WASHINGTON - Plans for implementing the merchant banking provisions of the Gramm-Leach-Bliley Act came under attack Tuesday by lawmakers from both sides of the aisle.
Two Senate Banking subcommittees announced a joint hearing for June 13 to determine whether the Federal Reserve Board and the Treasury Department went beyond the law when they issued restrictive rules governing merchant banking. Republican Sens. Rod Grams of Minnesota, chairman of the securities subcommittee, and Robert Bennett of Utah, chairman of the financial institutions subcommittee, called the hearing.
"I am concerned that the rules may not reflect the intent of Congress," Sen. Grams said in a press release. "Our job is to write the laws. Their job is to write the regulations. This hearing will brighten the line between the two."
Meanwhile, Rep. John J. LaFalce, the House Banking Committee's ranking Democrat, said the Fed's proposed capital rules for merchant banking "may be imposing unnecessarily harsh constraints on activities the Congress clearly intended to promote."
Congress opened the door to the world of integrated financial services companies with Gramm-Leach-Bliley, allowing banks and other financial companies to merge and create financial holding companies. Through subsidiaries, these parents may "directly or indirectly acquire or control any kind of ownership interest in an entity engaged in any kind of trade or business whatsoever," according to the law's conference report.
On March 17, the Fed and Treasury released an interim rule that, among other things, places an aggregate limit - $6 billion or 30% of Tier 1 capital - on the amount that financial holding companies may devote to merchant banking activities. Individual investments must be sold within 10 years.
The Fed also proposed requiring a capital charge for all merchant banking activities equal to 50% of the amount invested. Comments are being accepted on both the interim rule and the proposed capital plan until May 22.
In a speech to the New York Bankers Association, Rep. LaFalce criticized the capital requirement and the investment limit. "Particular note should be made of the concern that the aggregate limitation and 50% capital charge "undermine the new law's so-called 'two-way' street - which was intended to ensure that banks, insurance companies, and securities firms have equal opportunities to affiliate with one another," he said.
The investment cap, the New York Democrat continued, could prevent securities firms with merchant banking investments already near the cap from affiliating with banks.
Industry groups, such as the Financial Services Roundtable, have complained that Gramm-Leach-Bliley does not call for any limits on merchant banking authority, and objected specifically to the capital proposal. Banks have long been allowed to engage in limited merchant banking activities through Small Business Investment Companies.
"A lot of our members were shocked that they would be required to increase the capital that they hold for activities they have conducted for many, many years without any evidence of unsafe or unsound practices," said Richard M. Whiting, the Roundtable's executive director.
But House Banking Committee Chairman Jim Leach said earlier this month that he saw no need for hearings on the rules, and appeared to take the side of the regulators. "I don't think there is likely to be a legislative cure," the Iowa Republican said. "The legislature has given the mandate to develop rules to professionals in the Fed and the Treasury. My own sense is that these rules are likely to be preliminary rules and over time they could well be adjusted."
Witnesses at the Senate hearing have not been set, but Fed Governor Laurence H. Meyer and a senior Treasury official are expected to testify.
The American Bankers Association Securities Association told the Fed Monday that the interim and proposed rules "rebuild many of the barriers among financial services firms that Congress sought to eliminate."
"This goes to the essence of whether the whole structure of Gramm-Leach-Bliley is going to work at all," added Robert J. Kabel, legislative counsel for the Bank Private Equity Coalition. "Congress did this for a reason. They were persuaded that banks' involvement in venture capital is a good thing and ought to be expanded."
"We are very hopeful that opening this to further public discussion will lead to a revision of the proposed regulation," Mr. Whiting said.
While most trade groups were optimistic, Mr. Kabel noted one potential drawback to the hearings.
"The downside is that you'll get a few members who don't like merchant banking, and they'll express that point of view," he said. "The danger is that the regulators can say they are hearing two different points of view from the Hill, and so they'll do what they want."