What Is the Gramm-Leach-Bliley Act of 1999 (GLBA)?
You need to know that the Gramm-Leach-Bliley Act of 1999, or GLBA, was a bipartisan regulation signed by President Bill Clinton and passed by Congress on November 12, 1999. I see it as an effort to update and modernize the financial industry. Most people remember the GLBA for repealing the Glass-Steagall Act of 1933, which had prohibited commercial banks from offering financial services like investments and insurance as part of their normal operations.
Key Takeaways
- The act was passed in late 1999 and allows banks to offer financial services previously forbidden by the Glass-Steagall Act.
- Under the GLBA, each manager or service-person is only allowed to sell or manage one type of financial product/instrument.
- All banks must share their information-sharing practices with the customer.
Understanding the Gramm-Leach-Bliley Act of 1999 (GLBA)
Let me explain the background: due to the massive losses from 1929's Black Tuesday and Thursday, the Glass-Steagall Act was created to protect bank depositors from risks tied to stock market volatility. For years, this meant commercial banks couldn't legally act as brokers. But with many regulations added since the 1930s to safeguard depositors, the GLBA was introduced to let financial institutions offer more services.
The GLBA came right after the merger of commercial bank Citicorp with insurance firm Travelers Group, forming Citigroup. This new conglomerate provided commercial banking, insurance, and securities-related services, with brands like Citibank, Smith Barney, Primerica, and Travelers. That merger violated the existing Glass-Steagall Act and the Bank Holding Company Act of 1956.
You should note that the act is also known as the Gramm-Leach-Bliley Financial Services Modernization Act.
To make the merger possible, the U.S. Federal Reserve granted Citigroup a temporary waiver in September 1998, setting the stage for Congress to pass the GLBA. After that, similar mergers became fully legal. The repeal also lifted the ban on simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank.
The Gramm-Leach-Bliley Act and Consumer Privacy
Here's what the GLBA requires for privacy: financial institutions that offer loans, financial or investment advice, or insurance must fully explain their information-sharing practices to customers. They have to give customers the option to opt out if they don't want their sensitive information shared.
While many people think data like bank balances and account numbers should be confidential, in practice, this information is routinely bought and sold by banks, credit card companies, and others. The GLBA provides limited privacy protections against such sales, along with measures against pretexting, which is obtaining personal information through false pretenses.
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