Gramm-Leach-Bliley Act

The "Gramm-Leach-Bliley Act", also known as the "Gramm-Leach-Bliley Financial Services Modernization Act", USStatute|106|102|113|1338|1999|11|12, is an Act of the United States Congress which repealed part of the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies.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, Citibank merged with Travelers Group, an insurance company, and in 1998 formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services. Other 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-1990s. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act by combining insurance and securities companies, if not for a temporary waiver process [http://www.symtrex.com/pdfdocs/glb_paper.pdf] . The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the financial services industry.

Legislative history

", retrieved on October 9, 2008 ] This "veto-proof" legislation was signed into law by President Bill Clinton on November 12, 1999. [http://www.govtrack.us/congress/bill.xpd?bill=s106-900#votes "S. 900 [106th] : Gramm-Leach-Bliley Act"] . "GovTrack.us".]

The banking industry had been seeking the repeal of Glass-Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act. [http://digital.library.unt.edu/govdocs/crs/permalink/meta-crs-9065:1]

Changes caused by the Act

Many of the largest banks, brokerages, and insurance companies desired the Act at the time. The justification was that individuals usually put more money into investments when the economy is doing well, but they put most of their money into savings accounts when the economy turns bad. With the new Act, they would be able to do both 'savings' and 'investment' at the same financial institution, which would be able to do well in both good and bad economic times.

Prior to the Act, most financial services companies were already offering both saving and investment opportunities to their customers. On the retail/consumer side, a bank called Norwest which would later merge with Wells Fargo Bank led the charge in offering all types of financial services products in 1986. American Express attempted to own almost every field of financial business (although there was little synergy among them). Things culminated in 1998 when Travelers, a financial services company with everything but a retail/commercial bank, bought out Citibank, creating the largest and the most profitable company in the world. The move was technically illegal and provided 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 earlier, commercial Banks were allowed to get into investment banking, and before that banks were also allowed to get into stock and insurance brokerage. Insurance underwriting was the only main operation they weren't allowed to do, something rarely done by banks even after the passage of the Act.

Much consolidation occurred in the financial services industry since, but not at the scale some had expected. Retail banks, for example, do not tend to buy insurance underwriters, as they seek to engage in a more profitable business of insurance brokerage by selling products of other insurance companies. Other retail banks were slow to market investments and insurance products and package those products in a convincing way. Brokerage companies 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 2004 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.

Remaining restrictions

Crucial to the passing of this Act was an amendment made to the GLBA, stating that no merger may go ahead if any of the financial holding institutions, or affiliates thereof, received a "less than satisfactory [sic] rating at its most recent CRA exam", essentially meaning that any merger may only go ahead with the strict approval of the regulatory bodies responsible for the Community Reinvestment Act (CRA). [http://banking.senate.gov/conf/craamd.htm Community Reinvestment Act Amendments in the Gramm-Leach Act] , additional text.] . This was an issue of hot contention, and the Clinton Administration stressed that it "would veto any legislation that would scale back minority-lending requirements." [http://partners.nytimes.com/library/financial/102399banks-congress.html Compromise over Community Reinvestment Act crucial to repeal of Glass-Steagall] ]

The GLBA also did not remove the restrictions on banks placed by the Bank Holding Company Act of 1956 which prevented financial institutions from owning non-financial corporations. This is significant because this restriction prevents an ownership structure similar to Japan or Germany in which banks own the majority of large industrial enterprises. It conversely prohibits corporations outside of the banking or finance industry from entering retail and/or commercial banking. Many assume Wal-Mart's desire to convert its industrial bank to a commercial/retail bank ultimately drove the banking industry to back the GLBA 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, e.g., "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.

Privacy

* GLBA compliance is mandatory; whether a financial institution discloses nonpublic information or not, there must be a policy in place to protect the information from foreseeable threats in security and data integrity
* Major Components put into place to govern the collection, disclosure, and protection of consumers’ nonpublic personal information; or personally identifiable information:
** Financial Privacy Rule
** Safeguards Rule
** Pretexting Protection

Financial Privacy Rule

(Subtitle A: Disclosure of Nonpublic Personal Information, codified at usc|15|6801|6809)

The Financial Privacy Rule requires financial institutions to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter. The privacy notice must explain the information collected about the consumer, where that information is shared, how that information is used, and how that information is protected. The notice must also identify the consumer’s right to opt-out of the information being shared with unaffiliated parties per the Fair Credit Reporting Act. Should the privacy policy change at any point in time, the consumer must be notified again for acceptance. Each time the privacy notice is reestablished, the consumer has the right to opt-out again. The unaffiliated parties receiving the nonpublic information are held to the acceptance terms of the consumer under the original relationship agreement. In summary, the financial privacy rule provides for a privacy policy agreement between the company and the consumer pertaining to the protection of the consumer’s personal nonpublic information.

Safeguards Rule

(Subtitle A: Disclosure of Nonpublic Personal Information, codified at usc|15|6801|6809)

The Safeguards Rule requires financial institutions to develop a written information security plan that describes how the company is prepared for, and plans to continue to protect clients’ nonpublic personal information. (The Safeguards Rule also applies to information of those no longer consumers of the financial institution.) This plan must include:

* Denoting at least one employee to manage the safeguards,
* Constructing a thorough [risk management] on each department handling the nonpublic information,
* Develop, monitor, and test a program to secure the information, and
* Change the safeguards as needed with the changes in how information is collected, stored, and used.

This rule is intended to do what most businesses should already be doing: "protect their clients". The Safeguards Rule forces financial institutions to take a closer look at how they manage private data and to do a risk analysis on their current processes. No process is perfect, so this has meant that every financial institution has had to make some effort to comply with the GLBA.

Pretexting Protection

(Subtitle B: Fraudulent Access to Financial Information, codified at usc|15|6821|6827)

Pretexting (sometimes referred to as "social engineering") occurs when someone tries to gain access to personal nonpublic information without proper authority to do so. This may entail requesting private information while impersonating the account holder, by phone, by mail, by email, or even by "phishing" (i.e., using a "phony" website or email to collect data). The GLBA encourages the organizations covered by the GLBA to implement safeguards against pretexting. For example, a well-written plan designed to meet GLBA's Safeguards Rule ("develop, monitor, and test a program to secure the information") oughtFact|date=September 2008 to include a section on training employees to recognize and deflect inquiries made under pretext. In fact, the evaluation of the effectiveness of such employee training probably should include a follow-up program of random spot-checks, "outside the classroom", after completion of the [initial] employee training, in order to check on the resistance of a given (randomly chosen) student to various types of "social engineering" -- perhaps even designed to focus attention on any new wrinkle that might have arisen "after" the [initial] effort to "develop" the curriculum for such employee training. Under United States law, pretexting by individuals is punishable as a common law crime of False Pretenses.

Financial institutions defined

The GLBA defines “financial institutions” as: …”companies that offer financial products or services to individuals, like loans, financial or investment advice, or insurance. The Federal Trade Commission (FTC) has jurisdiction over financial institutions similar to, and including, these:
* non-bank mortgage lenders,
* loan brokers,
* some financial or investment advisers,
* debt collectors,
* tax return preparers,
* banks, and
* real estate settlement service providers.

These companies must also be considered significantly engaged in the financial service or production that defines them as a “financial institution”.

Insurance has jurisdiction first by the state, provided the state law at minimum complies with the GLBA. State law can require greater compliance, but not less than what is otherwise required by the GLBA.

Consumer vs. customer defined

The "Gramm-Leach-Bliley Act" defines a ‘consumer’ as :"an individual who obtains, from a financial institution, financial products or services which are to be used primarily for personal, family, or household purposes, and also means the legal representative of such an individual." (See usc|15|6809(9).}

A ‘customer’ is a consumer that has developed a relationship with privacy rights protected under the "GLBA". A ‘customer’ is not someone using an automated teller machine (ATM) or having a check cashed at a cash advance business. These are not ongoing relationships like a ‘customer’ might have; i.e. a mortgage loan, tax advising, or credit financing. A business is not an individual with personal nonpublic information, so a business cannot be a customer under the "GLBA". A business, however, may be liable for compliance to the "GLBA" depending upon the type of business and the activities utilizing individual’s personal nonpublic information.

Consumer/client privacy rights

Under the "GLBA", financial institutions must provide their clients a privacy notice that explains what information the company gathers about the client, where this information is shared, and how the company safeguards that information. This privacy notice must be given to the client prior to entering into an agreement to do business. There are exceptions to this when the client accepts a delayed receipt of the notice in order to complete a transaction on a timely basis. This has been somewhat mitigated due to online acknowledgement agreements requiring the client to read or scroll through the notice and check a box to accept terms.

The privacy notice must also explain to the customer the opportunity to ‘opt-out’. Opting out means that the client can say "no" to allowing their information to be shared with affiliated parties. The "Fair Credit Reporting Act" is responsible for the ‘opt-out’ opportunity, but the privacy notice must inform the customer of this right under the GLBA. The client cannot opt-out of:
* information shared with those providing priority service to the financial institution
* marketing of products or services for the financial institution
* when the information is deemed legally required.

Criticism and defense

Economists Robert Ekelund and Mark Thornton have criticized the Act as contributing to the 2007 subprime mortgage financial crisis, arguing that while "in a world regulated by a gold standard, 100% reserve banking, and no FDIC deposit insurance" the Financial Services Modernization Act would have made "perfect sense" as a legitimate act of deregulation, under the present fiat monetary system it "amounts to corporate welfare for financial institutions and a moral hazard that will make taxpayers pay dearly". [cite web
last = Ekelund
first = Robert
coauthors = Thornton, Mark
publisher = Ludwig von Mises Institute
url = http://mises.org/story/3098
title = More Awful Truths About Republicans
date = 2008-09-04
accessdate = 2008-09-07]

Others have defended the Act and for actually making the crisis less severe than it would have been otherwise. President Clinton himself stated:

"I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence." [cite web
last = BARTIROMO
first = MARIA
publisher = BusinessWeek
url = http://www.businessweek.com/magazine/content/08_40/b4102000409948.htm
title = Bill Clinton on the Banking Crisis, McCain, and Hillary
date = 2008-09-24
accessdate = 2008-10-05]

References

ources

* [http://www.ftc.gov/privacy/privacyinitiatives/glbact.html Financial Privacy: The Gramm-Leach Bliley Act] , Federal Trade Commission, 1999
* [http://www.ftc.gov/privacy/glbact/glbsub1.htm Gramm-Leach-Bliley Act,15 USC, Subchapter I, Sec. 6801-6809, Disclosure of Nonpublic Personal Information] , FTC, 1999
*Mike Chapple, [http://searchsecurity.techtarget.com/tip/1,289483,sid14_gci937043,00.html Gramm-Leach-Bliley and You] , November 18, 2003
*Robert H. Ledig, [http://www.ffhsj.com/bancmail/bmarts/ecdp_art.htm Gramm-Leach-Bliley Act Financial Privacy Provisions:The Federal Government Imposes Broad Requirements to Address Consumer Privacy Concerns]
* [http://www.ftc.gov/privacy/privacyinitiatives/financial_rule.html The Gramm-Leach-Bliley Act: The Financial Privacy Rule] , Federal Trade Commission
* [http://www.ftc.gov/bcp/conline/pubs/buspubs/glbshort.htm In Brief: The Financial Privacy Requirements of the Gramm-Leach-Bliley Act] , Federal Trade Commission
* [http://www.epic.org/privacy/glba/#reduce The Gramm-Leach-Bliley Act — “History of the GLBA”] , Electronic Privacy Information Center
* [http://thomas.loc.gov/cgi-bin/query/z?c108:S.1458.IS: Financial Institution Privacy Protection Act of 2003 — 108th CONGRESS, 1st Session, S. 1458, “To amend the Gramm-Leach-Bliley Act to provide for enhanced protection of nonpublic personal information, including health information, and for other purposes.”] , In the Senate of the United States; July 25 (legislative day, JULY 21), 2003, Library of Congress
* [http://www.federalreserve.gov/boarddocs/testimony/2001/20010404/default.htm Testimony of (Federal Reserve) Governor Laurence H. Meyer: Merchant banking] , Federal Reserve Bank
* Martin McLaughlin, [http://www.wsws.org/articles/1999/nov1999/bank-n01.shtml Clinton, Republicans agree to deregulation of US financial system] , World Socialist Web Site, November 1, 1999, retrieved on October 9, 2008

External links

Websites for compliance information

* [http://www.ftc.gov/privacy/glbact/glbsub1.htm Disclosure of Nonpublic Personal Information]
* [http://www.ftc.gov/bcp/conline/pubs/buspubs/safeguards.htm Financial Institutions and Customer Data: Complying with the Safeguards Rule]

Websites for consumer/client rights information

* [http://www.ftc.gov/privacy/glbact/glbsub1.htm Disclosure of Nonpublic Personal Information]
* [http://www.epic.org/privacy/glba/#reduce What Can You Do To Protect Your Privacy]
* [http://www.ftc.gov/bcp/conline/pubs/credit/privchoices.htm Privacy Choices for Your Personal Financial Information]
* [http://www.ftc.gov/bcp/conline/pubs/credit/pretext.htm Pretexting: Your Personal Information Revealed]

History of the GLBA

* [http://www.epic.org/privacy/glba History of the GLBA]

ee also

*Bank regulation
*Data Loss Prevention
*FACTA
*Financial institutions
*Financial regulation
*Health Insurance Portability and Accountability Act
*Information Technology Audit
*privacy
*U.S. Securities and Exchange Commission