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Gramme-Leach-Bliley Act

The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub. L. No. 106-102, 113 Stat. 1338 (November 12, 1999), is an Act of the United States Congress which repealed the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services. The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate. For example, in its wake Citibank merged with Travelers Group, an insurance company, and formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services. However, the law was not passed until some major mergers in the financial sector had already taken place such as the Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation combination in the mid-1990's. This combination announced in 1993 and finalized in 1994 already violated the Glass-Steagall Act by combining insurance and securities companies. The law was passed to legalize these mergers. Historically, the combined industry has been known as the financial services industry.

Changes caused by the Act
The Act was desired by many of the largest banks, brokerages, and insurance companies in the United States at the time. The justification was that people usually put more money in investments in a good economy, but when it turns bad, they put their money into savings accounts. With the new Act, they would do both with the same company, so the company would be doing well in all economic times. This has to some extent proven true.

Prior to the passage of the Act, most financial services companies were doing this anyway. On the retail/consumer side, a bank called Norwest led the charge in offering all types of financial services products in 1986. Also at the time American Express attempted to own almost every genre of financial business (although there was little synergy between them). Things culminated in 1997 when Travelers, a financial services company with everything but a retail/commercial bank, bought out Citibank, creating the largest and most profitable company in the world. At the time this was technically illegal, and was a large impetus for the passage of the Gramm-Leach-Bliley Act.

Also prior to the passage of the Act, there were many relaxations to the Glass-Steagall Act. For example, a few years before, Commercial Banks were allowed to get into investment banking, and before that banks were also allowed to get into stock and insurance brokerage. The only main operation they weren't allowed to do was insurance underwriting (something rarely done by banks even after the passage of the Act).

Since the passage of the GLBA, much consolidation has occurred in the financial services industry, but not as much as some expected. Retail banks for example, do not tend to buy insurance underwriters, since they expect they can make more money selling other companies insurance products in their branches (this is called insurance brokerage). Many other retail banks have been slow to adopt investments and insurance products, and to package those products in a convincing way. Brokerage companies have had a hard time getting into banking, because they do not have a large branch and backshop footprint. Banks have recently tended to buy other banks, such as the recent Bank of America and Fleet Boston merger, yet they have had less success integrating with investment and insurance companies. Many banks have expanded into investment banking, but have found it hard to package it with their banking services, without resorting to questionable tie-ins which caused scandals at Smith Barney.

Senator Phil Gramm led the Senate Banking Committee which sponsored the Act; he later joined UBS Warburg, at the time the investment banking arm of the largest Swiss bank.

Remaining Restrictions
Some restrictions remain to provide some amount of separation between the investment and commercial banking operations of a company. For example, licensed bankers must have separate business cards, eg. "Personal Banker, Wells Fargo Bank" and "Investment Consultant, Wells Fargo Private Client Services". Much of the debate about financial privacy is specifically centered around allowing or preventing the banking, brokerage, and insurances divisions of a company from working together.

In terms of compliance, the key rules under the Act include The Financial Privacy Rule which governs the collection and disclosure of customers' personal financial information by financial institutions. It also applies to companies, regardless of whether they are financial institutions, who receive such information. The Safeguards Rule requires all financial institutions to design, implement and maintain safeguards to protect customer information. The Safeguards Rule applies not only to financial institutions that collect information from their own customers, but also to financial institutions - such as credit reporting agencies - that receive customer information from other financial institutions.