President Clinton signed the Gramm-Leach-Bliley Act (“Act”) into law November 12, 1999. The Act repeals the 66-year old Glass-Steagall Act, which prohibited banks, securities firms and insurance companies from affiliating.

The following is a brief summary of the key provisions of interest to the securities industry.

Affiliation: The Act permits banks, securities firms, and insurance companies to affiliate within a new financial holding company (FHC”) structure. The Act prohibits non-financial companies from owning commercial banks.

Financial in Nature: The Act includes a broad definition of financial in nature’ and gives the Federal Reserve Board (“Board”) the authority to define additional activities as “financial in nature, or incidental or complementary to” financial activities.  Merchant banking is included in the definition of a financial activity.

Commercial Basket: The Act includes a grandfather provision for commercial activities which permits a securities firm that becomes a FHC to continue to engage in commercial activities in an amount not to exceed 15 percent of its consolidated annual gross revenues, excluding bank subsidiaries. The grandfather provision will expire ten years after date of enactment, unless extended by the Board for an additional five years.

Privacy: The Act requires all financial institutions, regardless of whether they form an FHC, to disclose to customers their policies and practices for protecting the privacy of non-public personal information. The disclosure which customers would receive at the time of establishing the relationship and at least annually thereafter would allow customers to “opt-out” of information sharing arrangements to non-affiliated third-parties.  The Act permits financial institutions to share personal customer information with affiliates within the holding company. Effective immediately, it is a criminal offense for any person (including firm employees) to obtain or attempt to attain customer information relating to another person from any financial institution by making a false or fraudulent statement to an employee of that financial institution.  Regulators have six months after the date of enactment to adopt final rules implementing the privacy provisions.

Functional Regulation: All insurance, banking, and securities activities will be functionally regulated. The Act significantly narrows the broad exemptions from broker-dealer registration that banks currently enjoy today. Banks can, however, engage in the following types of securities activities without broker-dealer registration:

• Third-party brokerage arrangements (arrangements pursuant to which registered broker-dealers offer securities on bank premises).
• Certain trust activities.
• Transactions in exempted securities (such as government securities).
• Transactions for certain stock purchase and employee benefit plans.
• Sweeping bank deposits into no-load, open-end money market funds.
• Transactions for some bank affiliates.
• Private placements of securities for banks that do not have securities affiliates (or have had such affiliates for no more than one year).
• Safekeeping and custody activities.
• Carrying broker activities.
• Municipal securities.

Transactions in “identified banking products.” Identified banking products include bank accounts, banker’s acceptances, letters of credit, bank loans, certain loan participations, credit card debit accounts, credit and equity swaps sold to a qualified investor (other than equity swaps to retail customers), and other instruments as determined by the Securities and Exchange Commission (“SEC”), subject to challenge by the Board and other interested parties, and to court review and determination

Other securities transactions not in excess of 500 transactions per year.