WASHINGTON - The Federal Reserve Board and the Treasury Department on Thursday issued an interim rule that establishes procedures for granting new powers to financial holding companies under the Gramm-Leach-Bliley Act.

The 1999 law allows financial holding companies to engage in activities that are financial in nature, incidental to such activities, and complementary to them. Lawmakers adopted a long list of activities that are financial in nature, but gave the Fed and Treasury joint authority to broaden it. The two agencies are responsible for determining which products qualify as incidental to finance, while the Fed has sole authority to rule on what is complementary to financial activity.

The law also directs the Fed and Treasury to treat as financial in nature activities in three broadly defined categories:

  • Lending, exchanging, transferring, investing for others, or safeguarding financial assets other than money or securities.
  • Providing any device or other instrumentality for transferring money or other financial assets.
  • Arranging, effecting, or facilitating financial transactions for the account of third parties.

However, the law leaves it to the agencies to determine what specific activities fall into those categories.Because these categories are so broad, the agencies decided not to attempt to write specific definitions of all the activities contained in them. Instead, they opted to introduce a system by which financial holding companies or other parties can formally request that the Fed and Treasury find that a particular activity falls into one of those categories and is therefore permissible.
To make such a request, a bank or other party must file a written description of the activity with either agency. The request must identify the business unit that will conduct the activity and provide "information that supports the requested determination."

In the future, the agencies may issue a rule listing specific activities that, by definition, fall into one of the three categories. The interim rule requests that parties filing comments suggest activities that should be on such a list.

The two regulators also asked for comments on the mechanism they will use to reach a joint decision on such requests. The Fed has the power to grant new powers to holding company units, and the Treasury - through the Office of the Comptroller of the Currency - to national bank subsidiaries. But Gramm-Leach-Bliley gave them mutual veto power to ensure as much parity as possible between holding company units and national bank subsidiaries.

Under the interim rule, the agency that receives a request for a ruling must inform the other, and the two are to confer and reach a decision.

Among the issues they will consider are "changes in marketplaces in which financial holding companies and banks compete, changes in the technology for delivering financial services, and whether the activity is necessary or appropriate to allow financial holding companies and their affiliates, or banks and their subsidiaries, to compete effectively."

Once a decision is reached, the agency that originally received the request will issue a written response explaining the joint ruling.

Institutions have 30 days to inform their primary federal regulator if they engage in an activity that has been approved.

The rule does not contain any indication of how a disagreement between the agencies over the permissibility of certain activities would be resolved. Some industry observers have speculated that potential conflict between the agencies could stifle financial innovation in the future. The rule is effective immediately, but will be revised after a comment period. Comments are due 30 days after the rule's publication in the Federal Register, which is expected soon.


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