measurement Approach. The Basic Indicator Approach arrives at its capital
requirement by multiplying a bank’s average annual gross income over the past three years by a
factor of 0.15. The Standardized Approach calculates capital requirements for each of a banking
institutions’ business lines by multiplying the banking institution’s gross income by factors
determined by the Basle Committee. Thus, under the Standardized Approach a banking
institution’s total operational risk capital requirement is the summation of each of the banking
institution’s business lines capital requirements. The Advanced Measurement Approach
(“AMA”) allows banking institutions to use their own comprehensive and systematic method for
assessing their exposure to operational risk.14 A banking institution may, however, use a
combination of AMA and either the Basic Indicator Approach or the Standardized Approach for
different parts of its operations so long as the combination effectively accounts for all material
risks of a banking institution on a global, consolidated basis.

                Pillar 2 focuses on supervisory review. Basle II seeks to address the need for
banks to assess their capital adequacy positions relative to their overall risk position. Currently
risk and capital adequacy are judged by reference to a banking institution’s compliance with its
minimum capital requirements. Basle II wants supervisors to play an active role in a
comprehensive assessment of a banking institution’s capital adequacy levels and take appropriate
actions when shortcomings are detected. A comprehensive supervisory review process will also
act as a check against the inevitable lag that regulation suffers in the face of the ever changing
risk profiles of complex banking institutions.

                Pillar 3 seeks to complement the substantive regulations and supervisory
oversight of Pillars 1 and 2 by addressing market discipline through the development of a set of
disclosure requirements. The disclosure requirements are designed to allow market participants
to assess key information about a banking institution’s risk profile and level of capitalization.15
Pillar 3 contemplates a series of qualitative and quantitative disclosures that cover the following
aspects of a given banking institution:

          •       scope of application: Pillar 3 applies to the top consolidated level of the banking
                  institution in questions;

          •       capital structure: covers the amounts of Tier 1 and Tier 2 capital;

          •       capital adequacy: covers the capital requirements of the various risk calculations;

          •       credit risk: general disclosures;

          •       credit risk for portfolios subject to the standardized approach;

                                                        7

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          •       credit risk for portfolios subject to IRB approaches;

          •       equities: disclosures for banking book positions;

          •       credit risk mitigation: disclosures for standardized and IRB approaches;

          •       securitization: disclosure for standardized and IRB approaches;

          •       market risk: disclosures for banking institutions using the standardized approach;

          •       market risk: disclosures for banking institutions using the internal models approach
                  for trading portfolios;

          •       operational risk; and

          •       interest rate risk in the banking book.

                The Basle Committee released an updated version of Basle II in November 2005.
This revision incorporates changes to the capital requirements for exposures to certain trading-
related activities, including counterparty credit risk and the treatment of double default effects
(the risk that both a borrower and guarantor default on the same obligation), short-term maturity
adjustment and failed transactions, and also make improvements to the trading book regime. 16

               The U.S. banking regulators issued a joint request for comment concerning Basle
II’s risk based capital guidelines and the manner of Basle II’s implementation in the United
States.17 The request for comment followed congressional hearings before the House Committee
on Financial Services and analysis of Basle II by the various U.S. banking regulators. The House
Committee, the regulators and many commentators have voiced several concerns about Basle II
including the following:18

          •        that a comprehensive application of Basle II would have negative impacts on the
                  competitive structure of the U.S. dual banking system;

          •       Basle II’s allowance for large banking institutions to reduce their capital reserves may
                  result in a significant decrease in the aggregate level of capital in the U.S. banking
                  system;

          •       that Basle II’s Pillar I approach to operational risk may be impossible to implement
                  because the assessment of operational risk requires a degree subjective judgement
                  resistant to accurate quantification;

          •       Basle II is overly complex; and



                                                        8

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          •       Basle II’s complexity would increase regulatory arbitrage opportunities because
                  sophisticated regulatory regimes with strong resources would only be likely to
                  adequately supervise Basle II’s requirements.

                On January 27, 2005, the OCC, FRB, FDIC and OTS (the “Agencies”) issued an
interagency release19 aimed at establishing the implementation process for the Basle II
framework in the United States, setting forth the following timeline of events for implementation
of the Basle II framework:

                     •   mid-year 2005 – publication of a notice of proposed rulemaking and updated
                         guidance;

                     •   mid year 2006 – publication of final rule and updated guidance;

                     •   January 2007 – first opportunity for “parallel run”; and

                     •   January 2008 – effective date of final regulations.

               On September 30, 2005, the Agencies issued a joint press release announcing
their proposal to delay the implementation of Basle II in the United States by one year and the
expectation that a notice of proposed rulemaking would be available sometime during the first
half of 2006. 20 Although the Agencies issued an advanced notice of proposed rulemaking
(“Basle II ANPR”) in August 2003, the issuance of a notice of proposed rulemaking had been
delayed due to concerns resulting from a qualitative impact study (QIS4) conducted during late
2004 and early 2005 assessing the potential impact of Basle II on U.S. banking institutions.

                On March 30, 2006, the Agencies issued for comment a joint notice of proposed
rulemaking that would implement Basle II risk-based capital requirements in the United States
for large, internationally active banking organizations (“Basle II NPR”). The framework
proposed by the Basle II NPR is intended to produce risk-based capital requirements that are
more risk-sensitive than the existing general risk-based capital rules, which are based on Basle I
(the “current rules”). The proposed rule maintains the current Basle I minimum risk-based
capital ratio requirements, and the elements of Tier 1 and Tier 2 capital also generally remain
unchanged. However, there are differences between the current rules and the proposed rule in
adjustments made to Tier 1 and Tier 2 capital, including the treatment of nonfinancial equity
investments, allowance for loan and lease losses, gain-on-sale at the inception of securitization
transactions, and certain other high risk securitization exposures. The primary difference,
however, is in the methodologies used to calculate risk-weighted assets (the denominator
component of the capital ratios). Under the proposed rule, banks would use their internal risk
measurement systems to determine the inputs for calculating the risk-weighted asset amounts for
(1) general credit risk (includes wholesale and retail exposures), (2) securitization exposures, (3)
equity exposures, and (4) operational risk. Large, internationally active banks would be required
to implement the IRB approach for determining capital requirements for credit risk and the AMA
approach for determining capital requirements for operational risk. Banks would also be subject
                                                       9

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to supervisory review of their capital adequacy (Pillar 2), certain public disclosure requirements
regarding their risk profile and capital adequacy (Pillar 3), and supplemental supervisory
reporting requirements as determined by the Agencies.

                The Basle II NPR proposes a number of safeguards, including the requirement
that a bank satisfactorily complete at least a four consecutive calendar-quarter parallel run
period, beginning no sooner than January 1, 2008, before operating under the Basle II
framework. Following a successful parallel run, a bank would progress through three
transitional periods, each lasting at least one year, during which there would be temporary floors
on potential declines in risk-based capital requirements relative to the current rules. A bank
would need approval from its primary federal supervisor to move to each new transitional period,
and at the end of the three transition periods, to fully implement Basle II risk-based capital rules.

                It is expected that Basel II risk-based capital guidelines will be mandatory only
for the largest U.S. money center banks. Another 10 to 12 banking institutions are also expected
to adopt Basel II voluntarily. For all other banks, the existing standard under Basle I will apply
until the revision, termed "Basel IA," (as defined below) is put in place.

          E. Modifications to Basle I

                On October 6, 2005, the Agencies jointly issued an ANPR (the “Basle IA
ANPR”) proposing revisions to the U.S. risk-based capital standards based upon Basle I. The
Agencies have stated they are considering increasing the number of risk-weight categories,
permitting greater use of external ratings as an indicator of credit risk for externally-rated
exposures, expanding the types of guarantees and collateral that may be recognized, and
modifying the risk-weights associated with residential mortgages. The ANPR also discussed
applying credit conversion factors to certain types of commitments, assigning a risk-based
capital charge to certain securitizations with early amortization provisions, and assigning higher
risk weight to certain real estate, retail and commercial exposures and to loans that are 90 days or
more past due or in nonaccrual status. The Agencies are also considering revisions to Basle I
that will apply to smaller banking organizations in the United States. If a separate FRB proposal
of September 8, 2005 (70 Fed. Reg. 53320) is followed, the Basle IA ANPR changes could be
applicable to bank holding companies with less than $500 million in assets.

              On November 15, 2005, in addition to the updated version of Basle II, the Basle
Committee released an updated version of the Amendment to the Capital Accord to incorporate
market risks (often referred to as the “Market Risk Amendment”). 21 The Basle Committee
amended Basle I to take account of and set capital requirements for market risks. Market risk is
defined as the risk of losses in on and off-balance sheet positions arising from movements in
market prices (e.g. interest rate related instruments and equities in the trading book, foreign
exchange risk and commodities risk). Market risk is measured either according to a standardized
method (using the measurement framework provided in the amendment) or an internal models
method (which allows banks to use their own internal risk management models to derive risk
measures, subject to certain conditions).
                                                 10

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III. Current U.S. Regulatory Treatment of Preferred Capital Instruments

          A. Federal Reserve Board

          1.         Generally

                     Bank Holding Companies – Prior to April 2005

               On October 21, 1996, the FRB, the federal regulator of bank holding companies
(“BHCs”) and state member banks, approved the use of trust preferred instruments as Tier 1
regulatory capital for BHCs on the theory that they qualify as minority interests in consolidated
subsidiaries. According to FRB guidelines, to be eligible as Tier 1 capital:

          •       the preferred securities must provide for a minimum 5 year consecutive deferral
                  period;

          •       the intercompany loan must be deeply subordinated (subordinated to all subordinated
                  debt) and have the longest feasible maturity (typically 30 years);

          •       the preferred securities must be redeemable only upon the approval of the FRB; and

          •       the amount, together with other cumulative preferred stock issued by the bank
                  holding company), must be limited to 25% of the bank holding company’s total Tier
                  1 capital.

                     Bank Holding Companies – After April 2005

                The FRB’s premise that trust preferred securities constitute minority interests in a
bank holding company subsidiary was altered when, in January of 2003, the Financial
Accounting Standards Board (“FASB”) issued interpretation No.46 (“FIN 46”) that interprets
Accounting Research Bulletin No.51. FIN 46 addresses the consolidation by business
enterprises of “variable interest entities” and requires companies that control another entity to
consolidate the controlled entity for financial purposes. FIN 46 also implies, however, that a
bank holding company’s trust preferred issuing trust subsidiary should be de-consolidated from
its parent for accounting purposes. This de-consolidation means that the bank holding company
and its trust subsidiary have a relationship based exclusively on a debt interest. As a result of
this new relationship, the trust preferred securities are treated as a liability on the bank holding
company’s consolidated balance sheets, not as equity, and the “related expense [is] recorded as
an interest expense on the income statement rather than as a minority interest in the income of its
[trust] subsidiary.” In December 2003, FASB revised FIN 46 stating that trust preferred
securities issued by trust subsidiaries of bank holding companies must be de-consolidated as of
December 31, 2003.



                                                     11

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               In May 2004, the FRB reacted to the adoption of FIN 46 by proposing new
regulations on the treatment of trust preferred securities as regulatory capital and the definition of
capital for bank holding companies.

                On March 1, 2005, the FRB issued its long-awaited final regulations on trust
preferred securities and the definition of capital. The final regulations adopted, with minor
modifications, the FRB’s May 2004 proposed regulations on the subject. The final regulations
became effective on April 11, 2005. However, the FRB has indicated that it will not object if a
bank holding company applies the provisions of the final regulations beginning on the date the
final regulations are published in the Federal Register.

          Summarized below are the major provisions of the final regulations.

               Continued Inclusion of Trust Preferred in Tier 1 Capital. The final regulations
allow for the inclusion of trust preferred securities in bank holding company tier 1 capital,
subject to quantitative and qualitative requirements, notwithstanding that, as a result of FIN 46,
trust preferred securities no longer give rise to a minority interest in the equity accounts of a
consolidated subsidiary. In adopting the final regulations, FRB considered, but rejected, the
view of the Federal Deposit Insurance Corporation, contained in a comment letter from its
chairman, that trust preferred securities should no longer be eligible for inclusion in bank holding
company tier 1 capital.

                General Quantitative Limitation. As in the proposed regulations, the final
regulations tighten the quantitative limitations applicable to the inclusion of trust preferred
securities in bank holding company tier 1 capital. Under the final regulations, restricted core
capital elements (including trust preferred securities) includable in bank holding company tier 1
capital are limited to 25% (15% in the case of “internationally active banking organizations”) of
the sum of core capital elements (including restricted core capital elements), net of goodwill less
any associated deferred tax liability. “Restricted core capital elements” are defined to include
qualifying cumulative perpetual preferred stock (including related surplus), minority interest
related to qualifying cumulative perpetual preferred stock directly issued by a consolidated U.S.
depository institution or foreign bank subsidiary, minority interest related to qualifying common
stockholders’ equity or perpetual preferred stock issued by a consolidated subsidiary that is
neither a U.S. depository institution nor a foreign bank, and qualifying trust preferred securities.
“Core capital elements” are defined to include qualifying common stockholders’ equity,
qualifying noncumulative perpetual preferred stock (including related surplus), minority interest
related to qualifying common or noncumulative perpetual preferred stock directly issued by a
consolidated U.S. depository institution or foreign bank subsidiary, and restricted core capital
elements.

              Goodwill. The FRB declined in the final regulations to eliminate the deduction of
goodwill from core capital elements in calculating the tier 1 capital limitation for restricted core
capital elements, noting that the restricted core capital elements’ limits should be keyed more
closely to tangible equity. However, the final regulations modify the goodwill deduction as
                                                 12

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originally proposed by allowing any associated deferred tax liability to be netted from the
amount of goodwill deducted.

                Application of the 15% Limitation on Restricted Core Capital Elements. The
proposed regulations did not provide a precise definition of “internationally active banking
organization” to which the more constraining 15% limitation on restricted core capital elements,
referred to above, would apply. In response to comments, the final regulations define an
“internationally active banking organization” as a banking organization that (i) as of its most
recent year-end FR Y 9-C report has total consolidated assets equal to $250 billion or more or
(ii) on a consolidated basis, reports total on-balance-sheet foreign exposure of $10 billion or
more on its most recent year-end FFIEC 009 Country Exposure Report. This is similar to the
definition previously proposed by FRB for determining which banking organizations must
mandatorily adopt the Basle II Capital Accord provisions which will apply in the United States.
Significantly, the final regulations make clear that the 15% limitation on restricted core capital
elements will not apply to bank holding companies that choose to opt into the Basle II
framework (i.e., are not mandatory Basle II adopters) in the United States. However, FRB
indicates that it will generally expect and strongly encourage opt-in bank holding companies to
plan for, and come into compliance with, the 15% limitation on restricted core capital elements
as they approach the definitional criteria for being considered internationally active banking
organizations.

                The final regulations exempt qualifying mandatory convertible preferred
securities from the 15% limitation on restricted core capital elements applicable to
internationally active banking organizations. Accordingly, under the final regulations, the
aggregate amount of restricted core capital elements (excluding mandatory convertible preferred
securities) that a bank holding company which is an internationally active banking organization
may include in tier 1 capital may not exceed the 15% limit applicable to such banking
organizations, whereas the aggregate amount of restricted core capital elements (including
mandatory convertible preferred securities) that a bank holding company which is an
internationally active banking organization may include in tier 1 capital may not exceed the 25%
limitation applicable to all bank holding companies. FRB indicates that bank holding companies
desiring to issue mandatory convertible preferred securities should seek review of such preferred
securities by Board staff prior to issuance to ensure that they do not contain features that detract
from their high capital quality.

               On January 23, 2006, the FRB issued a letter to Wachovia Corporation which
confirmed that trust preferred securities that convert into noncumulative perpetual preferred
stock (instead of common stock) constitute qualifying mandatory convertible preferred securities
within the meaning of the FRB’s capital guidelines. Accordingly, such securities would be
exempt from the 15% limitation on restricted core capital elements applicable to internationally
active banking organizations and are instead subject to the limitation that an internationally
active banking organization may include restricted core capital elements in Tier 1 capital up to
25% of Tier 1 capital so long as restricted core capital elements that exceed 15% of Tier 1 capital
are in the form of qualifying mandatory convertible securities.
                                                 13

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                Transition Period. The revised quantitative limitations will become applicable to
bank holding companies’ restricted core capital elements for reports and capital computations
beginning March 31, 2009, the reporting date for the first quarter of 2009. This represents an
extension from the three-year transition period contained in the proposed regulations. Prior to
March 31, 2009, a bank holding company must comply with existing (pre-final regulations)
quantitative limitations and, in addition, if it has restricted core capital elements exceeding the
revised quantitative limitations must consult with the Federal Reserve on a plan for ensuring that
it is not unduly relying on these elements in its capital base.

                Non-Voting Instruments Includable in Tier 1 Capital. The final regulations retain
the standard that voting common stock should be the dominant form of a bank holding
company’s tier 1 capital and continue to caution that excessive non-voting elements generally
will be reallocated to tier 2 capital.

                  Specific Provisions. The final regulations expressly cover the following
provisions:

     •    Step-Ups. Notwithstanding industry comments urging the FRB to conform its position
          on allowable rate step-up provisions to the October 27, 1998 Basle Committee release on
          instruments eligible for inclusion in tier 1 capital, the final regulations continue to
          prohibit rate step-up provisions in tier 1 capital instruments and in tier 2 subordinated
          debt. The final regulations are silent as to the circumstances under which fixed/floating
          rate provisions are permitted in tier 1 and tier 2 capital instruments.

     •    Elimination of Call Option Requirement. The final regulations eliminate the FRB’s long-
          standing requirement for the presence of a call option in qualifying trust preferred
          securities.

        Technical Requirements for Underlying Junior Subordinated Debt. The final regulations
require that the underlying junior subordinated debt have a minimum maturity of 30 years, be
subordinated to all debt of the sponsoring banking organization (subject to certain exceptions
noted below), and otherwise comply with the FRB’s policy statement with regard to
subordinated debt securities includable in capital. As is currently the case, qualifying trust
preferred securities which are backed by such junior subordinated debt must allow for dividends
to be deferred for at least 20 consecutive quarterly periods.

          The final regulations clarify that:

     •    a deferral notice period of up to 15 business days before a payment date is permissible;

     •    junior subordinated debt does not have to be subordinated to, and may rank pari passu
          with, trade creditors and may also rank pari passu with junior subordinated debt
          underlying another issue of trust preferred securities, and pari passu with or senior to

                                                  14

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          deeply subordinated debt that the FRB may in the future authorize for inclusion in tier 1
          capital;

     •    junior subordinated debt must be subordinated to senior obligations not only with regard
          to priority in bankruptcy, but also with regard to priority of interest payments on other
          debt while the bank holding company is a going concern;

     •    in addition to bankruptcy of the bank holding company or receivership of a major
          banking subsidiary, defaults which are authorized to trigger acceleration may include
          (i) nonpayment of interest for 20 or more consecutive quarters and (ii) the trust issuing
          the preferred securities going into bankruptcy or being dissolved, unless the junior
          subordinated debt has been redeemed or distributed to the trust preferred securities’
          investors or the obligation is assumed by a successor bank holding company; and

     •    provisions that prohibit interest deferral on junior subordinated debt if a default has
          occurred are permissible only if the default is one that is authorized to trigger acceleration
          of principal and interest.

                 The final regulations provide that in the last five years before the maturity of the
junior subordinated debt, the outstanding amount of the associated trust preferred securities must
be excluded from tier 1 capital, but may be included in tier 2 capital subject to the amortization
provisions and quantitative restrictions applicable to the inclusion of limited-life preferred stock
in tier 2 capital.

                Extension of Grandfather Date. The final regulations extended the grandfathering
date for junior subordinated debt with nonconforming provisions, but satisfying the grandfather
criteria, to April 15, 2005 (from May 31, 2004, the originally proposed grandfather date).

                     Financial Holding Companies

                Furthermore, under the recently enacted Gramm-Leach-Bliley Act (“GLBA”),
one of the criterion for a foreign bank to qualify as a financial holding company and therefore to
engage in expanded U.S. nonbanking activities is for it to be “well capitalized.” The GLBA
provides that a foreign bank is well-capitalized if:

          •       its home-country supervisor has adopted risk-based capital standards consistent with
                  the 1988 Basle Accord;

          •       the foreign bank maintains a Tier 1 capital to total risk-based assets ratio of 10%, as
                  calculated under its home-country standard;

          •       the foreign bank maintains a Tier 1 capital to total assets leverage ratio of at least 3%;
                  and


                                                        15

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APPENDIX A




          •       the foreign bank’s capital is comparable to the capital required of a U.S. bank owned
                  by a financial holding company.

Therefore, if the home country supervisor of a foreign bank with a branch or agency in the
United States treats a preferred capital product as Tier 1 capital, it is likely that the FRB will do
the same.

                     State Member Banks

                Under the FRB’s capital regulations applicable to state member banks,
noncumulative perpetual preferred stock qualifies as Tier 1 capital, but cumulative preferred
stock may only be counted as Tier 2 capital. The FRB has not yet approved trust preferred
securities (either cumulative or noncumulative) as Tier 1 capital at the bank level.

          2.         Derivative Contracts Hedging Trust Preferred Stock

                In its supervisory letter dated March 28, 2002 (“SR 02-10”), the FRB noted that
some BHCs seeking to hedge interest rate risk on issues of trust preferred stock had been offered
derivative contracts with terms that have the effect of contravening the strict conditions for the
inclusion of trust preferred stock in Tier 1 capital. The terms in question were said to take effect
when the BHC defers dividend payments on the trust preferred stock subject to the hedge. When
such a deferral event occurs, the contracts provide that the derivative counterparty will defer on a
cumulative basis its swaps payments due to the banking organization while the BHC continues to
make payments to the derivative counterparty. The FRB expressed supervisory concerns where
the contract terms for deferral on swap payments are not symmetrical and require the banking
organization to make payments to the swap counterparty without receiving payments from the
counterparty. The FRB noted that contracts structured in this manner undermine the loss-
absorbing capacity of the hedged trust preferred stock and, consequently, its eligibility for Tier 1
capital treatment.

          B.         Office of the Comptroller of the Currency

          1.         Capital Treatment

              Under the OCC’s capital guidelines, which are applicable to national banks,
noncumulative perpetual preferred stock qualifies as Tier 1 capital, but cumulative preferred
stock may only be counted as Tier 2 capital.

                On December 22, 2000, the OCC, the primary regulator of national banks,
approved trust preferred securities as Tier 1 capital at the bank level for the first time. In
addition, in October 2000 the OCC approved the inclusion of certain noncumulative, perpetual,
fixed-rate preferred securities issued by a limited liability company subsidiary of a national bank
as Tier 1 capital.


                                                      16

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APPENDIX A




                The OCC permits real estate investment trust (“REIT”) noncumulative perpetual
preferred securities to qualify as Tier 1 capital for up to 25% of the bank’s Tier 1 capital, as long
as REIT preferred shares are automatically exchangeable for preferred shares of the parent bank
in the event the OCC directs the bank to make the conversion because:

          •       the bank is “undercapitalized” under prompt corrective action regulations;

          •       the bank is placed in conservatorship or receivership; or

          •       the OCC, in its sole discretion, anticipates the bank becoming undercapitalized in the
                  near term.

          2.         Investment Securities

                 On April 8, 1997, the staff of OCC issued Interpretive Letter 777 (“Letter 777”),
which concluded that national banks may purchase trust preferred securities as Type III
securities,22 if they meet the applicable rating and marketability requirements of Part 1 of the
OCC’s regulations.23 To meet these requirements, Letter 777 provides that a trust preferred
security and a corresponding debenture should be:

          •       investment grade (as defined in the OCC’s Part 1 regulation) or the credit equivalent
                  of a security rated investment grade, and therefore not predominantly speculative in
                  nature; and

          •       registered under the Securities Act of 1933, or offered and sold pursuant to Rule
                  144A, or can be sold with reasonable promptness at a price that corresponds
                  reasonably to its fair value.

                In Letter 777, OCC staff observed that trust preferred securities possess many
characteristics typically associated with debt obligations, such as corporate bonds and municipal
revenue bonds. For example, holders of trust preferred securities, like holders of debt, do not
share in any appreciation in the value of the issuer trust, and are protected from changes in the
value of the principal of the instruments (except credit risk). Also, like holders of debt, holders
trust preferred securities do not have voting rights in the management or the ordinary course of
business of the issuer trust. Furthermore, like debt, trust preferred securities are not perpetual
and distributions on trust preferred securities resemble the periodic interest payments on debt.
The OCC supported this conclusion with a no-action letter issued by the staff of the Securities
and Exchange Commission that did not object to a bank holding company treating trust preferred
securities as debt under Generally Accepted Accounting Principles (even if the bank holding
company classified the securities as minority interests in consolidated subsidiaries for regulatory
reporting purposes).

              On November 3, 1999, just before enactment of the GLBA, which gave banks
broad securities underwriting/dealing powers, the OCC gave an operating subsidiary of a
                                                      17

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APPENDIX A




national bank special permission to privately place trust preferred securities and to engage in
secondary market transactions as a dealer in trust preferred securities issued by unaffiliated bank
holding companies.24

                On April 23, 2001, the OCC issued Interpretive Letter 908 (“Letter 908”). Letter
908 expands the OCC’s approval of trust preferred securities contained in Letter 777 by
concluding that because trust preferred securities qualify as debt obligations they may be
purchased and held as loans under the authority to discount and negotiate evidences of debt even
if the securities do not meet the rating and marketability requirements of Part 1 of the OCC
regulations.25 This departure from the OCC’s previous conclusions in Letter 777 is attributable
to the increasing emphasis placed on trust preferred securities’ similarity to traditional debt
instruments.

              In Letter 908 the OCC held that the purchase of trust preferred securities by a
national bank must:

          •       comply with the lending limit restrictions of 12 USC 84;26

          •       not purchase an amount of trust preferred securities in excess of 15% of its capital
                  and surplus; and

          •       the prudential requirements in Banking Circular No.181.27

These requirements are very much the typical standards for debt investment safety incumbent
upon all of a national bank’s usual debt investments. However, the OCC did require that
national banks must assure that they have continual access to appropriate credit and portfolio
performance data as long as they hold trust preferred securities.

                On May 22, 2002, the OCC issued supplemental guidance concerning unsafe and
unsound investment portfolio practices. The OCC was concerned that trust preferred securities
could be an area where national bank’s would engage in the unsafe and unsound practice of
“yield chasing.” Yield chasing typically occurs when a national bank suffers a large decline in
asset yields, they ignore prudent investing practices and assume dangerously high levels of risk.
Among other areas, the OCC considered how certain investment securities could create high risk
by their combination of credit, interest rate and liquidity risk.28

                The OCC noted its belief that many national banks have acquired large amounts
of trust preferred securities but have failed to appreciate such securities’ inherent risks. The
OCC first noted that many national banks have failed to appreciate that trust preferred securities
are not the obligation of a bank but rather of a bank holding company’s trust subsidiary. The
failure to appreciate this difference had led some such banks to mistakenly believe that trust
preferred securities were the functional equivalent of federal funds sold to a bank. This mistake
caused such banks to overlook the risks associated with the facts that trust preferred securities
contain an option that allows the issuer to defer payment of dividends for up to five years
                                                       18

NY1 5320753v.12
APPENDIX A




without representing an event of default, and that unlike federal funds trust preferred securities, if
not called, generally represent a 30-year bullet maturity. The OCC believes that credit risks are
associated with trust preferred securities given their long maturities. The securities’ price
sensitivity can negatively affect the bank’s interest rate risk profile. Finally, the fact that some
trust preferred securities did not increase in value when interest rates declined indicates generally
poor liquidity.

          C. Federal Deposit Insurance Corporation

          1.         Capital Treatment

                Under the FDIC capital guidelines applicable to state nonmember banks,
noncumulative perpetual preferred stock qualifies as Tier 1 capital, but cumulative preferred
stock may only be counted as Tier 2 capital. The FDIC has not yet approved trust preferred
securities as Tier 1 capital at the bank level.

               The FDIC permits noncumulative perpetual preferred REIT stock to qualify as
Tier 1 bank capital for up to 25% of a bank’s Tier 1 capital, as long as the minority interests
arising from the preferred stock are automatically exchangeable for Tier 1 equity instruments of
the parent bank upon the occurrence of a conversion event, including where:

          •       the bank becomes “undercapitalized” under the FDIC’s prompt corrective action rule;

          •       the bank is placed into bankruptcy, reorganization, conservatorship, or receivership;
                  or

          •       the FDIC, in its sole discretion, directs the exchange in anticipation of the bank
                  becoming undercapitalized in the near term.

In addition, the FDIC must give consent for the redemption or retirement of the REIT preferred
stock. Similarly, preferred stock to be issued by a REIT subsidiary of an FDIC-supervised bank
should include a disclosure in the prospectus and any related preferred stock agreements that
such preferred stock cannot be redeemed unless the parent bank receives prior written consent
from the FDIC.

          2.         Investment Securities

         On February 19, 1999, the FDIC opined that state banks, like national banks, may invest
in trust preferred securities, provided that state law so permits and that the trust preferred
securities meet the investment quality and marketability requirements applicable to “investment
securities” under the OCC’s Part 1 regulations.29 In addition, the FDIC clarified that the 10% per
issuer diversity limit that is applicable to national banks’ investment in Type III securities does
not apply to state non-member banks. The only limit imposed are general safety and soundness
limitations and limitations imposed by state law.

                                                       19

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APPENDIX A




          D. Office of Thrift Supervision

          1.         Capital Treatment

                Like the other federal banking agencies, the Office of Thrift Supervision (“OTS”),
the primary regulator of federally-chartered savings associations, has not yet approved trust
preferred securities as Tier 1 capital at the bank level. On December 18, 2001, the OTS issued
Thrift Bulletin No. 73a (“Bulletin 73a”), which states that because deferred payment on trust
preferred securities are cumulative, trust preferred securities may not count toward Tier 1 capital.
Also, since thrifts are limited on the amount of dividends that they may pay as a percentage of
their annual income, a thrift holding company’s ability to rely on receipt of dividends from its
thrift subsidiary to make payments on an issue of trust preferred securities may be jeopardized.
Bulletin 73a indicates, however, that if a thrift holding company issues trust preferred securities
and invests the proceeds in a thrift subsidiary, those funds may qualify as capital at the thrift
level. (Note that, while thrift holding companies are generally not subject to capital
requirements, some have issued trust preferred securities in anticipation of future capital
requirements for thrift holding companies.)

               The OTS also permits noncumulative perpetual preferred REIT stock to qualify as
Tier 1 bank capital for up to 25% of a bank’s Tier 1 capital, as long as the minority interests
arising from the preferred stock are automatically exchangeable for Tier equity instruments of
the parent bank upon the occurrence of a conversion event, including where:

          •       the bank become “undercapitalized” under the OTS’s prompt corrective action rule;

          •       the bank is placed into bankruptcy, reorganization, conservatorship, or receivership;
                  or

          •       the OTS, in its sole discretion, directs the exchange in anticipation of the bank
                  becoming undercapitalized in the near term.

In addition, the OTS must give consent for the redemption of REIT preferred stock.

          2.         Investment Securities

               Bulletin 73a concludes that federal savings associations may invest in trust
preferred securities that meet the requirement of corporate debt securities set forth at 12 C.F.R. §
560.40.30 Section 560.40 provides that a savings association investment in such securities must:

          •       be able to be sold with reasonable promptness at a price that corresponds reasonably
                  to their fair value;
          •       be rated in one of the four highest categories by a nationally recognized rating
                  service; and
          •       meet general “loan to one borrower” lending limits.
                                                       20

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APPENDIX A




Moreover, thrifts may make pass-through, equity-type investments in entities such as limited
partnerships, trusts, and similar entities so long as the underlying investments are permissible for
federal savings associations.31

               Bulletin 73a notes that trust preferred securities may pose certain risks that are
generally higher than the risks associated with traditional corporate debt securities. The OTS
notes the following issues of particular concern:

          •       trust preferred securities typically allow an issuer to defer payments for up to five
                  years without declaring an event of default, thus thrift holders are foreclosed from
                  taking action against the issuer during such time;

          •       some 30- year trust preferred issues allow the issuer to extend the maturity of the
                  issue for an additional 20-years without the thrift holders’ approval;

          •       an institution may raise capital without substantively changing its financial condition
                  by issuing trust preferred securities, counting them toward capital, then using the
                  proceeds of the sale to purchase similar securities from other issuers;

          •       many issuers of trust preferred securities are bank holding companies rated in one of
                  the two lower investment grades; and

          •       there is little data on the performance of trust preferred securities over time, yet such
                  securities have long maturities.

               Due to such concerns, the OTS has concluded that both federally- and state-
chartered savings associations that invest in trust preferred securities or similar securities should
ensure that such investment meet the following additional limitations and requirements:

          •       savings associations’ aggregate investment in trust preferred securities and similar
                  securities should be limited to 15% of total capital;

          •       savings associations should not enter into formal or informal reciprocal agreements or
                  understandings with other issuers or brokers to purchase the securities of other
                  issuers;

          •       savings associations should not invest in securities whose maturity can be unilaterally
                  extended by issuers beyond 30 years; and

          •       savings associations should only purchase trust preferred securities that are public
                  offerings (because of liquidity concerns).

              Bulletin 73a also provides that if a savings association wants to invest more than
15% of its capital in trust preferred securities or similar securities, it must obtain approval from
                                                        21

NY1 5320753v.12
APPENDIX A




its OTS Regional Office prior to its purchase or commitment. The OTS Regional Office will
approve such a request only if it determines that the proposed investment poses no greater risk
than an investment in a non-subordinated, investment grade corporate debt security.

               Bulletin 73a indicates that trust preferred securities must be 100% risk weighted
by the investing thrift for risk-based capital purposes.

          Any questions or queries relating to this memorandum should be addressed to any of the following
  lawyers at Sidley Austin LLP:

                  Name                       Direct Telephone                         E-mail

  Connie M. Friesen                  1-212-839-5507                     Cfriesen@sidley.com
  Daniel M. Rossner                  1-212-839-5533                     Drossner@sidley.com




                                                      22

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EXHIBIT A




                                               CAPITAL TREATMENT OF PREFERRED STOCK BY THE
                                                        FEDERAL BANK REGULATORS
I.        Introduction

                The purpose of the following summary and the attached matrix is to identify differences among the federal bank regulators in
the treatment of various capital instruments as Tier 1 and Tier 2 capital. The chart does not attempt to identify all potential differences in
classification of capital instruments, but focuses on those that are clear from the basic capital statements of each of the four regulators.

II.       Summary

          •       Banking organizations regulated by the Federal Reserve Board (“FRB”), the Office of the Comptroller of the Currency (“OCC”),
                  the Federal Deposit Insurance Corporation (“FDIC”), and the Office of Thrift Supervision (“OTS”) may include noncumulative
                  perpetual preferred stock (“PPS”) in Tier 1 capital, although these agencies provide that it is desirable from a supervisory standpoint
                  that common stockholders’ equity remain the dominant form of Tier 1 capital.

          •       The FRB provides that U.S. bank holding companies (“BHCs”) may also include cumulative PPS as up to one-third of Tier 1 capital
                  (excluding cumulative PPS) or 25% of Tier 1 capital (including cumulative PPS).32

          •       All banking organizations and BHCs may include PPS (cumulative and noncumulative) and long-term preferred stock in Tier 2
                  capital, without limit.

          •       BHCs and banking organizations regulated by the FRB, OCC, and FDIC may include intermediate-term preferred stock in Tier 2
                  capital, which together with term subordinated debt is limited to 50% of Tier 1 capital. OTS institutions are not subject to the 50%
                  limit.

          •       BHCs and banking organizations regulated by the FRB, OCC, and FDIC may include hybrid capital instruments in Tier 2 capital.
                  The OTS is silent on this matter.




NY1 5320753V.12
EXHIBIT A

                                                              TIER 1 CAPITAL
                  FRB                     FRB                      OCC                          FDIC                         OTS
              (BHCs)               (State Member Banks)         (National Banks)       (State Non-Member Banks)      (Savings Associations)

Noncumulative                   Noncumulative              Noncumulative              Noncumulative               Noncumulative
Perpetual Preferred             Perpetual Preferred        Perpetual Preferred        Perpetual Preferred         Perpetual Preferred
Stock (including related        Stock (including related   Stock (including related   Stock (including related    Stock (including related
surplus).33,34                  surplus).1,2               surplus).35                surplus).2,3                surplus).36
•    The following
     limitations apply to all
     perpetual preferred
     stock (“PPS”) for Tier
     1 purposes:
•    Issuer redemption is
     subject to prior FRB
     approval.
Issuer must have legal
right to defer or eliminate
preferred dividends.
Qualifying Cumulative     Not permitted.                   Not permitted.             Not permitted.              Not permitted.
Perpetual Preferred Stock
(including related
surplus).37
Cumulative PPS is limited
to:
  (a) one-third of core
      capital, excluding
      cumulative PPS or
  (b) 25% of core capital,
      including cumulative
      PPS.



                                                                       2
NY1 5320753v.12
EXHIBIT A



                                                          TIER 2 CAPITAL
              FRB                     FRB                      OCC                               FDIC                           OTS
             (BHCs)           (State Member Banks)          (National Banks)            (State Non-Member Banks)        (Savings Associations)

Perpetual Preferred        Perpetual Preferred        Perpetual Preferred           Perpetual Preferred              Perpetual Preferred
Stock (including related   Stock (including related   Stock (including related      Stock (including related         Stock (including related
surplus).                  surplus).                  surplus).                     surplus).                        surplus).4
                                                      Cumulative PPS may be         Cumulative PPS may be
                                                      without limit if the issuer   without limit if the issuer
                                                      has option to defer           has option to defer
                                                      payment of dividends.         payment of dividends.


Long-Term Preferred        Long-Term Preferred        Long-Term Preferred           Long Term Preferred              Silent
Stock (including related   Stock (including related   Stock (including related      Stock (including related
surplus).                  surplus).                  surplus).                     surplus).
Must have original         Must have original         •   May be included           •     May be without limit if
maturity of 20 years or    maturity of 20 years or        without limit if the            the issuer has option to
more.38                    more.6                         issuer has option to            defer payment of
                                                          defer payment of                dividends.
                                                          dividends.
                                                                                    •     Must have original
                                                      •   Amount eligible in              maturity of 20 years or
                                                          Tier 2 is reduced by            more.
                                                          20% of the original
                                                                                    •     May not be
                                                          amount at the
                                                                                          redeemable at the
                                                          beginning of each of
                                                                                          option of the holder
                                                          the last 5 years of the
                                                                                          prior to maturity,
                                                          life of the instrument.
                                                                                          except with the prior
                                                                                          approval of FDIC.



                                                                   3
NY1 5320753v.12
EXHIBIT A

                                                             TIER 2 CAPITAL
              FRB                       FRB                       OCC                                 FDIC                          OTS
             (BHCs)              (State Member Banks)           (National Banks)             (State Non-Member Banks)       (Savings Associations)

Intermediate-Term            Intermediate-Term            Intermediate-Term              Intermediate-Term              Intermediate-Term
Preferred Stock              Preferred Stock              Preferred Stock                Preferred Stock                Preferred          Stock
(including related           (including related           (including related             (including related             (including        related
surplus).                    surplus).                    surplus).                      surplus).                      surplus).
•   Aggregate amount with    •   Aggregate amount with    • Aggregate amount with        •     Aggregate amount with    •   Amount eligible in Tier
    term subordinated debt       term subordinated debt       term subordinated debt           term subordinated debt       2 is reduced by 20% of
    is limited to 50% of         is limited to 50% of         is limited to 50% of             is limited to 50% of         the original amount at
    Tier 1 capital.39            Tier 1 capital.8             Tier 1 capital.                  Tier 1 capital.8             the beginning of each of
•                                                         • Amount eligible in Tier      •                                  the last 5 years of the
    Original weighted        •   Original weighted                                             Original average
    average maturity of at                                    2 is reduced by 20% of           maturity of at least 5       life of the instrument.
                                 average maturity of at
    least 5 years.                                            the original amount at           years.
                                 least 5 years.
                                                              the beginning of each of
                                                              the last 5 years of the    •     May not be
                                                              life of the instrument.          redeemable at the
                                                                                               option of the holder
                                                                                               prior to maturity,
                                                                                               except with the prior
                                                                                               approval of FDIC.




                                                                       4
NY1 5320753v.12
EXHIBIT A

                                                                  TIER 2 CAPITAL
              FRB                         FRB                          OCC                                FDIC                           OTS
             (BHCs)                (State Member Banks)             (National Banks)             (State Non-Member Banks)        (Savings Associations)

Hybrid Capital                 Hybrid Capital                 Hybrid Capital                 Hybrid Capital                   Silent
Instruments.40                 Instruments.9                  Instruments.9                  Instruments.9
Must satisfy the following     Must satisfy the following     Must satisfy the following     Must satisfy the following
criteria:                      criteria:                      criteria:                      criteria:
• Convertible to common        • convertible to common        • convertible to common        • convertible to common
     stock or PPS;                  stock or PPS;                  stock or PPS;                  stock or PPS;
• Unsecured;                   • unsecured;                   • unsecured;                   • unsecured;
• Fully paid-up and            • fully paid-up and            • fully paid-up and            • fully paid-up and
     subordinated to general        subordinated to general        subordinated to general        subordinated to general
     creditors;                     creditors;                     creditors;                     creditors;
• may not be redeemable        • may not be redeemable        • may not be redeemable        • may not be redeemable
     at the option of the           at the option of the           at the option of the           at the option of the
     holder prior to                holder prior to                holder prior to                holder prior to
     maturity, except with          maturity, except with          maturity, except with          maturity, except with
     the prior approval of          the prior approval of          the prior approval of          the prior approval of
     FRB; and                       FRB; and                       OCC; and                       FDIC; and
• option for the issuer to     •   option for the issuer to   •   option for the issuer to   •     option for the issuer to
     defer interest                defer interest                 defer interest                   defer principal and
     payments.                     payments.                      payments.                        interest payments.

Silent                         Silent                         Convertible Preferred          Silent                           Silent
                                                              Stock (including related
                                                              surplus).
                                                              May be without limit if the
                                                              issuer has option to defer
                                                              payment of dividends.




                                                                           5
NY1 5320753v.12
1
        See, e.g., 12 U.S.C. § 84; 12 C.F.R. § 32.3 (national bank lending limits).
2
        See, e.g., N.Y. Banking Law § 235(9)(a)(1) (limiting state savings bank investment in real property required for banking activities to 25% of capital surplus).
3
        Pursuant to the Gramm-Leach-Bliley Act, a bank holding company must be “well-capitalized” to qualify as a financial holding company and engage in permissible
nonbanking activities. 12 U.S.C. § 1843(l).
4
         The FRB’s capital guidelines apply to state-chartered banks that are members of the Federal Reserve System (state member banks) and bank holding companies
(including financial holding companies) on a consolidated basis. See 12 C.F.R. pt. 208 (Appendix A); 12 C.F.R. pt. 225 (Appendix A). The OCC capital guidelines apply to
national banks and are similar to the Reserve Board’s guidelines. See 12 C.F.R. pt. 3 (Appendix A). The FDIC’s capital guidelines apply to FDIC-insured state-chartered
banks that are not members of the Federal Reserve System (state nonmember banks). See 12 C.F.R. pt. 325. The OTS’s capital adequacy guidelines apply to federally-
chartered savings associations. See 12 C.F.R. § 567.5.
5
          See Exhibit A for description of variations in capital treatment of preferred securities by the federal bank regulators.
6
         As a result of the January 2003, Financial Accounting Standards Board’s interpretation No. 46, “Consolidation of Variable Interest Entities” (“Fin-46”) the U.S.
banking regulators jointly released interim rules that will “permit sponsoring banking organizations to exclude the assets of asset-backed commercial paper programs that
must be consolidated under Fin-46 from risk-weighted assets when they calculate their Tier 1 and total risk-based capital ratios.” OCC, FRB, FDIC OTS, Joint Release:
Interim Capital Treatment of Consolidated Asset-Back Commercial Paper Program Assets, dated Sept. 9, 2003 (the interim rule covers the quarters ending Sept. 30, 2003,
Dec. 31, 2003 and March 31, 2004).
7
          Basle II (see item II.D. below) requires that loans considered past-due be risk weighted at 150%, unless a threshold amount of specific provisions has already been
set aside by the bank against the past-due loan and introduces, among other things, a new 10% risk category for certain on-balance sheet items.
8
        Basle II (see item II. D. below) purports to change the calculation of risk weights for banks’ assets and introduces the concept of “operational risk” into the capital
adequacy ratio.
9
        Group of Ten (G-10) countries include Belgium, Canada, France, Germany, Italy, the Netherlands, Japan, Sweden, Switzerland, the UK, and the U.S. Switzerland
became a full member in 1984, bringing the group to eleven members. The G-10 countries plus Luxembourg and Spain comprise the Basle Committee which issues the
Basle Accords.
10
          According to the 1988 Basle Accord, such instruments had to meet the following requirements: (1) unsecured, subordinated and fully paid-up; (2) not redeemable
at the initiative of the holder or without the prior consent of the supervisory authority; (3) available to participate in losses without the bank being obliged to cease trading
(unlike conventional subordinated debt); and (4) although the capital instrument may carry an obligation to pay interest that cannot permanently be reduced or waived
(unlike dividends on ordinary shareholders' equity), it should allow service obligations to be deferred (as with cumulative preference shares) where the profitability of the
bank would not support payment.
11
         Basle II clarifies the calculation of the 15% limitation on innovative instruments by (1) requiring that Tier 1 capital be construed net of good will, and (2) requiring
that in determining the allowable amount of innovative instruments, banking institutions and their supervisors should multiply the amount of non-innovative Tier I by
17.65%.
12
          OCC, FRB, FDIC, OTS, Joint Request for Comment on Risk-Based Capital Guidelines; Implementation of the New Basel Accord, Aug. 4, 2003; See also, FRB


                                                                                        2
NY1 5320753v.12
Speech, Ferguson, Concerns and Considerations for the Practical Implementation of the New Basel Accord, Dec. 2, 2003.
13
         Basle II does not change the definition of what qualifies as regulatory capital, the minimum risk-based capital ratio, or the methodology for determining capital
charges for market risk. Basle II only changes the definition of risk-weighted assets.
14
         Banking Institutions relying upon the Basic Indicator Approach or the Standardized Approach to calculate their operational risk are foreclosed from recognizing
any risk mitigation provided by insurance. However, the banking institutions relying upon AMA may do so subject to certain conditions.
15
        Basle II is cognizant of the need to coordinate with national accounting standards in order to avoid conflicts with any broader accounting disclosure standards with
which a banking institution must comply.
16
          These changes had been proposed in advance as part of a paper released by the Basle Committee on July 18, 2005 titled “The Application of Basel II to Trading
          Activities and the Treatment of Double Default Effect”.
17
          OCC, FRB, FDIC, OTS, Joint Request for Comment on Risk-Based Capital Guidelines; Implementation of the New Basel Accord, Aug. 4, 2003.
18
        U.S. House of Representatives, Committee on Financial Services, Comments Regarding Basel II, dated Nov. 3, 2003; FRB: Speech by Roger W. Ferguson, Jr. –
Concerns and Considerations for the Practical Implementation of the New Basel Accord, dated Dec. 2, 2003; OCC: Speech by John D. Hawke, Jr., dated March 3, 2003;
OTS: Testimony on Basel II Capital Accord by James E. Gilleran before the Subcommittee on Financial Institutions and Consumer Credit of the House Financial Services
Committee, dated June 19, 2003.
19
          OCC, FRB, FIDC, OTS, Joint Statement – U.S. Implementation of Basel II Framework; Qualification Process – IRB and AMA, Jan. 27, 2005.
20
          OCC, FRB, FIDC, OTS, Joint Press Release – Banking Agencies Announce Revised Plan for Implementation of Basel II Framework, September 30, 2005.
21
          The Amendment to the Capital Accord to incorporate market risks was originally released in January 1996 and modified in September 1997.
22
         Type III securities are defined as “investment securities that do not qualify as Type I, II, IV, or V securities, such as corporate bonds and municipal revenue
bonds.” 12 C.F.R. § 1.2(k).
23
          OCC Interpretive Letter No. 777, Apr. 8, 1997.
24
          OCC Conditional Approval Letter No. 331, Nov. 3, 1999.
25
          OCC Interpretive Letter No. 908, April 23, 2001.
26
         12 USC 84 requires that a bank’s total loans to a person outstanding at one time and not fully secured by collateral having a market value at least equal to the
amount of the loan shall not exceed 15% of the unimpaired capital and unimpaired surplus of the association; and in the case of fully secured readily marketable collateral
having a market value at least equal to the amount of funds outstanding shall not be greater than 10% of the unimpaired capital and unimpaired surplus of the association.
27
          OCC Banking Circular 181, August 2, 1984. The prudential requirements of BC-181 are somewhat relative to a given bank’s formal lending policy. However,
most such policies require: the complete analysis and documentation of the credit quality of obligations to be purchased; an analysis of the value and lien status of the
collateral; and the maintenance of full credit information on the obligor during the term of the loan.
28
          OCC Bulletin 2002-19, May 22, 2002.
29
          FDIC Interpretive Letter 99-16, Feb. 19, 1999.




                                                                                     3
NY1 5320753v.12
30
          OTS Thrift Bulletin No. 73a, Dec. 18, 2001; clarifying OTS Thrift Bulletin No. 73, Nov. 4, 1998.
31
          See, 12 CFR 560.32.
32
          Note that a bank subsidiary of a BHC would not benefit from cumulative PPS issued by the BHC because the bank subsidiary’s primary regulator judges the bank
          on an individual, not consolidated, basis. Also, commencing March 31, 2009, these limitations will change as discussed in the accompanying memorandum.
33
          Perpetual preferred stock is defined as preferred stock that does not have a maturity date, that cannot be redeemed at the option of the holder of the instrument, and
          that has no other provisions that will require future redemption of the issue. Perpetual preferred stock in which the dividend is reset periodically based, in whole
          or in part, upon the banking organization’s current credit standing, that is auction rate perpetual preferred stock, including so called Dutch auction money market
          and remarketable preferred, will not qualify for inclusion in Tier 1 capital. Such instruments, however, qualify for inclusion in Tier 2 capital.
34
          While the guidelines allow for the inclusion of noncumulative perpetual preferred stock and limited amounts of cumulative perpetual preferred stock in Tier 1, it is
          desirable from a supervisory standpoint that voting common equity remain the dominant form of Tier 1 capital. Thus, bank holding companies should avoid
          overreliance on preferred stock or nonvoting equity elements within Tier 1.
35
          Preferred stock issues where the dividend is reset periodically based upon current market conditions and the bank’s current credit rating, including but not limited
          to, auction rate, money market or remarketable preferred stock, are assigned to Tier 2 capital regardless of whether the dividends are cumulative or noncumulative.
36
          Stock issued by subsidiaries that may not be counted by the parent savings association on the Thrift Financial Report, likewise shall not be considered in
          calculating capital. For example, preferred stock issued by a savings association or a subsidiary that is, in effect, collateralized by assets of the savings association
          or one of its subsidiaries shall not be included in capital. Similarly, common stock with mandatorily redeemable provisions is not includable in core capital.


37
          For BHCs, both cumulative and noncumulative perpetual preferred stock qualify for inclusion in Tier 1. However, the aggregate amount of cumulative perpetual
          preferred stock that may be included in a holding company’s Tier 1 is limited to one-third of the sum of the core capital elements, excluding the cumulative
          perpetual preferred stock. Stated differently, the aggregate amount may not exceed 25% of the sum of all core capital elements, including perpetual preferred
          stock. Any cumulative perpetual preferred stock outstanding in excess of this limit may be included in Tier 2 capital without any sublimits within that Tier.


38
          If the holder of such an instrument has a right to require the issuer to redeem, repay, or repurchase the instrument prior to the original stated maturity, maturity
          would be defined, for risk-based capital purposes, as the earliest possible date on which the holder can put the instrument back to the issuing banking organization.
39
          Amounts in excess of these limits may be issued and while not included in the ratio calculation, will be taken into account in the overall assessment of an
          organization’s funding and financial condition.
40
          Instruments which have characteristics of both debt and equity should convert to common or perpetual preferred stock in the event that the accumulated losses
          exceed the sum of the retained earnings and capital surplus accounts of the issuer.




                                                                                         4
NY1 5320753v.12
APPENDIX B
                                          SIDLEY AUSTIN   LLP        BEIJING        GENEVA        SAN FRANCISCO
                                          787 SEVENTH AVENUE         BRUSSELS       HONG KONG     SHANGHAI
                                          NEW YORK, NEW YORK 10019   CHICAGO        LONDON        SINGAPORE
                                          212 839 5300               DALLAS         LOS ANGELES   TOKYO
                                          212 839 5599 FAX           FRANKFURT      NEW YORK      WASHINGTON, DC


                                                                     FOUNDED 1866




                                                                                                      April 2006



                  SELECTED U.S. BANK REGULATORY ISSUES APPLICABLE TO
                        INNOVATIVE CAPITAL SECURITIES OFFERING
       This memorandum discusses some of the U.S. bank regulatory issues that parties should
consider when structuring capital securities offerings that involve U.S. banking organizations or
U.S. branches or agencies of foreign banks.

I.        Affiliate Transaction Restrictions

        Structuring capital securities for a U.S. bank may involve transactions between the U.S.
bank and its affiliates. Accordingly, it is essential to consider whether any of the component
transactions of such an offering would be subject to the affiliate transaction limitations
prescribed under sections 23A and 23B of the Federal Reserve Act (“FRA”). Intercompany
transactions are a principal concern of the federal banking regulators primarily due to their
concern that, in times of severe financial stress, bank holding companies will be tempted to
divert resources from their bank subsidiaries to their nonbanking affiliates. Sections 23A and
23B of the FRA seek to safeguard against such conduct by imposing restrictions on transactions
involving banks and their affiliates.

        On October 31, 2002 the Board of Governors of the Federal Reserve (“Board”) issued a
final rule (“Regulation W”)1 that implemented sections 23A and 23B of the FRA. Over the years
the Board has issued various interpretations and staff opinions to guide banks in their compliance
with sections 23A and 23B. With the adoption of Regulation W, the Board placed all of its
significant interpretations of sections 23A and 23B into one document. Regulation W became
effective on April 1, 2003.2




1         12 CFR 223.
2         FRB Supervisory Letter SR 03-2, Jan. 9, 2003.




NY1 5320766v.11
APPENDIX B



          Section 23A

         Section 23A is designed to protect insured depository institutions from abuses that may
result from lending and asset purchase transactions with their affiliates. As clarified by
Regulation W, section 23A prohibits a U.S. bank3 or any of its subsidiaries from engaging in
“covered transactions” with an affiliate if the bank’s total covered transactions with that affiliate
would exceed 10 percent of the bank’s capital and surplus.4 A 20 percent aggregate limit is
imposed on the total amount of covered transactions by a bank or any of its subsidiaries with all
affiliates. Section 23A defines “covered transaction” to mean, with respect to an affiliate of a
bank:

          (1)     a loan or extension of credit to the affiliate;

          (2)     a purchase of or an investment in securities5 issued by the affiliate;

          (3)     a purchase of assets from the affiliate;

          (4)     the acceptance of securities issued by the affiliate as collateral for a loan or
                  extension of credit; or

          (5)     the issuance of a guarantee, acceptance, or letter of credit on behalf of an
                  affiliate.6

          Regulation W defines “affiliate” for section 23A purposes to include:

          (1)     any company that controls the bank and any other company that is controlled by
                  the company that controls the bank;

          (2)     a bank subsidiary of the bank;

          (3)     any company, including a real estate investment trust, that is sponsored and
                  advised on a contractual basis by the bank or any subsidiary or affiliate of the
                  bank;

3        Although section 23A, by its terms, applies only to Federal Reserve member banks, the Federal Deposit
Insurance Act applies section 23A to all nonmember insured banks (12 U.S.C. § 1828(j)), and the Home Owners'
Loan Act applies section 23A to savings associations (12 U.S.C. § 1468).
4        An insured depository institution’s capital stock and surplus for purposes of section 23A is: (1) Tier 1 and
Tier 2 capital included in an institution’s risk-based capital under the capital guidelines of the appropriate federal
banking agency, based on the institution’s most recent consolidated Report of Condition and Income; and (2) the
balance of an institution’s allowance for loan and lease losses not included in its Tier 2 capital for purposes of the
calculation of risk-based capital by the appropriate federal banking agency, based on the institution’s most recent
consolidated Report of Condition and Income.
5        The term “securities” means stocks, bonds, debentures, notes, or other similar obligations. 12 U.S.C. §
371c(b)(9).
6         12 U.S.C. § 371c(b)(7).



                                                           2
NY1 5320766v.11
APPENDIX B


          (4)     any unregistered investment fund, if the bank or any bank affiliate serves as an
                  investment advisor to the fund and the bank and its affiliates, in the aggregate,
                  own more than 5% of any class of voting shares of the fund or of the equity
                  capital of the fund;

          (5)     a financial subsidiary of the bank; and

          (6)     companies held under merchant banking or insurance company investment
                  authority.

        Thus, under Regulation W transactions between a bank and its financial subsidiary, as
well as other affiliates, are subject to sections 23A and 23B. A “financial subsidiary” is defined
as any subsidiary of a national or state-chartered bank that engages in an activity not permissible
for national banks to conduct directly.

       Section 23A, as further clarified by Regulation W, also places restrictions on transactions
between U.S. branches or agencies of foreign banks and their U.S. affiliates that are engaged in
insurance underwriting, securities underwriting and dealing, merchant banking, or insurance
company investment activities. The regulation also applies sections 23A and 23B to transactions
between a U.S. branch or agency of a foreign bank and any portfolio company controlled by a
foreign bank as a merchant banking investment.

         Regulation W subjects derivative transactions between banks and their affiliates to the
market terms requirement of section 23B and requires banks to establish policies and procedures
to manage credit exposure arising from such transactions in a safe and sound manner.
Additionally, Regulation W treats a credit derivative transaction between a bank and a non-
affiliate as a covered transaction (a guarantee), if the transaction requires the bank to protect the
counterparty from a default on, or decline in value of, an obligation of an affiliate of the bank.

         Under Regulation W, intraday extensions of credit by a bank to an affiliate are covered
transactions. However, any such transaction is exempt from the requirements of section 23A,
except the safety and soundness requirement, if the bank has no reason to believe that the
affiliate will have difficulty repaying the loan in accordance with its terms and has adopted
policies and procedures to manage the credit exposure arising from such extensions of credit in a
safe and sound manner. The policies and procedures must provide for monitoring and
controlling credit exposure arising at any one time from the bank’s intraday extensions of credit
to affiliates and ensuring that any such transactions are subject to the market terms requirement
of section 23B. Any intraday extension of credit to an affiliate that exists at the end of the bank’s
U.S. business day will be treated as a non-exempt covered transaction.

        In addition to the transaction limits described above, all transactions between a U.S. bank
and its affiliate must be on terms and conditions consistent with safe and sound banking




                                                    3
NY1 5320766v.11
APPENDIX B


practices, and, in particular, a bank may not purchase low-quality assets7 from the bank’s
affiliate. Section 23A also requires that all credit exposures to an affiliate be secured by a
statutorily defined amount of collateral.8

          Section 23B

         Section 23B9 of the FRA applies to any covered transaction with an “affiliate,” as that
term is defined in section 23A, but excludes other banks from the term. It imposes an arm’s
length standard requiring that transactions be on terms and under circumstances, including credit
standards, that are substantially the same, or at least as favorable to the bank, as those prevailing
at the time for comparable transactions with or involving other nonaffiliated companies.

          Discussion

        In structuring a capital securities offering, care should be taken to ensure that none of its
component transactions are “covered transactions” under FRA sections 23A/23B. To
accomplish this, structures should avoid involving U.S. banks as parents to SPV issuers. For
example, in a multi-tiered trust preferred securities offering involving a foreign bank with a U.S.
bank subsidiary, the trust SPV should either be held by the parent foreign bank or one of its
nonbank affiliates. This way, where there is an issuance of capital securities by an affiliate of the
U.S. bank to the SPV in exchange for cash proceeds, this component transaction would not be
subject to the FRA sections 23A/23B limitations, because the SPV is not a bank or a bank
subsidiary.

II.       Potential Prohibition of Branch/Agency of Non-U.S. Bank Holding Equity Interest

       Under a final rule that became effective on October 26, 2001, the Office of the
Comptroller of the Currency (“OCC”) decided to allow a federal branch or agency of a foreign
bank to set up and hold an equity interest in an operating subsidiary in generally the same
manner that a national bank may acquire and hold such a subsidiary.10

       Previously, the OCC prohibited federal branches and agencies of non-U.S. banks from
holding equity interests in subsidiaries. This prohibition was based on the principle that, because
branches and agencies are offices of foreign banks rather than separately incorporated entities,
only the parent corporation and not the branch/agency itself would hold equity in a subsidiary.11

7        The term “low-quality asset” means an asset that falls in any one or more of the following categories: (1)
an asset classified as “substandard”, “doubtful”, or “loss” or treated as “other loans especially mentioned” in the
most recent report of examination or inspection of an affiliate prepared by either a Federal or State supervisory
agency; (2) an asset in a nonaccrual status; (3) an asset on which principal or interest payments are more than thirty
days past due; or (4) an asset whose terms have been renegotiated or compromised due to the deteriorating financial
condition of the obligor. 12 U.S.C. § 371c(b)(10).
8        Id. § 371c(c).
9        12 U.S.C. § 371c-1.
10        See 66 Fed. Reg. 49093 (Sept. 26, 2001).
11        See OCC Interpretive Letter No. 476, 1989.



                                                          4
NY1 5320766v.11
APPENDIX B


The OCC had not further opined on the applicability of this to securities offerings where a
branch or agency of a foreign bank “holds” equity in an SPV issuer. Adoption of the final rule
now removes the risk that that the regulators will take action against a branch or agency that
merely holds an equity interest in an SPV.

III.      Asset Pledge Requirements

       In a trust preferred securities offering involving a New York stated-licensed branch or
agency of a non-U.S. bank, parties should consider how the transaction would alter a branch’s or
agency’s liabilities and what implications that would have on the asset pledge required by the
New York Banking Law (the “NYBL”).

         The New York asset pledge requirement mandates that all state-licensed branches and
agencies of foreign banking organizations maintain in a segregated account a certain percentage
of their assets. Prior to December 18, 2002, a branch or agency was required to maintain on
deposit with a depository approved by the New York Superintendent of Banks (the
“Superintendent”), eligible assets in an amount equal to the higher of: (i) 5% of total liabilities,
excluding liabilities of the branch’s international banking facility (“IBF”) and amounts due and
other liabilities to other offices, agencies, branches and affiliates of the foreign banking
corporation; (ii) 1% of total liabilities (including the IBF), excluding amounts due and other
liabilities to other offices, agencies, branches and affiliates of the foreign banking corporation; or
(iii) $1 million.

        As of December 18, 2002, amendments to the New York asset pledge requirement
reduced by approximately 80 percent the $35 billion of collateral then pledged by branches and
agencies of foreign banking organizations. Under the new asset pledge requirement, the pledge is
reduced to 1% of third-party liabilities. The exclusion of liabilities arising from securities
repurchase agreements has been expanded to include all self-liquidating liabilities arising under
“Qualified Financial Contracts.” The minimum pledge has been raised from $1 million to $2
million and the pledge is now capped at $400 million for well-rated institutions. The calculation
of liabilities subject to pledge is changed from a daily actual to a monthly average of the
Wednesday Call Report figures. All institutions are permitted to use additional AAA rated assets
for up to one-half of the required amount. Institutions considered well-rated are also permitted to
use additional assets with an investment grade rating. The pledge of obligations issued or
guaranteed by entities from the home country of the foreign banking organization is no longer
allowed. Haircuts are placed upon the market value of all assets pledged, based upon the Federal
Reserve’s Discount Window valuation list. These haircuts are of varying amounts, based on the
type of asset and the duration and in most cases are less than 5%.

        The New York State Banking Department is expected to release proposed modifications
to the New York asset pledge requirement for public comment sometime during 2006. The
modifications would significantly reduce the pledge requirement for larger branches and
agencies. Under the proposal, the pledge requirement would be based on a sliding scale of the
branch or agency’s average total liabilities for the previous month (including the IBF), but
excluding amounts due and other liabilities to other offices, agencies, branches and affiliates of



                                                  5
NY1 5320766v.11
APPENDIX B


the foreign banking corporation. The minimum pledge would remain the same at $2 million but
the cap would be reduced to $100 million for “well rated” institutions.

Liabilities Requiring Pledge                                Calculation of Pledge Requirement

Under $200 million                                          $2 million (minimum pledge)

$200 million - $1 billion                                   1% of liabilities

Over $1 billion up to $5 billion                            $10 million + ¾ of 1% of liabilities over $1
                                                            billion

Over $5 billion up to $10 billion                           $40 million + ½ of 1% of liabilities over $5
                                                            billion

Over $10 billion up to $15 billion                          $65 million + ¼ of 1% of liabilities over $10
                                                            billion

Over $15 billion up to $20 billion                          $65 million + ¼ of 1% of liabilities over $10
                                                            billion

Over $20 billion up to $24 billion                          $65 million + ¼ of 1% of liabilities over $10
                                                            billion

Over $24 billion                                            $100 million (cap)



        The calculation of liabilities subject to pledge is based on a monthly average of the
Wednesday Call Report figures. If the proposal is adopted in its current form, all institutions
would still be permitted to use additional AAA rated assets for up to one-half of the required
amount. Furthermore, all institutions would be permitted to use additional assets with an
investment grade rating for up to one-half of the required amount (currently available only to
“well rated” institutions).

        The NYBL defines “affiliate” as “any person, or group of persons acting in concert, that
controls, is controlled by or is under common control with such foreign banking corporation.”12
Eligible assets consist of specified types of government obligations, US dollar deposits,
investment-grade commercial paper, obligations of certain international financial institutions and
other specified obligations.

       If a trust preferred securities offering includes the issuance of debt securities, parties must
determine if such securities constitute debts that would affect the asset pledge requirement. In


12        See, NYBL §202-b (2)(i); Superintendent’s Regulations §322.6(a).



                                                        6
NY1 5320766v.11
APPENDIX B


structures where the debt is only issued to branch “affiliates,” as that term is defined under the
NYBL, such liabilities should be excluded from the asset pledge requirement. Where it is not
clear that an entity receiving the debt is an affiliate, parties should notify the New York State
Banking Department for interpretation.



        Any questions or queries relating to this memorandum should be addressed to any of the following
lawyers at Sidley Austin LLP:

Name                               Direct Telephone                   E-mail
Connie M. Friesen                  1-212-839-5507                     Cfriesen@sidley.com
Daniel M. Rossner                  1-212-839-5533                     Drossner@sidley.com




                                                      7
NY1 5320766v.11
APPENDIX C

                                             SIDLEY AUSTIN    LLP       BEIJING      GENEVA          SAN FRANCISCO
                                             787 SEVENTH AVENUE         BRUSSELS     HONG KONG       SHANGHAI
                                             NEW YORK, NY 10019         CHICAGO      LONDON          SINGAPORE
                                             (212) 839 5300             DALLAS       LOS ANGELES     TOKYO
                                             (212) 839 5599 FAX         FRANKFURT    NEW YORK        WASHINGTON, DC



                                                                        FOUNDED 1866




                                                                                              October 2001

                 FINAL REGULATION TO REVISE REGULATORY CAPITAL TREATMENT OF
                       RECOURSE ARRANGEMENTS, DIRECT CREDIT SUBSTITUTES AND
                            RESIDUAL INTERESTS IN ASSET SECURITIZATIONS

        On October 23, 2001, the Federal Deposit Insurance Corporation (the “FDIC”) adopted a
final regulation (the “Regulation”) which revises the regulatory capital treatment of recourse
arrangements, direct credit substitutes and residual interests in asset securitizations. The other
federal banking regulators–the Board of Governors of the Federal Reserve System, the Office of
the Comptroller of the Currency and the Office of Thrift Supervision (together with the FDIC,
the “Regulators”)–are expected to adopt the Regulation in substantially similar form in the near
future.

        The long-awaited Regulation is the result of a rule-making process which was begun by
the Regulators in 1994 to revise the capital treatment of recourse arrangements and direct credit
substitutes and adopts in most respects the provisions of the Regulators’ March 2000 notice of
proposed rulemaking (the “March 2000 proposal”) on the subject. A notable difference between
the March 2000 proposal and the Regulation is that the March 2000 proposal’s proposed
requirement that banking organizations hold additional capital against securitized off-balance
sheet assets in securitizations with early amortization features (e.g., credit card and CLO master-
trust securitizations) has not been included in the Regulation.1 The Regulation also incorporates,
with certain modifications, the Regulators’ September 2000 notice of proposed rulemaking (the
“September 2000 proposal”) on the treatment of residual interests in asset securitizations,
thereby effectively merging the March 2000 proposal and the September 2000 proposal.

          As discussed in more detail below, the Regulation amends current capital standards by:

     •    deducting from Tier 1 capital the amount of credit-enhancing interest-only strips that
          exceeds 25 percent of Tier 1 capital;

     •


1
  The Regulators have indicated that they may develop an advance notice of proposed rulemaking that considers
additional capital requirements for securitization activities of banking organizations, including early amortization
features, that fall outside the scope of the Regulation.

    As used herein, the term “banking organizations” includes banks, bank holding companies and thrift institutions.


NY1 5157547v.4
APPENDIX C



     •    generally requiring uncapped dollar-for-dollar risk-based capital for each dollar of
          residual interests not deducted from Tier 1 capital;

     •    providing for more consistent risk-based capital treatment of recourse obligations and
          direct credit substitutes; and

     •    applying a ratings-based approach that sets capital requirements for positions in
          securitization transactions according to their relative risk exposures, using ratings from
          nationally-recognized statistical rating organizations (the “rating agencies”).

        As part of its proposed new Basel Accord, the Basel Committee on Banking Supervision
has proposed changes in the capital treatment of securitizations, which, along with other
provisions of the proposed new Basel Accord, are currently scheduled to be finalized and
approved by the Basel Committee by the end of 2002 and to be implemented in member
countries by 2005. The standards adopted in the Regulation are consistent in many respects with
the approach of the proposed new Basel Accord, although, as discussed below, they fail to
provide for broad application, beyond direct credit substitutes in asset-backed commercial paper
programs, of the internal risk rating approach which is a central feature of the securitization
provisions in the proposed new Basel Accord. The Regulators have indicated that they intend to
consider additional changes to the Regulation when revisions to the proposed new Basel Accord
are finalized.

Effective Date

          The Regulation is effective for any transaction that settles on or after January 1, 2002.

Treatment of Residual Interests

        Under current capital standards, retention of a residual interest by a banking organization
in connection with a securitization of its own assets is generally treated, for risk-based capital
purposes, as a sale of assets with recourse. Under current capital standards, a sale of assets with
recourse is generally treated, for risk-based capital purposes, as if the banking organization had
never sold the assets. Accordingly, the banking organization must keep the same amount of risk-
based capital against the assets sold as if the assets had remained on its balance sheet, subject to
an exception whereby if the recourse exposure is less than the capital charge on the assets sold,
the banking organization can instead hold capital solely against the recourse exposure (the “low
level recourse rule”). Generally, the banking organization is not required to keep more capital
against the recourse position than the capital charge on the assets sold in the related
securitization.

        With respect to residual interests, the Regulation changes the current capital regulations
in two significant respects.

       First, the Regulation imposes a concentration limit (the “Concentration Limit”) on a
subset of residual interests defined by the Regulation as credit-enhancing interest-only strips
(“CEIOS”). Under the Concentration Limit, CEIOS, whether retained or purchased, are limited
NY1 5157547v.4


                                                    2
APPENDIX C



to 25% of Tier 1 capital, with the excess deducted from Tier 1 capital.2 CEIOS are defined in the
Regulation as on-balance sheet assets that represent the contractual right to receive some or all of
the interest due on transferred assets and that expose the banking organization to credit risk that
exceeds its pro rata claim on the underlying assets. The Regulators state that they will look to
the economic substance of a transaction in determining whether an asset is a CEIOS. For
example, principal included in cash flow will not prevent an asset from being regarded as a
CEIOS.

        Second, the Regulation imposes a dollar-for-dollar capital charge against all residual
interests (whether or not CEIOS) which do not qualify for the ratings-based approach discussed
below (including retained or purchased CEIOS that have not been deducted from Tier 1 capital).
The dollar-for-dollar capital charge is not capped by the capital charge on the assets sold in the
related securitization. Thus, a banking organization must keep dollar-for-dollar capital against a
retained residual interest which does not qualify for the ratings-based approach, even if such
capital exceeds the capital charge on the assets sold in the related securitization.3

       The Regulation does, however, allow banking organizations the option of netting existing
associated deferred tax liabilities against residual interests for regulatory capital purposes.
Further, residual interests which are not CEIOS may qualify for the ratings-based approach
discussed below, with the result that they can carry a capital charge that is significantly lower
than dollar-for-dollar.

        A “residual interest” is broadly defined in the Regulation as any interest created by a
transfer that qualifies as a sale (in accordance with GAAP) of financial assets that exposes the
banking organization to any credit risk that exceeds a pro rata share of the banking
organization’s claim in the asset. Residual interests do not include assets purchased from third
parties, except purchased CEIOS. Examples of residual interests are CEIOS, spread accounts,
retained subordinated interests and accrued but uncollected interest on transferred assets that,
when collected, will be available to serve as credit-enhancement.

         Because, under the definition of “residual interest” in the Regulation, residual interests
generally must arise out of a GAAP sale, interests retained in a securitization or asset transfer
that is accounted for as a financing are generally not subject to the Regulation’s special rules for


2
   The September 2000 proposal would have applied the Concentration Limit to all residual interests (not just
CEIOS). In addition, unlike the September 2000 proposal, the Regulation provides that the Concentration Limit for
CEIOS is to be calculated separately from the existing concentration limit on the amount of nonmortgage servicing
assets and purchased credit card relationships that may be included in Tier 1 capital. Further, under the September
2000 proposal, rated non-CEIOS residual interests would not have qualified, as they do under the Regulation, for the
ratings-based approach. Thus, to a limited extent, the Regulation represents a less constraining approach than the
September 2000 proposal.
3
   As an example, under the Regulation a banking organization that sells $100 of assets carrying an 8% capital
charge and retains an unrated non-CEIOS residual interest of $10 would generally be required to hold $10 in capital
to cover this exposure. Under prior rules, the same banking organization would only have been required to hold $8
in capital against the $10 exposure ($8 being the capital charge on the $100 of underlying assets transferred).

NY1 5157547v.4


                                                         3
APPENDIX C



residual interests. However, the Regulators have reserved the right to factor such residual
interests into their assessment of a banking organization’s capital adequacy.

Definitions of “Recourse” and “Direct Credit Substitute”

        As discussed below, the Regulation effects a number of other significant changes with
respect to recourse arrangements and direct credit substitutes under the risk-based capital rules,
including applying a ratings-based approach that sets capital requirements for positions in
securitized transactions according to relative risk exposure, using credit ratings from rating
agencies.

        As a starting point, the Regulation defines “recourse” as an arrangement in which a
banking organization retains any credit risk directly or indirectly associated with an asset it has
transferred and sold that exceeds a pro rata share of the banking organization’s claim on the
asset. An example of recourse is a retained subordinated interest that absorbs more than its pro
rata share of losses from the underlying assets.

        “Direct credit substitutes” are defined in the Regulation as arrangements in which a
banking organization assumes credit risk directly or indirectly associated with an on- or off-
balance sheet asset or exposure that was not previously owned by the banking organization and
the risk assumed by the banking organization exceeds the pro rata share of the banking
organization’s interest in such asset. Examples of direct credit substitutes are off-balance sheet
financial guarantees and similar arrangements, including standby letters of credit, in which a
banking organization assumes risk of credit loss from a third-party’s assets, purchased
subordinated interests and agreements to absorb credit losses that arise from purchased loan
servicing rights.

        The Regulation clarifies that the following arrangements will also be considered recourse
or direct credit substitutes:

                  Credit Enhancing Representations and Warranties Made on Transferred Assets.
          As in the March 2000 proposal, the Regulation clarifies that representations or warranties
          that function as credit enhancement constitute recourse. The Regulation clarifies that
          credit enhancing representations and warranties do not include:

                 •   early default clauses and similar warranties that permit the return of 1-4 family
                     residential first mortgage loans for a period of 120 days from the date of transfer.
                     These warranties may cover only those loans that are eligible for a 50% risk-
                     weight and that were originated within 1 year of the date of transfer;

                 •   premium refund clauses covering assets guaranteed, in whole or in part, by the US
                     government, a US government agency or a US government-sponsored agency,
                     provided the premium refund clauses are for a period not exceeding 120 days
                     from the date of transfer; and



NY1 5157547v.4


                                                       4
APPENDIX C



                 •   warranties that permit the return of assets in instances of fraud, misrepresentation
                     or incomplete documentation.

                  Clean-up Calls Greater Than 10% of the Original Pool Balance. Clean-up calls
          of greater than 10% of the original pool balance are considered recourse or direct credit
          substitutes. In addition, the Regulation imposes a significant new requirement that a
          banking organization that exercises a clean-up call of 10% or less may not, without the
          clean-up call being considered recourse or a direct credit substitute, repurchase any loans
          that are 30 days or more past due. Alternatively, the banking organization must
          repurchase the loans at the lower of their estimated fair market value or their par value
          plus accrued interest.

                  Certain Servicing Arrangements. To avoid being treated as recourse or a direct
          credit substitute, servicing advances made by a servicer of residential mortgage loans
          must be reimbursable on an unsubordinated basis. If the residential mortgage loan
          servicer is not entitled to full reimbursement, then the maximum permissible amount of
          any nonreimbursed advance on any one loan must be contractually limited to an
          “insignificant amount” of the outstanding principal on that loan. The Regulation does not
          make clear how servicing advances on asset types other than residential mortgage loans
          should be treated.

                  Credit Derivatives. The Regulation makes clear that the definitions of “recourse”
          and “direct credit substitute” cover credit derivatives to the extent that the banking
          organization’s credit risk exposure exceeds its pro rata interest in the underlying
          obligation. Accordingly, the ratings-based approach, described below, applies to rated
          instruments such as credit-linked notes issued in synthetic securitizations.

                  Certain Types of Insurance Protection. Although the purchase of insurance
          protection, where the banking organization is completely removed from credit risk, is
          generally not considered recourse, if the purchase or premium price is paid over time and
          the size of the payment is a function of the third party’s loss experience on the portfolio,
          such an arrangement is considered recourse.

Consistent Treatment of Recourse Obligations and Direct Credit Substitutes

        Current capital standards generally allow banking organizations to hold different amounts
of capital against recourse arrangements and direct credit substitutes that expose the banking
organization to similar credit risks. This is a function of the fact that, under current capital
standards, banking organizations are generally required to hold capital against recourse
arrangements based on the amount of the assets supported by the recourse arrangement rather
than the face amount of the recourse obligation and are generally permitted to hold capital




NY1 5157547v.4


                                                       5
APPENDIX C



against direct credit substitutes based on the face amount of the direct credit substitute rather
than the amount of assets it supports.4

        Consistent with the March 2000 proposal, the Regulation generally treats recourse
arrangements and direct credit substitutes similarly by subjecting both types of credit risk to
gross-up treatment, discussed below. However, as discussed below, the Regulation allows
certain recourse arrangements and direct credit substitutes to qualify for more favorable
treatment than gross-up treatment under the ratings-based approach or the internal ratings,
program ratings or computer program ratings approaches discussed below.

Gross-Up Treatment

         Recourse obligations and direct credit substitutes (other than residual interests which, as
discussed above, are subject to special rules) that do not qualify for the ratings-based approach or
the internal ratings, program ratings or computer program ratings approaches discussed below,
receive gross-up treatment. “Gross-up treatment” means that the banking organization holding
the position must hold capital against the amount of the position plus all more senior positions,
subject to the low-level recourse rule. The grossed-up amount is placed into a risk-weight
category according to the obligor or, if relevant, the guarantor or the nature of the collateral. The
gross-up amount multiplied by both the risk weight and 8% is subject to the low-level recourse
rule (i.e., the capital charge is never greater than the full capital charge that would otherwise be
imposed on the assets if they were on the banking organization’s balance sheet).

Ratings-Based Approach for Rated Positions (Other Than CEIOS)

        The Regulation adopts, with certain modifications, the ratings-based approach set forth in
the March 2000 proposal to assess capital requirements on recourse obligations, direct credit
substitutes, residual interests (except for CEIOS) and asset-backed securities.5 This approach
uses credit ratings from the rating agencies to measure relative exposure to credit risk and
determine the associated risk-based capital category, as follows:




4
   For example, under the current capital rules, if a direct credit substitute, such as a guarantee, covers losses of up
to $20 on a $100 pool of assets, risk-based capital is held only against $20. In contrast, if the arrangement is a
recourse arrangement in which a banking organization sells $100 of assets and retains a $20 subordinated interest in
the assets sold, risk-based capital must be held against the full $100 of assets sold.
5
   The Regulation modifies the ratings-based approach from the March 2000 proposal to explain how short-term
ratings associated with asset-backed commercial paper should be taken into account.

NY1 5157547v.4


                                                           6
APPENDIX C



 Long-Term Rating                   Ratings*          Risk Weight       Resulting Capital
 Category                                                               Charge**


 Highest or second highest           AAA or AA         20%***                        1.6%
 investment grade


 Third highest investment                A             50%***                           4%
 grade


 Lowest investment grade               BBB               100%                           8%


 One category below                     BB               200%                         16%
 investment grade


 More than one category              B or unrated      Not eligible
 below investment grade, or                            for ratings-
 unrated                                                  based
                                                        approach



 Short-Term Rating                  Ratings*          Risk Weight       Resulting Capital
 Category                                                               Charge**


 Highest investment grade             A-1/ P-1         20%***                        1.6%


 Second highest investment            A-2/ P-2         50%***                           4%
 grade


 Lowest investment grade              A-3/ P-3           100%                           8%


 Below investment grade              Not Prime         Not eligible
                                                       for ratings-
                                                          based
                                                        approach

* Indicates rating shown or an equivalent rating agency rating.
** To be applied to the face amount of the position, without regard to the amount of any senior positions.
*** Stripped mortgage-backed securities and similar instruments, such as interest-only strips and principal-only
strips, are not eligible for the 20% and 50% risk categories under the ratings-based approach.

NY1 5157547v.4


                                                          7
APPENDIX C



The ratings-based approach is available to both traded and untraded positions, subject to the
application of additional conditions, described below, in the case of untraded positions.

       A position is considered “traded” if, at the time it is rated by a rating agency, there is a
reasonable expectation that in the near future:

     •    the position may be sold to unaffiliated investors relying on the rating, or

     •    an unaffiliated third party may enter into a transaction (e.g., a loan or repurchase
          agreement) involving the position in which the third party relies on the rating of the
          position.

Unrated positions that are senior in all respects (including collateralization and maturity) to rated
positions that are traded may be treated as having the same risk weight as the rated traded
positions, subject to applicable regulatory guidance and to the requirement that the rated traded
positions provide credit support for the entire life of the unrated positions.

       Rated but untraded positions qualify for the ratings-based approach only if the following
conditions are satisfied:

     •    the position must be rated by more than one rating agency (vs. traded positions where
          only one rating is required),

     •    the ratings must be one category below investment grade or better for long-term positions
          (investment grade or better for short-term positions) by all rating agencies providing a
          rating,

     •    the ratings must be publicly available, and

     •    the ratings must be based on the same criteria used to rate securities that are traded.

       In all cases, if a position carries a split-rating, the lowest single rating must be used to
determine the risk-weight category.

Capital Treatment of Unrated Positions

          The Regulation provides three alternatives for the capital treatment of unrated positions:

     •    the use of internal risk ratings for unrated direct credit substitute exposures in asset-
          backed commercial paper programs,

     •    the use of program ratings, and

     •    the use of computer programs.



NY1 5157547v.4


                                                     8
APPENDIX C



However, none of these alternatives is available for unrated residual interests. In addition, none
of these methods allows for a risk weight lower than 100%. A banking organization’s use of any
of these methods is subject to approval by its Regulator.

                   Internal Risk Ratings Method. This method, which allows for the use of internal
          risk ratings, is available only for a banking organization’s unrated direct credit substitute
          exposures in asset-backed commercial paper programs and only where the banking
          organization is able to demonstrate to the satisfaction of its Regulator, prior to use, that
          the bank’s internal credit risk rating system is adequate. This method allows a banking
          organization to map its internal risk ratings to rating agency ratings which can then be
          used to place the direct credit substitute into one of the rating agency categories included
          in the ratings-based approach. The Regulation sets forth a number of requirements for
          use of this method. The Regulators have indicated that the limitation of the internal risk
          ratings method to direct credit substitutes in asset-backed commercial paper programs is a
          step toward potential adoption of a broader use of internal risk ratings as provided in the
          proposed new Basel Accord.

                   Program Ratings. This method is available for a banking organization that
          extends a direct credit substitute or retains a recourse obligation in connection with a
          structured finance program, and a rating agency has reviewed the terms of the program
          and stated a rating for positions associated with the program. If the program has options
          for different combinations of assets, standards, internal credit enhancements and other
          relevant factors and the rating agency specifies ranges of rating categories to them, the
          banking organization may apply the rating category applicable to the option that
          corresponds to the banking organization’s position. In order to rely on the program
          rating, the banking organization must demonstrate to its Regulator that the rating
          assigned to the program meets the same standards generally used by the rating agency for
          rated positions and that the criteria underlying the rating agency’s assignment of ratings
          for the program are satisfied for the particular position issued by the banking
          organization.

                  Computer Programs. This method allows a banking organization to use an
          acceptable credit assessment computer program to determine the rating of a direct credit
          substitute or recourse obligation extended in connection with a structured finance
          program. A rating agency must have developed the computer program, and the banking
          organization must demonstrate to its Regulator’s satisfaction that ratings under the
          program correspond credibly and reliably to the ratings of traded positions.

Modification of Stated Risk Weights on a Case-by-Case Basis

        Under the Regulation, the Regulators reserve the authority to modify risk weights on a
case-by-case basis. The Regulation provides that the exercise of this authority may lead to
higher or lower capital charges than would otherwise apply. The Regulators have indicated that
they have retained this authority in order to ensure that banking organizations, as they develop
novel financial assets, will be treated appropriately under regulatory capital standards.

NY1 5157547v.4


                                                   9
APPENDIX C



Interaction With Market Risk Rules and Special Recourse Rules for Small Business Loan
Securitizations

        The Regulation makes clear that it applies to positions held in a banking organization’s
banking book and, also, for banking organizations that are not subject to the Regulators’ special
market risk rules, to positions in such banking organizations’ trading book. For banking
organizations that comply with the market risk rules, positions in the trading book arising from
asset securitizations, including recourse obligations, residual interests and direct credit
substitutes, are to be treated in accordance with such market risk rules. However, these banking
organizations remain subject to the Concentration Limit for CEIOS.

        In addition, the Regulation makes clear that banking organizations may continue to
calculate the capital charge for qualifying small business loans under the special rules
promulgated under the Community Development and Regulatory Improvement Act for such
loans.

Additional Information

      Clients who wish to obtain further information on the Regulation should feel free to call
Dan Rossner at (212) 839-5533 or any other member of our securitization group.




NY1 5157547v.4


                                               10
APPENDIX D

                                       SIDLEY AUSTIN    LLP   BEIJING     GENEVA        SAN FRANCISCO
                                       787 SEVENTH AVENUE     BRUSSELS    HONG KONG     SHANGHAI
                                       NEW YORK, NY 10019     CHICAGO     LONDON        SINGAPORE
                                       (212) 839 5300         DALLAS      LOS ANGELES   TOKYO
                                       (212) 839 5599 FAX     FRANKFURT   NEW YORK      WASHINGTON, DC



                                                              FOUNDED 1866




                                                                                        February 2006

                                UK FSA RULES ON TIER 1 CAPITAL

Banks

        In March 1999, the UK Financial Services Authority (the “UK FSA”), arguably the most
active country regulator in the Tier 1 capital product area, issued its own guidelines on the
acceptance of indirectly (i.e., special purpose vehicle or tax-deductible non-operating subsidiary)
issued Tier 1 preferred. Since then, the UK FSA has opted for an approach that is more
conservative than the Basle Committee’s own guidelines (under the regime established by the
1988 Basle Capital Accord) in a number of respects.

        Where this note refers to the Basle Committee's guidelines, it refers to the position prior
to the implementation in the UK of the Basle II framework. At the time of writing (early
February 2006), the UK FSA has yet to publish its consultation paper and “near final” rules on
the implementation in the UK of the EU Capital Requirements Directive (“CRD”), which
implements the principles of Basle II throughout the EU. The UK is expected to implement the
various approaches set out in the CRD in stages, some from year-end 2006 and the most
advanced at year-end 2007. Current indications are that the FSA will not depart in any
significant respects from the rules as set out in the CRD (which are based on Basle II).

        The UK FSA’s requirements for the characteristics of the tax-deductible non-operating
subsidiary to be solo-consolidated include (1) the subsidiary must be at least 75%-owned by the
bank, (2) the subsidiary must be wholly funded by the parent or its exposure be wholly in respect
of the parent and (3) there should be no potential obstacles to the repayment of surplus capital to
the parent. The UK FSA adopted the Basle Committee’s guidelines for step-ups and added that,
should the capital ratio of the bank fall below 8%, the tax-deductible non-operating subsidiary
issued preferred securities must convert to directly issued preference shares.

        While tax-deductible non-operating subsidiary preferred might constitute minority
interest in the consolidated accounts, the UK FSA prefers to restrict the extent to which it is
considered equivalent to solo capital at the bank level, and thus subjects subsidiary preferred to
the Basle Committee’s 15% limit. Tax deductibility itself is irrelevant to the regulator.

          The FSA guidelines that are more restrictive than those of the Basle Committee include:

                 •   While the UK FSA keeps the 15% limit of Tier 1 capital for ‘innovative’ or
                     hybrid Tier 1, it has extended the definition of ‘innovative’ beyond issues that
                     may have a step up or are indirectly issued via a tax-deductible non-operating

NY1 5835638v.3
APPENDIX D


                     subsidiary. The UK FSA explicitly states that other innovative features will
                     be considered on an ad hoc basis to determine whether they come within the
                     15% limit (e.g., certain direct issues discussed herein below, including RCIs).

                 •   Banks must have solo and consolidated Tier 1 ratios of at least 6% (not
                     including issued innovative Tier 1 capital) before they are allowed to include
                     further innovative Tier 1 capital.

          CP 155

        The UK FSA published Consultation Paper 155 (“CP 155”) in October 2002, which was
entitled “Tier 1 Capital for Banks: Update to IPRU (Banks).” The UK FSA’s consultation closed
at end-January 2003, and the UK FSA sought to implement these proposals in the first half of
2003. CP 155 outlined proposed changes to the FSA’s Tier 1 capital policies. The main goal of
CP 155 was to provide greater clarity on the FSA’s classification of capital instruments within
Tier 1 (Innovative Tier 1). In brief, the UK FSA suggested the following composition of total
Tier 1 capital (net of Tier 1 deductions):

                 •   minimum of 50% in ordinary shares, reserves and retained earnings; and

                 •   maximum of 15% in innovative (‘hybrid’) instruments.

       The proposed changes were heralded by the UK FSA to free up significant capacity for
the UK banks to issue non-innovative, or preference share-like instruments, up to the equivalent
of 35% of Tier 1 capital. The UK FSA recognized that capital instruments that are economically
equivalent to preference shares could be eligible for non-innovative treatment.

       The UK FSA attempted to define these non-innovative Tier 1 instruments to include the
following features:

                 •   no step-up;

                 •   directly issued; and

                 •   no stock settlement.

       Other proposals include a clarification of the characteristics of innovative Tier 1
products:

                 •   Innovative Tier 1 products are limited to 15% of total Tier 1 capital (core Tier
                     1 plus innovative Tier 1 minus deductions);

                 •   all indirect Tier 1 products are innovative; and

                 •   all Tier 1 products incorporating a step-up and/or principal equity settlement
                     are innovative.



NY1 5835638v.3
                                                   2
APPENDIX D


        CP155 proposed to further explain the principles that underpin the classification of Tier 1
capital, that is, capital must be able to absorb losses and must be permanently available for this
purpose. To meet these two fundamental criteria, the UK FSA required that an instrument be
deeply subordinated, undated, and non-cumulative. CP 155 further proposed that, provided a
capital instrument is in all ways economically equivalent to preference shares, it would be
considered Core Tier 1. This proposal was meant to open the door to capital instruments that
were liabilities (or prospective or contingent liabilities) provided they:

          •      had an equivalent degree of subordination to preference shares

          •      had no feature that might have dated the instrument, weakened the permanence of the
                 capital, or the right to waive coupon payments; and

          •      were non cash-cumulative.

          Current FSA Position

       However, after the publication of CP 155, the FSA had several discussions about other
regulators’ concerns at a working group of the Basel Committee (the Capital Group). The
Capital Group raised questions over the ability of certain instruments to absorb losses on a going
concern basis. As a result, the UK FSA re-assessed its policy and made certain changes to its
proposals contained in CP 155 and issued a Policy Statement in November 2003 (“Tier 1 Capital
for Banks: Update to IPRU (Banks)”). The principal changes as set out in the Policy Statement
were:

          •      The UK FSA no longer proposes to treat capital instruments that are economically
                 equivalent to preference shares as eligible for Core Tier 1.

          •      Therefore, Core Tier 1 capital must only comprise directly issued and fully paid
                 shares defined as shares under UK Companies Act 1985 of Great Britain (which
                 includes non-cumulative perpetual preference shares and, for group requirements,
                 minority interests other than interests arising from indirect capital issues), as well as
                 retained earnings.

          In addition, a Core Tier 1 instrument should have the following features:

          •      It should rank below or equal to non-cumulative perpetual preference shares on a
                 winding-up.

          •      The payment of any dividend must be discretionary so the issuer is able to waive any
                 payment obligation; and no dividends should be payable if the issuer has no
                 distributable reserves.

          •      The instrument must be marketed as perpetual. This means that even if the
                 instrument can be called by the issuer after a certain date, the issuer ensures that
                 neither it, nor its agents and advisors, express any intention to exercise the call.



NY1 5835638v.3
                                                        3
APPENDIX D


          •      Only the issuer may have the option to call, which must be at least five years from
                 issue and unrelated to any other feature.

         The UK FSA provided further clarification of the meaning of “loss absorbency on a
going concern basis.” That is, a capital instrument must be able to absorb losses in such a way
that the issuing bank can continue to trade normally, despite suffering losses up to the value of
that capital, and the UK FSA needs to be satisfied that an insolvency petition in the UK would
not succeed if based on an assertion that liabilities exceed assets. Moreover, a bank wishing to
issue a Core Tier 1 instrument will need to obtain an opinion from a UK Queen’s Counsel or,
where the opinion relates to the law of a jurisdiction outside the United Kingdom, from a lawyer
in that jurisdiction of equivalent status confirming that these criteria, particularly with respect to
“loss absorbency” are met.

        Given the above, the UK FSA has ruled that issuances, such as TONS, RCIs and any
mandatory convertible securities will only qualify for Innovative Tier 1 and not Core Tier 1.
Any issues done under these rubrics prior to this revision have been grandfathered, at least for
the present.

        Innovative Tier 1 and Upper Tier 2 instruments should provide a degree of loss
absorbency similar to Core Tier 1 instruments and the UK FSA will insist on the same level of
comfort as to the loss absorbency ability of a capital instrument in Upper Tier 2 or Innovative
Tier 1 as they would for Core Tier 1. For purposes of Innovative Tier 1 as well as Upper Tier 2
classification, the UK FSA is prepared to consider capital instruments that are liabilities, or
prospective or contingent liabilities, provided that the UK FSA can be satisfied that:

          •      a winding up or administration petition by an issuer or any creditor (not only a holder
                 of the instrument), based only on the grounds that the issuer is unable to pay its debts
                 because of its obligations under the capital instrument would be dismissed; and

          •      the company’s directors would not be at risk of wrongful trading if they continue
                 trading while liabilities exceed assets (where liabilities include obligations under the
                 terms of the capital instruments).

          An innovative Tier 1 capital instrument should also have the following features:

          •      It should rank below or equal to non-cumulative perpetual preference shares on a
                 winding up.

          •      The payment of any dividend must be discretionary so that issuer is able to waive or
                 defer any payment obligation, and no dividends should be payable if the issuer has no
                 distributable reserves.

          •      The coupons must not be cash-cumulative. Any deferred coupons must be paid in
                 shares.

          •      Only the issuer can have an option to call, which must be at least five years from
                 issue and unrelated to any other feature.

NY1 5835638v.3
                                                      4
APPENDIX D


          •      There is no feature, in conjunction with a call, which might lead to the instrument
                 being redeemed within the first ten years of issue.

          •      The instrument must be marketed as perpetual. This means that even if the instrument
                 can be called by the issuer after a certain date, the issuer ensures that neither it, nor its
                 agents and advisors, express any intention to exercise the call.

       An Upper Tier 2 capital instrument should have the same features as an Innovative Tier 1
instrument, but:

          •      the coupons can be cumulative in cash or kind; and

          •      a pure call or any feature, in conjunction with a call, which might lead to the
                 instrument being redeemed, is permitted after a minimum of five years from issue.

        There are several proposals contained in CP155 that the UK FSA did not modify in light
of the responses that the UK FSA received to the consultation phases:

          •      The Tier 1 limit that a bank must meet before issuing Innovative capital is reduced
                 from 6% to 4%.

          •      All indirect issues of Tier 1 Capital through a special purposes vehicle should be
                 classified (at most) as Innovative Tier 1 on a solo (i.e., solo-consolidation) and
                 consolidated basis (i.e., through the creation of minority interests).

          •      If a minority interest arises other than through a special purpose vehicle, then this will
                 be assessed on a case-by-case basis to determine classification as Core or Innovative
                 Tier 1 for group capital requirements.

          •      All issues incorporating principal settlement by issuing ordinary shares or preference
                 shares should be treated as Innovative Tier 1 capital so long as they do not exceed a
                 200% redemption ratio and the bank holds an appropriate buffer of authorized share
                 capital to fulfill their potential obligations under such issues.

          •      At least 50% of total Tier 1 should comprise ordinary shares and retained earnings
                 (i.e., excluding preference shares).

          •      The 60% Tier 1 repayment test no longer applies.

          •      The policy as set out in the Policy Statement came into force in the UK on 1 January,
                 2004.

Insurance Companies

          CP 190 and CP 195:

      In July and August 2003, the UK FSA published consultation papers 190 and 195,
(“CP190” and “CP195”, respectively). CP190 covered enhanced capital requirements and

NY1 5835638v.3
                                                        5
APPENDIX D


individual capital assessments for non-life insurers and CP195 covered “Enhanced capital
requirements and individual capital assessments for” life insurers. CP 190 and CP 195 were
intended to bring regulatory capital guidelines for insurance companies more in line with
regulatory capital guidelines for banks, building societies and investment firms. In June 2004,
the FSA published Policy Statement 04/16, which provided feedback on the responses received
on CP190 and CP195 and contained “near final” rules and guidance to implement the new
prudential regime for insurers in the FSA's Integrated Prudential Source book. This new
prudential regime for insurers came into effect in December 2004 and is set out in the FSA’s
Integrated Prudential Guidebook (“PRU”).

        Chapter 2 of the PRU identifies two categories, or tiers, of capital applicable to insurers,
Tier 1 and Tier 2. Tier 1 capital is sub divided into three categories: Core Tier 1, perpetual non-
cumulative preference shares and Innovative Tier 1. Tier 2 is sub divided between upper and
lower Tier 2. The elements in Core Tier 1 can be included in an issuer’s regulatory capital
without limit. Lower tiers of capital are either subject to limits or require a waiver to be eligible
for inclusion in an issuer’s capital resources. Examples of the types of capital that fall into the
various tiers are set out below.

       Tier 1 capital typically has the following characteristics; it is able to absorb losses, it is
permanent (cannot be redeemed at all or can only be redeemed on a winding up of the issuer), it
ranks for repayment upon the winding up after all other debts and liabilities, and it has no fixed
costs.

          Core Tier 1 capital

          The main components of Core Tier 1 capital are:

          permanent share capital;

          profit and loss account and other reserves;

          share premium account;

          externally verified interim net profits;

          positive valuation differences; and

          fund for future appropriations.

          Perpetual Non-cumulative Preference Shares

        Perpetual non-cumulative preference shares should be perpetual and redeemable only at
the issuer's option. Any feature that, in conjunction with a call, would make a firm more likely
to redeem perpetual non-cumulative preference shares would normally result in classification as
an innovative tier one instrument. Such features would include a step-up, bonus coupon on
redemption or redemption at a premium to the original issue price of the share.



NY1 5835638v.3
                                                     6
APPENDIX D


          Innovative Tier 1 Capital

        If a Tier 1 instrument is redeemable and is issued on terms that a reasonable person
would think that the firm is likely to redeem it or the firm is likely to have a substantial economic
incentive to redeem it, then it is an innovative Tier 1 instrument. Innovative Tier 1 instruments
include, but are not limited to, those incorporating a step-up or principal stock settlement and
cumulative coupons provided that such coupons, if deferred, are paid by the issuer in the form of
permanent share capital.

          Upper and Lower Tier 2 Capital

        A capital instrument must not form part of the Tier 2 capital of an insurer unless it meets
certain general conditions, including that the claims of creditors must rank behind those of all
unsubordinated creditors, the only events of default must be non-payment or winding-up of the
firm, the remedies available in the event of non-payment must be limited to the winding up of the
firm, the debt must not become due and payable before its stated final maturity date (if any)
except on an event of default, creditors must waive their right to set off amounts they owe the
firm against subordinated amounts and the debt must be unsecured and fully paid up.

       A major distinction between upper and lower Tier 2 capital is that only perpetual
instruments may be included in Upper Tier 2 capital whereas dated instruments are included in
Lower Tier 2 capital.

        In addition to the general conditions for Tier 2 capital listed above, Upper Tier 2 capital
must meet certain additional conditions, including that the debt must have no fixed maturity date,
the contractual terms of the instrument must provide for the issuer to have the option to defer any
interest payment on the debt and the contractual terms of the instrument must provide for the
loss-absorption capacity of the debt and unpaid interest while enabling the issuer to continue its
business.

        Lower Tier 2 capital must meet general conditions for Tier 2 capital listed above; it must
have an original maturity of at least five years or have no fixed maturity date. Insurance lower
Tier 2 capital generally consists of long term subordinated debt.




NY1 5835638v.3
                                                 7
APPENDIX E
                                       SIDLEY AUSTIN   LLP     BEIJING        GENEVA        SAN FRANCISCO
                                       787 SEVENTH AVENUE      BRUSSELS       HONG KONG     SHANGHAI
                                       NEW YORK, NY 10019      CHICAGO        LONDON        SINGAPORE
                                       212 839 5300            DALLAS         LOS ANGELES   TOKYO
                                       212 839 5599 FAX                       NEW YORK      WASHINGTON, DC



                                                               FOUNDED 1866



                                                                                                April 2006


      USE OF TRUST STRUCTURES IN TIER 1 PREFERRED SECURITIES AND OTHER CAPITAL
                  MARKETS TRANSACTIONS--FOREIGN TRUST TAX ISSUES


          Many Tier 1 preferred securities structures (and other capital market transactions) include
a U.S. trust. In several recent transactions there has been substantial confusion over the
application of the Internal Revenue Code’s foreign trust reporting rules to these structures. The
confusion arises because a trust formed under U.S. law can be considered a foreign trust under
the foreign trust reporting rules. This memorandum discusses the foreign trust reporting rules
and describes several structures designed to ensure that a trust is a domestic trust for federal
income tax purposes.

Background

          The current capital markets confusion is an unintended offshoot of congressional
attempts to attack tax avoidance transactions usually involving foreign grantor trusts with
individual grantors. As part of the Small Business Job Protection Act of 1996 (the “1996 Act”),
Congress enacted sweeping new rules designed to curb the use of foreign trusts. According to
the Joint Committee on Taxation:

                          The Congress was informed that certain U.S. settlors established foreign
                 trusts, including grantor trusts, in tax haven jurisdictions. Income from such
                 foreign grantor trusts was taxable on a current basis to the U.S. grantor, but the
                 Congress understood that there was noncompliance in this regard. The Congress
                 was concerned that the prior law civil penalties for failure to comply with the
                 reporting requirements applicable to foreign trusts established by U.S. persons
                 had proven to be ineffective. In order to deter noncompliance, the Congress
                 believed that it is appropriate to expand the reporting requirements relating to
                 activities of foreign trusts with U.S. grantors or U.S. beneficiaries and to increase
                 the civil penalties applicable to a failure to comply with such reporting
                 requirements.


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APPENDIX E



          In order to curb the perceived abuse Congress adopted an objective test for determining
whether a trust is a foreign trust under the Code. However, the most important change made by
the 1996 Act, from a capital markets standpoint, was increased penalties for failing to report
transfers of property (including money) to a foreign trust. Before the 1996 Act, such penalties
were generally insubstantial. Now, the penalties can be severe. As a result, there is an increased
focus on the distinction between “foreign trusts” and domestic trusts. As one might imagine,
these definitions were aimed at personal trusts. When applied to trusts used in capital markets
transactions, they tend not to work in the exact manner intended.

Foreign Trust Reporting Rule – the Stakes

          Under the 1996 Act, transfers of property (including cash) to a foreign trust by a U.S.
person are subject to special Internal Revenue Service (“IRS”) reporting requirements and
possible penalties.1 Additionally, distributions to U.S. persons from foreign trusts are also
subject to special reporting requirements and possible penalties.2 The penalties range up to 35%
of the unreported amount. For example, if an investor pays $100,000 for an interest in a foreign
trust and does not report the transaction, the penalty could technically be as high as $35,000.

Summary of the Foreign Trust Reporting Rules

          The reporting rules only apply to the creation of a foreign trust by a U.S. person and the
transfer (directly or indirectly) of money or property by a U.S. person to a foreign trust.3 In a
capital markets transaction the initial purchasers of interests in the trust (or perhaps the sponsor)
may be considered to have transferred property (i.e., money) to the trust. The reporting rules
could also cause a U.S. person that is treated as the owner of any portion of a foreign trust to be
responsible for ensuring that the trust files a return and furnishes information to its U.S. owners.4

          Thus, the distinction between a “foreign trust” and a “domestic trust” is of critical
importance. Under the revised 1996 Act definition, the default is classification as a foreign trust.


1
          Section 6048(a) (reporting obligation); Section 6677 (civil penalties). Additionally, section 7203 enables
          the IRS to assert criminal penalties under certain circumstances.
2
          Section 6048(c) (reporting obligation); Section 6677 (civil penalties).
3
          Section 6048(a)(3)(A).
4
          Section 6048(b).

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                                                           2
APPENDIX E


A trust is only treated as a U.S. person, and thus a domestic trust, if it meets both the “court test”
and the “control test.”

          The court test is satisfied if a court within the United States is able to exercise primary
supervision over trust administration.5 Normally this will be the case where the trust is
established under the laws of one of the United States (including the District of Columbia) and
the trust agreement is expressly made subject to the laws of such state.6

          The control test is satisfied if one or more U.S. persons have the power, by vote or
otherwise, to control all substantial decisions of the trust with no other person having the power
to veto any of the substantial decisions.7 Substantial decisions include, but are not limited to,
decisions concerning:8

                   1.        Whether and when to distribute income or corpus;
                   2.        The amount of any distributions;
                   3.        The selection of a beneficiary;
                   4.        Whether a receipt is allocable to income or principal;
                   5.        Whether to terminate the trust;
                   6.        Whether to compromise, arbitrate, or abandon claims of the trust;
                   7.        Whether to sue on behalf of the trust or to defend suits against the trust;
                   8.        Whether to remove, add or replace a trustee;
                   9.        Whether to appoint a successor trustee to succeed a trustee who has died,
                             resigned or otherwise ceased to act as a trustee (unless such power is
                             unaccompanied by the power to remove a trustee and the appointment
                             power is limited to U.S. persons); and
                   10.       Investment decisions.




5
          Section 7701(a)(30)(E)(i); Treasury regulation sections 301.7701-7(a)(i), 301.7701-7(c).
6
          While not essential to classification as a domestic trust, a trust will qualify for a safe harbor provision and
          satisfy the jurisdiction test if (i) the trust instrument does not direct that the trust be administered outside
          the United States, (ii) the trust in fact is administered exclusively in the United States, and (iii) the trust is
          not subject to an automatic migration provision. Treasury regulation section 301.7701-7(c). For this
          purpose the term “administration” means the carrying out of the duties imposed by the terms of the trust
          instrument and applicable law, including maintaining the books and records of the trust, filing tax returns,
          managing and investing the assets of the trust, defending the trust from suits by creditors, and determining
          the amount and timing of distributions. Treasury regulation section 301.7701-7(c)(3)(v).
7
          Section 7701(a)(30)(E)(ii). Treasury regulation section 301.7701-7(d).
8
          Treasury regulation section 301.7701-7(d)(ii).

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                                                              3
APPENDIX E


          On August 8, 2001, the U.S. Treasury Department finalized certain regulations (the
“Regulations”) that alter the control test in the case of certain investment trusts.9 Under the
Regulations an investment trust will be deemed to satisfy the control test if, (i) all trustees are
U.S. Persons,10 (ii) at least one trustee is a domestic bank (or United States government-owned
agency or government sponsored enterprise), (iii) all sponsors (i.e., persons who exchange
investment assets for beneficial interests in the trust with a view to selling such interests), if any,
are U.S. Persons, and (iv) the beneficial interests in the trust are widely offered for sale primarily
in the United States to U.S. Persons. An investment trust that satisfies these conditions will be
deemed to satisfy the control test even though one or more foreign persons (who are not trustees)
may have the power to make certain substantial decisions with respect to the trust.

          The Regulations are effective for taxable years ending on or after August 9, 2001.
However, the Regulations state that the portions dealing with investment trusts (described above)
may be relied on by trusts for taxable years beginning after December 31, 1996.11 This means
that the Regulations are retroactively effective.

          Tax lawyers from Sidley Austin LLP, as well as other commentators, have suggested that
the safe harbor in the Regulations is too narrow and does not sufficiently address the unintended
application of the foreign trust reporting requirements contained in section 6048 of the Code and
the related penalty provisions to widely held fixed investment trusts in the context of
contemporary capital markets transactions.12



9
          Treasury regulation section 301.7701-7(d)(1)(iv); T.D. 8962 (August 8, 2001), finalizing, Proposed
          Treasury regulation section 301.7701-7(d)(1)(iv); Reg. 108553-00, published in the Federal Register on
          October 12, 2000. An investment trust must be treated as a “grantor trust” to be eligible for the application
          of the Regulations. Trusts used in many capital markets financings will qualify as grantor trusts.
10
          A U.S. Person is (i) a citizen or resident of the United States who is a natural person, (ii) a corporation or
          partnership, (including an entity treated as a corporation or partnership for United States federal income tax
          purposes) created or organized in or under the laws of the United States, any state thereof or the District of
          Columbia, (iii) an estate, the income of which is subject to United States federal income taxation regardless
          of its source or (iv) a trust if a court within the United States is able to exercise primary supervision over
          the administration of the trust and one or more United States persons have authority to control all
          substantial decisions of the trust.
11
          Treasury regulation section 301.7701-7(e)(3).
12
          See, Letter from Nicholas R. Brown and Jacob J. Amato III, Sidley Austin Brown & Wood LLP (September
          16, 2002) (2002 TNT 188-23). See also, Letter from Saul M. Rosen, Securities Industry Association, to
          Treasury Department (Mar. 23, 2001) (2001 TNT 70-29); Letter from Mark Perwien and John Dickey,
          Salomon Smith Barney, to Treasury Department (Apr. 9, 2001) (2001 TNT 75-26); Letter from James M.

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                                                           4
APPENDIX E


          Specifically, the tax lawyers from Sidley Austin LLP commented that the safe harbor
provided by the Regulations does not, for example, protect U.S. investors who invest in widely
held fixed investment trusts that are marketed primarily to foreign investors or are organized
outside the United States. Our tax lawyers noted that the rules simply were not drafted with the
intent of targeting such trusts, but rather were enacted by Congress to combat perceived
noncompliance by individual grantors transferring or receiving property to or from foreign trusts.
Our tax lawyers urged the IRS to issue new guidance limiting the potential imposition of
penalties to the situations Congress intended to address and broadening the safe harbor to avoid
imposing an undue hardship on capital markets participants and discouraging capital markets
transactions.

          On January 23, 2006, the Treasury Department issued final regulations (the “Final
Regulations”)13 which define “Widely Held Fixed Investment Trusts” (“WHFITs”) and clarify
the reporting obligations of trustees and middlemen connected with these trusts, and provide for
the communication of tax information to beneficial owners of trust interests in such WHFITs.

          For purposes of the Final Regulations, a WHFIT is an arrangement classified as a trust
under Treasury regulation section 301.7701-4(c), provided that (i) such trust is a United States
person under section 7701(a)(30)(E), (ii) the beneficial owners of the trust are treated as owners
under the grantor trust rules and (iii) at least one interest in the trust is held by a “middleman.” A
“middleman,” as defined in Final Regulation section 1.671-5(b)(10), is any “trust interest holder”
(i.e., any person who holds a direct or indirect interest, including a beneficial interest, in a
WHFIT at any time during the calendar year, or simply a “TIH”), other than a qualified
intermediary (as defined in Treasury regulation section 1.1031(k)-1(g)), who at any time during
the calendar year, holds an interest in a WHFIT on behalf of, or for the account of, another TIH,
or who otherwise acts in a capacity as an intermediary for the account of another person. A
middleman includes, but is not limited to, (i) a custodian of a person’s account, such as a bank,
financial institution, or brokerage firm acting as a custodian of an account; (ii) a nominee; (iii) a

          Peaslee and Linda M. Beale, Cleary, Gottlieb, Steen & Hamilton, to Treasury Department (Aug. 14, 2000)
          (2000 TNT 185-17).
13
          Treasury regulation 1.671-5, T.D. 9241, published in the Federal Register on January 23, 2006. These Final
          Regulations are based on proposed regulations issued by the Treasury in 1998, REG-209813-96 published
          in the Federal Register on August 13, 1998, revoked and subsequently re-proposed in 2002, REG-106871-
          00, published in the Federal Register on June 20, 2002.

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                                                          5
APPENDIX E


joint owner of an account or instrument other than (A) a joint owner who is the spouse of the
other owner, and (B) a joint owner who is the beneficial owner and whose name appears on the
Form 1099 filed with respect to the trust interest under Treasury regulation section 1.671-5(d);
and (iv) a broker (as defined in section 6045(c)(1) and Treasury regulation section 1.6045-
1(a)(1)), holding an interest for a customer in street name.

          From the definition of WHFIT, the Final Regulations apply only to trusts, who are United
States persons under section 7701(a)(30)(E). Therefore trusts that are not United States persons
and trustees and middlemen connected to such trusts are not subject to these reporting
provisions, but remain subject to the existing reporting obligations under section 6048, discussed
above.14 However, in the preamble to the Final Regulations, the IRS and the Treasury
Department announced that they would continue to study proposals made with regard to the
application of reporting rules to foreign WHFITs and promised to provide guidance on this
subject.

          In general, pursuant to Treasury regulation section 1.671-5(d)(1)(i), (A) a trustee of a
WHFIT must file with the IRS the appropriate Form 1099 with respect to any TIH who holds an
interest in the WHFIT directly and not through a middleman, and (B) every middleman must file
with the IRS the appropriate Form 1099 with respect to any TIH on whose behalf or account the
middleman holds an interest in the WHFIT or acts as an intermediary, in each case reporting the
information specified in Treasury regulation section 1.671-5(d)(2). Pursuant to Treasury
regulation section 1.671-5(d)(2), the information which has to be reported includes but is not
limited to information regarding the person filing the Form 1099, items of gross income
(including OID) attributable to a TIH for the calendar year, information regarding non-pro rata
partial principal payments, certain trust sale proceeds attributable to the TIH, sales asset proceeds
paid to the TIH for the sale of a trust interest or interests on a secondary market established for
the WHFIT for the calendar year and any other information required by Form 1099.

          In addition, every trustee or middleman required to file the appropriate Forms 1099 under
Treasury regulation section 1.671-5(d) with respect to a TIH must furnish to that TIH a written
tax information statement showing the information described in Treasury regulation section

14
          See, the Preamble to T.D. 9241, January 23, 2006, VI.

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                                                         6
APPENDIX E


1.671-5(e)(2). The amount of a trust item reported to a TIH under this Treasury regulation
section 1.671-5(e) must be consistent with the information reported to the IRS with respect to the
TIH under Treasury regulation section 1.671-5(d). The written tax information statement must
include the name and the identifying number of the WHFIT, identifying information with respect
to the person furnishing the statement, information regarding items of income, expense and
credit that are attributable to the TIH for the calendar year and any other information necessary
to the TIH to report, with reasonable accuracy for the calendar year, the items, as defined in
Treasury regulation section 1.671-5(b)(9), attributable to the portion of the trust treated as owned
by the TIH under the grantor trust rules.

          Pursuant to Treasury regulation section 1.671(d)(1)(ii), generally no Form 1099 is
required with respect to a TIH who is an “exempt recipient.” Notwithstanding the preceding
sentence, if the trustee or middleman backup withholds under section 3406 on payments made to
an exempt recipient (because, for example, the exempt recipient has failed to furnish a Form W-9
on request), then the trustee or middleman is required to file Form 1099 with the IRS unless the
trustee or middleman refunds the amount withheld in accordance with Treasury regulation
section 31.6413(a)-3. Pursuant to Treasury regulation section 1.671-5(b)(7), an exempt recipient
is (i) any person described in Treasury regulation section 1.6049-4(c)(1)(ii), (ii) a middleman,
(iii) a real estate mortgage investment conduit (as defined in section 860(D)(a)), (iv) a WHFIT or
(v) a trust or an estate for which the trustee or middleman of the WHFIT is also required to file a
Form 1041 “U.S. Income Tax Return for Estates and Trusts” in its capacity as a fiduciary of that
trust or estate. Persons described in Treasury regulation section 1.6049-4(c)(1)(ii), and therefore
persons that are exempt recipients (within the meaning of Treasury regulation section 1.671-
5(b)(7) for purposes of the Final Regulations), include, among other persons, (a) corporations,
(b) certain tax exempt entities, (c) individual retirement plans, (d) the United States government
and any wholly-owned agency or instrumentality thereof, a State, the District of Columbia, a
possession of the United States or a political subdivision of any of the foregoing, (e) securities
and commodities dealers, (f) real estate investment trusts, (g) entities registered under the
Investment Company Act of 1940, (h) nominees or custodians, (i) brokers (as defined in section
6045(c)), and (j) swap dealers.




NY1 5157519v.9
                                                  7
APPENDIX E


          Notwithstanding the preceding, a beneficial owner who is an exempt recipient must
obtain WHFIT information and must include the items of the WHFIT in computing its taxable
income on its federal income tax return. Treasury regulation section 1.671-5(c)(3) and (h)
provide rules for exempt recipients to obtain information from a WHFIT.

          Notwithstanding the preceding sentence, a trustee and a middleman of a WHFIT must
report pursuant to Treasury regulation section 1.671-5(c) and (h) to an exempt recipient and to
any other requesting person (i.e., (i) a middleman; (ii) a beneficial owner who is a broker; (iii) a
beneficial owner who is an exempt recipient who holds a trust interest directly and not through a
middleman; (iv) a noncalendar-year beneficial owner, who holds a trust interest directly and not
through a middleman; or (v) a representative or agent of a person described in (i) through (iv)
above)) the information described in Treasury regulation section 1.671(5)(c)(2). The information
described in Treasury regulation section 1.671-5(c)(2) includes the trust identification and
calculation period chosen; items of income, expense and credit; information regarding non pro-
rata partial principal payments; asset sales and dispositions; redemption and sales of WHFIT
interests; information regarding bond premium, market discount and generally any other
information necessary for a beneficial owner of a trust interest to report, with reasonable
accuracy, the items attributable to the portion of the trust treated as owned by the beneficial
owner under the grantor trust rules.

          In addition, Treasury regulation section 1.671-5(d)(1)(iii) provides that with respect to
WHFIT items attributable to a TIH who is not a United States person, such items do not have to
be reported under Treasury regulation section 1.671-5(d). Instead such items must be reported,
and amounts must be withheld, as provided under section 1441 through 1464 and the regulations
promulgated thereunder.

          In addition, pursuant to Treasury regulation section 1.671-5(k), every trustee and
middleman required to file a Form 1099 under the Final Regulations is a payor within the
meaning of Treasury regulation section 31.3406(a)-2, and must backup withhold as required
under section 3406 and any regulations thereunder.




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                                                   8
APPENDIX E


Suggested Structures

          A. Requirements for All Trusts

                 1. General

                 In order to ensure that a trust used in a “Tier 1” or other capital markets transaction is
                 a domestic trust there are some basic ground rules. First, the trust should be formed
                 under U.S. law, e.g., as a Delaware business trust or a common law trust under state
                 law. Second, the governing documents should clearly provide that the trust is to be
                 administered in the United States. Third, the trust should not have an “automatic
                 migration” provision, i.e., a provision that causes the trust to migrate from the United
                 States if a U.S. court attempts to assert jurisdiction or otherwise supervise the trust’s
                 administration. Fourth, all trustees should be U.S. Persons.15 If this is not possible,
                 then a majority (including replacements) must be U.S. Persons and the foreign
                 trustees cannot have a right to veto substantial decisions (i.e., the U.S. trustees must
                 be able to act through a majority vote).

                 2. Hat-Check Trusts

                 Some financing structures make use of a foreign entity known as a “hat-check” trust.
                 The intended benefit is that a totally offshore structure may be able to avoid the
                 foreign trust reporting rules. This benefit is obtained because the hat-check trust is
                 not a trust at all but a custodial or depositary arrangement. In a typical structure, the
                 underlying securities are held in a custodial account or depository account and the
                 beneficial owners (the investors) receive a claim check in the form of a custody
                 receipt or certificate. The investors can remove the securities from the account at any
                 time. U.S. structures, on the other hand, normally make use of a statutory business
                 trust, under a document entitled “Trust Agreement” and issue “Trust Certificates” or
                 “Trust Securities.” These facts may make it difficult to persuade the IRS that the trust
                 is actually a custodial arrangement. Thus, “hat-check” trust structures in the United


15
          In the case of investment decisions, a trust may employ the services of an investment advisor that is a non-
          U.S. Person provided that the trust may terminate the foreign investment advisor at will.

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                                                           9
APPENDIX E


                 States are trusts that qualify as domestic grantor trusts for federal income tax
                 purposes. The typical structure involves a Delaware Business Trust that has no
                 common securities. In such a structure, the trust has only two trustees, both U.S.
                 financial institutions and the power to remove and replace trustees resides in the
                 domestic LLC already in use in the structure. Thus, all substantial decisions reside
                 with U.S. Persons.

          B. Special Considerations for Trusts with Common and Preferred Interests

          There are special considerations when a trust has two classes of securities, preferred and
common. In this case, there are several possible solutions, depending on the answers to the
following questions. These solutions should be implemented with the features listed above under
“Requirements for All Trusts -- General”.

          1.        Does the Structure Include a Domestic LLC or Limited Partnership? If the
                    structure includes a domestic LLC or domestic limited partnership already, then
                    the LLC or LP can hold the trust common. In this case, the domestic LLC or LP
                    is a U.S. Person for U.S. federal income tax purposes. Therefore, all of the
                    substantial decisions will be made by U.S. Persons. For this option to work, the
                    LLC or LP must either be a partnership for U.S. federal income tax purposes (i.e.,
                    have more than one member or partner) or (less likely) it must elect to be treated
                    as a corporation for U.S. federal income tax purposes under the check-the-box
                    regulations.

          2.        Can the Common Securities Be Held by a U.S. Person? If there is no LLC or LP
                    in the structure but the trust common securities can be held by a U.S. Person, then
                    the solution is to either create a special purpose vehicle to hold the trust common
                    securities or find an existing U.S. Person to hold the trust common securities. If
                    an SPV is utilized, the SPV can be a (i) corporation, or (ii) a trust, LLC or
                    partnership under state law that, in each case, elects to be treated as a corporation
                    or a partnership for U.S. federal tax purposes. Again U.S. Persons will make all
                    substantial decisions in that: the U.S. trustees will have the authority to control all
                    substantial decisions of the trust except the power to remove and replace trustees

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                                                      10
APPENDIX E


                  and the SPV, as holder of the trust common securities, will have the power to
                  remove and replace trustees.

          3.      Must a Foreign Person Hold the Trust Common? If a foreign person must hold
                  the trust common, then there are two possible solutions:

                  a.       The trust should be drafted so that there is no power to remove the trustees
                           but only a power to replace trustees who die, resign or fail to act. This
                           power could be held by a foreign person provided the replacement
                           parameters were limited such that only a U.S. Person could be appointed.

                  b.       Alternatively, under the Regulations, the trust could be established so that
                           (i) at least one trustee is a domestic banking institution, (ii) all trustees
                           (and potential replacements) qualify as U.S. Persons, (iii) the sponsors
                           (i.e., persons who exchange investment assets for beneficial interests in
                           the trust), if any, are U.S. Persons, and (iv) the beneficial interests in the
                           trust are widely offered for sale primarily in the United States to U.S.
                           Persons.16 If these conditions are satisfied, it is acceptable to give the
                           owner of the trust common (even if such person is a non-U.S. Person)
                           certain powers which would normally be considered a power to make
                           “substantial decisions” (e.g., a power to remove and replace trustees).




16
          This last requirement does not prohibit reliance upon the Regulations in situations where the offering is
          144A and Reg. S. However, in such a situation, the 144A portion must be substantial in comparison to the
          Reg. S portion of the offering.

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                                                         11
APPENDIX F


                                               SIDLEY AUSTIN   LLP         BEIJING        GENEVA         SAN FRANCISCO
                                               787 SEVENTH AVENUE          BRUSSELS       HONG KONG      SHANGHAI
                                               NEW YORK, NY 10019          CHICAGO        LONDON         SINGAPORE
                                               212 839 5300                DALLAS         LOS ANGELES    TOKYO
                                               212 839 5599 FAX                           NEW YORK       WASHINGTON, DC



                                                                           FOUNDED 1866




                                                                                                              April 2006



    2003 LAW TEMPORARILY REDUCES INDIVIDUAL INCOME TAX RATE ON U.S. AND FOREIGN
                  CORPORATE DIVIDENDS AND CAPITAL GAINS TO 15%


                      On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief
Reconciliation Act of 2003 (the “Act”). The Act amends the Internal Revenue Code of 1986 (the
“Code”) to, among other things, reduce the federal income tax rates for individuals with respect
to dividend income to 15 percent, effective retroactively to January 1, 2003.1

                       One of the Act’s features is that dividends from certain foreign
corporations are eligible for the preferential 15 percent rate. This should create an opportunity
for non-U.S. issuers to sell certain Tier 1 capital instruments to U.S. individual investors.2 The
remainder of this memorandum describes the provisions of the Act that afford the reduced U.S.
tax rates on dividends and capital gains and what steps must be taken to assure that Tier 1 capital
products qualify for such rates.3




1
          Technically the Act treats qualified dividend income as net capital gain for tax rate purposes, then states
          that dividends received during the taxable year shall be treated as earned on or after May 6, 2003. The net
          effect is that dividends received by individual calendar year taxpayers beginning January 1, 2003 will be
          eligible for the 15 percent rate.
2
          It is also possible that the treatment of the Tier 1 security in the issuer’s home jurisdiction may provide tax
          benefits in such jurisdiction. For example, an issuer might be entitled to deduct distributions on some Tier
          1 securities in its home jurisdiction. In this case, the home jurisdiction tax deduction coupled with the 15
          percent U.S. federal income tax on dividends could be an attractive combination. Conversely, certain Tier
          1 capital securities issued by U.S. institutions (e.g., “trust preferreds”) have historically been treated as debt
          for federal income tax purposes. Thus, individual U.S. investors will be subject to tax on interest on such
          securities at rates up to a maximum of 35 percent.
3
          The other provisions of the Act, including provisions increasing the amounts of corporate depreciation
          deductions, increasing expensing limits, and accelerating certain previously enacted tax reductions for
          individuals, are discussed in a separate memorandum which you may obtain by contacting a member of the
          Tax Practice Group.


NY1 5499996v.7
APPENDIX F


                   A.       Background

                        Over the past two decades the world banking industry has led the way in
developing innovative capital securities. With the advent of the 1988 Basle Accord and, later,
the 1998 Basle Release, Tier 1 capital products have become ever more popular and
sophisticated. Tier 1 capital product development to date has focused primarily on non-dilutive,
fixed income, non-voting securities that raise capital at a lower cost than traditional common
and, to the extent available to the bank, preferred shares. However, a bank’s strategic
requirements or particular tax situation are instrumental in Tier 1 product selection and
development. For example, a bank might need “upper” Tier 1 capital to obtain more equity
credit with the rating agencies in connection with an acquisition or due to recent significant
losses. Another bank may need “upper” Tier 1 capital because its 15 percent innovative capital
basket is full. Also, a bank may want an income tax deduction in a high tax jurisdiction where a
branch or subsidiary has significant taxable income, may have capital needs at a particular
branch or subsidiary or may simply find it otherwise more capital or tax efficient to raise capital
through a particular branch or subsidiary.

                        A primary purpose of Tier 1 capital products developed to date has been to
lower a bank’s cost of capital, in particular by introducing features that make the securities
offered more tax efficient. The costs of capital may apply to the instruments themselves, such as
withholding tax on dividends paid to foreign investors, or to the bank that issues them, such as
having to pay dividends out of after-tax profits. Accordingly, the most important issues in the
development of Tier 1 capital products arise as these products must satisfy both the loss
absorption and other requirements of the bank regulators on the one hand and the tax objectives
of the bank on the other. The tension between these two competing goals is exacerbated because
both the bank regulators and investors in the capital markets, where most Tier 1 capital products
are sold, require a tax analysis with a high degree of certainty – for bank regulators because,
among other things, of the requirement that Tier 1 capital be permanent and for investors because
of the pricing of the product.

                   B.       Reduction of Tax Rates on Dividends Under the Act4

                       Generally, the Act provides that “qualified dividend income” received by
an individual will be taxed at long-term capital gain rates rather than at ordinary rates.5
Additionally, the Act reduces the current 20 percent individual long-term capital gain tax rate to
15 percent.6 Thus, the Act effectively reduces the income tax rate applicable to qualified
dividend income earned by an individual from the previous top bracket rate of 38.6 percent to 15
percent.7 However, the provisions reducing taxes on long-term capital gains and dividends are
4
          Unless otherwise noted, all section references are to the Code.
5
          Section 402 of the Working Families Tax Relief Act of 2004, P.L. 108-311, clarified that dividends derived
          by partners or beneficiaries of partnerships, S corporations, estates and trusts, regulated investment
          companies, real estate investment trusts and common trust funds, through such entities, and which
          otherwise constitute qualified dividend income, are entitled to the reduced rates for qualified dividend
          income. Thus qualified dividend income is passed through to the partners or beneficiaries of such entities,
          who will then be taxed at the reduced rates.
6
          In addition, the capital gains tax rate for lower income taxpayers, currently 10 percent, is reduced to 5
          percent (or 0 percent for tax years beginning after 2007).
7
          The Act does not restrict an individual’s ability to borrow funds to purchase dividend paying securities and

NY1 5499996v.7
                                                          2
APPENDIX F


temporary and will not apply to taxable years beginning after December 31, 2008.8 The Act does
not change the state tax treatment of dividends. Because Congress chose to simply lower the
dividend tax rate, rather than create a dividend exclusion from gross income, state taxes on
dividends will be the same as before the Act.

                        The term “qualified dividend income” is defined as dividends9 received
during a taxable year from domestic corporations and “qualified foreign corporations,” other
than (i) dividends from corporations exempt from tax under sections 501 or 521,10 (ii) any
amount allowed as a deduction under section 591,11 and (iii) any dividend described in section
404(k).12 An individual or entity that is not otherwise subject to United States income tax and
that receives qualified dividend income is not eligible for the 15 percent rate.13

                       Dividend income is not “qualified dividend income” if the dividends are
paid on stock with respect to which a 60-day holding period requirement is not met,14 or to the
extent the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related property.

                      The Act also provides that if an individual receives, from a domestic or
foreign corporation, qualified dividend income in amount sufficient to constitute an
“extraordinary dividend” within the meaning of the Code, any loss on the sale or exchange of the


          still qualify for the 15 percent preferential dividend rate. Interest on such borrowing would, however, be
          subject to the Code’s investment interest limitation rules. For purposes of the investment interest limit,
          qualified dividend income is not treated as investment income although the Act does provide for an election
          to treat such dividend income as investment income provided the taxpayer foregoes the 15 percent tax rate.
          The net effect of these rules is that a taxpayer can borrow funds to purchase dividend paying securities,
          receive the 15 percent preferential tax rate, and deduct the interest to the extent the taxpayer has other
          investment income.
8
          Importantly, payments “in lieu of” dividends received from lending stock are not eligible for the reduced
          rates and instead will be taxed at the individual rates applicable to ordinary income (35 percent maximum).
          Under prior law, it made no difference for an individual whether he or she received payments in lieu of
          dividends or dividends – both were taxed at individual ordinary income rates. Now, it will make a
          significant difference to an individual whether he or she is receiving payments in lieu of dividends or actual
          dividends.
9
          The Act effectively incorporates the Code’s current “dividend” definition, basically, any distribution of
          property made by a corporation to its shareholders out of either current year or accumulated earnings and
          profits, as determined for federal income tax purposes.
10
          Section 501 contains general rules relating to the tax-exempt status of certain corporations and trusts.
          Section 521 exempts farmers’ cooperatives from tax.
11
          Section 591 allows a dividends paid deduction to mutual savings banks, cooperative banks and certain
          other savings institutions.
12
          Section 404(k) allows a dividends paid deduction to corporations paying dividends to participants in
          deferred payment plans, provided certain requirements are satisfied.
13
          Thus, the Act does not change the United States statutory withholding tax rate of 30 percent which applies
          to dividends paid to certain non-United States persons.
14
          In order to claim a corporate dividends-received deduction, section 246(c) requires that stock be held by a
          corporate taxpayer for more than 45 days during the 91-day period beginning on the date which is 45 days
          before the date on which the stock becomes ex-dividend with respect to the dividends received. The
          holding period is tolled for any period during which the taxpayer has diminished its risk of loss with respect
          to the stock. For income to be “qualified dividend income” under the Act, section 246(c) is applied by
          substituting 60 days for 45 days and 121 days for 91 days.

NY1 5499996v.7
                                                           3
APPENDIX F


stock on which the dividends were paid will be treated as long-term capital loss to the extent of
such dividends. 15

                        In order for dividends received from foreign issuers to qualify for the
reduced tax rate such foreign issuer must be a “qualified foreign corporation.” A qualified
foreign corporation is a foreign corporation that is either incorporated in a possession of the
United States or is eligible for the benefits of a comprehensive income tax treaty with the United
States (the “Treaty Test”).16 Additionally, a foreign corporation not otherwise treated as a
qualified foreign corporation will nevertheless be treated as such with respect to any dividend
paid with respect to a security that is “readily tradable on an established securities market in the
United States” (the “Trading Test”).17 Notwithstanding the above, the term qualified foreign
corporation does not include a corporation treated as a passive foreign investment company.18

                        Two of the most prevalent Tier 1 capital structures include (i) direct issue
stock settled instruments such as Reserve Capital Instruments (“RCIs”) and Perpetual Regulatory
Tier 1 Securities (“PROs”), and (ii) tax-deductible non-operating subsidiary preferred. The
archetypal tax-deductible subsidiary preferred structure involves a debt obligation (the
“Subordinated Note”) issued by a non-U.S. bank (the “Bank”) to a tax-transparent subsidiary that
provides the Bank with an interest deduction for tax purposes in the Bank’s home jurisdiction
and minority interest treatment for accounting purposes. Where this subsidiary is a partnership
for U.S. tax purposes, the partnership subsidiary’s preferred securities would normally be issued
to a trust, which in turn would issue its securities to investors. In such a structure it is the Bank
that must be a “qualified foreign corporation” or the Subordinated Note that must be readily
tradable on an established securities market in the United States. Also, the Subordinated Note
must be treated as equity for U.S. federal income tax purposes. In other words, in such a

15
          Generally, an extraordinary dividend is a dividend with respect to a share of stock held by a taxpayer which
          equals or exceeds a “threshold percentage” (5 percent in the case of preferred stock; 10 percent for all other
          stock) of the taxpayer’s adjusted basis in such share of stock. Section 1059(c).
16
          In IRS Notice 2003-69, 2003-42 IRB 1 (October 1, 2003), the IRS specified the U.S. tax treaties that would
          satisfy the Treaty Test (the “Approved Treaties”). A list of the Approved Treaties is attached hereto as
          Exhibit A. Importantly, under Notice 2003-69, a foreign corporation must be eligible for the benefits of one
          of the Approved Treaties in order to be treated as a qualified foreign corporation. Specifically, the foreign
          corporation must be a “resident” within the meaning of an Approved Treaty and must satisfy any other
          requirements of the treaty, including the requirements under any applicable limitation on benefits provision.
17
          IRS Notice 2003-71, 2003-43 IRB 1 (October 6, 2003) provides that common or ordinary stock, or an
          American depositary receipt in respect of such stock, meets the Trading Test if it is listed on a national
          securities exchange that is registered under Section 6 of the Securities Exchange Act of 1933 (15 U.S.C.
          78f) or on the Nasdaq Stock Market. As of September 30, 2002, registered national exchanges included the
          American Stock Exchange, the Boston Stock Exchange, the Cincinnati Stock Exchange, the Chicago Stock
          Exchange, the New York Stock Exchange, the Philadelphia Stock Exchange, and the Pacific Exchange, Inc.
          In IRS Notice 2006-3, 2006-3 IRB 306 (December 22, 2005), the IRS announced that it would extend the
          application of the simplified reporting rules under section 6042, announced in IRS Notice 2003-79, 2003-2
          CB 1206 (November 11, 2003) for the year 2003 and extended for the first time in Notice 2004-71, 2004-
          45 IRB 793 (October 22, 2004) for the year 2004, to the year 2005 and future years.
18
          For guidance regarding the extent to which distributions, inclusions and other amounts received by, or
          included in the income of, individual shareholders as ordinary income from foreign corporations subject to
          certain anti-deferral regimes may be treated as “qualified dividend income”, see IRS Notice 2004-70, 2004-
          44 IRB 724 (October 8, 2004). However, every foreign issuer should consult its tax advisor with respect to
          whether it may be treated as a passive foreign investment company, as the test involved is fact-based.


NY1 5499996v.7
                                                           4
APPENDIX F


structure the distributions on the partnership preferred and trust preferred securities will merely
represent a flow-through of the distributions made on the Subordinated Note. Thus, the
distributions on the Subordinated Note in this particular structure must constitute “qualified
dividend income” in order for individual investors in the partnership preferred or trust preferred
securities to avail themselves of the 15 percent tax rate. With respect to the RCI or PRO
structures, the security is issued directly by the Bank to the investors. Thus, in this case the Bank
must be a qualified foreign corporation or the RCI or PRO (the actual security issued to
investors) must be readily tradable on an established securities market in the United States.

                            C.        Qualification of Tier 1 Capital Securities Under the Act

                        To ensure that a Tier 1 capital security will be eligible for the reduced U.S.
tax rate available for qualified dividend income, issuers should consult their tax advisors.
However, as a general matter, foreign issuers should verify the following checklist items:

     The issuer must be treated as a corporation for U.S. federal income tax purposes;

     The security must be treated as equity for U.S. federal income tax purposes;19

     Distributions on the security must be paid out of the issuer’s current or accumulated earnings
     and profits, as determined for U.S. federal income tax purposes;

     Either (i) the issuer must be eligible for the benefits of a comprehensive income tax treaty
     with the U.S. that includes an exchange of information program (a list of such jurisdictions is
     attached hereto as Exhibit A), or (ii) the security must be readily tradable on an established
     securities market in the U.S.;20

     The foreign corporation treated as the issuer for U.S. federal income tax purposes must not
     be treated as a passive foreign investment company.

       For more information regarding the issues discussed herein, or any tax matters, please
contact Nicholas R. Brown at (212) 839-5585, Jacob J. Amato III at (212) 839-5581, Mirt
Zwitter-Tehovnik at (212) 839-8531 or any other member of the Sidley Austin LLP Tax Practice
Group.




19
          Whether an instrument is treated as debt or equity for U.S. federal income tax purposes is based on all the
          facts and circumstances. Some generalizations are possible however. For example, perpetual debt issued
          by a foreign issuer should be treated as equity for U.S. federal income tax purposes.
20
          In IRS Notice 2003-71, the IRS announced that it was continuing to consider the treatment of dividends
          with respect to stock that is not listed on a national securities exchange that is registered under Section 6 of
          the Securities Exchange Act of 1993, and is instead listed in a different manner, such as on the OTC
          Bulletin Board or on the electronic pink sheets. However, as of the date hereof, the IRS has not issued such
          guidance.

NY1 5499996v.7
                                                            5
                                             EXHIBIT A


                 IRS Notice 2003-69 contains the following list of approved U.S. tax treaties:


                 Australia                                         Lithuania
                 Austria                                           Luxembourg
                 Belgium                                           Mexico
                 Canada                                            Morocco
                 China                                             Netherlands
                 Cyprus                                            New Zealand
                 Czech Republic                                    Norway
                 Denmark                                           Pakistan
                 Egypt                                             Philippines
                 Estonia                                           Poland
                 Finland                                           Portugal
                 France                                            Romania
                 Germany                                           Russian Federation
                 Greece                                            Slovak Republic
                 Hungary                                           Slovenia
                 Iceland                                           South Africa
                 India                                             Spain
                 Indonesia                                         Sweden
                 Ireland                                           Switzerland
                 Israel                                            Thailand
                 Italy                                             Trinidad and Tobago
                 Jamaica                                           Tunisia
                 Japan                                             Turkey
                 Kazakhstan                                        Ukraine
                 Korea                                             United Kingdom
                 Latvia                                            Venezuela




NY1 5499996v.7
APPENDIX G

                                           SIDLEY AUSTIN    LLP       BEIJING     GENEVA         SAN FRANCISCO
                                           787 SEVENTH AVENUE         BRUSSELS    HONG KONG      SHANGHAI
                                           NEW YORK, NY 10019         CHICAGO     LONDON         SINGAPORE
                                           (212) 839 5300             DALLAS      LOS ANGELES    TOKYO
                                           (212) 839 5599 FAX         FRANKFURT   NEW YORK       WASHINGTON, DC



                                                                      FOUNDED 1866

                                                                                                      April 2006

                    THE EU PROSPECTUS AND THE TRANSPARENCY DIRECTIVES

        The EU Prospectus Directive (Directive 2003/71/EC of the European Parliament and of
the Council of November 4, 2003 on the prospectus to be published when securities are offered
to the public or admitted to trading and amending Directive 2001/34/EC1) was required to be
brought into effect throughout the European Economic Area (“EEA”)2 on July 1, 2005. It has
completely changed the regulatory environment pertaining to the offering of securities in the
EEA. The Transparency Directive (Directive 2004/109/EC of the European Parliament and of
the Council of December 15, 2004 on the harmonisation of transparency requirements in relation
to information about issuers whose securities are admitted to trading on a regulated market and
amending Directive 2001/34/EC3) is required to be brought into effect throughout the EEA on
January 20, 2007 and it will impose new continuing obligations. The following is a general
introduction to these directives and provides brief information as to the principal effects specific
to preferred and capital securities. However, more information on the directives is available from
our website as indicated in Appendix K.

The Prospectus Directive

        Where securities are either: (i) offered in the EEA; or (ii) listed on an EEA regulated
market (e.g., the London, Irish or Luxembourg Stock Exchanges),4 a Prospectus Directive-
compliant prospectus must be approved by the competent authority of the issuer’s “home
member state” in the EEA and “published” before the offer or listing is made unless, in the case
of an offer, an exemption applies.

Denomination issues

Debt securities with a minimum denomination of at least €50,000 (or equivalent)

         If “debt securities” (which term excludes securities carrying rights to shares in the issuer
or a group company) are to be offered (and not listed) within the EEA, where the denomination
is at least €50,000, then a Prospectus Directive-compliant prospectus is not required. However,

1
  See http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_345/l_34520031231en00640089.pdf
2
  The countries comprising the EEA are Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland,
France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland,
Portugal, Slovak Republic, Slovenia, Spain, Sweden, United Kingdom, Iceland, Liechtenstein and Norway
3
  See http://europa.eu.int/eur-lex/lex/LexUriServ/site/en/oj/2004/l_390/l_39020041231en00380057.pdf
4
  The UK, Ireland and Luxembourg each have created a listing for securities to which the Prospectus Directive does
not apply (the Professional Securities Market in the UK, the Euro MTF in Luxembourg). Many EEA institutional
investors may not be able to invest in securities listed on these unregulated markets.




NY1 5861872v.6
APPENDIX G


if such debt securities are to be listed on an EEA regulated market, a Prospectus Directive-
compliant prospectus will still be required.5

Debt securities with a denomination of less than €1,000 (or equivalent) and equity securities

       A non-EEA issuer (i.e., an issuer whose state of incorporation is a country other than an
EEA Member State) who makes any offer in the EEA (e.g., Greece) of (i) debt securities with a
denomination of less than €1,000 or (ii) “equity securities” (i.e., shares, securities equivalent to
shares and securities carrying rights to shares in the issuer or a group company) may
inadvertently fix forever its “home member state” (in this example, Greece) and thus its
regulator for approving prospectuses for future EEA offers/listings of such securities. Therefore,
advice should be taken before offering or listing any debt securities with a denomination less
than €1,000 or equity securities within the EEA if the issuer has not already fixed its home
Member State for such securities.6

Debt securities with a denomination of less than €50,000 (or equivalent)

        If debt securities are to be offered (and not listed) within the EEA and the denomination
is less than €50,000, a Prospectus Directive-compliant prospectus is required unless the
distribution (including contemplated subsequent distributions) is in accordance with the general
EEA selling restriction circulated by the International Capital Markets Association and available
from Sidley Austin LLP. However, country specific selling restrictions may be required.

       If such debt securities are to be listed on an EEA regulated market, a Prospectus
Directive-compliant prospectus will be required, and the selling restrictions should be included.

Risk of liability

        A prospectus approved in one EEA state may be “passported” so as to allow sales or
listings in other EEA states without further approvals. However, approval of a prospectus by a
regulator is unlikely to be a defence (if it ever was) to a claim that an investor has lost money
because the party responsible for the prospectus (in some jurisdictions this will include the
underwriters) did not comply with the Prospectus Directive.




5
    Local selling restrictions still may be required for both listed and unlisted securities.
6
    See http://www.sidley.com/db30/cgi-bin/pubs/110603-EU%20Prospectus%20ES.pdf for more details.




                                                       2
NY1 5861872v.6
APPENDIX G


Contents of a Prospectus Directive prospectus

       The information required to be contained in a Prospectus Directive prospectus is the same
regardless of which regulator approves it as it is governed by the Annexures to the Prospectus
Directive Regulation7. The Annexures are specific to particular types of security and require
progressively more information for:

1. debt with a denomination of at least €50,000

2. debt with a denomination of less than €50,000

3. “equity securities” (i.e., shares, securities equivalent to shares and securities carrying rights
   to shares in the issuer or a group company).

        Therefore, preference share issues apparently require the greatest level of disclosure.
Fortunately, in the UK and Luxembourg, by concession, if preference shares do not carry a
general right to vote or to share in the profits of the issuer and are otherwise more like debt than
equity shares they will be treated as debt for the purposes of the requirements. However, there
are arguments that the Prospectus Directive Regulation does not give the power to grant such
treatment. As a result, it is possible that a prospectus approved on this basis will not be
recognised so as to allow sales in another EEA state.

Transparency Directive

        The Transparency Directive will impose new continuing obligations with respect to
securities admitted to an EEA regulated market on issuers and, with respect to interests in certain
securities, the holders of such securities.

        There is a requirement to publish IFRS or equivalent accounts unless the securities are
“debt securities” with a denomination of at least €50,000. Unfortunately, debt securities are
defined even more narrowly than in the Prospectus Directive and exclude shares and any security
equivalent to a share and securities carrying rights to such a security, even in a non-group
company. Therefore, the exemption would not appear to be available in the case of preference
shares.

        Provisions requiring notifications by investors of changes of holdings at thresholds of 5,
10, 15, 20, 25, 30, 50 and 75 per cent. apply to shares to which voting rights are attached (and to
the bare voting rights) and direct or indirect holdings in financial instruments that give an
entitlement on the holder’s initiative alone to already issued such shares.

       Another provision requires notification by an issuer of purchases of its own shares at
thresholds of 5 and 10 per cent.

7
  Commission Regulation (EC) No 809/2004 of 29 April 2004 on implementing Directive 2003/71/EC of the
European Parliament and of the Council as regards information contained in prospectuses as well as the format,
incorporation by reference and publication of such prospectuses and dissemination of advertisements. See
http://europa.eu.int/eur-lex/lex/LexUriServ/LexUriServ.do?uri=OJ:L:2004:215:0003:0103:EN:PDF



                                                         3
NY1 5861872v.6
APPENDIX G


        Both these notification requirements will apply to all preference shares carrying any right
to vote (even in the case of a special purpose entity) unless the Commission is persuaded to
exclude such securities in the implementing Regulation, for example during such period as such
voting rights are not currently exercisable because the issuer is current in its payments. The
majority of debt investors will not be used to giving such notifications. Therefore, market
disruption could result if an exemption is not given.




                                                 4
NY1 5861872v.6
Appendix I

                                     SIDLEY AUSTIN    LLP    BEIJING     GENEVA        SAN FRANCISCO
                                     787 SEVENTH AVENUE      BRUSSELS    HONG KONG     SHANGHAI
                                     NEW YORK, NY 10019      CHICAGO     LONDON        SINGAPORE
                                     (212) 839 5300          DALLAS      LOS ANGELES   TOKYO
                                     (212) 839 5599 FAX      FRANKFURT   NEW YORK      WASHINGTON, DC



                                                             FOUNDED 1866




                                                                                           April 2006

                                    ERISA CONSIDERATIONS

                                (Preferred Securities Offerings)

        The U.S. Employee Retirement Income Security Act of 1974 (“ERISA”) applies to any
employer engaged in commerce in the United States and to any employee benefit plan that
covers the employees of such an employer, other than certain governmental plans, church plans,
off-shore plans and unfunded deferred compensation plans for management or highly
compensated employees. The fiduciaries of plans subject to Title I of ERISA must satisfy duties
of prudence and diversification and, when making investment decisions, must act for the
exclusive benefit of the participants and beneficiaries of such plans. If fiduciaries breach their
duties, each breaching fiduciary may be jointly and severally personally liable to make the plan
whole for losses suffered by the plan and to return to the plan any profits made by the fiduciary.
Each fiduciary also may be liable for a civil penalty of up to 20% of any amount recovered by
the plan from the fiduciary.

        ERISA and the U.S. Internal Revenue Code (the “Code”) also prohibit employee benefit
plans subject to ERISA, as well as individual retirement accounts and Keogh and other plans
subject to Section 4975 of the Code and any entity whose underlying assets include ‘‘plan
assets’’ by reason of any such plan’s or account’s investment in the entity (collectively, “Plans”),
from engaging in investment transactions involving the assets of a Plan with persons who are
‘‘parties in interest’’ under ERISA or ‘‘disqualified persons’’ under the Code (collectively,
‘‘Parties in Interest’’) with respect to such Plan. Violations of these ‘‘prohibited transaction’’
rules may result in the imposition of an excise tax or other penalty upon Parties in Interest and
necessitate the unwinding of the transaction, unless exemptive relief is available under an
applicable statutory or administrative exemption.

        Under a regulation (the ‘‘Plan Assets Regulation’’) issued the U.S. Department of Labor
(the ‘‘DOL’’), the assets of a Tier 1 issuer will be deemed to include the assets of Plans that
acquire equity interests in the issuer, unless an exception is applicable. An ‘‘equity interest’’ is
defined under the Plan Assets Regulation as any interest in an entity other than an instrument
which is treated as indebtedness under applicable local law and which has no substantial equity
features. For these purposes, interests in partnerships and trusts and other typical forms of
preferred securities will constitute equity interests, even though the underlying securities held by
the issuer typically will constitute debt securities for ERISA purposes. Pursuant to an exception
contained in the Plan Assets Regulation (the “25% Exception”), the assets of an issuer will not
be deemed to include Plan assets if, immediately after the most recent acquisition of any equity



NY1 5865488v.5
Appendix I


interest in the issuer, less than 25% of the value of each class of equity interests in the issuer are
held by Plans and other employee benefit plans not subject to ERISA or Section 4975 of the
Code (collectively, ‘‘Benefit Plan Investors’’). This exception requires ongoing monitoring of
the investors in a preferred securities offering and, thus, is difficult or impossible to implement if
the securities are not issued in physical form. Pursuant to another exception contained in the
Plan Assets Regulation (the “Publicly Offered Securities Exception”), the assets of an issuer will
not be deemed to include Plan assets if Benefit Plan Investors acquire securities which are part of
a class that has at least 100 unrelated holders at closing, is freely transferable and are covered by
a registration statement under the U.S. Securities Exchange Act of 1934.

        Under the terms of Plan Assets Regulation, if an issuer were deemed to hold Plan assets
by reason of a Plan’s investment in preferred securities, the investing Plan’s assets would include
an undivided interest in the assets held by the issuer (such as any underlying debt securities). In
that event, transactions involving the assets of the issuer would be subject to the fiduciary duty
requirements and the prohibited transaction rules of ERISA and the Code. Moreover, the person
or persons with discretionary responsibility with respect to such assets would become fiduciaries
of the investing Plan (and could become subject to a bonding requirement and to a requirement
that the indicia of ownership of the Plan’s assets be kept within the reach of the U.S. federal
courts). If those fiduciaries were affiliated with the financial institution that issued the
underlying debt securities, any such discretionary actions taken with respect to the assets of the
issuer could be deemed to constitute prohibited transactions under ERISA or the Code (for
example, the use of such fiduciary authority or responsibility in circumstances under which such
persons have interests that may conflict with the interests of the Plans for which they act and
affect the exercise of their best judgment as fiduciaries). For this reason, if an offering of
preferred securities cannot be structured to qualify for one of the exceptions to the Plan Assets
Regulation (such as the 25% Exception or the Publicly Offered Securities Exception), then the
issuer often will be structured to eliminate or limit significantly any discretionary actions that the
fiduciaries of the issuer may take with respect to the issuer’s assets. In such situations, investing
Plans also may be required or deemed to direct the fiduciaries of the issuer to invest the assets of
the issuer in the underlying securities and to take other necessary actions contemplated by the
offering. This approach obviously has limited utility if the fiduciaries of the issuer must retain
significant discretion with respect to the assets of the issuer.

        A Plan’s purchase and holding of preferred securities, as well as certain transactions
involving an issuer or contemplated by an offering, could constitute direct or indirect prohibited
transactions under ERISA and the Code with respect to a Plan whether or not the assets of the
issuer were deemed to include Plan assets. For example, if the guarantor of a preferred security
is or becomes a Party in Interest with respect to an investing Plan, indirect extensions of credit
between the guarantor and the Plan could be deemed to occur and would likely be prohibited by
ERISA and the Code, unless exemptive relief were available under an applicable exemption.
The DOL has issued five prohibited transaction class exemptions (‘‘PTCEs’’) that may provide
exemptive relief for direct or indirect prohibited transactions that may arise from the purchase,
holding or disposition of preferred securities. Those class exemptions are PTCE 96-23 (for
certain transactions determined by in-house asset managers), PTCE 95-60 (for certain
transactions involving insurance company general accounts), PTCE 91-38 (for certain
transactions involving bank collective investment funds), PTCE 90-1 (for certain transactions
involving insurance company pooled separate accounts), and PTCE 84-14 (for certain

                                                  2
NY1 5865488v.5
Appendix I


transactions determined by independent qualified professional asset managers). These
exemptions are frequently referred to as investor-based exemptions, because eligibility for the
exemption is largely within the control of (and can be represented to by) the Plan fiduciary that
makes the decision to invest in the preferred securities. Thus, a Plan investor in preferred
securities frequently will be required (in the case of physical securities) or deemed (in the case of
global securities) to represent that on each day from the date it holds such preferred securities its
purchase, holding and disposition of the securities (and certain related transactions, such as
guarantees and conversions) will be exempt from the prohibited transaction rules by reason of
PTCE 96-23, 95-60, 91-38, 90-1 or 84-14.

        Federal, state or local laws or regulations governing the investment and management of
the assets of governmental plans and church plans (which are not subject to ERISA) may contain
fiduciary and prohibited transaction requirements substantially similar to those under ERISA and
the Code. For this reason, the fiduciaries of governmental plans and church plans frequently are
required or deemed to represent that their purchase, holding and disposition of preferred
securities (and certain related transactions) will not violate any such similar laws.




                                                  3
NY1 5865488v.5
APPENDIX K

                                       SIDLEY AUSTIN    LLP   BEIJING     GENEVA        SAN FRANCISCO
                                       787 SEVENTH AVENUE     BRUSSELS    HONG KONG     SHANGHAI
                                       NEW YORK, NY 10019     CHICAGO     LONDON        SINGAPORE
                                       (212) 839 5300         DALLAS      LOS ANGELES   TOKYO
                                       (212) 839 5599 FAX     FRANKFURT   NEW YORK      WASHINGTON, DC



                                                              FOUNDED 1866



                                                                                            April 2006

                 SELECTED 2006, 2005, 2004, 2003, 2002 AND 2001 DEVELOPMENTS IN
                    CORPORATE AND SECURITIES LAWS, TAX AND ACCOUNTING

April 2006

     •    US Court of Appeals Requires SEC to Reopen Comment on Two 1940 Act Rules.
          On April 7, 2006, the US Court of Appeals for the District of Columbia Circuit ruled that
          the promulgation of two SEC investment company governance regulations violated the
          US Administrative Procedures Act notice and comment requirements. The regulations
          required that mutual funds that rely on certain exemptive rules under the 1940 Act have
          (i) a board of no less than 75% independent directors and (ii) an independent chair. The
          Court vacated the two regulations, but withheld the issuance of its mandate for 90 days to
          give the SEC the opportunity to reopen its record with respect to the potential expense of
          the two new requirements.

     •    SEC and CFTC Propose Rules for Trading Futures on Debt Security Index
          Contracts. It has been reported that on April 5, 2006 the SEC and the CFTC jointly
          proposed rules to permit the trading of futures on debt indices. Current rules effectively
          prohibit trading futures on debt indices, but the federal law specifically grants the two
          agencies joint rulemaking authority to permit this activity. Under the proposals, futures
          contracts on debt indices would be subject to CFTC regulation. Security futures on debt
          securities could trade on futures exchanges and securities exchanges, and accordingly
          would be subject to CFTC and SEC regulation. SEC Chairman Cox stated that, in
          response to the proposals, he expects new financial products to be created that will
          provide investors additional ways to diversify and manage risk. For more information,
          please see the SEC website at www.sec.gov/news/press/2006-47.htm.

     •    SEC Releases Public Comments on Non-US Private Issuer Deregistration Proposals.
          The SEC has proposed new Rule 12h-6 under the 1934 Act that would permit a non-US
          private issuer that has been subject to the 1934 Act reporting requirements for two years
          to terminate its periodic reporting obligations with respect to a class of its equity
          securities if certain conditions are met. On March 27, 2006, it was reported that the SEC
          had received comments on the proposed rule from the European Commission and a
          consortium of European listed companies urging the SEC to modify the proposed rule to
          permit a greater number of issuers to utilize it. As drafted, the proposed rule would
          permit only about 25% of European private issuers to terminate their SEC registration,
          because institutional investors are included when calculating the number of US record
          holders. The European Commission advocates excluding institutional investors when

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          calculating the US shareholder base of an issuer for purposes of the rule. Alternatively,
          they advocate increasing to 25% the US ownership threshold for determining the
          eligibility of non-US private issuers to deregister under the rule. The full text of public
          comments received by the SEC with respect to the proposed deregistration rule, including
          those of the European Commission, are available on the SEC website at
          www.sec.gov/rules/proposed/s71205.shtml.

March 2006

     •    Supreme Court Holds that SLUSA Applies to “Holders” of Securities. On March 21,
          2006, the Supreme Court unanimously decided that the 1998 Securities Litigation
          Uniform Standards Act (SLUSA) preempts state-law class action securities fraud suits
          not only by purchasers and sellers of covered securities, but also by investors who merely
          held covered securities while the alleged fraud occurred. In general, SLUSA bars class
          action plaintiffs who are alleging fraud in connection with the purchase or sale of a
          covered security from filing suit in state court. In its ruling, the Supreme Court held that
          an actual purchase or sale of a security by the plaintiffs was not necessary for SLUSA to
          apply; rather, the Court stated, SLUSA applies to bar state court suits by plaintiffs who
          merely hold a security, as long as the fraud alleged coincides with any securities
          transaction, whether entered into by the plaintiff or by someone else.

     •    Comments Received on Proposed SEC Deregistration Rules for Non-US Private
          Issuers. In December 2005, the SEC proposed a new Rule 12h-6 under the 1934 Act that
          would permit a non-US private issuer that has been subject to the 1934 Act reporting
          requirements for two years to terminate its periodic reporting obligations with respect to a
          class of its equity securities if certain conditions are met. On March 27, 2006, it was
          reported that the SEC had received comments on the proposed rule from the European
          Commission, a consortium of European listed companies, urging the SEC to modify the
          proposed rule to encompass more European issuers. As drafted, the proposed rule would
          not permit most European private issuers to terminate their SEC registration, because
          institutional investors are included in the minimum threshold of record holders. The
          European Commission stated that this result is particularly troublesome in light of the
          already stringent disclosure and reporting requirements that European issuers must adhere
          to under EU securities regulations, and that added protection for institutional investors is
          neither appropriate nor economically justified. The European Commission suggested that
          institutional investors should be excluded from the calculation of the US shareholder
          base, or, alternatively, to increase to 25% the public threshold that determines the
          eligibility of non-US private issuers to deregister. The SEC has acknowledged these
          comments, and others received by EU officials, to the effect that the proposed
          deregistration rule may not go far enough, and has estimated that only 26% of all non-US
          private issuers will be able to permanently deregister under the proposed rules as drafted.
          All comments that have been received on the proposed deregistration rule, including
          those of the European Commission, are available on the SEC website at
          www.sec.gov/rules/proposed/s71205.shtml.




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     •    SEC Approves Hybrid Market Model at NYSE. On March 22, 2006, the SEC
          approved the New York Stock Exchange’s (NYSE) proposal to switch to a Hybrid
          Market structure. Under the new market structure, the NYSE’s automatic execution
          facility will be expanded to accept more order types and to allow executions to occur
          against liquidity that is priced outside the NYSE’s best bid or offer, NYSE floor member
          participation will be automated so that they can electronically provide liquidity that
          would be available for automatic executions and specialists will be able to create
          proprietary algorithms so that they can electronically quote and trade. SEC Chairman
          Christopher Cox stated that these new technologies will improve overall service to
          investors. For more information, visit the SEC’s website at
          www.sec.gov/news/press/2006-41.htm.

     •    Bar Panelists Discuss Developments in FCPA Cases. It was reported on March 24,
          2006 that a group of panelists at a District of Columbia Bar Association program
          discussed new developments in cases involving the Foreign Corrupt Practices Act
          (FCPA). At the program, Mark Mendelsohn, a deputy chief of the fraud section of the
          Department of Justice’s criminal division, advised companies that learned of potential
          FCPA violations through internal investigations to report such violations to the
          government immediately instead of at the conclusion of the internal investigation.
          Another panelist added that companies are expected to carry out internal FCPA
          investigations regardless of whether the SEC or the DOJ had started its own
          investigation. In response to a question from the audience, panelists also stated that the
          DOJ had a number of investigations currently in progress in the PRC, and that US
          companies are required to adhere to FCPA guidelines regarding payments to government
          officials regardless of business practices in the PRC. Because PRC regulators are
          involved in any business enterprise, one panelist stated that some companies have gone
          so far as to treat all third parties in the PRC as a government entity for FCPA purposes.

     •    US Trading of German Stock Index Futures. The staff of the Commodity Futures
          Trading Commission issued a letter on March 14, 2006, permitting the US trading of
          Eurex’s futures contract based on the MDAX® Index, a broad-based security index
          consisting of German and non-German companies that are listed on the Frankfurt Stock
          Exchange. For more information, visit the CFTC’s website at
          www.cftc.gov/opa/press06/opa5172-06.htm.

     •    Sidley Austin LLP has prepared an SEC Update summarizing the highlights of the
          SEC’s annual “SEC Speaks” conference. The conference was held in Washington, D.C.
          on March 3-4, 2006. The memorandum is available on the Sidley Austin LLP website at
          http://www.sidley.com/db30/cgi-bin/pubs/SECSpeaksMar
          1706.pdf.

     •    SEC Commissioner Opposes Full Exemption of Smaller Companies from Section
          404 of the Sarbanes-Oxley Act. It was reported on March 15, 2006 that SEC
          Commissioner Cynthia Glassman stated at a recent Corporate Counsel Institute meeting
          that Section 404 of the Sarbanes-Oxley Act should be applied to all public companies,
          including small ones, but that small public companies could be subject to tailored

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          exemptions to Section 404 based on their size and complexity of their operations. The
          text of the speech can be found on the SEC website at
          http://www.sec.gov/news/speech/spch030906cag.htm.

     •    SEC Seeks Comment on Proposed PCAOB Rules Concerning Auditor
          Independence, Tax Services and Contingent Fees. On March 7, 2006, the SEC issued
          a release seeking public comment on proposals by the US Public Company Accounting
          Oversight Board (PCAOB) to amend the PCAOB’s rules on ethics and auditor
          independence. If approved by the SEC, the proposed rules would forbid auditors of
          public companies from providing (a) tax services involving contingent fee arrangements,
          (b) tax marketing, planning or advice in favor of tax treatments that are considered
          confidential under PCAOB 3501 or that are based on an aggressive interpretation of tax
          laws, and (c) (i) tax services to corporate managers who serve in a financial reporting
          oversight role at an audit client or (ii) tax services to the immediate family members of
          such corporate managers. For more information, visit the SEC’s website at
          www.sec.gov/rules/pcaob/34-53427.pdf.

     •    Lawmakers Say SEC Has Power to Mitigate Sarbanes-Oxley Act Provisions. It was
          reported on March 13, 2006 that US Congressmen Michael Oxley and Richard Baker sent
          a letter to the SEC chairman expressing their view that the SEC has authority under
          Section 36(a) of the 1934 Act and Section 3(a) of Sarbanes-Oxley Act to lessen the
          burden of the Sarbanes-Oxley Act on microcap companies (defined as those having
          equity capital below approximately US$128 million and less than US$125 in annual
          revenue) and smallcap companies (defined as those having equity capital between
          approximately US$128 million and US$787 million and less than US$10 million in
          annual revenue). The letter was released simultaneously with the SEC’s request for
          public comment on its final report on Smaller Public Companies, in which the SEC
          recommended full Section 404 exemption for some microcap and smallcap companies.

     •    SEC Grants One-Time Exception for Cash-Flow Corrections. It was reported on
          March 9, 2006 that the SEC advised the American Institute of Certified Public
          Accountants that financial statement filers that previously consolidated cash flows from
          current operations, investments and discontinued operations, instead of disclosing them
          separately, will be given one opportunity to correct their cash-flow reporting without
          having to file a financial restatement. The correction must be made in the quarterly or
          annual report for the filer’s first filing period after February 15, 2006. Companies that
          fail to utilize this opportunity to correct their disclosure will be required to restate their
          financial statements.

February 2006

     •    CFTC Permits London-based Futures Exchange to Trade Through US Screens
          Without CFTC Registration. On January 31, 2006, the CFTC issued a letter to ICE
          Futures, a London-based electronic regulated futures and options exchange, permitting
          trading of its West Texas Intermediate crude oil futures contracts through electronic
          screens located in the United States without its being regulated by the CFTC as a futures


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          exchange. ICE Futures is regulated by the Financial Services Authority in London. The
          New York Mercantile Exchange and US Senator Charles Schumer have requested that
          the CFTC reconsider the regulatory status of ICE Futures based on the lack of protection
          afforded to US investors. For more information, please see the CFTC website at
          www.cftc.gov/files/dea/icefutureslettertothecftc.pdf.

     •    Hours of Operation of Nasdaq’s Brut System Modified. It has been reported that the
          proposed NASD rule change to shorten the hours of operation of Nasdaq’s Brut system,
          an alternative trading system that operates an electronic communications network for the
          trading of exchange-listed securities, became effective upon filing on January 30, 2006
          under Section 19(b)(3)(A) of the 1934 Act.

     •    Sidley Austin LLP has prepared an SEC Update describing the SEC’s proposal to amend
          its disclosure requirements relating to executive compensation, related-party transactions,
          director compensation, director independence and securities ownership by officers and
          directors. The Update is available on the Sidley Austin LLP website at
          www.sidley.com/db30/cgi-bin/pubs/SEC_Update_Jan3106.pdf.

     •    SEC Issues Guidance on Disclosure of Perquisites and Personal Benefits. The SEC,
          as part of its proposal to amend the executive compensation disclosure requirements,
          issued a release on January 27, 2006 to provide guidance on what items constitute
          perquisites or other personal benefits. The SEC stated that, in general, an item will be
          deemed to be a perquisite or personal benefit for purposes of the executive compensation
          disclosure rules if it provides a “direct or indirect benefit that has a personal aspect,
          without regard to whether it may be provided for some business reason or for the
          convenience of the company, unless it is generally available on a non-discriminatory
          basis to all employees.” Under the proposed amendments, all perquisites and personal
          benefits that exceed $10,000 in aggregate value must be disclosed for named officers and
          directors in an “All Other Compensation” column in the summary compensation table.
          Individual perquisites and personal benefits exceeding in value the greater of $25,000 or
          10% of the total value of all perquisites and other personal benefits would also have to be
          identified and quantified in footnotes to the table. In addition, the SEC has proposed
          requiring issuers to disclose the number of shares that named executive officers and
          directors have pledged as collateral for personal loans. The SEC stated that shares
          pledged by such persons are subject to material risk and contingencies not applicable to
          other shares owned by them, and that these circumstances have the potential to influence
          management’s performance and decisions. The SEC is proposing that such disclosure be
          made in footnotes included in a company’s proxy materials. A complete copy of the
          SEC’s proposed rules on executive compensation disclosure is available at
          www.sec.gov/rules/proposed/33-8655.pdf.

     •    EU May Delay Additional Accounting Requirements for Japanese Companies. It
          was reported on January 26, 2006 that the EU may delay by several years requiring
          Japanese companies listed on European stock exchanges to conform to International
          Financial Reporting Standards (IFRS). A representative of the EU stated that Japan’s
          auditing standards may be considered equivalent to IFRS although differing in 26 ways

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          from IFRS. Beginning January 2007, the EU is scheduled to require non-EU firms that
          list on EU stock exchanges to submit financial information in accordance with IFRS or
          standards it judges to be equivalent to IFRS.

January 2006

     •    NASDAQ Becomes Registered National Exchange. On January 13, 2006, the SEC
          approved the NASDAQ Stock Market LLC’s application to become a national securities
          exchange registered with the SEC. The practical impact of such registration is that
          NASDAQ will become a self-regulatory organization with responsibility for its own and
          its members’ compliance with federal securities laws. Since 1971, NASDAQ has been
          supervised and controlled by the NASD, itself a self-regulatory organization. Although
          NASDAQ has registered, it still must satisfy several conditions before achieving
          independence from NASD control and commencing operations as an exchange. These
          conditions include joining various national market system plans and the Intermarket
          Surveillance Group and filing an agreement with the SEC that allocates to the NASD
          regulatory responsibility regarding certain activities of common members of both the
          NASD and NASDAQ. For more information, please see the SEC website at:
          http://www.sec.gov/litigation/opinions/34-53128.pdf.

     •    Court Finds Whistleblower Provisions in Sarbanes-Oxley Do Not Apply Outside US.
          It was reported on January 16, 2006 that the US Court of Appeals for the First Circuit
          found that a non-US employee of a US company’s Argentine subsidiary cannot seek
          protection against retaliation from his employer under the whistleblower provisions of the
          Sarbanes-Oxley Act. The court said that Congress did not indicate any intent that such
          provisions should be applicable to employees outside the US.

     •    Sidley Austin LLP has prepared an SEC Update describing the SEC’s proposal to amend
          its disclosure requirements relating to executive compensation, related-party transactions,
          director compensation, director independence and securities ownership by officers and
          directors. The Update is available on the Sidley Austin LLP website at
          http://www.sidley.com/db30/cgi-bin/pubs/SECUpdateJan1705.pdf.

     •    SEC Issues Additional Guidance Regarding Segment Reporting and Allowance for
          Loan Losses. It has been reported that the SEC’s Division of Corporation Finance has
          updated its guidance with respect to segment reporting and allowance for loan losses.
          Under the updated guidance, registrants that change or plan to change their internal
          organization after fiscal year end should not present such changes in the financial
          statements until operating results are reported that derive from the registrant’s new
          organizational structure. Instead, registrants should disclose based on the historical
          reportable segments, supplementing such disclosure with information on the future
          effects of such changes. Registrants also should include a revised segment footnote to
          the annual audited financial statements when the financial statements are required in a
          registration statement or a proxy statement that includes subsequent periods managed on
          the basis of the new organizational structure. With respect to allowances for loan losses,
          allowances for credit losses are valuation accounts that should be presented as a reduction

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          of the carrying value of the related balance sheet item. For more information, please see
          the SEC website at www.sec.gov/divisions/corpfin/120105.pdf.

     •    Sidley Austin LLP has prepared an SEC Update describing the SEC’s statement
          concerning civil penalties against public companies in enforcement actions. Copies of
          the Update are available on the Sidley Austin LLP website at
          http://www.sidley.com/db30/cgi-bin/pubs/SECUpdateJan0905.pdf.

     •    SEC Issues Statement Concerning Civil Penalties Against Public Companies. On
          January 4, 2006, the SEC issued a statement identifying the criteria that the SEC will use
          to evaluate whether and to what extent to impose civil penalties on public companies that
          violate the US securities laws. According to the statement, the SEC will consider whether
          the violation directly benefited the company and the degree to which the penalty will
          compensate or cause further financial harm to injured shareholders. The SEC will also
          consider the need to deter the particular type of offense, the extent of the injury to
          innocent parties, the degree to which complicity in the violation is widespread throughout
          the company, whether the violation was intentional, the degree of difficulty in detecting
          the particular type of offense, and whether the company has sought to remedy the
          violation and to cooperate with the SEC and other law enforcement agencies. For more
          information, please see the SEC website at www.sec.gov/news/press/2006-4.htm.

     •    SEC Updates Guidance on Warrants. It has been reported that the SEC’s Division of
          Corporation Finance has issued guidance with respect to the classification and
          measurement of warrants and instruments with embedded conversion features. The
          guidance urges registrants to ensure that they have correctly analyzed the terms in their
          convertible preferred share and debt agreements. The SEC stated that although Issue 00-
          19 of the SEC’s Emerging Issues Task Force provides explicit guidance on the
          classification and measurement of warrants and instruments with embedded conversion
          features, registrants should first determine whether the instruments fall within the scope
          of FASB Statement No. 150, which regulates accounting for financial instruments with
          characteristics of both liabilities and equity. If the instruments are not within the scope of
          FASB 150, registrants must determine whether the instruments fall within the scope of
          FASB Statement No. 133, which describes accounting for derivative instruments and
          hedging activities.

     •    Bill Passed Regarding Futures Margin Practices. On December 14, 2005, the US
          House of Representatives passed a bill requiring the US Commodity Futures Trading
          Commission and the SEC to authorize risk-based portfolio margining for security options
          and security futures products. H.R. 4473, which has yet to be considered by the US
          Senate, also grants the CFTC additional authority to monitor natural gas markets.
          Among other things, the bill directs the CFTC to undertake surveillance of futures as well
          as over-the-counter trading in natural gas derivatives when there is a significant change in
          price.

     •    SEC Proposes Rule Permitting Certain Foreign Private Issuers to Terminate 1934
          Act Reporting. At a public meeting held on December 14, 2005, the SEC voted to

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          publish for comment new Rule 12h-6 under the 1934 Act that would permit a foreign
          private issuer that has been subject to the 1934 Act reporting requirements for two years
          to terminate its periodic reporting obligations with respect to a class of its equity
          securities if it has (i) complied with its reporting requirements for each of the last two
          years, (ii) filed at least two annual reports under Section 13(a) of the 1934 Act, (iii) not
          sold securities in the United States in either a registered or unregistered offering during
          the preceding twelve months and (iv) maintained during the preceding two years a listing
          of the securities on an exchange in its home country which constitutes the primary trading
          market for the securities. A foreign issuer meeting these criteria that is a well known
          seasoned issuer (WKSI) could terminate its reporting obligations if (i) the US average
          daily trading volume of the equity securities has been no greater than 5% of the average
          daily trading volume of the securities in its primary trading market and US residents held
          no more than 10% of its worldwide public float, or (ii) regardless of US trading volume,
          US residents held no more than 5% of its worldwide public float. A non-WKSI foreign
          issuer could terminate its reporting obligations if US residents held no more than 5% of
          its worldwide public float, regardless of its US trading volume. A foreign private issuer
          would be eligible to terminate its periodic reporting obligations with respect to a class of
          its debt securities under the proposed rule if it has both (i) filed or furnished all required
          reports under Section 15(d), including at least one annual report pursuant to Section 13(a)
          of the 1934 Act; and (ii) the class of debt securities is either held of record by less than
          300 persons on a worldwide basis or less than 300 persons resident in the United States.
          For     more       information,    please     see    the    SEC’s       press    release     at
          http://www.sec.gov/news/press/2005-176.htm.

     •    SEC Adopts Revisions to the Accelerated Filer Definition and Accelerated Deadlines
          for Periodic Reports. On December 21, 2005, the SEC published an adopting release
          revising the accelerated filing deadlines that apply to periodic reports of a “large
          accelerated filer,” defined as a 1934 Act reporting company with worldwide market value
          of outstanding voting and non-voting common equity held by non-affiliates of US$700
          million or more. Among other things, under the new rules, a large accelerated filer will
          be required to file its Form 10-K annual report within 60 days after the end of the
          previous fiscal year, beginning with the annual report filed for its first fiscal year ending
          on or after December 15, 2006. For more information, please see the SEC website at
          http://www.sec.gov/rules/final/33-8644.pdf.

     •    SEC Proposes Amendments to the Tender Offer Best-Price Rule. At a public
          meeting held on December 14, 2005, the SEC voted to publish for comment an
          amendment to the best-price rule in the SEC’s tender offer regulations to clarify that the
          best-price rule applies only with respect to the consideration paid for securities tendered
          in an issuer or third-party tender offer and that in third-party tender offers certain
          compensation, severance or other employee benefit arrangements with employees or
          directors of the target company that are based on services performed or to be performed
          or non-compete arrangements, rather than on the number of shares the employee or
          director owns or tenders, will not violate the best-price rule. For more information,
          please see the SEC’s press release at http://www.sec.gov/news/press/2005-176.htm.


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December 2005

     •    SEC Approves Final Rule on Form 10-K Deadlines. At a public meeting held on
          December 14, 2005, the SEC finalized new periodic report filing deadlines. The new rule
          requires “large accelerated filers,” defined as reporting companies with market
          capitalization of at least US$700 million, to file their annual reports on Form 10-K within
          60 days after the end of their fiscal year. Accelerated filers not in the new “large
          accelerated filer” category remain subject to the 75-day filing schedule now in force. In
          an important change from the original proposal, the new 60-day filing requirement for
          large accelerated filers has been postponed until the fiscal years ending on or after
          December 15, 2006. As a result, all calendar year accelerated filers will be subject to the
          75-day schedule for 10-K filings for 2005. In addition, both accelerated filers and large
          accelerated filers will continue to be subject to the 40-day filing schedule now in force
          for filing quarterly reports on Form 10-Q. The final terms of the new rule will not be
          known until the SEC publishes the related release. For more information, please see the
          SEC’s press release at http://www.sec.gov/news/press/2005-176.htm.

November 2005

     •    Court Finds Preferred Shares Need Not Confer Dividend Rights. It was reported
          that, in a case decided on October 31, 2005, the Delaware Supreme Court ruled that
          Section 151 of the Delaware General Corporation Law does not require preferred shares
          to provide dividend rights to their holders. Delaware law merely requires that preferred
          shares have “some bona fide preference over other stock,” according to the court. The
          case, Shintom v. Audiovox, concerned a challenge to the issuance of preferred stock that
          had a liquidation preference over common stock, but did not entitle their holders to
          dividends.

     •    SEC Recommends that Financial Institutions Review Special Purpose Entity
          Activities. It has been reported that on November 8, 2005, SEC Deputy Chief
          Accountant Taub told an AICPA banking conference that the SEC believes some
          qualifying special-purpose entities (QSPEs) are engaging in inappropriate activities.
          Taub declined to specify, but stated that some QSPEs may be making decisions in certain
          non-routine workout situations that QSPEs are not supposed to be making. He also urged
          financial institutions to review the documents governing the powers of their QSPEs to
          make sure they comply with FAS 140, which governs accounting for QSPEs, and to
          update their determinations on an ongoing basis with respect to when an accounting
          policy change has a material impact on their balance sheet.

     •    SEC Issues Guidance Regarding EDGAR Filings by ABS Issuers. On November 7,
          2005, the SEC’s Division of Corporation Finance published a statement regarding
          programming changes affecting the EDGAR system. The changes allow an asset-backed
          securities (ABS) depositor or sponsor to apply for central index key (CIK) numbers and
          access codes for the ABS issuing entity before the final prospectus is filed pursuant to
          Rule 424 under the 1933 Act. Additionally, the changes will permit the filing of a free
          writing prospectus, a 424(b) prospectus, an Item 6.01 Form 8-K or a Form 8-A

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          registration statement to be treated as an initial filing. Finally, the guidance details the
          procedures for an ABS depositor with respect to its request to create issuing entities on
          EDGAR. Regulation AB, effective as of March 8, 2005, contains provisions regarding
          disclosure, reporting and registration requirements applicable to registered offerings of
          ABS after December 31, 2005. For more information, please see the SEC website at
          www.sec.gov/divisions/corpfin/abs110705.pdf.

     •    PRC Amends Securities Laws to Better Protect Shareholders’ Rights and to Provide
          for Trading in Financial Derivatives. It was reported that on October 27, 2005, PRC’s
          legislative body adopted amendments to its Company Law and Securities Law. The
          amended laws are to take effect on January 1, 2006. The revised securities laws provide a
          mechanism for trading in financial derivatives such as futures and options. The State
          Council was also given the authority to issue new regulations on the management and
          operation of banking, securities, trust and insurance sectors. These changes create the
          possibility that financial firms could engage in more than one of those fields at the same
          time, something previously prohibited. The amendments create conditions that may
          make it possible for bank capital to eventually enter the capital markets. The amendments
          also provide for more disclosure, reduce the minimum registered capital required to
          establish a company, permit the establishment of limited liability companies by
          individual natural or legal persons, provide measures to protect interests of shareholders,
          and make it easier to punish illegal behavior.

October 2005

     •    SEC Issues Interpretive Guidance On Commission Practices. On October 20, 2005,
          the SEC issued a proposed interpretation and request for comment regarding “soft dollar”
          practices that fit within the safe harbor of Section 28(e) of the 1934 Act. Under Section
          28(e), an investment manager will not be deemed to have violated its fiduciary duty by
          paying a commission rate higher than the lowest available rate if it determines in good
          faith that the amount of the commission was reasonable in relation to the value of the
          “brokerage and research services,” as defined in Section 28(e)(3), provided by the broker-
          dealer. The SEC wishes to clarify what types of services constitute “brokerage and
          research services” for that purpose. The proposed interpretation would clarify that such
          services will be evaluated in light of whether they constitute “lawful and appropriate
          assistance.” Further, “research services” will be limited to “advice,” “analyses” and
          “reports,” and exclude items such as computer hardware, but would include market,
          financial, economic and similar data. The proposed interpretation also defines “brokerage
          services” as “products and services that relate to the execution of the trade from the point
          at which the money manager communicates with the broker-dealer for the purpose of
          transmitting an order for execution, through the point at which funds or securities are
          delivered or credited to the advised account.” Finally, the guidance requires reasonable
          allocation of mixed-used items between eligible and ineligible uses and documentation of
          such allocation. For more information, please visit the SEC website at
          http://www.sec.gov under “Regulatory Actions – Interpretive Releases”.




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     •    COSO Issues Internal Control Guidance for Small Companies. On October 26,
          2005, the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
          released a draft on guidance for smaller public companies to comply with Sarbanes-
          Oxley. The guidance, a supplement to COSO’s original document on internal control
          published in 1992, aims to reduce the burden of Sarbanes-Oxley on smaller public
          companies. While the guidance does not change the requirements for financial reporting,
          it does delineate how smaller companies can achieve compliance with a more cost-
          efficient approach. The SEC’s Advisory Committee on Smaller Public Companies, which
          is considering possible recommendations to the SEC with respect to the utility of Section
          404, plans to examine COSO’s recommendations.

     •    Sidley Austin Brown & Wood LLP has prepared an Investment Management Alert
          regarding the proposed interpretation of “soft dollar” practices that fit within the safe
          harbor of Section 28(e) of the 1934 Act. The memorandum is available on the Sidley
          Austin Brown & Wood website at http://www.sidley.com/db30/cgi-
          bin/pubs/Investment_Products_102605.pdf.

     •    SEC Clarifies Scope of Investment Company Act Exemption for Non-US Banks. On
          October 12, 2005, the SEC issued a no-action letter providing guidance on Rule 3a-6 of
          the Investment Company Act, which allows certain non-US banks to make public
          offerings of their securities in the US without registering as investment companies.
          Clarifying the requirement that a non-US bank be “[e]ngaged substantially in commercial
          banking activity,” the SEC identified numerous factors it would consider for purposes of
          Rule 3a-6. Such factors include (a) whether the non-US bank was authorized to accept
          demand deposits and other types of deposits and to extend commercial and other types of
          credit and did so on a continuous basis, (b) whether it engaged in deposit taking and
          credit extension at a level sufficient to require separate identification of each in public
          reports and regulatory filings, and (c) whether it engaged in either deposit taking or credit
          extension as one of its principal activities. The text of the no-action letter is available on
          the SEC’s website at
          http://www.sec.gov/divisions/investment/noaction/seward101205.htm.

     •    FASB will Revise Proposed Guidance on Treatment of Derivatives Held in Certain
          SPEs. The FASB recently reviewed its proposed guidance on FASB Statement No. 140,
          Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
          Liabilities. The guidance affects large banks with global operations that use qualifying
          special purpose entities (SPEs) in securitizations of receivables and other financial assets.
          Currently, to be considered a qualifying SPE, a legal entity must hold only passive
          derivative financial investments pertaining to beneficial interests issued or sold to parties
          other than the transferor, its affiliates or its agents. The FASB has now accepted a
          recommendation to permit qualified SPEs to hold passive derivatives that pertain to
          beneficial interests later purchased by a transferor, provided the transferor holds the
          beneficial interests temporarily and reports the beneficial interests as trading securities in
          accordance with FASB Statement No. 115, Accounting for Certain Investments in Debt
          and Equity Securities. For more information, please visit the FASB website at
          http://www.fasb.org/fasb_staff_positions/proposed_fsp.shtml.

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     •    NYSE Identifies Factors Used to Determine Sanctions for Misconduct. On October
          7, 2005, the NYSE issued an information memorandum (No. 05-77) detailing factors
          used by its Enforcement Division to determine sanctions for misconduct. In addition to
          factors such as the nature of the misconduct, the degree of scienter, the harm caused by
          the misconduct, the extent of misconduct and the prior disciplinary record, the NYSE
          also considers acceptance of responsibility, implementation of corrective measures,
          neglect of “red flags,” effectiveness of supervisory controls, reliance on professional
          advice and extent of cooperation. For more information, please visit the NYSE website
          at http://www.nyse.com under “Regulation – Information Memos”.

     •    Federal Court Finds No Private Remedy Implied by Sarbanes-Oxley Section 304. A
          US District Court, on September 27, 2005, concluded that the Sarbanes-Oxley Act does
          not allow shareholder litigants in derivative litigation to seek to enforce the disgorgement
          provisions of Sarbanes-Oxley Section 304. Section 304 allows the SEC to compel CEOs
          and CFOs to return bonus compensation they receive if the company must restate
          earnings because of issuer misconduct.

     •    SEC Announces Fee Rate Changes. In a September 30, 2005 fee rate advisory, the
          SEC announced that it will maintain certain filing fees at their current rates, under a
          continuing resolution that ends on November 18, 2005. The resolution affects fees
          required under Section 6(b) (registration of securities) of the 1933 Act, and Sections
          13(e) (repurchase of securities) and 14(g) (proxy solicitations and corporate control
          transactions) of the 1934 Act. Five days after the SEC receives its 2006 appropriation, it
          will reduce the current rate from US$117.70 per million to US$107.00 per million.
          Additionally, 30 days after receiving the 2006 appropriation, the SEC will decrease
          Section 31 fees for exchange and over-the-counter market transactions from US$41.80
          per million to US$30.70 per million. For more information, please see the SEC website
          at http://www.sec.gov/news/press/2005-140.htm.

     •    Federal Court Finds IPO Underwriters Liable for Antitrust Law Violations. On
          September 28, 2005, the US Court of Appeals for the Second Circuit held that implied
          immunity from federal antitrust laws does not shield IPO underwriters that manipulate
          share prices in the aftermarket. The SEC had argued that the federal securities laws
          preempt federal antitrust laws in the context of securities market manipulation. The court
          explained that the SEC neither authorizes “tying or laddering,” nor holds the same
          regulatory relationship with underwriters as it has with SROs, which are immune from
          federal antitrust laws.

September 2005

     •    Compliance Date of Internal Control Reporting Requirements Further Extended
          for Non Accelerated Filers. On September 21, 2005, the SEC extended the dates for
          companies other than accelerated filers to comply with the internal control reporting
          requirements of Section 404 of the Sarbanes-Oxley Act (Section 404). Small business
          issuers with less than US$75 million in market capitalization are eligible to benefit from
          the compliance date extension. Under this new timetable, such non-accelerated filers

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          must comply with Section 404 for their first fiscal year that ends on or after July 15,
          2007. A foreign private issuer that is an accelerated filer and that files a Form 20-F or
          Form 40-F as its annual report must comply with the internal controls requirements in the
          annual report for its first fiscal year ending on or after July 15, 2006. This action follows
          a previous one-year extension granted in March of 2005. For further information, please
          visit the SEC website at http://www.sec.gov/news/digest/dig092305.txt.

     •    FASB Issues Staff Guidance on Instruments Initially Issued as Employee Stock
          Compensation. It has been reported that on August 31, 2005 an FASB Staff Position
          (FSP) was issued with respect to accounting for financial instruments initially issued as
          employee stock compensation. The FSP defers the application of provisions of the
          FASB’s Statement No. 123(R), Share-Based Payment (the Statement), under which a
          freestanding financial instrument initially subject to the Statement would become subject
          to the recognition and measurement provisions of other applicable generally accepted
          accounting principles (GAAP) when the rights conveyed by the instrument cease to be
          dependent on the holder’s employee status. Prior to the issuance of the FSP, the
          classification of such financial instruments as equity or liability under the Statement
          could change when they become subject to other applicable GAAP. The new FSP will
          become effective on the initial adoption of the Statement, which for some large
          companies will not be until January 1, 2006. The deferral will continue until FASB
          concludes its project focused on resolving general classification issues of instruments
          having the attributes of equity and liabilities.

     •    SEC Approves Modification of NASD Rule 2790 on “New Issues.” On August 4,
          2005, the SEC announced its approval of the proposed rule change to NASD Rule 2790,
          which prohibits NASD member firms from selling a new issue of equity securities to an
          account in which NASD members, broker-dealers or other “restricted persons” have a
          beneficial interest. The rule also imposes certain compliance and document retention
          obligations. The proposed rule change amends subparagraph (i)(9) of NASD Rule 2790
          to exclude from the definition of “new issue” securities offerings of business
          development companies, direct participation programs and real estate investment trusts.
          The proposed rule change also modifies the exemption for foreign investment companies
          in subparagraph (c)(6)(A) of NASD Rule 2790. Additionally, the proposed rule change
          codifies the existing requirement for book-running managing underwriters to file
          distribution information using the NASD’s IPO Distribution Manager software, and
          requires the lead managing underwriters of “new issue” offerings to submit two filings
          with information about distribution participants. The amendments are scheduled to
          become effective on or about September 19, 2005. For more information, please see the
          SEC website at http://www.sec.gov/rules/sro/nasd/34-52209.pdf.

August 2005

     •    PCAOB Adopts Rules On Auditor Independence, Tax Services and Fees. On July 26,
          2005, the PCAOB adopted rules to enhance the independence of registered public
          accounting firms (audit firms). In general, the rules provide that an audit firm must be
          independent of its audit client during the audit engagement period. Specifically, the rules

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          provide that an audit firm is not independent if it serves an audit client on a contingent
          fee basis, provides tax service to a member of the client’s management in a financial
          reporting supervisory role or to an immediate family member of such person or provides
          any non-audit service relating to marketing, planning or opining in favor of the tax
          treatment of a transaction (i) that is a confidential transaction (as defined in PCAOB Rule
          3501) or (ii) that is initially recommended by the audit firm and has a significant tax
          avoidance purpose (unless the proposed tax treatment is at least more likely than not to be
          allowable under applicable tax laws). Under the rules, an audit firm that seeks to provide
          non-prohibited tax services to an audit client is required to provide a description of the
          proposed engagement to the audit client’s audit committee, to discuss with the audit
          committee the potential effects of such engagement on the audit firm’s independence and
          to document the substance of the discussion. The rules are subject to SEC approval. For
          more information, please see the PCAOB website at
          http://www.pcaobus.org/Rules/Docket_017/2005-07-26_Release_2004-014.pdf


     •    PCAOB Adopts Auditing Standard on Reporting on Continued Existence of
          Material Weaknesses. On July 26, 2005, the PCAOB adopted Auditing Standard No. 4,
          “Reporting on Whether a Previously Reported Material Weakness Continues to Exist”.
          The Auditing Standard sets out audit standards to be followed by audit firms engaged by
          public companies to report on whether a material weakness in internal controls that was
          previously reported pursuant to Section 404 of the Sarbanes Oxley Act continues to exist.
          The Auditing Standard is designed to generate increased public confidence in the
          financial reports of public companies that choose to engage audit firms to provide such a
          report. The Auditing Standard is subject to SEC approval. For more information, please
          see the PCAOB website at http://www.pcaobus.org/ Rules/Docket_018/2005-07-
          26_Release_2005-015.pdf

     •    Sidley Austin Brown & Wood LLP has prepared a Corporate Governance,
          Responsibility & Disclosure Alert, describing the rule text of the comprehensive
          amendments to the SEC rules under the 1933 Act approved on June 29, 2005 and SEC
          commentary. The alert is available on the Sidley Austin Brown & Wood website at
          http://www.sidley.com.

     •    SEC Amends Rules Governing Electronic Data Gathering, Analysis, and Retrieval
          (EDGAR) System. On July 18, 2005 the SEC issued a release adopting final rules and
          form amendments that will require certain investment companies and insurance company
          separate accounts to identify information about their series, classes and contracts in their
          EDGAR filings. Identifiers can be obtained by entering certain information related to the
          series, class or contract on a special section of the EDGAR filing website Such identifiers
          are already available on a voluntary basis. Filers must receive an identifier by February
          6, 2006. The SEC also adopted a new requirement that investment companies
          electronically file their fidelity bonds, sales literature and claims and settlements that are
          filed under Rule 17g-1(g)(1). The change is scheduled to become effective on June 12,
          2006. For further information, please visit the SEC website at www.seg.gov.


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     •    SEC Publishes Adopting Release for 1933 Act Reform Rules. The SEC has published
          the adopting release for new rules implemented under the 1933 Act. Among other things,
          the rules will replace certain restrictions on offerings that have been deemed outmoded,
          provide more timely investment information without mandating unnecessary delays and
          further integrate disclosure under the 1933 Act and the 1934 Act. The rules, which were
          approved June 29, 2005, will become effective 120 days after their publication in the
          Federal Register. For a copy of the adopting release, please see the SEC website at
          http://www.sec.gov/news/whatsnew/wn-today.shtml.


     •    SEC Adopts Rule Amendment Regarding Delisting and Deregistration of Listed
          Securities. The SEC has issued final rules amending Rule 12d2-2 under the 1934 Act
          and revising Form 25 on July 14, 2005, designed to streamline the procedures required
          for delisting and deregistering securities under Section 12(b) of the 1934 Act. The rule
          amendments also exempt standardized options and security futures from the delisting and
          deregistration procedures. The rule amendments take effect 30 days after publication in
          the Federal Register; however, the compliance date is nine months after publication to
          provide the exchanges with sufficient time to conform their rules to the new
          requirements. For more information, please see the SEC website at
          http://www.sec.gov/news/whatsnew/wn-today.shtml.

     •    SEC Adopts Rules Against the Abuse of Shell Companies. The SEC adopted new
          rules to prevent circumvention of securities markets’ information by using shell
          companies. The rules prohibit shell companies from using Form S-8 and add a new item
          to Form 8-K. Once a company ceases to be a shell company, it must disclose information
          on Form 8-K comparable to information required to be disclosed in 1934 Act registration
          statements. Non-US private issuers must report on Form 20-F when they cease to be
          shells and must provide disclosure comparable to that of US companies under Form 8-K.
          A company has to identify on the cover page of its periodic reports whether it is a shell
          company. “Shell companies” are registrants, other than asset-backed issuers, that have
          no or nominal operations, and (i) no or nominal assets, or (ii) assets consisting solely of
          cash and cash equivalents, or (iii) assets consisting of any amount of cash and cash
          equivalents and nominal other assets. The SEC specifically designed the new rules to
          address the use of shell companies to effect “reverse mergers,” which deprive the
          securities markets of information that otherwise would have to be disclosed.

     •    SEC Asks Broker-Dealers to Report Material Compliance Breaches. It has been
          reported that the SEC has requested broker-dealer firms to report material compliance
          breaches during comprehensive compliance examinations. It has identified four broad
          measures of a firm’s cooperation that it considers in determining whether and how to
          charge violations of the US securities laws: (i) self-policing prior to the discovery of the
          misconduct, (ii) self-reporting of misconduct when it is discovered, (iii) remediation
          actions taken, and (iv) cooperation with law enforcement authorities. Meeting the
          measures may result in reduced charges, lighter sanctions or mitigating language in
          documents the SEC uses to announce and resolve enforcement actions.


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     •    IASB and FASB Publish Draft on Disclosure Obligations During M&A
          Transactions. It has been reported that the International Accounting Standards Board
          (IASB) and the US Financial Accounting Standards Board (FASB) published a proposal
          on June 30, 2005 for new, joint accounting rules regarding business combinations. The
          rules are designed to apply to both domestic and cross-border transactions. Under the
          proposed rules, an acquiror would be required to recognize separately from goodwill the
          target’s identifiable intangible assets. Further, an acquiror would be required to account
          for a bargain purchase by reducing goodwill related to the combination until it is reduced
          to zero, and then recognize any excess in profit or loss. Acquisitions of additional non-
          controlling equity interests after the M&A transaction could no longer be accounted for
          using the acquisition method. Payments to advisors, such as consultants, auditors and
          attorneys, would be recognized as expenses when incurred and could not be capitalized as
          part of the transaction. The IASB and the FASB intend that the proposed rules will
          improve the comparability of financial information reported by companies around the
          world that issue financial statements under IFRS or US GAAP.

     •    Sidley Austin Brown & Wood LLP has prepared an SEC Update that summarizes the
          reform of the rules for public securities offerings under the Securities Act of 1933. The
          SEC Update is available on the Sidley Austin Brown & Wood LLP website at
          www.sidley.com/db30/cgi-bin/pubs/secupdatejune2905.pdf.

     •    SEC Adopts Wide-Ranging Securities Offering Reforms. On June 29, 2005, the SEC
          adopted rules that significantly amend the procedures for public securities offerings under
          the 1933 Act. The new rules effect several changes to various aspects of the 1933 Act,
          including communications permitted before and during registered public securities
          offerings, registration procedures, prospectus delivery requirements and securities
          offering liabilities and impose new disclosure requirements for annual reports on Form
          10-K. Among other things, the new rules generally liberalize the scope of permitted
          communications and streamline registration procedures (particularly those for shelf
          offerings). Under the new rules, well-known seasoned issuers, a defined term including
          issuers with at least $700 million in market capitalization and issuers of at least $1 billion
          in debt securities under registration statements in the last three years, will be permitted to
          file registration statements that automatically become effective on filing without staff
          review. The new rules also abolish the requirement for the delivery of a final prospectus
          in most types of offerings and codifies the SEC’s views on certain securities related
          liabilities. Reports on Form 10-K are required to include risk factor disclosure under the
          new rules.

     •    SEC Issues Staff Legal Bulletin Regarding Shareholder Proposals. On June 28,
          2005, the Division of Corporation Finance of the SEC (the Division) issued a Staff Legal
          Bulletin (the Bulletin) relating to shareholder proposals and Rule 14a-8 under the 1934
          Act. The Bulletin sets forth guidance relating to common questions that arise under Rule
          14a-8, including details of the Division’s analysis of a company’s no-action request
          where the company intends to rely on Rule 14a-8(i)(6) in order to exclude shareholder
          proposals calling for director independence. Rule 14a-8(i)(6) permits companies to
          exclude shareholder proposals where the company lacks the power or authority to

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          implement the proposal. The Bulletin also discusses rule 14a-8(i)(7), 14a-8(l) and other
          common questions relating to shareholder proposals. The shareholder proposal rules are
          not applicable to non-US companies. For more information, see the SEC website at
          http://www.sec.gov/interps/legal/cfslb14c.htm.

June 2005

     •    SEC Issues Staff Report on Off-Balance Sheet Arrangements, SPEs and Related
          Issues. On June 15, 2005, the SEC released a report prepared pursuant to Section 401(c)
          of the Sarbanes-Oxley Act of 2002. The report recommends that the financial reporting
          community achieve certain goals, including: discouraging transactions and transaction
          structures motivated primarily by accounting and reporting considerations, rather than by
          economics; expanding the use of objectives-oriented standards; improving the
          consistency and relevance of disclosures; and improving the focus of financial reporting
          on communication with investors. The SEC staff specifically recommended that
          accounting guidance for defined-benefit pension plans and other post-retirement plans be
          reconsidered, that accounting guidance for leases be reconsidered, that the feasibility of
          reporting all financial instruments at fair value, which would reduce the complexity of
          financial reporting, continue to be explored and that the Financial Accounting Standards
          Board continue to work on accounting guidance that determines whether an issuer would
          consolidate other entities, including Special-purpose entities (SPEs), in which the issuer
          has an ownership or other interest. The full text of the staff study can be found at
          http://www.sec.gov/news/studies/soxoffbalancerpt.pdf

     •    PRC to Exempt Certain Equity Transactions from Stamp Tax and Dividends from
          Personal and Corporate Income Taxes. It was reported that the PRC’s Ministry of
          Finance and State Administration of Taxation announced on June 13, 2005 a series of
          decisions that would exempt certain transactions involving transfers of equity securities
          from the stamp tax and would exempt certain dividends from both corporate and personal
          income taxes. Effective June 13, 2005, equity transaction compensation earned by
          holders of publicly-traded equity securities will be exempt from stamp tax. The
          government also announced that certain income from publicly-traded equity securities
          will be exempted from the corporate and personal income tax on shares. In addition, only
          50 percent of listed company dividends distributed to individual investors will be subject
          to personal income tax.

May 2005

     •    CFTC Amends Rules On Permissible Investments. On May 11, 2005, the CFTC
          approved amendments to CFTC Rule 1.25 regarding permissible investments of excess
          customer margin funds by futures commission merchants (FCMs) and derivative clearing
          houses (DCOs). The revised Rule allows investments in instruments redeemable in
          whole or in part at par, instruments with upper limits, lower limits or collars on interest
          payable under adjustable rate instruments, and variable rate securities with interest rates
          that correlate closely to any fixed rate instrument that is a permitted investment under the
          Rule. The revised Rule also provides for concentration limits on reverse repurchase

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          agreements, permits FCMs that are also broker-dealers to exchange customer money or
          securities for securities held by such FCMs which qualify as permitted investments and
          permits FCMs and DCOs to invest in rated money market mutual funds (MMMFs)
          regardless of the rating given to the MMMF by a nationally recognized statistical rating
          organization, provided that such MMMFs are registered with the SEC. The approved
          amendments will become effective 30 days from the date of publication in the Federal
          Register. For more information, please visit the CFTC’s website at
          http://www.cftc.gov/files/opa/oparule125frrelease5-11-05final.pdf.

     •    Accounting Board Releases Sarbanes-Oxley Guidance on Internal Controls. On
          May 16, 2005, the Public Company Accounting Oversight Board (PCAOB) published
          guidance to auditors on implementing PCAOB’s Auditing Standard No. 2, “An Audit of
          Internal Control over Financial Reporting Performed in Conjunction with an Audit of
          Financial Statements.” The Board’s guidance includes a Board Policy Statement as well
          as a series of staff questions and answers regarding the scope of an internal control audit
          and the extent of testing required of a company’s internal controls. The PCAOB released
          the questions and answers to correct what it termed a “misimpression” that auditors
          should apply Auditing Standard No. 2 in a rigid manner, an approach viewed by certain
          industry participants as discouraging auditors from exercising the judgment necessary to
          conduct an effective and cost-efficient internal controls audit. Section 404 of the
          Sarbanes-Oxley Act requires certain companies to include in their annual reports filed
          with the SEC a report on management’s assessment of the effectiveness of their internal
          controls over financial reporting. It includes a requirement that a company’s auditors
          attest to and report on the internal control assessment made by management. PCAOB
          Auditing Standard No. 2 is the standard auditors must follow to satisfy their Section 404
          obligations. For more information, please visit the PCAOB website at
          http://www.pcaobus.org/News_and_Events/News/2005/05-16.asp


     •    SEC Releases Statement on Implementation of Internal Control Reporting
          Requirements. On May 16, 2005, the SEC released a Staff Statement on Management's
          Report on Internal Control Over Financial Reporting. The Statement responds to
          questions raised in connection with the implementation of Section 404 of the Sarbanes-
          Oxley Act and, along with PCAOB Auditing Standard No. 2, provides guidance to
          issuers and accounting firms in moving forward with such implementation. The
          interpretations appear to endorse risk-based application of the rules, a view formerly
          believed to have been repudiated by the two agencies. For example, the Statement
          clarifies that internal controls over financial reporting should reflect the nature and size of
          the company to which they relate, and that reasoned judgment and a risk-based approach
          should be used in establishing such controls. For more information, please visit the SEC
          website at www.sec.gov.

April 2005

     •    SEC Adopts Regulation NMS. On April 6, 2005, the SEC approved Regulation NMS,
          which addresses the topics of order protection, intermarket access, sub-penny pricing and

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          market data. Regulation NMS’s “Trade-Through” rule will require trading centers to
          obtain the best price for investors when such price is represented by automated quotations
          that are immediately accessible. The “Access” rule under Regulation NMS will require
          fair and non-discriminatory access to quotations, limit access fees across different trading
          centers, and require national securities exchanges and certain national securities
          associations to adopt and enforce rules prohibiting members from displaying quotations
          that lock or cross automated quotations. The “Sub-Penny” rule will prohibit market
          participants, in most cases, from accepting, ranking or displaying orders in pricing
          increments smaller than one US cent. The “Market Data” rule will, among other things,
          update the formulas for allocating revenues generated by market data fees to the various
          securities exchanges and other SROs and provide the wide availability of market data.
          The effective date of the prohibition on sub-penny pricing is July 1, 2005 while the other
          components of Regulation NMS, including intermarket access and market data rules, will
          be phased in between April and June 2006. For more information, please visit the SEC
          website at http://sec.gov/news/digest/dig040705.txt.

     •    SEC Issues Guidance on IPO Activity by Underwriters and Regulation M. The SEC
          issued guidance regarding prohibited conduct by underwriters in connection with IPO
          allocations under Regulation M. Regulation M prohibits underwriters and others from
          bidding for, purchasing, or attempting to induce any person to bid for or purchase an
          offered security during a restricted period. The SEC release clarifies that attempting to
          induce aftermarket purchases during a restricted period is prohibited by Regulation M.
          The guidance also addresses distinctions between prohibited conduct and legitimate
          underwriting activities. For more information, please visit the SEC website at
          http://www.sec.gov/news/press/2005-49.htm.

     •    SEC Allows NASD Arbitrations To Occur Outside US. On March 7, 2004, the SEC
          approved the NASD proposed rule change to amend NASD Rule 10315 to permit
          arbitrations to be held in non-US hearing locations. The SEC also approved the related
          amendment to IM-10104 to allow the NASD’s Director of Arbitration to authorize higher
          or additional fees when non-US hearing locations are used. The selection of non-US
          hearing locations will be at the discretion of the parties to the arbitration proceedings.

     •    SEC Amends Form 20-F to Address Adoption of International Financial Reporting
          Standards (IFRS). On April 13, 2005, the SEC adopted amendments to Form 20-F, the
          annual report form and registration statement for eligible non-US private issuers to
          accommodate issuers that adopt IFRS, which becomes mandatory for public companies
          in the European Union for fiscal years ending on or after January 1, 2005. The
          amendments facilitate the transition to IFRS for issuers that change their accounting
          method prior to or for the 2007 fiscal year. Subject to appropriate disclosure, those
          issuers will be required to file with the SEC only two years of financial statements
          prepared in accordance with IFRS during the first year of adoption, instead of the usual
          three years, as would otherwise be required. In addition, issuers that adopt IFRS for the
          first time in any fiscal year will have to disclose reliance on any transitional exceptions
          available because of the change of accounting standards or on reconciliation


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          requirements. For more information, please visit the SEC website at
          http://www.sec.gov/news/press/2005-55.htm.

March 2005

     •    European Organization Recommends New SEC Deregistration Rules. It has been
          reported that, on March 24, 2005, the European Association of Listed Companies sent the
          SEC a proposal designed to simplify the process of SEC deregistration. The proposal,
          which follows a letter on this topic sent to the SEC in February 2004, recommends
          dispensing with the requirement that companies re-register if the number of US
          shareholders exceeds certain thresholds after deregistration. The suggestions would
          permit a non-US company that publishes IOSCO reports and IFRS financial statements
          and has less than 5% of its worldwide share trading volume in the US to deregister if the
          SEC concluded that US investors would be substantially protected after deregistration, as
          measured by certain criteria. Alternatively, a non-US company could deregister if less
          than 10% of its equity securities were held in the US, if 10% or fewer of its shareholders
          were US residents, or if it had fewer than 3,000 shareholders in the US (not counting
          institutional buyers, employees and directors).

     •    The Fed Approves Final Regulations for Treating Trust Preferred Securities as Tier
          1 Capital. On March 1, 2005, the Federal Reserve Board approved final regulations that
          allow trust preferred securities of US bank holding companies to be treated as Tier 1
          capital, notwithstanding that they are no longer treated as minority interests under US
          GAAP as a result of FASB’s Interpretation No. 46. The regulations require no significant
          changes to existing bank holding company trust preferred securities structures in order to
          achieve Tier 1 treatment. Trust preferred securities and other “restricted core capital
          elements” may not exceed 25% (15% in in the case of internationally active banking
          organizations) of a bank holding company’s core capital elements, net of goodwill less
          any associated deferred tax liability. Restricted core capital elements include cumulative
          preferred stock, minority interests in nonbanking subsidiaries and qualifying trust
          preferred securities. In addition to restricted core capital elements, core capital elements
          includes common stock and perpetual noncumulative preferred stock (including related
          surplus) and minority interests in banking subsidiaries. Interestingly, mandatory
          convertible preferred securities are specifically exempted from the 15% limitation for
          internationally active banking organizations, but are included in a separate 25% limitation
          for those institutions. The quantitative limits of the final regulations become effective as
          of March 31, 2009.

     •    SEC Staff to Issue Guidance on Stock Options and Off-Balance Sheet Transactions.
          It has been reported that the SEC Staff intends to provide guidance on accounting for
          stock options and to issue a report on off-balance sheet transactions. The guidance to be
          provided on accounting for stock options will focus on companies’ implementation of
          FASB Statement No. 123(R) relating to employee share-based payments, with particular
          emphasis on the valuation of options. The report on off-balance sheet transactions is
          expected to cover transactions related to pensions, leasing, derivative instruments and



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          securitizations. The SEC Staff expects to release the guidance and the report in early
          April.

     •    SEC “Seriously Considering” Allowing Non-US Companies More Time To Comply
          With Internal Controls Rules. According to a speech by SEC Commissioner Cynthia
          Glassman on February 24, 2005 in London, the SEC will give “serious consideration” to
          requests by non-US companies for a delay in enforcing compliance with the internal
          controls rules beyond the current extended deadlines. Commissioner Glassman also noted
          that the SEC and other US regulators are considering ways to make it easier for non-US
          companies to withdraw from the US markets and SEC regulation. The text of the speech
          is available on the SEC’s website at www.sec.gov/news/speech/spch022405cag.htm.

     •    CFTC Reaffirms Jurisdiction Over Foreign Currency Trading Practices. On
          February 28, 2005, the Commodity Futures Trading Commission (CFTC) announced that
          the US Solicitor General would not appeal an appellate court determination in CFTC v.
          Zelener that retail speculative foreign exchange transactions with a “rollover” feature are
          outside the CFTC’s enforcement jurisdiction. The CFTC had alleged that the defendants
          committed fraud in the sale of off-exchange foreign currency futures contracts, but the
          CFTC’s enforcement case was dismissed on the grounds that the transactions were
          unregulated spot transactions. The CFTC announcement advised that “we will continue to
          prove to each and every court that these perpetrators of fraud are engaging in illegal off-
          exchange forex futures with retail customers.”

February 2005

     •    NASD Changes Corporate Governance Rule as Applied to Non-US Issuers. A rule
          change proposed by the NASD allowing non-US private issuers to follow certain home
          country corporate governance practices is expected to become effective March 3, 2005.
          Under the prior rules, a non-US private issuer listed on the NASDAQ had to demonstrate
          that the NASDAQ’s requirements were contrary to the law or regulations of its home
          country and to request an exemption from NASDAQ. New NASDAQ Marketplace Rule
          4350(a)(1) instead requires that a non-US private issuer provide a letter from outside
          counsel in the home country which certifies that the issuer’s practice is consistent with its
          home country law. For more information, please see the NASDAQ website at:
          http://www.nasdaq.com/about/ForeignListingStandards021105.pdf.Financial Accounting

     •    Financial Accounting Standards Board (FASB) and International Accounting
          Standards Board (IASB) Attempt to Reconcile Rules on Business Combinations. It
          has been reported that the FASB is considering an amendment to FASB Statement No.
          109, Accounting for Income Taxes, to harmonize it with IASB’s International
          Accounting Standard 12, the set of rules applicable to recording deferred tax assets on
          business combinations. It has also been reported that IASB announced plans to make
          changes to International Accounting Standard 37, regarding contingent liabilities and
          assets, which changes are being inspired by FASB Statement 146 on accounting for costs
          associated with exit or disposal activities. and International Accounting Standards B
          Standards Bo


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     •    NYSE Corporate Governance Website Now Available To Listed Companies. On
          February 9, 2005, the NYSE launched its corporate governance website,
          eGovDirect.com, which is designed to simplify the process for submitting and
          administering NYSE-listed companies’ corporate compliance information, so that paper
          filings are no longer necessary. The website’s electronic system includes a feature that
          alerts listed companies with respect to their compliance and reporting deadlines as well as
          their compliance responsibilities, such as written affirmations, CEO certifications and
          shareholder meeting dates. The site also offers tools for assessing director independence
          and comparing corporate governance structures with those of industry peers. For more
          information, please see the NYSE website at
          http://www.nyse.com/about/listed/1107258305106.html.

January 2005

     •    PCAOB Releases Guidance on Internal Control Audits. It has been reported that on
          January 21, 2005 the PCAOB released more answers to commonly asked questions
          regarding audits of internal controls over financial reporting. For more information,
          please see the PCAOB website at
          http://www.pcaobus.org/Standards/Staff_Questions_and_Answers/index.asp.

     •    US Accounting Body Acts to Narrow Comfort Available Prior to Publication of
          Year End Financials. The Center for Public Company Audit Firms’ SEC Regulations
          Committee, successor to the American Institute of Chartered Accountants’ Securities
          Regulations Committee, has issued a white paper that would significantly limit the
          comfort that US accounting firms can provide on fourth quarter financial information or
          full year financial information that issuers publish prior to the publication of their audited
          annual financial statements, putting additional pressure on the due diligence process that
          issuers and underwriters perform in connection with securities offerings in the US capital
          markets. See http://www.aicpa.org/cpcaf/download/Comfort_Letter_Procedures.pdf.

December 2004

     •    SEC Adopts Rules for Asset-Backed Securities (ABS). On December 22, 2004, the
          SEC adopted comprehensive new rules that clarify ABS registration, disclosure and
          periodic reporting requirements under the 1933 and 1934 Acts. The rules, among other
          things, clarify the extent to which 1934 Act registration requirements apply to offerings
          of ABS, expand the types of ABS that may be offered on a delayed basis on Form S-3
          and introduce a new Form 10-D under the 1934 Act. Sidley Austin Brown & Wood llp
          has published a client alert that describes these new rules in detail. Please visit:
          www.sidley.com/news/news.asp. For most purposes, the compliance date for the new
          rules is August 15, 2005. Registered offerings of ABS commencing with an initial bona
          fide offer after December 31, 2005 and ABS that are the subject of such an offering must
          comply with the new rules and related forms. More information is also available on the
          SEC website at www.sec.gov.



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     •    NYSE and NASD Proposals on the IPO Process Published. It has been reported that
          on December 28, 2005, the SEC asked for public comment on rule proposals by the
          NYSE and NASD barring certain abuses in the allocation and distribution of shares in
          initial public offerings. The proposed rule seeks to address “spinning” (the allocation of
          hot IPO shares to executives of prospective investment banking clients in return for
          future business); unlawful “quid pro quo” arrangements, by which IPO shares are
          allocated in return for excessive compensation; the imposition of penalty bids on retail
          brokers whose clients immediately sell IPO shares in the aftermarket, but not on brokers
          servicing institutional clients; and the allocation of IPO shares in exchange for
          agreements to pay excessive commissions for unrelated securities transactions.

     •    SEC May Delay Effective Date of the Internal Control on Financial Reporting
          Requirements for Non-US Issuers. It has been reported that SEC Chairman Donaldson
          stated in a speech today at the London School of Economics that he has asked the SEC
          staff to consider whether to recommend the delay. Other SEC initiatives mentioned in the
          speech intended to address concerns of non-US issuers include consideration of a new
          approach to the process of deregistering and a proposal to allow first-time users of IFRS
          to reconcile their financial statements to US GAAP for only two years. The full text of
          the speech is available at the SEC’s website at
          www.sec.gov/news/speech/spch012505whd.htm.

     •    SEC Announces New Fee Rates. The SEC announced on December 9, 2004 that, in
          view of the appropriations bill signed into law on December 8, 2004, the fee rates
          charged for the registration and repurchase of securities and in connection with proxy
          solicitations and statements in corporate control transactions will decrease from
          US$126.70 per million to US$117.70 per million, effective December 13, 2004. Also,
          effective January 7, 2005, the Section 31 fee rate applicable to securities transactions on
          the exchanges and NASDAQ will increase to US$32.90 per million. The Section 31
          assessment on securities futures transactions will remain unchanged at US$0.009 per
          round turn transaction. For further information, please visit the SEC website at
          http://www.sec.gov.

     •    SEC Proposes Changes to Anti-manipulation Rules Concerning Securities
          Offerings. On December 9, 2004, the SEC published for comment proposed amendments
          to Regulation M under the 1934 Act, which governs the activities of underwriters,
          issuers, selling security holders and others in connection with offerings of securities. The
          proposed amendments are intended to prohibit certain activities by underwriters and other
          distribution participants that can undermine the integrity and fairness of the offering
          process, particularly with respect to allocations of offered securities. The proposal also
          seeks to enhance the transparency of syndicate covering bids and prohibit the use of
          penalty bids. Comments must be received by the SEC by February 15, 2005. For further
          information, please visit the SEC website at http://www.sec.gov.

     •    NASD Announces Fee Increase. The NASD filed with the SEC proposed amendments
          that would raise the maximum fee for filing documents pursuant to NASD Rule 2710 (the
          NASD Corporate Financing Rule) from US$30,500 to US$75,500 as of January 1, 2005.

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          The rate of the fee would remain US$500 plus 0.01% of the proposed maximum offering
          price. Any offering initially filed with the NASD prior to 12:00 pm E.S.T. on December
          30, 2004 will be subject to the current fee structure, notwithstanding that additional
          amendments to the filing may be made in 2005 and that the offering may not be declared
          effective by the SEC until 2005. Filings will not be accepted between 12:00 pm E.S.T. on
          December 30, 2004 and 8:00 am E.S.T. on January 3, 2005.

     • NASD Proposes Rule to Modernize and Improve Shelf Offering Regulation. On
          December 7, 2004, the SEC published for comment an NASD rule proposal amending
          the NASD’s Corporate Financing Rules as they relate to shelf registration statements.
          The proposed revisions to the Corporate Financing Rules maintain the current exemption
          from the filing requirements for certain shelf offerings, while streamlining the process for
          filing and reviewing shelf registration statements with the NASD in order to more clearly
          delineate the responsibilities of underwriters under the Corporate Financing Rules. The
          proposed rule changes also seek to more clearly define the level of underwriting
          compensation in shelf takedown transactions, depending upon whether the transaction is
          a principal or agency transaction, and whether the security is sold at a fixed price, at a
          discount to the market price, or at prevailing market prices. The proposed rule changes
          would also add a “market transaction exemption” from the filing requirements for
          transactions which meet certain requirements under the Rule that the NASD believes
          renders such transactions to be more like ordinary trading transactions than public
          offerings. The proposed rule changes are subject to comment for at least 45 days prior to
          their being approved by the SEC.

November 2004

     •    SEC Approves Changes in NYSE’s Corporate Governance Standards. On November
          3, 2004, the SEC approved proposed rule changes filed by the New York Stock Exchange
          (NYSE) to amend certain corporate governance provisions under Section 303A of the
          NYSE Listed Company Manual. Under the new rules, foreign private issuers are required
          to disclose significant ways in which their existing internal corporate governance
          practices (as opposed to home country practices) differ from the standards required of
          listed domestic companies. Among other things, the new rules allow CEOs of listed
          companies to include necessary qualifications in compliance certifications submitted to
          the NYSE and require listed companies to submit annual written affirmations with
          respect to compliance and interim written affirmations when board or committee
          composition changes. The new rules also mandate listed companies to identify the
          directors they have deemed independent and require audit committees to meet to examine
          and discuss their company’s financial statements and Management’s Discussion and
          Analysis.

October, 2004

     • SEC Requests Comment on Proposed Conforming Amendments to PCAOB Interim
          Standards. On October 5, 2004, the SEC requested public comment on rule proposals
          under Section 107(b) of the Sarbanes-Oxley Act. The proposals would amend the

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APPENDIX K


          existing professional standards adopted by the PCAOB with respect to internal controls
          and the audit of financial statements. The changes seek to remove inconsistencies
          between such standards and PCAOB Auditing Standard No. 2, titled “An Audit of
          Internal Control over Financial Reporting Performed In Conjunction with an Audit of
          Financial Statements.” The proposals would, among other things, clarify the
          circumstances in which an auditor is required to communicate the ineffectiveness of a
          Board’s audit committee to the full Board, as well as describe the circumstances in which
          a registered public accounting firm must receive prior audit committee approval before
          providing internal control related services to an issuer whose financial statements it
          audits. The release is available on the SEC’s website at
          http://www.sec.gov/rules/pcaob/34-50495.pdf.

     •    SEC Revises “Frequently Asked Questions” Relating to Management’s
          Responsibilities for Internal Control over Financial Reporting. On October 6, 2004,
          the SEC published revised “Frequently Asked Questions” relating to the SEC’s rules on
          “Management’s Report on Internal Control over Financial Reporting and Certification of
          Disclosure in Exchange Act Periodic Reports.” The revised publication is available on
          the SEC’s website at http://www.sec.gov/info/accountants/controlfaq1004.htm.

     •    SEC Proposes Amendments to Regulation M. On October 13, 2004, the SEC proposed
          amendments to Regulation M aimed to improve the integrity and fairness of the initial
          public offering (IPO) process. Regulation M is designed to prevent activities that could
          artificially influence the market for securities offerings and create, for example, the
          perception that the stock of an IPO was scarce or that significant demand existed. The
          proposed amendments would extend the “restricted period” for IPOs beyond the current
          five day period, require the underwriter to publicly disclose syndicate covering bids, and
          prohibit the use of penalty bids that may act as an undisclosed form of stabilization,
          among other new requirements. The SEC’s proposals also include a new rule under
          Regulation M that would prohibit the sale of shares in a “hot issue” to a customer based
          on the condition that the customer buy shares in a less desirable, or “cold” offering, or
          pay excessive trading commissions on unrelated securities transactions. Comments were
          required to be submitted within 60 days from the date of publication of the proposals in
          the Federal Register. For more information please visit the SEC website at www.sec.gov.

     •    SEC Proposal to Reform Securities Offering Process. On October 26, 2004, the SEC
          proposed modifications to the registration, communications, and offering processes under
          the 1933 Act. The proposals would revise rules regarding communications related to
          registered securities offerings, delivery of information to investors, and registration and
          other procedures in the offering and capital formation process. In the proposals, the SEC
          divides issuers into four categories: a non-reporting issuer, an unseasoned issuer, a
          seasoned issuer, and a well-known seasoned issuer. The most significant revisions would
          apply to well-known seasoned issuers. The proposals would also allow more information
          to reach investors by revising the “gun-jumping” provisions under the 1933 Act. The
          SEC is also expected to propose improvements to the registration procedures for shelf
          registrations, reform the prospectus delivery procedure and revise requirements for


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APPENDIX K


          disclosure in 1934 Act periodic reports. For more information please visit the SEC
          website at http://www.sec.gov.

August 2004

     •    SEC Approves Public Company Accounting Oversight Board (“PCAOB”)’s
          Proposed Audit Documentation Standard and an Amendment to Interim Auditing
          Standards. On August 25, 2004, the SEC approved the PCAOB’s proposed Auditing
          Standard No. 3, Audit Documentation, in accordance with the Sarbanes-Oxley Act of
          2002 and Section 19(b) of the 1934 Act. Auditing Standard No. 3 establishes general
          requirements for auditors when preparing and retaining documentation in connection with
          engagements conducted pursuant to PCAOB standards. In connection with proposed
          Auditing Standard No. 3, the SEC also approved the PCAOB’s proposed amendment to
          AU sec. 543, which is aimed at ensuring appropriate audit documentation when a
          principal auditor decides not to reference the work of other auditors that have performed
          part of the audit work. For further information, please visit the SEC website at
          www.sec.gov.

July 2004

     •    PCAOB Proposes Rule on Auditor Responsibility. On July 26, 2004, the Public
          Company Accounting Oversight Board (“PCAOB”) filed proposed rules with the SEC to
          clarify the definition of “auditor” and auditor responsibility for purposes of the Sarbanes-
          Oxley Act. While the term “auditor” is defined in accordance with existing PCAOB
          standards, the proposed rule on auditor responsibility describes more thoroughly the
          professional standards to which auditors should adhere in conducting audits. The
          proposed rule provides auditors with clearer guidelines as to how to interpret degrees of
          responsibility with regard to the use of conditional language such as “might” or “could.”
          For further information, please visit the SEC website at www.sec.gov.

     • New Rule Proposals Relating to Oversight of Non-US Registered Public Accounting
          Firms. On July 20, 2004, the PCAOB filed proposed rules with the SEC that would
          enable the PCAOB to oversee non-US public accounting firms that are registered with
          the PCAOB such that those firms would be subject to the Sarbanes-Oxley Act to the
          same extent as US public accounting firms. The proposed rules include requirements that
          such non-US firms submit to PCAOB inspections and investigations, and permit such
          firms to submit statements requesting the PCAOB to rely on non-US inspections. The
          proposals would also allow the PCAOB to assist non-US regulatory bodies with
          inspections and investigations. For further information, please visit the SEC website at
          www.sec.gov.

     •    Financial Accounting Standards Board (FASB) Task Force to Propose Change in
          Accounting Requirements for Contingent Convertible Bonds (CCBs). It was reported
          on July 6, 2004 that FASB’s Emerging Issues Task Force (the “Task Force”) will propose
          a rule to require companies to factor the shares that can be issued pursuant to CCBs into
          their calculation of diluted per-share earnings immediately upon issuance of the CCBs.

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          CCBs generally become convertible only when the underlying share price exceeds the
          conversion price by some predetermined percentage. Currently, companies are allowed to
          delay incorporating the dilution caused by shares underlying CCBs until that
          convertibility trigger occurs. The Task Force’s proposal would treat CCBs the same as
          standard convertible bonds, and would also require companies to restate prior diluted
          earnings per share to conform to the new rule.

     • New Proposed Rules Relating to Oversight of Non-US Registered Public Accounting
          Firms. On July 20, 2004, the Public Company Accounting Oversight Board (“PCAOB”)
          filed proposed rules with the SEC that would enable the PCAOB to oversee non-US
          registered public accounting firms so that such firms would be subject to the Sarbanes-
          Oxley Act to the same extent as US public accounting firms. The proposed rules include
          requirements relating to PCAOB inspections, submission of statements requesting SEC
          reliance on non-US inspections, and investigations of such firms. For further information,
          please visit the SEC website at www.sec.gov.

June 2004

     •    SEC Will Make Public Comment Letters and Responses. On June 24, 2004, the SEC
          announced that in order to increase the transparency of the comment process, comment
          letters to disclosure filings received by the SEC after August 1, 2004, and selected for
          review by the Division of Corporation Finance and the Division of Investment
          Management, and issuer responses thereto, will be made available to the public through
          the Commission’s Public Dissemination Service and on the SEC’s website. Such
          disclosure will occur not less than 45 days after the SEC staff has completed a filing
          review. As a result, public access to such letters and responses will be free of charge and
          will no longer require a Freedom of Information Act submission, except for the portions
          of response letters that are subject to confidential treatment. The SEC will require every
          company whose filings are selected for review to deliver what is known as a “Tandy”
          letter, representing that it will not use the SEC’s comment process as a defense in any
          securities related litigation against it. For further information, please visit the SEC
          website at www.sec.gov.

     •    PCAOB Adopts Audit Documentation Standard. On June 9, 2004 the PCAOB
          adopted an audit standard designed to improve the integrity of audits of public
          companies. The new standard requires auditors to document procedures performed,
          evidence obtained, and conclusions reached such that an experienced auditor, having no
          previous connection to the audit, could understand the work performed and the
          conclusions reached. The new standard was adopted pursuant to Section 103(a)(2)(A)(i)
          of the Sarbanes-Oxley Act, which authorizes the PCAOB to establish an audit standard
          requiring auditors to prepare and maintain back-up documentation related to any audit
          report for at least seven years. The PCAOB also adopted final rules relating to its
          oversight of non-US accounting firms that produce reports on US public companies. The
          SEC must approve all PCAOB rules before they can become effective. For more
          information, please visit the SEC website at www.sec.gov.


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     •    SEC Approves Standard for Internal Controls and Financial Statements Audits. On
          June 18, 2004, the SEC approved Release No. 2004-03, An Audit of Internal Control
          Over Financial Reporting Performed in Conjunction with an Audit of Financial
          Statements. The PCAOB proposed the standard in response to the SEC’s amendment of
          its rules under the 1934 Act pursuant to Section 404 of the Sarbanes-Oxley Act, which
          requires companies to include with their annual reports a report by management detailing
          the company’s internal control over financial reporting and an accompanying auditor’s
          report. The PCAOB standard applies specifically to the auditor’s involvement with the
          company and the auditor’s report. The standard is effective for accelerated filers with
          fiscal years ending on or after November 15, 2004, and for other filers for fiscal years
          ending on or after July 15, 2005. For more information please visit the SEC website at
          www.sec.gov.

     •    Comment Period Lengthened for Statement on Structured Finance. It has been
          reported that on June 18, 2004, the Federal Reserve Board, the Federal Deposit Insurance
          Corporation, the Office of the Comptroller of the Currency, the Office of Thrift
          Supervision and the SEC extended the comment period for 30 days on the Interagency
          Statement on Sound Practices Concerning Complex Structured Finance Activities. The
          extension was prompted by a letter request by eight trade associations representing
          financial institutions. The statement was originally published in the Federal Register on
          May 19, 2004. The deadline for comments was extended to July 19, 2004. For more
          information, please visit the SEC website at www.sec.gov.

May 2004

     •    SEC Announces Proposed Rules Affecting Asset-Backed Securities. The SEC has
          proposed rule and form changes that will affect the registration, disclosure and reporting
          requirements with respect to asset-backed securities. The proposals strive to update and
          provide increased guidance for current statutory obligations that will be more specific to
          asset-backed securities, as well as increase transparency. The SEC will solicit comments
          on the rule proposals for 60 days after their publication in the Federal Register. For
          further information, please visit the SEC’s website at www.sec.gov.

     •    Federal Agencies Request Public Comment on Statement Describing Structured
          Finance Activities. On May 14, 2004, the SEC, the Board of Governors of the Federal
          Reserve System, the Federal Deposit Insurance Corporation, the Office of the
          Comptroller of the Currency and the Office of Thrift Supervision requested comments on
          a statement describing internal controls and risk management policies in complex
          structured finance transactions. The agencies believe the statement will help financial
          institutions manage the risks of structured finance transactions, such as the risk to an
          institution’s reputation and the legal risk associated with dealing with a customer who
          uses the transaction to circumvent reporting requirements or evade tax liability. The
          statement identifies types of internal controls and procedures that would help to minimize
          such risks.

April 2004

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     •    Nations Create Tax Avoidance Task Force. It was reported on April 23, 2004 that an
          international task force is to be set up by the US, Australia, the UK and Canada. The task
          force is expected to focus on tax avoidance schemes used by businesses and take joint
          action against such schemes. It is anticipated that the task force will analyze corporate
          structures and tax avoidance schemes, as well as monitor industry trends and procedures
          of tax advisors. It is hoped that other countries, including France, will join to share
          techniques and information among the tax authorities.

     • SEC Issues No-Action Letter for europrospectus.com limited. On April 28, 2004, the
          SEC issued a no-action letter stating it would not recommend enforcement action if
          europrospectus.com limited (“Europrospectus”) made available a final prospectus for an
          international offering to its subscribers through the Europrospectus database. The SEC’s
          Division of Corporate Finance determined that Europrospectus’s making available
          prospectuses and related documents for international securities offerings to database
          subscribers would not be deemed “directed selling efforts” in the US within the meaning
          of Regulation S under the US Securities Act of 1933. Europrospectus is a company
          organized under UK law that provides an online database of information obtained from
          international markets.

March 2004

     •    SEC Proposal for First-Time Application of International Financial Reporting
          Standards (IFRS). The SEC is proposing to amend Form 20-F to allow any non-US
          private issuer registered with the SEC that has not previously published financial
          statements under IFRS to omit, in its first year of reporting under IFRS, financial
          statements for the earliest of the three financial years for which it would otherwise be
          required to file financial statements under current rules. In addition, the SEC is proposing
          to amend Form 20-F to require disclosures relating to exceptions from IFRS on which the
          issuer has relied and reconciliations from the accounting principles used by the issuer
          prior to adopting IFRS. The proposals are intended to facilitate the transition of non-US
          companies in adopting IFRS and to improve the quality of their financial disclosure. For
          further information please visit the SEC’s website at http://www.sec.gov.

     •    Public Company Accounting Oversight Board (PCAOB) Adopts Key Audit
          Standards on Public Companies’ Internal Controls. It has been reported that the
          PCAOB adopted an audit standard based on the Sarbanes-Oxley Act’s requirement that
          auditors review the effectiveness of public companies’ internal controls over financial
          reporting. The new audit standard requires auditors to look at the internal controls
          themselves, rather than merely review a company’s internally generated assessment of
          the controls.

January 2004

     •    SEC Approves a New Governance Structure for the NYSE. The SEC has
          unanimously approved a new governance structure for the NYSE. Under the new

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          governance structure, the job of NYSE chairman and chief executive officer shall be split
          in an effort to avoid concentrating the executive authority in one individual.

December 2003

     •    SEC Issues an Interpretive Release Providing MD&A Guidance. On December 19,
          2003, the SEC issued an interpretive release providing guidance on MD&A disclosure.
          To elicit more informative and transparent MD&A, the guidance reminds reporting
          companies (i) to provide a narrative explanation of company’s financial statements, (ii)
          to enhance the overall financial disclosure and provide the context within which financial
          information should be analyzed, and (iii) to provide information on the quality of, and
          potential variability of, company’s earnings and cash flow. In addition, the guidance
          encourages high level management involvement from an early stage in drafting
          disclosure documents.

     •    Public Company Accounting Oversight Board (PCOAB) Propose Rules Aimed at
          Making it Easier for Non-US Accounting Firms to Audit U.S. Public Companies. On
          December 9, 2003, the PCAOB proposed Rule 4011, which would allow a non-US audit
          firm to petition the PCAOB to rely on the appropriate non-US regulator in inspecting the
          non-US audit firm. The PCOAB’s reliance on non-US regulators would depend on the
          PCOAB’s assessment of the regulator’s independence and rigor of its oversight system.
          The PCOAB when making this assessment would look at a number of factors, including
          the adequacy and integrity of a home country’s regulatory system, the independence of
          the regulatory system’s operations from the auditing profession and the system’s
          historical performance.

     •    Treasury Revises Rules Outlining How Foreign Companies Should Share
          Information with the IRS. On Friday, December 12, 2003, the US Treasury Department
          issued revised rules outlining how non-US companies, when moving their headquarters
          offshore or being taken over by a foreign company, should inform the IRS and their
          shareholders. Previously on November 12, 2002, the Treasury issued temporary
          regulations allowing foreign companies to forego filing Forms 1099-Cap with
          shareholders who are clearing organizations, in the event the corporations elected to let
          the IRS publish the applicable information. The new rules expand what foreign
          corporations must share with the IRS if they choose to not file Forms 1099-Cap with
          shareholders who are clearing organizations. Both the previous and new rules are aimed
          at making it easier for brokers to get the necessary information needed to file a Form
          1099-B with their customers.

     •    SEC Proposes Amendments to the Rules of Practice and Related Provisions. On
          November 26, the SEC proposed for public comments amendments to its Rules of
          Practice and related provisions with respect to the Sarbanes-Oxley Act. These provisions
          relate to the reviewing of disciplinary actions of the Public Company Accounting
          Oversight Board (PCAOB) and the creation of “Fair Funds” in SEC administrative
          proceedings. The purpose of the proposed amendments is to help facilitate the
          understanding of the review process while making practice under the rules more efficient.


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     •    SEC Adopts New Disclosure Requirements. The new requirements are intended to
          enhance existing disclosure requirements specifically with regard to the means of
          communication between security holders and directors as well as operations of board
          nominating committees. The effective date for these requirements is January 1, 2004.

November 2003

     •    Sidley Austin Brown & Wood LLP has prepared a Corporate Alert describing the SEC’s
          proposed rule to allow security holders to nominate directors (SEC Release No. 34-
          48626). The proposed rules would require companies, in certain circumstances, to
          include in their proxy materials board candidates nominated by security holders. The
          rules would not create a right where state laws prohibit security holders from nominating
          directors. The rules are aimed at empowering long-term holders of significant interests in
          companies that have proven unresponsive to security holders’ concerns. For more
          information and to obtain a copy of this alert please visit http://www.sidley.com.

     •    SEC Approves NYSE and NASDAQ Rules Aimed at Strengthening Corporate
          Governance Standards for Public Companies. On November 4, 2003, the SEC
          announced that it has approved new rules proposed by the NYSE and NASDAQ that
          would strengthen corporate governance standards for public companies. The new rules
          establish a more precise definition of independence for directors, require a majority of
          members on listed companies’ boards to be truly independent and create a framework for
          improving director oversight over such issues as auditing, corporate governance, director
          nominations and compensation. Non-US issuers that may be exempted from these new
          rules by complying with comparable home country standards will nonetheless have to
          disclose the differences between those standards and these new rules.

     •    SEC Announces Fee Rate Changes for Fiscal Year 2004. On November 7, 2003, the
          SEC released a Fee Rate Advisory for fiscal year 2004 increasing the Section 6(b) fee
          rate applicable to the registration of securities, the Section 13(e) fee rate applicable to the
          repurchase of securities, and the Section 14(g) fee rate applicable to proxy solicitations
          and statements in corporate control transactions from the current rate of $80.90 per
          million to $126.70 per million. In addition, the new Section 31 fee rate for securities
          transactions on the exchanges and Nasdaq will be reduced from the current rate of $46.80
          per million to $39.00 per million. For further information, please visit the SEC website at
          http://www.sec.gov.

     •    SEC Amends Rule 10b-18’s “Safe Harbor” and Adopts New Provisions Relating to
          Issuer Repurchase Transactions. On November 10, 2003, the SEC issued a release
          adopting amendments to Rule 10b-18’s “safe harbor” from liability for manipulation
          when issuers repurchase their common stock in the market. The SEC also approved new
          disclosure provisions regarding issuer repurchases of equity securities. The release
          further notes that the following compliance dates will apply to the amendments that
          require periodic disclosure of all issuer repurchases: (1) the repurchase disclosure
          required by new Item 2(e) of Forms 10-Q and 10-QSB and new Item 5(c) of Forms 10-K
          and 10-KSB must appear in reports filed on these forms for periods ending on or after

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          March 15, 2004; (2) the disclosure required by new Item 16E of Form 20-F must appear
          in Form 20-F reports filed for fiscal years ending on or after December 15, 2004; (3) the
          repurchase disclosure required by new Item 8 and Item 10(a)(3) of Form N-CSR must
          appear in reports filed on this form by registered closed-end management investment
          companies for periods ending on or after June 15, 2004; and (4) a registered closed-end
          management investment company need not file reports on Form N-23C-1 with respect to
          any repurchases during any calendar month following June 2004. The new rule
          provisions will become effective 30 days after next week’s publication in the Federal
          Register. For further information, please visit the SEC website at http://www.sec.gov.

     •    New Income Tax Treaty between Japan and the United States. On November 6,
          2003, representatives of the United States and Japan signed a new income tax treaty.
          Generally, the new income tax treaty would completely eliminate source-country
          withholding taxes on certain income, including the elimination of withholding taxes on
          all royalty income, certain interest income (including interest income earned by financial
          institutions) and dividend income paid to parent companies with a controlling interest in
          the paying company. The new income tax treaty would also provide certain treaty
          benefits for investments made through partnerships, and includes provisions regarding
          the application of international standards for transfer pricing between affiliated
          companies operating in both countries. The new income tax treaty must be ratified by the
          Senate before it will enter into force.

     •    PCAOB Leaves Room for Joint Inspection of Non-US Audit Firms. On October 28,
          2003, the Public Company Accounting Oversight Board (“PCAOB”) announced that
          when regulating non-US audit firms, it will rely on inspections carried out by the
          appropriate foreign auditor oversight authorities. The board also announced that it intends
          to propose a rule permitting varying degrees of reliance on a non-US firm’s home
          country’s auditor oversight system based on a sliding scale that will measure the
          independence and reliability of the home country’s system. This announcement is a
          response to criticisms leveled by European Union officials that the Sarbanes-Oxley Act’s
          requirement that the accounting board establish a system to register and inspect public
          accounting firms imposes unnecessary regulatory burdens on non-US audit firms who are
          already tightly regulated at home.

October 2003

     •    SEC Proposes Creation of Framework for Supervising Investment Bank Holding
          Companies. On October 24, 2003, the SEC proposed rules which would implement
          Section 17(i) of the 1934 Act. The proposed rules would create a new framework
          through which the SEC could supervise investment bank holding companies. A
          supervised investment bank holding company would become subject to a process of
          supervision by the SEC and would be required to meet periodic reporting requirements.
          The SEC will solicit comment on the proposal for a period of 90 days following
          publication in the Federal Register. For further information, please visit the SEC website
          at http://www.sec.gov.



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     •    SEC Votes to Adopt Amendments to Rule 10b-18 of the 1934 Act. On October 22,
          2003, the SEC voted to adopt amendments to Rule 10b-18 of the 1934 Act. The rule
          provides issuers and their affiliated purchasers with a limited safe-harbor from
          manipulation liability if their repurchases of the issuer’s common stock are made in
          accordance with the rule’s provisions. The amendment, together with related
          amendments, will enhance the disclosure requirements of issuers who engage in
          repurchases of equity securities. These provisions will be effective 30 days from
          publication in the Federal Register. For further information, please visit the SEC website
          at http://www.sec.gov.

     •    Sidley Austin Brown & Wood LLP has prepared a memorandum summarizing several
          rulemaking initiatives approved by the SEC’s Division of Market Regulation on October
          22, 2003. The rulemaking initiatives include: (i) the adoption of rule amendments
          relating to issuer repurchase transactions; (ii) the proposal of amendments to several rules
          regulating short sales; and (iii) the issuance of an interpretive release regarding the SEC’s
          views on the use of “married put” transactions. To obtain a copy of the memorandum,
          please visit our website at www.sidley.com.

     •    Sidley Austin Brown & Wood LLP has prepared two memoranda summarizing the
          European Union Prospectus Directive. The first discusses the Prospectus Directive
          generally. The second, although primarily directed at US issuers, applies equally to all
          non-EU issuers and sets out issues and proposed solutions. To obtain a copy of the
          memoranda, please visit our website at www.sidley.com.

     •    Sidley Austin Brown & Wood LLP has prepared a memorandum describing new
          interpretations of the Sarbanes-Oxley Act by the SEC staff holding that the criminal
          certification requirement and certain internal control rules do not apply to annual reports
          of employee benefit plans on Form 11-K. The first position appears to reverse an earlier
          staff view. To obtain a copy of the memorandum, please visit our website at
          www.sidley.com.

September 2003

     •    SEC Proposes Rule Exempting Non-US Banks from Insider Lending Prohibition of
          1934 Act. On September 11, 2003, the SEC voted to propose a rule that would exempt
          certain non-US banks whose securities are registered with the SEC from the insider
          lending prohibition as set forth in Section 13(k) of the 1934 Act (which was added by
          Section 402 of the Sarbanes-Oxley Act of 2002). In general, non-US banks may qualify
          for the exemption (i) if the laws or regulations of the bank’s home jurisdiction require the
          bank to insure its deposits, (ii) if the laws or regulations of the bank’s home jurisdiction
          restrict the bank from making loans to its executive officers and directors unless the bank
          extends the loan on substantially the same terms as those prevailing at the time for
          comparable transactions by the bank with other persons who are not executive officers,
          directors or employees, and (iii) if, for any loan that, when aggregated with the amount of
          all other outstanding loans to a particular executive officer or director, exceeds
          US$500,000, a majority of the bank’s board of directors has approved the loan in

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          advance. Without such exemption, such non-US banks would be prohibited from making
          or arranging loans to their directors and executive officers unless the loans fall within the
          scope of certain specified exemptions. The proposal also includes an amendment to
          Form 20-F that would require a non-US bank issuer to provide the same disclosure as US
          banks under Regulation S-K regarding problematic loans to insiders.

     •    SEC Votes to Propose Amendment to Form F-6. On September 11, 2003, the SEC
          voted to propose an amendment to Form F-6, which is the form used to register ADRs
          under the 1933 Act. The proposed amendment would prohibit registration of
          unsponsored ADRs if the non-US issuer has separately listed those securities on a
          registered national securities exchange or automated inter-dealer quotation system of a
          national securities association.

     •    NYSE Seeks to Repeal its Delisting Rule. On September 3, 2003, the SEC issued a
          notice of filing of a NYSE proposal to repeal NYSE rule 500, which dictates the
          procedures a listed company must take in order to delist from the NYSE. The current
          rule calls for companies to obtain audit committee approval before delisting. Given that
          many NYSE-listed companies have majority independent boards, and that the NYSE
          anticipates adopting new corporate governance proposals that will require majority
          independent boards, the NYSE concluded that audit committee approval should no longer
          necessary for a voluntary delisting. In addition, in connection with the repeal of rule 500,
          the NYSE has proposed to amend section 806 of its listed company manual. This
          amendment will require that a company voluntarily delisting its shares obtain board
          approval and submit a copy of the board resolutions to the NYSE. The complete text of
          this rule proposal release should be available later this week on the SEC’s website at
          www.sec.gov.

August 2003

     •    SEC Adopts Filing Fee Account Rule. On August 19, 2003, the SEC adopted a final
          rule permitting unused filing fees to be returned to account holders. For current accounts,
          account statements will be sent to all account holders at the most current account address
          they have provided to the SEC. Funds in accounts inactive since January 1, 2003 and
          with balances exceeding $5.00 will be returned to the account holders. Subsequently,
          each account with activity within 180 calendar days will receive a monthly account
          statement and the SEC will return funds in accounts inactive for 180 calendar days.
          Filers may update their addresses online via the EDGAR filing website or by listing their
          change of address on and filing an amended Form ID. The SEC will not update a filer’s
          address based on changes to the address given on general SEC filings. The final rule will
          become effective on October 21, 2003. For further information, please visit the SEC
          website at http://www.sec.gov.

     •    Sidley Austin Brown & Wood LLP has prepared a client alert describing the SEC’s
          proposed amendments to the 1934 Act proxy rules that would impose additional
          disclosure requirements regarding nominating procedures and communications between



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          security holders and directors. Copies of the client alert are available at the Sidley
          Austin Brown & Wood LLP website http://www.sidley.com

     •    SEC Staff Responds to Questions Regarding Auditor Independence. On August 13,
          2003, the SEC’s Office of the Chief Accountant published responses to 35 frequently
          asked questions regarding the SEC’s rules on auditor independence. The responses are
          intended to help registrants and their audit committees, audit firms and other market
          participants understand and comply with the new rules. The Staff’s responses can be
          found on the SEC’s website at http://www.sec.gov.

     •    Sidley Austin Brown & Wood LLP has prepared a Market Regulation Alert which
          discusses the SEC’s approval of the adoption of several rule changes and amendments
          submitted by the National Association of Securities Dealers, Inc. and the New York
          Stock Exchange, Inc. Copies of this memorandum are available at the Sidley Austin
          Brown & Wood LLP website http://www.sidley.com.

     •    SEC Clarifies Financial Statement Filing and Customer Distribution Requirements
          for Broker-Dealers under Section 17 of the 1934 Act. On August 4, 2003, the SEC
          announced that broker-dealers that are not “issuers” (as such term is defined under the
          Sarbanes-Oxley Act of 2002) may, until January 1, 2005, file with the SEC and may send
          to customers certain financial information that has been certified by independent public
          accountants rather than by registered public accounting firms. The Sarbanes-Oxley Act
          of 2002 amended Section 17(e) of the 1934 Act so as to replace the words “an
          independent public accountant” with “a registered public accounting firm”, thereby
          essentially requiring auditors of “issuers”, including “issuer” broker-dealers, to register
          with the Public Company Accounting Oversight Board. However, because such
          amendment to the Sarbanes-Oxley Act of 2002 was unclear as to its application to
          broker-dealers that are not “issuers”, the SEC has clarified the rule as applied to such
          non-”issuer” broker-dealers.

     •    SEC Approves Self-Regulatory Organization Rules Governing Research Analysts.
          On July 29, 2003, the SEC announced new self-regulatory organization research analyst
          rules promulgated pursuant to the Sarbanes-Oxley Act of 2002. The rules: (1) separate
          compensation for research analysts from investment banking; (2) prohibit research
          analysts from contributing to communications soliciting investment banking business; (3)
          expand quiet periods for firms engaged in offerings and disallow “booster shot” research
          reports in and around lock-up expirations; (4) require added disclosure for fee
          arrangements between firms and issuers and added disclosure for client relationships
          between firms, affiliates of such firms, and issuers; (5) require customer notification in
          final reports when firms conclude their research coverage of covered companies; (6)
          prohibit firms from punishing or threatening research analysts for making comments that
          may negatively affect firms’ investment banking business; and (7) impose registration,
          qualification, and continuing education requirements on research analysts.




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July 2003

     •    SEC Released Staff Study on Adopting Principles-based Accounting System. On
          July 25, 2003, the SEC released a staff study recommending the development of
          accounting standards utilizing a principles-based approach. The SEC noted that this
          “objectives-oriented” approach will provide sufficient detail and structure and a
          framework with enough detail to be operational. The study has been submitted to the
          Committee on Banking, Housing, and Urban Affairs of the US Senate and the Committee
          on Financial Services of the US House of Representatives. For further information,
          please visit the SEC website at http://www.sec.gov.

     •    EDGAR Capabilities Expanded to Incorporate New Requirements. The SEC issued
          interim guidance on March 21, 2003 in Release No. 33-8212, March 27 in Release No.
          33-8216 and June 5 in Release No. 33-8238 providing guidance on how to comply with
          Items 11 and 12 to Form 8-K and Sections 302 and 906 of the Sarbanes-Oxley Act of
          2002 while EDGAR was being modified to incorporate the new requirements. Item 11 of
          Form 8-K requires disclosure of pension fund blackout periods and Item 12 of Form 8-K
          requires certain disclosure when a registrant makes a public release disclosing material,
          non-public information regarding results of operations or financial condition for a fiscal
          period. Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 require certification of
          an issuer’s financial reports by certain corporate officers. Beginning on Monday, July 28,
          2003, registrants will be able to file Item 11 disclosures and furnish Item 12 disclosures
          on EDGAR; and they will able to file Section 302 certifications and to furnish or file
          Section 906 certifications as Exhibits 31 and 32, respectively, to their periodic reports on
          EDGAR. Therefore, registrants may no longer rely on the interim guidance. For further
          information, please visit the SEC website at http://www.sec.gov/info/edgar.shtml.

     •    SEC Adopts Updated Electronic Data Gathering and Retrieval System (EDGAR)
          Filer Manual. On July 22, 2003, the SEC adopted revisions to the EDGAR Filer
          Manual, designed primarily to improve the functionality of the SEC’s Online Forms
          website. The website is currently used for preparing and submitting ownership reports,
          Forms 3, 4, 5 and their amendments, Forms 3/A, 4/A and 5/A. The improvements
          include the ability to list holdings of securities separately from securities transactions and
          facilitating the reporting of gift, phantom stock plan and similar transactions. For further
          information, please visit the SEC website at http://www.sec.gov.

     •    SEC’s Acting International Director Reportedly Hints at Expanded Leeway for
          Non-US Auditors. It has been reported that, in a speech of July 8, 2003, the SEC’s
          acting international director, Ethiopis Tafara, hinted that the Public Company Accounting
          Oversight Board (PCAOB) would provide non-US auditors, who examine the financial
          statements of non-US companies listed in the United States, with greater leeway in the
          PCAOB’s enforcement of the Sarbanes-Oxley Act. Mr. Tafara also mentioned in his
          speech that the PCAOB would cooperate with non-US accounting regulators regarding
          the monitoring of non-US auditors.




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     •    Sidley Austin Brown & Wood LLP has prepared a memorandum describing certain rules
          adopted by the SEC under Section 303 of the Sarbanes-Oxley Act of 2002, which became
          effective June 27, 2003. The new rules generally prohibit officers and directors of a
          public company and any other person “acting under the direction” of such officers or
          directors from exerting improper influence over the accountants auditing the company’s
          financial statements. Copies of the memorandum are available on the Sidley Austin
          Brown & Wood LLP web site at http://www.sidley.com.

June 2003

     •    International Accounting Standards Board Votes to Allow Fair Value Macro Hedge
          Accounting. It has been reported that the International Accounting Standards Board
          voted on June 18, 2003 to allow the use of fair value hedge accounting for certain
          derivatives-based hedging transactions. The method, referred to as fair value macro
          hedge accounting, is used in accounting for derivatives-based hedging transactions that
          are effected in response to adverse changes in interest rates. Fair value macro hedge
          accounting is not allowed in the United States under FASB Statement No. 133, which
          governs accounting for hedging transactions and derivatives.

     •    NASD Declares Instant Messaging Subject to Rules Governing Written
          Communications. The NASD issued a notice to members on June 18, 2003 advising
          that communications with customers via instant messaging are considered written
          communications, which must comply with NASD rules regarding sales literature and
          correspondence, including the three-year retention requirement.

     •    SEC Publishes List of Foreign Issuers Claiming Exemption from Registration.
          Foreign private issuers that have total assets exceeding $10,000,000 and that have a class
          of equity securities with at least 500 holders of record, with at least 300 of such holders
          residing in the United States, must register under Section 12(g) of the 1934 Act. Such
          issuers are exempted from the registration requirements of Section 12(g) if they comply
          with the requirements of Rule 12g3-2(b), which are intended to allow investors to inform
          themselves about the issuer. The SEC has published a list of the foreign issuers that have
          claimed exemptions from the requirements of 12(g) pursuant to Rule 12g3-2(b). For a
          list of such foreign issuers or for further information, please visit the SEC website at
          http://www.sec.gov/rules/other/34-48063.htm.

     •    SEC Releases Answers to Frequently Asked Questions (FAQs) Relating to Use of
          Non-GAAP Financial Information. On June 13, 2003, the SEC published its response
          to thirty-three FAQs about the appropriate use of non-GAAP financial measures. These
          answers address various questions about the previously-adopted rules on the inclusion of
          non-GAAP financial information in public disclosure. Among other topics, the FAQs
          respond to issues involving incorporation by reference, business combination
          transactions, definitional clarifications and non-US private issuers. For further
          information on the adoption of rules relating to the use of non-GAAP financial
          information in public disclosure and the responses to FAQs in relation thereto, please



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          refer to the January 29, 2003 edition of Legal Update or visit the SEC website at
          http://www.sec.gov.

     •    SEC Adopts Final Rules on Management’s Reports on Internal Control Over
          Financial Reporting. On June 5, 2003 in accordance with Section 404 of the Sarbanes-
          Oxley Act of 2002, the SEC published final rules requiring reporting companies, other
          than registered investment companies, to include in the annual report a management
          report, attested to by the company’s auditors, on the effectiveness of the company’s
          internal control over financial reporting. Management is also required to report any
          material changes to the company’s internal control over financial reporting for the fiscal
          period covered by a company’s quarterly or annual filings, as the case may be. Internal
          control over financial reporting is defined as a process designed to provide reasonable
          assurance regarding the reliability of financial reporting and the preparation of financial
          statements for external purposes in accordance with GAAP. Companies that are
          “accelerated filers,” other than non-US private issuers, will be required to comply with
          the new rules for fiscal years ending on or after June 15, 2004. All other companies,
          including non-US private issuers, will be required to comply for their fiscal years ending
          on or after April 15, 2005. As reported in the June 4 Legal Update, the rules were
          adopted by vote of the SEC commissioners on May 27, 2003. For further information,
          please visit the SEC website at http://www.sec.gov/rules/final/33-8238.htm.

     •    SEC Changes Certification Requirements of Section 302 of the Sarbanes-Oxley Act
          of 2002. On June 5, 2003, the SEC adopted amendments to the certification requirements
          of Section 302 of the Sarbanes-Oxley Act of 2002 to conform the certification to recently
          adopted final rules requiring a management report on internal control over financial
          reporting. For further information, please visit the SEC website at http://www.sec.gov.

     •    SEC Reviews and Seeks Comments on the Role of Credit Rating Agencies in the
          Securities Market. On June 4, 2003, the SEC issued a concept release as part of its
          review of the role of credit rating agencies under federal securities law to solicit
          comments on various issues, including the oversight of credit rating agencies and the
          continued use of credit ratings for regulatory purposes. For further information, please
          visit the SEC website at http://www.sec.gov.

     •    SEC Votes to Adopt Internal Control Provisions to Implement Requirements of
          Section 404 of the Sarbanes-Oxley Act of 2002. On May 27, 2003, the SEC adopted
          rules to implement requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
          Under the new rules, each company’s annual report must contain management’s annual
          internal control report, consisting of management’s assessment of the effectiveness of
          internal controls as of the end of the company’s most recent fiscal year, as well as
          statements regarding management’s responsibility for establishing and maintaining
          adequate internal control over financial reporting, identifying the framework used by
          management to evaluate the effectiveness of such internal control and affirming that the
          company’s auditor has issued an attestation report on management’s assessment. As part
          of its assessment, management must disclose any material weaknesses in the company’s
          internal control procedures. If there are any material weaknesses, management will not

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          be able to conclude that their company’s internal controls are effective. In addition, the
          SEC voted to adopt amendments that require companies to perform quarterly assessments
          of changes that have materially affected or that may materially affect the company’s
          internal control over financial reporting. Companies that are “accelerated filers,” other
          than non-US private issuers, will be required to comply with the new rules for fiscal years
          ending on or after June 15, 2004. All other companies, including non-US private issuers,
          will be required to comply for their fiscal years ending on or after April 15, 2005. For
          further information, please visit the SEC’s website at
          http://www.sec.gov/news/press/2003-66.htm.

     •    SEC Votes to Adopt New Rule 3a-8 under the 1940 Act to Provide Safe Harbor for
          Research and Development Companies from Definition of “Investment Company.”
          On May 27, 2003, the SEC voted to adopt new Rule 3a-8 under the 1940 Act to provide a
          nonexclusive safe harbor from the definition of “investment company” in Section 3(a)(1)
          of the 1940 Act for certain eligible research and development companies.

     •    Sidley Austin Brown & Wood LLP has prepared a memorandum discussing employee
          benefit plan certification requirements under Section 906 of the Sarbanes-Oxley Act.
          While the SEC has not given an authoritative statement as to whether an issuer that is
          required to file Annual Reports on Form 10-K is required to have their chief executive
          officer or chief financial officer certify employee benefit plans and their financial
          statements filed on Form 11-K, Alan Beller of the SEC’s Division of Corporation
          Finance stated the SEC is “tending toward” the conclusion that Section 906 applies to
          Form 11-K. Until an authoritative statement is made, Sidley Austin Brown & Wood LLP
          believes that Section 906 certifications should accompany Annual Reports on Form 11-K.
          Copies of this memorandum are available on the Sidley Austin Brown & Wood LLP
          website at http://www.sidley.com.

May 2003

     •    SEC Approves Public Company Accounting Oversight Board Chairman. The SEC
          announced on May 21, 2003 that it has unanimously approved the appointment of
          William J. McDonough as Chairman of the Public Company Accounting Oversight
          Board. Mr. McDonough has served as the President of the Federal Reserve Bank of New
          York since 1993. He will officially begin work as Chairman on June 11, 2003.

     •    SEC Issues Final Rule on Improper Influence on Conduct of Audits. As required by
          Section 303 of the Sarbanes-Oxley Act of 2002, the SEC has issued final Rule 13b2-
          2(b)(1) of Regulation 13B-2 under the 1934 Act prohibiting officers and directors of an
          issuer (or those acting under their direction) from taking any action to coerce, manipulate,
          mislead, or fraudulently influence the auditor of the issuer’s financial statements if that
          person knew or should have known that such action could result in rendering the financial
          statements materially misleading. For further information, please refer to the May 2,
          2003 edition of Legal Update or visit the SEC’s website at http://www.sec.gov.

     •    FASB Issues New Accounting Rules. On May 15, 2003, the FASB issued FASB 150 –
          Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
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          Equity, that generally requires the following three types of instruments to be treated as
          liabilities: (i) mandatorily redeemable shares; (ii) put options, forward purchase contracts,
          and similar instruments that require or may require the issuer to repurchase a portion of
          shares when presented with cash or other assets; and (iii) liabilities that can be settled
          with shares, the monetary value of which is fixed, tied to a variable such as a market
          index, or increases as the value of shares goes down or vice-versa. Most of the
          provisions will be effective for all financial instruments entered into or modified after
          May 31, 2003 and otherwise may be applied for at the start of the first interim period
          beginning after June 15, 2003. For nonpublic entities, mandatory redeemable financial
          instruments are subject to the provisions prescribed in FASB 150 for the first fiscal
          period starting after December 15, 2003.

     •    Egyptian Stock Exchanges Are Regulation S ‘Designated Offshore Securities
          Markets’. In a no-action letter dated April 16, 2003, the staff of the Office of
          International Corporate Finance of the SEC granted a request by the Cairo and
          Alexandria Stock Exchange to be “designated offshore securities markets” for purposes
          of Regulation S under the U.S. Securities Act of 1933.

     •    SEC Announces Fee Changes. On April 30, 2003, the SEC announced that the fee rate
          will be increased to US$126.70 per million from the current rate of US$80.90 per million
          for each of the following: (i) registering securities under Section 6(b) of the 1933 Act; (ii)
          repurchasing securities under Section 13(e) of the 1934 Act; and (iii) proxy solicitations
          and information statements in corporate control transactions under Section 14(g) of the
          1934 Act. The fee changes will become effective on the later of October 1, 2003 or 5
          days after the SEC receives its fiscal 2004 regular appropriation. Further, the fee rate
          under Section 31 of the 1934 Act for transactions on the US national securities exchanges
          or NASDAQ will also be decreased to the rate of US$39.00 per million from the current
          rate of US$46.80 per million. These fee changes will become effective on the later of
          October 1, 2003 or 30 days after the SEC receives its fiscal 2004 regular appropriation.
          For further information, please visit the SEC’s website at http://www.sec.gov.

     •    SEC Adopts Updated EDGAR Filing Manual. On April 30, 2003, the SEC announced
          its adoption of a revised EDGAR filing manual which incorporates recent changes to the
          electronic filing requirements mandated by the SEC. A new online forms website has
          also been created to facilitate the creation and submission of certain forms now required
          to be filed electronically. The new online forms website can be found at
          https://www.onlineforms.edgarfiling.sec.gov. For further information, please visit the
          SEC’s website at http://www.sec.gov.

     •    Sidley Austin Brown & Wood LLP has prepared a client alert discussing the SEC’s
          adoption of final rules for the mandatory electronic filing and posting of reports required
          under Section 16 of the 1934 Act. Copies of this client alert are available on the Sidley
          Austin Brown & Wood LLP website at http://www.sidley.com.

     •    Sidley Austin Brown & Wood LLP has prepared a client alert discussing the SEC’s
          adoption of a final rule requiring US national securities exchanges and US national

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          securities associations to prohibit the listing of any security of any company that is not in
          compliance with certain standards regarding audit committees. Copies of this client alert
          are available on the Sidley Austin Brown & Wood LLP website at http://www.sidley.com.

April 2003

     •    SEC to Continue Recognizing Pronouncements of the Financial Accounting
          Standards Board (“FASB”). On April 25, 2003, in response to Section 108 of the
          Sarbanes-Oxley Act of 2002, the SEC announced that it will continue to recognize the
          pronouncements of the FASB for the purpose of filings with the SEC. The FASB
          provides guidance on accounting and financial reporting standards. For further
          information, please visit the SEC website at http://www.sec.gov.

     •    The Public Company Accounting Oversight Board (“PCAOB”) Appropriately
          Organized. On April 25, 2003, in accordance with Section 101(d) of the Sarbanes-Oxley
          Act of 2002, the SEC announced that the PCAOB was appropriately organized and
          prepared to enforce compliance with the Sarbanes-Oxley Act of 2002. For further
          information, please visit the SEC website at http://www.sec.gov.

     •    SEC Requires Insiders to Electronically File Disclosure Statements. On April 24,
          2003, the SEC voted to require officers, directors and principal holders to electronically
          file disclosure statements required by Section 16(a) of the 1934 Act. This requirement
          shall apply to Forms 3, 4 and 5. To facilitate electronic filing of these disclosure
          statements, a new on-line filing system has been created. In addition, these disclosure
          statements will be required to be posted on the issuer’s corporate website. The new rules
          and amendments implementing the requirements of Section 16(a)(4) of the 1934 Act, as
          amended by Section 403 of the Sarbanes-Oxley Act of 2002, become effective on June
          30, 2003. For further information, please visit the SEC website at http://www.sec.gov.

     •    SEC Adopts Rules Prohibiting Improper Influence of Auditors. On April 24, 2003,
          in accordance with Section 303 of the Sarbanes-Oxley Act of 2002, the SEC adopted
          amendments to Regulation 13B2 which will prohibit an issuer’s officers and directors, or
          their agents, from improperly influencing the auditor of such issuer’s financial
          statements. These amendments will become effective 30 days after publication in the
          Federal Register. For further information, please visit the SEC website at
          http://www.sec.gov.

     •    Correction Regarding Acceleration of Periodic Filing Deadlines and Disclosure. On
          September 5, 2002, the SEC adopted changes to its rules regarding the timeliness of
          financial information in quarterly and annual reports filed by certain US accelerated
          filers. The amendments shortened the filing deadlines from 90 to 60 calendar days after
          period end for annual reports and from 45 to 35 calendar days for quarterly reports. The
          new deadlines are scheduled to be phased in over three years. On April 8, 2003, the SEC
          issued a clarification that the phase-in periods for accelerated filers who need to update
          interim information pursuant to Rules 3-01 and 3-12 of Regulation S-X require interim
          information to be filed within 130 days after the end of the registrant’s fiscal year for
          fiscal years ending on or after December 15, 2003 through December 14, 2004. Interim
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          information is required within 125 days after the end of a registrant’s fiscal year for fiscal
          years ending on or after December 15, 2004.

     •    Temporary Exemption of Banks, Savings Associations and Savings Banks from the
          Definition of “Broker” under Section 3(a)(4) of the 1934 Act Extended. On April 8,
          2003, the SEC announced that it would amend existing interim final rules that define
          certain terms used in, and grant additional exemptions from, the amended definitions of
          “broker” and “dealer” under the Gramm-Leach-Bliley Act (GLBA). As a result of this
          decision, the SEC also announced that it will extend the exemption of banks, savings
          associations and savings banks from the amended definition of “broker” under GLBA
          until November 12, 2004, so as to give the SEC time to fully consider comments received
          and amend the rules as necessary.

     •    Foreign Financial Auditors Warn the Public Company Accounting Oversight Board
          (PCAOB) of Legal Obstacles. It has been reported that non-US financial regulators
          warned the PCAOB that laws in some countries may preclude the PCAOB from
          registering and inspecting non-US auditors as it has proposed pursuant to the Sarbanes-
          Oxley Act. The PCAOB voted to propose to require both non-US and US accounting
          firms to register with the PCAOB if they audit a US public company. For further
          information, please refer to the March 5, 2003 edition of Legal Update or visit the SEC
          website at http://www.sec.gov. PCAOB Acting Chairman Charles D. Niemeier and SEC
          Chairman William H. Donaldson reportedly want to hear about the regulatory structures
          in place in such countries, the special problems registration would pose for non-US
          auditors, the specific conflicts with non-US laws and suggestions for addressing these
          problems. PCAOB member Daniel Goelzer noted that the PCAOB will need to notify
          the SEC by April 26, 2003 whether it decides to modify the requirements for non-US
          Auditors. April 26, 2003 is also the deadline for the SEC to determine whether the
          PCAOB can carry out its duties under the Sarbanes-Oxley Act.

     •    NYSE Abandons Plan Restricting Analysts Communications with Media. It has
          been reported that the NYSE has discarded its plan to prevent analysts from talking to
          newspapers, television networks and other media outlets that do not disclose that the
          analysts or their employers have possible conflicts of interest regarding the companies
          that the analysts rate. Instead, the analysts would be required to disclose possible
          conflicts of interest but would not be sanctioned if the media does not report the conflicts.
          Such conflicts include bids for investment banking and other business related to the
          securities industry.

     •    Sidley Austin Brown & Wood LLP has prepared a memorandum summarizing final
          regulations recently issued by the IRS that require certain parties to maintain a list of
          specified persons participating in, and other information relating to, a wide variety of
          transactions entered into after February 27, 2003.

     •    SEC Adopts Rules on Exchange Listing Standards Related to Issuers’ Audit
          Committees. On April 1, 2003, the SEC adopted rules that would prohibit US national
          security exchanges and US national securities associations from listing any security of an

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          issuer failing to comply with the SEC rules relating to minimum audit committee
          standards, as promulgated under the Sarbanes-Oxley Act of 2002. These requirements
          seek to assure the independence and supervisory power of audit committees, and apply to
          both US and non-US issuers. Listed US issuers are required to comply with the rules by
          the date of their first annual shareholders’ meeting after January 15, 2003, and in no
          event later than October 31, 2004. Non-US issuers are required to comply with the rules
          by July 31, 2005. For further information, please refer to the January 14, 2003 edition of
          Legal Update or visit the SEC website at http://www.sec.gov.

     •    SEC Provides Interim Guidance for Filers Reporting Pension Fund Blackout
          Periods and Non-GAAP Financial Data. On March 27, 2002, the SEC issued a release
          providing interim guidance to registrants required publicly to disclose information under
          recently-adopted Item 11 and Item 12 of Form 8-K. New Item 11 requires disclosure of
          pension fund blackout periods and new Item 12 requires specified disclosure when a
          registrant publicly releases material non-public information relating to the registrant’s
          results of operations or financial condition for a fiscal period. As the changes to the
          SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system necessary to
          accommodate the new requirements are not yet complete, the SEC has advised registrants
          to continue to disclose the information required by Item 11 under Item 5 (Other
          Information) of the first quarterly Form 10-Q filing after commencement of the blackout
          period, and the information required by Item 12 under Item 9 (Regulation FD Disclosure)
          of Form 8-K. The interim guidance is to remain in effect until the EDGAR system is
          adjusted to permit the filing of such information under the appropriate Item 11 or Item 12
          designation. For further information, please visit the SEC website at http://www.sec.gov.

March 2003

     •    NYSE Proposes Revised Listing and Maintenance Standards for Corporate
          Governance. On March 12, 2003, the NYSE published a proposal relating to director
          independence standards for listed companies, implementing requirements of the
          Sarbanes-Oxley Act. Under the rule, NYSE-listed companies would be required to have
          a majority of independent directors. The rule provides for an exception from this
          requirement for controlled companies as long as the company has a minimum three-
          person audit committee composed entirely of independent directors. The NYSE
          specifically noted that, as applied to non-US private issuers, its corporate governance
          standards generally defer to home-country practices, but that the NYSE would require
          non-US private issuers to comply with the independent audit committee requirements set
          forth in Section 301 of the Sarbanes-Oxley Act and SEC rule adopted thereunder.

February 2003

     •    SEC Recognizes New Rating Agency. It has been reported that the SEC has recognized
          Dominion Bond Rating Service Ltd., a privately-owned Toronto rating agency, as a
          fourth credit-ratings company. This recognition marks the first time since 1997 that a
          new credit-ratings company will compete with the three others currently recognized,
          Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. In addition, the SEC is
          reportedly considering requests for recognition from four other credit-ratings companies
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          and plans to issue a release outlining the ratings industry practices that may be in need of
          regulation.

     •    SEC Adopts Final Rule on Analyst Certification. On February 20, 2003, the SEC
          adopted Regulation Analyst Certification (“Regulation AC”). Regulation AC seeks to
          ensure the integrity of research reports by requiring that all such reports issued by
          brokers, dealers and certain persons associated with a broker or dealer include a clear and
          prominent certification by the analyst preparing the report that the report contains
          statements accurately reflecting the analyst’s personal views and a disclosure of whether
          the analyst received compensation in connection with the recommendations contained in
          the report. Further, broker-dealers must obtain periodic certifications in connection with
          analysts’ public appearances. Non-US persons are covered by Regulation AC, unless
          such non-US person is located outside of the US and is not associated with a registered
          broker-dealer that prepares and provides research on foreign securities to major US
          institutions in the US in accordance with the provisions of Rule 15a-6(a)(2). For further
          information please visit the SEC website at http://www.sec.gov.

     •    William Donaldson Sworn in as Chairman of the SEC. On February 19, 2003,
          William Donaldson was sworn in as Chairman of the SEC. William Donaldson has
          formerly served as a Chairman of both the New York Stock Exchange and Aetna Inc. He
          also co-founded the brokerage firm Donaldson, Lufkin & Jenrette. Donaldson said his
          first priority would be selecting a Chairman for the Public Company Accounting
          Oversight Board (the “PCAOB”). The PCAOB was created by the Senate in July 2002 to
          police the accounting industry and has been without a permanent Chairman since its
          inception.

     •    SEC Modernizes and Simplifies Depository Requirements for Investment
          Companies. On February 13, 2003, the SEC adopted amendments to Rule 17f-4 under
          the Investment Company Act of 1940. Under Rule 17f-4, securities owned by a
          registered management investment company may be deposited into a securities
          depository. The amendments modernize and simplify Rule 17f-4 to reflect developments
          in custody practices and commercial law. In particular, the amendments permit more
          investment companies to rely on the rule and remove certain custodial compliance
          requirements. Under the new amendments, these latter custodial compliance
          requirements have been replaced by a standard of due care in accordance with reasonable
          commercial standards. The amendments are effective on March 28, 2003. For further
          information please visit the SEC website at http://www.sec.gov.

     •    Sidley Austin Brown & Wood LLP has prepared a memorandum summarizing the
          SEC’s new rule regarding the standards of professional conduct for attorneys “appearing
          or practicing” before the SEC. The new rule implements Section 307 of the Sarbanes-
          Oxley Act of 2002. Copies of this memorandum are available on the Sidley Austin
          Brown & Wood LLP website at http://www.sidley.com.

     •    SEC Amends Definition of “Dealer” for Banks. On February 6, 2003, the SEC
          approved measures affecting banks and their activities as dealers under the Gramm-

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          Leach-Bliley Act of 1999. Previously, the rules had removed the complete exception of
          banks from the definitions of “broker” and “dealer” and had instead provided banks with
          certain exceptions from those definitions. Under the new rules, the SEC has modified
          certain terms used in the Asset-Backed Exception to Dealer registration, amended the
          definition of “dealer” for banks engaged in “riskless principal” transactions, and created a
          new exception from registration for certain bank securities lending transactions with
          qualified investors. In addition, the SEC voted to extend the exemption from rescission
          liability under Section 29 of the 1934 Act for contracts entered into by banks in a dealer
          capacity through March 31, 2005.

     •    Sidley Austin Brown & Wood LLP has prepared a memorandum summarizing the
          SEC’s new rules and regulations implementing the pension plan blackout trading
          prohibition on directors and executive officer’s and the related notification provisions of
          the Sarbanes-Oxley Act of 2002. Copies of this memorandum are available on the Sidley
          Austin Brown & Wood LLP website at http://www.sidley.com.

     •    Sidley Austin Brown & Wood LLP has prepared a memorandum summarizing the
          SEC’s new rule on record retention for audits and reviews of a company’s financial
          statements under Section 802 of the Sarbanes-Oxley Act of 2002. The rule requires
          auditors to retain records related to its audits and reviews of a companies financial
          statements for seven years. Copies of this memorandum are available on the Sidley
          Austin Brown & Wood LLP website at http://www.sidley.com.

     •    Sidley Austin Brown & Wood LLP has prepared a memorandum summarizing the
          SEC’s new rules relating to disclosure of off-balance sheet arrangements and contractual
          obligations required by Section 401(a) of the Sarbanes-Oxley Act of 2002. The new
          rules add provisions to the 1934 Act and require disclosure to be made in the
          management discussion and analysis of financial condition and results of operations
          section in the annual and quarterly reports. Copies of this memorandum are available on
          the Sidley Austin Brown & Wood LLP website at http://www.sidley.com.

     •    Sidley Austin Brown & Wood LLP has prepared a memorandum summarizing the
          SEC’s new rules designed to “enhance the independence of auditors that audit and review
          financial statements and prepare attestation reports” filed with the SEC. Copies of this
          memorandum are available on the Sidley Austin Brown & Wood LLP website at
          http://www.sidley.com.

     •    SEC Issues Final Rules Relating to Auditor Independence. On January 28, 2003, in
          accordance with the Sarbanes-Oxley Act, the SEC posted final rules regarding auditor
          independence and disclosure. For a more detailed explanation, please refer to the January
          24, 2003 edition of Legal Update or visit the SEC website at http://www.sec.gov.

     •    Sidley Austin Brown & Wood LLP has prepared a memorandum summarizing the
          SEC’s new rules on disclosures relating to audit committee financial experts and codes of
          ethics. Copies of the memorandum are available on the Sidley Austin Brown & Wood
          LLP website at http://www.sidley.com.


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     •    Sidley Austin Brown & Wood LLP has prepared a memorandum summarizing the
          SEC’s new rules and rule amendments concerning public companies’ use of non-
          GAAP financial measures. Copies of the memorandum are available on the Sidley
          Austin Brown & Wood LLP website at http://www.sidley.com.

January 2003

     •    SEC Votes to Adopt Regulation Defining the Presentation of Non-GAAP Financial
          Information. On January 15, 2003 and in accordance with the Sarbanes-Oxley Act, the
          SEC voted to adopt new Regulation G which would prohibit material misstatements or
          omissions that would make the presentation of non-GAAP financial measures
          misleading. Regulation G would also require a quantitative reconciliation of any
          difference between the non-GAAP financial measures presented and comparable
          financial measures conforming with GAAP. A limited exception would exist for non-US
          private issuers whose securities are listed and whose non-GAAP financial information is
          provided outside of the United States. For further information please visit the SEC
          website at http://www.sec.gov.

     •    SEC Votes to Adopt Amendments to SEC Filing Requirements and Amends Forms
          20-F and 8-K. On January 15, 2003 and in accordance with the adoption of rules
          defining the presentation of non-GAAP financial information, the SEC adopted
          amendments to Regulations S-K and S-B concerning the use of non-GAAP financial
          measures in SEC filings. Accordingly, the SEC voted to adopt amended Forms 20-F and
          8-K. These amendments would require public companies to provide the SEC with
          announcements disclosing material non-public financial information about completed
          fiscal periods. While the amendments do not require the issuance of such releases, they
          do require the reporting of such releases if made. For further information please visit the
          SEC website at http://www.sec.gov.

     •    SEC Votes to Adopt Rules Requiring Disclosure of Corporate Codes of Ethics and
          Existence of Audit Committee Financial Experts. On January 15, 2003 and in
          accordance with the Sarbanes-Oxley Act, the SEC voted to adopt rules that would require
          companies to annually disclose the existence of a code of ethics for certain principal
          officers and the membership of one “audit committee financial expert” on a company’s
          audit committee. If either does not exist, the company must disclose this fact and explain
          why this is so. In addition, the rules require a company to disclose any waivers from or
          amendments to the code of ethics. For further information please visit the SEC website at
          http://www.sec.gov.

     •    SEC Adopts New Regulation Restricting Insider Trading During Pension Fund
          Blackout Periods. On January 15, 2003 and in accordance with the Sarbanes-Oxley Act,
          the SEC voted to adopt Regulation Blackout Trading Restriction (“BTR”), which clarifies
          the provisions of the Sarbanes-Oxley Act that prohibit sales and purchases by directors
          and executive officers of equity securities of the issuer during pension plan blackout
          periods. Regulation BTR, which will become effective on January 26, 2003, will only
          apply to equity securities that are acquired, directly or indirectly, in connection with a

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          director or executive officer’s service or employment. The trading restrictions will be
          triggered if 50% or more of pension plan participants or beneficiaries have their ability to
          transfer their interests temporarily suspended for more than three consecutive business
          days. The trading restrictions trigger is slightly relaxed for non-US private issuers. For
          further information please visit the SEC website at http://www.sec.gov.

November 2002

     •    SEC Proposes New Regulation G Governing the Disclosure of Non-GAAP Financial
          Measures. The SEC has proposed Regulation G under the Securities Exchange Act of
          1934 which would require that whenever a public company publicly discloses or releases
          material information that includes a non-GAAP financial measure, (e.g., pro forma or as
          adjusted information), it must provide a quantitative reconciliation of the differences
          between the non-GAAP financial measure and the comparable financial measure
          calculated and presented in accordance with GAAP. Sarbanes-Oxley requires the SEC to
          issue rules relating to the reconciliation of “pro forma financial information” to GAAP.

     •    SEC Proposes to Enhance Disclosures of Non-GAAP Financial Measures in 1934
          Act Reports. The SEC has proposed the following new rules and amendments to
          address disclosure of financial information that is based on non-GAAP methodologies:
          (i) a new Regulation G that must be filed whenever a company publicly discloses
          material information that includes a non-GAAP financial measure, (ii) amendments to
          Form 20-F and Items 10 of Regulation S-K and Regulation S-B that would require
          enhanced disclosures of a company’s use of non-GAAP financial measures and (iii) an
          amendment to Form 8-K that would require a company to file an 8-K within two business
          days of any public announcement disclosing material non-public information regarding
          completed annual or quarterly fiscal periods.

October 2002

     •    SEC Issues Reminder to Non-US Issuers Regarding Effectiveness of the EDGAR
          Filing Requirement. The SEC issued a release on October 16, 2002 reminding non-US
          issuers, their advisers and other interested persons that the mandate requiring non-US
          issuers to submit their filings or submissions through the Electronic Data Gathering,
          Analysis and Retrieval System (“EDGAR”) will take effect on November 4, 2002. On or
          after November 4, 2002, the SEC will not accept any filings or submissions in paper
          unless the non-US issuer satisfies one of the exceptions that allows for a paper filing or
          submission (which includes filings under Rule 12g3-2(b)). Any paper filings or
          submissions by the non-US issuer that does not satisfy such exception will be returned to
          the non-US issuer or the filing party and such party will be required to refile or resubmit
          the document through EDGAR.

September 2002

     •    SEC Declares the Channel Islands Stock Exchange (“CISX”) as a Designated
          Offshore Securities Market. It was reported that, on September 12, 2002, the SEC


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          designated the CISX an offshore securities market in response to an application filed by
          the CISX, pursuant to Rule 902(b) under Regulation S of the 1933 Act.

August 2002

     •    The Sarbanes-Oxley Act of 2002 Becomes Law. On July 30, 2002, US President
          George W. Bush signed the Sarbanes-Oxley Act of 2002 (the “Act”) into law. The
          purpose of the Act is to protect investors by improving the accuracy and reliability of
          corporate disclosures made under federal securities laws. Non-US companies that file
          periodic reports with the SEC are subject to the key provisions of the Act that become
          effective immediately or within a short period. These include the requirements that
          officers certify the company’s reports, the prohibitions (with limited exceptions) on loans
          to directors and officers, the bonus and profit-recapture provisions relating to accounting
          restatements, and the “whistleblower” protective provisions. In addition, non-US
          companies are not excluded from other provisions of the Act that become effective within
          a longer period or upon the adoption of SEC or self regulatory organizations rules. These
          provisions include audit committee organization and responsibilities, improper influence
          on the conduct of audits, disclosure of “material correcting adjustments” in financial
          statements, disclosure of off-balance sheet transactions, reconciliation of pro forma
          financial information to “gaap” information, internal control reports, and codes of ethics
          for senior financial officers. For more information on the Act, please visit our Web site
          at www.sidley.com. We have prepared a memorandum on the impact of the Act on non-
          US issuers, which is available on request.

     •    Nasdaq Proposes New Corporate Governance Reform. On July 25, 2002, Nasdaq
          issued a press release (the “Press Release”) stating that its Board had approved 25
          “corporate governance reform proposals designed to increase accountability and
          transparency for the benefit of investors.” These proposals are in addition to the
          proposals announced by Nasdaq in its press release of May 24, 2002. The proposals
          described in the Press Release are subject to further approval by the NASD board and the
          SEC. Some of the more significant proposals reported in the Press Release include: (1) a
          requirement that a majority of board members be independent and that the independent
          directors hold regular meetings in executive session; (2) further tightening of the
          definition of independence to exclude large shareholders, relatives of executives, and
          employees of the outside auditor; (3) a requirement that audit committees be given the
          sole power to hire and fire independent auditors and approve all non-audit related
          services; (4) a requirement that executive officer compensation be approved by an
          independent compensation committee or by a majority of independent directors; (5) a
          requirement that all stock option plans be approved by shareholders (the Press Release
          clarifies that the existing exemptions for “ESOP” and “inducement” options will be
          retained); (6) a requirement that all listed companies have codes of conduct (the codes
          themselves, as well as any waivers relating to officers or directors, would be required to
          be disclosed); (7) a requirement that companies disclose insider transactions in company
          stock within two business days for transactions exceeding $100,000; (8) a requirement
          that non-US companies disclose all exemptions to corporate governance standards due to
          contrary home country practice; and (9) a requirement that non-US companies file with

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          the SEC and Nasdaq semi-annual and interim reports, including statement of operations
          and balance sheet, prepared in accordance with rules of the home-country marketplace.
          The Press Release can be found by going to www.nasdaqnews.com and clicking on the
          link captioned “Nasdaq Takes New Actions on Corporate Governance Reform.”

June 2002

     •    Australia Assigned Strong Quality Rating from S&P. It has been reported that S&P
          assigned Australia the second-highest rating of AA-plus foreign-currency rating; only 13
          governments are rated at the highest level of AAA. S&P noted that Australia’s credit
          rating was constrained by the private sector’s external debt which exposes the national
          economy to changes in foreign investor sentiment. However, S&P further commented
          that Australia’s growth prospects continue to be stronger than many of its peers and it has
          maintained a resilient, competitive and flexible economy. Accordingly, there could be an
          upgrade if the external private-sector leverage declines.

     •    SEC Issues Order Requiring the Filing of Sworn Statements Regarding Accuracy of
          Financial Reports. On June 27, 2002, the SEC issued an order pursuant to Section 21(a)
          of the 1934 Act that requires written sworn certification by a company’s principal
          executive officer and principal financial officer as to the accuracy of their financial
          statements and the independence of their audit committee. All companies that had
          revenues of greater than US$1.2 billion during their last fiscal year are required to submit
          such statements to the SEC not later than the date of their first 10-K or 10-Q filed on or
          after August 14, 2002. A list of companies subject to this order will be published on the
          SEC website on June 28, 2002. See <http://www.sec.gov/>.

May 2002

     •    SEC Requests Comments on Proposed Disclosure Requirement Rules for the
          Management’s Discussion and Analysis Section. On April 30, 2002, the SEC issued a
          press release seeking comments on various proposed rules and amendments. Among the
          proposals, one rule would require companies to separately disclose critical accounting
          policies in the “Management’s Discussion and Analysis” section of their annual reports,
          registration statements and proxy and information statements, as well as disclose their
          initial adoption of an accounting policy if the policy was adopted within the last year and
          had a material impact on the company’s financial condition. The SEC staff has indicated
          that the proposal would be applicable to non-US issuers as well as US issuers. Further
          information can be found in SEC Press Release 2002-58.

     •    SEC Adopts Rule Requiring Foreign Issuers to File Electronically. On May 8, 2002,
          the SEC adopted a rule that requires foreign companies and governments to file most of
          their securities related documents, including registration statements and reports filed
          pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, with the
          SEC using the EDGAR filing system. However, foreign companies that are qualified to
          file 12g3-2(b) submissions with the SEC, are required to continue to file those documents
          in paper form. The new rule will become effective November 4, 2002.


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February 2002

     •    New Accounting Treatment for Reserve Capital Instruments (“RCIs”) and
          Perpetual Regulatory Tier 1 Securities (“PROs”) in UK. On February 14, 2002, the
          Urgent Issues Task Force of the UK Accounting Standards Board (“ASB”) issued
          Abstract 33 on “Obligations in Capital Instruments” (the “Abstract”). The Abstract
          provides guidance on the accounting treatment of capital instruments that have
          characteristics of both debt and equity such as RCIs and PROs. The ASB February 2002
          release finalizes the ASB’s proposed policy guidelines released October 11, 2001 under
          Information Sheet 49.

       All capital instruments are accounted for as either liabilities, equity (or shareholders’
funds) or, in consolidated financial statements, minority interests. Prior to the release of the
Abstract, Tier 1 instruments directly issued by UK banks (such as RCIs or PROs) were treated as
shareholders’ funds under UK accounting rules. This treatment was consistent with the
requirements of the Financial Services Authority (“FSA”), the UK bank regulator, as the FSA
accorded Tier 1 status to capital instruments issued by UK banks if, among other requirements
(perpetual, subordination, limited step-up), such instruments were accounted for as shareholders’
funds.

        However, under the new Abstract guidelines, directly-issued Tier 1 instruments should
now be accounted for as liabilities rather than equity (or shareholders’ funds). According to the
Abstract “capital instruments that are not shares or warrants should be classified as liabilities if
they contain an obligation of the reporting entity to transfer economic benefits.” The obligation
to transfer economic benefits would include any kind of transfer of assets, including cash
coupons.

         Many RCIs and PROs include a stock settlement feature whereby deferred cash coupons
may be satisfied by the issuing bank by issuing shares. The Abstract suggests that where the
option of the bank to issue shares to satisfy its obligations is real, the instrument may still be
classified within shareholders’ funds. However, as an issuing bank is unlikely to issue equity to
meet its coupon obligations because of shareholder dilution, it is unlikely that the stock
settlement feature would be used, and, therefore, such instruments would likely be treated as
liabilities rather than as shareholders’ funds.

       The FSA has not responded specifically to the ASB Abstract. If directly-issued
instruments are now to be accounted for as liabilities, such instruments may not, depending on
the view of the FSA, qualify for Tier 1 status under existing FSA rules. However, it has been
speculated that the FSA will accommodate the RCIs/PROs structure. The new accounting
changes will not affect non-direct issues by UK banks, as such instruments are accounted for as
minority interests in the consolidated accounts of the parent bank.

     ● Office of Thrift Supervision Warns against Transfer of Higher-Risk Assets. The
       Office of Thrift Supervision of the Department of Treasury (the “OTS”) warned against
       high-risk asset transfers, such as performing subprime loans, nonperforming or otherwise
       troubled loans, repossessed assets and subordinate interests in securitized financial assets

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          (including residual interests) to holding companies, affiliates or special purpose entities
          where the transferor retains significant credit risk in the transferred assets and, unlike
          typical securitization transactions, may provide substantial funding to the transferee. The
          OTS advised that these transfers raise both safety and soundness concerns and regulatory
          reporting concerns because they may be motivated by favorable regulatory reporting
          treatment but lack a sound business purpose.

     •    FASB to Propose New Accounting Rules for Special Purpose Entities. FASB plans to
          propose new accounting standards for business consolidations, including new standards
          that would govern accounting treatment of Special Purpose Entities (“SPE”), in the
          second quarter of 2002. SEC Chairman Harvey Pitt had criticized FASB’s sluggishness
          in promulgating accounting rules for SPEs and threatened SEC imposition of such rules.
          FASB explained that proposed rules under consideration would require the “primary
          beneficiary” of an SPE, that is, the company exposed to the most economic risk presented
          by the SPE, to consolidate the SPE’s financials into its own unless (1) an independent
          third party holds at least a 10% unprotected equity investment in the SPE and (2) the SPE
          has the ability to obtain financing without support from the primary beneficiary.
          Consolidation is generally appropriate where the SPE has insufficient economic
          substance.

     •    FASB to Offer Guidance on Reporting Obligations Pertaining to Guarantees Used
          to Support Off-Balance-Sheet Transactions. FASB plans to issue final guidance on
          reporting obligations pertaining to guarantees supporting off-balance-sheet transactions.
          It has been reported that the interpretive guidance will require that an obligation to stand
          ready to perform be recognized as a liability valued at fair value. It has also been reported
          that FASB will offer guidance on measuring such exposure on an ongoing basis. FASB
          will limit the scope of its guidance by setting forth a definition of a guarantee that will
          likely exclude such things as product warranties. FASB believes that its guidance
          involves interpretations of FASB Statement No. 5 (Accounting for Contingencies), FASB
          Statement No. 107 (Disclosure About Fair Value of Financial Instruments) and FASB
          No. 57 (Disclosures About Related Third-Party Transactions).

     •    SEC Chief Accountant Emphasizes that Technical Compliance with Accounting
          Standards is Necessary but not Sufficient. Charles Niemeier, chief accountant for the
          SEC’s enforcement division, warned that companies whose filings do not accurately
          represent underlying financial circumstances may violate the anti-deception provisions of
          the federal securities laws notwithstanding adherence to generally accepted accounting
          principles. In order to avoid private, civil and, quite possibly, criminal liability under the
          anti-deception provisions, Mr. Niemeier suggested that companies apply two tests in
          determining whether disclosures are properly stated. Companies should first assess
          whether disclosures violate the accounting principles on which the disclosures are based.
          Then, companies should determine whether otherwise appropriate disclosures mislead
          investors as to facts material to the investment decision.

     •    SEC Announces Its Intention to Propose Significant Changes in Corporate
          Disclosure Rules. The SEC announced that it intends to propose significant changes to

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APPENDIX K


          corporate disclosure rules as a first step in the reformation of financial reporting and
          disclosure requirements, accounting standards, auditing regulations and corporate
          governance rules. The SEC intends to propose rules that would: (1) require companies to
          file annual reports within 60 days after fiscal year end and quarterly reports within 30
          days of the quarter-end; (2) require management discussion and analysis disclosure to
          explain critical accounting policies and discuss the likelihood of materially different
          reported financial results under different conditions or assumptions; (3) significantly
          expand the list of events that require current disclosure on Form 8-K (e.g., credit rating
          changes, material definitive agreements); (4) require disclosure of significant transactions
          in company stock by executive officers, including transactions involving the company
          itself, on a current basis; and (5) require companies to post SEC reports to their web sites
          simultaneous with SEC filing.

January 2002

     •    SEC Staff to Monitor Filings of Fortune 500 Companies. On December 21, 2001,
          SEC Chairman Harvey L. Pitt announced that the Division of Corporation Finance will
          scrutinize annual reports filed by Fortune 500 companies with the SEC in 2002 as part of
          a review of disclosures made by public companies. The Division will focus on
          disclosures that appear to conflict significantly with generally accepted accounting
          principles or Commission rules, or that appear materially unclear. Problematic filings will
          receive “expedited review.”

     •    President Signs “Investor and Capital Markets Fee Relief Act.” On January 16,
          2002, President Bush signed H.R. 1088, the “Investor and Capital Markets Fee Relief
          Act.” The Act substantially reduces filing fees and securities transaction fees. The Act
          sets the filing fee rates under Section 6(b) of the 1933 Act and Sections 13(e) and 14(g)
          of the 1934 Act at $92 per $1,000,000. This new filing fee will be retroactively effective
          to October 1, 2001. In addition, the Act eliminates the filing fee under Section 307(b) of
          the Trust Indenture Act of 1939. All fees paid between October 1, 2001 and January 16,
          2002 under the preceding four sections will be recalculated by the SEC at the appropriate
          new rate. Beginning January 17, 2002, filers should file at the new fee rate of $92 per
          million. Finally, the Act sets the securities transaction fee rate under Section 31 of the
          1934 Act at $15 per $1,000,000 retroactively effective to December 28, 2001. For more
          information about refund procedures and additional general information, see SEC
          Release No. 2002-7 at http://www.sec.gov.

     •    Proposed US Legislation Targets MIPS/TOPrS. Fallout from the Enron bankruptcy
          has prompted renewed interest in financial products on Capitol Hill, including the
          introduction of anti-MIPS/TOPrS legislation similar to that proposed by Treasury during
          the Clinton administration. On January 24, 2002, Representative Charles B. Rangel of
          New York introduced a bill that would amend subsection (l) of section 163 of the Internal
          Revenue Code to effectively deny a deduction for payments on debt instruments not
          included as liabilities for purposes of shareholder reporting.

      The legislation targets instruments like MIPS (Monthly Income Preferred Securities) and
TOPrS (Trust-Originated Preferred Securities) that are characterized as debt for federal income
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APPENDIX K


tax purposes while being treated by issuers as equity for financial accounting purposes. If
enacted, the legislation could significantly impact the future issuance of such securities, but
should not by its terms apply retroactively. See Emergency Worker and Investor Protection Act,
H.R. 3622, 107th Cong. (2002). However, it is currently unclear whether Congress will
seriously consider this proposal.

     •    SEC Statement Provides Additional Guidance for Manager’s Discussion and Analysis
          Disclosure (“MD&A”) Pertaining to Liquidity and Capital Resources. The SEC issued a
          statement on issues that companies should consider in preparing MD&A disclosures. The
          statement included discussion on the SEC’s views regarding disclosure of trends
          affecting liquidity and capital resources. Generally, the MD&A disclosure rule requires
          companies to make certain disclosures necessary to investor decision-making that are not
          required by other disclosure rules. MD&A disclosure requires, among other things,
          disclosure of known trends “reasonably likely” to have a material effect on the financial
          condition or the results of operations, including known material trends relating to
          liquidity and capital resources. The statement reminded companies that such disclosure
          should include discussion of material trends relating to equity, debt and off-balance-sheet
          arrangements. The SEC statement offered a number of examples on what companies
          should consider, including: (1) contractual provisions that might trigger materially
          adverse financial requirements, such as debt acceleration; (2) circumstances that could
          impair a company’s manner of doing business, such as credit rating downgrades; (3)
          factors relevant to a company’s cost of capital or access to capital markets; and (4) risk
          exposure from a company’s guarantees and commitments. The SEC advised against
          excessively general, boilerplate or conclusory disclosures. Instead, the SEC stated that
          disclosures should explain each statement in sufficient detail so as to make clear to
          investors material facts pertinent to investor decision-making.

     •    Changes in Credit Ratings Process by Moody’s and S&P may Introduce Greater Ratings
          Sensitivity to Changes in Economic Circumstances. Moody’s announced implementation
          and consideration of “a number of measures that could create greater alignment in the
          pace of ratings changes with the pace of credit changes.” Changes already implemented
          that may increase ratings sensitivity to changes in economic circumstances include the
          acquisition of technology that will allow it to better “obtain or extract the information
          content of current market data,” commencement of a study of ratings triggers embedded
          in contracts of rated issuers, and enhancement of liquidity risk analysis for US and
          European issuers of commercial paper. Changes under consideration include: (1)
          compressing ratings review periods when economic circumstances so warrant; (2)
          allowing more responsive action following the release of economically material
          information; (3) providing more ratings changes without formal review; and (4)
          streamlining or eliminating ratings outlooks. Moody’s plans to solicit comments on the
          contemplated changes.

       S&P published a report that discusses implemented and potential changes in its rating
process. While most of its policies remain unchanged, S&P has implemented several changes
that may increase the sensitivity of credit ratings to variations in economic circumstances. S&P
has shortened the publishing cycle for comments on individual credits and has intensified

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APPENDIX K


surveillance, particularly on liquidity and funding risk. Moreover, S&P is reviewing contingent
financial and operating commitments embedded in companies’ various contractual arrangements.
Unlike Moody’s, however, S&P does not contemplate elimination of ratings outlooks,
emphasizing that “strong disciplines” in its credit ratings system exist “to ensure that outlook
revisions are not used as substitutes for ratings revision.” The report is unclear as to future
changes to the S&P ratings system.

December 2001

     •    New Basle Capital Accord Announced. On December 13, 2001, the Basle Committee
          on Banking Supervision (the “Committee”) announced its intention to finalize the new
          Basle Capital Accord (the “Accord”) in 2002 and for member countries to implement the
          new Accord in 2005. The Committee also announced that, in order to best reflect its
          objectives, it now plans to undertake an additional review aimed at assessing the overall
          impact of a new Accord on banks and the banking system before releasing the next
          consultative paper. The Committee will focus on the following three issues during the
          “quality assurance” phase:

     •    balancing the need for a risk-sensitive Accord with its being sufficiently clear and
          flexible so that banks can use it effectively;

     •    ensuring that the Accord leads to appropriate treatment of credit to small- and medium-
          sized enterprises, which are important for economic growth and job creation; and

     •    finalizing calibration of the minimum capital requirements to bring about a level of
          capital that, on average, is approximately equal to the requirements of the present Basle
          Accord, while providing some incentive to those banks using the more risk-sensitive
          internal ratings-based system.

         In addition, the Committee created the Accord Implementation Group (the “Group”) to
be led by Nicholas Le Pan, Superintendent of Financial Institutions, Canada. The Group is to
facilitate supervisors to share information and promote consistency in implementation of the new
Accord.

        Previously, in June 2001, the Committee released a progress update and highlighted
several important modifications from its earlier proposal based, in part, on industry comments.
Earlier in January 2001, the Committee had introduced a draft for a new Accord. The
Committee based the proposal on three “pillars” that build on and reward sound risk
management practices:

          •      minimum capital requirements, which seek to refine the measurement framework
                 set out in the 1988 accord;

          •      supervisory review of an institution’s capital adequacy and internal assessment
                 process; and



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APPENDIX K


          •      market discipline through effective disclosure to encourage safe and sound banking
                 practices.

     •    SEC Urges Public Companies to Make Precise Disclosure of Critical Accounting
          Policies. On December 12, 2001, the SEC, noting the insufficiency of mere technical
          compliance with GAAP principles, urged public companies to include clear explanations
          and analyses of “critical accounting policies” in their MD&A disclosure as it considered
          new rules on the issue. The SEC deems critical those accounting policies that (1) are
          “most important to the portrayal of a company’s financial condition and results” and (2)
          “require management’s most difficult, subjective or complex judgements, often as a
          result of the need to make estimates about the effects” of inherently uncertain matters.
          According to the SEC, public companies should include in their MD&A disclosure: (1)
          full explanations of “critical accounting policies”; (2) a discussion of the judgments and
          uncertainties affecting the execution of those policies; and (3) the likelihood that
          materially different amounts would result under different conditions or from using
          different assumptions (that is, the sensitivity of the accounting model to management’s
          policy choices).

         The SEC’s outline model disclosure regimen emphasized the involvement of
management, the auditor, board audit committee and itself. Management should ensure that
disclosure is “balanced and fully responsive” along the lines discussed above and should be able
to “defend the quality and reasonableness” of critical accounting policies. Auditors should
“obtain an understanding of management’s judgment in selecting and applying accounting
principles and methods” and “satisfy themselves thoroughly” on the selection, application and
disclosure of critical accounting policies. Audit committees should work to understand the
evaluative criteria used by management in deliberations involving critical accounting policies.
The SEC particularly noted the appropriateness of “proactive discussion” among senior
management, members of the audit committee and auditors. The SEC signaled hands-on
involvement by encouraging all involved in the disclosure process to seek the assistance of SEC
staff in the face of uncertainty about specific applications of GAAP principles. The SEC
emphasized its goal “to address problems before they happen” and its commitment “to providing
assistance in a timely fashion.”

September 2001

     •    SEC Proposes Electronic Filing for Foreign Issuers. The SEC proposed rules that
          would compel foreign companies and governmental entities subject to SEC regulations to
          file registration statements and periodic reports electronically to the EDGAR system. The
          proposed rules would affect foreign public companies with a market presence in the US,
          certain sovereign and multinational authorities that have sold securities in the US and
          foreign companies and governmental entities that consider accessing the US capital
          markets. Under the proposal, all documents not drafted in English would have to be
          translated into English. Currently, the SEC accepts English-language summaries of
          documents filed by foreign registrants. Companies excused from Exchange Act
          registration and reports through Rule 12g3-2(b) would be able to continue to make paper
          filings under the rules as proposed, but the SEC has requested public comment on this

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APPENDIX K


          exemption. The proposed rules would not affect the SEC’s informal review of draft
          registration statements pertaining to IPOs. While the proposing release and certain
          members of the SEC staff suggest a fast implementation of the proposed rule once
          adopted, SEC Chairman Harvey Pitt expressed concern that aggressive implementation
          might be unduly burdensome.

August 2001

     •    Foreign Trust Rules Clarified. Foreign trusts with US grantors or US beneficiaries are
          subject to expanded reporting requirements and potential civil penalties ranging up to
          35% under 1996 legislation. In order for any trust to avoid these rules, it must be treated
          as a US person and hence a domestic trust. A trust will be considered a US person if it
          meets both a “court test” and a “control test.”

        In August 2001, Treasury issued final regulations altering the “control test” applicable to
certain investment trusts. See Treasury regulation section 301.7701-7(d)(1)(iv); T.D. 8962,
2001-35 I.R.B. 201. An investment trust meeting the conditions of the final regulations will be
deemed to satisfy the “control test,” provided that US trustees control all of the substantial
decisions made by the trustees of the trust. Furthermore, the test is deemed satisfied even if one
or more foreign persons (who are not trustees) have the power to make certain substantial
decisions with respect to the trust.

     The final regulations are effective for taxable years ending on or after August 9, 2001.
However, they may be retroactively relied upon by trusts for taxable years beginning after
December 31, 1996 (for a detailed discussion, see memorandum attached hereto as Appendix D).

     •    Tax Shelter Rule Changes. Section 6011 of the Internal Revenue Code and temporary
          Treasury regulations promulgated thereunder require a statement disclosing participation
          in certain transactions (“tax shelters”) by corporate taxpayers. Specifically, there are two
          types of transactions which must be reported to the Internal Revenue Service: (1) Listed
          Transactions, and (2) Other Reportable Transactions. The Service identifies Listed
          Transactions in regularly published guidance. See Notice 2001-51, 2001-34 I.R.B. 190
          (most recent Service list of transactions identified as Listed Transactions). It defines
          Other Reportable Transactions transactions having at least two out of a possible five
          characteristics designed to flag potentially abusive arrangements. See Temporary
          Treasury regulation section 1.6011-4T(b)(3)(i)(A) through (E). In August 2001, Treasury
          removed a sixth characteristic from the regulations. T.D. 8961, 2001-35 I.R.B. 194. The
          sixth characteristic required an evaluation of whether the expected characterization of any
          significant aspect of a transaction for federal income tax purposes would differ from the
          expected characterization of such aspect of the transaction for foreign taxation purposes.
          See former Temporary Treasury regulation section 1.6011-4T(b)(3)(i)(F). Thus, the fact
          that a transaction is characterized differently for US and foreign tax purposes is no longer
          a factor in determining whether the transaction is in the Other Reportable Transaction
          category for purposes of the tax shelter reporting requirements of Section 6011 and the
          regulations thereunder.

July 2001

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APPENDIX K


     •    New UK/US Tax Treaty Pending. Representatives from the US and the UK signed a
          new tax treaty which will replace the current treaty dating from 1975. The new treaty is
          expected to be ratified by the US Senate and the UK government by the end of 2002, in
          which case it would become effective from January 1, 2003.

       Until recently, preferred shares issued by UK financial institutions into the US retail
market have featured a gross-up provision requiring a UK issuer to adjust the amount of the cash
dividend on such shares to compensate for any decrease in the amount of the tax credit that was
available to US holders on the issue date.

        Under the current tax treaty, eligible US holders who hold UK-originated preferred
shares are entitled to claim this tax credit in respect of their annual US income tax. However,
when the new treaty is ratified, from its effective date, the tax credit available to US holders will
be eliminated (subject to an elective 12-month transition period). Furthermore, it is not expected
that UK-originated preferred shares issued before the effective date of the new treaty will be
grandfathered. As a result, the elimination of the tax credit available to US holders will require
UK issuers to gross-up cash dividends on preferred shares held by US holders.

     •    Legislative Proposal to Permit S Corporations to Issue Preferred Stock. Effective
          January 1997, the Small Business Job Protection Act of 1996 permitted eligible banks to
          elect S corporation status for federal income tax purposes. Two legislative proposals in
          March and July of 2001 included provisions that would have expanded S corporation
          eligibility for banks, ostensibly permitting a greater number of elections.

        Furthermore, the proposals would have amended the Internal Revenue Code to include a
new provision permitting issuance of certain preferred stock by S corporations. The preferred
stock would not be considered a “second class of stock” under the existing rules for an S
corporation election. It remains to be seen whether any of the proposed legislation will be
reintroduced in 2002. See Small Business and Financial Institutions Tax Relief Act, H.R. 1263,
107th Cong. (2001); Subchapter S Modernization Act, H.R. 2576, 107th Cong. (2001).

June 2001

     •    SEC Makes Technical Amendments to Certain Disclosure Rules for Foreign Filers.
          In June 2001, the SEC announced technical amendments to Form 20-F under the 1934
          Act and to Forms F-2 and F-3 under the 1933 Act. The amendments clarified
          requirements pertaining to the age of financial statements, formally approved the practice
          of requiring only two years of audited income and cash flow statements for statements
          prepared in accordance with US generally accepted accounting principles and corrected
          certain cross-references.

May 2001

     •    SEC Revises Practice of Confidential Processing of Foreign Issuer Filings. The SEC
          announced that its staff will no longer confidentially review and screen draft submissions
          of foreign registrants. However, a senior staff member noted in August 2001 that the staff
          might be flexible in special circumstances, such as when issuers decide to fully conform

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APPENDIX K


          financial statements to US generally accepted accounting principles. The SEC will
          continue to accept and review on a confidential basis draft registration statements in
          connection with an issuer’s initial public offering in the United States.

     •    SEC Staff Says that Foreign Issuers Involved in Registered Exchange Offers or
          M&A Transactions Must Keep Financial Statements Current Until Shareholders
          Make Investment Decision. The staff of the Division of Corporation Finance of the SEC
          announced its position that foreign issuers engaged in registered exchange offerings or
          M&A transactions must keep their financial statements current under standards set forth
          in Form 20-F throughout the entire time of an exchange offer or until shareholder
          approval is obtained in an M&A transaction. According to a senior staff member, the
          staff’s position has been consistent “for years” on this point.

     •    FASB Draft Statement Would Require Separate Balance Sheet Presentation of the
          Liability and Equity Components Embedded in Compound Financial Instruments;
          Draft Statement Classifies Trust-Preferred Securities as Debt. A FASB Exposure
          Draft of a proposed Statement of Financial Accounting Standards would require separate
          balance sheet treatment of the liability and the equity components of compound financial
          instruments. Compound financial instrument components would constitute equity when
          they (1) represent outstanding shares of issuer stock that do not embody obligations on
          the part of the issuer or (2) embody obligations, that is, duties or responsibilities on the
          part of an issuer either to transfer assets or to issue shares if its own stock, that require, or
          permit at the issuer’s discretion, settlement by issuance of a fixed number of the issuer’s
          equity securities, and, to the extent that the monetary value of such obligations changes,
          the change is attributable to, equal to and in the same direction as the change in value of
          the issuer’s equity securities. Otherwise, such components would be liabilities. According
          to the Exposure Draft, “separate balance sheet presentation of liability components and
          equity components of compound instruments more faithfully represents the rights and
          obligations embedded in those instruments than does presenting those components on a
          combined basis entirely as liabilities or equity.” The draft statement would require
          liability treatment for trust preferred securities containing mandatory redemption terms.
          Trust preferred securities constitute liabilities under the draft statement because the
          mandatory redemption provisions embodied in such instruments neither require nor
          permit settlement by issuance of equity shares. If a company does not consolidate an SPE
          that issues trust-preferred securities, the debentures issued by the company to the SPE
          would be classified as liabilities. The comment period on the draft statement expired
          March 31, 2001. As of March 2002, FASB was still in deliberations.

February 2001

     •    SEC Adopts Safe Harbor Rule on Integration of Abandoned Offerings. In February
          2001, the SEC adopted Rule 155 under the Securities Act of 1933 (the “1933 Act”) that
          provides safe harbor for (1) offerings registered under the 1933 Act subsequent to
          abandoned private offerings and for (2) private offerings following abandoned registered
          offerings. Under the rule, private offerings exempt under Sections 4(2) or 4(6) of the



NY1 5157048v.8
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APPENDIX K


          1933 Act will not be considered part of an offering for which the issuer later files a
          registration statement when:

          1.     no securities are sold in the private offering;
          2.     the issuer and all persons acting on the issuer’s behalf terminate all offering
                 activity prior to the filing of the registration statement;
          3.     the final and any preliminary prospectus disclose certain information pertaining to
                 the private offering and the prospectus for the registered offering supersedes
                 offering materials used in the private offering; and
          4.     the issuer does not file the registration statement until 30 days after termination of
                 all activity in the private offering unless the offerees in the private offering
                 consisted only of sufficiently sophisticated investors.

      Moreover, registered offerings will not be integrated with subsequent private offerings
exempt under Sections 4(2) or 4(6) of the 1933 Act when:

          1.     no proceeds were received, in escrow or otherwise, in the registered offering;
          2.     the issuer withdraws its registration statement in accordance with Rule 477;
          3.     the issuer or any person acting on its behalf does not commence the private
                 offering earlier than 30 days after the effective date of the withdrawal of the
                 registration statement;
          4.     the issuer makes certain notifications to each offeree as to the fact and certain
                 effects of non-registration; and
          5.     the disclosure documents used in the private offering inform investors of changes
                 in business or financial conditions material to investor decision-making.

        The SEC will analyze offerings made subsequent to abandoned offerings that do not
qualify for the Rule 155 safe harbor under traditional integration principles. Safe harbor will not
apply to offerings made pursuant to a plan or scheme to evade registration requirements even
when the safe harbor conditions are met. Particularly, the SEC warns in the adopting release for
Rule 155 that safe harbor will not apply in cases where the SEC finds that an issuer used a
registered offering as a marketing tool to solicit purchasers for a subsequent private offering.




NY1 5157048v.8
                                                   59
APPENDIX L


                                           S IDLEY A USTIN                 LLP
                    Preferred and Capital Securities Group Directory

       Today, our firm is one of the leading legal advisers on a broad range of preferred
and capital securities products, including auction and remarketed preferred, DRD pre-
ferred, trust preferred, partnership preferred, pay-in-kind preferred, participating capital
instruments and various bank and insurance regulatory capital instruments. Our pre-
ferred and capital securities group consists of partners and associates with strong
backgrounds in corporate, securities, banking, investment company, tax, ERISA, bank-
ruptcy, structured finance, commodities and futures regulation. This multi-disciplinary
group concentrates on the development and execution of preferred and capital securi-
ties transactions. The group has expanded as preferred and capital securities
transactions have grown in their complexity and areas of application. The senior mem-
bers of this group have worked for over ten years with a broad array of investment banks
and issuers on preferred and capital securities transactions designed to achieve a wide
array of objectives, including tax regulatory, credit rating and strategic benefits.

RELATIONSHIP PARTNERS

Craig E. Chapman (Capital Markets) ..............................................................................2
Daniel M. Rossner (Banking and Structured Finance)...................................................11
Michael J. Pinsel (Insurance) ........................................................................................10
Nicholas R. Brown (Tax) .................................................................................................1
Robert P. Hardy (ERISA) ................................................................................................6
Hugh Frame and Mark Walsh (Europe) .................................................................3 & 13
G. Matthew Sheridan (Asia) ..........................................................................................13
Eric S. Haueter (San Francisco) .....................................................................................7

DEPARTMENTS

Capital Markets

Craig E. Chapman (NY) ..................................................................................................2
Hugh V. Frame (LON) .....................................................................................................3
Samir A. Gandhi (NY) .....................................................................................................4
Eric S. Haueter (SF) .......................................................................................................7
Robert Mandell (NY) ........................................................................................................8
Edward F. Petrosky Jr. (NY) ..........................................................................................10
Daniel M. Rossner (NY) ................................................................................................11
John Russell (LON) .......................................................................................................12
G. Matthew Sheridan (HK) ............................................................................................13
E. Mark Walsh (LON) ....................................................................................................13
APPENDIX L


DEPARTMENTS (cont'd)

Bank Regulatory

Connie M. Friesen (NY) ..................................................................................................4
Daniel M. Rossner (NY) ................................................................................................11

Insurance Regulatory

Michael P. Goldman (CH) ...............................................................................................5
Michael J. Pinsel (CH) ..................................................................................................10

Tax

Jacob Amato (NY) ............................................................................................................1
Nicholas R. Brown (NY) ..................................................................................................1
A. J. Alexis Gelinas (NY) .................................................................................................5
Graeme Harrower (LON) .................................................................................................7

ERISA

A. J. Alexis Gelinas (NY) .................................................................................................5
Robert P. Hardy (NY) ......................................................................................................6

Structured Finance
(including CDOs, Leveraged Leases and Repos)

Jonathan Edge (LON) ......................................................................................................3
Robin Parsons (LON).......................................................................................................9
Michael P. Peck (NY) ......................................................................................................9
Daniel M. Rossner (NY) ................................................................................................11
John Russell (LON)........................................................................................................12

Commodities and Futures Regulation

Michael S. Sackheim (NY) ............................................................................................12

Bankruptcy

William M. Goldman (NY) ...............................................................................................6
Robin Parsons (LON).......................................................................................................9

Investment Company Act

Frank P. Bruno (NY) ........................................................................................................2
Brian M. Kaplowitz (NY) ..................................................................................................8
Tuuli-Ann Ristkok (NY) ...................................................................................................11

                                                              ii
APPENDIX L


JACOB J. AMATO III
TAX ASSOCIATE
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5581
Main Fax: (212) 839-5599
E-mail: jamato@sidley.com



          Jacob, an associate in the New York office, practices in the tax department. His
          practice concentrates in the areas of mergers and acquisitions, corporate
          finance and securities as well as derivative and structured financial products
          including equity, debt and hybrid products, swaps, options, forwards, and mone-
          tization transactions.




NICHOLAS R. BROWN
TAX PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5585
Main Fax: (212) 839-5599
E-mail: nbrown@sidley.com



          Nick devotes a significant portion of his practice to the areas of financial prod-
          ucts, corporate finance transactions and mergers and acquisitions. Nick has
          extensive experience in structuring complex U.S. and international financial
          products and securities transactions designed to achieve a wide array of objec-
          tives, including tax deconsolidation, capital and balance sheet advantages,
          shifting of tax attributes, monetization of financial positions and tax arbitrage.

                Relevant Products: Auction securities, remarketed securities, DRD
                preferred, convertible securities, trust preferred securities, partner-
                ship preferred securities, REIT preferred, STRYPES, STEERS,
                PRIDES, FELINE PRIDES, MITTS, LYONs TrUEPrS, STRIDES,
                PHONES and ProGroS and equity, interest rate, credit and other
                derivatives transactions.


                                            1
4/24/06                                                                 SIDLEY AUSTIN LLP
APPENDIX L


FRANK P. BRUNO
INVESTMENT COMPANY ACT PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5540
Main Fax: (212) 839-5599
E-mail: fbruno@sidley.com



          Frank has worked on a broad range of corporate and securities transactions,
          including equity and debt offerings by industrial, utility, financial institution and
          real estate investment trust issuers. He has worked on a variety of transactions
          and offerings by open-end and closed-end investment companies as both fund
          and underwriters' counsel, including initial public offerings, rights offerings, pre-
          ferred stock offerings, debt offerings, asset acquisitions and mergers. Frank also
          acts as counsel on an ongoing basis to the independent directors of a number
          of investment companies.

                 Relevant Products: Investment company auction securities, remarketed
                 securities, preferred securities and convertible securities.

CRAIG E. CHAPMAN
CAPITAL MARKETS PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5564
Main Fax: (212) 839-5599
E-mail: cchapman@sidley.com



          Craig has extensive experience in corporate finance law and concentrates on
          structuring complex U.S. and international securities transactions, including
          transactions by U.S., Australian, European and Asian entities for capital, fund-
          ing, tax, deconsolidation, income splitting, balance sheet, defensive and other
          purposes.

                 Relevant Products: Auction securities, remarketed securities, convertible
                 preferred and other capital, floater/inverse floaters, DRD preferred, partic-
                 ipating capital, trust preferred, partnership preferred, STRYPES,
                 TrUEPrS, ACES, REIT preferred, FELINE PRIDES, PRIDES, PIK pre-
                 ferred, ABCs and various Tier 1 and Tier 2 securities.



                                            2
4/24/06                                                                   SIDLEY AUSTIN LLP
APPENDIX L


JONATHAN EDGE
STRUCTURED FINANCE ASSOCIATE
LONDON OFFICE
(U.K. LAW)
Direct Tel: 44.20.7778.1874
Main Fax: 44.20.7626.7937
E- mail: jedge@sidley.com



          Jonathan is an associate in the International Finance Group in London.
          Jonathan’s practice is focused on structured finance and derivatives work. He
          represents issuers, underwriters and, occasionally, portfolio managers and
          trustees in a variety of transactions, including collateralised debt obligation
          transactions (CBOs and CLOs), Structured Investment Vehicles (SIVs), repack-
          agings, credit-linked notes, synthetic securities, warehousings, accumulation
          swaps and hedging transactions.

                Relevant Products: Synthetic CDOs, structured products and
                derivatives.



HUGH V. FRAME
CAPITAL MARKETS PARTNER
LONDON OFFICE
(U.S. LAW)
Direct Tel: 44-20-7778-1833
Main Fax: 44-20-7778-1807
E- mail: hframe@sidley.com



          Hugh has represented underwriters and corporate, governmental and special
          purpose issuers in a broad variety of international capital markets transactions.
          Hugh has worked with issuers incorporated in the U.S., Europe, Scandinavia,
          Africa, Asia, Australia, the Caribbean and the Channel Islands in securities
          transactions involving SEC registration, Rule 144A/Regulation D placements,
          Regulation S offshore offerings and pan-European public offerings.

                Relevant Products: Ordinary shares, preference shares, guaranteed
                preference shares, exchangeable preference shares, convertible prefer-
                ence shares, cash-settled convertible preference shares, trust preferred
                securities, capital securities, exchangeable capital securities and equity,
                currency and interest rate derivative securities.


                                           3
4/24/06                                                                 SIDLEY AUSTIN LLP
APPENDIX L


CONNIE M. FRIESEN
BANK REGULATORY PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5507
Main Fax: (212) 839-5599
E-mail: cfriesen@sidley.com



          Connie works primarily on domestic and international bank regulatory matters
          affecting financial institutions. Her work encompasses advising financial institu-
          tion clients on appropriate strategic and transactional responses to capital and
          financial markets crises, constraints and opportunities and includes global com-
          pliance and risk management programs, bank secrecy issues, GDRs/ADRs,
          CLOs, new product development, and financial institution mergers and acquisitions.

                Relevant Products: Various bank Tier 1 and Tier 2 securities, including
                trust-preferred securities and credit-linked notes.



SAMIR A. GANDHI
CAPITAL MARKETS PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5684
Main Fax: (212) 839-5599
E-mail: sgandhi@sidley.com



          Since joining Sidley, Sam has represented both companies and underwriters in
          a broad range of capital markets activities, with particular emphasis on struc-
          tured and corporate finance and government securities. Sam has extensive
          experience in tax-advantaged financial structures and preferred securities prod-
          ucts.

                Relevant Products: Auction securities, remarketed securities, convertible
                preferred, trust preferred, partnership preferred, STRYPES, TrUEPrS,
                REIT preferred, structured notes, mortgage- and asset-backed securities.




                                           4
4/24/06                                                                SIDLEY AUSTIN LLP
APPENDIX L


A. J. ALEXIS GELINAS
ERISA & TAX PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5365
Main Fax: (212) 839-5599
E-mail: agelinas@sidley.com



          Alex has extensive experience in the tax aspects of corporate finance, pooled
          investment vehicles and tax-oriented transactions, and the ERISA regulatory
          issues involved in offering various types of U.S. and foreign securities and struc-
          tured investment products, including swaps and other derivatives, to the U.S.
          pension fund market ("ERISA-covered plans").

                 Relevant Products: Partnership transactions, including floater/inverse
                 floater issues; preferred securities; special purpose issuers; other private-
                 ly placed structured investment products.



MICHAEL P. GOLDMAN
INSURANCE REGULATORY PARTNER
CHICAGO OFFICE
(U.S. LAW)
Direct Tel: (312) 853-4665
Main Fax: (312) 853-7036
E-mail: mgoldman@sidley.com



          Mike has extensive experience in the corporate representation of insurance
          companies and other insurance entities. His practice focuses on acquisitions,
          divestitures and corporate reorganizations (including demutualization and mutu-
          al holding company conversions); the formation, capitalization and corporate
          financing of insurance companies and related ventures; the regulation of insur-
          ance holding company systems and insurance company investment practices;
          the structure and regulation of alternative risk financing mechanisms and com-
          plex reinsurance arrangements; the structure of unique marketing and insurance
          distribution systems; and captive insurance companies, risk retention groups
          and other alternative market mechanisms. Mike also represents investment
          banks, commercial banks, private equity funds, investment advisors, derivatives
          dealers and other sectors of the financial services industry, with respect to insur-
          ance company relationships and transactions.


                                            5
4/24/06                                                                  SIDLEY AUSTIN LLP
APPENDIX L


WILLIAM M. GOLDMAN
BANKRUPTCY PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5470
Main Fax: (212) 839-5599
E-mail: wgoldman@sidley.com



          Bill, who is the head of the New York Office's Corporate Reorganization and
          Bankruptcy Group, has extensive experience and expertise in structuring com-
          plex U.S. and international securities, lending, derivative and other transactions
          to avoid problems under U.S. bankruptcy and insolvency laws. Bill has spent his
          entire legal career specializing in bankruptcy and problem loan situations and
          has served as counsel to major U.S. and non-U.S. creditors in numerous bank-
          ruptcy cases and out-of-court workouts.




ROBERT P. HARDY
ERISA & TAX PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-8793
Main Fax: (212) 839-5599
E-mail: rhardy@sidley.com



          Rob has extensive experience in executive compensation, employee benefits
          and ERISA fiduciary duty matters, particularly in connection with plan asset,
          public offering, private placement, and merger and acquisition transactions.




                                           6
4/24/06                                                                 SIDLEY AUSTIN LLP
APPENDIX L


GRAEME HARROWER
TAX PARTNER
LONDON OFFICE
(U.K. LAW)
Direct Tel: 44-20-7360-3634
Main Fax: 44-20-7626-7937
E-mail: gharrower@sidley.com



          Graeme advises on U.K. taxes (including taxes on income and capital gains,
          withholding tax, value added tax and stamp duties) in dealing with the structur-
          ing, negotiation and documentation of a range of structured finance
          transactions, including structured products and securitisations of a wide variety
          of asset types. The clients whom he advises include a number of banks, a rat-
          ing agency and a monoline insurer. His practice has a significant international
          element, which entails working with tax lawyers in the firm's U.S. offices and in
          other jurisdictions.




ERIC S. HAUETER
CAPITAL MARKETS PARTNER
SAN FRANCISCO
(U.S. LAW)
Direct Tel: (415) 772-1231
Main Fax: (415) 397-4621
E-mail: ehaueter@sidley.com



          Eric has represented issuers and underwriters in a broad range of equity and
          debt financings, merger and acquisition transactions and other corporate mat-
          ters. In addition to working on transactions for industrial companies and financial
          institutions, Eric has extensive experience with real estate investment trusts.


                Relevant Products: Trust preferred and convertible trust preferred secu-
                rities, remarketed securities, preferred and convertible preferred stock,
                TECoNs, FELINE PRIDES, STRYPES and LYONS.




                                            7
4/24/06                                                                 SIDLEY AUSTIN LLP
APPENDIX L


BRIAN M. KAPLOWITZ
INVESTMENT COMPANY ACT PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5370
Main Fax: (212) 839-5599
E-mail: bkaplowitz@sidley.com



          Brian has worked on a variety of transactions of and offerings by mutual funds
          as well as on broker-dealer investment programs including funds. In addition, he
          has consulted on interpretive issues related to Rule 2a-7 under the Investment
          Company Act. He has been involved in numerous Investment Company Act sta-
          tus questions for structured financings and various other types of enterprises.
          Brian was formerly with the SEC's Division of Investment Management and has
          appeared on several panels relating to legal issues surrounding investment
          companies and investment advisers.




ROBERT MANDELL
CAPITAL MARKETS PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5360
Main Fax: (212) 839-5599
E-mail: rmandell@sidley.com



          Rob is a partner in the New York office, practicing in corporate securities. Rob
          focuses on corporate financing transactions and has worked on a wide variety
          of securities transactions, ranging from debt and equity offerings to issuances of
          convertible and exchangeable securities. Rob has also worked on cross-border
          offerings involving complex structured securities and has also assisted invest-
          ment banking clients in the development of structured convertible products.
          Prior to joining the firm in 1997, Rob worked at the United States Securities and
          Exchange Commission in the Division of Corporation Finance.

                Relevant Products: Remarketed securities, convertible and exchange-
                able securities and various Tier 1 and Tier 2 securities.



                                           8
4/24/06                                                                 SIDLEY AUSTIN LLP
APPENDIX L


ROBIN PARSONS
STRUCTURED FINANCE & BANKRUPTCY PARTNER
LONDON OFFICE
(U.K. LAW)
Direct Tel: 44-20-7360-3651
Main Fax: 44.20.7626.7937
E-mail: rparsons@sidley.com



          Robin‘s practice ranges from structured finance and securitisations to consumer
          finance, but with particular emphasis on restructurings and workouts and acqui-
          sition finance. He handled many of the high profile workouts of the 1980s
          involving cross-border restructurings, debt/equity swaps, success fees and other
          incentives. High profile restructurings have included acting for the lead bank on
          Goodman International and acting for Federal Mogul Corporation in connection
          with the dual Chapter 11 and administration proceedings of its UK subsidiaries.
          Acquisition finance experience has included buy-backs through schemes of
          arrangement and bid finance.




MICHAEL P. PECK
STRUCTURED FINANCE PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5576
Main Fax: (212) 839-5599
E-mail: mpeck@sidley.com



          Michael has practiced in the area of mortgage-and asset-backed finance
          and securitization at the firm since 1981 and has represented underwriters
          and issuers of publicly and privately offered securities and commercial
          banks and broker/dealers in various committed and uncommitted lending
          arrangements.

                Relevant Products: Mortgage-and asset-backed securities, derivative
                products repurchase agreements, revolving credit facilities, warehouse
                and gestation lending arrangements.




                                           9
4/24/06                                                                SIDLEY AUSTIN LLP
APPENDIX L


EDWARD F. PETROSKY
CAPITAL MARKETS PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5455
Main Fax: (212) 839-5599
E-mail: epetrosky@sidley.com



          Ed has represented issuers in general corporate matters and has extensive
          experience in a wide variety of capital market transactions, with a particular
          emphasis on registered and private securities offerings by various entities
          including financial institutions and mortgage REITs. In recent years, Ed has
          worked with investment banks in bringing to market CDOs, totaling more than
          $4 billion in the last three years, that are supported by trust preferred securities
          and subordinated debt of bank and thrift holding companies and by trust pre-
          ferred securities and surplus notes of insurance holding companies and
          insurers.
                 Relevant Products: DRD preferred stock, convertible securities, trust
                 preferred securities, mandatorily tendered remarketed debt securities,
                 U.S. and Euro medium-term note programs (secured and unsecured) and
                 commercial paper programs.

MICHAEL J. PINSEL
INSURANCE REGULATORY PARTNER
CHICAGO OFFICE
(U.S. LAW)
Direct Tel: (312) 853-7103
Main Fax: (312) 853-7036
E-mail: mpinsel@sidley.com



          Michael is a partner in the Insurance and Financial Services group in Sidley's
          Chicago office and heads the firm's property and casualty alternative risk trans-
          fer practice. His practice is concentrated primarily in the corporate and
          regulatory representation of insurance companies and other insurance entities,
          with a focus on the structure and regulation of alternative risk transfer mecha-
          nisms, including insurance securitization and derivatives; acquisitions,
          divestitures and corporate reorganizations; the formation, capitalization and cor-
          porate financing of insurance companies and related ventures; the regulation of
          insurance holding company systems and insurance company investment prac-
          tices, including the use of derivative instruments. His practice also involves the
          representation of investment banks, hedge funds, private equity funds, invest-
          ment advisors, derivative dealers and other sectors of the financial services
          industry, with respect to their insurance industry relationships and transactions.


                                            10
4/24/06                                                                   SIDLEY AUSTIN LLP
APPENDIX L


TUULI-ANN RISTKOK
INVESTMENT COMPANY COUNSEL
NEW YORK OFFICE
(U.S.LAW)
Direct Tel: (212) 839-8513
Main Fax: (212) 839-5599
E-mail: tristkok@sidley.com



          Tuuli has extensive experience in investment company and corporate finance
          law and concentrates on structuring complex U.S. and international securities
          transactions and products, with emphasis on interpretive issues regarding
          investment company status and related matters, applications for exemptive and
          no-action relief and new product development.




DANIEL M. ROSSNER
BANK, SECURITIES AND STRUCTURED FINANCE
PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5533
Main Fax: (212) 839-5599
E-mail: drossner@sidley.com


          Dan is a partner in the New York office where he specializes in corporate securi-
          ties and securitization, with an emphasis on financial institutions. He represents
          banks and underwriters in connection with securities offerings, including bank
          capital instruments and asset-backed securities transactions. Dan is also a
          member of the firm's bank regulatory team.

                Relevant Products: Various Bank Tier 1 and Tier 2 products, auction
                securities, remarketed securities, trust preferred securities, credit-linked
                notes, and mortgage and asset-backed securities.




                                           11
4/24/06                                                                  SIDLEY AUSTIN LLP
APPENDIX L


JOHN RUSSELL
STRUCTURED FINANCE AND
CAPITAL MARKETS PARTNER
LONDON OFFICE
(U.K. LAW)
Direct Tel: 44-20-7778-1889
Main Fax: 44-20-7796-1807
E-mail: jrussell@sidley.com


          John has practiced in the structured securities area for over 20 years as an
          investment banker and a lawyer. As well as extensive experience of Tier 1 and
          Tier 2 capital raising products, John has been involved from the outset in credit
          derivative based products and transactions by emerging market issuers.


                Relevant Products: Preferred securities, guaranteed preference shares,
                auction securities, remarketed securities, ordinary shares and related
                ADR or GDR programs, MTN programs, CP programs, structured
                (repackaged) products, CDOs and covered bonds.


MICHAEL S. SACKHEIM
COMMODITIES AND FUTURES REGULATION PARTNER
NEW YORK OFFICE
(U.S. LAW)
Direct Tel: (212) 839-5503
Main Fax: (212) 839-5599
E-mail: msackheim@sidley.com



          Michael has wide experience in the regulation of forwards, futures and deriva-
          tives and the drafting and structuring of swaps and related instruments for use
          by special purpose vehicles and other end-users.




                                           12
4/24/06                                                                 SIDLEY AUSTIN LLP
APPENDIX L


G. MATTHEW SHERIDAN
CAPITAL MARKETS PARTNER
HONG KONG OFFICE
(U.S. LAW)
Direct Tel: 852-2901-3886
Main Fax: 852-2509-3110
E-mail: msheridan@sidley.com



          Matthew’s practice includes corporate financings through global offerings of debt
          and equity securities, as well as mergers and acquisitions and corporate
          restructurings. His experience includes transactions involving a broad range of
          sectors, including telecommunications, financial institutions, technology, trans-
          portation, metals industry, mining, forest products, consumer products, power
          and oil and gas. Mr. Sheridan has lived and worked in Asia since 1994. He is
          qualified in New York and Victoria, Australia.




E. MARK WALSH
CAPITAL MARKETS PARTNER
LONDON OFFICE
(U.S., U.K., AND HONG KONG LAW)
Direct Tel: 44-20-7778-1851
Direct Fax: 44-20-7796-1807
E-mail: mwalsh@sidley.com



          Mark has extensive experience in international corporate finance and capital
          markets law. He spent seven years in the firm's New York office, five years in its
          Hong Kong office and is now based in London. Mark is admitted to practice
          New York, English and Hong Kong law, and is a member (non-practicing) of the
          Irish bar. He has worked on a broad range of debt and equity capital markets
          transactions, most recently as counsel to some of the larger UK, Irish and other
          European banks and US and European underwriters.

                Relevant Products: Limited partnership securities, ADRs and preference
                shares, remarketed securities, convertible preferred, floater/inverse
                floaters, DRD preferred, trust preferred, PIK preferred and various Tier 1
                and Tier 2 securities.


                                           13
4/24/06                                                                 SIDLEY AUSTIN LLP
WORLD OFFICES

BEIJING                                          GENEVA                                            SAN FRANCISCO
Suite 3527, Tower 1                              Rue de Lausanne 139                               555 California Street
China World Trade Center                         Sixth Floor                                       San Francisco, California 94104
1 Jian Guo Men Wai Avenue                        1202 Geneva                                       T: 415.772.1200
Beijing 100004                                   Switzerland                                       F: 415.772.7400
China                                            T: 41.22.308.00.00
T: 86.10.6505.5359                               F: 41.22.308.00.01                                SHANGHAI
F: 86.10.6505.5360                                                                                 Suite 2501
                                                 HONG KONG                                         Shui On Plaza
BRUSSELS                                         Level 39                                          333 Middle Huai Hai Road
Square de Meeus, 35                              Two Int’l Finance Centre                          Shanghai 200021
B-1000 Brussels                                  8 Finance Street                                  China
Belgium                                          Central, Hong Kong                                T: 86.21.5306.2866
T: 32.2.504.6400                                 T: 852.2509.7888                                  F: 86.21.5306.8966
F: 32.2.504.6401                                 F: 852.2509.3110
                                                                                                   SINGAPORE
CHICAGO                                          LONDON                                            6 Battery Road
One South Dearborn                               Woolgate Exchange                                 Suite 40-01
Chicago, Illinois 60603                          25 Basinghall Street                              Singapore 049909
T: 312.853.7000                                  London, EC2V 5HA                                  T: 65.6230.3900
F: 312.853.7036                                  United Kingdom                                    F: 65.6230.3939
                                                 T: 44.20.7360.3600
DALLAS                                           F: 44.20.7626.7937                                TOKYO
717 North Harwood                                                                                  Sidley Austin
Suite 3400                                       LOS ANGELES                                       Gaikokuho Jimu Bengoshi Jimusho
Dallas, Texas 75201                              555 West Fifth Street                             Nishikawa & Partners
T: 214.981.3300                                  Los Angeles, California 90013                     (Registered Associated Offices)
F: 214.981.3400                                  T: 213.896.6000
                                                 F: 213.896.6600                                   Marunouchi Building 23F
FRANKFURT                                                                                          4-1, Marunouchi 2-chome
                                                 NEW YORK                                          Chiyoda-Ku, Tokyo 100-6323
Taunusanlage 1                                                                                     Japan
60329                                            787 Seventh Avenue                                T: 81.3.3218.5900
Frankfurt am Main                                New York, New York 10019                          F: 81.3.3218.5922
Germany                                          T: 212.839.5300
T: 49.69.22.221.4000                             F: 212.839.5599
                                                                                                   WASHINGTON, D.C.
F: 49.69.22.221.4001
                                                                                                   1501 K Street N.W.
                                                                                                   Washington, D.C. 20005
                                                                                                   T: 202.736.8000
                                                                                                   F: 202.736.8711


www.sidley.com



*   Sidley Austin LLP, a Delaware limited liability partnership, operates in affiliation with other partnerships, including Sidley Austin LLP,
    an Illinois limited liability partnership, Sidley Austin, an English general partnership (through which the London office operates) and
    Sidley Austin, a New York general partnership (through which the Hong Kong office operates). The affiliated partnerships are referred to
    herein collectively as Sidley Austin, Sidley or the firm.




                                                                                                   SIDLEY AUSTIN LLP

				
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