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By James Hamilton, J.D., LL.M., Senior Writer Analyst, CCH Federal Securities Law Reporter; Co-Author, CCH Federal Privacy Rules for Financial Institutions and Financial Services Modernization - Gramm-Leach-Bliley Act of 1999 - Law and Explanation; contributing author, CCH FOCUS. |
ith the advent of financial holding companies offering a full range of securities, banking and insurance products, Congress has become concerned about the possibility of fraud across a broad spectrum of financial activity. That concern centers on bad actors who could engage in fraudulent activities in different segments of the financial industry always staying one step ahead of the functional regulators. It is becoming evident that new regulatory tools will be needed to control the activities of these rogue actors.
The Gramm-Leach-Bliley Act ushered in a new era of financial regulation and with it a need for a more intense coordination among the functional regulators than had ever previously existed. Recently, the views of banking and securities regulators were sought as Congress begins to examine what new legislation will be needed to enable the regulatory interaction that Gramm-Leach-Bliley virtually demands. To be sure, there are a number of concerns that must be addressed before such legislation becomes a reality, chief among them protecting the privacy and confidentiality of financial information.
Joint hearings were held before the House subcommittees on oversight and investigations and financial institutions. Currently, noted Michael Oxley, Chairman of the full Financial Services Committee, there is no entity tasked with coordinating regulations across all financial industries and there is no mechanism for regulators to share information without losing critical legal privileges and confidentiality protections for the material. The regulators cannot set up this system by themselves without federal legislation, added the chairman.
The Securities and Exchange Commission strongly supports steps to help regulators act against rogue individuals, such as broadening the Commission's authority to use regulatory information and improving processes for sharing information among financial regulators. According to SEC General Counsel David M. Becker, the sharing of regulatory information can serve as an important tool to help control rogue individuals.
The Gramm-Leach-Bliley Act commands the Commission to share information with federal banking regulators about categories of information such as the results of investment company examinations and the results of examinations of bank investment advisory activities. The Act also requires federal banking regulators to provide the Commission with information about banks that rely on exceptions from the securities law definitions of "broker" and "dealer" and about the results of examinations of bank investment advisory activities. The Commission pledges to work with banking regulators to develop further mechanisms to exchange this information.
Under the current statutory framework, even if the SEC has information showing that a person has been disciplined by banking or insurance regulators, it may not have the authority to use that information to keep that person out of the securities business. That situation, he analogized, is like "giving rotten apples one barrel after another to spoil."
Julie L. Williams, First Senior Deputy Comptroller and Chief Counsel, emphasized that effective coordination and information sharing among the regulators of banks, securities firms and insurance providers is essential in order for the functional regulation established by the Gramm-Leach-Bliley Act to work as Congress intended. In view of the integration of the financial services industries that GLB permits, and the possibility that individuals will migrate between industries, it is particularly important for a functional regulator to have a means to know whether these individuals have been subject to enforcement actions by another functional regulator.
The ability of the OCC and the other federal banking agencies to disseminate non-public information to other regulators is currently limited by the restrictions contained in federal statutes and by the necessity of preserving privileges recognized under federal statutes and state common law. Among the federal statutes that prohibit or restrict the transferring of non-public information are the Trade Secrets Act, the Right to Financial Privacy Act, and the Privacy Act of 1974. In the absence of an express statutory exception, these laws prohibit or restrict certain types of non-public information from being shared with other agencies. Moreover, even if a statutory exception applies, a number of statutory and common law privileges recognized by the courts may be waived or destroyed by the unprotected disclosure of privileged information. These include the bank examination privilege and the attorney-client and work product privileges.
Williams also pointed out that, currently, a provision in the Federal Deposit Insurance Act expressly protects transfers of privileged information from the federal banking agencies to other federal agencies. The provision does not address the sharing of privileged materials with state agencies, such as state banking authorities. However, GLB separately provides that information exchanged pursuant to its Section 307(c) by a federal banking regulator or a state insurance regulator will not constitute a waiver of any privilege to which the information is subject. Section 307 pertains only to information regarding transactions or relationships between an insured institution and an affiliated company that is engaged in insurance activities and to certain other information that a banking agency believes is necessary or appropriate for a state insurance regulator to administer state insurance laws. It does not cover information sharing with the National Association of Insurance Commissioners. Thus, under current law, sharing of confidential or privileged information with state agencies and the NAIC runs the risk of resulting in a loss of protected status for the privileged materials.
Regarding new legislation, the OCC and SEC urged Congress to build on the information sharing arrangements that already exist. A meaningful level of information exchange already exists among federal financial regulators and state regulators, though the information is not as complete or as readily accessible as one would desire.
Congress could direct the agencies to create a linked system containing public information on enforcement actions taken, with the limited addition of non-public information concerning the issuance of notices of charges or comparable actions, with provision for the role of the NAIC on behalf of the state insurance supervisors in that process. That directive, reasoned Williams, coupled with protections to ensure that privacy is protected, would be a significant aid to cooperative law enforcement among regulators of financial services providers. This approach would also, in the view of the OCC, obviate the need to create any new governmental entity to manage information sharing among functional regulators.