United States: The Gramm-Leach-Bliley Act: One Year Later

As of September 29, 2000, the Federal Reserve Board ("FRB") had deemed effective the financial holding company ("FHC") election of more than 400 top tier holding companies. The companies that have elected FHC status include large banking organizations (e.g., Citigroup, Inc., Bank of America Corporation, First Union Corporation), small banking organizations, foreign banking organizations (e.g., Credit Suisse Group, Deutsche Bank Aktiengesellschaft), insurance agencies (e.g., Neighbor Insurance Agency, Inc., Newburg Insurance Agency, Inc.), and securities firms (e.g., Charles Schwab, J.P. Morgan). The Office of the Comptroller of the Currency ("OCC"), on the other hand, has approved approximately 60 financial subsidiaries to engage in activities such as insurance sales and securities underwriting.

Relatively few domestic affiliations between banks and insurance companies or securities firms have occurred since the passage of GLBA. At the same time, several foreign banks have announced their intention to acquire domestic investment banking firms (e.g., UBS- PaineWebber Group; Royal Bank of Canada-Dain Rauscher & Co.; Dresdner Bank-Wasserstein, Perella & Co.). The most significant domestic bank/securities firm affiliation to date has been the Charles Schwab Corporation ("Schwab") acquisition of U.S. Trust Corporation ("U.S. Trust"). The FRB approved Schwab’s application to acquire U.S. Trust and become a financial holding company on May 1, 2000. On the insurance side, MetLife, Inc. has filed an application with the FRB to acquire Grand Bank, N.A. and become a financial holding company, and ULLICO, Inc. has filed an application with the FRB to acquire Amalgamated Bank of Chicago. At least one other insurance company, Vesta, has announced plans to enter the banking business as well. Ironically, the largest bank/insurance affiliation to date was the Citicorp/Travelers transaction which occurred prior to the passage of GLBA. With respect to cross-border acquisitions, the UBS-PaineWebber acquisition stands out as the largest to date.

The FRB and the Treasury Department have taken a cautious approach with respect to identifying, and providing guidance related to, financial activities. The FRB and Treasury’s interim rules governing merchant banking activities (which activities were deemed "financial" by GLBA) impose significant restrictions on financial institutions engaging in such activities, including record keeping and reporting obligations; risk management practices; maximum holding periods for merchant banking investments; corporate separateness and limits on involvement in management; and limits on exposure of financial holding companies to merchant banking investments. Another controversial regulatory action is the proposed regulatory capital deduction for merchant banking and other nonfinancial investments.

GLBA also gave the FRB and the Department of Treasury the authority to identify new "financial" activities. In August, the FRB issued a proposed rule defining "finder activities" as financial in nature. The proposed rule would allow a financial holding company to act as a "finder" by bringing together buyers and sellers of financial and nonfinancial products for transactions that the buyers and sellers themselves negotiate and consummate. The proposal was not controversial because national banks were previously granted the authority to act as finders.

Although no other financial activity proposals have been issued by the FRB or Department of Treasury, it is possible that these agencies soon will be considering whether activities such as real estate brokerage, real estate development, and real estate management are activities that are financial in nature.

The federal banking regulatory agencies have proposed new rules relating to the sale of insurance products by banks. The proposed consumer protection rules apply to retail sales practices, solicitations, advertising, or offers of insurance. The proposed rules are discussed below in "Federal Banking Agencies Issue Proposed Rule Regarding Sales of Insurance by Depository Institutions" on page nine.

The federal banking regulatory agencies, as well as the Federal Trade Commission and Securities and Exchange Commission, have passed regulations implementing the privacy provisions of GLBA. These regulations take effect on July 1, 2001. The privacy rules are discussed in detail below in "Preparing Now for Privacy Compliance" on page four.

The Federal Housing Finance Board ("FHFB") has been very active in proposing and finalizing new regulations required by GLBA. In addition to finalizing a reorganization of its regulations, the FHFB has adopted final or interim final rules regarding:

• devolution of corporate governance responsibilities from the FHFB to the Federal Home Loan Banks;
• election of Federal Home Loan Bank directors and the powers and responsibilities of Federal Home Loan
• Bank Boards of Directors and Senior Management;
• operations of the Office of Finance and authority of Federal Home Loan Banks to issue consolidated obligations.
• Federal Home Loan Bank membership and advances regulations;
• determination of appropriate present-value factors associated with payment made by the Federal Home Loan Banks to the Resolution Funding Corporation and Resolution Funding Corporation operations; and
• Federal Home Loan Bank acquired member assets, core mission activities, investments, and advances.

In addition, an FHFB proposed rule on Federal Home Loan Bank capital standards had its comment period extended in September.

In May, the federal banking regulatory agencies released a proposed rule regarding disclosure and reporting of CRA-related agreements. The proposed 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 (including business entities) made pursuant to, or in connection with, the fulfillment of the Community Reinvestment Act of 1977 (CRA). Some lawmakers, including Senator Phil Gramm, have found the proposed "CRA Sunshine" rule to be "troubling" as they would seem to render the related provisions of GLBA "ineffective." Community groups, on the other hand, have expressed support for the proposed rule.

While it has been a busy year for the regulatory agencies tasked with adopting regulations implementing GLBA, a trend toward general consolidation of the bank, insurance, and securities industry has not materialized to the extent some observers may have expected. As new financial affiliations are approved and new financial activities are identified, however, it is likely to increase the pace of consolidation. In the meantime, many companies are taking the steps necessary (i.e., becoming financial holding companies and establishing financial subsidiaries) to take advantage of the expanded activities available to them.

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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