On November 12, 1999, the President signed into law the Gramm-Leach-Bliley Act of 1999 ("Gramm-Leach"), which creates a genuine millennial shift in the structure and delivery of American financial services. The new law rebuilds the bridges among banks, securities firms and insurance companies that were demolished by the Glass-Steagall Act in 1933.

Gramm-Leach begins with a bang, repealing the 66-year-old Glass-Steagall prohibitions against affiliations between banks and securities firms. It then spreads its net widely by inventing the "financial holding company" ("FHC") as an alternative to the traditional bank holding company and the national bank "financial subsidiary" ("FS"), having powers beyond those of traditional operating subsidiaries. State-chartered banks also are impacted by Gramm-Leach.

Title V of Gramm-Leach on privacy issues deserves special mention. It addresses the right of financial institutions to share customer financial information and the corresponding right of consumers to protect the confidentiality of that information. The new law also can affect companies ranging from retailers to travel agencies.

This Bulletin is designed to give our readers a global view of this landmark legislation. To do that, we draw from a number of sources, including the text of the law and official summaries issued by the Senate-House Conference Committee that crafted the final legislation. We emphasize that the statutory provisions are only half the story, since we must await a multitude of Federal regulations to work out the details.

Title I of Gramm-Leach removes the barriers to affiliations among financial services companies. For example, Title I:

• Repeals the restrictions on banks affiliating with securities firms imposed under the Glass-Steagall Act.
• Creates a new "FHC" under the Bank Holding Company Act, which can engage in a prescribed list of financial activities, including insurance and securities underwriting and agency activities, merchant banking (venture capital) and insurance company portfolio investment activities, as well as "complementary" financial activities.
• Prevents the Federal Reserve Board from permitting a company to form an FHC if any of its insured depository institution subsidiaries are not well-capitalized and well-managed, or if they did not receive a satisfactory Community Reinvestment Act ("CRA") rating.
• Prevents the appropriate Federal banking agency from approving additional new activities or acquisitions for insured depository institutions or affiliates of an FHC if they received less than a satisfactory CRA rating.
• Confirms State regulation of insurance, while prohibiting States from discriminating against persons affiliated with a bank.
• Permits a national bank to engage in new financial activities through an FS (except for insurance underwriting, merchant banking, insurance company portfolio investments, real estate development or investment), up to an aggregate asset limit for all FS’s of 45% of the parent bank’s consolidated assets or $50 billion, whichever is less.

Title II – Agency Jurisdiction Over Bank Securities Activities

Title II of Gramm-Leach reorganizes the regulatory authority of Federal agencies over securities and investment activities along functional lines to assure consistency in the treatment of banks and other financial companies. For example, Title II:

• Replaces broad bank exemptions from broker-dealer regulation with limited exemptions designed to permit banks to continue current activities, develop new products and, under certain conditions, compensate employees for cross-referrals.
• Allows banks to continue to participate in the derivatives business and divides rulemaking authority over new hybrid products between the SEC and the Federal Reserve Board.
• Addresses potential conflicts of interest in the mutual fund business and requires banks that advise mutual funds to register as investment advisers.

Title III of Gramm-Leach reaffirms the primacy of the States in regulating insurance activities, allows redomestication of mutual insurance companies and encourages uniform insurance licensing practices. For example, Title III:

• Designates insurance products that banks and their subsidiaries may provide.
• Prohibits national banks from underwriting or selling title insurance if they did not actively conduct those activities before enactment of Gramm-Leach, but permits national banks to sell title insurance in States where State banks are specifically authorized to do so.
• Permits national bank subsidiaries and affiliates to sell all types of insurance, including title insurance.
• Requires Federal banking agencies to prescribe consumer protection regulations for bank insurance sales.
• Preempts State laws that interfere with affiliations between banks and insurance companies.
• Permits mutual insurance companies to move their home office to another State (redomesticate).
• Initiates a process for creating nationwide uniformity in licensing of insurance agents.

Title IV of Gramm-Leach reinforces the barrier separating banking from general commerce by preventing anyone from applying to the OTS to form a unitary (one-thrift) holding company after May 4, 1999. It further permits all existing unitaries to continue to operate, no matter who may own them, but permits them to be sold only to financial companies.

Title V of Gramm-Leach covers privacy of consumer financial information. It is especially important to remember that these provisions will apply to any company that is engaged in financial activities, not only banks, insurance companies and securities firms, but also many others, such as certain retailers and travel agencies. For example, Title V:

• Requires every "financial institution" to disclose its privacy policy regarding the sharing of "nonpublic personal information" with affiliates and with third parties.
• Requires that consumers be given a notice and an opportunity to "opt out" of sharing of their nonpublic personal information with nonaffiliated third parties.
• Permits joint marketing arrangements between financial institutions that do not trigger the opt-out disclosures.
• Safeguards the continuing effectiveness of the restrictions on information-sharing imposed under the Fair Credit Reporting Act and permits more restrictive State privacy laws to override the Gramm-Leach rules.

Title VI of Gramm-Leach modernizes the Federal Home Loan ("FHL") Bank System by making membership voluntary for Federal thrifts and expanding access to FHLBank advances to small bank members. It also establishes a permanent capital structure for FHLBanks and equalizes stock purchase requirements for banks and thrifts.

Title VII – ATMs, CRA, and Other Provisions

Title VII of Gramm-Leach contains a variety of provisions that affect the delivery of financial services, with particular emphasis on ATM fees and CRA. For example, Title VII:

• Requires ATM operators to post a notice about non-customer fees on each machine and screen.
• Requires ATM cards to be issued with a notice that surcharges may be imposed on non-customers by other parties and amends the Electronic Fund Transfer Act accordingly.
• Requires full public disclosure of all CRA agreements between financial institutions and nongovernmental persons and annual public reports by all parties on the use of CRA money and resources.
• Reduces the frequency of CRA exams for small institutions.

Gramm-Leach embodies a comprehensive overhaul of the American financial services industry, with major implications for banks, securities firms and insurance companies. The various provisions of the statute become effective on different dates over the course of the next year or more, and the full impact will not be evident until implementing regulations are issued. Nevertheless, the wiser course is to begin now to plan and position for change.