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Leslie Bonacum
Neil Allen

CCH Explains What Banks Need To Know About Complying With New Financial Services Reform Act

(RIVERWOODS, ILL., November 15, 1999) – With passage of the Gramm-Leach-Bliley Act of 1999, banks now must turn their attention to complying with one of the most significant set of legal changes to face the industry in decades, according to CCH INCORPORATED (CCH), a leading provider of banking and securities law information, software and services.

The legislation, which repeals the 66 year-old Glass-Steagall Act, allows banks to form financial holding companies (FHCs) under which they can offer a wider range of financial services, including selling insurance and securities products. However, with this added opportunity also come significant changes in rules on protecting consumer privacy, disclosing costs and ensuring banks reinvest within the communities they serve.

"All banks will have a multitude of compliance issues that need to be addressed in light of the legislation and those banks looking to expand into other financial services will have the added challenge of understanding compliance issues within the insurance and securities industries," said Ted Dreyer, an attorney and analyst for CCH’s Bankers Systems Inc. unit, St. Cloud, Minn., and a contributing author to CCH’s Financial Services Modernization – Gramm-Leach-Bliley Act – Law and Explanation.

Formation of Financial Holding Companies

Under the new legislation, a bank holding company (BHC) can qualify as a financial holding company (FHC) – and thereby expand into other services that are "financial in nature" – so long as its subsidiary depository institutions are well- managed and well-capitalized and have received at minimum a "satisfactory" rating on their last Community Reinvestment Act (CRA) examination.

The new legislation outlines specific pre-approved activities that are deemed financial in nature, including lending and other traditional bank activities; insurance underwriting and agency activities; providing financial, investment or economic advisory services; securities underwriting and dealing, and mutual fund distribution; and insurance company portfolio investments as permitted by applicable state insurance laws. In addition, defined as financial in nature are any activities that the Federal Reserve Board has deemed "closely related to banking," or that the board already has approved for U.S. banks operating abroad.

Also, while merchant banking activity meets the financial in nature definition, and may be conducted at the FHC level by securities and insurance affiliates, the law prohibits banks and their subsidiaries from directly conducting this activity for the time being. However, the Federal Reserve Board and Treasury Department can revisit the issue five years after the Act is effective. The Act also prohibits banks from acquiring companies whose activities are not financial in nature, although securities firms and insurance companies can acquire non-financial companies under certain circumstances.

The Act also leaves open and undefined "complementary" activities that may be engaged in by FHCs, giving the Federal Reserve Board authority to determine on a case-by-case basis whether additional activities meet the financial in nature definition.

In order for an FHC to undertake an additional activity that is "financial in nature," it must provide written notice to the Federal Reserve Board within 30 days after starting that activity. If the Federal Reserve Board determines the FHC is not in compliance with the requirements to engage in these added activities (e.g., the FHC’s insured depository institutions aren’t well-capitalized or well-managed or received a less than a satisfactory CRA rating on its last exam), the FHC must take steps to correct the FHC's noncompliance. If the FHC still has not complied within 180 days, the Federal Reserve Board may order it to divest of its depository institution or cease "financial in nature" activity.

Added Incentives for CRA Compliance

The 22-year-old Community Reinvestment Act essentially requires that banks that take deposits in a community must also make a certain level of loans available to that community, including low and moderate income areas. Under the CRA, banks are examined on their lending, investments and community development activities in particular areas and can earn one of four ratings: outstanding, satisfactory, needs to improve and substantial noncompliance.

By tying CRA compliance to FHC qualification as well as to the ability to expand into other financial services, the Gramm-Leach-Bliley Act provides added reasons for banks to comply.

The new legislation also provides CRA regulatory relief to smaller banks. Specifically, banks with no more than $250 million in assets, that receive an outstanding rating in a CRA exam will not have to undergo a routine CRA exam more often than once every five years. Those with a satisfactory rating will be able to go four years without their next routine CRA exam.

"Essentially, the Act is offering all banks an incentive to comply with CRA requirements," said Dreyer. "Large banks, which are more likely to want to delve into other financial services, know their ability to continue to expand will be contingent on meeting CRA guidelines. Small banks that make an extra effort to comply also are rewarded in the form of less frequent CRA examinations."

Privacy Protection

Another key provision of the new legislation addresses concerns about the use of consumer’s financial information. Under the Act, banks must provide consumers the right to "opt-out" of programs that allow the financial institution to share customer information with unaffiliated third parties, subject to exceptions for the institution’s own marketing. Each financial institution must also establish a privacy policy that clearly and conspicuously states its policies and procedures regarding disclosure and protection of customers’ personal information (e.g., account number or balance) to both non-affiliated and affiliated entities. The privacy policy must be provided at the establishment of the customer relationship and annually thereafter to each of the institution’s customers.

However, removed from the Act was any reference regarding how to ensure privacy of medical information. A concern among those lobbying for privacy is that financial institutions that offer insurance as well as bank or securities services will be able to freely share this information among each of their financial divisions. Lawmakers have indicated that privacy of medical information will be dealt with as a separate issue.

ATM Fee Reform

While a growing form of revenue for banks, ATM fees have long been the bane of consumers, particularly those socked with high surcharges. Under the Act, ATM operators who impose fees for use of their machines must clearly post a notice on the machine as well as either on the screen or on a paper notice that a fee is being assessed. In addition, the amount of that fee must be shown on the screen or paper notice and the user must be given the opportunity to decide whether to authorize a charge prior to a transaction completing.

However, the legislation provides a temporary exemption for older machines that are unable to provide certain notices based on their technological limitations, giving owners of these machines until the end of 2004 to upgrade or replace them with machines capable of providing both on-screen and paper fee notices. Finally, Electronic Funds Transfer Act disclosures required by Regulation E must now contain a statement advising the customer that the use of ATMs that are not operated by the customer’s bank may result in the imposition of a surcharge by the ATM operator or network.

"Ever since banks began imposing surcharges on the use of ATMs to certain consumers, there have been efforts made to restrict or ban the fees," said Dreyer. "While provisions in this Act don’t go that far, they do provide certain safeguards for the consumer."

Who’s Policing What: Streamlining Compliance Supervision

To help streamline the regulatory maze that could result as the lines between different financial institutions blur, the new legislation adheres to a functional regulation approach. It specifically calls for regulatory jurisdiction to be based on the financial activity being undertaken. For example, banking activities will be regulated by banking regulators and securities activities will be regulated by securities regulators. The Act also reaffirms that regulation of insurance activities will remain within the states as permitted by the McCarran-Ferguson Act, as long as the regulation does not prevent insurance activities from being conducted by depository institutions or their affiliates. The responsibility for regulating FHCs has been given to the Federal Reserve Board.


Bankers Systems Inc., St. Cloud, Minn., a unit of CCH INCORPORATED, has been developing documentation and compliance solutions for the banking industry for nearly 50 years. CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients.

CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company produces more than 700 electronic and print products for the tax, legal, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer U.S. The CCH web site can be accessed at

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EDITORS NOTE: Editorial review copies of Financial Services Modernization – Gramm-Leach-Bliley Act – Law and Explanation are available upon request. Contact Leslie Bonacum, 847-267-7153 or



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