Introduction
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the provisions of the Depression-era Glass-Steagall Act1 separating commercial and investment banking, which were repealed by the Gramm-Leach-Bliley Act of 1999 (the “GLBA”).2 Notably, a bill with bipartisan sponsorship, the 21st Century Glass-Steagall Act, has been introduced in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,3 particularly the impact of the Dodd-Frank Act4 on the financial industry, rather than additional regulation of banking organizations. Such legislation could have 1 Glass-Steagall Act, ch. 89, 48 Stat. 162, 188 (1933) (Section 20 originally codified at 12 U.S.C. § 377 and repealed by § 101(a) of the Gramm-Leach-Bliley Act in 1999). 2 Financial Services Modernization (Gramm-Leach-Bliley) Act of 1999, Pub. L. No. 106–102, 113 Stat. 1338. 3 See, e.g., Financial Regulatory Improvement Act of 2015, S. 1484, 114th Cong. (reported to Senate without amendment June 2, 2015), https://www.congress.gov/114/bills/s1484/BILLS-114s1484pcs.pdf (raising consolidated asset thresholds for increased regulatory requirements for systemically important financial institutions); Financial CHOICE Act, H.R. 5983, 115th Cong. (reported to House, as amended, Dec. 20, 2016), https://www.congress.gov/114/bills/hr5983/BILLS-114hr5983rh.pdf (reducing a number of regulatory requirements for financial institutions willing to accept increases in required capital levels); Main Street Regulatory Fairness Act, S. 1139, 115th Cong. (reported to the Committee on Banking, Housing, and Urban Affairs May 16, 2017), 163 Cong. Rec. S2,964 (daily ed. May 16, 2017), https://www.congress.gov/bill/115thcongress/senate-bill/1139/text (modifying, among other things, the $10 billion asset threshold for DFAST stress tests by increasing the threshold to $50 billion). 4 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. 1376. Fried Frank Client Memorandum 2 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 platform5 – 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.”6 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 WarrenMcCain 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 Journal7 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.8 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.”9 Under 5 Republican National Committee, Republican Platform 2016 at 28 (“We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment.”), available at https://www.gop.com/the-2016-republican-party-platform. 6 Ryan Tracy and Emily Glazer, Gary Cohn Backs Breaking Up Big Banks, WALL ST. J. (Apr. 6, 2017), https://www.wsj.com/articles/gary-cohn-backs-breaking-up-big-banks-1491491219. 7 Id. 8 See infra “Key Provisions of the Warren-McCain Bill” (discussion of the proposed 21st Century Glass-Steagall Act). 9 Thomas M. Hoenig, FDIC Vice Chairman, “A Market-Based Proposal for Regulatory Relief and Accountability” (Mar. 13, 2017). Fried Frank Client Memorandum 3 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”).10 The 21st Century Glass-Steagall Act Senator Warren and others, in 2013, 2015, and recently in 2017,11 introduced a bill (the “Warren-McCain Bill”) entitled the 21st Century Glass-Steagall Act.12 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.13 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, 10 Perhaps more interestingly, the proposal calls for such non-traditional IHCs to be capitalized with so-called tracking stock issued by the ultimate parent company. See Alan S. Kaden, Michael J. Alter, W. Reid Thompson and Shane C. Hoffmann, Fried Frank Harris Shriver & Jacobson LLP, Tracking Stock Awakens (Law 360, Apr. 18, 2016), http://www.friedfrank.com/siteFiles/Publications/Tracking%20Stock%20Awakens%20(2).pdf (description and brief history of use of tracking stock, along with examples of recent issuances of tracking stock). 11 The 2013, 2015, and 2017 versions are substantively the same. 12 21st Century Glass-Steagall Act of 2017, S. 881, 115th Cong. (as introduced Apr. 6, 2017), https://www.congress.gov/115/bills/s881/BILLS-115s881is.pdf. 13 The most significant substantive changes are discussed below and are shown in redlines provided in Appendices A-D. Fried Frank Client Memorandum 4 “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 WarrenMcCain 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.”14 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 activitie, including insurance and real estate development or investment.15 14 12 U.S.C. § 24 (2016). 15 See 12 U.S.C. § 24a (2016). Fried Frank Client Memorandum 5 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 marketmaking 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”; Fried Frank Client Memorandum 6 Engaging in proprietary trading or investing in covered funds, as prohibited by the Volcker Rule;16 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.17 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.18 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. 16 The Volcker Rule has been interpreted and described as a replacement for the Glass-Steagall Act, at least with respect to the Section 20 separation of investment and commercial banking. E.g., Christopher Whalen, A 21st Century Glass-Steagall? It’s Called the Volcker Rule, AMERICAN BANKER, Feb. 8, 2017. Notably, however, the Warren-McCain Bill would not replace the Volcker Rule; rather, it explicitly reaffirms the statutory Volcker Rule and the regulations implementing it. 12 U.S.C. § 1851 (2016); 12 C.F.R. Part 248 (2016). 17 Since the GLBA, BHCs have been permitted to invest in companies engaged in the list of activities “frozen in amber” as of November 11, 1999, the day before the enactment of the GLBA, as approved by Board order at that time. See 12 U.S.C. § 1843(k)(4)(F). Such activities are listed in Regulation Y, and include, among others: extending credit and activities related to extending credit (for example, check-guaranty, collection agency, and credit bureau services); leasing personal and real property; operating nonbank depository institutions, such as industrial loan companies; financial and investment advisory activities; agency transactional services, such as securities brokerage, riskless principal transactions, and private placement services; underwriting and dealing in government obligations and money market instruments, buying and selling bullion, management consulting activities; certain insurance activities; community development activities; the issuance of money orders, travelers checks and savings bonds; and data processing. 12 C.F.R. § 225.28(b)(1)-(14) (2016). But note that these permissible activities for BHCs would be curtailed by the Warren-McCain Bill, as discussed herein. 18 Though, as noted above, there is a five-year conformance window that may be extended or expedited by the Board. See supra “Key Provisions of the Warren-McCain Bill – Amendments to the Federal Deposit Insurance Act…” Fried Frank Client Memorandum 7 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 requirements19 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”). 20 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 bill22 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.23 Insurance Companies National banks themselves have limited insurance powers,24 and their financial subsidiaries have somewhat broader powers with respect to brokerage and sales of insurance products (though not 19 See Federal Reserve Act §§ 23A and 23B (codified at 12 U.S.C. § 371c); see also Regulation W, 12 C.F.R. Part 223. 20 Subcategories of RICs include mutual funds, exchange-traded funds, and closed-end funds. 21 12 C.F.R. Part 225 (2016). 22 See supra “Amendments to the BHCA – 2. Limiting activities ‘closely related to banking’ for BHCs.” 23 See supra “Key Provisions of the Warren-McCain Bill – Amendments to the Federal Deposit Insurance Act…”; note 18. 24 See, e.g., 12 U.S.C. § 92 (2016). Fried Frank Client Memorandum 8 insurance underwriting).25 BHCs and nonbank subsidiaries of BHCs also have the power to conduct certain insurance activities.26 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.27 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 25 See 12 U.S.C. § 24a (2016). 26 12 C.F.R. § 225.28(b)(11) (2016). 27 See AnnaMaria Andriotis, Banks No Longer Make the Bulk of U.S. Mortgages, WALL ST. J. (Nov. 2, 2016), https://www.wsj.com/articles/banks-no-longer-make-the-bulk-of-u-s-mortgages-1478079004; Michele Lerner, The Mortgage Market Is Now Dominated by Non-Bank Lenders, WASHINGTON POST (Feb. 23, 2017), https://www.washingtonpost.com/realestate/the-mortgage-market-is-now-dominated-by-nonbanklenders/2017/02/22/9c6bf5fc-d1f5-11e6-a783-cd3fa950f2fd_story.html. See also Marshall Lux & Robert Greene, What’s Behind the Non-Bank Mortgage Boom? (Harv. Kennedy School Mossavar-Rahmani Ctr. for Bus. & Gov’t, Associate Working Paper Series No. 42 (June 2015), https://www.hks.harvard.edu/content/download/76449/1714947/version/1/file/Final_Nonbank_Boom_Lux_Green e.pdf. Fried Frank Client Memorandum 9 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.28 Further, national banks may also privately place securities,29 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.30 National banks may act as riskless principals in securities transactions.31 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.32 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.33 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.34 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.35 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 28 See 12 C.F.R. § 252.153 (2016); see also Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations, 79 Fed. Reg. 17240 (Mar. 27, 2014). 29 OCC Permissible Activities at 51; see also SIA v. Board of Governors Federal Reserve, 807 F.2d 1052 (D.C. Cir. 1986); cert. denied, 483 U.S. 1005 (1987). 30 OCC Corporate Services No. 2000-2 (Feb. 25, 2006). 31 OCC Permissible Activities at 52. 32 Id. 33 Id. at 54; see also 12 C.F.R. § 12 (2016); 12 C.F.R. § 1 (2016). 34 12 U.S.C. § 377 (2016) (repealed 1999). 35 12 U.S.C. §§ 24(7), 335 (2016). Fried Frank Client Memorandum 10 activities did not represent more than 25% of gross revenues.36 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.37 Conclusion 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 WarrenMcCain 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.38 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. * * * 36 See BOK Financial Corporation, 83 Fed. Res. Bull. 510 (1997) (“Effective March 6, 1997, the Board increased from 10 percent to 25 percent the amount of total revenue that a section 20 subsidiary may derive from [securities underwriting and dealing activities.]).” See also Norwest Corporation, 84 Fed. Res. Bull. 552 (1998); Commerce Bancorp, Inc., 84 Fed. Res. Bull. 798 (1998); Board of Governors of the Federal Reserve System, https://www.federalreserve.gov/bankinforeg/suds_about.htm (“A section 20 subsidiary is also limited to deriving no more than 25 percent of its gross revenue from underwriting or dealing in bank-ineligible securities.”). 37 See supra note 17. 38 See 12 C.F.R. § 252.153 (2016); see also Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations, 79 Fed. Reg. 17240 (Mar. 27, 2014). Fried Frank Client Memorandum 11 Appendix A – Warren-McCain Bill – Key Changes to the Federal Deposit Insurance Act § 1828. Regulations governing insured depository institutions (s) Prohibition on certain affiliations (1) In general No depository institution may be an affiliate of, be sponsored by, or accept financial support, directly or indirectly, from any Government-sponsored enterprise. (2) Exception for members of a Federal home loan bank Paragraph (1) shall not apply with respect to the membership of a depository institution in a Federal home loan bank. (3) Routine business financing Paragraph (1) shall not apply with respect to advances or other forms of financial assistance provided by a Government-sponsored enterprise pursuant to the statutes governing such enterprise. (4) Student loans (A) In general This subsection shall not apply to any arrangement between the Holding Company (or any subsidiary of the Holding Company other than the Student Loan Marketing Association) and a depository institution, if the Secretary approves the affiliation and determines that— (i) the reorganization of such Association in accordance with section 1087– 3 of title 20 will not be adversely affected by the arrangement; (ii) the dissolution of the Association pursuant to such reorganization will occur before the end of the 2-year period beginning on the date on which such arrangement is consummated or on such earlier date as the Secretary deems appropriate: Provided, That the Secretary may extend this period for not more than 1 year at a time if the Secretary determines that such extension is in the public interest and is appropriate to achieve an orderly reorganization of the Association or to prevent market disruptions in connection with such reorganization, but no such extensions shall in the aggregate exceed 2 years; (iii) the Association will not purchase or extend credit to, or guarantee or provide credit enhancement to, any obligation of the depository institution; (iv) the operations of the Association will be separate from the operations of the depository institution; and (v) until the ‘‘dissolution date’’ (as that term is defined in section 1087–3 of Fried Frank Client Memorandum 12 title 20) has occurred, such depository institution will not use the trade name or service mark ‘‘Sallie Mae’’ in connection with any product or service it offers if the appropriate Federal banking agency for such depository institution determines that— (I) the depository institution is the only institution offering such product or service using the ‘‘Sallie Mae’’ name; and (II) such use would result in the depository institution having an unfair competitive advantage over other depository institutions. (B) Terms and conditions In approving any arrangement referred to in subparagraph (A) the Secretary may impose any terms and conditions on such an arrangement that the Secretary considers appropriate, including— (i) imposing additional restrictions on the issuance of debt obligations by the Association; or (ii) restricting the use of proceeds from the issuance of such debt. (C) Additional limitations In the event that the Holding Company (or any subsidiary of the Holding Company) enters into such an arrangement, the value of the Association’s ‘‘investment portfolio’’ shall not at any time exceed the lesser of— (i) the value of such portfolio on the date of the enactment of this subsection; or (ii) the value of such portfolio on the date such an arrangement is consummated. The term ‘‘investment portfolio’’ shall mean all investments shown on the consolidated balance sheet of the Association other than— (I) any instrument or assets described in section 1087–2(d) of title 20, as such section existed on the day before the date of the repeal of such section; (II) any direct noncallable obligations of the United States or any agency thereof for which the full faith and credit of the United States is pledged; or (III) cash or cash equivalents. (D) Enforcement The terms and conditions imposed under subparagraph (B) may be enforced by the Secretary in accordance with section 1087–3 of title 20. (E) Definitions Fried Frank Client Memorandum 13 For purposes of this paragraph, the following definition shall apply— (i) Association; Holding Company Notwithstanding any provision in section 1813 of this title, the terms ‘‘Association’’ and ‘‘Holding Company’’ have the same meanings as in section 1087–3(i) of title 20. (ii) Secretary The term ‘‘Secretary’’ means the Secretary of the Treasury. (5) ‘‘Government-sponsored enterprise’’ defined For purposes of this subsection, the term ‘‘Government-sponsored enterprise’’ has the meaning given to such term in section 1404(e)(1)(A) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. (6) Limitations on Banking Affiliations (A) Prohibition on Affiliations with Nondepository Entities An insured depository institution may not— (i) be or become an affiliate of any insurance company, securities entity, or swaps entity; (ii) be in common ownership or control with any insurance company, securities entity, or swaps entity; or (iii) engage in any activity that would cause the insured depository institution to qualify as an insurance company, securities entity, or swaps entity. (B) Individuals Eligible to Serve on Boards of Depository Institutions In General—An individual who is an officer, director, partner, or employee of any securities entity, insurance company, or swaps entity may not serve at the same time as an officer, director, employee, or other institution-affiliated party of any insured depository institution. (ii) Exception Clause (i) shall not apply with respect to service by any individual which is otherwise prohibited under clause (i), if the appropriate Federal banking agency determines, by regulation with respect to a limited number of cases, that service by such an individual as an officer, director, employee, or other institution-affiliated party of an insured depository institution would not unduly influence— (I) the investment policies of the depository institution; or (II) the advice that the institution provides to customers. Fried Frank Client Memorandum 14 (iii) Termination of Service.— Subject to a determination under clause (i), any individual described in clause (i) who, as of the date of enactment of the 21st Century GlassSteagall Act of 2017, is serving as an officer, director, employee, or other institution-affiliated party of any insured depository institution shall terminate such service as soon as is practicable after such date of enactment, and in no event, later than the end of the 60-day period beginning on that date of enactment. (C) Termination of Existing Affiliations and Activities (i) Orderly Termination of Existing Affiliations and Activities Any affiliation, common ownership or control, or activity of an insured depository institution with any securities entity, insurance company, swaps entity, or any other person, as of the date of enactment of the 21st Century Glass-Steagall Act of 2017, which is prohibited under subparagraph (A) shall be terminated as soon as is practicable, and in no event later than the end of the 5-year period beginning on that date of enactment. (ii) Early Termination The appropriate Federal banking agency, at any time after opportunity for hearing, may order termination of an affiliation, common ownership or control, or activity prohibited by clause (i) before the end of the 5-year period described in clause (i), if the agency determines that such action— (I) is necessary to prevent undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices; and (II) is in the public interest. (iii) Extension Subject to a determination under clause (ii), an appropriate Federal banking agency may extend the 5-year period described in clause (i) as to any particular insured depository institution for not more than an additional 6 months at a time, if— (I) the agency certifies that such extension would promote the public interest and would not pose a significant threat to the stability of the banking system or financial markets in the United States; and (II) such extension, in the aggregate, does not exceed 1 year for any single insured depository institution. (iv) Requirements for Entities Receiving an Extension Fried Frank Client Memorandum 15 Upon receipt of an extension under clause (iii), the insured depository institution shall notify shareholders of the insured depository institution and the general public that it has failed to comply with the requirements of clause (i). (D) Definitions For purposes of this paragraph, the following definitions shall apply: (i) Insurance Company The term ‘insurance company’ has the meaning given the term in section 2(q) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(q)). (ii) Insured Depository Institution The term ‘insured depository institution’ (I) has the meaning given the term in section 3(c)(2); and (II) does not include a savings association controlled by a savings and loan holding company, as described in section 10(c)(9)(C) of the Home Owners’ Loan Act (12 U.S.C. 1467a(c)(9)(C)). (iii) Securities Entity The term ‘securities entity’ (I) includes any entity engaged in (aa) the issue, flotation, underwriting, public sale, or distribution of stocks, bonds, debentures, notes, or other securities; (bb) market making; (cc) activities of a broker or dealer, as those terms are defined in section 3(a) of the Securities Exchange Act of 1934 (12 U.S.C. 78c(a)); (dd) activities of a futures commission merchant; (ee) activities of an investment adviser or investment company, as those terms are defined in section 202(a) of the Investment Advisers Act of 1940 (20 U.S.C. 80b– 2(a)) and section 3(a)(1) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(a)(1)), respectively; or (ff) hedge fund or private equity investments in the securities of either privately or publicly held companies; and (II) does not include a bank that, pursuant to its authorized trust and Fried Frank Client Memorandum 16 fiduciary activities— (aa) purchases and sells investments for the account of its customers; or (bb) provides financial or investment advice to its customers. (iv) Swaps Entity The term ‘swaps entity’ means any swap dealer, security-based swap dealer, major swap participant, or major security-based swap participant, that is registered under— (I) the Commodity Exchange Act (7 U.S.C. 1 et seq.); or (II) the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.). Fried Frank Client Memorandum 17 Appendix B – Warren-McCain Bill – Key Changes to the Banking Act of 1933 § 378. Dealers in securities engaging in banking business; individuals or associations engaging in banking business; examinations and reports; penalties (a) After the expiration of one year after June 16, 1933, it shall be unlawful— (1) For any person, firm, corporation, association, business trust, or other similar organization, engaged in the business of issuing, underwriting, selling, or distributing, at wholesale or retail, or through syndicate participation, stocks, bonds, debentures, notes, or other securities, to engage at the same time to any extent whatever in the business of receiving deposits subject to check or to repayment upon presentation of a passbook, certificate of deposit, or other evidence of debt, or upon request of the depositor: Provided, That the provisions of this paragraph shall not prohibit national banks or State banks or trust companies (whether or not members of the Federal Reserve System) or other financial institutions or private bankers from dealing in, underwriting, purchasing, and selling investment securities, or issuing securities, to the extent permitted to national banking associations by the provisions of section 24 of this title: Provided further, That nothing in this paragraph shall be construed as affecting in any way such right as any bank, banking association, savings bank, trust company, or other banking institution, may otherwise possess to sell, without recourse or agreement to repurchase, obligations evidencing loans on real estate; or (2) For any person, firm, corporation, association, business trust, or other similar organization to engage, to any extent whatever with others than his or its officers, agents or employees, in the business of receiving deposits subject to check or to repayment upon presentation of a pass book, certificate of deposit, or other evidence of debt, or upon request of the depositor, unless such person, firm, corporation, association, business trust, or other similar organization (A) shall be incorporated under, and authorized to engage in such business by, the laws of the United States or of any State, Territory, or District, and subjected, by the laws of the United States, or of the State, Territory, or District wherein located, to examination and regulation, or (B) shall be permitted by the United States, any State, territory, or district to engage in such business and shall be subjected by the laws of the United States, or such State, territory, or district to examination and regulations or, (C) shall submit to periodic examination by the banking authority of the State, Territory, or District where such business is carried on and shall make and publish periodic reports of its condition, exhibiting in detail its resources and liabilities, such examination and reports to be made and published at the same times and in the same manner and under the same conditions as required by the law of such State, Territory, or District in the case of incorporated banking institutions engaged in such business in the same locality. (b) Whoever shall willfully violate any of the provisions of this section shall upon conviction be fined not more than $5,000 or imprisoned not more than five years, or both, and any officer, director, employee, or agent of any person, firm, corporation, association, business trust, or other similar organization who knowingly participates in any such violation shall be punished by a like fine or imprisonment or both. Fried Frank Client Memorandum 18 (c) Business of Receiving Deposits. For purposes of this section, the term “business of receiving deposits” includes the establishment and maintenance of any transaction account (as defined in section 19(b)(1)(C) of the Federal Reserve Act (12 U.S.C. 461(b)(1)(C)). Fried Frank Client Memorandum 19 Appendix C – Warren-McCain Bill – Key Changes to the National Bank Act § 24. Corporate powers of associations Seventh. To exercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes according to the provisions of title 62 of the Revised Statutes. The business of dealing in securities and stock by the association shall be limited to purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the association shall not underwrite any issue of securities or stock; Provided, That the association may purchase for its own account investment securities under such limitations and restrictions as the Comptroller of the Currency may by regulation prescribe. In no event shall the total amount of the investment securities of any one obligor or maker, held by the association for its own account, exceed at any time 10 per centum of its capital stock actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund, except that this limitation shall not require any association to dispose of any securities lawfully held by it on August 23, 1935. As used in this section the term “investment securities” shall mean marketable obligations, evidencing indebtedness of any person, copartnership, association, or corporation in the form of bonds, notes and/or debentures commonly known as investment securities under such further definition of the term “investment securities” as may by regulation be prescribed by the Comptroller of the Currency. Except as hereinafter provided or otherwise permitted by law, nothing herein contained shall authorize the purchase by the association for its own account of any shares of stock of any corporation. The limitations and restrictions herein contained as to dealing in, underwriting and purchasing for its own account, investment securities shall not apply to obligations of the United States, or general obligations of any State or of any political subdivision thereof, or obligations of the Washington Metropolitan Area Transit Authority which are guaranteed by the Secretary of Transportation under section 9 of the National Capital Transportation Act of 1969, or obligations issued under authority of the Federal Farm Loan Act, as amended, or issued by the thirteen banks for cooperatives or any of them or the Federal Home Loan Banks, or obligations which are insured by the Secretary of Housing and Urban Development under title XI of the National Housing Act [12 U.S.C. 1749aaa et seq.] or obligations which are insured by the Secretary of Housing and Urban Development (hereinafter in this sentence referred to as the “Secretary”) pursuant to section 207 of the National Housing Act [12 U.S.C. 1713], if the debentures to be issued in payment of such insured obligations are guaranteed as to principal and interest by the United States, or obligations, participations, or other instruments of or issued by the Federal National Mortgage Association, or the Government National Mortgage Association, or mortgages, obligations or other securities which are or ever have been sold by the Federal Home Loan Mortgage Corporation pursuant to section 305 or section 306 of the Federal Home Loan Mortgage Corporation Act [12 U.S.C. 1454 or 1455], or obligations of the Federal Financing Bank or obligations of the Environmental Financing Authority, or obligations or other instruments or securities of the Student Loan Marketing Association, or such obligations of any local public agency (as defined in section 110(h) of the Housing Act of 1949 [42 U.S.C. 1460(h)]) as are secured by an agreement between the local public agency and the Secretary in which the local public agency agrees to borrow from said Secretary, and said Secretary agrees to lend to said local public agency, monies in an aggregate amount which (together with any other monies irrevocably committed to the payment of interest on such obligations) will suffice to pay, when due, the interest on and all installments (including the final installment) of the principal of such obligations, which monies under the Fried Frank Client Memorandum 20 terms of said agreement are required to be used for such payments, or such obligations of a public housing agency (as defined in the United States Housing Act of 1937, as amended [42 U.S.C. 1437 et seq.]) as are secured (1) by an agreement between the public housing agency and the Secretary in which the public housing agency agrees to borrow from the Secretary, and the Secretary agrees to lend to the public housing agency, prior to the maturity of such obligations, monies in an amount which (together with any other monies irrevocably committed to the payment of interest on such obligations) will suffice to pay the principal of such obligations with interest to maturity thereon, which monies under the terms of said agreement are required to be used for the purpose of paying the principal of and the interest on such obligations at their maturity, (2) by a pledge of annual contributions under an annual contributions contract between such public housing agency and the Secretary if such contract shall contain the covenant by the Secretary which is authorized by subsection (g) of section 6 of the United States Housing Act of 1937, as amended [42 U.S.C. 1437d(g)], and if the maximum sum and the maximum period specified in such contract pursuant to said subsection 6(g) [42 U.S.C. 1437d(g)] shall not be less than the annual amount and the period for payment which are requisite to provide for the payment when due of all installments of principal and interest on such obligations, or (3) by a pledge of both annual contributions under an annual contributions contract containing the covenant by the Secretary which is authorized by section 6(g) of the United States Housing Act of 1937 [42 U.S.C. 1437d(g)], and a loan under an agreement between the local public housing agency and the Secretary in which the public housing agency agrees to borrow from the Secretary, and the Secretary agrees to lend to the public housing agency, prior to the maturity of the obligations involved, moneys in an amount which (together with any other moneys irrevocably committed under the annual contributions contract to the payment of principal and interest on such obligations) will suffice to provide for the payment when due of all installments of principal and interest on such obligations, which moneys under the terms of the agreement are required to be used for the purpose of paying the principal and interest on such obligations at their maturity: Provided, That in carrying on the business commonly known as the safe-deposit business the association shall not invest in the capital stock of a corporation organized under the law of any State to conduct a safe-deposit business in an amount in excess of 15 per centum of the capital stock of the association actually paid in and unimpaired and 15 per centum of its unimpaired surplus. The limitations and restrictions herein contained as to dealing in and underwriting investment securities shall not apply to obligations issued by the International Bank for Reconstruction and Development, the European Bank for Reconstruction and Development, the Inter-American Development Bank 1 Bank for Economic Cooperation and Development in the Middle East and North Africa,,2 the North American Development Bank, the Asian Development Bank, the African Development Bank, the Inter-American Investment Corporation, or the International Finance Corporation,,2 or obligations issued by any State or political subdivision or any agency of a State or political subdivision for housing, university, or dormitory purposes, which are at the time eligible for purchase by a national bank for its own account, nor to bonds, notes and other obligations issued by the Tennessee Valley Authority or by the United States Postal Service: Provided, That no association shall hold obligations issued by any of said organizations as a result of underwriting, dealing, or purchasing for its own account (and for this purpose obligations as to which it is under commitment shall be deemed to be held by it) in a total amount exceeding at any one time 10 per centum of its capital stock actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund. Notwithstanding any other provision in this paragraph, the association may purchase for its own account shares of stock issued by a corporation authorized to be created pursuant to title IX of the Housing and Urban Development Act of 1968 [42 U.S.C. 3931 et seq.], and may make investments in a partnership, limited partnership, or joint venture formed pursuant to section 907(a) or 907(c) of that Act [42 U.S.C. 3937(a) or 3937(c)]. Notwithstanding any other provision of this paragraph, the association Fried Frank Client Memorandum 21 may purchase for its own account shares of stock issued by any State housing corporation incorporated in the State in which the association is located and may make investments in loans and commitments for loans to any such corporation: Provided, That in no event shall the total amount of such stock held for its own account and such investments in loans and commitments made by the association exceed at any time 5 per centum of its capital stock actually paid in and unimpaired plus 5 per centum of its unimpaired surplus fund. Notwithstanding any other provision in this paragraph, the association may purchase for its own account shares of stock issued by a corporation organized solely for the purpose of making loans to farmers and ranchers for agricultural purposes, including the breeding, raising, fattening, or marketing of livestock. However, unless the association owns at least 80 per centum of the stock of such agricultural credit corporation the amount invested by the association at any one time in the stock of such corporation shall not exceed 20 per centum of the unimpaired capital and surplus of the association: Provided further, That notwithstanding any other provision of this paragraph, the association may purchase for its own account shares of stock of a bank insured by the Federal Deposit Insurance Corporation or a holding company which owns or controls such an insured bank if the stock of such bank or company is owned exclusively (except to the extent directors’ qualifying shares are required by law) by depository institutions or depository institution holding companies (as defined in section 1813 of this title) and such bank or company and all subsidiaries thereof are engaged exclusively in providing services to or for other depository institutions, their holding companies, and the officers, directors, and employees of such institutions and companies, and in providing correspondent banking services at the request of other depository institutions or their holding companies (also referred to as a “banker's bank”), but in no event shall the total amount of such stock held by the association in any bank or holding company exceed at any time 10 per centum of the association's capital stock and paid in and unimpaired surplus and in no event shall the purchase of such stock result in an association's acquiring more than 5 per centum of any class of voting securities of such bank or company. The limitations and restrictions contained in this paragraph as to an association purchasing for its own account investment securities shall not apply to securities that (A) are offered and sold pursuant to section 4(5) of the Securities Act of 1933 (15 U.S.C. 77d(5)); (B) are small business related securities (as defined in section 3(a)(53) of the Securities Exchange Act of 1934 [15 U.S.C. 78c(a)(53)]); or (C) are mortgage related securities (as that term is defined in section 3(a)(41) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(41)).3 The exception provided for the securities described in subparagraphs (A), (B), and (C) shall be subject to such regulations as the Comptroller of the Currency may prescribe, including regulations prescribing minimum size of the issue (at the time of initial distribution) or minimum aggregate sales prices, or both. A national banking association may deal in, underwrite, and purchase for such association's own account qualified Canadian government obligations to the same extent that such association may deal in, underwrite, and purchase for such association's own account obligations of the United States or general obligations of any State or of any political subdivision thereof. For purposes of this paragraph— (1) the term “qualified Canadian government obligations” means any debt obligation which is backed by Canada, any Province of Canada, or any political subdivision of any such Province to a degree which is comparable to the liability of the United States, any State, or any political subdivision thereof for any obligation which is backed by the full faith and credit of the United States, such State, or such political subdivision, and such term includes any debt obligation of any agent of Canada or any such Province or any political subdivision of such Province if— Fried Frank Client Memorandum 22 (A) the obligation of the agent is assumed in such agent's capacity as agent for Canada or such Province or such political subdivision; andTo exercise by its board of directors or duly authorized officers or agents, subject to law, all such powers as are necessary to carry on the business of banking. (B) Canada, such Province, or such political subdivision on whose behalf such agent is acting with respect to such obligation is ultimately and unconditionally liable for such obligation; andAs used in this paragraph, the term ‘business of banking’ shall be limited to the following core banking services: (2) the term “Province of Canada” means a Province of Canada and includes the Yukon Territory and the Northwest Territories and their successors. In addition to the provisions in this paragraph for dealing in, underwriting, or purchasing securities, the (i) Receiving Deposits A national banking association may engage in the business of receiving deposits. (iii) Extensions of Credit A national banking association may— (I) extend credit to individuals, businesses, not for profit organizations, and other entities; (II) discount and negotiate promissory notes, drafts, bills of exchange, and other evidences of debt; and (III) loan money on personal security. (iv) Payment Systems A national banking association may participate in payment systems, defined as instruments, banking procedures, and interbank funds transfer systems that ensure the circulation of money. (iv) Coin and Bullion A national banking association may buy, sell, and exchange coin and bullion. (v) Investments in Securities (I) In General A national banking association may invest in investment securities, defined as marketable obligations evidencing indebtedness of any person, copartnership, association, or corporation in the form of bonds, notes, or debentures Fried Frank Client Memorandum 23 (commonly known as ‘investment securities’), obligations of the Federal Government, or any State or subdivision thereof, and includes the definition of ‘investment securities’, as may be jointly prescribed by regulation by— (aa) the Comptroller of the Currency; (bb) the Federal Deposit Insurance Corporation; and (cc) the Board of Governors of the Federal Reserve System. (II) Limitations The business of dealing in securities and stock by the association shall be limited to— (aa) purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the association shall not underwrite any issue of securities or stock; and (bb) purchasing for its own account investment securities under such limitations and restrictions contained in this paragraph as to dealing in, underwriting, and purchasing investment securities for the national bank's own account shall not apply to obligations (including limited obligation bonds, revenue bonds, and obligations that satisfy the requirements of section 142(b)(1) of title 26) issued by or on behalf of any State or political subdivision of a State, including any municipal corporate instrumentality of 1 or more States, or any public agency or authority of any State or political subdivision of a State, if the national bank is well capitalized (as defined in section 1831o of this title).as the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve System may jointly prescribe, by regulation. (III) Prohibition on Amount of Investment In no event shall the total amount of the investment securities of any single obligor or maker, held by the association for its own account, exceed 10 percent of its capital stock actually paid in and unimpaired and 10 percent of its unimpaired surplus fund, except that such limitation shall not require any association to dispose of any securities lawfully held by it on August 23, 1935. Fried Frank Client Memorandum 24 (C) Prohibition Against Transactions Involving Structured or Synthetic Products A national banking association may not— (i) invest in a structured or synthetic product, a financial instrument in which a return is calculated based on the value of, or by reference to the performance of, a security, commodity, swap, other asset, or an entity, or any index or basket composed of securities, commodities, swaps, other assets, or entities, other than customarily determined interest rates; or (ii) otherwise engage in the business of receiving deposits or extending credit for transactions involving structured or synthetic products. Fried Frank Client Memorandum 25 Appendix D – Warren-McCain Bill – Key Changes to the Bank Holding Company Act, §4, Subsections (a), (c) and (k)-(o) § 1843. Interests in nonbanking organizations (a) Ownership or control of voting shares of any company not a bank; engagement in activities other than banking Except as otherwise provided in this chapter, no bank holding company shall— (1) after May 9, 1956, acquire direct or indirect ownership or control of any voting shares of any company which is not a bank, or; (2) after two years from the date as of which it becomes a bank holding company, or in the case of a company which has been continuously affiliated since May 15, 1955, with a company which was registered under the Investment Company Act of 1940 [15 U.S.C. 80a–1 et seq.], prior to May 15, 1955, in such a manner as to constitute an affiliated company within the meaning of that Act, after December 31, 1978, or, in the case of any company which becomes, as a result of the enactment of the Bank Holding Company Act Amendments of 1970, a bank holding company on December 31, 1970, after December 31, 1980, retain direct or indirect ownership or control of any voting shares of any company which is not a bank or bank holding company or engage in any activities other than (A) those of banking or of managing or controlling banks and other subsidiaries authorized under this chapter or of furnishing services to or performing services for its subsidiaries, and (B) those permitted under paragraph (8) of subsection (c) of this section subject to all the conditions specified in such paragraph or in any order or regulation issued by the Board under such paragraph: Provided, That a company covered in 1970 may also engage in those activities in which directly or through a subsidiary (i) it was lawfully engaged on June 30, 1968 (or on a date subsequent to June 30, 1968 in the case of activities carried on as the result of the acquisition by such company or subsidiary, pursuant to a binding written contract entered into on or before June 30, 1968, of another company engaged in such activities at the time of the acquisition), and (ii) it has been continuously engaged since June 30, 1968 (or such subsequent date). The Board by order, after opportunity for hearing, may terminate the authority conferred by the preceding proviso on any company to engage directly or through a subsidiary in any activity otherwise permitted by that proviso if it determines, having due regard to the purposes of this chapter, that such action is necessary to prevent undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices; and in the case of any such company controlling a bank having bank assets in excess of $60,000,000 on or after December 31, 1970, the Board shall determine, within two years after such date (or, if later, within two years after the date on which the bank assets first exceed $60,000,000), whether the authority conferred by the preceding proviso with respect to such company should be terminated as provided in this sentence. Nothing in this paragraph shall be construed to authorize any bank holding company referred to in the preceding proviso, or any subsidiary thereof, to engage in activities authorized by that proviso through the acquisition, pursuant to a contract entered into after June 30, 1968, of any interest in or the assets of a going concern engaged in such activities. Any company which is authorized to engage in any activity pursuant to the preceding proviso or subsection (d) of this section but, as a result of action of the Board, is required to terminate such activity may (notwithstanding any otherwise applicable time limit prescribed in this paragraph) retain the ownership or control of shares in any Fried Frank Client Memorandum 26 company carrying on such activity for a period of ten years from the date on which its authority was so terminated by the Board. Notwithstanding any other provision of this paragraph, if any company that became a bank holding company as a result of the enactment of the Competitive Equality Amendments of 1987 acquired, between March 5, 1987, and August 10, 1987, an institution that became a bank as a result of the enactment of such Amendments, that company shall, upon enactment of such Amendments, immediately come into compliance with the requirements of this chapter.; or (3) with the exception of the activities permitted under subsection (c), engage in the business of a “securities entity” or a “swaps entity”, as those terms are defined in section 18(s)(6)(D) of the Federal Deposit Insurance Act (12 U.S.C. 1828(s)(6)(D)), including dealing or making markets in securities, repurchase agreements, exchange traded and over-the-counter swaps, as defined by the Commodity Futures Trading Commission and the Securities and Exchange Commission, or structured or synthetic products, as defined in the paragraph designated as ‘Seventh’ of section 24 of the Revised Statutes (12 U.S.C. 24), or any other over-the-counter securities, swaps, contracts, or any other agreement that derives its value from, or takes on the form of, such securities, derivatives, or contracts; (4) engage in proprietary trading, as provided by section 13, or any rule or regulation under that section; (5) own, sponsor, or invest in a hedge fund, or private equity fund, or any other fund, as provided by section 13, or any rule or regulation under that section, or any other fund that exhibits the characteristics of a fund that takes on proprietary trading activities or positions; (6) hold ineligible securities or derivatives; (7) engage in market-making; or (8) engage in prime brokerage activities. The Board is authorized, upon application by a bank holding company, to extend the two year period referred to in paragraph (2) above from time to time as to such bank holding company for not more than one year at a time, if, in its judgment, such an extension would not be detrimental to the public interest, but no such extensions shall in the aggregate exceed three years. Notwithstanding any other provision of this chapter, the period ending December 31, 1980, referred to in paragraph (2) above, may be extended by the Board of Governors to December 31, 1984, but only for the divestiture by a bank holding company of real estate or interests in real estate lawfully acquired for investment or development. In making its decision whether to grant such extension, the Board shall consider whether the company has made a good faith effort to divest such interests and whether such extension is necessary to avert substantial loss to the company. (c) Exemptions The prohibitions in this section shall not apply to (i) any company that was on January 4, 1977, both a bank holding company and a labor, agricultural, or horticultural organization exempt from taxation under section 501 of title 26, or to any labor, agricultural, or horticultural organization to which all or substantially all of the assets of such company are hereafter transferred, or (ii) a Fried Frank Client Memorandum 27 company covered in 1970 more than 85 per centum of the voting stock of which was collectively owned on June 30, 1968, and continuously thereafter, directly or indirectly, by or for members of the same family, or their spouses, who are lineal descendants of common ancestors; and such prohibitions shall not, with respect to any other bank holding company, apply to— (1) shares of any company engaged or to be engaged solely in one or more of the following activities: (A) holding or operating properties used wholly or substantially by any banking subsidiary of such bank holding company in the operations of such banking subsidiary or acquired for such future use; or (B) conducting a safe deposit business; or (C) furnishing services to or performing services for such bank holding company or its banking subsidiaries; or (D) liquidating assets acquired from such bank holding company or its banking subsidiaries or acquired from any other source prior to May 9, 1956, or the date on which such company became a bank holding company, whichever is later; (2) shares acquired by a bank holding company or any of its subsidiaries in satisfaction of a debt previously contracted in good faith, but such shares shall be disposed of within a period of two years from the date on which they were acquired, except that the Board is authorized upon application by such bank holding company to extend such period of two years from time to time as to such holding company if, in its judgment, such an extension would not be detrimental to the public interest, and, in the case of a bank holding company which has not disposed of such shares within 5 years after the date on which such shares were acquired, the Board may, upon the application of such company, grant additional exemptions if, in the judgment of the Board, such extension would not be detrimental to the public interest and, either the bank holding company has made a good faith attempt to dispose of such shares during such 5-year period, or the disposal of such shares during such 5-year period would have been detrimental to the company, except that the aggregate duration of such extensions shall not extend beyond 10 years after the date on which such shares were acquired; (3) shares acquired by such bank holding company from any of its subsidiaries which subsidiary has been requested to dispose of such shares by any Federal or State authority having statutory power to examine such subsidiary, but such bank holding company shall dispose of such shares within a period of two years from the date on which they were acquired; (4) shares held or acquired by a bank in good faith in a fiduciary capacity, except where such shares are held under a trust that constitutes a company as defined in section 1841(b) of this title and except as provided in paragraphs (2) and (3) of section 1841(g) of this title; (5) shares which are of the kinds and amounts eligible for investment by national banking associations under the provisions of section 24 of this title; (6) shares of any company which do not include more than 5 per centum of the outstanding voting shares of such company; (7) shares of an investment company which is not a bank holding company and which is not engaged in any business other than investing in securities, which securities do not include more than 5 per centum of the outstanding voting shares of any company; (8) shares of any company the activities of which had been determined by the Board by regulation or order under this paragraph as of the day before November 12, 1999, to beare so closely related to banking so as to be a proper incident thereto (subject to such Fried Frank Client Memorandum 28 terms and conditions contained in such regulation or order, unless modified by the Board);, as provided under this paragraph or any rule or regulation issued by the Board under this paragraph, provided that for purposes of this paragraph, closely related shall not be considered to include— (A) serving as an investment adviser (as defined in section 2(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)) to an investment company registered under that Act, including sponsoring, organizing, and managing a closed-end investment company; (B) agency transactional services for customer investments, except that this subparagraph may not be construed as prohibiting purchases and sales of investments for the account of customers conducted by a bank (or subsidiary thereof) pursuant to the bank’s trust and fiduciary powers; (C) investment transactions as principal, except for activities specifically allowed by paragraph (14); and (D) management consulting and counseling activities; (9) shares held or activities conducted by any company organized under the laws of a foreign country the greater part of whose business is conducted outside the United States, if the Board by regulation or order determines that, under the circumstances and subject to the conditions set forth in the regulation or order, the exemption would not be substantially at variance with the purposes of this chapter and would be in the public interest; (10) shares lawfully acquired and owned prior to May 9, 1956, by a bank which is a bank holding company, or by any of its wholly owned subsidiaries; (11) shares owned directly or indirectly by a company covered in 1970 in a company which does not engage in any activities other than those in which the bank holding company, or its subsidiaries, may engage by virtue of this section, but nothing in this paragraph authorizes any bank holding company, or subsidiary thereof, to acquire any interest in or the assets of any going concern (except pursuant to a binding written contract entered into before June 30, 1968, or pursuant to another provision of this chapter) other than one which was a subsidiary on June 30, 1968; (12) shares retained or acquired, or activities engaged in, by any company which becomes, as a result of the enactment of the Bank Holding Company Act Amendments of 1970, a bank holding company on December 31, 1970, or by any subsidiary thereof, if such company— within the applicable time limits prescribed in subsection (a)(2) of this section (i) ceases to be a bank holding company, or (ii) ceases to retain direct or indirect ownership or control of those shares and to engage in those activities not authorized under this section; and complies with such other conditions as the Board may by regulation or order prescribe; (13) shares of, or activities conducted by, any company which does no business in the United States except as an incident to its international or foreign business, if the Board by regulation or order determines that, under the circumstances and subject to the Fried Frank Client Memorandum 29 conditions set forth in the regulation or order, the exemption would not be substantially at variance with the purposes of this chapter and would be in the public interest; or (14) purchasing, as an end user, any swap, to the extent that— (A) the purchase of any such swap occurs contemporaneously with the underlying hedged item or hedged transaction; (B) there is formal documentation identifying the hedging relationship with particularity at the inception of the hedge; and (C) the swap is being used to hedge against exposure to— (i) changes in the value of an individual recognized asset or liability or an identified portion thereof that is attributable to a particular risk; (ii) changes in interest rates; or (iii) changes in the value of currency; or (14) (15) [Note: Current Subsection 14, related to export trading companies, would be unchanged by the 21st Century Glass Steagall Act other than being redesignated as Subsection 15.] [Note: § 4 Subsections (k)-(o) are deleted in their entirety:] (k) Engaging in activities that are financial in nature … (l) Conditions for engaging in expanded financial activities … (m) Provisions applicable to financial holding companies that fail to meet certain requirements … (n) Authority to retain limited nonfinancial activities and affiliations … (o) Regulation of certain financial holding companies * * * Fried Frank Client Memorandum New York Washington, DC London Paris Frankfurt friedfrank.com 30 Authors: V. Gerard Comizio Nathan S. Brownback This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions about the contents of this memorandum, please call your regular Fried Frank contact or an attorney listed below: Contacts: Washington, D.C. V. Gerard Comizio +1.202.639.7450 [email protected] New York Jessica Forbes +1.212.859.8558 [email protected] John M. Liftin +1.212.859.8508 [email protected]