A Guide to the Gramm–Leach–Bliley Act of 1999
The Gramm–Leach–Bliley Act of 1999, sometimes referred to as the Financial Services Modernization Act, is an act created by the 106th U.S. Congress. The Gramm–Leach–Bliley Act was signed into law Bill Clinton, which repealed sections of the 1933 Glass–Steagall. This opened up the market among security companies, insurance companies, ad banking companies. The former Glass–Steagall Act did not allow any single institution from performing as any sort of combination of an insurance company, commercial bank, or an investment bank.
The Gramm Leach Bliley Act of 1999 allowed securities firms, insurance companies, commercial banks, and investment banks, to consolidate if desired. The Gramm Leach Bliley Act of 1999 was passed to legalize mergers between these organizations on a permanent basis. The Gramm Leach Bliley Act of 1999 also repealed the Glass–Steagall Act’s conflict regarding interest prohibitions against simultaneous service by an employee, director, or an officer of a securities firm as an employee, director, or an officer of any member bank.
Background on the Gramm–Leach–Bliley Act
The banking industry had wanted to repeal the 1933 Glass–Steagall Act since around the 1980s. The Congressional Research Service created a report in 1987 that researched the cases for and against keeping the Glass–Steagall act.
Separate versions of the Gramm Leach Bliley Act of 1999 were introduced to the Senate by Phil Gramm, and by Jim Leach in the House. Representative Thomas J. Bliley, Jr., the House Commerce Committee’s Chairman, was the third legislator associated to the Act. The House approved its version of the Act on July 1, 1999 with a bipartisan vote of 343-86, two months after the Senate’s version of the bill had passed with a 54–44 vote which essentially followed party lines.
When both chambers could not decide on a joint version of the Gramm Leach Bliley Act of 1999, the House voted (241-132) on July 30 to tell the House’s negotiators to work to pass a law that ensured that consumers could enjoy financial and medical privacy along with strong competition and non-discriminatory and equal access to the economic opportunities and financial services in their communities.
The bill was then moved to a conference committee between the two chambers to figure out the differences between the House and Senate versions of the bill. Democrats agreed to support it once Republicans agreed to address certain concerns about privacy in the bill and also strengthen provisions regarding the anti-redlining Community Reinvestment Act. The conference committee worked to finish making changes to the bill and on November 4, the final bill, which resolved the differences between the two versions, was passed in the Senate with a 90-8 vote and in the House with a 362-57. The passed bill was then signed into law by President Bill Clinton on November 12, 1999 as the Gramm Leach Bliley Act of 1999.
Resulting Changes of the Gramm–Leach–Bliley Act
Many of the largest brokerages, insurance companies, and banks wanted the Gramm–Leach–Bliley Act to pass at the time. The justification for this was that individuals will typically put more money into various investments when the economy is healthy and strong, but if the economy is poor and weak, these potential investors will place the majority of their money into savings accounts. With the Gramm–Leach–Bliley Act, these investors could be able both save and invest without using different financial institutions, allowing the institution to thrive in both bad and good economic times.
Before the Gramm–Leach–Bliley Act, the majority of financial services companies already offered both investment and saving opportunities to their clients. Furthermore, before the Gramm–Leach–Bliley Act passed, there were a variety of relaxations found in the Glass–Steagall Act. An example of this was a few years before, commercial Banks could pursue investment banking, and banks could begin insurance and stock brokerages. Insurance underwriting was the single operation that was not allowed, which was rarely done even after passing the Gramm Leach Bliley Act of 1999.
A lot of consolidation and merging happened in the financial services industry subsequently, but not to the extent that some had expected. For example, retail banks typically do not buy insurance underwriters, since they look for more profitable businesses such as insurance brokerages where they sell products from other insurance companies. Retail banks did not quickly package insurance and investment products in a way that was convincing and appealing to consumers.
Brokerage companies also had a hard time finding a way into banking, because these organizations are not known for having large branches and back shop footprints. More recently, banks have started a trend of buying other banks, but they still have less success integrating with other organizations such as insurance or investment companies. Many of these banks have gone beyond their normal scope and tried getting into investment banking, but many have found it difficult to easily package these products with their banking services, without having to resort to concerning tie-ins that can be the cause of scandals.
Restrictions under the Gramm–Leach–Bliley Act
In order for the Gramm-Leach-Bliley Act to successfully pass, an amendment was made to the bill which stated that mergers could not be cleared to go ahead if any of the involved financial holding institutions, or any affiliates thereof, received a rating that was less than satisfactory at the most recent CRA exam. This mean that any merger could only go on ahead if it had received the strict approval of the necessary regulatory bodies that were in charge for the Community Reinvestment Act. This was a very controversial issue, and Presidential Clinton’s administration stressed that it any legislation that tried to scale back minority-lending requirements would get vetoed.
The Gramm-Leach-Bliley Act did not get rid of restrictions that were placed by the Bank Holding Company Act which stopped financial institutions and banks from owning any non-financial companies. The Act conversely prohibited corporations that were outside of the finance or banking industry from trying to enter commercial or retail banking.
Some restrictions have been kept in the Gramm Leach Bliley Act of 1999 in order to maintain some level of separation between the commercial and investment banking functions of a company. The majority of the debate surrounding financial privacy is centered specifically on preventing or allowing the insurance, banking, or brokerage divisions of a company from functioning and working together.
When looking at compliance, the main rules under the Gramm-Leach-Bliley Act are the Financial Privacy Rule. This rule governs the disclosure and collection of personal financial information of customers by financial institutions. The rule also applies to corporations, regardless of if they are financial organizations, who obtain such data. A second major rule is the Safeguards Rule, which requires all financial companies to create, apply and uphold protections to defend customer information. The Safeguards Rule does not only apply financial companies that collect data from their own consumers, but also to appraisers, credit reporting agencies, mortgage brokers, and other financial institutions that obtain customer info from other financial companies.
Financial Privacy Rule in the Gramm–Leach–Bliley Act
The Financial Privacy Rule involves having financial institutions provide each customer with a privacy notice given at the time the company establishes a customer relationship and annually after that. The privacy notice has to explain what information is collected about the consumer, how that information gets used, who or where it gets shared with, and how the company protects the information.
Safeguards Rule in the Gramm–Leach–Bliley Act
The Safeguards Rule makes financial institutions responsible for developing and writing an information security plan that discusses how the institution is equipped for protecting client’s personal information and how they plan to continue doing so. This plan must designate at least one employee who will manage safeguards, construct risk management on all departments that handle the information, create a program to secure information and have it monitored and tested, and change any safeguards that are needed in order to be up to regulation.
The purpose of the rule is to protecting the institution’s clients. It forces financial companies to closely examine how they deal with a client’s private data and perform risk analysis on these processes. Because of this, all financial institutions must make an effort to some extent in order to correctly follow the Gramm Leach Bliley Act of 1999.