Déjà Vu All Over Again: New Efforts to Reinstate the Glass-Steagall Act

V. Gerard Comizio is a partner and Nathan S. Brownback is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Comizio and Mr. Brownback.

The Trump administration has sent signals that the White House would support legislation that would function to reinstate the provisions of the Depression-era Glass-Steagall Act separating commercial and investment banking, which were repealed by the Gramm-Leach-Bliley Act of 1999 (the “GLBA”).

Notably, a bill with bipartisan sponsorship, the 21st Century Glass-Steagall Act, has been introduced in the Senate that would reinstate the Glass-Steagall Act’s separation of commercial and investment banking and also restrict long-standing bank and bank holding company powers and activities.

Undertaking any initiative with such major impact on U.S. financial services, as discussed below, clearly raises a number of significant questions about how such legislation would be structured, and the major challenges that would be presented to the industry as a result. In considering these questions, it is important to recognize that such potential changes will not be written on a clean slate; federal bank regulation of securities activities has a long and established history with volumes of precedent.

Moreover, depending on the final form any new legislation takes—assuming it garners sufficient support in Congress—the changes could go further than merely reinstating the status quo as of 1999; that is, banks might face more restrictions on their powers and activities than they did prior to the GLBA. These developments are particularly noteworthy because the recent trend in proposed bank regulatory legislation has been focused on regulatory relief, particularly the impact of the Dodd-Frank Act on the financial industry, rather than additional regulation of banking organizations. Such legislation could have a profound impact not only on banks but potentially on many other types of businesses within the financial industry.

Background: The Trump Administration

A number of senior U.S. government officials in the Trump administration appear to be converging on the subject of separating commercial and investment banking, including the President himself, the Secretary of the Treasury, the Director of the National Economic Council (the “NEC”), and the Vice Chairman of the Federal Deposit Insurance Corporation (“FDIC”).

In following up on promises in the 2016 Republican platform—and made by the Trump campaign—to reinstate the specific provisions of the Glass-Steagall Act separating traditional commercial banking from investment banking, Treasury Secretary Steven Mnuchin took the position in his January 17 confirmation hearing that the Trump administration is open to implementing some version of this campaign promise, while noting, as reported, that such separation would have “very big implications to the liquidity in the capital markets and banks being able to perform necessary lending.”

In a hearing before the Senate Banking Committee on May 18, 2017, however, Secretary Mnuchin clashed with Senator Warren, saying that he supported a “21st century Glass-Steagall”—not the Warren-McCain Bill—that would restore “aspects of [Glass-Steagall] that make sense,” but not a separation of “investment banking and commercial banking.” Domestic and International Policy Update: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 115th Cong. (2017) (questions and responses of Sec. Mnuchin and Sen. Warren).

Further, the Wall Street Journal recently reported that NEC Director Gary Cohn, in a private meeting with the Senate Banking Committee, told lawmakers that he could support legislation “breaking up the largest U.S. banks,” a development reported as bolstering congressional efforts to reinstate the Glass-Steagall Act. It is noteworthy that, in so doing, it was reported that Mr. Cohn expressed an openness to working on a bipartisan basis with Senator Elizabeth Warren on this issue. In addressing Mr. Cohn’s remarks, it was reported that a White House spokesman said Mr. Cohn “was simply discussing the President’s previously stated positions” adding, “The President spoke to the need for simplification of the banking system on the campaign trail, what he called a ‘21st century Glass-Steagall [Act]’.”

Finally, in a speech to the Institute of International Bankers’ annual Washington conference, FDIC Vice Chairman Hoenig recently proposed an “alternate approach to reshape and reinvigorate the banking system by ending too-big-to-fail, enhancing competition and rebuilding trust in our financial firms” through a model requiring “large, complex universal banks” to separately capitalize and manage their traditional commercial banking activities and their “non-traditional activities such as investment banking.” Under this proposal, entities engaged in traditional and non-traditional banking activities would each become affiliates structured under one or more separately capitalized intermediate holding companies (“IHCs”) under a financial holding company (“FHC”).

The 21st Century Glass-Steagall Act

Senator Warren and others, in 2013, 2015, and recently in 2017, introduced a bill (the “Warren-McCain Bill”) entitled the 21st Century Glass-Steagall Act. The Warren-McCain Bill, discussed in more detail below, is proposed legislation designed to separate commercial and investment banking, and was sponsored in 2017 by Senators Warren (D-MA), McCain (R-AZ), Cantwell (D-WA), and King (I-ME). It remains to be seen whether the sponsorship of the Warren-McCain Bill evidences some degree of bipartisan support, at least in the Senate, for reinstating Glass-Steagall’s separation of commercial and investment banking. As legislation proposed on a bipartisan basis and designed to achieve a goal that may have strong White House support, this legislation could, in terms of permissible powers and activities for bank holding companies, banks, and their affiliates, potentially be the most dramatic rewrite of the federal banking laws in 150 years of federal banking regulation.

Key Provisions of the Warren-McCain Bill

The Warren-McCain Bill would make significant changes to a number of the most important U.S. bank regulatory statutes. The legislation essentially repeals the entire GLBA, giving the financial services industry up to five years to entirely sever all affiliations between and among banking, insurance, securities, and swaps firms and their respective activities. Not only would it reinstate the Section 20 prohibitions of the Glass-Steagall Act separating commercial banking and investment banking that was repealed by the GLBA, but the Warren-McCain Bill appears to go further than the Glass-Steagall Act, as implemented over the past 80 years, in prohibiting the banking industry from engaging in a wide range of long-standing, banking-related securities activities.

Amendments to the Federal Deposit Insurance Act to Prohibit Certain Affiliations for Insured Depository Institutions

The Warren-McCain Bill would amend the Federal Deposit Insurance Act (“FDIA”) to prevent an insured depository institution (“IDI”) from being affiliated with, being under common ownership or control with, or itself qualifying as “any insurance company, securities entity, or swaps entity.” “Insurance company” is defined by reference to the Bank Holding Company Act (“BHCA”), but “securities entity” is newly defined in the Warren-McCain Bill to include entities engaged in activities such as: issuing, floating, underwriting and sale of securities, market-making, broker-dealer activities, futures commission merchant activities, activities of registered investment advisers or registered investment companies, and, somewhat vaguely, “making hedge fund or private equity investments in the securities of either privately or publicly held companies.” A “swaps entity” is a swap dealer or a major swap participant registered under the Commodity Exchange Act or a security-based swap dealer or major security-based swap participant registered with the SEC.

The amendments to the FDIA would also prevent individuals from serving as an officer, director, partner, or employee of both an IDI and an insurance company, securities entity, or swaps entity.

The amendments would provide a compliance window during which IDIs would be required to terminate existing affiliations and newly prohibited activities within five years of the enactment of the Warren-McCain Bill. The five-year window would be subject to no more than two six-month extensions to be granted on a case-by-case basis. The Board could also terminate such affiliations before the end of the window, after a hearing, if such early termination would “prevent undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices,” and if it would be in the public interest.

Amendments to the National Bank Act

1. Limiting the “business of banking”

The famous “paragraph Seventh” of Section 24 of the National Bank Act currently provides national banks with both enumerated and incidental powers “as shall be necessary to carry on the business of banking.” Notably, the Warren-McCain Bill would, for the first time since the National Bank Act created national banks in 1863, redefine by statute what constitutes—and what does not constitute—the business of banking.

The “business of banking” would be defined to include only receiving deposits, making extensions of credit, participating in payment systems, transacting in coin and bullion, and making investments in debt securities; in the latter case, only with a number of limitations, including:

  • Purchases would only be permitted without recourse and solely for the account of customers;
  • Underwriting issuances of securities or stock would be prohibited; and
  • Holdings of securities would be limited to 10% of capital stock actually paid in and unimpaired, and 10% of the bank’s unimpaired surplus fund.

In addition to these limitations on the business of banking, national banks would not be permitted to transact in structured or synthetic products.

2. Disallowing financial subsidiaries of national banks

The Warren-McCain Bill would repeal the GLBA’s provision allowing national banks to have financial subsidiaries; that is, subsidiaries that engage in nonbanking financial activities, including insurance and real estate development or investment.

Amendments to the BHCA

1. Eliminating the Financial Holding Company designation

The GLBA amended the BHCA to create FHCs as a new subset category of bank holding companies (“BHCs”). FHCs under current law are permitted to engage in a range of financial activities related to banking. The Warren-McCain Bill would repeal the designation such that all FHCs would lose FHC status and would once again be designated as “mere” BHCs. It would also repeal Subsections (k)-(o) of Section 4 of the BHCA, which provide for the FHC designation and lay out the framework for FHC activities and regulation.

2. Limiting activities “closely related to banking” for BHCs

The Warren-McCain Bill would amend the BHCA’s definition of the phrase “closely related to banking” in the context of BHCs holding shares in nonbank companies engaged in businesses closely related to banking. The definition would exclude the following activities from the definition of “closely related to banking,” while retaining in the definition other activities, as provided for by regulation by the Board of Governors of the Federal Reserve (the “Board”):

  • Acting as investment adviser to a registered investment company;
  • Providing agency transactional services for customer investments (other than purchases and sales of investments for the accounts of customers conducted by a bank or bank subsidiary pursuant to the bank’s trust and fiduciary powers);
  • Entering into investment transactions as principal, except for end-use purchases of swaps for hedging purposes; and
  • Management consulting and counseling.

3. Listing prohibited activities for BHCs

Prohibited activities for BHCs would include:

  • Except activities permitted within the definition of “closely related to banking,” as described above, engaging in the business of a securities entity or swaps entity, with such entities defined, as discussed above, but with their businesses specifically defined to include dealing and market-making in:
  • Securities,
  • Repos,
  • Exchange traded and OTC swaps,
  • Structured or synthetic products,
  • “[A]ny other [OTC] securities, swaps, or contracts, or any other agreement that derives its value from, or takes on the form of, such securities, derivatives or contracts”;
  • Engaging in proprietary trading or investing in covered funds, as prohibited by the Volcker Rule;
  • Holding ineligible securities or derivatives; or
  • Engaging in market-making or prime brokerage activities.

Changes to other federal statutory provisions

  1. Bankruptcy Code: The Warren-McCain Bill would remove from the bankruptcy code provisions related to contractual rights to liquidate, terminate, or accelerate certain types of contracts.
  2. Banking Act of 1933 (the Glass-Steagall Act): The legislation would amend the definition of the “business of taking deposits” to include transaction accounts, as defined in the Federal Reserve Act.
  3. Home Owners’ Loan Act: The legislation would strip federal savings associations of the authority to invest in mutual funds.

The Warren-McCain Bill and the Financial Industry: Potential Effects and Initial Open Questions

Financial Holding Companies

The impact of the Warren-McCain Bill would be to remove the FHC designation entirely such that, as discussed above, all FHCs would revert to BHC status. BHCs’ permitted activities are narrower and more constrained than activities permitted for FHCs. It appears that FHCs would have to divest or spin off securities and other nonbanking affiliates except to the extent such that activities remain permitted for BHCs, though the bill does not specify any particular method of conformance.

If a bill more like the Hoenig proposal than the Warren-McCain Bill were enacted, internal reorganization of FHCs, but not divestiture, would be required.

Bank Holding Companies and Banks

BHCs that are not currently FHCs would face the new restrictions, discussed above, on activities “closely related to banking,” while BHCs with subsidiaries that are IDIs, as well as subsidiaries that are securities, insurance, or swaps entities, would have to restructure such that the IDI is no longer affiliated with the nonbanking entity.

After surmounting the obstacles imposed by divestiture and spinoff, banks no longer affiliated with securities, swaps, and insurance entities would have to shift their compliance focus with respect to such entities from complying with affiliated transactions requirements to focusing on issues arising from arranging relationships with former affiliates that have become third parties, such as referral fees and participation arrangements.

Investment Companies and Investment Advisers

As discussed above, the Warren-McCain Bill would prohibit a BHC from having a subsidiary that acts a registered investment adviser (“RIA”) to a registered investment company (“RIC”).

On the other hand, it would not appear directly to prohibit a BHC (or a subsidiary of a BHC) from acting as an RIA to advisory clients other than RICs; that is, either private funds (hedge funds and private equity funds) or separately managed accounts. This is because the Warren-McCain Bill’s amendments to the BHCA would leave in place the Board’s determinations by rule or regulation (in this case, Regulation Y21) of activities that are “closely related to banking,” other than the four activities named in the bill that would be defined by statute not to be “closely related to banking,” one of which is acting as an RIA to a RIC.

However, the fact that a BHC would not be prohibited from having an RIA as a subsidiary (as long as the RIA is not an adviser to a RIC) may not be of much use to BHCs that have subsidiaries that are RIAs, because, as discussed above, the Warren-McCain Bill would prohibit an IDI from being affiliated with, or being under common control with, a “securities entity.” The Warren-McCain Bill’s definition of “securities entity” includes any entity engaged in the activities of an investment adviser, as defined in Section 202(a)(11) of the Advisers Act. As noted above, the conformance period for termination of prohibited affiliations for IDIs would be five years, subject in certain circumstances either to extension or early termination.

Insurance Companies

National banks themselves have limited insurance powers, and their financial subsidiaries have somewhat broader powers with respect to brokerage and sales of insurance products (though not insurance underwriting). BHCs and nonbank subsidiaries of BHCs also have the power to conduct certain insurance activities. Since the GLBA, FHCs have had broad powers related to sales, brokerage, and underwriting of insurance, and many insurance companies have adopted arrangements under which the insurance company has a banking subsidiary or subsidiaries. With the end of the FHC designation and the prohibition on IDIs having affiliates that are insurance companies, the Warren-McCain Bill would appear to require separation of such entities, by divestiture or otherwise.

Nonbank Lenders

Companies that make loans without also taking deposits—nonbank lenders—would not appear to be directly affected by the Warren-McCain Bill. However, indirect effects on these lenders could be significant. Since the financial crisis, nonbank lenders have surpassed banks to the extent that they now make up the majority of new mortgage lending activity. Banks shorn of their securities, insurance, and swaps affiliates and/or activities under the Warren-McCain Bill could potentially seek increased market share of traditional bank lending activities, including mortgage lending, particularly if interest rates continue to rise.

Commercial Real Estate Companies

Any impact on commercial real estate companies—in this context, investment managers of real estate investments that often obtain financing from banks—would be indirect only, because the ability of banks to make commercial real estate loans to commercial real estate companies or others would not be altered by the Warren-McCain Bill.

Banks and Bank Holding Companies: Securities Activities Permitted Prior to the GLBA

Although it is designed functionally to reinstate Section 20 of the Glass-Steagall Act, the Warren-McCain Bill does not do so by restoring the exact text of Section 20, and it does not directly address the status of a wide range of long-standing securities activities permissible for banks and bank holding companies under Section 16 of the Glass-Steagall Act (a section not repealed by the GLBA) and under the Bank Holding Company Act. While there is no guarantee, it is possible that the final outcome of the legislative process could be a restoration of the status quo before the GLBA, or something similar. The remainder of this section presumes that outcome, not the passage of the Warren-McCain Bill as is.

Banks: Section 16 of the Glass-Steagall Act

Pursuant to this authority, under Section 16 of the Glass-Steagall Act, member banks may underwrite and deal only in “bank-eligible” securities. Banks have express authority to underwrite, deal in and act as agents in the purchase and sale of municipal general obligation bonds, and also in the purchase and sale of revenue bonds, provided the underwriting bank is well capitalized. Further, national banks may also privately place securities, and operating subsidiaries may assist customers in the issuance of debt and equity securities by providing placement services as agents, and supply financial and transactional advice to customers in structuring, arranging and executing various final transactions, as agents, in connection with its private placement activities.

National banks may act as riskless principals in securities transactions. They also have a wide array of other permissible powers, including the power to conduct the following activities:

  • Securities brokerage, both for securities underwritten by a Section 20 affiliate and for other securities;
  • Investment advisory activities;
  • Acting as futures commission merchants; and
  • Providing credit and other related services.

Finally, national banks directly and through operating subsidiaries may underwrite, deal in and act as agents in the purchase and sale of various types of securities, including U.S. government securities and asset-backed securities.

BHCs: Bank Holding Company Act

Prior to the repeal of Section 20 of the Glass-Steagall Act by the GLBA, and the creation of FHCs permitted to engage in a wide range of banking, securities, insurance, and merchant banking activities, BHCs had gradually been granted expanded authority by the Board to engage in securities underwriting activities. The baseline for such authority was circumscribed by former Section 20 of the Glass-Steagall Act, which generally prohibited a bank affiliate from being “engaged principally” in the flotation, underwriting, public sale, or distribution of securities. Section 16 of the Glass-Steagall Act generally prohibits a member bank from underwriting and dealing in debt and equity securities. However, as far as the Glass-Steagall Act is concerned, an affiliate, such as a BHC parent company or its nonbank subsidiaries, may underwrite and deal in “bank-ineligible” securities, so long as it is not engaged principally or substantially in that activity. In that regard, the Board, in a series of orders, established an interpretation of the statute to permit securities underwriting and dealing activities, so long as such activities did not represent more than 25% of gross revenues. As noted above, BHCs are permitted to invest in companies engaged in the Board’s list of activities, “frozen in amber,” as of the day before the enactment of the GLBA.


In light of the foregoing, the financial services industry faces the real possibility of a bipartisan effort to pursue a number of potential approaches to reinstating the portions of the Glass-Steagall Act that separated commercial and investment banking. These approaches could range between the Warren- McCain Bill—splitting apart firms completely (for example, requiring a bank holding company to divest a registered broker-dealer subsidiary, such that the broker-dealer is no longer an affiliate of a bank)—to the Hoenig proposal, which would require separate operations but would allow the affiliates to retain an ultimate parent company, similar to the IHC structure required by the Federal Reserve for foreign banking organizations’ U.S. operations.

Further developments in this area are likely, and future bulletins will follow, as current proposals for reinstating Glass-Steagall evolve or new proposals emerge. These future bulletins will include pieces individually focused on various sectors of the financial services industry.

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The complete publication, including footnotes, is available here.

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