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It is safe to say that voluntary submission to governmental oversight ranks high on most companies’ lists of do nots. The prospect of being an agency guinea pig is even less appealing. While regulatory gears may grind slowly and sometimes squeakily, a new regulatory machine may break down entirely. Indeed, many lawyers cite corporate reluctance to wrestle with new regulations as one of the reasons the year-old Gramm-Leach-Bliley Financial Services Modernization Act (GLB) has been slow to catch on. The act removed the legal barriers among insurers, banks and brokerage firms. But to offer the full scope of permitted financial services, a corporation must first apply for financial holding company (FHC) status, which subjects it to oversight by the Federal Reserve Board. This can be a difficult decision for insurers and brokerage firms that may not want to face such scrutiny. According to Brian Smith, a partner at the Washington, D.C., office of Mayer, Brown & Platt, it need not be that tough a decision. Smith handled the governmental side of insurance giant MetLife’s recent purchase of a small bank, shepherding the company through the previously untested GLB regulatory process at the Federal Reserve to its final approval last month. Surprisingly, he found the experience to be virtually painless. FAST-TRACK APPROVAL “It was a very fast track approval,” Smith said. Throughout the process, “they were thorough, professional and cooperative,” he added. He said the key to a smooth approval process is anticipation of all the issues going in. Decide what is important and what is not so important, he advised. For the important issues, decide what you will do if you run into a problem, he added. Even before MetLife could submit its application with the Federal Reserve to provide banking services, the company had to take several preparatory steps. The first step was to decide whether it wanted to get into the banking business at all — something it had never done — and if so, in what manner. MetLife decided it was interested. By offering banking services, it could recapture at least a portion of the more than $25 billion it pays out to policy holders each year, explained Judy Weiss, who is chairwoman and CEO of the newly rechristened MetLife Bank. For example, it could invite policy holders to deposit proceeds from an insurance claim into a MetLife bank account, allowing the company to keep the money and the customer contact. It also wanted to buy a small bank to avoid acquiring “a lot of infrastructure,” Ms. Weiss added. Relatively speaking, the bank MetLife bought, Grand Bank in Princeton, N.J., could not be much smaller. Its $84 million in assets represents about .03 percent of MetLife’s assets of $258 billion. “It is advisable to get into a new business in digestible bites,” Smith said. The next step, which took over a year and a half, was demutualization, or converting from mutual to stock form. Traditionally, insurance companies such as MetLife are mutual firms owned by their policy holders. But this arrangement presents difficulties in the context of an acquisition because the company has no stock to barter. And in the context of a merger, because it is not publicly traded, it is hard to get a sense of a company’s worth, Smith explained. A few months after completing demutualization, MetLife bought Grand Bank last August, “subject to regulatory approval.” It then applied for status as both a bank holding company (BHC) and an FHC: the former to offer banking services and the latter to provide diversified financial services. And it had to have the bank in tow to make the filing with the Federal Reserve, Smith said. Under the act, MetLife had to show that it met a number of criteria, including its financial and managerial bona fides, the absence of anticompetitive concerns and the benefit of the transaction to the bank’s community. The process turned out to be a learning experience for both the company and the agency, Smith said. After the regulators digested the initial application, they came back with a series of pointed questions. The inquiry had a distinctly informational flavor to it, as the regulators, who had never dealt with an insurance company before, worked hard to understand how it operated. They first focused on the specifics of MetLife’s business portfolio, and then turned to how MetLife, as an insurance company as opposed to a bank, assessed risk. Insurance regulations also came under scrutiny as part of the agency’s attempt to get its arms around the industry, Smith said. THREE-YEAR PLAN The company also has to file a three-year business plan with the Office of the Comptroller of the Currency (OCC). That agency seemed interested mainly in whether, in its opinion, the business plan was viable, Smith said. Overall, there was a “palpable novelty” to the application process, Smith said. He sensed a concern on the agency’s part that it was setting a precedent for future applications. For a new procedure, it went quickly, Smith said. The regulators extended the published time frame of 60 days a couple of times, so overall it took about three months, not including holidays. Smith, who has 30 years of regulatory background, came from the experience with only good words for the Federal Reserve regulators. “They were open to a true understanding of what is going on,” he said, adding, “In that respect it was a shared cooperative experience.” He too learned from the encounter. “It is amazing how illuminating this was,” he said. FOLLOWING IN FOOTSTEPS? Although the GLB regulatory process has now been tested and found to be sound, the jury is still out on whether others will soon follow in MetLife’s footsteps. The slow pace of post-GLB change in the financial services industry has been ascribed not just to fear of the “Fed” but also to a depressed market and the availability of other means by which companies can carry out many of the same activities sanctioned by GLB. The poor stock prices of banks and insurers dampens deal-making in two ways. First, boards of directors are reluctant to sell at a discount or, on the flip side, buy a company that will dilute their company’s shares. Second, the soft market has created a cash crunch. And companies are allocating the cash they do have to an Internet presence. Despite the uncertainties presented by the Internet, no one wants to be left behind. Another reason for the languid corporate response to GLB is that many companies did not wait for its passage before branching out into other financial services. Federal Reserve Board member Laurence H. Meyer declared this to be the main cause for the lack of GLB activity among large corporations. “The financial service revolution has always been more of an evolution,” he said. He added that “when GLB was passed, no backlog of new business concepts just lay in wait for the legal shackles to be broken; markets and deregulation had already moved financial organizations pretty much to where they wanted to be.” And regulatory process aside, no strategic business decision by a large corporation happens overnight. For example, on the insurance side, demutualization, a necessary first step before firms can merge, buy or be bought by other firms, can take many months or even years. Still, there is some rustling among the leaves. Another insurance company, ULICO, recently applied to buy a small bank. Charles Schwab, the broker-dealer, also recently bought a commercial bank and became an FHC. And a small number of large FHCs have purchased securities firms since GLB’s enactment. And now that MetLife and a few others have pioneered the GLB process, “maybe the ice will start to break a little bit,” Smith surmised.

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