CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 1037
engaging as principal in underwriting or dealing in securities,
underwriting any type of insurance (except for credit insurance),
dealing or trading in derivatives, or making private equity
investments.
b. The Second Tier of Nontraditional Banking Organizations
Unlike first-tier banking firms, the second tier of “nontraditional”
banking organizations would be allowed, through nonbank
subsidiaries, to engage in (1) underwriting and dealing (i.e.,
proprietary trading) in “bank-ineligible” securities, 376 (2)
underwriting all types of insurance, and (3) dealing and trading in
derivatives. Second-tier banking organizations would include (1)
FHCs registered under sections 4(k) and 4(l) of the BHC Act, 377 (2)
holding companies owning grandfathered “nonbank banks,” and (3)
grandfathered “unitary thrift” holding companies. 378 In addition,
firms controlling industrial banks should be required either to register
as FHCs or to divest their ownership of such banks if they cannot
comply with the BHC Act’s prohibition against commercial
activities. 379 Second-tier holding companies would thus encompass
Congress should revise section 4(c)(8) by authorizing the FRB to approve a limited range
of new activities that are “closely related” to the traditional banking functions of accepting
deposits, extending credit, discounting negotiable instruments, and providing fiduciary
services. See Wilmarth, supra note 6, at 767.
376 See Wilmarth, supra note 120, at 219–20, 225–26 n.30, 318–20 (discussing the
distinction between (1) “bank-eligible” securities, which banks may underwrite and deal in
directly, and (2) “bank-ineligible” securities, which affiliates of banks—but not banks
themselves—may underwrite and deal in under GLBA).
377 12 U.S.C. § 1843(k), (l) (2006); see also CARNELL ET AL., supra note 118, at 467–
70 (describing “financial” activities, such as securities underwriting and dealing and
insurance underwriting, that are authorized for FHCs under the BHC Act, as amended by
GLBA).
378 See Arthur E. Wilmarth, Jr., Wal-Mart and the Separation of Banking and
Commerce, 39 CONN.L.REV. 1539, 1569–71, 1584–86 (2007) (explaining that (1) during
the 1980s and 1990s, many securities firms, life insurers, and industrial firms used the
“nonbank bank” loophole or the “unitary thrift” loophole to acquire FDIC-insured
institutions, and (2) those loopholes were closed to new acquisitions by a 1987 statute and
by GLBA, respectively).
379 Industrial banks are exempted from treatment as “banks” under the BHC Act. See
12 U.S.C. § 1841(c)(2)(H). As a result, the BHC Act allows commercial (i.e.,
nonfinancial) firms to retain their existing ownership of industrial banks. However, Dodd-
Frank imposes a three-year moratorium on the authority of federal regulators to approve
any new acquisitions of industrial banks by commercial firms. Dodd-Frank Act § 603(a).
In addition, Dodd-Frank requires the GAO to conduct a study and report to Congress on
whether commercial firms should be permanently barred from owning industrial banks.
Id. § 603(b); see also Wilmarth, supra note 378, at 1543–44, 1554–1620 (arguing that