Now that Congress has finally updated the nation's financial laws, every financial institution - but especially community banks - must be prepared to deliver a wide range of services, from auto insurance and car loans to securities brokerage and Internet banking.

Community banks could view the Gramm-Leach-Bliley Act's expansion of the products and services that banks can offer as an opportunity, not a threat. Using new organizational structures, community banks can reasonably and profitably enhance their competitive positions by adding new technology to the personal service and local focus on which they are based.

Certainly, to expand into the insurance or securities business, you must be able to comfortably absorb the time, expense, and risk. But if that is too much to handle, you can still get involved, because you don't have to go it alone. Several very good, more in-scale alternatives, like joint ventures, may be more suitable. In fact, a joint venture may be the best route for many of the smaller community banks.

For example, two or more community banks can profitably band together to buy an insurance agency or broker-dealer. This gives community banks a way to retain their customers without the cost of developing insurance or securities brokerage vehicles on their own.

In some cases the best option might be a merger of equals. Together, two or more small institutions can become more efficient and more competitive while remaining community-oriented.

The law creates two new financial services structures: the "financial holding company" and the "financial subsidiary" for national banks. Financial holding companies and, to a lesser extent, financial subsidiaries, may engage in any activity that the Federal Reserve Board determines to be "financial in nature" or "incidental" to such activities or "complementary" to financial activities.

The new criteria open the door for a banking company to engage in any financial activity that it needs to compete effectively in the marketplace or to keep abreast of technological developments in the delivery of financial services.

In addition to giving the Fed wide discretionary authority to add new financial services, the law enumerates a list of specific activities that are designated as "financial in nature," and thus permissible for financial holding companies and financial subsidiaries. Two of these are the underwriting and sale of insurance and securities products and services.

For community banks that want to offer or expand their current insurance and securities products and service offerings, there are several structural options available.


A bank holding company that is well managed, well capitalized, and holds a "satisfactory" or better Community Reinvestment Act rating can qualify to become a financial holding company. These holding companies may own subsidiaries that engage in "financial activities," including insurance and securities activities.

It is important to note that a subsidiary of a financial holding company may engage in insurance activities in any location without regard to the statutory "town of 5,000" population limitations.


A well-managed and well-capitalized national bank may operate financial subsidiaries, but their aggregate consolidated total assets may not exceed the lesser of 45% of the bank's consolidated total assets orÊ$50Êbillion.

A financial subsidiary may offer generally the same insurance products as a subsidiary of a financial holding company, except that a financial subsidiary may not underwrite insurance products as principal, issue annuities, or underwrite title insurance.

A financial subsidiary also may engage generally in the same securities brokerage activities as a subsidiary of a financial holding company, except that a financial subsidiary may not engage in merchant banking activities or portfolio investment activities.

(For state-chartered banks, if the state in which the bank is located has a statute that gives its banks the same powers as national banks, then financial subsidiaries are permissible. Absent such a statute, then state banks will be limited by state regulations as well as the regulations of the FDIC.)


National banks may also continue to have operating subsidiaries, which are more restricted than financial subsidiaries because they can engage only in activities that are permissible for a national bank directly. For example, operating subsidiaries are still limited to offering insurance services from towns with populations of 5,000 or less, just like national banks. An operating subsidiary may engage in securities brokerage activities, but also only to the same extent as a national bank.


Finally, banks may continue to provide many insurance and brokerage activities directly without creating a separate subsidiary, but would be subject to the current restrictions imposed on those activities. Any liability arising out of the activities would be incurred by the bank, whereas if the activities were in a separate legal entity, the bank would be shielded.

In selecting the best structure, community banks should consider their business goals, staffing, and regulatory preferences, among other factors. But given the speed at which the industry is changing, community bankers must make some decisions now on the best strategic direction.

Mr. Rubin, general counsel to the Independent Community Bankers of America, is a Washington-based partner in the financial institutions group of Powell, Goldstein, Frasier& Murphy LLP, an Atlanta law firm. Ms. Sumlin, who is based in Atlanta, is a senior associate with the group.

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