Overview of the Gramm-Leach-Bliley Act
Criteria
to be a Financial Holding Company ("FHC")
| Expanded Powers for FHCs | Expanded
Powers for Banks | Supervision | Insurance
Activities | Bank Securities Activities |
Privacy | CRA Provisions
| Other Significant Provisions
The Gramm-Leach-Bliley Act of 1999 (“Act”) will significantly
impact the financial services industry. By repealing provisions of the
Glass-Steagall Act, the Act facilitates affiliations between banks, securities
firms, and insurance companies. The Act also authorizes bank holding companies
(“BHCs”) and foreign banks that meet certain eligibility criteria
to become financial holding companies (“FHCs”). FHCs may engage
in a broad array of financially related activities. In addition, the Act
provides for functional regulation of FHCs, protects nonpublic customer
information, alters supervision related to the Community Reinvestment
Act, and makes miscellaneous regulatory changes.
Criteria to be a FHC
Capital and Managerial Requirements.
All depository institution subsidiaries must be well-capitalized and
well-managed. The Board must establish comparable capital and management
standards for foreign banks that operate a branch or agency, or control
a commercial lending company, in the U.S. If a FHC or foreign bank subsequently
fails to meet any applicable capital and managerial standards and does
not correct the deficiency within 180 days, the Board may order the company
or bank to divest or terminate the financial activities or divest its
depository institution subsidiaries.
CRA Requirements.
All depository institution subsidiaries must have a satisfactory or better
CRA rating. If any depository institution subsidiary receives a less than
satisfactory rating after filing of the FHC declaration, the Board must
prohibit the company from acquiring any additional companies or engaging
de novo in any additional financial activities until the CRA rating is
restored to satisfactory.
To become a FHC, a BHC must file a declaration with the appropriate Federal
Reserve Bank and the Federal Reserve Board certifying that all of its
depository institution subsidiaries are well-capitalized and well-managed.
A declaration to become a FHC is not effective unless all of the BHC’s
insured depository institution subsidiaries have a “satisfactory”
or better rating under the Community Reinvestment Act (“CRA”).1
Regulatory Provisions
The Board’s January 19, 2000 interim rule sets forth procedures
for BHCs and foreign banks to elect to become FHCs and describes the period
in which the Board will act on FHC elections. The rule also enumerates
the criteria that BHCs and foreign banks must meet in order to qualify
as a FHC. In addition, the rule sets forth the limitations that the Board
will apply to FHCs that fail to maintain compliance with capital, management,
and CRA criteria. On March 15, 2000, the Board announced amendments to
the January 19 rule primarily concerning FHC elections by foreign banks.
The Board also removed the compliance rating component from the definition
of well-managed.
Expanded Powers for FHCs
The Act authorizes FHCs to engage in a broad array of activities known
as 4(k) Activities.
Financially related activities.
The Act authorizes FHCs to engage in activities that are financial in
nature including:
- securities underwriting and dealing;
- insurance agency and underwriting activities; and
- merchant banking activities.
Other Financial Activities.
FHCs may engage in any other activity that the Federal Reserve Board
determines to be financial in nature or incidental to financial activities
after consultation with the Secretary of the Treasury.
Complementary Activities.
A FHC may engage in any non-financial activity that the Federal Reserve
Board determines is (i) complementary to a financial activity and (ii)
does not pose a substantial risk to the safety or soundness of depository
institutions or the financial system.
Generally, a FHC does not need Federal Reserve Board approval prior to
engaging in, or acquiring a company engaged in financial in nature activities.
However, a FHC must provide written notice to the Federal Reserve Board
within 30 days of commencing the activity or acquiring the entity that
engages in the activity.2
Prior approval by the Federal Reserve Board is still required
in order for a FHC to acquire control of a bank or savings and loan association
or to engage in any complementary activity. BHCs (that have not elected
to become FHCs) may only engage in activities that the Federal Reserve
Board has determined to be closely related to banking under Section 4(c)(8)
of the BHC Act.
Regulatory Provisions
The Board approved an interim rule on March 10, 2000, which lists the
financial activities permissible for FHCs and establishes a procedure
by which a FHC may seek a Board determination that a particular activity
is complementary to a financial activity and receive approval to engage
in that activity.
The Board and the Secretary of the Treasury issued an interim rule implementing
the merchant banking pro-visions of the Act on March 17, 2000. The interim
rule limits exposure of FHCs to merchant banking investments. In addition,
the Board and the Secretary proposed a rule that would generally impose
a 50 percent capital requirement on merchant banking and similar investments.
Expanded Powers for Banks
The Act authorizes a number of activities for banks and their subsidiaries.
Municipal Revenue Bonds.
Well-capitalized national banks are authorized to directly underwrite
and deal in municipal revenue bonds. Because of existing provisions of
the Federal Reserve Act and Federal Deposit Insurance Act, this authority
extends to state banks as well.
National Bank Financial Subsidiaries.
The Act authorizes national banks to own or control a “financial
subsidiary” that engages in activities that are not permissible for
national banks to engage in directly, if the bank and financial subsidiary
meet certain criteria and comply with certain conditions involving financial
and operational safeguards.
Generally, a financial subsidiary may not engage as principal in underwriting
insurance, providing or issuing annuities, real estate development or
investment, or merchant banking activities.
Complementary activities are not authorized for a financial subsidiary
of a national bank.
Prior approval of the OCC is required for a national bank to conduct
activities through a financial subsidiary.
State Member Bank Subsidiaries.
A state member bank may own or control a subsidiary that engages as principal
in activities that national banks may conduct through a financial subsidiary,
if the bank and its subsidiary comply with the conditions and limitations
applicable to national banks.
Section 24.
Because Section 24 of the Federal Deposit Insurance Act was not altered
by the Act, state banks may still engage as principal in activities not
permissible for a national bank if the Federal Deposit Insurance Corporation
(“FDIC”) determines the activity would pose no significant risk
to the Deposit Insurance Fund and the state bank is in compliance with
applicable capital standards.
Regulatory Provisions
The OCC issued its final rule for financial subsidiaries of national
banks on March 10, 2000. The rule describes the types of activity permissible
for a financial subsidiary and lists the qualifications that a national
bank must satisfy to hold an interest in a financial subsidiary. On the
same date, the Board issued a similar rule for financial subsidiaries
of state member banks. The rule establishes a streamlined notice procedure
for member banks wishing to engage in financial activities through a financial
subsidiary.
Supervision
The Federal Reserve Board will serve as the “umbrella” supervisor
of all BHCs, including FHCs. As such, the Federal Reserve Board has the
authority to require reports from and examine any BHC, including a FHC,
and any subsidiary. However, the Act places certain limits on supervisory
powers with respect to functionally regulated subsidiaries of a BHC (“Fed-lite”).
The Federal Reserve Board must, to the fullest extent possible, rely
on audited financial statements, reports submitted to functional regulators,
and reports of examination prepared by the subsidiary’s functional
regulator. In addition, the Federal Reserve Board may examine a functionally
regulated subsidiary only if the Federal Reserve Board reasonably believes
that:
- the subsidiary is engaged in activities that pose a material risk
to an affiliated depository institution;
- examination of the subsidiary is necessary to adequately inform the
Federal Reserve Board concerning the holding company’s systems
for monitoring and controlling financial and operational risks; or
- the subsidiary is not in compliance with the BHC Act or any other
Federal law that the Federal Reserve Board has specific jurisdiction
to enforce against the subsidiary and the compliance determi nation
cannot be made through examination of the FHC or affiliated depository
institution.
The Federal Reserve Board is generally prohibited from imposing capital
requirements on a functionally regulated subsidiary that is in compliance
with applicable Federal and state requirements. In addition, the Federal
Reserve Board may not require certain functionally regulated subsidiaries
to provide funds or assets to an affiliated depository institution except
in very limited circumstances. Finally, the Act authorizes the banking
regulators to adopt prudential standards and restrictions on relationships
or transactions between depository institutions and their subsidiaries
and affiliates.
Primary Bank
Regulators
(FDIC, FRB, OCC) |
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Secutities Exchange Commission
CFTC
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State Insurance Commissioners
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Banking Activities
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Securities Activities
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Insurance Activities
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Insurance Activities
The Act contains a number of provisions dealing with insurance activities
by FHCs and bank subsidiaries. Generally, the Act affirms the role of
the states in regulating insurance activities, including the insurance
activities of financial subsidiaries of banks and FHC-affiliated insurance
companies, but the Act also preempts certain state laws.
FHC Affiliates.
A nonbank affiliate of a FHC may engage in insurance underwriting and
agency activities as discussed above in the section entitled “Expanded
Powers for FHCs.”
Place of 5,000.
National banks may continue to engage in insurance agency activities
from a place with a population of 5,000 or less.
Financial Subsidiaries.
National banks may engage in insurance agency activities through a financial
subsidiary at any location, subject to the criteria and conditions discussed
above in the section entitled “Expanded Powers for Banks.”
Title Insurance.
The ability of national banks to underwrite and sell title insurance
is limited by the Act.
Preemption of State Anti-Affiliation Laws.
The Act preempts any state law that prevents or significantly interferes
with affiliations authorized or permitted by the Federal law between depository
institutions or an affiliate thereof and insurance entities.
Preemption of Other State Laws.
The Act preempts any state law that prevents or significantly interferes
with the insurance sales, solicitation, or cross-marketing activities
of any insured depository institution or affiliate thereof, except for
state laws that fit certain “safe harbor” provisions or meet
the Act’s non-discrimination standard.
Bank Securities Activities
The Act makes a number of changes to the regulation of bank securities
powers, such as the following:
FHC Affiliates.
A nonbank affiliate of a FHC may engage in securities underwriting and
agency activities as discussed above in the section entitled “Expanded
Powers for FHCs.”
Financial Subsidiaries.
National banks may engage in securities underwriting activities through
a financial subsidiary, subject to the criteria and conditions discussed
above in the section entitled “Expanded Powers for Banks.”
Broker/Dealer Exemption.
The Act repeals the bank exemption from the definitions of “broker”
and “dealer” in the securities laws and substitutes narrower
exemptions for traditional bank securities activities, such as for transactions
related to trust operations, government securities, and third party networking
arrangements (effective May 12, 2001).
Investment Advisor Exemption.
The Act repeals the bank exemption from registration as an investment
advisor under the Investment Advisors Act (effective May 12, 2000).
Mutual Fund Distribution.
By repealing Section 32 of the Glass-Steagall Act, member banks have
the authority to act as distributor for mutual funds.
Privacy
The Act contains a number of new requirements related to customer financial
information.
Disclosure of Information Sharing Policies and Procedures.
The Act requires financial institutions 3
to provide clear and conspicuous notice to consumers, prior to the time
a customer relationship is established and at least annually thereafter,
of the institution’s policies and practices regarding the collection
and disclosure of nonpublic personal information to affiliates and third
parties.
“Opt Out” for Information Sharing Arrangements with Third
Parties.
The Act prohibits a financial institution from disclosing to nonaffiliated
third parties any nonpublic personal information about a consumer unless
the institution (i) informs the consumer that such information may be
shared with third parties, and (ii) allows the consumer to “opt out”
of such sharing arrangements.
Prohibition on Disclosing Account Numbers for Marketing Purposes.
Financial institutions are generally prohibited from disclosing a customer’s
account number or access code for a deposit, transaction, or credit card
account to nonaffiliated third parties for use in marketing programs,
including telemarketing and direct mail programs.
Prohibition on Obtaining Financial Information Under False Pretenses.
The Act prohibits most persons from obtaining customer information from
a financial institution 4
or from a customer of a financial institution through the use of false,
fictitious, or fraudulent statements or representations.
The Act sets forth a number of general exceptions to the disclosure and
opt out provisions, including exceptions related to disclosure of information
to service providers and joint marketing partners.
Regulatory Provisions
On May 10, 2000, the federal regulatory agencies approved the issuance
of final regulations which implement the consumer privacy provisions of
the Act. The regulations limit disclosure by financial institutions of
“nonpublic personal information” about individuals who obtain
financial products or services for personal, family or household purposes.
Subject to certain exceptions allowed by the law, the regulations cover
information sharing between financial institutions and nonaffiliated third
parties. The final regulations require that financial institutions provide
initial notices to customers about their privacy policies; provide annual
notices of their privacy policies to their current customers; and provide
a reasonable method for consumers to opt out of disclosures to nonaffiliated
third parties. Consumers may exercise their opt out option at any time.
The regulation is effective November 13, 2000, but full compliance is
optional until July 1, 2001.
CRA Provisions
“Sunshine” Provisions.
The Act requires that each party to a covered CRA-related agreement fully
disclose the agreement and its terms to the public and the appropriate
Federal banking agency for the insured depository institution involved
in the agreement. In addition, each party to a covered CRA-related agreement
must submit annually a report to the appropriate Federal banking agency
concerning the use of CRA-related money and resources during the previous
year.
Examination Cycles.
Under the Act, any insured depository institution with $250 million or
less in aggregate assets would be subject to routine CRA examinations
as follows:
- on a 5-year cycle, if the institution received an “outstanding”
rating at its most recent CRA examination; or
- on a 4-year cycle, if the institution received a “satisfactory”
rating at its most recent CRA examination.
The Federal banking agencies may conduct non-routine examinations for
reasonable cause in such circumstances as they deem appropriate.
Note: Other than changes indicated above, CRA examination cycles
remain unchanged.
Regulatory Provisions
On May 10, 2000, the federal regulatory agencies issued a proposed rule
implementing CRA Sunshine requirements. The rule establishes annual reporting
and public disclosure requirements for certain written agreements between
insured depository institutions or their affiliates and non-governmental
entities or persons made pursuant to, or in connection with, the fulfillment
of the CRA. The rule identifies the types of written agreements that are
covered by the Act and defines many of the terms used in the statute.
The rule also describes how the parties to a covered agreement must make
the agreement available to the public and the appropriate agencies and
explains the type of information that must be included in the annual report
filed by a party to a covered agreement.
Other Significant Provisions
Transactions with Affiliates.
The Act requires the Federal Reserve Board to adopt rules under Section
23A of the Federal Reserve Act to address credit exposure arising out
of derivative transactions between member banks and their affiliates and
intra-day extensions of credit by member banks to their affiliates. In
addition, covered transactions between banks and their financial subsidiaries
are made subject to a 20% quantitative limit and the collateral requirements
of Section 23A by the Act. Furthermore, the Act creates a presumption
that covered transactions between depository institutions and certain
companies, such as FHC affiliates engaged in merchant banking activities,
are subject to the limitations and requirements of Section 23A.
Unitary Thrift Holding Companies.
Companies that file an application with the Office of Thrift Supervision
to acquire a thrift after the grandfather date (May 4, 1999) may only
engage in activities permissible for a FHC. Existing unitary thrift holding
companies would be grandfathered and could continue to engage in any type
of financial or commercial activity.
Federal Home Loan Bank (“FLHB”) System.
The Act allows any insured depository institution with less than $500
million in assets to become a member of the FHLB system without satisfying
the Qualified Thrift Lender test. The Act also authorizes the FHLB system
to make long-term advances to any insured depository institution with
less than $500 million in assets secured by loans to small businesses,
small farms, and small agri-businesses.
Disclosure of ATM surcharges.
The Act requires that ATM operators imposing an ATM surcharge to (i)
post a notice that a surcharge may be imposed and (ii) inform the consumer,
either through an on-screen message or paper receipt, of the amount of
the surcharge before the consumer is irrevocably committed to completing
the transaction.
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