Indefinite Securities Extension Keeps Bankers Happy
Written by Victor Cruz on March 29, 2001
By Victor Cruz
Much of the banking community breathed a sigh of relief March 16 when the US Securities & Exchange Commission — the federal agency charged with regulating securities activity — granted an indefinite extension to the industry before forcing it to comply with the full regulations of the Gramm-Leach-Bliley Act.
The act, passed by Congress in November 1999, allows banks in good economic standing to redefine themselves as "financial holding companies" and thereby offer a wider range of services.
The act essentially eliminates the legal walls that once separated banking, insurance and investment activities.
Once the act is fine-tuned, banks will be able to engage in securities and insurance underwriting and, merchant-banking activities and offer other investment services.
Without the extension, as part of what is called the push-out provision — one of two mandatory regulatory provisions in Gramm-Leach-Bliley — banks engaging in securities activities would be forced to push out, or farm out, many of those services to registered securities brokers by May 12.
It was the second extension of a Gramm-Leach-Bliley mandatory provision granted to a banking industry that is pleased with some elements of the legislation and unclear about other parts.
A privacy provision setting guidelines for how client information is passed between the various service groups offered at banks-turned-financial-holding-institutions has been moved from November 2000 to this July.
Allowing banks to offer more services makes them more competitive — but the new legislation comes at a price. Gramm-Leach-Bliley, for example, as part of the push-out provision, has done away with the traditional exemption banks were routinely granted from having to register as broker-dealers with the SEC. A shift like that can be costly and disruptive to banking structure, introducing new regulatory agencies that must be accounted to and new procedures and administrative structures.
Some in South Florida’s banking community think that the competitive edge the newfound freedoms bring to the industry could be dulled by how federal regulators choose to interpret other parts of Gramm-Leach-Bliley. What guidelines are established for the push-out provision and the privacy provision, both mandatory elements of the new law, are fundamental concerns to the banking community.
Bowman Brown of the commercial law firm Shutts & Bowen — who routinely serves many banks in Miami-Dade — says that the mandatory provisions of the law "are hard for banks to comply with under the original timeframes."
Instead of a fast-track to profits, he sees the potential for a costly bookkeeping and systemic morass up ahead.
The new legislation is unclear about the rules for granting future exemptions and vague as to how much a bank can earn in securities activities before the service must be pushed out to an outside registered broker-dealer.
Mr. Brown said he hopes the SEC will do more than delay the effective date, which has not yet been set, and provide clear guidelines. He says he hopes the SEC continues to grant banks exemptions from registering as broker-dealers.
"If banks have to push out" securities services to outside broker-dealers, Mr. Brown said, "this implies licensing fees, duplicative procedures, increased personnel and second accounts. This is particularly disruptive when your client is in Latin America."
Indeed, it is foreign banks that specialize in private banking that will be impacted most by how the SEC establishes the push-out guidelines.
"We’re in a holding pattern," says Patricia Roth, the Miami-based executive director of the Florida International Bankers Association, a nonprofit association of foreign and domestic banks whose members include 70 banks from 21 different countries.
"We are hoping the SEC issues favorable guidelines which allow these banks to continue offering their services the way they have been doing it," says Bowman.
John Heine, deputy director of public affairs for the SEC, says that a final effective date for compliance with the new deadlines has not been established.