WASHINGTON - In its U.S. Trust Corp. deal, Charles Schwab Corp. is likely to be creating the first financial holding company under terms of the Gramm-Leach-Bliley Act of 1999.

In planning to buy U.S. Trust, the king of discount brokerages has decided to form a financial holding company subject to oversight by the Federal Reserve Board - a step most nonbank financial firms have avoided.

"They will have to form a financial holding company, and they will be in the ever-loving arms of the Federal Reserve. That's a big decision," said L. William Seidman, former Federal Deposit Insurance Corp. chairman and a CNBC commentator.

"This is a deal that illustrates the two-way street that has been opened up" by the financial reform law, said Bert Ely, president of Ely & Co. in Alexandria, Va. "Before, you could have this affiliation, but it was the bank holding company that was the survivor.

"This opens the door to situations where it is the securities firm that takes the initiative and is going to be the survivor."

Cantwell F. Muckenfuss 3d, a partner in the Washington law firm Gibson, Dunn & Crutcher, agreed. "I think what is interesting is that this will be the first of the new companies under the Fed where the bank is not the dominant company," he said.

The combination will also test the financial reform law's functional regulation of nonbanking entities within a financial holding company. For instance, the law envisions the Securities and Exchange Commission as continuing to regulate the brokerage business, but the central bank will have some say over how the SEC does this. How well the two agencies are able to coordinate their activities remains to be seen.

The Federal Reserve declined to comment on the Schwab plan to become a financial holding company, but industry lawyers said they expected it to be approved.

"This appears to be a relatively straightforward transaction that probably could have been done under existing law even before Gramm-Leach-Bliley," said John L. Douglas, a partner in the Atlanta law firm Alston & Bird.

To gain approval as a financial holding company, Schwab will be required to demonstrate that U.S. Trust is well-capitalized, well-managed, and that it got a rating of satisfactory or better in its most recent Community Reinvestment Act examination.

A U.S. Trust spokesman said discussions with regulators have led the company to expect approvals by late May or early June. Approvals from state banking authorities and other regulators are expected to be granted by then as well.

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