Federal legislation opens new financial-services markets.

• Author: Buck, Peter C.

On Nov. 12, 1999, Congress rewrote the basic statutory scheme for regulation and oversight of the U.S. financial-services industry. Commentators have called the Gramm-Leach-Bliley Act the most significant piece of financial-services legislation in the last 65 years. It effectively repeals the Glass-Steagall Act, a Depression-era statute that built firewalls between banking, securities underwriting and dealing, and insurance underwriting and sales. Banks, securities firms, insurance companies and other financial-service providers can combine operations and pursue the full spectrum of financial-services markets. But the freedom comes at a cost for financial institutions: consumer-privacy protections and additional layers of federal and state regulation that increase their regulatory burden.

The new law allows any bank holding company that meets certain standards of capitalization and management and that has a "satisfactory" or better rating under the Community Reinvestment Act to engage in the expanded activities by qualifying as a "financial holding company." Since March 11, more than 350 have been certified. Bank of America Corp., First Union Corp., Wachovia Corp., BB&T Corp. and First Citizens Bancshares Inc. are the only North Carolina institutions that have filed for the status. As financial holding companies, they can take advantage of three important market expansions.

Securities underwriting and dealing

They may underwrite and deal in securities (including market making) free of previously applicable limits on the revenue generated from them. A financial holding company can own a full-service securities broker-dealer, regardless of the sizes of the businesses. It is possible, for example, for Merrill Lynch or Goldman Sachs to combine with one of the nation's largest banking institutions.

Insurance agency and underwriting

They may engage through affiliates in all types of insurance activities, including sale of policies and underwriting of property, casualty, life and title insurance and annuities. Subject to certain exceptions, the act preempts state anti-affiliation laws and state laws that regulate underwriting of insurance to the extent they discriminate against bank affiliates. It confirms the jurisdiction of state insurance authorities over financial holding company insurance activities. This is in keeping with the legislative theme of functional regulation of financial services: Responsibility is allocated by the nature of the...