Banking, Investment Banking and Securities

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    F I N A N C I A L S E R V I C E S

    T H E S T A T E O F

    T H E B A N K I N G I N D U S T R Y

    B a n k i n g a n d

    I n v e s t m e n t B a n k i n g & S e c u r i t i e

    A p r i l 1 J u n e 3 0 , 2 0 0 3

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    A p r i l 1 t h r o u g h J u n e 3 0 , 2 0 0 3

    P u b l i s h e d A u g u s t 2 0 0 3

    The State of the Banking Industry is published by KPMGs Banking practice for members of the Banking

    and Investment Banking and Securities Industries. Information and statistics contained in this document

    were obtained from publicly available materials. The information provided here is of a general nature and

    is not intended to address the circumstances of any particular individual or entity. Although we endeavor

    to provide accurate and timely information, there can be no guarantee that such information is accurate as

    of the date it is received or that it will continue to be accurate in the future. No one should act upon such

    information without the appropriate professional advice after a thorough examination of the facts of the

    particular situation.

    For additional information on KPMG, please go to our Web site at www.us.kpmg.com.

    F I N A N C I A L S E R V I C E S

    T H E S T A T E O F T H E B A N K I N G I N D U S T R Y

    B a n k i n g a n d I n v e s t m e n t B a n k i n g & S e c u r i t i e s

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International

    or any KPMG member firm.

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    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International

    or any KPMG member firm.

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    T A B L E O F C O N T E N T S

    Q uar ter l y U pdates

    General Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

    Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

    Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

    Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

    Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

    Accounting Standards and Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

    Market Forces

    Broker/Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

    Consolidation and Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

    International Focus and Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

    e-Business and Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

    Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

    KPMGs Ban k i n g I n s i d er

    Analysis and Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG International

    or any KPMG member firm.

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    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    Q U A R T E R L Y U P D A T E S

    G e n e r a l H i g h l i g h t s

    On May 8, 2003, the Public Company Accounting

    Oversight Board announced that Thomas Ray is joining

    the Boards staff as Deputy Chief Auditor who will work

    closely with Chief Auditor Douglas R. Carmichael. Mr.

    Ray, a partner in KPMG LLPs Department of

    Professional Practice Assurance, has been the

    chairman of the International Auditing Standards

    Subcommittee of the AICPA, a member of the AICPA

    Internal Control Reporting Task Force, and a member of

    the International Auditing and Assurance Standards

    Board Quality Control Task Force. (PCAOB press

    release, May 8, 2003)

    On June 2, 2003, NASD announced that it has agreed to

    principle terms to sell the American Stock Exchange to

    GTCR Golder Rauner LLC, a Chicago based private

    equity firm for approximately $110 million, subject to

    completion of definitive sale documents and various

    approvals. In line with NASDs key goals to exit

    ownership of exchanges and focus on its core mission as

    a regulator to promote market integrity and protect

    investors, NASD began the process by spinning off

    Nasdaq in 2000. (NASD press release, June 2, 2003)

    The final report and recommendations of the

    NYSE/NASD IPO Advisory Committee was issued on

    May 29, 2003 and proposes 20 steps to enhance public

    confidence in the integrity of the IPO process. The

    Committee, formed in October 2002 by the New York

    Stock Exchange and NASD at the request of the SEC,

    included corporate, financial and academic leaders.

    Recommendations of the Committee are intended to

    complement the numerous recent legislative and

    regulatory initiatives, including the Global Settlement

    among regulators and major investment banks. Overall:

    The IPO process must promote transparency in

    pricing and avoid aftermarket distortions.

    Abusive allocation practices must be eliminated.

    The flow of, and access to, information regarding

    IPOs must be improved.

    (NASD/NYSE press release, May 29, 2003)

    On June 5, the NYSEs board of directors adopted initial

    recommendations of its Special Committee on

    Governance of the NYSE that would annually disclose

    director and senior executive compensation, prohibit

    NYSE officers from serving on the boards of listed

    companies, and provide that the NYSEs compensation

    committee consist only of non-securities industry

    directors. These were among ten initial steps to be put

    into effect immediately to ensure that the NYSEs

    governance structure and practices best serve the 85million people who invest, directly or indirectly, through

    the NYSE. (NYSE press release, June 5, 2003)

    New Tillinghast-Towers Perrin research indicates that

    there is going to be a considerable increase in the sale of

    financial services products through the workplace,

    particularly in the areas of critical illness, health

    insurance, and banking products such as personal loans,

    credit cards and mortgages. Reasons behind the expected

    growth include the relatively low customer acquisition

    costs; the increasing interest in flexible benefit schemesof employers as they look to reduce their costs while

    adding choice; the need to educate consumers on

    financial issues as the Government seeks ways in which

    to reduce the retirement savings gap; and the potential

    change from occupational pension schemes to individual

    plans. (Tillinghast press release, June 2, 2003)

    Weiss Ratings, Inc. noted that in 2002 the banking

    industry set a new record for profits, earning $105.3

    billion, outpacing its previous record of $87.5 billion in

    2001. With interest rates at near record lows, the surgein consumer demand for loans more than offset the

    decline in commercial lending. Banks saw more

    profitable net interest margins, higher values for bond

    holdings and increased consumer demand for mortgages,

    home equity and credit card loans and other consumer

    borrowing. There was a 9.7 percent increase in both

    home mortgage lending and consumer loans and a 39.1

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    Q U A R T E R L Y U P D A T E S

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    percent increase in home equity loans in 2002, while

    commercial and industrial lending saw a decline of 5.3

    percent for the year. For the week ended June 27, 2003,the U.S. 30-year fixed rate mortgage averaged 5.24

    percent vs. 6.55 percent a year ago; 15-year rates

    averaged 4.63 percent vs. 5.99 percent at this time last

    year; and one-year adjustable rate mortgages averaged

    3.45 percent vs. 4.61 percent a year ago. (Weiss Ratings,

    Inc. press release, May 12, 2003; Freddie Mac press

    release, June 26, 2003)

    The Office of Federal Housing Enterprise Oversight

    reports in its latest quarterly House Price Index that

    average prices for U.S. homes increased 6.48 percent

    from the first quarter of 2002 through the first quarter of

    2003. At the same time, the quarterly national average

    price appreciation continued deceleration at 0.94 percent

    from 1.3 percent last quarter. In the current quarter, all

    U.S. states experienced positive growth, with California

    continuing to dominate the ranks of the Top 20. (Office

    of Federal Housing Enterprise Oversight press release,

    June 9, 2003)

    On July 16th Sanford I. Weill announced his decision to

    step down as head of Citigroup, effective in January

    2004. Charles O. Prince will become Citigroups new

    Chief Executive Officer and Robert B. Willumstad,

    President, will become Chief Operating Officer. Mr.

    Weill will remain Chairman of the Board until the 2006

    Annual Meeting of Citigroup shareholders. (Citigroup

    press release, July 16, 2003)

    Earnings

    U.S . Ba nk Ea rning s

    Bank of America Corp.: With a strongperformance in most product lines such as mortgage,

    debit and credit cards, deposits and loans, Bank of

    America reported record earnings of $2.74 billion in the

    second quarter of 2003, compared to $2.22 billion for

    the same quarter a year ago. Net income for Bank of

    America's consumer and commercial banking segment

    was $1.87 billion, compared to $1.59 billion in the

    second quarter of 2002. Total revenue for BofA's credit

    card operation in the second quarter of 2003 was $1.04billion, compared to $806 million a year earlier. Return

    on assets was 1.42 percent, compared to 1.38 percent in

    the second quarter 2002, while return on equity was

    21.86 percent, compared to 18.47 percent for the year-

    earlier quarter. Assets on June 30 were $769 billion.

    Bank of New York: The closing of Pershing

    lowered Bank of New Yorks reported net income to

    $295 million for the second quarter, compared to $361

    million in the second quarter of 2002. Return on assets

    was 1.30 percent, compared to 1.82 percent a year

    earlier, while return on equity was 15.56 percent,

    compared to 22.59 percent a year ago. The bank's non-

    interest income was $996 million, compared to $855

    million in the second quarter last year, while net interest

    income was $398 million, compared to $423 million a

    year earlier. Assets on June 30 were $99.8 billion.

    Bank One Corp.: Reported 2003 second-quarter

    net income of $856 million, compared to $803 million in

    the second quarter of 2002 (excluding a $40 million

    after-tax benefit from a restructuring charge reversal in

    the second quarter of 2002). Bank One's retail line of

    business recorded net income of $373 million (excluding

    $11 million after-tax benefit from a restructuring charge

    reversal a year earlier), compared to $371 million a year

    earlier, while its commercial banking business had net

    income of $249 million (excluding the $3 million after-

    tax benefit from a restructuring charge reversal in the

    prior year), compared to $147 million in the second

    quarter of 2002. Return on assets totaled 1.24 percent,

    compared to 1.32 percent a year earlier, while return on

    equity was 15.3 percent, compared to 15.7 percent in the

    year-ago quarter. Reported total assets on June 30 were$299 billion.

    Citigroup: Helped by its strong consumer business,

    the nation's largest financial services company reported

    second-quarter operating earnings of $4.3 billion,

    compared to $3.83 billion a year earlier. Net income was

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    earnings for J.P. Morgan's investment bank operation was

    $1.09 billion, up 114 percent from second quarter 2002,

    and its Chase Financial Services business reported recordoperating earnings of $883 million, an increase of 36

    percent from 2002's second quarter. Return on assets was

    0.96 percent, compared to 0.56 percent in the year-ago

    quarter, and second-quarter return on equity was 17

    percent, compared to 10 percent a year ago. Assets on

    June 30 were $803 billion.

    Mellon Financial Corp.: Reported second

    quarter operating income of $173 million, compared to

    $106 million for the second quarter last year. Net income

    was $175 million, compared to $109 million in the year-ago quarter. Total non-interest revenue was $874 million,

    compared to $923 million in the second quarter of 2002;

    investment management fee revenue was $334 million in

    the quarter, compared to $355 million a year earlier.

    Return on equity was 19.5 percent, compared to 12.6

    percent in 2002's second quarter. Assets on June 30 were

    $38.9 billion.

    Merri l l Lynch: Reported second quarter 2003 net

    earnings of $1.02 billion, compared to $634 million for

    the comparable quarter in 2002, an increase of 61 percent

    mainly due to strong bond trading, cutting costs and

    increasing profit margins. The earnings per diluted share

    were $1.05 compared to $0.66 in last years quarter. Non-

    interest expenses declined by 3.7 percent or $150 million

    in the quarter. The Global Markets and Investment

    Banking group produced quarterly pre-tax earnings of

    $1.11 billion, 72 percent over last years second quarter.

    Return on average common equity was 17.0 percent in the

    second quarter 2003, compared to 12.0 percent a year

    earlier.

    Morgan Stanley 1: Reported second quarter 2003

    net income of $599 million, including a pre-tax asset

    impairment charge of $287 million from Morgan

    Stanleys aircraft financing business, compared to $797

    million for the comparable quarter in 2002, a decrease of

    25 percent. The earnings per diluted share were $0.55

    also $4.3 billion, compared to $4.08 billion a year earlier.

    Citi's consumer cards operation had income of $768

    million for the quarter, compared to $722 million a yearago, while its retail banking operations had income of

    $1.05 billion, compared to $645 million in 2002's second

    quarter. Income for Citigroup's total global corporate and

    investment bank was $1.34 billion, compared to $1.32

    billion a year earlier. Return on equity was 19.2 percent,

    compared to 19.5 percent in the second quarter of 2002.

    Assets on June 30 were $1.19 trillion.

    FleetBoston Financial: Reported net income of

    $624 million for the second quarter of 2003, compared to

    a net loss of $386 million for the second quarter last year,

    mainly due to the banks position of becoming more

    consumer-oriented after suffering losses from its

    Argentine business and reducing its risk. Net chargeoffs to

    average loans was 1.59 percent, compared to 3.29 percent

    in the second quarter of 2002. Return on average assets

    was 1.27 percent and return on equity was 14.47 percent.

    Assets on June 30 were $197.1 billion.

    Goldman Sachs1

    : Reported second-quarter 2003

    net earnings of $695 million, compared to $563 million

    for the comparable quarter in 2002, an increase of 23

    percent resulting from solid operations from the Fixed

    Income, Currency and Commodities franchise. The

    earnings per diluted share were $1.36 compared to $1.06

    in last years quarter. According to Goldman Sachs, Fixed

    Income, Currency and Commodities (FICC) produced

    quarterly net revenues of $1.59 billion, 39 percent over

    last years second quarter. Annualized return on average

    tangible shareholders equity was 18.7 percent, and

    annualized return on average shareholdersequity 14.1

    percent for second quarter 2003. Total capital as of May

    30 was approximately $71.3 billion.

    J.P. Morgan Chase & Co.: Boosted by bond

    trading and consumer banking, J.P. Morgan Chase

    reported operating earnings and net income of $1.8 billion

    in the second quarter, compared to operating earnings of

    $1.18 billion and net income of $1.0 billion a year earlier

    that included merger and restructuring costs. Operating1

    First quarter ended May 31, 2003

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    quarter. Net chargeoffs to average loans was 0.44

    percent, compared to 0.62 percent in the second quarter

    of 2002. Return on average assets was 1.11 percent,compared to 1.29 percent in the same quarter last year,

    and return on equity was 14.95 percent, compared to

    15.77 percent in 2002's second quarter. Assets on June

    30 were $120.9 billion.

    U.S . Ba nco rp: Reported second-quarter net

    income of $954 million, compared to $823 million a

    year ago. Net interest income in the second quarter was

    $1.81 billion, compared to $1.69 billion in the same

    quarter last year; non-interest income was $1.67 billion,

    compared to $1.44 billion in 2002's second quarter.Return on assets was 2.04 percent, compared to 1.95 a

    year earlier, while return on equity was 20.0 percent,

    compared to 20.0 percent in the second quarter of 2002.

    Assets on June 30 were $195 billion.

    Wachovia Corp.: Reported second-quarter net

    income of $1.03 billion, compared to $849 million for

    the same quarter a year ago. Non-performing assets as a

    percentage of total loans was 1.04 percent for the

    quarter, compared to 1.24 percent a year earlier;

    chargeoffs were 0.43 percent, compared to 0.97 percent

    in the second quarter of 2002. Average core deposits

    were $179 billion during the second quarter, compared

    to $165 billion a year ago. Return on assets was 1.21

    percent, compared to 1.09 percent in the year-ago

    quarter; return on equity was 12.78 percent, compared to

    11.52 percent in the second quarter of 2002. Assets on

    June 30 were $364 billion.

    Washington Mutual Inc.: Boosted by branch

    growth and mortgage lending, Washington Mutual

    reported net income in 2003's second quarter of $1.02

    billion, compared to $990 million for the same quarter a

    year ago. Net interest income after provisions for loan

    and lease losses was $1.91 billion for the quarter,

    compared to $1.94 billion in the second quarter of 2002.

    Wamu's non-interest income was $1.63 billion for the

    second quarter of 2003, compared to $1.21 billion a year

    earlier. Return on assets was 1.44 percent, compared to

    compared to $0.72 in last years quarter. Institutional

    Securities posted quarterly net income of $298 million,

    33 percent below last years second quarter. The FixedIncome Sales & Trading net revenues increased year-

    over-year by 48 percent to $1.3 billion. Return on

    average common equity was 10.6 percent in the second

    quarter 2003, compared to 15.1 percent a year earlier.

    Total capital as of May 31, 2003 was $78.7 billion.

    National City Corp.: Helped by a strong core

    deposit, consumer loan and mortgage results, National

    City Corp. reported net income of $617 million for the

    second quarter, compared to $393 million for the same

    period a year earlier. Net interest income after provisionsfor loan losses was $919 million, compared to $806

    million in 2002's second quarter, and fees and other

    income totaled $1.03 billion, compared to $729 million

    for the year-ago quarter. Return on assets was 2.08

    percent, compared to 1.61 percent a year ago, and return

    on equity was 28.10 percent, compared to 19.98 percent

    for the second quarter of 2002. Assets on June 30 were

    $123.4 billion.

    State Street Corp.: State Street reported net

    loss of $23 million on revenue of $1.1 billion that

    included pre-tax restructuring charges of $292 million

    from its expense-reduction program, a $13 million pre-

    tax charge relating to an agreement to sell some real

    estate in suburban Boston and a $18 million pre-tax

    merger and integration cost related to the business it

    acquired from Deutsche Bank. State Street also finished

    a tax issue relating to its REIT with the Massachusetts

    Department of Revenue that produced a tax benefit of

    $13 million. For second quarter 2002, net income was

    $178 million, and revenue was $1.0 billion. Assets on

    June 30 were $83.1 billion.

    SunTrust Banks Inc.: SunTrust reported net

    income of $330 million for the second quarter of 2003,

    compared to net income of $344 million for the second

    quarter of 2002. The bank holding company reported net

    interest income after loan loss provisions of $717

    million, compared to $702 million in the year-ago

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    1.48 percent in 2002's second quarter, while return on

    equity was 19.25 percent, compared to 20.37 percent for

    the same quarter a year ago. Assets on June 30 were$283 billion.

    Wells Fargo & Co.: With strong results in

    consumer lending, Wells Fargo reported net income of

    $1.53 billion in the second quarter of 2003, compared to

    net income of $1.42 billion for the same quarter a year

    ago. Return on assets was 1.63 percent, compared to

    1.83 percent a year ago, while return on equity was

    19.60 percent, compared to 19.72 percent in 2002's

    second quarter. Net interest income after loan losses was

    $3.62 billion, compared to $3.23 billion a year earlier,while non-interest income was $2.71 billion in the

    second quarter, up from $2.38 billion in the second

    quarter of 2002. Assets on June 30 were $370 billion.

    Canadian Bank Earnings*

    Bank of Montreal announced a second quarter

    net income of $409 million compared to $301 million

    during the same period a year ago. Revenues for the

    quarter decreased by 1 percent over the second quarter

    of 2002 to $2.2 billion due to the fact that volume

    growth and improved net interest margins in Canadian

    retail and business banking were offset by the effects of

    low client transaction volumes in other operating groups

    and the weaker U.S. dollar. Net interest income after

    provision of credit losses was $1.09 billion. Return on

    equity was 15.2 percent, compared to 11.6 percent in the

    year-ago quarter. Assets on April 30, 2003 were

    $258 billion.

    CIBC announced a second quarter net income of $320

    million compared to $227 million during the same

    period a year ago. Total revenues reported on a taxequivalent basis were $2.7 billion in the quarter. Net

    interest income rose to $1.36 billion in the second

    quarter of 2003 from $1.32 billion in the same quarter of

    2002 due to increases in loan volume, residential

    mortgages and volume growth and improved spreads in

    cards and Presidents Choice Financial which were

    moderately counteracted by lower West Indies revenue

    as a result of the change to equity accounting and lower

    trading revenue. Return on equity was 11.9 percent,compared to 8.0 percent in the year-ago quarter. Assets

    on April 30, 2003 were $280 billion.

    Royal Bank of Canada announced second

    quarter record net income of $689 million compared to

    $710 million during the same period a year ago. Net

    income from U.S. acquisitions (RBC Centura, RBC

    Dain Rauscher and RBC Liberty Insurance) was $58

    million. Total revenues dropped by 4 percent in the

    quarter to $3.75 billion from $3.91 billion in the second

    quarter of 2002, due to a net gain on credit derivativesthat was recorded in last years second quarter, and a

    decline in revenue this quarter due to the appreciation of

    the Canadian dollar in comparison to the U.S. dollar.

    Interest income was $1.70 billion for the quarter down

    from prior years quarter of $1.72 billion. Return on

    equity was 15.4 percent, compared to 16.8 percent in the

    year-ago quarter. Assets on April 30, 2003 were

    $398 billion.

    Scotiabankannounced second quarter net income

    of $596 million compared with $598 million during the

    same period a year ago. Revenues for the quarter were

    $2.57 billion compared to $2.77 billion in the second

    quarter of 2002. This decline mainly resulted from lower

    securities gains and foreign currency funding spread as

    well as the sales of Scotiabank Quilmes and the Banks

    merchant acquirer business last year. Net interest income

    was $1.54 billion compared to $1.65 billion in the prior

    years quarter. Return on equity was17.2 percent,

    compared to 18.3 percent in the year-ago quarter. Assets

    on April 30, 2003 were $292 billion.

    TD Bank Financial Group reported a netincome on operating cash basis loss of $146 million in

    the second quarter of 2003, compared to net income on

    an operating cash basis of $316 million in the same

    quarter of 2002 which reflects the steps the Bank is

    taking to restructure its wealth management business

    outside North America and the U.S. equity option arm of

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

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    is the subject of the lease stripping transaction. The fact

    that parties that were unrelated up to and including the

    time of a transaction engage in that transaction in anattempt to arbitrarily shift income or deductions among

    themselves does not by itself evidence the type of

    control necessary to satisfy the acting in concert or with

    a common goal or purpose requirement of section

    1.482-1(i)(4).

    The IRS also noted that it will challenge lease stripping

    transactions on other legal grounds. Rev. Rul. 2003-96

    will appear in Internal Revenue Bulletin 2003-34, dated

    August 25, 2003.

    (KPMGs TaxNewsFlash, No. 2003-234, July 21, 2003)

    IRS Identifies Lease Stripping Transactions as

    "Listed Transactions"

    On July 21, 2003, the IRS released an advance copy of

    Notice 2003-55, relating to lease strips and other

    stripping transactions. With this notice, the IRS stated

    that transactions that are the same as or substantially

    similar to the lease strips described in the notice are

    "listed transactions" for purposes of the tax shelter

    regulations.

    Listed Transaction - The IRS concluded that lease

    strips improperly separate income from related

    deductions and generally do not produce the tax

    consequences desired by the participants.

    Therefore, transactions that are the same as, or

    substantially similar to, the lease strips described in

    Notice 2003-55 are "listed transactions" for purposes of

    Reg. sections 1.6011-4(b)(2), 301.6111-2(b)(2), and

    301.6112-1(b)(2). Moreover, according to the notice,

    these transactions may already be subject to the

    disclosure requirements, the tax shelter registration

    requirements, or the list maintenance requirements under

    the regulations. Finally, the IRS warns that accuracy-

    related penalties may be imposed on participants in lease

    strip transactions.

    its wholesale banking operation. Net interest income

    (TEB) grew from $1.37 billion in the second quarter of

    2002 to $1.47 billion in this years second quarter.Return on equity on an operating cash basis was negative

    6.0 percent, compared to 9.7 percent in the year-ago

    quarter. Assets on April 30, 2003 were $322 billion.

    * Canadian financial information reported in Canadian currency.

    Second quarter ended April 30, 2003.

    (Source: Company financial reports)

    The information contained in this Earnings section was obtained from

    the individual company financial statements. KPMG LLP has not

    verified any information stated herein and does not endorse any of the

    numerical information provided.

    Taxation

    IRS Rules Section 482 Cannot Be Used to Allocate

    Income, Deductions From Lease Stripping

    Transactions

    On July 21, 2003, the IRS released an advance copy of

    Rev. Rul. 2003-96, concerning whether the transfer

    pricing rules can be used to allow allocations of incomeand deductions under a lease stripping arrangement

    entered into among unrelated parties, under a plan

    promoted to realize tax benefits for one or more of the

    parties, solely on the basis that at the time the parties

    entered into the transaction, they had a common goal to

    shift income or deductions among themselves.

    The IRS ruled that under the facts presented, section 482

    could not be used to allow the allocation of income and

    deductions arising from property that is the subject of a

    lease stripping transaction. According to the IRS, the

    facts in the revenue ruling:

    . . . described up to and including the time the income is

    stripped from the leases do not support the application of

    section 482 to allow the allocation among the parties of

    the income and deductions arising from the property that

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

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    (1) A book method, under which the inducement fee

    is recognized for federal income tax purposes in

    the same amounts and over the same period inwhich that fee is included in income by the

    taxpayer for financial reporting purposes

    (provided that period is not shorter than the period

    over which the REMIC is expected to generate

    taxable income).

    (2) A method under which the inducement fee is

    recognized for federal income tax purposes ratably

    over the remaining anticipated weighted average

    life of the REMIC determined as of the time the

    noneconomic residual interest is transferred to thetaxpayer.

    Provide a rule that applies if a holder of a residual

    interest sells or otherwise disposes of the residual

    interest.

    Include a rule clarifying that an inducement fee is

    income from sources within the United States.

    If the regulations are finalized as proposed, the timing

    for including inducement fees in income would apply

    for tax years ending on or after the publication of finalregulations in the Federal Register. Comments are

    requested.

    The proposed rules also note that a taxpayer may not

    change its method of accounting for inducement fees

    without securing the prior consent of the Commissioner.

    Treasury and the IRS request comments as to how best

    to effect any change in method of accounting under

    these regulations.

    REG-162625-02 is scheduled to be published in the

    Federal Register, July 21, 2003.

    (KPMGs TaxNewsFlash, No. 2003-230, July 18, 2003)

    The IRS further stated that it was currently evaluating

    other situations in which tax benefits are claimed as a

    result of transactions in which the ownership of propertyhas been separated from the right to income from the

    property. For example, the IRS reported that it is

    evaluating situations in which, in exchange for

    consideration, one participant assigns its interest in

    property but retains the right to income from the

    property, and, by allocating all of its basis to the

    transferred property and none to the retained future

    payments, the transferor claims a loss on the transfer.

    Notice 2003-55 modifies and supersedes Notice 95-53,

    and will appear in Internal Revenue Bulletin 2003-34,

    dated August 25, 2003.

    (KPMGs TaxNewsFlash, No. 2003-233, July 21, 2003)

    Proposed Accounting Rules for REMIC

    Inducement Fees

    On July 18, 2003, the Treasury Department and IRS

    released proposed regulations (REG-162625-02) with

    accounting rules for taking into income any fees received

    to induce the acquisition of noneconomic residual

    interests in real estate mortgage investment conduits(REMICs). Under the proposed accounting rules,

    inducement fees would be taken into income over a

    period that is related to the period during which the

    applicable REMIC is expected to generate taxable

    income or net loss allocable to the holder of the

    noneconomic residual interest. In general, the proposed

    regulations:

    Provide that an inducement fee may not be taken into

    account in a single tax year, but must be included in

    income over a period that is reasonably related to theperiod during which the REMIC is expected to

    generate taxable income or net loss allocable to the

    holder of the noneconomic residual interest.

    Establish two safe harbor methods of accounting for

    inducement fees:

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    procedure is effective for leases in effect or entered into

    on or after January 1, 2001, and will appear in Internal

    Revenue Bulletin 2003-33, dated August 18, 2003.

    (KPMGs TaxNewsFlash, No. 2003-223, July 16, 2003)

    IRS Establishes Safe Harbor for Loan by REIT to Be

    Treated as Real Estate Asset

    On July 11, 2003, the IRS released an advance copy of

    Rev. Proc. 2003-65, establishing a safe harbor for a loan

    made by a real estate investment trust (REIT) to be

    treated as a real estate asset for purposes of sections

    856(c)(4)(A) and 856(c)(5)(B), even though the loan isnot directly secured by a mortgage on real property. In

    addition, if the criteria for the safe harbor are satisfied,

    the IRS states that interest on such loans will be treated

    as interest on an obligation secured by a mortgage on

    real property or on an interest in real property for

    purposes of section 856(c)(3)(B).

    Background - Many REITs invest in real estate by

    making loans that are secured by real property. In certain

    cases, because of financing arrangements and restrictive

    loan covenants, REITs make loans to the owners of

    entities that hold real property, instead of making loans

    that are secured directly by real property. The loans are

    secured by a pledge of the borrowers' ownership

    interests in the property-owning entities.

    Section 856, however, requires that certain tests must be

    met for the entity to qualify as a REIT. These tests

    include requirements that:

    75 percent of the value of the REIT's total assets is

    represented by real estate assets (including mortgages

    on real property), cash and cash items, andgovernment securities.

    75 percent of the REIT's gross income is derived

    from certain items including interest on obligations

    secured by mortgages on real property or on interests

    in real property.

    IRS Issues Guidance for REITs and Taxable REIT

    Subsidiaries

    On July 16, 2003, the IRS released the following

    guidance concerning real estate investment trusts

    (REITs):

    Rev. Rul. 2003-86 addresses whether a joint venture

    partnership between a taxable REIT subsidiary and a

    corporation that qualifies as an independent

    contractor of the REIT can provide noncustomary

    services to tenants of the REIT without causing the

    rents paid to the REIT to fail to qualify as rents from

    real property under section 856(d).

    Rev. Proc. 2003-66 describes the conditions under

    which payments to a REIT from a joint venture

    between a taxable REIT subsidiary and an unrelated

    third party for space at property owned by the REIT

    will be treated as rents from property under section

    856(d).

    Rev. Rul. 2003-86 - Under the facts considered in the

    July 16th revenue ruling, the IRS ruled that the joint

    venture partnership between the unrelated independent

    contractor and the taxable REIT subsidiary may provide

    certain noncustomary services (primarily for the

    convenience of the REIT tenants) to such tenants without

    causing the related rents paid to the REIT to fail to

    qualify as rents from real property.

    Rev. Rul. 2003-86 will appear in Internal Revenue

    Bulletin 2003-32, dated August 11, 2003.

    Rev. Proc. 2003-66provides the rules under which the

    IRS will treat rents from a qualifying joint venture as

    rents from real property, where the amounts paid to the

    REIT by the joint venture are substantially comparable torents paid by other tenants at the REIT's property for

    comparable space and at least 90 percent of the leased

    space of the REIT's property is rented to persons other

    than (1) taxable REIT subsidiaries and (2) related parties

    as described in section 856(d)(2)(B). The revenue

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    Rev. Proc. 2003-65 - With the July 11th revenue

    procedure, the IRS provides a safe harbor for treating a

    loan as a qualified real estate asset under the REITqualification rules, even though the loan is not directly

    secured by a mortgage on real property. To qualify for

    the safe harbor, the following requirements must be met:

    The borrower is either a partner or a partnership, or

    the sole member of an eligible entity that has not

    elected to be treated as a corporation for federal tax

    purposes (and therefore is disregarded as an entity

    separate from its owner).

    The loan is nonrecourse.

    The lender has a first priority security interest in the

    pledged ownership interest.

    On default and foreclosure of the secured loan, the

    lender will replace the borrower as a partner in the

    partnership or as the sole member of the disregarded

    entity.

    On the date that the lender's commitment to make the

    loan is binding, the partnership or disregarded entity

    holds real property and if any of this property is sold

    or transferred, the loan is immediately due andpayable.

    On each testing date, the value of the subject real

    property is at least 85 percent of the value of all of the

    assets of the partnership or disregarded entity.

    The loan value of the real property owned by the

    partnership or disregarded entity equals or exceeds

    the amount of the loan as determined under Reg.

    section 1.856-5(c)(2).

    Interest on the loan includes only an amount that

    constitutes compensation for the use or forbearance of

    money.

    A loan that satisfies these eight requirements will be

    treated as a real estate asset for purposes of sections

    856(c)(4)(A) and 856(c)(5)(B), and the interest on the

    loan will be treated as interest on an obligation secured

    by a mortgage on real property or on an interest in real

    property for purposes of section 856(c)(3)(B).

    Rev. Proc. 2003-65 is effective August 11, 2003, and will

    appear in Internal Revenue Bulletin 2003-32, dated

    August 11, 2003.

    (KPMGs TaxNewsFlash, No. 2003-219, July 11, 2003)

    Final IRS Guidance on Withholding Rules for

    Foreign Partnerships and Foreign Trusts

    On July 10, 2003, the IRS issued Rev. Proc. 2003-64,

    concerning the withholding and reporting obligations for

    payments of income made to foreign partnerships and

    foreign simple or grantor trusts. The IRS stated that the

    purpose of this guidance is to simplify these withholding

    and reporting obligations. Accordingly, Rev. Proc. 2003-64:

    Provides final withholding foreign partnership (WP)

    and withholding foreign trust (WT) agreements, as

    described in Reg. section 1.1441-5(c)(2)(ii) and

    (e)(5)(v), and the application procedures for entering

    into such agreements.

    Amends the Qualified Intermediary (QI) withholdingagreement of Rev. Proc. 2000-12 by including new

    section 4A -i.e., additional rules for QIs for

    withholding and reporting on certain small or related

    foreign partnerships and foreign simple or grantor

    trusts that do not enter into WP or WT agreements.

    Similar rules are part of the final WP and WT

    agreements. Rev. Proc. 2003-64 provides that a WP or

    WT agreement entered into during a calendar year may

    be made effective as of the first day of that calendar

    year. Therefore, a QI may apply the provisions of section

    4A as of the beginning of the 2003 calendar year.

    Background - In Notice 2001-4, the IRS provided

    important transitional relief and guidance related to the

    section 1441 regulations (as amended in May 2000) for

    foreign partnerships for calendar year 2001 (see

    KPMGs TaxNewsFlash 2000-207). The transitional

    relief was extended through calendar year 2002.

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

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    In Notice 2002-41, the IRS proposed WP and WT

    agreements with streamlined procedures designed to

    simplify documentation and reporting (see KPMGsTaxNewsFlash 2002-120). As proposed, a WP or

    WT was to provide the withholding agent with a

    Form W-8IMY as a WP or WT without attached

    documentation from partners, beneficiaries, or owners.

    The WP or WT would receive gross payments from the

    withholding agent, and then withhold and deposit tax (if

    any) based on the Forms W-8 or W-9 received from the

    partners, beneficiaries, or owners. The WP or WT would

    report payments to, and tax withheld from, its direct

    foreign partners, beneficiaries, or owners on Form 1042-

    S on an individual basis or, by election, on a pooled

    basis. Thus, a WP or WT would be relieved of having to

    disclose to a withholding agent any documentation and

    payment information for partners, beneficiaries, or

    owners. A withholding agent would be relieved of the

    responsibility for collecting documentation, withholding,

    and reporting payment information for partners,

    beneficiaries, or owners of a WP or WT.

    Rev. Proc. 2003-64 - According to the July 10th revenue

    procedure, no further extensions of the transitional relief

    for foreign partnerships are required. With respect to the

    documentation and reporting relief for foreign simple

    and grantor trusts, comprehensive guidance is included

    in the revenue procedure; however, for the year 2003, a

    QI may apply the earlier rules of Notice 2001-4 or the

    rules of this revenue procedure.

    Concerning WP and WT agreements, several provisions

    of the WP and WT agreements have been amended, and

    a new set of provisions for certain smaller foreign

    partnerships and trusts and for certain foreign

    partnerships and trusts that are related to a QI, WP, or

    WT have been developed. Other changes concern the::

    Term of the Agreement: The six-year renewable term

    is still available, but the WP or WT may elect to use a

    longer non-renewable term of up to 15 years.

    Automatic Termination: The final WP or WT

    agreements (1) extend the date for curing

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    documentation failures from January 31 to March 15

    and (2) add an alternative method for curing failure.

    Withholding on Distributions: The WP or WT may

    compute the amount of withholding on a distribution

    by using a reasonable estimate of the partner,

    beneficiary, or owner's distributive share of income

    subject to withholding for the year.

    Application to Direct Partners, Beneficiaries, or

    Owner: The final WP and WT agreements contain

    two new provisions for application to indirect

    partners, beneficiaries, or owners (1) that are small

    partnerships and trusts (streamlined rules similar to

    the U.S. rules for joint account holders) and (2) thatare partnerships or trusts that are related to the WP or

    WT (rules similar to those for private arrangement

    intermediaries (PAIs) under the QI agreement)

    Frequency of Audit: The WP and WT agreements

    have been amended to conform the audit cycle for the

    six-year agreement to the audit cycle under the QI

    agreement. If the WP or WT elects pooled reporting

    and a six-year term, it must agree to have the external

    auditor conduct an audit of the second and fifth full

    calendar year that the agreement is in effect. The two-

    year audit cycle is retained for a WP or WT that

    elects pooled reporting and a non-renewable term of

    up to 15 years.

    Yet, for the most part, the final WP and WT agreements

    are substantially the same as originally proposed in

    Notice 2002-41. For example, the WP and WT

    agreements continue to require payments to partners,

    beneficiaries, or owners to be documented solely with

    Forms W-8 and W-9 and do not permit reliance on the

    presumption rules. Rev. Proc. 2003-64 also includes new

    rules for:

    A small foreign partnership or simple or grantor trust

    that is an account holder of a QI.

    A foreign partnership or trust that is related to a QI,

    WP, or WT to provide information necessary for the

    QI, WP, or WT to withhold and report on reportable

    amounts.

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    Rev. Proc. 2003-64 is effective, July 10, 2003, and will

    appear in Internal Revenue Bulletin 2002-32, dated

    August 11, 2003.

    (KPMGs TaxNewsFlash, No. 2003-217, July10, 2003)

    New Regulations Governing Section 338(h)(10)

    Elections and Multi-Step Transactions -

    A Brave New World

    On July 8, 2003, the Treasury Department and IRS

    released an advance copy of final and temporary

    regulations (T.D. 9071) and, by cross reference, proposed

    regulations (REG-143679-02), giving effect to section

    338(h)(10) elections in certain multi-step transactions as

    contemplated by Rev. Rul. 2001-46.

    The regulations provide that the step-transaction doctrine

    will not be applied if a taxpayer makes a valid section

    338(h)(10) election with respect to a step in a multi-step

    transaction, even if the transaction would otherwise

    qualify as a reorganization, if the step, viewed

    independently, is a qualified stock purchase.

    Background - Rev. Rul. 2001-46 applied the step-

    transaction doctrine to treat a series of transactionsoccurring pursuant to a single plan - encompassing a

    first step acquisition merger of a subsidiary of Acquiring

    into Target that would otherwise constitute a qualified

    stock purchase, followed by a second step upstream

    merger of Target into Acquiring - as a single statutory

    merger of Target into Acquiring (see KPMGs

    TaxNewsFlash 2001-187).

    Final and Temporary Regulations - As contemplated

    by Rev. Rul. 2001-46, the July 8th release adopts new

    final and temporary regulations to give effect to section

    338(h)(10) elections in multi-step transactions where the

    purchasing corporation's acquisition of the target's stock,

    viewed independently, constitutes a qualified stock

    purchase.

    The regulations provide that if a section 338(h)(10)

    election is made in these circumstances, the purchasing

    corporation's acquisition of target's stock will be treated

    as a qualified stock purchase for all federal tax purposes,

    even if the overall transaction would be integrated andtreated as a single reorganization qualifying under

    section 368(a) in the absence of a section 338(h)(10)

    election.

    Effective Date - The final and temporary regulations are

    applicable to acquisitions of stock occurring on or after

    the date of publication of the regulations in the Federal

    Register (scheduled to be July 9, 2003).

    KPMG Observation - The regulations provide

    taxpayers flexibility in structuring and planning the tax

    consequences of an acquisition, and represent a novel

    approach by the Treasury in which tax-free

    reorganization treatment is, in certain circumstances,

    elective. One may wonder if this may be an initial foray

    into a check-the-box regime for tax-free reorganization

    treatment.

    (KPMGs TaxNewsFlash, No. 2003-214, July 8, 2003)

    For electronic versions of the releases mentioned above or for additionaltax-related information, see KPMGs TaxNewsFlash publications at

    www.kpmgtax.com.

    Regulat ion

    FinCEN and the SEC issued joint final rules that require

    broker-dealers and mutual funds to take steps to verify

    the identities of their customers. They became effective

    on June 9. These institutions must fully implement their

    customer identification programs (CIPs) by October 1.

    These rules were issued concurrently with other final

    regulations affecting banks, savings associations, credit

    unions, and certain non-federally regulated banks, as

    well as futures commission merchants and introducing

    brokers. Collectively, the rules are intended to be

    uniform throughout the financial services industry.

    FinCEN and the SEC collaborated on the broker-dealer

    and mutual fund CIP rules, which are intended to

    implement Section 326 of the United and Strengthening

    America by Providing Appropriate Tools Required to

    Intercept and Obstruct Terrorism Act of 2001 (USA

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

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    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    on Sound Practices to Strengthen the Resilience of the

    U.S. Financial System. The paper identifies three new

    business continuity objectives that are of specialimportance to financial institutions in the post-

    September 11 environment, and four sound practices

    which are intended to strengthen the resilience of critical

    U.S. financial markets by minimizing the immediate

    systemic effects of a wide-scale disruption. The paper

    applies most directly to core clearing and settlement

    organizations and firms that play significant roles in

    critical financial markets. The agencies expect these

    institutions to adopt the sound practices discussed in the

    paper within designated time frames.

    The SEC issued a notice that it approved an order to

    extend the temporary exemption of banks, savings

    associations and savings banks from the definitions of

    broker under Section 3(a)(4) of the Securities and

    Exchange Act of 1934 (Exchange Act) until November

    12, 2004.

    The SEC adopted an amendment to Rule 15c3-3(b)(3)

    under theExchange Act, which provides that broker-

    dealers must provide full collateral consisting of certain

    specified financial instruments or cash when theyborrow fully paid and excess margin securities from

    customers. The rule change will allow firms to pledge

    other collateral as the SEC designates as permissible by

    order of the SECs Division of Market Regulation. The

    change became effective on April 16.

    The SEC issued an interpretive release regarding its

    books and records regulations (Rules 17a-3 and 17a-4

    under theExchange Act) in order to clarify certain issues

    raised by industry participants. Amendments to these

    rules, which were adopted on October 26, 2001, recentlybecame effective on May 2. The interpretation became

    effective on May 29.

    NASD announced a proposal to amend Rule 3010 to

    require the Chief Executive Officer and Chief

    Compliance Officer of each member firm to make

    annual, joint certifications regarding the adequacy of

    PATRIOT Act). They aim to strengthen ongoing efforts by

    these agencies to prevent, detect and prosecute money

    laundering and the financing of terrorism.

    FinCEN issued a notice of proposed rulemaking that

    would amendBank Secrecy Act (BSA) rules to add

    futures commission merchants and introducing brokers

    in commodities to the regulatory definition of financial

    institution, and require that they report suspicious

    transactions to FinCEN. These institutions are considered

    at risk for certain money laundering activities due to

    their respective business activities and importance in the

    global economy. The proposal is intended to implement

    provisions of theBSA in order to further the efforts ofTreasury and other financial regulators to prevent, detect

    and prosecute money laundering and the financing of

    terrorism. In developing the proposed and amended

    rules, FinCEN consulted extensively with the Chicago

    Futures Trading Commission, which, with designated

    self regulatory organizations, would be responsible for

    oversight and enforcement of the rules. The changes

    would become effective 180 days after the final version

    of the rule is adopted.

    The SEC, New York Attorney General, North AmericanSecurities Administrators Association, NASD, NYSE,

    and state securities regulators jointly announced the

    finalization of an approximate $1.4 billion settlement

    with ten large broker-dealers, in connection with

    allegations of conflicts of interest between research and

    investment banking interests at these firms, supervisory

    deficiencies and allegations of spinning. The action

    represents finalization of the so-called global

    settlement that was reached in principle in December

    2002. The terms require payments of penalties,

    disgorgement and funds for independent research and

    investment education, as well as significant structural

    reforms to increase the integrity of equity research.

    The SEC, the Board of Governors of the Federal Reserve

    System (Fed), and the Office of the Comptroller of the

    Currency (OCC), in cooperation with the Federal

    Reserve Bank of New York, issued anInteragency Paper

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

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    the firms compliance and supervisory procedures.

    NASD also proposed the adoption of related

    interpretive material to describe the purpose of theproposed rule and provide clarification regarding the

    obligations and liabilities associated with the

    certification requirement.

    The SEC requested public comment on a petition

    filed by The Nasdaq Stock Market, Inc., relative to

    trading in Nasdaq-listed securities. Nasdaq has asked

    the SEC to take multiple actions in order to address

    unequal and inadequate regulation by various

    national and regional exchanges that trade these

    securities.

    NASD established a one-time global extension for

    all firms subject to the requirement to complete a

    self-assessment of front-end load mutual fund

    transactions. This review was required in connection

    with recent regulatory, Congressional and industry

    attention to potential problems in this area.

    Sources: KPMGs Compliance & Regulatory Focus, April-July 2003;

    KPMGs Washington Report, March-July 2003. Federal Register and Web

    sites of the issuing agencies including: www.treas.gov/fincen,

    www.sec.gov, www.nasd.com, www.nyse.com, www.nasaa.org and

    www.gao.gov.

    KPMG hostsRegulatory Perspectives, a quarterly teleconference

    briefing for clients on important legislative and regulatory activities

    specific to the financial services industry. For more information about

    Regulatory Perspectives, or to register for future teleconferences, please

    send an e-mail to [email protected]. The e-mail should include your

    name, title, company name, and your e-mail address.You will be

    notified via e-mail regarding future teleconferences.

    Legis lat ion

    Basel Bill Passes House Subcommittee

    The House Financial Services Subcommittee on

    Financial Institutions passes H.R. 2043, the United

    States Financial Policy Committee For Fair Capital

    Standards Act, by voice vote on July 16.

    The bill would create an interagency financial policy

    committee that would include the Treasury secretary as

    chairman, the chairman of the Board of Governors of the

    Federal Reserve System, the comptroller of the currency,the chairman of the Federal Deposit Insurance

    Corporation, and the chairman of the Office of Thrift

    Supervision.

    The Financial Policy Committee would be responsible

    for constructing uniform United States positions on

    proposals made to, and issues before, the Basel

    Committee on Banking Supervision that may affect U.S.

    financial institutions.

    If the bill passed tomorrow, it would force regulators to

    form a uniform policy on the Basel II accord. According

    to a committee press release, several members of the

    Committee questioned the wisdom of making

    operational risk a mandatory capital charge under Pillar I

    of the Basel Accord a provision which is included

    under the current Basel proposal. Several members also

    expressed their desire for continued Congressional

    oversight of the Basel process.

    The House Committee on Financial Services has yet to

    schedule a markup on the bill. Further, there is no

    companion legislation in the Senate as of yet.

    The text of H.R. 2043 is available on the Library of

    Congress Web site.

    (KPMGs Washington Report, July 21, 2003)

    FACT Act Passes House Financial Services

    Committee

    The House Committee on Financial Services passed

    H.R. 2622, theFair and Accurate Credit Transactions

    Act(FACT), by a 61-3 vote. H.R. 2622 would renewpreemption provisions in theFair Credit Reporting Act

    (FCRA) that allow financial and retail firms to share

    certain customer data among their affiliates. These

    provisions are set to expire on January 1, 2004. The bill

    also strengthens rules to fight identity theft. The

    Committee passed a number of amendments to the bill

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    that would:

    Require consumer reporting agencies to employ afraud alert system to help victims of identity theft to

    ensure that credit is not extended to identity thieves.

    Ban businesses from sharing negative information

    about a consumer if they have received a copy of a

    police report indicating an illegal transaction

    following an identity theft.

    Require the General Accounting Office to conduct a

    study on the role of race and gender in the credit

    granting process.

    Require credit bureaus to notify users of consumer

    reports when discrepancies exist in connection with

    addresses.

    Require federal bank regulators to issue guidance on

    how lenders should treat credit reports when there is

    confusion about a consumers address.

    Ban the passing on of consumer information to credit

    bureaus if the information furnisher has substantial

    doubts about the accuracy of the information.

    Permit consumers to reinvestigate consumer disputesdirectly through resellers of credit reporting

    information.

    Define a fraud alert as a statement that notified users

    of the file that the consumer does not want credit

    offered without permission through a preauthorized

    procedure.

    The fraud alert system created by the bill is composed of

    three tiers: an initial alert; an extended alert; and a

    special military alert.

    When a consumer reporting agency creates an alert, it

    would automatically be communicated to other consumer

    reporting agencies and would exclude the consumer from

    pre-screened offers of credit or insurance. Further, no

    user of a consumer report with a fraud alert in it may

    issue or extend credit in the name of the consumer to a

    Q U A R T E R L Y U P D A T E S

    person other than the consumer without first attempting

    to obtain the authorization or preauthorization of the

    consumer in the manner contained in the fraud alert.

    The FACT Act now heads to the House Floor for

    consideration. Congressman Oxley (R-OH), Chairman

    of the House Committee on Financial Services, would

    like the House to complete action on the bill before the

    end of September. Congressman Frank (D-MA)

    predicted the bill would pass the Senate before

    January 1, 2004.

    The text of H.R. 2622 is available on the Library of Congress

    Web site at http://thomas.loc.gov.

    (KPMGs Washington Report, July 28, 2003)

    To subscribe to KPMGs regulatory and legislative reports, please

    send an e-mail message to [email protected] for any of the

    following publications:

    Washington Reports

    Regulatory Practice Letters

    Legislative Practice Letters

    Compliance and Regulatory Focus

    These reports can also be accessed through KPMGs Web site at

    www.us.kpmg.com (Financial Services industry). Back issues may be

    obtained by sending an e-mail message to [email protected].

    Accounting Standards and

    Developments

    Financial Accounting Standards Board (FASB)

    The FASB has issued for public comment an Exposure

    Draft, Qualifying Special-Purpose Entities and Isolation

    of Transferred Assets, which would amend FASB

    Statement No. 140,Accounting for Transfers and

    Servicing of Financial Assets and Extinguishments ofLiabilities. The purpose of the proposal is to provide

    more specific guidance on the accounting for transfers

    of financial assets from a company to an off-balance

    sheet structure known as a qualifying special-purpose

    entity (QSPE).

    The Boards objective is to improve the accounting for

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    QSPEs in several key respects. First, it would prohibit an

    entity from being a QSPE if a company that transfers

    assets to the entity enters into a commitment (such as afinancial guarantee, liquidity commitment or total return

    swap) to provide additional cash or other assets to fulfill

    the QSPEs obligations to its beneficial interest holders.

    Second, if an entity can reissue beneficial interests, the

    proposed Statement would prohibit that entity from

    being a QSPE if any party involved with the entity has

    certain risks or combinations of risks and decision-

    making abilities. Third, the proposed Statement would

    prohibit an entity from being a QSPE if it holds equity

    instruments, such as shares or partnership interests.

    Finally, the proposed Statement would clarify certain of

    the requirements in Statement 140 related to legally

    isolating assets and surrendering control of assets. The

    comment period ends July 31, 2003.

    FASB has issued Statement No. 150,Accounting for

    Certain Financial Instruments with Characteristics of

    both Liabilities and Equity. The Statement improves the

    accounting for certain financial instruments that, under

    previous guidance, issuers could account for as equity.

    The new Statement requires that those instruments be

    classified as liabilities (or, in certain circumstances, as

    assets) in statements of financial position.

    Statement 150 affects the issuers accounting for

    mandatorily redeemable shares that the issuing company

    is obligated to buy back in exchange for cash or other

    assets, instruments that do or may require issuers to buy

    back shares in exchange for cash or other assets, and

    obligations that can be settled with shares, the monetary

    value of which is fixed, tied solely or predominantly to a

    variable such as a market index, or varies inversely with

    the value of the issuers shares. Statement 150 does not

    apply to features embedded in a financial instrument that

    is not a derivative in its entirety.

    Most of the guidance in Statement 150 is effective for

    financial instruments entered into or modified after May

    31, 2003, and otherwise is effective at the beginning of

    the first interim period beginning after June 15, 2003,

    except that for private companies, mandatorily

    redeemable financial instruments are subject to the

    provisions of this Statement for the fiscal periodbeginning after December 15, 2003.

    FASB issued Statement No. 149,Amendment of

    Statement 133 on Derivative Instruments and Hedging

    Activities. The Statement amends and clarifies

    accounting for derivative instruments, including certain

    derivative instruments embedded in other contracts, and

    for hedging activities under Statement No. 133,

    Accounting for Derivative Instruments and Hedging

    Activities.

    The amendments set forth in Statement 149 are intended

    to improve financial reporting by requiring that contracts

    with comparable characteristics be accounted for

    similarly. In particular, this Statement: (1) clarifies under

    what circumstances a contract with an initial net

    investment meets the characteristic of a derivative as

    discussed in paragraph 6(b) of Statement 133;

    (2) clarifies when a derivative contains a financing

    component; (3) clarifies the definition of an underlying

    to conform it to language used in FASB Interpretation

    No. 45, Guarantors Accounting and Disclosure

    Requirements for Guarantees, Including Indirect

    Guarantees of Indebtedness of Others; and (4) amends

    certain other existing pronouncements. In addition to

    other changes, this Statement:

    Removes from the scope of Statement 133 contracts

    for the purchase or sale of securities referred to as

    when-issuedsecurities or other securities that do not

    yet exist if the contracts meet all three criteria in

    paragraph 59(a) of Statement 133.

    Significantly modifies DIG Issue C13 by excludingfrom the exemption from Statement 133, as well as

    from the automatic inclusion, commitments to

    purchase loans. Holders and issuers of commitments

    to purchase loans now will need to evaluate the terms

    of the contracts to conclude whether they otherwise

    meet the characteristics of a derivative.

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    Clarifies the use of the short-cut method by requiring

    that the interest rate swap has a fair value of zero at

    inception of the hedging relationship if the hedginginstrument is solely an interest rate swap. If the

    hedging instrument is a compound derivative, that is

    when the hedged item is callable, the premium for

    the mirror-image call option compounded with the

    swap must be paid or received in the same manner as

    the premium on the call option embedded in the

    hedged item.

    Clarifies the accounting for option-based contracts

    used as hedging instruments in a cash flow hedge of

    the variability of the functional-currency-equivalent

    cash flows for a recognized foreign-currency-

    denominated asset or liability that is remeasured at

    spot exchange rates.

    Clarifies those financial guarantee contracts within

    the scope exception.

    This Statement is effective for contracts entered into or

    modified after June 30, 2003, except as stated below and

    for hedging relationships designated after June 30, 2003.

    The guidance should be applied prospectively.

    The provisions of this Statement that relate to Statement

    133 Implementation Issues that have been effective for

    fiscal quarters that began prior to June 15, 2003, should

    continue to be applied in accordance with their

    respective effective dates. In addition, certain provisions

    relating to forward purchases or sales of when-issued

    securities or other securities that do not yet exist, should

    be applied to existing contracts as well as new contracts

    entered into after June 30, 2003.

    The FASB decided on April 22, 2003 to require allcompanies to expense the value of employee stock

    options. Companies will be required to measure the cost

    according to the fair value of the options.

    At the May 7, 2003 Board meeting, the Board decided

    that: (1) compensation cost would be recognized over

    the service period; (2) stock-based compensation awards

    would be accounted for using the modified grant-date

    measurement approach in FASB Statement No. 123,Accounting for Stock-Based Compensation; therefore,

    compensation cost would be adjusted to reflect actual

    forfeitures and outcomes of performance conditions;

    (3) the method of attribution would be consistent with

    the approach presented in Statement 123 which requires

    attribution over the period the employee provides the

    service; and (4) for awards with service conditions, an

    enterprise would base accruals of compensation cost on

    the best available estimate of the number of equity

    instruments that are expected to vest and to revise that

    estimate, if necessary, if subsequent information

    indicates that actual forfeitures are likely to differ from

    initial estimates.

    Securities and Exchange Commission (SEC)

    Companies will be delisted if they fail to comply with

    the audit committee requirements of the Sarbanes-Oxley

    Actand implementing SEC regulations, according to a

    recent release that mandates changes in the listing

    standards. The release contains new audit committee

    requirements; conforming provisions by the national

    securities exchanges and the national securities

    association must be approved by the SEC by December

    1, 2003; and listed issuers other than small-business and

    foreign-private issuers must be in compliance with the

    new provisions by the date of their first shareholders

    meeting after January 15, 2004, but in any event no later

    than October 31, 2004. Foreign-private and small-

    business issuers are given more time.

    The exchanges and securities association will be

    obligated to delist companies that are not in compliance

    with several sets of requirements and do not successfully

    cure violations. The requirements cover audit

    committees independence; responsibilities with respect

    to public accounting firms; procedures for handling

    complaints on auditing, accounting, and control matters;

    authority to engage independent counsel and other

    advisors; and funding.

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    Q U A R T E R L Y U P D A T E S

    The SEC has released final rules governing

    managements report on internal control over financial

    reporting and revisions to certifications of disclosure inExchange Actperiodic reports. The rules pertaining to

    Section 302 and Section 906 certifications, including

    changes relative to registered investment companies,

    become effective on August 14, 2003 (the due date for

    June 30, 2003 quarterly filings). The Commission staff

    has indicated their intent to apply the revised Section

    302 certification to all quarterly filings for the quarter

    ended June 30, 2003, regardless of the date actually

    filed. Section 302 certifications may temporarily omit

    certain references to internal control over financial

    reporting until the compliance date for managements

    report on internal control over financial reporting.

    Managements report on internal control over financial

    reporting will be required by issuers, other than foreign

    private issuers, that meet the definition of an

    accelerated filer inExchange ActRule 12b-2, for

    fiscal years ending on or after June 15, 2004 (December

    31, 2004, for calendar-year accelerated filers).

    Accelerated filers are generally U.S. companies that have

    public float over $75 million and have filed an annual

    report with the Commission. All other issuers, including

    small-business and foreign-private issuers, will be

    required to comply with the requirements of Section 404

    for their fiscal years ending on or after April 15, 2005

    (December 31, 2005, for calendar-year issuers).

    Voluntary early compliance is permitted.

    On April 24, 2003, the SEC voted to require that reports

    by insiders disclosing their securities holdings be filed

    electronically with the SEC. The Commission also voted

    to adopt rules prohibiting company officials from

    improperly influencing auditors of financial statements.

    These new rules and amendments will become effective

    on June 30, 2003.

    American Institute of Certified Public

    Accountants (AICPA)

    The AICPAs Accounting Standards Executive

    Committee has issued an exposure draft of a proposed

    Statement of Position (SOP), Allowance for Credit

    Losses. The proposed SOP addresses the recognition and

    measurement by creditors of the allowance for credit

    losses related to all loans, as that term is defined in

    FASB Statement of Financial Accounting Standards No.

    114,Accounting by Creditors for Impairment of a Loan,

    with certain exceptions. The proposed SOP would apply

    to all creditors other than state and local governmental

    entities and federal governmental entities.

    The provisions of the proposed SOP would be effective

    for financial statements for fiscal years beginning after

    December 15, 2003, with earlier application permitted.

    The effect of initially applying the provisions of the

    proposed SOP would be reported as a change in

    accounting estimate.

    Federal Financial Institutions Examination Council

    (FFIEC)

    James E. Gilleran, Director of the Office of Thrift

    Supervision, has been named Chairman of the FFIEC

    for a two-year term beginning April l, 2003. Director

    Gilleran succeeds Donald E. Powell, Chairman of the

    Federal Deposit Insurance Corporation. The Council also

    named NCUA Chairman Dennis Dollar, as its new Vice

    Chairman.

    The FFIEC announced several appointments to its State

    Liaison Committee. The Council has appointed Richard

    C. Houseworth, Superintendent of Banks, Arizona, to fillthe vacancy created by the resignation of Elizabeth

    McCaul, former Superintendent of Banking, New York.

    The National Association of State Credit Union

    Supervisors appoints Jerrie J. Lattimore, Credit Union

    Division, North Carolina Commerce Department to the

    Committee to replace Iowa Superintendent of Credit

    Unions James E. Forney. The American Council of State

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    Savings Supervisors has appointed Jonathan Smith,

    Review Examiner, State Banking Department,

    Delaware, to replace Texas Savings & LoanCommissioner James L. Pledger.

    (Sources: FASB, SEC, AICPA, and FFIEC Websites)

    KPMGs Audit Committee Institute (ACI) has been serving audit

    committee members, interacting with thousands of directors and

    officers, since its inception two years ago.ACIs initiatives include

    semiannual roundtables, conference and board presentations, a toll-

    free hotline, theAudit Committee Quarterly Update, periodic

    distribution of time-sensitive information and its Web site. ACI has

    received positive feedback from directors and officers who have used

    the Web site, which is dedicated to providing tools to meet the needs of

    audit committee members. ACIs Web site address is

    http://www.us.kpmg.com/auditcommittee.ACI can be reached at 877-

    KPMG-ACI (877-576-4224) or via e-mail at

    [email protected].

    2003 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.

    All rights reserved.

    BearingPoint, Inc., formerly KPMG Consulting Inc., is an independent consulting firm and is not affiliated with KPMG Internationalor any KPMG member firm.

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    M A R K E T F O R C E S

    Broker /Dealers

    Thomson Financial announced on June 4th theintroduction of a suite of brokerage solutions designed to

    add transparency to the research process and facilitate

    broker compliance with the recently announced Global

    Analyst Settlement. The solutions, which can be grouped

    together and customized to meet individual

    requirements, include the newly created Thomson

    proprietary In Context reports that are designed to

    educate individual investors and add context to

    brokerage and boutique research, broker infrastructure

    outsourcing opportunities and Thomsons independent

    analyst rankings and monitoring services. (Thomsonpress release, June 4, 2003)

    On May 13th, Charles Schwab & Co., Inc. announced

    public disclosure of performance reporting on all its

    stock ratings. The company launched its Schwab Equity

    Ratings on May 6, 2002, and with one year of

    performance data available the public can now have

    access to the performance of Schwabs equity ratings

    during rolling 52-week periods through the companys

    Web site. A survey sponsored by Schwab found that the

    majority of those polled want objective research

    combined with performance information. According to

    the results of the survey, research conducted by

    independent research firms is more valuable than

    research conducted by Wall Street firms that are

    financially tied to the companies they evaluate. Also, the

    majority surveyed said they would like to know how

    well stock analysts recommendations compare to

    subsequent stock performance. (Charles Schwab & Co.,

    Inc. press release, May 13, 2003)

    Charles Schwabs newly launched Charles Schwab Bank

    has entered into the home mortgage loan area for clients

    and clients of independent investment advisors.

    Responding to consumers requests for greater

    transparency in mortgage rates and terms, the bank is

    offering three guarantees. First, Schwab will top any