Gramm-Leach-Bliley Act
After almost seventy years of experience with Glass Steagall, Act, Congress concluded that its reach was too broad. Congress believe that it was possible to impose less onerous restrictions on commercial and investment banks and still avoid the abuses that led to the problems of the late 1920s. Congress believed that these changes would help keep U.S. financial institutions competitive with foreign institutions, that did not face similar restrictions. The Gramm-Leach-Bliley Act (“GLB Act”) was signed into law on November 12, 1999. It represents a major overhaul of the Glass-Steagall Act.
Underlying the GLB Act is the idea of “functional regulation.” Functional regulation is designed to assure that the most knowledgeable regulator supervises each of a financial institution’s activities. For example if a financial company seeks to engage in securities, banking, and insurance, it must conduct the securities activities in a broker-dealer regulated by the SEC and its banking activities in a regulated bank. Similarly, state insurance regulatory bodies serve as the functional regulators of insurance companies. As a general matter, the Federal Reserve Board serves as the umbrella supervisor of financial holding companies and is not permitted to engage in supervisory regulation of regulated subsidiaries. (Broker-dealers need not register with the Fed.)
Among other things, the GLB Act
- Eliminated the Glass-Stegall restrictions on affiliations between commercial banks and investment banks;
- Repealed Section 32 of the Glass-Steagall Act, which prohibited commercial banks and investment banks from having overlapping officers, directors, or employees.
- Amended Section 16 of the Glass-Steagall Act, which defines the corporate powers of national banks, so that well-capitalized banks may underwrite, deal, or purchase municipal revenue bonds, limited obligation bonds and other debt instruments issued by a state or a political sub-division of a state.
The GLB Act made corresponding changes to the federal securities laws.
The GLB Act also amended the Bank Holding Company Act of 1956 by providing for the creation of financial holding companies. A financial holding company is a bank holding company that may engage in any activity or hold the shares of any company that engages in any activity that the Federal Reserve Board has determined is:
- Financial in nature;
- Incidental to financial activities; or
- Complementary to a financial activity, and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.
Finally and significantly, the GLB Act imposed broad new consumer protections relating to financial privacy.