Senate Banking Committee Approves Financial Services Reform Legislation, March 1999

Washington, DC, March 18, 1999 - The Senate Banking, Housing, and Urban Affairs Committee recently approved the Financial Services Modernization Act of 1999, legislation to modernize the nation's financial services laws. The bill was passed 11-9 on a straight party-line vote. Among other provisions, the Senate bill would:

repeal the Glass-Steagall Act's provisions that restrict bank and securities firm affiliations,
amend the Bank Holding Company Act to permit affiliations among financial services companies, including banks, registered investment companies, securities firms, and insurance companies,
expand the authority of bank holding companies to engage in activities that are "financial in nature,"
prescribe the existing authority of the Federal Reserve Board when exercising its general supervisory authority to regulate, examine, or take enforcement action against regulated, non-bank subsidiaries of the holding company (such as investment advisers, broker/dealers, and insurance companies), and require a determination by the FRB that actions by a regulated subsidiary within the holding company pose a material risk to an affiliated bank or the domestic or international payments system,
apply the same provisions to the general supervisory authority of the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision,
continue the Securities and Exchange Commission's primary examination authority over investment companies,
loosen Community Reinvestment Act requirements somewhat and exempt from CRA requirements banks with less than $100 million in assets that are outside of metropolitan areas,
permit the FRB to authorize activities that are complementary to financial activities or any other service that does not pose a substantial safety and soundness risk (there is no provision to allow for grandfathering of existing commercial activities of bank holding companies),
expand "merchant banking" authority for bank holding companies which would permit investments in nonfinancial companies as part of "bona fide underwriting or merchant banking activity,"
bar any company engaged in commercial or nonfinancial activities from owning a thrift (there is a grandfather provision for existing ownerships),
amend the various exemptions for banks and their activities under the Investment Company and Investment Advisers Acts of 1940 and the Securities Exchange Act of 1934. Thus, certain bank activities that were previously exempt would now be required to be conducted in a broker-dealer. Also, banks will be required to register as investment advisers to investment companies.

Banking Committee Chairman Gramm expects the bill to be considered in the full Senate in early April. President Clinton has clearly stated that he will veto the legislation unless certain provisions of the bill are amended-particularly those affecting the Community Reinvestment Act.