NCPA - National Center for Policy Analysis

Repealing The Glass-steagall Act

August 26, 2002

Two of the most significant prohibitions passed in 1930s were the Glass-Steagall Act's requirement that commercial banking firms not engage in securities underwriting, and the 1933 Securities Act's requirement that only securities registered with the Securities and Exchange Commission can be made available for sale to the public.

Despite the fact that elements of Glass-Steagall have been eliminated, some observers believe it is time to repeal the act altogether, because it creates international complications and needless costs.

  • Because the foreign offices of U.S. investment banks were not subject to the Act, they often followed the local practice of affiliating with a commercial banking organization.
  • Those variations in local practice made it difficult for an investment bank to play a uniform role in all phases of a global offering.
  • In the same way, the requirement that a public offering be registered in the United States, but not in other jurisdictions, creates difficulties in proceeding with a global offering on a uniform basis.
  • The typical result that the entire global offering is held hostage to the U.S. timetable.

The Glass-Steagall Act proved costly to firms attempting to prove their transactions did not violate the prohibitions. The firms also absorbed continuing compliance costs as they attempted to ensure that they did not cross the line between simply engaging, and engaging "principally."

Similarly, the 1933 Act's requirement that stocks sold to the public be registered with the SEC has placed significant costs on issuers and underwriters who must decide whether to register or use an exemption.

Lawmakers should consider reforming the laws governing the investment system that fuels the nation's economic growth, observers say.

Source: Edmund W. Kitch, "Readying for More Reform," Regulation, Spring 2002, Vol. 25, No. 1, Cato Institute.

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