Regulators Race Tight Deadline on Reform Rules

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Federal regulators responsible for transforming the nation's financial laws are under pressure to write a slew of rules implementing the Gramm-Leach-Bliley Act of 1999.

Complex regulations governing bank operations often take years to complete, but the agencies' first deadline is March 12 -- four months after the landmark law was signed by President Clinton.

"We have a very tight deadline," said Julie L. Williams, chief counsel for the Office of the Comptroller of the Currency. "We are working right now to identify what needs to be drafted."

Ms. Williams and her counterpart at the Federal Reserve Board, general counsel J. Virgil Mattingly Jr., will be the main forces behind the new rules.

"We're just beginning, and I think there are something in the neighborhood of 40 projects," Mr. Mattingly said Tuesday. "The most immediate concern is to get out certification procedures for financial holding companies."

Those procedures will, for the first time, permit banks, securities firms, and insurance companies to affiliate under financial holding companies, which the Fed will supervise.

Also attracting the regulators' attention are the law's privacy provisions, which give consumers the right to limit use of their financial information. Those rules must be in place by May 12.

"Six months to a final rule is a forced march -- particularly in an area where there are bound to be unintended consequences," said Cantwell F. Muckenfuss 3d, a partner with Washington law firm Gibson, Dunn & Crutcher.

Beyond working under tight deadlines, regulators must interpret Congress's intentions where the law is vague.

"The way it's written, the act is pretty skeletal," said Jonathan L. Levin, a partner with the Reed Smith Shaw & McClay law firm in Philadelphia. "You don't want to put meat on the bones too quickly, because you don't know if you'll end up with Adonis or with Frankenstein."

The agencies won't be sculpting alone.

Trade groups, individual institutions, and consumer advocates will provide advice on hot-button issues, particularly the law's privacy provisions and its sections expanding bank powers.

"Privacy is going to be a flashpoint for everybody," Mr. Muckenfuss said.

Regulators have six months to issue regulations outlining the law's "opt-out" provision, which gives consumers the right to bar institutions from sharing their personal financial information with unrelated companies.

However, lawmakers did not define "financial information." Once the agencies define the type of information deemed private, they must create rules to protect it. Among them will be rules prohibiting disclosure of a customer's financial information to third parties for marketing purposes, and rules stipulating how a bank must store the data to prevent its being accessed illegally.

Banks will also be required to disclose those policies to new customers when they begin their relationship with the institution, and to all customers on a yearly basis.

New rules expanding bank powers are also expected to be contentious. The first title in the 416-page law creates financial holding companies that may own banks, securities firms, and insurance companies. Beyond banking and insurance and securities underwriting, these financial holding companies will also be allowed to provide merchant banking and anything else that the bill lists as a permissible financial activity.

Further, the Fed has the primary authority to expand the definition of "financial" to include future products and let companies engage in activities that are "incidental" or "complementary" to their financial powers.

However, the Treasury Department has the right to veto Fed rulings defining financial or incidental activities. …