August 13, 1991
TO: BOARD OF GOVERNORS NO. 59-91
RE: STATUS OF GLASS-STEAGALL LEGISLATION
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The purpose of this memorandum is to advise you as to the
current status of financial services restructuring legislation.
Congress has adjourned until after Labor Day, but is expected to
move quickly on this legislation upon its return.
House Banking Committee. The House Banking Committee
reported the Administration's bill on financial services
legislation on June 28. (See Memorandum to Board of Governors
No. 50-91, dated July 3, 1991.) The bill contains a number of
provisions endorsed by the Institute: a full "two-way street",
under which all banks could affiliate with securities firms and
all securities firms, including those with insurance or
commercial affiliates, could affiliate with banks; interstate
banking; and a requirement that most new bank securities
activities, including mutual fund sponsorship, be conducted in
separate affiliates, subject to full SEC regulation.
As we informed you earlier, the House Banking Committee
voted to strike all provisions in the Administration's bill that
would amend the federal securities laws, including mutual fund
firewalls and other provisions endorsed by the Institute. The
Committee Report confirms that this action was a procedural move
made for jurisdictional reasons. The report states: "The
Committee wants to make it clear that the adoption of the
amendment should not be interpreted as a vote by the Committee
against the firewalls contained within the subtitle. The
Committee is on the record in strong support of such consumer and
safety and soundness protections."
Senate Banking Committee. On August 2, the Senate Banking
Committee reported S.543, the "Comprehensive Deposit Insurance
Reform and Taxpayer Protection Act of 1991." S.543, as expected,
would repeal Section 20 of the Glass-Steagall Act and thereby
permit bank affiliates to engage in all securities activities,
including the sponsorship and underwriting of mutual funds. In
addition, as also expected, S.543 does not provide for a full
competitive "two-way street"; as a result, most securities firms
affiliated with insurance companies or commercial corporations
could not affiliate with banks. (There is a narrow exception
that would allow some firms with limited insurance activities to
own small banks.) Indeed, there was never any consideration of
the "banking and commerce" issue by the Senate Banking Committee;
the debate focused on "firewalls."
S. 543 is in many respects similar to S.1886, which passed
the Senate in 1988. However, S.543 contains several additional
mutual fund firewall provisions, which have been endorsed by the
Institute. These include a prohibition on a fund having a
similar name as an affiliated bank (with SEC exemptive
authority), additional disclosure obligations in the case of
banks that invest fiduciary accounts in affiliated mutual funds,
a narrowing of the common trust fund exemption, and the
authorization of an SEC study of the regulation of collective
investment funds for retirement plans. Despite the efforts of
banking representatives to strike or weaken these provisions, the
Institute was successful in preserving them.
Attached is a memorandum that decribes certain provisions
of S.543 in greater detail.
House Energy and Commerce Committee. The legislation
reported by the House Banking Committee has been referred to the
House Energy and Commerce Committee, and to three other House
Committees. Each of these Committees must act by September 27.
Contrary to widespread reports, we do not expect that the Energy
and Commerce Committee will seek to remove provisions granting
securities powers to banks from the legislation. Instead, we
expect that the Committee's actions will be generally focused on
firewalls and increased authority to the SEC and that the
Committee will oppose efforts to permit affiliations between
banking and commercial firms.
In this regard, Chairman Dingell and other members of the
Committee have introduced a bill, H.R. 797, which contains many
firewall provisions endorsed by the Institute and which is
expected to be the basis of the firewall provisions reported by
the Energy and Commerce Committee.
Outlook. A convergence of views both within the Congress
and the Executive branch makes the repeal of Glass-Steagall more
likely than ever: in 1988, the Senate passed a bill nearly
identical to the Senate Banking Committee's current bill by a
vote of 94-2. Similarly, in 1988, a Glass-Steagall repeal bill
was reported by the House Banking Committee; the current crisis
in the federal deposit insurance system makes some banking
legislation necessary; the Bush Administration strongly supports
financial services reform and will accept as "comprehensive" the
repeal of the Glass-Steagall Act without attendant changes to
traditional bars on banking and commerce affiliations. Thus,
there is a very good chance that legislation that grants bank
affiliates broad securities powers, including mutual fund powers,
will be passed this year by Congress. The most likely scenario
precluding such action would involve a Congressional decision
that the federal deposit insurance fund must be recapitalized
quickly by the passage of noncontroversial legislation.
The Institute, in accordance with the resolution adopted by
the Board in January 1990, will continue its efforts to ensure
that any such legislation includes strong mutual fund firewalls
and, to the extent possible, a two-way competitive street.
However, with respect to the latter, the insurance industry is
expected to undertake a massive effort on the House floor to
remove the provisions in the House Banking Committee bill that
would permit affiliations between banks and insurance companies,
including those affiliated with mutual fund organizations, and
thus preclude the possibility for a two-way street.
Other major issues to be decided involve brokered deposits
(on which major brokerage houses have devoted most of their
resources) and Congressman Schumer's proposed "core bank". It is
not yet clear how the resolution of these issues will affect
other provisions in the legislation or the bill as a whole.
We will keep you informed of developments.
Matthew P. Fink
Senior Vice President &
General Counsel
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