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The Gramm-Leach-Bliley Act (GLB) was signed into law on November 12, 1999, culminating almost a decade of efforts to pass such a measure. The legislation essentially ended regulations that prevented companies in the various financial sectors from engaging in each other’s businesses. The law repeals major sections of the Glass-Steagall Act of 1933, the Bank Holding Company Act of 1956 and other federal banking laws. The following explains some of the law’s provisions.
Financial Holding Companies

GLB expanded permissible activities for bank holding companies, entities that control one or more commercial banks, by creating a new type of financial services company, the financial holding company (FHC). Under the act, securities firms, banks, insurance companies and other entities engaged in financial services may affiliate under an FHC umbrella and cross-sell an affiliate’s products within a regulatory system overseen by the Federal Reserve Board.

An FHC may engage in many financial activities, including any future activity the Federal Reserve, in conjunction with the Secretary of the Treasury, considers to be financial in nature, incidental to finance, or complementary to a financial activity as long as it does not pose a substantial risk to the safety and soundness of the institution. More than 500 bank holding companies elected to become FHCs within the first 12 months that the option was available.
Commercial (Nonfinancial) Business

Prior to the passage of GLB, banks and others had been concerned about the possibility of commercial entities such as big retail stores entering the banking business. While a financial firm engaged in nonfinancial activities is not required to divest itself of these activities for at least 10 years if they do not constitute more than 15 percent of its business, the act bars expansion of such activities by mergers and nonfinancial company ownership of commercial banks. In addition, while existing thrift nonfinancial activities are protected by a grandfather provision, commercial companies are prohibited from buying thrifts. Securities firms may continue existing nonfinancial business activities on a limited basis for a limited time.

All financial services activities are essentially regulated by the agency that oversaw such transactions before the passage of the law. Thus, whether insurance is sold by a bank or insurance company, the sale is regulated by the states. This is known as "functional regulation." Functional regulation particularly adressed the fears of some insurers that the system of state regulation of insurance would be summarily disbanded an dreplaced by a federal regulatory framework. At the same time, forms of federal regulation have support from many from within the insurance industry and state vs. federal regulation is one of its most controvesial subjects.
National Banks

National banks are commercial banks with a national as opposed to state charter. Those that meet the GLB’s capitalization and management requirements may establish financial operating subsidiaries. These subsidiaries can sell any financial product and assume the risk as dealer for most financial products. However, national banks may not underwrite insurance (except credit-related insurance) or engage in real estate development, real estate investment, or merchant banking because these are riskier businesses requiring more capital and more safeguards to protect that capital. Merchant banking, an investment bank activity in which the bank raises funds or lends its own capital for a period to finance a transaction, may be allowed starting in 2004. National banks may continue to underwrite municipal revenue bonds, an activity that was not barred under Glass-Steagall.

Independent banks, which are not affiliated with multibank holding companies, and which are also known as community banks because they are locally owned and operated, may sell financial products through joint ventures with other bank and thrift institutions.

GLB’s response to the concern of banks and insurance agents that regulatory agencies create a level playing field for the sale of insurance products is a framework to resolve disputes over regulatory practices and how a new product should be classified — as an insurance or a banking product. GLB sets up procedures for resolving these disputes.

In addition, federal regulators must establish consumer protection regulations for banks selling insurance. In case of conflict with state laws, only federal standards stricter than state laws pre-empt those laws.

General bank exemption from registration with the Securities and Exchange Commission (SEC) as a broker has been replaced with a list of specific exempt activities such as trust and custodial activities, employment benefit plan management, and others. Banks can continue to create and trade in derivatives, swaps and other similar securities products. The SEC, in consultation with the Federal Reserve Board, is authorized to rule on whether a specific product is a security which can only be sold by a broker/dealer affiliate.

The issue of privacy, which tended to divide consumer groups wanting tight restrictions on personal information from financial services companies seeking broad access for cross-marketing purposes, was partially resolved through compromise. Financial institutions may share customer information with affiliates and joint venture partners, but are barred from disclosing customer account numbers or access codes to unaffiliated third parties for marketing purposes, with certain narrow exceptions necessary for the conduct of the customers’ business or compliance with regulations. Other customer information may be shared with third parties, but customers must be informed and have the right to bar such sharing. Any attempt to gain private customer information by fraud or deception is made a federal crime punishable by up to five years in prison.

Titles of the Act

TITLE I: Affiliations among Banks, Securities Firms and Insurance CompaniesAllows banks, securities firms, insurance companies and other firms engaged in financial services to affiliate under a financial holding company (FHC) structure

TITLE II: Functional Regulation

Specifies that all financial activities will be functionally regulated by the
relevant regulatory body: banking (Federal Reserve), securities (Securities
and Exchange Commission) and insurance (state regulators)
TITLE III: Insurance Regulation

Covers state regulation of insurance, redomestication of mutual insurers, National Association of Registered Agents and Brokers, rental car agency insurance activities and confidentiality
TITLE IV: Unitary Thrift Holding Company ProvisionsProhibits unitary savings and loan holding companies from engaging in
nonfinancial activities or affiliating with nonfinancial entities
TITLE V: Privacy

Requires all financial institutions to disclose to customers their privacy policy
for nonpublic information
TITLE VI: Federal Home Loan Bank (FHLB) System ModernizationEstablishes a new capital structure for FHLBs, increases access to funds for smaller member banks, and discusses regulatory changes
TITLE VII: Other Provisions

Addresses ATM fee reform, the Community Reinvestment Act and other
regulatory improvements

Source: TowerGroup.