The Gramm-Leach-Bliley Act, P.L. 106-102, Financial Services Modernization, Working Summary No. 4

Abstract

The symbolism of enactment of major new financial services legislation on the verge the year 2000 is compelling. A new law for a new century. After almost two decades of attempts, the antiquated and outmoded Glass-Steagall Act of 1933 has been substantially replaced, and the Bank Holding Company ("BHC") Act of 1956 has been modernized. The enactment of the Gramm-Leach-Bliley Act (the "Act") is a landmark achievement.

The memorandum that follows sets forth the changes made by this new Act, both in its own terms and in the context of prior law. It attempts to lay out all of the Act's provisions topically and thus help to make its opportunities and issues more accessible to both executives and lawyers.

The long process that produced the Act also helps us understand its scope, purpose, and effects. Over the last two decades, the case for modernization of Glass-Steagall and the BHC Act was often made: Technology and the ingenuity of business leaders and lawyers had substantially eroded legal barriers between "banking," "securities," and "insurance." Securities and insurance firms were offering banking or bank-substitute products and services, while commercial banking organizations increasingly penetrated the securities and insurance businesses. The existing legal framework was out-of-joint with marketplace reality. It distorted competition and caused inefficiencies.

Even a short list of major developments since the Reagan Administration proposed its modernization bill in 1983 indicates the breadth of change since that time:

- securities, insurance, and retailing companies acquired "nonbank banks;"

- South Dakota and Delaware banks were authorized to engage in insurance underwriting;

- Section 20 affiliates of major banks engaged in investment banking;

- national banks began selling insurance out of "town of 5000" offices;

- Mellon Bank acquired the Dreyfus mutual fund complex;

- the VALIC and Barnett Supreme Court decisions validating regulatory authorization of national bank insurance activities resulted in an end to the "fortress insurance" opposition to reform;

- over 50 insurance and securities firms acquired thrifts and became "unitary" S&L holding companies; and

- Citigroup was created by a combination of Travelers/Salomon Smith Barney and Citicorp.

The parallel legislative events are also telling. The 1983 Treasury Department proposal, which would have permitted a bank holding company to engage in full-service securities and insurance activities, was not seriously considered. Efforts focused instead on the possibility of a few new securities powers for banking organizations, and then stopping new "nonbank banks." The latter was achieved in 1987 legislation, even as bank expansion through regulatory action accelerated. The Bush Administration proposed a broad financial services restructuring bill in 1991. But in the aftermath of the S&L debacle and the wave of bank failures and in the face of deep industry divisions over expanded bank affiliations, this bill turned into the re-regulatory Federal Deposit Insurance Corporation Improvement Act.

The Act has direct lineage to the 1995 bill introduced by Chairman Jim Leach, which permitted banking, securities, insurance and other "financial" affiliations in a revised Bank Holding Company Act with the Federal Reserve as the preeminent "umbrella" regulator (and thus revived the 1983 Treasury bill concept, rather than the 1991 Bush model). Although many specific changes have been made, the Act retains this framework. (It is perhaps noteworthy that except for the specter of Microsoft and the privacy provisions, issues of electronic commerce are not significant elements of the Act.)

The stated goal was "financial services" modernization. Nevertheless, most participants in the legislative process viewed it from the perspective of their core industry -- banking, securities, or insurance. Two major industry compromises involved the drawing of regulatory lines between banking and securities and banking and insurance that have the effect of limiting direct bank expansion. Parallel "functional regulation" amendments address the jurisdiction and roles of the SEC, the federal banking agencies, and the state insurance commissioners. However, the Act does contain in Section 104 significant tools for the development of integrated financial services. Its federal preemption provisions contain broad language preempting any discriminatory or other state laws that may interfere with the operation of integrated banking and financial companies.

Another major inter-industry issue concerned the ability of nonfinancial firms to provide banking products through a thrift in a unitary savings and loan holding company ("Unitary") structure. This issue was given greater impetus by an application by Wal-Mart to acquire a thrift and by the fear that Microsoft or another major technology company might do so as well. While grandfathering existing Unitaries, the Act provides that no new Unitaries may be established - and thus reinforces the line drawn in the Act between financial and nonfinancial firms.

The other major issues addressed by the Act fall into two categories. The first is consumer and "public" issues associated with the Community Reinvestment Act ("CRA"), consumer protection, and, most important, privacy. The Act reaffirms CRA but calls for significant new disclosures by community group beneficiaries of that law. It also establishes a significant, new framework for privacy disclosures and protections by a very broad range of "financial" companies. The second category includes proposals that had been pending for some time and found a vehicle in the Act, notably, Federal Home Loan Bank system reforms and the interstate licensing of insurance agents and brokers.

Throughout 1999, the financial modernization bills had unprecedented momentum, moving from introduction to Senate and House passage in a matter of months. The actual fate of the Bill hung in the balance until the very end of the process, when the bank subsidiary and CRA compromises removed the threat of a presidential veto. In the end, the Act rested on a broad consensus both in Washington and among industry groups.

Seventy-two days after the year 2000 begins, the centerpiece affiliations provisions of the Act take effect and new, wide-ranging financial companies will be legally permissible. How quickly, and how many companies will develop a "financial services" perspective remains to be seen. In the meantime, the immediate efforts will focus on the many implementing regulations to be adopted and the prospects for new combinations. A new page is being turned.