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 CCHs
Bankers Systems Inc. unit, St. Cloud, Minn., and a contributing author to CCHs 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)
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 FHCs
insured depository institutions arent 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
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
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."
Another key provision of the new legislation addresses concerns about the use of
consumers 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
institutions 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
provided at the establishment of the customer relationship and annually thereafter to each
of the institutions 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
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 customers 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 dont go that far, they do provide certain
safeguards for the consumer."
Whos 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.
About BSI and CCH INCORPORATED
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 www.cch.com.
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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 firstname.lastname@example.org.