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In the financial services sector, the revolution, apparently, can wait. A year after President Clinton signed the Gramm-Leach-Bliley Financial Services Modernization Act (GLB) into law, the financial services industry looks, to the surprise of many, largely the same. GLB repealed the Glass-Steagall Act, which kept insurers, banks and brokerages from dabbling in the others’ businesses, thus opening a door that had been shut to financial services companies since the Great Depression. The predicted rush of mega-mergers such as the 1998 union of banking colossus Citicorp and insurance giant Travelers Group Inc., which in part spurred the act’s passage, has yet to happen. And “one-stop shopping” for financial products has yet to become the industry standard. “There was such excitement when GLB was passed,” said Nicholas Potter, a partner at New York’s Debevoise & Plimpton who specializes in insurance law. “It kind of feels like a big thud,” he added. Recently, a couple of companies have dipped their toe in the GLB waters. The first such transaction was MetLife’s proposed mid-August purchase of Grand Bank, a small Princeton, N.J., bank. Brian W. Smith, a partner in the Washington, D.C., office of Mayer Brown & Platt who represents MetLife in the acquisition, said the insurance powerhouse was seeking a “measured way” to get into a new industry. Buying “a small, healthy bank it could grow with gives MetLife the flexibility to get accustomed to retail banking,” Smith said. The acquisition will, for example, allow MetLife to invite policy holders to deposit proceeds from an insurance claim into a MetLife bank account, thus allowing the insurer to keep the money and the customer contact. Smith views MetLife’s pioneering move as “a learning experience,” with pros and cons. “You may hit a couple of rocks,” along the way, he said, “but you gain market-mover advantage.” Since the MetLife deal, only a small handful of deals, including Franklin Resources Inc.’s planned purchase of Fiduciary Trust International and the acquisition of an Internet bank by Dutch banking and insurance powerhouse ING Baring, have hit the radar screen in the year since GLB’s enactment. SLOW PACE OF CHANGE Lawyers cite a number of reasons for the slow pace of change, including the popularity of joint ventures and other business arrangements in lieu of full-blown mergers, the reluctance to be a GLB guinea pig and cumbersome federal regulations. But foremost, they blame the market. “You can’t legislate away economics,” said H. Rodgin Cohen, a partner at Sullivan & Cromwell. “The poor stock prices of banks and insurers has been a real negative for getting deals done,” he added. The depressed market discourages deal-making in two ways. First, “it creates a disconnect between potential buyers and sellers,” Debevoise’s Potter said. Boards of directors are not interested either in selling at a discount or buying a company that will dilute their company’s shares, he explained. Second, companies have found themselves in a cash crunch. And they are allocating the resources they do have toward e-commerce, said Jerome Walker, a partner with Salans’ global financial institutions group. Despite the risks and uncertainties presented by the Internet right now, no one wants to be left behind, he said. The huge investment involved in creating an Internet presence diminishes resources that might be deployed for an acquisition or merger, Walker explained. Another reason we have not seen a tidal wave of mergers is that many companies did not wait for the adoption of reforms before branching out into other financial services. “The banking and securities industries have long ago figured out a number of ways to combine services,” said Lawrence D. Fruchtman, special counsel at New York’s Cadwalader, Wickersham & Taft. According to Debevoise’s Potter, for several years now, insurance companies have also been developing products and distribution strategies that allow them to do the same things sanctioned under GLB. For example, insurers have been busy buying thrifts and trusts across the country for years. As a result, GLB’s impact has been more evolutionary than revolutionary. “The act put a stamp of approval” on things that had already been happening, said Fruchtman, “and set up a rational structure for going forward.” Finally, a hesitancy to subject themselves to federal banking regulations has also given securities and insurance firms pause. To offer the full scope of financial services envisioned by the act, a company must first apply for financial holding company (FHC) status. FHCs are subjected to oversight by the Federal Reserve Board, a no-brainer for banks, which are already federally regulated. As of Nov. 3, 2000, 443 bank holding companies have elected to become FHCs. Although there are no statistics available, lawyers suspect that a fair number of modest, low-profile deals are taking place among the smaller and mid-sized banks that take advantage of the procedural benefits of FHC status. On the other hand, federal regulation presents a real potential downside for securities firms and insurance companies, who may not want to face such scrutiny. It is “a very difficult decision” for such companies, said Robert Tortoriello, a partner at New York’s Cleary, Gottlieb, Steen & Hamilton. “The feds are trying to work with them,” he said. However, its first efforts at regulating the act, in the merchant banking arena, have not been well received, he added. “The feds have hamstrung merchant banking activities” with its rigid, “check the box” mentality, Tortoriello said, “which is not the way venture capitalists operate,” he added. This rigidity, combined with the length of time things take at the federal agency level, “gives people pause,” he added. As a result, many companies are opting for “test runs,” offering expanded financial services through joint ventures and other types of arrangements that do not require federal approval, Salans’ Walker said. But federal oversight is not a deal breaker for everyone. Franklin Resources Inc., a mutual fund holding company, determined that the strategic advantages of its planned $1 billion purchase of Fiduciary Trust International were well worth the costs of federal regulation, Tortoriello said. Tortoriello, who represents Fiduciary Trust, described the deal as “the perfect poster child” for GLB. Despite the slow start, practitioners praised the act. “There is no question that the law is a good thing,” said Cadwalader’s Fruchtman. Before GLB, the United States was the only country that had legally imposed barriers among the insurance, banking and securities industries, he explained. “U.S. companies have to compete in a global marketplace,” Fruchtman said. Observers also expect more GLB activity down the pike, as companies navigate the learning curve that goes with any complex new set of laws. “There are going to be more deals,” Debevoise’s Potter said, “but it’s going to take the right mix of buyers and sellers, strategic benefits and pricing.” “Over time, GLB will translate into a more efficient financial services industry,” he added. In the meantime, lawyers are busy. “Whenever there is a deregulatory statute, it seems that the work of the regulatory lawyer increases,” Fruchtman said.

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