WASHINGTON - The Federal Reserve Board is expected to give Charles Schwab Corp. permission today to buy U.S. Trust Corp. and create the first financial conglomerate under the Gramm-Leach-Bliley Act.

How tough the Fed makes it for the giant discount brokerage to acquire a bank will influence whether other firms decide to become financial holding companies.

"I have a lot of clients who are sitting on the sidelines waiting to see how this turns out, because they are concerned about being regulated by the Fed," said Ronald R. Glancz, a partner with the Venable Baetjer Howard & Civiletti law firm here. "They are looking to see how onerous the process is and what kind of conditions the Fed will be putting in the orders."

Karen Shaw Petrou, president of ISD/Shaw, a Washington bank consulting firm, said she expects a "heavy-handed" approach from the central bank that will come as no surprise to Schwab. "It was the price they were prepared to pay for acquiring U.S. Trust," she said.

Key questions focus on regulation of Schwab as the parent company: how closely will it be examined, how much capital will it need, and what limits will be placed on its dealings with affiliates.

The Gramm-Leach-Bliley Act created financial holding companies as a means for banks, securities firms, and insurance companies to own each other. Lawmakers charged the Fed with overseeing the new conglomerates.

The issue drawing the most interest is how the Fed will examine Schwab.

To spare companies from excessive oversight, Gramm-Leach-Bliley mandates functional regulation, also known as Fed Lite. That means specific activities within a financial holding company, like broker-dealer operations or insurance sales, will continue to be regulated by specialized agencies. For example, the Securities and Exchange Commission will regulate broker-dealers, and state insurance commissioners will regulate insurance sales.

Exactly how much deference the Fed will give to functional regulators is the key question.

"This is really the first test of Fed Lite," said Gilbert T. Schwartz, a partner with the Washington law firm Schwartz & Ballen. "People will be looking to see whether the Fed interferes in [Schwab's] broker-dealer or investment advisory operations."

Mr. Schwartz, a former Fed official, agreed the order will be restrictive.

"The Fed is a cautious agency," he said. It will "be wary of cutting the reins entirely, especially with companies that are not primarily banking organizations."

The functional regulation question, while the most pressing, is not the only one that the Schwab approval will answer. Another issue is capital - specifically, whether the Fed will require the holding company to carry more.

"The Fed has said it will be looking for 'adequate' capital at the parent company level. We're not sure yet what that means," Ms. Petrou said.

Though informative for securities firms, the decision may be of little use to other financial companies.

The Gramm-Leach-Bliley Act says that when the parent company is a securities firm, the Fed should rely as much as possible on the capital rules for the securities business. "There is no comparable language for when the parent company is an insurance form or another financial company," Ms. Petrou said.

Finally, the Schwab order will show how the Fed intends to regulate transactions among and between holding companies and their affiliates. Section 23A of the Federal Reserve Act limits the amount that a bank may lend to any one affiliate to 10% of its capital, and loans to all affiliates to 20%.

Currently, if a bank lends to an individual who uses the money to buy securities from an affiliate of the bank, the loan counts against the cap. Ms. Petrou said that prospective financial holding companies will be interested to see if the Fed also counts bundled services and joint marketing agreements.

Schwab announced its $2.7 billion deal for U.S. Trust on Jan. 13. Chairman and co-chief executive Charles R. Schwab said the aim was to meet the needs of long-time brokerage customers who have begun to require asset management services.

U.S. Trust manages $86 billion of assets, catering to customers with $2 million or more to in invest. Schwab has 6.6 million customer accounts holding $725 billion of assets.

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