The Financial Services Regulatory Relief Act of 2006:
An Overview

Jeffery Smith
Bricker & Eckler LLP
January 2007

President Bush signed the Financial Services Regulatory Relief Act of 2006 into law on October 13, 2006. The result of five years of legislative, regulatory, and industry input and negotiation, the Act will hopefully provide at least some level of “…regulatory relief and improve productivity for insured depository institutions”. Those expecting real and recognizable regulatory “relief” in the day-to-day operations of the bank following the long gestation period of this legislation are, however, likely to be somewhat disappointed. None of the provisions of the Act taken alone are likely to result in a new world of regulatory relief for the industry or real significant relief from the current regulatory burden. While not a comprehensive regulatory cure, the Act should at least help move the regulatory environment in that general direction and hopefully provide at least some level of assistance for an otherwise heavily-burdened industry.

Many of the provisions of the Act are technical in nature, while others provide more general applicability to the operations and various business lines of the industry. A number of the provisions clarify or amend portions of the Gramm-Leach-Bliley Act (“GLBA”).

Highlights of some of the more significant provisions of the Act are described below.

National Bank Corporate Governance and Investment Powers

Powers of national banks to adopt desired methods of director elections in their articles are expanded through elimination of the current requirement of cumulative voting (it remains permissible only if authorized by the bank’s articles). While helpful to independent national banks, this provision has little impact on holding company subsidiaries.

The statutory formula for determining when lawful national bank dividend declarations may be made is repealed by the Act, and boards are authorized to declare a dividend of so much of the bank’s undivided profits as they may deem expedient. Care must be taken, however, to keep in mind the board’s duties to it’s constituents (including a parent holding company), and to assure continued safe and sound banking operations, in the declaration and payment of dividends.

The amount that national banks are authorized to invest in investments designed to “promote the public welfare” is increased from 10% of unimpaired capital and surplus to 15%, thereby freeing up additional funds for investment in community projects and CRA-related activities.

Securities Powers

The Act requires the SEC and the Federal Reserve to at long last adopt final rules relating to exceptions to the definition of “broker” for purposes of GLBA. While the SEC has long-standing proposed rules which generated significant controversy in the industry, they have not been implemented. The SEC announced in September 2006 that final rules would be issued by early summer, 2007. This controversial issue will likely continue to be problematic for the industry. In addition, federal savings associations were exempted by the Act from investment advisor and broker-dealer regulations under the Act to the same extent as banks are otherwise exempt.

Privacy Issues

The Act amends the privacy rules of GLBA to clarify that CPA’s are not required to notify their customers of privacy and disclosure policies otherwise applicable under GLBA so long as they are subject to state law restraints on disclosure of non-public personal information without customer approval.

In addition, the Act requires that the federal banking agencies develop model privacy notice forms (a welcome relief for compliance personnel) to satisfy GLBA requirements. Banks adopting the model forms (and using them correctly) will be afforded a regulatory safe harbor under the disclosure requirements of GLBA. While short of meaningful reform of the GLBA privacy rules and the ongoing requirement to provide “privacy statements” that tend to find their way into the trash without being read, institutions will at least have the ability to know that proper use of “model” forms will provide them a safe harbor from a regulatory perspective.

Consumer Issues

The Act adopts extensive and somewhat complex amendments to the Fair Debt Collections Practices Act, which institutions must review and implement. Among other things, the amendments impact customer collection contact procedures, consumer notification requirements, and clarify the impact of the GLBA privacy requirements and data security matters.

Federal Reserve Issues

The Act authorizes the payment of interest on institution balances held at Federal Reserve banks, increases flexibility of the Fed to set institution reserve ratios against transaction accounts, and allows the use of “pass-through” accounts for member banks as well as non-member banks.

Examination Cycles

Perhaps one of the most significant aspects of the Act for community banks is the increase from $250 million to $500 million the size of bank eligible for 18-month (rather than annual) examinations. The expanded examination cycle will be available only for well-capitalized and well-managed institutions.

Enforcement Provisions

A variety of enforcement-related provisions are included in the Act which generally serve to enhance the authority of the federal agencies to engage in expanded enforcement and removal activities. None of the enforcement provisions would likely be construed by institutions to provide any real form of regulatory “relief”, and most expand the authority of the agencies under the Federal Deposit Insurance Act, the Federal Reserve Act, and the Bank Holding Company Act in enforcement and application processes.

General Banking Provisions

Another potentially important provision for smaller community banks is the amendment of the Depository Management Interlocks Act to provide that the asset ceiling for small institutions exempt from the prohibition against management interlocks in the same market is raised from $20 million to $50 million. This provision, however, may have little impact in the real world of competing institutions and concerns regarding liability issues arising from potentially mixed obligations of loyalty to employing or appointing institutions.

The Federal Reserve Act and Bank Holding Company Act are also amended to reduce reporting requirements relating to loans by individuals subject to Reg O with correspondent banks. The amendment does not provide any real change from the current requirements of Reg O impacting how such credits are to be handled by institutions.

Studies and Reports

The Act requires that the Comptroller General study and report to Congress on various matters pertaining to AML reporting issues; regulatory oversight and charter options for banks based on size, complexity and diversity; and possible efficiencies from consolidation of financial regulators and charter simplification. Given the speed at which Congress works on these kinds of issues, particularly in a changing Congress and approaching a presidential election year, it is unlikely that this provision will have any real impact for some time (if ever).

Conclusions

Institutions expecting significant real and recognizable “relief” from the current regulatory burden as a result of the Act are likely to be somewhat disappointed in that while there are a number of relatively small “perks” the Act does not constitute a wholesale overhaul of the system to alleviate the regulatory burdens faced by the industry.

As noted above, given the political changes underway in Washington and the fact that the nation is headed into what is likely to be a somewhat tumultuous period leading up to a presidential election next year, irrespective of the best intentions of Congress it is unlikely that real and demonstrable “regulatory relief” will be forthcoming in the very near future.