Travelers Group Inc. and Citicorp won Federal Reserve Board approval Wednesday to create the first truly integrated financial services company.

The Fed imposed relatively few conditions on its approval, essentially doing everything the law requires but going no further.

Citigroup, the name of the combined company, would be a powerhouse in the securities, insurance, and banking industries, with $751 billion of assets, 100 million customers, and 3,200 offices in more than 100 countries. The companies expect to close the deal, currently valued at $50 billion, on Oct. 8.

Citigroup would be the first banking company since 1956 to engage in substantial insurance underwriting, an activity barred to most banks by the Bank Holding Company Act.

However, that status could be short-lived. The Fed said Citigroup must sell its insurance underwriting business within two years unless it can convince Congress to change the law. It may not acquire any other companies that are engaged in insurance underwriting.

Other conditions the Fed imposed:

Citigroup may not distribute mutual funds-a technical role akin to underwriting that involves setting up sales contracts between a fund management company and a brokerage firm. This does not preclude Citigroup from either managing or selling funds, however.

The company must ensure that none of its securities underwriting units earn more than a quarter of its revenue underwriting and dealing in corporate securities.

William J. Sweet Jr., a partner at the Washington law firm Skadden, Arps, Slate, Meagher & Flom, who represented Travelers and Citicorp before the Fed, said these and other restrictions were in line with the merger partners' own proposals. "We are quite happy with the approval and with the language of the order," Mr. Sweet said.

The Fed gave the financial giant permission to cross-market banking, insurance, and securities products. "The board does not believe that the proposal to cross-market various products and services would result in an unfair competitive advantage," the Fed said.

Citigroup's Salomon Smith Barney unit may for the next two years buy more than 5% of a company's stock as part of its market-making securities business, the Fed said However, it must reduce these investments to less than 5% within 30 days. (Banking companies' section 20 securities units must limit such purchases to less than 5%.)

However, Citigroup must keep customer data bases for banking, securities, and insurance operations separate, follow anti-tying laws, and offer insurance products through Citigroup affiliates on the same terms as it does through third-party vendors. Customers must be given the option of opting out of any cross-marketing programs, and Citigroup must adopt a global privacy statement.

Citicorp and Travelers shareholders, in separate meetings on July 22, approved the merger-the largest in history.

"The approval opens the way for creation of a financial company with unmatched capacity to provide customers around the world with services they need and value," said Citicorp spokesman Jack Morris.

He said the companies were not ready to comment on the conditions imposed in the 109-page order, which was approved 6 to 0, with Fed Governor Roger Ferguson abstaining.

In the order, the Fed rejected arguments by some activists and the Independent Bankers Association of America that a merger would be illegal.

"Travelers' proposal to acquire Citicorp is permissible under the express terms of the (Bank Holding Company) Act, is contemplated by and consistent with the legislative history and the purposes of that act, and is consistent with the board's long-standing precedent and practice," according to the Fed order.

The Fed said if the law is not changed, Citigroup would have to divest about 15% of its assets, which produce about 20% of its revenue. It also said Citigroup could apply for up to three, one-year extensions from the divestiture requirement.

Supervising Citigroup will not be a problem, the Fed said, noting it has effectively regulated Citicorp's global operations by using both on- and off-site exams, risk-management reviews, and continuous discussions with senior bank management.

"Diversity of business activities should enhance Citigroup's ability to withstand cycles that affect individual types of businesses and events that affect a single industry or company," the Fed said. "Since Citigroup would generate revenue from a wide spectrum of financial products and services, its capital strength should be enhanced."

The Fed rejected Community Reinvestment Act protests, noting that 320 of the 425 people who testified during two days of hearings in New York spoke in favor of the deal. Also, it said that all of Citicorp's banking and thrift units have "satisfactory" or "outstanding" CRA grades. "Examiners did not note any evidence of discrimination during any of the most recent CRA performance examinations," the Fed said.

The agency also referenced Citigroup's 10-year, $115 billion CRA pledge, which includes $430 million in home-equity loans in low-to-moderate income communities during the next three years.

Kenneth Guenther, executive vice president of the IBAA, said the group may appeal the Fed's order to the U.S. district court here.

Matthew Lee, executive director of the Bronx, N.Y.-based Inner City Press/Community on the Move, criticized the order, calling the restrictions on Citigroup's cross-marketing efforts "weak." He also questioned the legal reasoning underlying the order. "They are on the outer most branch of the legal tree," Mr. Lee said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.