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Congress Passes Financial Services Modernization Act of 1999

On November 4, 1999, Congress passed sweeping legislation that will dramatically reshape the financial services industry by removing barriers between banks, insurance companies, and investment firms which have existed since the Great Depression. President Clinton is expected to sign this historic legislation.

The purpose of this Update is to provide our clients and friends in the financial services industry with a broad overview of the Financial Services Modernization Act of 1999 (the "Act"). This Update will be followed by a series of more comprehensive analysis of the Act as it impacts on each segment of the financial services industry.

The Act's stated purpose is to enhance competition in the financial services industry by "providing a prudential framework for the affiliation of banks, securities firms, insurance companies, and other financial service providers, and for other purposes."

Overall highlights of the Act include the following:

Financial Affiliations

  • Eliminates many Federal and State legal barriers to affiliations among banks and securities firms, insurance companies, and other financial service providers, including provisions of the Bank Holding Company Act of 1956 and Section 20 of the Banking Act of 1933 (commonly referred to as the "Glass-Steagall Act"). Full affiliation can now occur between the entities.

  • Provides financial services organizations with flexibility in structuring new financial affiliations through a holding company structure, or a financial subsidiary (with certain limitations on activities and appropriate safeguards).

  • Establishes functional regulation for affiliated entities. Accordingly, banking activities will be regulated by banking regulators, securities activities will be regulated by securities regulators, and insurance activities will be regulated by insurance regulators. The Federal Reserve Board will serve as the umbrella supervisor for the holding companies themselves, and in certain cases may examine the functionally regulated subsidiaries.

  • Permits bank holding companies that qualify as Financial Holding Companies ("FHC") to engage in an expanded array of activities, and to acquire companies engaged in such activities, that are financial in nature, incidental to, or complementary to financial activities, subject to certain Federal Reserve Board restrictions. For example, the Act designates the following as permissible FHC activities: underwriting; dealing and market making without any revenue limitation (such as sponsoring and distributing all types of mutual funds); operating investment companies; insurance underwriting and agency activities; merchant banking; and insurance company portfolio investments.

  • Creates a new investment holding company structure under the Securities and Exchange Act.

  • Establishes a mechanism for coordination between the Federal Reserve Board and the Secretary of the Treasury ("the Secretary") regarding the approval of new financial activities for both holding companies and national bank financial subsidiaries.

Operation of State Law

  • Reaffirms the McCarran-Ferguson Act recognizing the primacy and legal authority of states to regulate insurance activities of all persons, including acting as the functional regulator for the insurance activities of federally chartered banks. The Act provides for thirteen general "safe harbor areas" for state insurance regulation. Regulation outside of these safe-harbor provisions is subject to the legal standard set forth in the United States Supreme Court decision in Barnett Bank v. Nelson, 517 U.S. 25 (1996).

Subsidiaries of National Banks

  • Financial subsidiaries of National Banks may engage only in "financial activities" (as described above), with four exceptions, in which case the activity must be done in FHC affiliates, these exceptions are for: (1) insurance or annuity underwriting; (2) insurance company portfolio investments; (3) real estate investment and development; and (4) merchant banking.

Brokers & Dealers

  • The Act repeals the general bank exemptions from the definition of broker and dealer under the Federal securities laws. Certain limited exemptions have been retained to facilitate activities in which banks have traditionally engaged.

  • The Act also requires the SEC to act by rulemaking prior to seeking to regulate any bank sales of newly developed hybrid products. Hybrid products are any product not identified in the Act as an "identified banking product."

Redomestication of Mutual Insurers

  • Allows for mutual insurance companies to redomesticate to another state and reorganize into a mutual holding company or stock company. This provision only applies to insurers in states which have not established reasonable terms and conditions for allowing mutual insurance companies to reorganize into a mutual holding company.

National Association of Registered Agents and Brokers

  • Provides for the creation of a uniform insurance agent and broker licensing system if a majority of the states do not establish uniform or reciprocal licensing laws of their own within three years.

    The National Association of Insurance Commissioners and its member state insurance regulators have already undertaken steps to create such a uniform licensing system in order to avoid the creation of such a national association. Federal Home Loan Bank System

  • Eliminates the mandatory FHLBank membership for Federal savings associations. Small bank members are given expanded access to FHLBank advances.

ATM Fee Reform

  • Requires operators of ATMs who impose a fee for use of an ATM by a non-customer to post a notice on the machine and on the screen that a fee will be charged and the amount of the fee.

Community Reinvestment Act

  • Requires that Federal bank regulators prohibit banks from participating in the new financial affiliations if, at the time of certification, any bank affiliate had received a less than "satisfactory" Community Reinvestment Act rating.

  • Requires parties to a CRA protest agreement to fully disclose the terms of the agreement and make them available to the public; each participant in a CRA agreement must file an annual report disclosing the use of resources provided in the agreement.

Unitary Thrift Holding Company Provisions

  • Amends the Home Owners' Loan Act to prohibit (except for corporate reorganizations) new unitary savings and loan holding companies from engaging in nonfinancial activities or affiliating with nonfinancial entities.


  • Includes provisions providing consumers with certain protections with respect to the transfer and use of their "nonpublic" personal information by financial institutions, including giving consumers the option to "opt out" of having their personal financial information shared with nonaffiliated third parties, subject to certain exceptions.

S Corporations

  • Requires the General Accounting Office to study and report to Congress within six months on revisions to S Corporation rules to permit greater access by community banks to S Corporation treatment.

The full text of the Financial Services Modernization Act of 1999 may be found on the Library of Congress' Thomas Website at

Many of Saul Ewing's attorneys have been closely monitoring this legislation for years. In fact, while serving as counsel for state insurance regulators, some of the attorneys now in the Firm's Insurance Practice Group were actively involved in the negotiations surrounding the drafting of this bill and its predecessor H.R. 10. Accordingly, combined with our banking and securities expertise, we are fully prepared to give our clients the full measure of our understanding of the legal, technical and practical implications of the Act.

This Update was prepared by John Lampi, a partner in Saul Ewing's Business Department, Constance B. Foster, Co-Chair of the Firm's Insurance Practice Group, and Michael F. Consedine, an associate in the Firm's Business Department. For further information, Mr. Lampi, Ms. Foster, and Mr. Consedine can be reached at Saul Ewing's Harrisburg office at (717) 257-7500 or through their respective e-mail addresses:,, and, or you may contact any of our other Saul Ewing attorneys who have provided you with legal services. Our attorney directory is available on our website at

Note: Posted articles are for general information only and should not be considered legal advice.

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