BANK ON IT: THE FINANCIAL SERVICES
1999
MODERNIZATION ACT OF by W Christopher Barrier and John O. Moore
This is the second oftwo articles on FSMA. An article on Section 73 J ofFSMA, pre-empting Arkansass usury limits, appeared in the Spring 2000 Arkansas Lawyer. nacted imo law on ovemher 12,1999, the Gramm-Leach-Bliley Act,
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commonly referred to as the Financial
Services Modernization Act ("FSMA" or the "Act"). provides sweeping revisions ro the Class-Stegall Act restrictions that prohibited broad affiliations among the banking, securities and Insurance industries. I FSMA practically eliminates most all of the federal and state law barriers to affiliations among banks, securities firms, insurance companies and other financial
service providers. Among other maners, FSMA also addresses thrift organizations. customer privacy, the Federal Home Loan Bank System, ATM systems and Communi~ Reinvestment Act ("eRA") requirements. A. FINANCIAL MRUATIONS & ACTMTIES
I. Affiliations. 2 Title I of FSMA authorizes and facilitates affiliations among banks, securities firms and insurance companies ("Financial Organizations"). These Financial Organizations are able co
About the Authors Chris Barrier practices at the Mitchell, WiUiams. Selig, Gates & Woodyard law firm in Linle Rock where he is chair of the firm's Business Practice
Group.
John O. Moore is an associate in the Business Practice Group of Mitchell, Williams. Selig, Gates & Woodyard.
structure such affiliations through a new type of bank holding company ("BHC") called a financial holding company ("FHC"). Undet the Act, FHC's are granced the authority co engage in activities or affiliate with companies that are engaged in activities - referred co as "financial activities" - that are not permitted for traditional BHCs.
2. Financial Activities) A "financial activity" is an activity that is (I) "financial in nature"; (2) "incidental" to a financial activity; or (3) "complimentary" to a financial activity and does not pose a substantial safety or soundness risk to the bank (these activities are collectively referred to as "New Financial Activities").4 FSMA does specifically designate certain activities as "financial in nature" which encompass mOSt traditional banking, securities and insurance business activities.> 3. Qualifications. 6 In order to qualify as an FHC and therefore engage in FSMA's New Financial Activities, all of the BHC's bank subsidiaries must be well-capitalized and well-managed, and the BHC must file notice with the Federal Reserve. Also, FHC's and their bank subsidiaries are prohibited from commencing any New Financial Activities or directly or indirectly acquiring control of a company engaged in any New Financial Activities if the bank or bank subsidiaties has a CRA rating of less than "satisfactory". These restrictions would be lifted once all such FHC subsidiaries met the minimum CRA rating. 4. Noncompliance.7 If a FH C's bank subsidiaries subsequently fail to comply with the Act's requirements, the Federal Reserve may impose limitations on the conduct or activities of the FHC or any affiliate of the FHC. If the FHC does not
correct the failure, the Federal Reserve may require the FHC to either divest control of any bank subsidiary or cease any New Financial Activities. 5. Regulation.' Through the FHC structure, banks will be less restricted regarding the purchase or establishment of securities broker/dealers and will have the new option of purchasing insurance companies. Moreover, securities firms and insurance companies will be permitted to purchase full-service banks, which will result in their being subject to regulation by the Federal Reserve. Under FSMA, the Federal Reserve serves as the "umbrella supervisor" of the holding company with the individual entities within the holding company structure subject to "functional regulation" based on the types of activities in which they engage. As such, a bank, broker/dealer and insurance subsidiary within the same FHC would be regulated respectively by the approptiate banking agency, the SEC and the appropriate state insurance commission. B. NATIONAL BANKS
1. General FSMA authorizes national banks to engage in the New Financial Activities through a "financial subsidiary".9 This authorization IS not complete, however, as financial subsidiaries are only permitted to engage in activities that are (a) "financial in nature", (b) "incidental" to a financial activity and (c) actjvities that a national bank could engage in directly.1O Furthermore, even through a financial subsidiary, national banks are prohibited from engaging in insurance underwriting, merchant banking, insurance company portfolio investments, and real estate development and investment. 2. Qualifications. I I A financial
leI. l~ Nt. l/S.ller 2000
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