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July 9, 1999
TO: BOARD OF GOVERNORS No. 45-99
FEDERAL LEGISLATION MEMBERS No. 18-99
PRIMARY CONTACTS - MEMBER COMPLEX No. 68-99
PUBLIC INFORMATION COMMITTEE No. 31-99
RE: HOUSE OF REPRESENTATIVES APPROVES FINANCIAL SERVICES REFORM
LEGISLATION
______________________________________________________________________________
On July 1, the House of Representatives passed H.R. 10, the “Financial Services Act of 1999,”
by a 343-86 vote. The bill repeals the Glass-Steagall Act’s restrictions on bank and securities firm
affiliations and amends the Bank Holding Company Act to permit affiliations among financial services
companies, including banks, registered investment companies, securities firms and insurance companies.
The provisions that have the greatest effect on the investment company industry are summarized below.
Holding Company Regulation
H.R. 10 utilizes functional regulation to govern the entities in a newly created bank holding company
structure. The legislation designates the Federal Reserve Board (FRB) as the “umbrella” regulator of the bank
holding companies, but also requires the FRB and other bank regulators — the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision and the Comptroller of the Currency — to defer to the authority
of the SEC when interpreting and enforcing the federal securities laws. The bill delineates the bank regulators’
ability to regulate investment companies and other entities. Specifically, bank regulators are permitted to address
concerns involving an investment company or other entity only if they represent a material risk to an affiliated
bank, the deposit insurance funds or the payment system.
Community Reinvestment Act (CRA)
The bill contains no provisions to extend the CRA to investment companies or other non-bank entities.
The Treasury secretary is directed to conduct a study of the bill’s effect on the extent to which banks provide
adequate services to low- and moderate-income communities as intended by the CRA.
1 See Memorandum to the Board of Governors No. 36–99, Federal Legislation Members No. 16-99, Primary
Contacts – Member Complex No. 54-99, Public Information Committee No. 24-99.
Privacy
H.R. 10 requires financial firms to adopt a privacy policy and disclose the details of the policy to
customers. For mutual funds, the SEC will regulate the content of the privacy policy and its format for
disclosure. The bill requires financial firms to give customers an opportunity to “opt out” or prevent the sharing
or sale of their personal information to unaffiliated third parties. Financial firms, however, are not required to
provide an “opt out” if the sharing of customer information with an unaffiliated third party is part of the
ordinary course of providing a financial service or product. H.R. 10 also prohibits the disclosure of medical
information by insurance companies without customer approval.
Commercial Baskets
The bill prohibits bank holding companies from engaging in commercial activities, but would give the
Federal Reserve Board flexibility to authorize permissible, “complementary” activities to supplement the
permissible financial activities undertaken by a bank holding company.
Unitary Thrifts
H.R. 10 prohibits companies engaged in commercial activities from owning a single or "unitary" thrift.
However, the bill includes a grandfather clause allowing commercial companies that currently own a thrift or
have applications pending as of March 4, 1999 to continue operations.
* * * * *
The House and Senate will meet in a conference committee to resolve the differences between S. 9001
and H.R. 10. The House and Senate may vote on a final version prior to the August congressional recess.
We will keep you informed of further developments.
Matthew P. Fink