President Clinton is expected to sign the Gramm-Leach-Bliley Act of 1999 today. The financial reform law is expected to have a major impact on cross-industry mergers, customer privacy, and lending to lower-income communities. After 20 years of trying, Congress in late October reached a deal on a compromise bill, which the Senate approved Nov. 4 on a 90-8 vote and the House later that day by 362 to 57.
Here are the highlights of the legislation. Cross-Industry Affiliations
Repeals the Glass-Steagall Act of 1933 that separated commercial and investment banking and eliminates the Bank Holding Company Act of 1956's prohibition on insurance underwriting activities.
Creates "financial holding companies" that may conduct a broad list of financial activities, including insurance and securities underwriting, merchant banking, and real estate development and investment.
Delays approval of cross-industry mergers until 120 days after enactment, or mid-March. Regulation
Establishes the Federal Reserve Board as the primary regulator of financial holding companies.
Provides for functional regulation of financial activities by state and other federal agencies. Nonfinancial activities
Lets financial holding companies conduct activities that are "complementary" to banking.
Grandfathers for 10 years the nonfinancial activities of firms predominantly engaged in financial business, with the possibility of a five-year extension. Bank Powers
Allows banks to underwrite securities in direct subsidiaries and use them for insurance or securities sales or other low-risk activities. Unless explicitly barred, all other "financial" activities are permitted for bank subsidiaries.
Limits the size of bank units to 45% of assets, or $50 billion, whichever is lower.
Bars bank units from underwriting insurance or real estate investment and development. Merchant banking is also off-limits for bank subsidiaries, although five years after enactment the Treasury Department and the Federal Reserve Board could agree to allow it.
Gives the Treasury Department and the Federal Reserve the right to veto each other's decisions on new financial powers. But the bill gives the Fed more leeway, by letting holding company units conduct activities that are "complementary" to banking.
Permits national banks to directly underwrite municipal revenue bonds. Community Reinvestment Act
Bars a bank holding company from merging with an insurance or securities firms or embarking on new powers if any of its banks earned less than a "satisfactory" CRA rating in its most recent exam. The company would be barred from additional powers or acquisitions if one of the banks' CRA ratings dropped below "satisfactory" later.
Requires banks and community groups to disclose the terms of certain CRA-related agreements once a year. Community groups must explain how they used the funds.
Extends the period between CRA exams to five years for banks and thrifts under $250 million of assets that earned an "outstanding" rating in their last exam. Small institutions with a "satisfactory" rating would only be subject to CRA exams every four years. Regulators could conduct an exam sooner if a bank filed a merger application or if the regulators have a "reasonable cause." Privacy
Requires financial institutions to establish privacy policies and disclose them at the start of a customer relationship and once a year thereafter.
Requires banks to give customers a chance to block sharing of confidential information with third parties except in cases of marketing agreements between financial institutions and some other marketing agreements.
Bars credit card and account numbers from being shared with third-party marketers.
Makes it illegal to try to trick a bank into disclosing private information. Thrifts
Prohibits approval of unitary thrift holding company applications received after May 4, 1999.
Commercial companies may not buy existing unitary thrift holding companies. Insurance
Says state laws enacted before Sept. 3, 1998, may not "prevent or significantly interfere" with national bank insurance sales as outlined in the landmark Barnett decision by the U.S. Supreme Court.
Says the Barnett standard and newly created anti-discrimination provisions shield banks from unfair state laws that are enacted after Sept. 3, 1998
Strips the Comptroller of the Currency of "deference," or legal advantage, in court disputes with state insurance regulators over state laws enacted after Sept. 3, 1998, but preserves the comptroller's deference in disputes over older laws.
Covers state banks with the Barnett standard and additional protections.
Establishes 13 types of insurance laws that may not be pre-empted, such as requiring banks to disclose that insurance products are not federally insured. Other
Lets Federal Home Loan Bank members use small-businesses and farm loans as collateral for advances.
Eliminates the Savings Association Insurance Fund special reserve.
Requires operators of automated teller machines to post notices of fees before users can complete a transaction. Studies
By the Fed and Treasury on the use of subordinated debt to protect the financial system and deposit insurance funds from "too big to fail" institutions.
Due 18 months after enactment.
By the Treasury and federal banking agencies on the effect of the law on the availability of small business and farm loans. Due five years after enactment.
By the Treasury, Federal Trade Commission, and other federal regulators on information-sharing practices at financial institutions. Due Jan. 1, 2002.
By the Fed on default rates and profitability of CRA loans. Due March 15, 2000.
By the Treasury and federal banking agencies on adapting regulatory requirements to electronic banking. Due two years after enactment.
By Treasury and federal banking regulators on whether adequate services are being provided by CRA. Preliminary report due March 15, 2000.
By the General Accounting Office on changes to S corporation rules that could help small banks. Due six months after enactment.
By the GAO on the Fed's conflict of interest as a provider of services to the banking industry. Due one year after enactment.