The repeal of the Glass-Steagall Act in November has not spurred consolidation in the financial services industry yet, but it may expand distribution for one mutual fund group soon.
Executives at the Warburg Pincus Funds of New York believe that the repeal of Glass-Steagall and their parent firm's recent designation as a financial holding company will provide new business opportunities for the Warburg Pincus Funds and the funds' adviser, Credit Suisse Asset Management LLC of New York. Those opportunities include potentially tapping into the money management expertise and high-net-worth client base of Credit Suisse Asset Management's affiliate, Credit Suisse First Boston of New York, said Eugene Podsiadlo, president of Warburg Pincus Funds and managing director of Credit Suisse Asset Management.
"There are a lot more resources in terms of research and there's also substantial distribution resources," Podsiadlo said of the Credit Suisse First Boston relationship.
Credit Suisse Asset Management had approximately $72 billion in assets under management as of March 31, according to a spokesperson. That includes assets in 35 retail funds. The firm also has the Warburg Pincus Large Company Growth Fund in registration with the SEC.
Credit Suisse First Boston is a bank, a status which under Glass-Steagall forced it to keep much of its business separate from Credit Suisse Asset Management, Podsiadlo said. The Glass-Steagall Act, enacted during the Depression, prevented companies from combining banking, insurance and securities underwriting businesses. The Gramm-Leach-Bliley Act, which Congress passed in November, eliminated Glass-Steagall's prohibitions for companies that the Federal Reserve Board of Governors designates as financial holding companies.
The Federal Reserve designated Credit Suisse Group of Zurich, Credit Suisse Asset Management's parent, and Credit Suisse First Boston as financial holding companies in March, Warburg Pincus executives said. Those designations will allow Credit Suisse Asset Management and Credit Suisse First Boston to cross-sell products, an activity that had been largely prohibited prior to the passage of Gramm-Leach-Bliley, Podsiadlo said.
Credit Suisse Asset Management executives and their counterparts at Credit Suisse First Boston have formed a committee to identify the cross-marketing opportunities, Podsiadlo said. Although no plans have been finalized, the group is examining strategies to broaden the distribution of Credit Suisse Asset Management's products to high-net-worth clients that Credit Suisse First Boston serves, Podsiadlo said. For example, Credit Suisse Asset Management now no longer is barred from managing money market funds that serve Credit Suisse First Boston's brokerage clients, Podsiadlo said.
The committee also is considering how Credit Suisse Asset Management could tap into Credit Suisse First Boston's research and investment management capabilities, Podsiadlo said. Because of the financial holding company designation, Credit Suisse First Boston could serve as an adviser or sub-adviser for Warburg Pincus mutual funds, he said.
"I think it will be a big deal for Warburg Pincus Funds," Podsiadlo said of the financial holding company designation.
The Federal Reserve has designated more than 100 bank holding companies and foreign banks as financial holding companies. Banks obtain the designation by certifying to the Federal Reserve that they meet capital requirements and satisfy the Community Reinvestment Act, banking and mutual fund lawyers said. Many of the newly-designated financial holding companies are small or have limited presence in the mutual fund industry. However, the list includes Citigroup of New York, Bank of America of Charlotte, N.C. and Fleet Financial of Boston, each of which has a notable mutual fund presence. Representatives of those firms with knowledge of the banks' plans as a result of the financial holding company designation were not available for comment.
The repeal of Glass-Steagall and the financial holding company designation will provide banks more flexibility in how they run the mutual fund operations of their affiliates, said Jay Baris, a partner with Kramer Levin Naftalis & Frankel LLP of New York. Prior to the repeal of Glass-Steagall, for example, banks needed to hire an unaffiliated firm to underwrite their mutual funds. Financial holding companies now have the ability to do banking business and underwrite funds under one roof. That could reduce costs and increase flexibility for bank funds, Baris said. It will take banks time to take advantage of the new law in their mutual fund operations, Baris said.
"You're not going to see any dramatic change in the near term," Baris said. "It will be a slow change."
One change that had been expected as a result of Gramm-Leach-Bliley - consolidation in the financial services sector - has been slow to occur. Consultants and attorneys attributed that in part to uncertainties about computer systems in December and January due to Y2K computer programming concerns and the comparatively low valuations for financial services firms' stock this year.