Highlights of the "Gramm-Leach-Bliley Act"
|On Friday, November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act (the "Act") into law, setting in motion the process for completing the transformation of the nation's financial services industry that has been ongoing for at least the past two decades.|
The Act consists of seven separate titles covering bank, insurance and securities firm affiliations (including partial repeal of the Glass-Steagall Act) (Title I), functional regulation of bank securities and mutual fund activities (Title II), preserving non-discriminatory State regulation of the insurance business (Title III), restrictions on commercial firm ownership of unitary savings and loan holding companies (Title IV), financial institution customer privacy issues (Title V), Federal Home Loan Bank System modernization (Title VI), and various other changes (e.g., ATM fees, CRA issues, etc.) not fitting in the other categories (Title VII).
The massive 385-page bill reflects many legislative compromises addressing various competing political, regulatory and business interests. While it is yet too early to present a complete picture of all of the Act's far-reaching ramifications, the following summary of selected highlights provides a preview.
By March 11, 2000, commercial and investment banks, insurance companies, and securities firms will be permitted to combine forces to offer a full range of financial services, free of the legal restrictions formerly separating the banking, insurance and securities businesses. Other changes affect the regulation of banks' securities activities, and alter the permissible relationship between banks and mutual funds.
This Alert summarizes changes that are likely to be of interest to our bank, broker-dealer, investment adviser and mutual fund clients and friends.
Banks currently enjoy blanket exemptions that generally permit them to engage in a wide variety of securities and investment advisory activities, free of regulation by the Securities and Exchange Commission ("SEC") and state securities authorities. Title II of the Act changes this regulatory landscape by repealing or cutting back existing statutory exclusions and exemptions for banks under the Securities Exchange Act of 1934 (the "Exchange Act") and the Investment Advisers Act of 1940 (the "Advisers Act").
By repealing key provisions of the Glass-Steagall Act, the Act paves the way for banks to become involved in mutual fund sponsorship and distribution through affiliates. However, as part of the "price to be paid" for Glass-Steagall reform, the banking industry is required to accept additional regulation of bank mutual fund activities. Accordingly, Title II also contains various amendments to the Investment Company Act of 1940 (the "Investment Company Act") and the Advisers Act that affect bank mutual fund and common trust fund activities.
Title II also permits a securities firm that is not affiliated with a bank or a savings association to choose to be regulated by the SEC as an investment bank holding company ("IBHC"). These provisions benefit securities firm holding companies that control non-U.S. banks and that are not regulated by the Federal Reserve Board. By being regulated by a consolidated supervisor, an IBHC will better be able to meet the requirements of foreign jurisdictions that increasingly are requiring entities that control non-U.S. banks to have a consolidated home country regulatory supervisor.
The changes effected by Title II take effect May 12, 2001, except that the IBHC provisions were effective as of November 12, 1999, the date of enactment.
While a complete summary of the significant changes effected by Title I of the Act is beyond the scope of this Alert, key highlights are summarized below.
The Act preserves existing barriers between banking and commerce. Thus, subject to a few notable exceptions, BHCs and banks still will be prohibited from affiliating with firms engaged in activities other than banking and newly authorized financial activities.
Client Alert is published solely for the interest of friends and clients of Paul, Hastings, Janofsky & Walker LLP and should in no way be relied upon or construed as legal advice. For specific information on recent developments or particular factual situations, the opinion of legal counsel should be sought. PHJ&W is a partnership, including professional corporations.