One-stop shopping for financial transactions is becoming more of a practical reality for investors with recent law changes. On November 12, 1999, President Clinton signed into law the Financial Services Modernization Act. In Nevada, the act affects not only the Secretary of State’s office in the Securities Division, but also the Insurance Division and the Financial Institutions Division and how Nevada coordinates regulatory and licensing issues.
What is the Financial Services Modernization Act? The bill expands upon the financial services that banks can offer. It may not have always been apparent but banks were not authorized to offer and sell securities or insurance products to the public under the 1933 Glass-Steagall Act and the Bank Holding Company Act of 1956. The appearance that banks engaged in securities sales was created because banks sold securities through separate non-banking entities, licensed through the Securities Division that conducted business at the same physical location as the bank. This bill now allows banks to conduct those activities directly with their depositors.
How does this affect the Securities Division? State securities laws are not preempted and the Nevada Securities Division retains the ability to investigate and enforce the securities laws including requiring registration of securities and licensing of securities brokers, dealers and investment advisers and associates. If a bank decides to offer securities directly to the public and not through a licensed subsidiary, the bank could be required to become licensed as a broker dealer. This activity could subject the bank and its affiliates to the same regulation as all other providers of securities products. The bill repeals the exclusion under which banks are not within the definition of broker dealer under federal securities laws. Therefore, in order to conform to federal regulation, it may be necessary to introduce legislative changes in future Nevada sessions to bring banks under the provisions of our securities laws.
One of the interesting aspects of this bill is that it contains some restrictions on the disclosure of nonpublic personal information of depositors. During the negotiation of the final bill, it was made apparent that personal information of depositors would not be kept as confidential as consumers might wish. The bill directs the relevant federal regulators to establish standards for ensuring the security and confidentiality of consumers’ personal information maintained by financial institutions and establishes that violations of these standards are a federal crime punishable by up to five years in prison. However, the bill allows for some sharing of information within subsidiaries to provide services to clientele.
At first, the bill may appear to have very little affect on the investing public of Nevada. Most banks currently have a subsidiary that handles the securities and/or insurance products sold to their clientele. These subsidiaries are required to license through the Securities Division and/or Insurance Division. This will probably not change. What the federal bill does is eliminate barriers for bank holding companies to affiliate with other banks and securities firms, insurance companies and other financial service providers. However, functional regulation by existing regulatory agencies remains in place at both the federal and state levels. In Nevada, securities activities will be regulated by the Securities Division, banking activities will continue to be regulated by Financial Institutions Division, and insurance activities will be regulated by the Insurance Division.
The trend of the financial services industry is to make available “one-stop shopping” for investments and financial planning. We see this in banking with telephone transactions, online banking and more services available through ATM5. The brokerage industry has had touch-tone telephone transactions services available for sometime now. Online securities accounts are growing at an astounding rate. With the removal of restrictions now opening the way for banks to enter the securities and insurance industries, the next step may be that transactions of any financial nature can be completed via the telephone, personal computer or even using ATMs.
Concerns exist whether investors will take the time to do the research needed to make informed decisions. Education of the public is a key factor, because an informed investor is less likely to get ripped off. A number of brokerage firms are proactive in this endeavor and provide investors with educational and research information on their Web sites.
Despite the high-tech benefits and convenience introduced with one-stop financial services shopping, the basic principals of safe investing still exist: know what you are purchasing and know the firm and individual with whom you are dealing. The Securities Division will continue to have that information available on every firm and individual that conducts business with Nevada residents. Visit the Secretary of State’s Web site, sos.state.nv.us, to find educational information, a list of materials, as well as a calendar of programs available to investors.