Maryland Legal Alert for Financial Services

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Maryland Legal Alert - December 2007

SPECIAL SESSION RESULTS IN SIGNIFICANT TAX CHANGES

The Maryland General Assembly concluded its 2007 Special Session on November 19, 2007, enacting a number of significant tax law changes that will impact how all companies do business in the state. If you have questions about the impact of any of the tax law changes on your business, please e-mail Jeff Spatz. It you have questions about possible legislative “fixes” during the upcoming 2008 session, please e-mail Bob Enten.

One significant change is to impose recordation and transfer taxes on transfers of controlling interests in “real property entities.” Unlike direct transfers of real property, controlling interest transfers currently are exempt from recordation and transfer taxes. This change is effective July 1, 2008, and we expect careful consideration prior to the effective date of the several exclusions and exemptions in the law, as well as possible different transfer methods.

Also, Maryland's sales and use tax rate increases from 5% to 6% on January 3, 2008. Of importance to many businesses, “computer services” now will be subject to this tax. Computer services are very broadly defined. Some businesses will want to consider how they account for computer services, for example if the services are provided by affiliated companies.
As time goes on we expect additional “thorny” tax issues to arise from this new legislation. Stay tuned.

MARYLAND'S DATA SECURITY AND BREACH LAW IS EFFECTIVE JANUARY 1

All businesses that have personal information of individuals who live in Maryland must adopt enhanced security practices and procedures by January 1, 2008. The Maryland Personal Information Protection Act imposes information security, document disposal and data breach protection requirements on all businesses in Maryland. Service provider contracts must be amended by January 1, 2009 to incorporate these new requirements. Financial institutions and their affiliates that are subject to and/or comply with the federal Gramm-Leach-Bliley Act privacy provisions, Fair and Accurate Credit Transactions Act and federal guidance on information security and unauthorized access are deemed to be in compliance with the Maryland law. As a result, it is even more important for financial institutions and their affiliates to comply with federal information security and data breach laws. Affiliates of financial institutions that are not subject to federal information security law, such as insurance agency affiliates, should take advantage of the available option to comply with federal law, rather than Maryland law, which includes additional requirements and enhanced penalties for violations. If you have questions about this law, please e-mail Chris Rahl.

FINAL RULES ISSUED FOR BANK SECURITIES ACTIVITIES

Maryland financial institutions engaged in securities activities should be aware that the Securities and Exchange Commission and the Federal Reserve Board recently adopted Regulation R, a single set of final rules implementing certain exceptions for banks from the definition of “broker” under section 3(a)(4) of the Securities Exchange Act of 1934, as amended by the Gramm-Leach-Bliley Act. GLBA eliminated the prior blanket exception by limiting its scope to several "traditional" banking activities. Probably the most notable exception is for networking arrangements. One of the requirements of this exception is that no unregistered bank employee may receive any "incentive compensation" for referring securities customers other than a one-time nominal cash referral fee that is paid regardless of whether a sale results. Regulation R defines certain key terms, like "incentive compensation" and "nominal," and also provides two exemptions from the meaning of "incentive compensation" to accommodate certain bonus plans that financial institutions have traditionally used to reward bank employees for their sales efforts. Compliance with the new broker rules is required on the first day of an institution's first fiscal year commencing after September 30, 2008. Financial institutions should review their incentive compensation programs for securities referrals, especially programs structured as bonus plans, to insure compliance with these new rules. The SEC and FRB addressed “dealer” activities in a separate rule. If you have questions, please e-mail Andy Bulgin.