[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
  RISKY BUSINESS IN THE OPERATING SUBSIDIARY: HOW THE OCC DROPPED THE 
                                  BALL

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 25, 1999

                               __________

                           Serial No. 106-37

                               __________

            Printed for the use of the Committee on Commerce



                     U.S. GOVERNMENT PRINTING OFFICE
58-493 CC                    WASHINGTON : 1999





                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

              Subcommittee on Oversight and Investigations

                     FRED UPTON, Michigan, Chairman

JOE BARTON, Texas                    RON KLINK, Pennsylvania
CHRISTOPHER COX, California          HENRY A. WAXMAN, California
RICHARD BURR, North Carolina         BART STUPAK, Michigan
  Vice Chairman                      GENE GREEN, Texas
BRIAN P. BILBRAY, California         KAREN McCARTHY, Missouri
ED WHITFIELD, Kentucky               TED STRICKLAND, Ohio
GREG GANSKE, Iowa                    DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  JOHN D. DINGELL, Michigan,
ED BRYANT, Tennessee                   (Ex Officio)
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Alpert, Jonathan L., Senior Partner, Alpert, Barker, and 
      Rodems.....................................................    13
    Crawford, Denise Voigt, Securities Commissioner, Texas State 
      Securities Board on behalf of North American Securities 
      Administrators Association.................................     4
    Griffin, Mary, Insurance Counsel, Consumers Union............     8
    Williams, Julie L., Chief Counsel, Office of the Comptroller 
      of the Currency............................................    76
Material submitted for the record by:
    Securities and Exchange Commission, prepared statement of....    86
    Williams, Julie L., Chief Counsel, Office of the Comptroller 
      of the Currency, letter dated July 8, 1999, to Hon. Tom 
      Bliley, enclosing response for the record..................    95

                                 (iii)

  


  RISKY BUSINESS IN THE OPERATING SUBSIDIARY: HOW THE OCC DROPPED THE 
                                  BALL

                              ----------                              


                         FRIDAY, JUNE 25, 1999

                  House of Representatives,
                             Committee on Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, Burr, Bilbray, 
Whitfield, and Green.
    Staff present: Duncan Wood, professional staff member; 
David Cavicke, majority counsel; Amy Davidge, legislative 
clerk; and Chris Knauer, minority investigator.
    Mr. Upton. Good morning everyone, and we are today holding 
a hearing on crucial consumer protection issues raised by the 
Office of the Comptroller of the Currency, the OCC's role, in 
overseeing securities-related activities in banks. This 
subcommittee is a strong supporter of the investor protections 
provided to the public by the securities laws and has serious 
concerns about OCC's supervision of bank operating subsidiaries 
that sell securities to bank customers.
    The primary mission of the securities regulators is to 
enforce the securities laws which are designed to ensure that 
investors receive adequate disclosure and information from the 
brokers, and to safeguard against consumer, customer confusion.
    In contrast, the OCC's primary mission is not investor 
protection, but rather ensuring the safety and soundness of 
national banks. Today's hearing is particularly timely because 
probably next week the House will vote on H.R. 10, otherwise 
known as the Financial Services Act of 1999, and unless the 
bill is amended on the floor or in the Rules Committee, it will 
allow banks to conduct the full range of securities activities 
within an operating subsidiary from retail sales of mutual 
funds to securities underwriting, and even merchant banking.
    Given the track record of the OCC's supervision of 
operating subsidiaries, aspects of which we will discuss today, 
Members of Congress should question the wisdom of any bank 
bill, that allows bank operating subsidiaries to expand their 
securities activity and undercut the long standing principles 
of fully functional regulation of securities and regulatory 
protection against the intermingling of commercial banking and 
securities.
    The OCC's mission is to promote the safety and soundness of 
the national banking system. According to the comptroller's 
hand book, the OCC's philosophy is to provide high-quality bank 
supervision based on a nonintrusive cooperative process between 
bankers and examiners which adds value to the supervised 
institution.
    In today's hearing, we will review whether the bank 
regulators' mission and philosophy offers investors the same 
level of protection as the security regulators provide. We also 
look at cases where securities fraud has occurred in the bank 
operating subsidiary in order to find out whether OCC's 
guidelines, examinations and ratings constitute an adequate 
substitute for fully functional regulation of securities by the 
SEC and the State Securities Commissioners.
    There are three issues with which I'm concerned. The first 
is that the OCC didn't interview any victims of the Op. Sub. 
fraud from whom they received complaints. Their investigation 
was limited to talking to the folks who supervised the fraud. 
Second is NationsBank received a rating of two, or 
satisfactory, the year the Op. Sub. committed this fraud.
    Hundreds of elderly investors were bilked out of their 
savings out of the Op. Sub. The OCC found the strongest levels 
of compliance were noted at Nation's Securities in a December 
2, 1993, report by OCC examiners when the Op. Sub. was engaging 
in fraud. If an Op. Sub. is defrauding hundreds of elderly 
people and your rating is satisfactory, what do you have to do 
to get a bad grade?
    And third, the OCC fined NationsBank $750,000 for a failure 
to supervise the Op. Sub. In the context of a fraud that bilked 
so many folks of more than $100 million, there is little 
deterrent if the fine is so small.
    For today's hearing, the first panel will consist of a 
State securities' regulator, a spokesperson from the Consumers 
Union, a civil attorney involved in the NationsBank case and 
other cases regarding security violations in operating 
subsidiaries. The second panel features Julie Williams, chief 
counsel and former acting comptroller of the OCC.
    I welcome all of our witnesses, and thank you for your 
contribution to this timely hearing on investor protection 
issues. And I yield to the vice chairman of this subcommittee, 
Mr. Burr, for an opening statement.
    Mr. Burr. Thank you, Mr. Chairman. I would really like to 
take this opportunity to raise questions about the purpose and 
direction of this morning's hearing, as well as the relevance 
of what I understand to be the purpose of today's witnesses. 
I'm also concerned that there are no banks, particularly 
NationsBank, here and neither were they invited to testify 
before the subcommittee.
    I've been told they weren't invited because there was a 
desire on the part of the committee to prevent this hearing 
from becoming an inquisition into the past activities of banks 
that sell securities and other financial instruments.
    However, based on our witnesses' testimony this morning, 
this is not an inquisition; it is a sentencing trial. If this 
hearing is meant to examine the role of the OCC in regulating 
the activities of banks as it operates in regards to operating 
subsidiaries, why hold the hearing now?
    If questions remain about potential problems in operating 
subsidiaries, they should have been addressed by this committee 
before we proceeded with the markup and before we voice voted 
H.R. 10 out of committee, because I understand from the 
legislative language of the committee report on H.R. 10, 
operating subsidiaries were addressed.
    Most of today's testimony, however, seems to center around 
questionable sales practices that took place years ago for a 
short period of time in a joint venture that no longer exists. 
Settlement in that case was reached over a year ago to resolve 
the matter.
    I'm also concerned about our new interest in the operations 
of the OCC and potential criticism based on the title of this 
hearing that they dropped the ball.
    Does that title refer simply to one case, or are they in 
the process of continually dropping the ball? Based on OCC's 
written testimony as well as the SEC, they're doing a fine job 
in their efforts to regulate the activities of operating 
subsidiaries today, which leaves us with one review of one 
incident. Are we going to criticize the OCC for moving too 
slowly in the NationsBank case? Based on their testimony, I get 
the impression they moved along pretty well in that 
investigation.
    If speed is an issue in these investigations, Mr. Chairman, 
perhaps it's time we turn the efforts of this subcommittee to 
turning up the heat as it relates to the Department of Energy's 
labs and not on legislation we've already passed. I thank the 
Chair.
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    In our work modernizing financial services laws, we have 
encountered one truly bad idea--the Administration's demand to expand 
the power of operating subsidiaries, giving the Treasury control over 
the financial markets.
    Our financial markets have thrived because of their independence. 
Unlike Asia with its crony capitalism and conflicts of interest, 
America has avoided expansion of taxpayer subsidy from banking to the 
capital markets.
    Alan Greenspan has indicated that operating subsidiaries pose 
serious risks to banks and to their deposit insurance funds. Op-Subs 
threaten to infect America with this crony capitalism. Op-Subs expand 
taxpayer subsidiary from banks to securities and merchant banking. 
Securities firms are not in need of a taxpayer handout.
    Still, the Administration persists in its turf grab against the 
interests of efficient free markets.
    Today the O&I subcommittee will take a look at the OCC's 
supervision of existing Op-Subs. The Treasury wants more power for op-
subs. Today we pose a simple questions--How are they doing with the 
one's they have?
    The answer is disturbing. In the wake of massive fraud in an 
operating subsidiary of NationsBank, the OCC rated NationsBank's 
compliance with its guidance as satisfactory.
    The OCC did not investigate customer complaints arising out of the 
fraud. They limited their discussions to the persons who perpetrated 
the fraud.
    When approached by elderly investors who had been defrauded by the 
op sub, the Comptroller indicated that it could be of no assistance 
because the matter was the subject of private litigation.
    Hundreds of elderly people were defrauded by the NationsBank op 
sub. Over $40 million was paid to settle private claims. The OCC gave 
NationsBank a satisfactory rating the year of this fraud. An operating 
subsidiary is part of a bank. Its profits are the bank's, its losses 
are the bank's. The OCC apparently did not think that this fraud 
merited a lower rating for the bank. I wonder what they would have had 
to do to fail their exam.
    The Subcommittee has found evidence that the OCC is failing to 
oversee the limited Op-Subs that exist today. Given this record, 
expanding Op-Subs would be reckless.
    I commend Chairman Upton for this hearing, and yield back the 
balance of my time.

    Mr. Upton. Thank you. We welcome the witnesses. Before us 
we have a ruling in the subcommittee that we swear in our 
witnesses. Do any of you have any objection to that? We also 
have a standard rule that you're welcome to have counsel if you 
so desire. Do any of you need counsel? I didn't think so. If 
you would stand and raise your hand.
    [Witnesses sworn.]
    Mr. Upton. Ms. Crawford, we will start with you. We have 
your testimony, which will be made a full part of the record. 
And we would like you to limit your oral testimony to 5 
minutes, if you can. And this little fancy smanchy timer will 
keep track of that for us.
    Go ahead.

 TESTIMONY OF DENISE VOIGT CRAWFORD, SECURITIES COMMISSIONER, 
   TEXAS STATE SECURITIES BOARD ON BEHALF OF NORTH AMERICAN 
SECURITIES ADMINISTRATORS ASSOCIATION; MARY GRIFFIN, INSURANCE 
   COUNSEL, CONSUMERS UNION; AND JONATHAN L. ALPERT, SENIOR 
              PARTNER, ALPERT, BARKER, AND RODEMS

    Ms. Crawford. Good morning, Mr. Chairman and members of the 
subcommittee. My name is Denise Voigt Crawford. I am the Texas 
securities commissioner and the immediate past president of the 
North American Securities Administrators Association, which is 
the entity that is the national voice of State securities 
regulators. By way of background, NASAA has testified on a 
number of occasions regarding financial services modernization.
    State securities regulators have welcomed banks and 
insurance companies into the securities business; however, we 
believe that modernization efforts should be congressionally 
dictated rather than accomplished via regulatory fiat. And to 
that end, we commend you, Chairman Upton, as well as your 
colleague, Congressman Klink, for holding this hearing.
    Back in 1996, the Texas State Securities Board brought a 
very important and unprecedented enforcement case in the 
NationsBank's matter. Our investigation and subsequent 
enforcement action exposed numerous violations of State 
securities laws, including among others the following.
    First, fraudulent misrepresentations. Bank customers were 
told that their highly volatile investments were FDIC insured, 
risk-free alternatives to certificates of deposit. This was 
absolutely false.
    Second, lack of suitability. The securities were 
aggressively marketed to elderly customers of the bank and to 
those whose risk tolerance clearly indicated that they were 
unsuited for such risky investments.
    Third, an appalling lack of supervision in an atmosphere 
particularly conducive to confusion, customers could not even 
determine who they were dealing with. Were they dealing with an 
agent of the broker/dealer subsidiary, or were they dealing 
with an employee of the bank? They simply could not tell.
    And particularly disturbing, especially in view of events 
that have occurred over the last few days, is the sharing of 
private customer information with the broker/dealer subsidiary 
on the part of the bank and simply to increase sales.
    This was done in connection with a so-called bank referral 
incentive program, whereby bank personnel were compensated to 
turn certain identified customers over to the broker/dealer 
subsidiary. For example, customers whose CDs were about to 
mature or customers who had made recently large deposits in 
their accounts were referred over pursuant to this program and 
referral fees were paid.
    There's no question that banking regulators do a great job 
in assuring the safety and soundness of the institutions. 
However, banking regulations do not mandate the screening, 
testing or licensing of bank employees. Banking regulations do 
not mandate that banks and their employees make full and fair 
disclosure of all material facts regarding a bank-sponsored 
investment product. Banking regulations do not provide wrong 
purchasers with private rights of action. And these are but 
some of the failings of the banking regulatory system as it 
relates to bank sales of securities.
    To dispense with these protections is clearly a recipe for 
disaster. To try to duplicate within the banking regulatory 
structure of the framework of securities regulation is 
unnecessarily duplicative and extremely costly. Fortunately, 
it's unnecessary to do this. Functional regulation where the 
expert regulator oversees the activities that fall within the 
area of that regulator's expertise is the best and least 
expensive approach.
    In conclusion, NASAA's position is that the SEC and State 
security regulators should be the only primary regulators of 
the bank securities activities regardless of where or how 
security sales take place. The experts should be the ones in 
charge.
    Thank you for your kind attention, and I would be happy to 
answer any questions that you might have.
    [The prepared statement of Denise Voigt Crawford follows:]
 Prepared Statement of Denise Voigt Crawford, Securities Commissioner, 
  Texas State Securities Board on Behalf of North American Securities 
                    Administrators Association, Inc.
    Chairman Upton and Members of the Subcommittee: I am Denise Voigt 
Crawford, the Texas Securities Commissioner and Past-President of the 
North American Securities Administrators Association 
(``NASAA'').1 I commend you and Congressman Klink for 
conducting these hearings, and I appreciate the opportunity to discuss 
several important issues associated with the regulatory oversight of 
securities activities at banks.
---------------------------------------------------------------------------
    \1\ The oldest international organization devoted to investor 
protection, the North American Securities Administrators Association, 
Inc., was organized in 1919. It is a voluntary association with a 
membership consisting of the 65 state, provincial and territorial 
securities administrators in the 50 states, the District of Columbia, 
Canada, Mexico and Puerto Rico. In the United States, NASAA is the 
voice of the 50 state securities agencies responsible for grass-roots 
investor protection and efficient capital formation.
---------------------------------------------------------------------------
    NASAA has testified before Congress over the years to support 
congressionally directed financial services modernization that will 
protect investors and preserve faith in the integrity of our securities 
markets.
    With a record number of households investing in the securities 
markets, investor protection, the basis for confidence in the 
securities markets, should be a top priority as Congress moves forward 
with legislation that reforms our financial services markets. We hope 
our expertise and experience as state securities regulators will be 
useful to you.
    Our federal counterparts at the Securities and Exchange Commission 
(``SEC'') tend to focus on the oversight of large corporate offerings 
and the globalization of the marketplace. State securities regulators, 
on the other hand, are closest to the investing public and serve as the 
local cops on the beat.
                         functional regulation
    NASAA strongly supports and upholds the ideals of functional 
regulation of securities activities and products. We believe it is a 
core element of investor protection.
    We welcome banks, as well as insurance companies, into the 
securities business, but under the same complementary state/federal 
securities oversight system. We believe it neither rational nor 
plausible to adopt a course calling for federal banking regulators to 
recreate within their ranks and walls the essential enforcement 
culture, regulatory schemes and systems essential to monitor securities 
activities and, more specifically, police abusive securities sales 
practices. It is completely impractical to expect them to do so in the 
near term and to the extent provided by the NASDR and other SROs, the 
SEC and the states. Even an attempt would be unnecessary, constituting 
a wasteful duplication of resources and money, and the dismissal of 
decades of proven securities regulatory experience.
    Residents of our states investing in securities should receive the 
same disclosures and have the same investor protections whether they 
invest through a broker-dealer, a bank, an insurance company or a 
mutual fund. Those who sell securities should be subject to the same 
licensing qualifications and oversight whether their employer is a 
bank, an insurance company, a securities firm, or something else.
                       the nationssecurities case
    Actions taken by state securities regulators in Texas in 1996 and 
Florida in 1997 exemplify the unique problems and risks to consumers 
posed by retail securities sales operations affiliated with and 
operating on the premises of banks. These actions also underscore the 
benefits of functional regulation of these affiliates or subsidiaries 
by state securities regulators.
    Texas and Florida securities authorities received numerous investor 
complaints regarding securities sales activities of NationsSecurities, 
a registered broker-dealer subsidiary of NationsBank. As a result of 
their investigations, Texas and Florida securities regulators brought 
enforcement actions in which they alleged NationsSecurities 
misrepresented the safety and risks associated with a particular 
investment vehicle.
    In the Texas action, among the investors involved were NationsBank 
depositors who had been targeted because they wanted higher returns on 
their money than what was provided by certificates of deposit. 
NationsBank proprietary investment products (whose title included the 
words ``Government Income Term Trust'') were marketed to them, in some 
cases with the misrepresentations that investments were safe, 
conservative, low risk, and high yield, backed by AAA-rated government 
securities. In fact, the investments were risky and volatile, involving 
derivatives based on collateralized mortgage obligations. Shortly after 
these products were sold to unsuspecting investors, their value 
declined sharply.
    In a settlement reached with the Texas State Securities Board, 
NationsSecurities was required to make offers of rescission to 
investors and undertake significant compliance enhancements. The firm 
also provided $275,000 in funding for an extensive Texas investor 
education program. Subsequent settlements were reached with Florida 
securities authorities ($250,000) and with the SEC ($4 million fine), 
National Association of Securities Dealers--Regulation, Inc. 
(``NASDR'') ($2 million fine, three individuals fined, suspended and 
censured) and the Office of the Comptroller of the Currency (``OCC'') 
($750,000 fine) on related issues. Private class action suits were 
settled as well, according to press reports, for nearly $40 million.
    In his Business Week Commentary of May 18, 1998, David Greising 
discussed both the NationsBank settlements and the need for functional 
regulation of securities activities at banks.
          The abusive atmosphere at the securities division of 
        NationsBank Corp. in the early 1990s was shocking even for 
        veteran stockbrokers. Working at the bank's branches, they were 
        told to hawk NationsBank's investment products to bank 
        customers without explaining that they were brokers, not 
        bankers.
          . . . The case shows how difficult is it to regulate 
        stockbrokers working for banks, in part because bank regulators 
        usually lack the skills or the inclination to root out 
        securities fraud.
          . . . Banks have pushed to stay under the umbrella of banking 
        regulators, who have precious little experience with brokerage 
        derring-do. But in an era when every ambitious bank is copying 
        the playbook of Merrill Lynch & Co., not J.P. Morgan & Co., 
        that's a recipe for regulatory undersight. It leaves regulators 
        unable to stop sleazy selling practices by stockbrokers dressed 
        in bankers' pinstripes.2
---------------------------------------------------------------------------
    \2\ 2David Greising, ``Commentary,'' Business Week, May 18, 1998, 
p. 154
---------------------------------------------------------------------------
    It is well known and often repeated that the essential goals of 
banking regulation are safety and soundness of the banks, while the 
essence of securities regulation is protection of the investor. These 
are very different premises; and as distinct as the systems and skills 
required to achieve them.
    Banking regulation imposes broad financial reporting requirements 
and limitations, and relies upon auditors and examiners to review both 
the adequacy of the finances and the level of regulatory compliance. It 
is very much geared to accounting and analysis. To avoid the worst of 
all banking nightmares, a run on the bank, secrecy and confidentiality 
are paramount concerns. The regulators make sure that depositors' 
confidence in the solvency of their institutions is maintained.
    Traditional banking regulation does not include any concept of the 
screening, testing or licensing of banker employees. Traditional 
banking did not include the concept of selling investment products on a 
commission basis. Banking regulation contains no direct mandate that 
banks must make--and see to it that their employees make--full and fair 
disclosure of all material facts regarding a bank-sponsored securities 
product or risk regulatory sanction. Banking regulators do not have a 
system in place to track bank employees who may move from one bank to 
another, perhaps without disclosing past customer-related problems. 
They cannot track such people, nor is there a database available for 
the public to access to make inquiry on their own. Banking regulation 
does not provide private rights of action for wronged purchasers of 
investments, nor is there established any means of alternative dispute 
resolution. Sanctions imposed on banks for banking law and regulatory 
violations are generally not publicized, probably because to do so 
could or would undermine the safety and soundness of the institution.
    The complementary state/federal securities oversight system, in 
conjunction with the self-regulatory organizations, provides all of 
those features in its regulation of securities sales activity.
    Finally, as the NationsSecurities and subsequent enforcement 
actions make clear, banking customers remain confused and highly 
susceptible to believing that securities investments offered and sold 
to them at banks are somehow insured against loss by federal deposit 
insurance. This potential for misunderstanding means that it is even 
more important for bank-sited brokerage personnel to provide potential 
investors with clear disclosure relating to the investment products 
they consider purchasing from the bank rather than at more traditional 
broker-dealers.
    Another issue of concern relating to bank sales of securities 
involves bank customers' rights to privacy and cross marketing 
practices. For example, a securities customer phoning or visiting the 
office of his or her securities broker-dealer does not expect to be 
referred to a desk where products federally insured against loss are 
available. Can the same be said for a bank depositor visiting his or 
her bank branch to make a deposit or renew a CD who is directed to a 
salesperson located on the bank floor and offered a ``government backed 
fund?''
                      pending federal legislation
    Most retail securities activity currently conducted on bank 
premises is conducted through broker-dealers registered with and 
regulated by state and federal securities authorities. We believe this 
should remain the norm. As the bills before both Houses of Congress are 
given further consideration, NASAA would request that certain key 
concepts be included to maintain the current level of investor 
confidence in the U.S. securities markets. There has been significant 
and consistent support to preserve and give full force and effect to 
state securities enforcement authority in any final legislation under 
consideration to become law. In addition, full functional regulation 
should be required of securities products as well as securities 
personnel in any entity where securities sales occur. Also important, 
any modernized financial services law should require the functional 
regulation of all entities or persons performing similar, if not almost 
identical, services in order to protect all investors equally.
    In conclusion, it is undeniable that financial markets and services 
are blending. Regulators have met and will continue to meet the 
challenges of coordinating efforts to achieve the greatest good at the 
lowest cost. But as securities regulators, our prime directive remains 
investor protection, not cutting costs. Synergies will continue to 
develop among corporations and regulators in dealing with macro issues 
of major conglomerates and international mergers. Retail investment 
consumers need the protection not so much from conglomerates and global 
mergers, but from overaggressive and abusive salespeople who would take 
advantage of their confusion and concerns; protections that state 
securities regulation, functional regulation, afford.
    Thank you for your kind attention.

    Mr. Upton. Thank you very much.
    Mrs. Griffin.

                   TESTIMONY OF MARY GRIFFIN

    Mrs. Griffin. Thank you. Thank you, Mr. Chairman and Mr. 
Burr, for the opportunity to present the views of consumers 
about consumer and investor protection regulatory issues in 
today's financial services marketplace. My name is Mary 
Griffin, and I am counsel with Consumers Union. And in our 
written testimony which we submit for the record outlines the 
problems and needed solutions for consumers facing confusion 
and risk in the world of one-stop shopping, but I will just 
highlight briefly the obstacles presented by our regulatory 
system.
    As the financial services market has consolidated, huge 
money centers peddling an array of products taunt one-stop 
shopping as a boom for consumers. As you will hear from Mr. 
Alpert, this boom can and has turned into a bust for many 
consumers. Consumers mislead and deceived about the nature and 
risk of products that they purchased from their once-trusted 
federally backed banking institution now face the risk of 
losing the very savings they were trying to protect.
    The changes in the market have been fostered by Federal 
regulators expanding bank powers. While studies and cases over 
the years provide ample evidence of the need to maintain clear 
separation between banks' insured and uninsured activities, 
strong disclosure of the nature and risk of uninsured products, 
anticoercion rules and other safeguards, Federal bank 
regulators have failed to provide these protections. Instead, 
they chose to issue guidelines to the banks rather than legally 
enforceable rules.
    We believe guidelines send a wink and a nod to the banks as 
opposed to a strong message of no tolerance for deception and 
unfair dealing. We have urged the OCC and other agencies to 
issue rules, rules with teeth. Even former Comptroller Ludwig 
recognized the need for such rules before he left and urged the 
interagency task force, the FFIEC, to move forward on 
rulemaking; but to date, no rulemaking has been put forth.
    And as you know, banks are currently exempt from investor 
protection rules, an outdated rule that must be repealed if 
investors are to feel safe purchasing securities from banks.
    In addition to dropping the ball on issuing needed rules, 
Federal regulators have also been meddling in the affairs of 
States and their consumer protections. The OCC has issued 
several opinion letters over the years that permit banks to 
ignore State consumer laws, even where there are no Federal 
laws providing the protections.
    Congress even admonished the Federal banking agencies in 
the conference report of the 1994 Riegle-Neal interstate 
Branching Act, stating that their application of preemption 
principals was ``inappropriately aggressive resulting in 
preemption of State law in situations where the Federal 
interests did not warrant it.''
    One of those preemption actions by the OCC involved New 
Jersey's lifelong bank account law which the OCC let national 
banks ignore. The New Jersey Banking Commission petitioned for 
review of that decision in 1996. The OCC to date has failed to 
take action on that case to reverse their overly broad 
preemption substance.
    The OCC's latest State activities are in Connecticut and 
Iowa where they furthered national bank attempts to overturn 
authority of States to enact and enforce ATM surcharge banks.
    Another area where we feel the OCC and other agencies may 
drop the ball is financial privacy. While both former acting 
Comptroller Williams and Comptroller Hawk have made strong 
statements about the banking institution's poor performance in 
the area of protecting customer's privacy, we have not heard 
them get out and support the privacy protections passed by this 
committee in H.R. 10 a few weeks ago.
    We hope the OCC will do so today, since what was passed by 
the committee a few weeks ago is consistent with and supported 
by the administration's own financial privacy policy announced 
last month. We commend this committee for its action on 
financial privacy in H.R. 10.
    As you know, the good progress this committee made by 
getting consumers some level of control over their financial 
information with notice and opt-out for affiliate and third-
party sharing is under an all-out attack by an unusual alliance 
of banking, insurance, and securities firms. We're concerned 
that industry pressure will even prevent a vote on the issue by 
the Rules Committee.
    Wouldn't it be ironic if the public through its members is 
denied even a vote on the privacy protections they are 
demanding, just like financial firms are refusing to give 
consumers the vote to say no to sharing of their information. 
The first compromised step taken by your committee toward 
providing a kind of price and the protection the public needs 
and is screaming for must not be held back and about industry 
pressure.
    We hope the House does not succumb to the campaign of 
misinformation and bold threats to Members of Congress and make 
sure the public through their representatives gets to vote at 
least on what the Commerce Committee's H.R. 10 privacy 
provisions are. Consumers have not faired well in the changing 
financial services market and the regulators have missed the 
opportunity to make sure consumers benefit from the change they 
helped create.
    Congress needs to step in to make sure strong retail sales 
protections are put in place, that the bank exemption from 
securities laws is repealed. But States can protect their 
residents and the consumers are given back control over the 
privacy rights they so cherish.
    While H.R. 10 has a long way to go to give consumers these 
assurances they need, a strong vote on privacy will prove 
Congress still heeds the call of the public and not just 
special interests. We thank you very much for allowing us to 
present our views today.
    [The prepared statement of Mary Griffin follows:]
 Prepared Statement of Mary Griffin, Insurance Counsel, Consumers Union
    Thank you for the opportunity to testify today on consumer, 
investor protection and regulatory issues in the current financial 
services marketplace. Consumers Union, publisher of Consumer Reports, 
is dedicated to educating consumers about pocketbook issues and helping 
to ensure a competitive marketplace characterized by fair and honest 
dealing. We will focus our remarks today on problems that consumers 
face in the world of one-stop shopping and the need to update consumer 
laws and regulations to keep pace with the rapid changes in the 
financial services market that will escalate with the enactment of H.R. 
10.
Protecting Consumers in the World of One-Stop Shopping
    When consumers walk into a bank, they are faced with a wide array 
of choices ranging from mutual funds to stocks to life insurance. 
Notwithstanding the changes that will be brought about by H.R. 10, 
retail sales of insurance and investment products has been a rapid 
growth business for banks over the past few years. According to the 
Association of Banks-in-Insurance (ABI) survey, 96% of all banks with 
assets greater than $10 billion are in the insurance business. Banks 
produced $27.8 billion in insurance premium in 1997, a huge increase 
from the $16.5 billion reported in 1996, with annuities accounting for 
68% of the premium. And, 68% of banks selling insurance market other 
products, including individual life, commercial property/casualty and 
personal property/casualty.
    Investment services of banks is also huge business. According to 
the FDIC, banks reported more than $2.4 billion in fee income from 
their mutual fund and annuity business in the first three quarters of 
1997 and a 46% increase from the previous year in their sales of these 
products. The ABA Securities Association reported profit margins on 
retail investment sales averaged 28% of revenues in 1997, up from 25% 
in 1996. And the number of full-time investment representatives at the 
companies continues to increase at a fairly rapid rate, indicating the 
continuing expansion of this business for banks.
    This expansion in sales activities by banks is not due to changes 
in legislation but from a changing marketplace aided by a series of 
decisions of Federal banking agencies authorizing banks to expand their 
insurance and investment activities. This growth business, however, has 
not been accompanied by an expansion or updating of consumer 
protections, which has added confusion and risk for consumers. And, 
banks still don't have to comply with the full panoply of investor 
protection rules that apply to registered securities brokers, including 
the ability to recover losses through the securities arbitration 
process.
What are some of the Risks to Consumers with Money Centers and One-Stop 
        Shopping?
    Banks tout their entry into the insurance and investment world as a 
boon for consumers but studies and cases over the years indicate it 
could just as easily be a bust for consumers who are misled about 
whether the products banks sell are FDIC-insured or otherwise 
guaranteed. They also show that banks recommend products that are 
inappropriate. For example, consumers who need a steady stream of 
income are recommended products that are subject to huge market 
fluctuations that could place their entire investment at risk. And 
banks, as providers of credit, are in a powerful position to coerce 
loan applicants into purchasing other products that they do not need or 
want, as they have with credit insurance.

 A survey conducted for AARP and the North American Securities 
        Administrators Association (NASAA) in 1994 found that fewer 
        than one in five bank customers understood that products such 
        as mutual funds and annuities are uninsured and over one-third 
        who purchased mutual funds had not spoken with anyone at the 
        bank about the appropriateness of the investment.
 In our March 1994 issue of Consumer Reports, we reported on 
        the results of an undercover investigation we conducted of 40 
        bank salespeople from different parts of the country. Only 16 
        of the 40 salespersons contacted even bothered to ask questions 
        that would have indicated what products were suitable for the 
        investigator.
 A May 1996 study initiated by the FDIC to assess bank 
        compliance with the guidelines issued by the Federal bank 
        agencies found that more than one-fourth of the banks surveyed 
        failed to tell on-site customers that products are not insured 
        and 55 percent failed to inform telephone customers. Some banks 
        even told consumers that investment products were FDIC-insured.
 In a 1996 survey, Prophet Market Research found that one in 
        four bank brokers failed to follow the guidelines. For example, 
        even though the guidelines direct that reasonable efforts be 
        made to obtain information about a customer's financial status 
        and investment objectives in order to make the appropriate 
        recommendation, 23% of those surveyed failed to adequately 
        complete a customer profile before pitching a product.
    What harm can come to consumers if banks mislead and deceive them 
about uninsured products? The oft-cited case of NationsBank/
NationsSecurities provides one of the most glaring examples of the 
risks consumers face. After NationsBank shared lists of its expiring CD 
holders, NationsSecurities allegedly misled the predominantly retired 
customers into purchasing various funds, some of which included 
derivatives. Consumers, who thought their principal was secure, lost 
money when the values dropped. It's not hard to understand why 
customers believed their investment was secure. In documents announcing 
some of these products ``managed by NationsBank,'' Worthen Investments 
in Arkansas, for example, promised a full return on the investments and 
recommended it to people who want high quality with a ``government 
guarantee.'' And NationsBank is not alone. Others such as First Union 
were allegedly involved in similar schemes.
    Other examples? Justine, a 92 year old retiree whose retirement 
home has a bank branch downstairs, lost about $3,700 before she was 
made aware that she had purchased an uninsured stock investment and her 
bank was selling off principal to pay her a monthly amount. A teller 
urged her to get better returns on her sizable savings account balance, 
recommending that she meet with a bank sales representative. She 
purchased what turned out to be stocks based on the representative's 
recommendation and her belief that the bank-backed investment would be 
safe and provide sufficient earnings. She was ``dumbfounded when [later 
her] broker told her what they were doing,'' which was selling off the 
stock to pay her monthly payments.
    Rick's mother-in-law, a Michigan resident, an elderly woman with 
limited English skills, was luckier than Justine. She was referred to a 
bank sales agent when she wanted to put some cash into an FDIC-insured 
product. Not knowing that it was uninsured, she purchased an annuity 
based on the recommendation of the sales rep. Rick cancelled the sales 
transaction at his mother-in-law's request after he informed her the 
bank sold her an uninsured annuity instead of an insured CD.
Why Current Laws Fail to Meet the Challenges Consumers Face in Today's 
        Marketplace
    Although Federal bank regulators have expanded the authority of 
banks to conduct insurance and investment activities, including 
allowing the merger of Citibank and Travelers without clear authority, 
and paved the way for banks to ignore state consumer laws, they have 
failed to implement strong measures to help prevent the problems 
consumers face.

 Lack of Enforceable Regulations Addressing Sales Practice 
        Problems: Despite studies and cases documenting problems with 
        bank sales, the federal banking agencies have not responded 
        forcefully and effectively to address these problems. The 
        banking agencies jointly issued non-binding guidelines for 
        retail sales of nondeposit investment products in 1994 and the 
        Office of the Comptroller of the Currency ("OCC") issued 
        "guidance" to banks on their insurance sales in 1996. But 
        guidelines are not legally enforceable and have not been 
        effective in preventing misleading and deceptive practices. 
        After repeated efforts to get the bank agencies to issue 
        enforceable rules and a letter to the FFIEC from former 
        Comptroller Ludwig in January of 1998 recognizing the need to 
        move forward with such rules, the FFIEC was supposed to 
        initiate a rulemaking process. However, no action by the 
        banking agencies has been taken to date.
  Banks are Exempt from Investor Protection Rules: Under current law, 
 banks are exempt from the definition of broker-dealer which means the 
    investor protection rules issued by the Securities and Exchange 
   Commission ("SEC"), including the ability to receive compensation 
through arbitration from unscrupulous sellers who violate SEC rules, do 
 not apply. Had consumers been purchasing directly from bank employees 
  in the NationsBank/NationsSecurities case rather than a registered 
 broker affiliate, they would not have been able to seek recovery for 
 violation of investor protection rules. Regardless of where consumers 
   purchase their securities, they should have the same protections 
                           available to them.
 Lack of Privacy Protections: Current law is woefully 
        inadequate in the area of financial privacy. Affiliates and 
        third parties have easy access to financial information of 
        customers--customers have virtually no control over the sharing 
        and selling of their information. NationsBank's sharing of 
        lists of expiring CD holders as well as the recent case filed 
        by the Minnesota attorney general against US Bancorp 
        exemplifies the risks posed to consumers from the disclosure of 
        their information without their knowledge or consent.
 Tying the Hands of States to Protect their Residents--the 
        Preemption Problem: The OCC has run roughshod over state 
        consumer laws, allowing national banks to ignore important 
        state consumer protections. Over the past few years, the OCC 
        has issued opinion letters telling national banks that they do 
        not have to comply with such essential protections as state 
        lifeline banking laws that protect consumers from price gouging 
        on checking accounts and laws that prohibit prepayment 
        penalties when consumers sell their homes and pay off their 
        mortgages. And, with the passage last Congress of the ``Riegle-
        Neal Clarification Act'' (H.R. 1306), state banks can ignore 
        state consumer protection laws whenever a national bank may do 
        so, making it even more important to rein in preemption 
        activities. Despite repeated attempts to have the OCC 
        reconsider its overly broad ``preemption'' standard, the agency 
        continues to give national banks special treatment vis-a-vis 
        state laws. We believe Congress needs to step in to preserve 
        the traditional authority of states and ensure state laws are 
        preempted only when they are in clear conflict with federal 
        law.
Updating Consumer Laws: What Consumers Need to Help Ensure they Benefit 
        from ``One-Stop'' Shopping
    The bank regulators have not taken action to protect consumers. It 
is time for Congress to act with strong and effective legislation. As 
Congress ``modernizes'' laws through H.R. 10 to allow the various 
financial firms to merge and diversify, it should also update consumer 
laws to make sure modernization does not become a code word for 
consumer rip-offs. The need for legislation to protect consumers is 
urgent and clear--Congress must take the action to ensure a fair and 
honest marketplace. Here are some of the actions Congress can and 
should take:

 Enact Strong and Effective Retail Sales Protections: These 
        include:
     Disclosure that products they sell are not FDIC-insured or 
            guaranteed and subject to risk of loss;
     Anti-coercion rules that prohibit a financial institution 
            from peddling to loan applicants uninsured products until 
            after the loan has been made:
     Suitability requirements to make sure sales are based on 
            consumers' financial needs, not solely the commissions and 
            fees paid to the seller;
     Requirement that sales activities be conducted in an area 
            separate from where they take deposits and make loans and 
            limitation on compensation for referrals by nonqualified 
            personnel;
     A process for consumers who lose money when banks violate 
            these rules to recover their losses.
    While H.R. 10 includes a package of consumer protections that 
provide some of the measures, it needs to be strengthened to protect 
against bad practices.

 Repeal Exemption of Banks from Investor Protection Rules: The 
        outdated and unfair exemption of banks from securities laws 
        must be repealed. The Committee's action on HR10 goes a long 
        way to close this gaping loophole in the law but we want to be 
        sure that any bank sales are subject to the protections 
        afforded by securities laws as well as strong investor 
        protection rules that take into account the unique nature of 
        sales from a federally insured institution.
 Give Consumers Control over their Financial Data: While we 
        commend this Committee for taking a big step forward for 
        financial privacy in H.R. 10, more needs to be done. 
        Information should not be disclosed for any other purpose than 
        for which it is given without the prior consent of the 
        consumer; consumers should have meaningful notice and access to 
        all their financial data; and consumers should be able to hold 
        institutions that violate their privacy accountable. We look 
        forward to working with the Committee to improve on its 
        progress on privacy in its recent consideration of H.R. 10.
 Preserve the Authority of States to Protect their Residents: 
        The continuing wave of preemption of state consumer laws must 
        be stopped. Congress should restate the authority of states to 
        regulate businesses operating within their borders, including 
        national banks, and allow states to protect their residents. 
        While H.R. 10 presents an opportunity to preserve and clarify 
        state authority, broad preemption standards in the bill not 
        only tie the hands of states to enact consumers laws in the 
        area of insurance but also for other activities of banks such 
        as deposit taking or lending laws, e.g., ATM surcharge laws, 
        check cashing or predatory lending laws. We believe the OCC and 
        other agencies will be given broader, not narrower, authority 
        under H.R. 10 to let banks ignore state consumer laws.
 Improved Disclosure of Costs and Fees: To help promote 
        comparison shopping and competition, it is essential that 
        consumers know and understand the costs of the products they 
        are considering. The Committee's version of H.R. 10 bill 
        includes a provision requiring all financial services 
        regulatory agencies to prescribe or revise rules to improve 
        disclosure of fees, commissions and other costs of financial 
        products.
Conclusion
    Consumers have not fared well in the changing financial services 
marketplace that federal regulators have helped create. Congress needs 
to step in and demonstrate a commitment to the public, not just the 
special, interest. While H.R. 10 provides some of the protections 
consumers need, it has a ways to go to ensure a competitive, fair and 
honest marketplace for consumers. We look forward to working with you 
to enact legislation that meets the needs of consumers, not just the 
financial industries vying for greater access to consumers' 
pocketbooks.

    Mr. Upton. Thank you, Mrs. Griffin.
    Mr. Alpert.

                TESTIMONY OF JONATHAN L. ALPERT

    Mr. Alpert. Mr. Chairman, members of the subcommittee, I 
appreciate the invitation to be here today. I'm Jonathan Alpert 
from Tampa, Florida; and I am speaking, I hope, to the best 
possible on behalf of my clients, the little people, the 
average American, that is the target of and the recipient of 
both the laws and the activities of this Congress and of the 
banks.
    There are serious privacy concerns that the folks have. In 
my written testimony, we discuss how NationsBank secretly 
pirated customer information and turned it over to its brokers 
allowing brokers to access the master customer information 
file; how First Union had scripts for their bankers to use to 
call people up and say I am calling from the branch of First 
Union, and, of course, the customer's first reaction was is 
there something wrong with my account?
    And then the banker or broker would go on to say, I am 
calling because we notice your CD is about to mature and we're 
working late tonight. Yes, they were working late tonight on 
blitz nights and boiler room nights where they were engaged in 
activities more characteristic of a penny operated stock boiler 
room than a national bank.
    NationsBank, now Bank of America, as an invasion of the 
body snatchers kind of thing, where it takes over the mantle of 
a respected bank, used its customers to enrich the bank and the 
brokerage. I made an investment of $56,000 and lost $20,000 in 
the NationsBank here in my neighborhood. I bought the 
investment in the bank building thinking it was federally 
insured. I wasn't told all the facts that I might lose. Larry, 
my husband, passed away. I went to the bank to try to get a 
proper investment, and I found now that my 130,000 investment 
has lost 11 percent. I now find that there is an early 
withdrawal penalty.
    I went to the NationsBank, I specifically explained to him 
that I was a recent widower, and I was interested in depositing 
my money in a plan that would have absolutely no risk. I have 
lost my money. When I arrived in Florida, I asked the bank 
teller to refer me to someone who could tell me where I could 
put my money to draw monthly interest. She referred me to a man 
with the bank in charge of investments. I told him I would like 
to put my money in a savings account or a CD. I am 62 years old 
and retired. And all the money I had was the $50,000 that the 
man took away from me.
    In May 1993, my certificate of deposit at NationsBank was 
maturing, to quote Mr. Schultz, the only way that I would lose 
money would be for the U.S. Government to collapse; of course, 
every bank would be gone, too.
    This is what the bankers are telling their customers: 
invest in our risky securities, and the only way you would lose 
money is if all the banks collapse. NationsBank, here are three 
cards, one is from a banker, one is from a broker, and one is 
from a mutual fund. You can't tell the difference. The same 
thing with First Union, one is from a banker, one is from a 
broker. You cannot tell the difference.
    The banks have engaged in a practice of deceptively mining 
their customers' accounts. They have done it with the blessing 
and encouragement of the banking regulators who at every 
opportunity, rather than protecting the customer, protecting 
the American people, have turned a silent stony face to the 
customers, to the American people, and to this Congress, 
because, gentlemen, Glass-Steagall has been repealed, not by 
Congress, but by the OCC.
    And when we turn to the OCC and ask the OCC for help, the 
OCC, instead of helping the American people, says this 
information is confidential, so you have the Department of 
Treasury hiding information on deception and deceit from the 
American people, while the Department of Energy is dumping 
nuclear secrets on the red Chinese. This is not right.
    Thank you.
    [The prepared statement of Jonathan L. Alpert follows:]
   Prepared Statement of Jonathan L. Alpert, Senior Partner, Alpert, 
                         Barker & Rodems, P.A.
                              introduction
    Mr. Chairman and Members of the Subcommittee, my name is Jonathan 
Alpert. I am a lawyer from Tampa, Florida. Our law firm, Alpert, Barker 
& Rodems, represents injured investors, consumers, and elderly and 
retired people. Twenty years ago, I was a Florida Judge of Industrial 
Claims and I have been on a Florida Bar Grievance Committee, as well as 
an Associate Professor of Law at Stetson University College of Law in 
St. Petersburg, Florida. I have written seven books on Florida law and 
articles in publications ranging from the American Bar Association 
Journal to the Journal of Legal History to Harvest Years, a magazine 
for retirees.
    Our firm has represented elderly investors and brokers in cases 
against some of the largest and most powerful banks and brokerages, 
including Bank of America (formerly known as NationsBank), First Union, 
Amsouth, Barnett Bank (Florida's largest bank until it was acquired by 
NationsBank at the end of 1997), Smith Barney, Dean Witter, Raymond 
James, MetLife, and PaineWebber, among others.
    The problems with the national banks were brought to our attention 
in mid-1994 when customers and brokers began telling us stories which, 
frankly, at first we did not believe. A NationsBank customer, Leilani 
DeMint, for example, was sold a risky government bond fund, even though 
she thought she was purchasing series EE bonds. Ms. DeMint, a retired 
toll taker, had her entire life savings put at risk. Another 
NationsBank customer, Max Wells, who has bought securities in the past 
and who is a retired Air Force policeman, was sold a mutual fund when 
he thought he was investing in a CD. Other elderly and retired bank 
customers who came to us reported that, unknown to them, their life 
savings were put into risky mutual funds when all they wanted were 
certificates of deposit.
    In August of 1994, when we first began bringing these problems to 
public attention, we had a meeting in our office with various bank 
securities regulators. We were told then that ``Congress does not care 
if elderly people are being swindled in bank lobbies.'' This hearing 
today says that Congress does care.
               profitable (for the banks) risky business
    In the early 1990's, the banks began to develop and market 
brokerage services. Characteristic of these retail securities 
activities were sales activities in bank lobbies by tellers and 
customer service representatives and by brokers disguised as bankers. 
Often those activities took place in unlicensed facilities so that the 
risky business was for a time concealed from both the regulators and 
the customers.
    Banks did this for one reason . . . profit. The profitability of 
bank brokerage operations is illustrated by an internal First Union 
1993 comparison between the profit from a one year $10,000.00 CD and a 
mutual fund sale of $10,000.00. According to the comparison, the CD 
yields pre-tax income of only $11.53; the mutual fund yields pre-tax 
income of $313.54, which is, of course, fee income to the bank--almost 
thirty times the CD income in one year. [Attachment 45]
                         customers are targeted
    Customers were targeted by the banks and their brokerage affiliates 
and subsidiaries. Illustrative of this is the April 14, 1994 Marketing 
Bulletin [Attachment 1] to the employees of NationsBank which advised 
the employees that, in obtaining information from customers, they 
should tell customers that only their banker would have access to their 
personal account. When asked, bankers were instructed by the Bulletin 
to say ``No, only your banker can access your account.'' [Attachment 2] 
Despite this, on August 17, 1994, NationsSecurities, the brokerage 
operating subsidiary of NationsBank, sent to one of our clients a 
letter in response to our client's complaint at having his private 
banking information shared with a broker: ``It is our understanding, 
however, that the agreement covering your relationship with the bank 
authorizes it to share such information with its affiliates, including 
NationsSecurities.'' [Attachment 3]
    Similarly, First Union targeted its bank customers for the sale of 
risky investment products. First Union's computer system was designed 
to provide ``Automated Prospects Functions'' identifying ``current 
users of First Union services who have been recognized, based on 
several criteria, as candidates for additional services.'' [Attachment 
4] In addition, there was a ``Personal Prospects Function'' which 
advised the First Union teller to share with the First Union broker the 
fact that a customer had deposited checks drawn on a Merrill Lynch 
asset management account. [Attachment 5]
     Blurring the line between the bank and the brokerage, First Union 
advised its bankers and brokers to send out a form letter which said in 
part, ``First Union investment specialists have an objective view . . . 
Our knowledgeable investment specialists look out for your best 
interest because they represent First Union and our broad range of 
services.'' [Attachment 6] Nowhere is it disclosed that there is a big 
difference between a bank product and a securities product; one 
involves significant risk and the other involves government guarantees 
of safety and soundness.
    First Union, as did NationsBank, had ``Nonlicensed Employee 
Calling'' scripts [Attachment 7] which establish that First Union knew 
both that its customers thought it was the bank calling and that it was 
pirating secret account information:

          Banker: Good evening. I'm ---------- from the ---------- 
        branch of First Union. Do you have a minute to talk?
          Customer: Is there anything wrong with my account?
          Banker: No, not at all. It's just that some of us are staying 
        late tonight to review the relationships of our most important 
        customers. As I studied your accounts with us, I noticed that 
        you have a CD scheduled to mature on [date] . . . '' 
        [Attachment 7]
    The script goes on to compare investment products with bank 
products. It technically, but not meaningfully, reveals the non-
existence of FDIC insurance for investments. First Union targeted its 
customers in these types of scripts. NationsBank also targeted its bank 
customers for risky securities, secretly disclosing private data to its 
stockbrokers. [Attachment 11 (a)&(b)]
                           customer confusion
    First Union National Bank blurred the differences between 
government guaranteed or backed bank products and securities. 
Illustrative of this is a letter to one of our clients on January 25, 
1993, on the stationary of First Union National Bank. The letter 
discusses a government agency guaranteed security which, although 
guaranteed against default, has no guarantees as to interest rate risk, 
market risk or other risks. [Attachment 8]
    First Union trained its brokers to make sure not to set up two 
brokerage accounts because some of its customers did not even know they 
had one [Attachment 12]; to conceal the risk of loss by not answering 
``Yes,'' to the question, ``Can I lose money in this?''. A training 
video which we obtained states, ``You didn't say yes, you could lose 
money. What I don't want you to say is [yes, you could lose money.] 
Negative. You don't want to be negative.'' [Attachment 15-16]
    First Union bankers and brokers were also trained to encourage 
unsophisticated customers to buy a mutual fund, even if they were risk 
averse. Brokers were to tell them, ``and what is important is you are 
buying them through the bank and look at the return, 12%.'' [Attachment 
17] The brokers and bankers were trained to make these representations 
to their typically elderly and unsophisticated customers. [Attachments 
18-20]
    Interestingly, both First Union and NationsBank also engaged in 
what amounted to money laundering, a practice more characteristic of 
racketeering than banking. Because of securities prohibitions against 
paying commissions to unlicensed persons, the bank brokerages split 
commissions with the bank and the bank then split the commissions with 
its unlicensed banking personnel. The First Union training tape reveals 
this: ``Because the capital management group is pooling the money and 
passing the money [to the bank], the bank is distributing it.'' 
[Attachments 21-23] Therefore, both of these banks and presumably 
others were able to evade the securities licensing requirements of 
state and federal securities regulators.
                     customers suffer severe losses
    Customers suffered severe losses as a result of these activities. 
Both First Union and NationsBank had telemarketing drives, such as the 
First Union Blitz Night, which more resembled penny stock boiler rooms 
than the appropriate activities of national banks. The July 19, 1994 
First Union Blitz Night referred to ``unimaginable wealth'' and 
``fabulous prizes.'' [Attachment 24] This wealth and prizes, of course, 
were for the bankers and brokers, not for the elderly and 
unsophisticated customers of First Union. In point of fact, customer 
losses became so spectacular that well over one thousand (1000) 
customers in just Florida and Texas alone wrote to NationsBank 
complaining of the losses. Just one letter, dated March 13, 1995, from 
one customer summarizes what happened, ``I made an investment of 
$56,000.00 and lost $20,500.00 in the NationsBank here in my 
neighborhood. I bought the investment in the bank building thinking 
that it was federally insured. I wasn't told all the facts, that I 
might lose. The stock market should be left to the stockbrokers and the 
banking should be left to the banks. What is the procedure? Can you do 
anything for me?'' [Attachment 25]
    Even though letters like these had been pouring into NationsBank 
for well over a year, in June of 1994, NationsBank, in promoting one of 
its risky mutual funds, included the language ``I've worked my whole 
life for this money and I can't afford to risk it now.'' [Attachment 
26] The return card was addressed, not to the brokerage, not to the 
mutual fund, but to NationsBank itself in Charlotte, North Carolina. 
[Attachment 27] People thought they were dealing with the bank, as they 
were . . . until the losses started.
    First Union also blurred its brokerage services with banking as is 
illustrated by its brochures advertising both bank and brokerage 
services. [Attachment 28]
                         the occ drops the ball
    One of our clients, Leilani DeMint, turned first to the OCC for 
help. NationsBank had sold a risky mutual fund to Leilani, who thought 
she was purchasing Series EE savings bonds. The OCC wrote to her that 
it could not be of any assistance because it understood that there was 
a lawsuit against NationsBank and, because of the lawsuit, the OCC 
would not become involved. The OCC stated in its letter of November 11, 
1994 to Leilani DeMint, ``This office contacted the bank and was 
advised that NBS previously responded to your concerns. NBS affirmed 
its position regarding this matter as stated in its letter to you dated 
March 11, 1994 . . . The office has been advised that this matter is 
the subject of litigation pending in U.S. District Court in Tampa, 
Florida. Accordingly, the office can provide no further assistance in 
this matter.'' [Attachment 29]
    This is not the only instance of the OCC washing its hands. Barnett 
Bank, then Florida's largest bank, was purchased by NationsBank at the 
end of 1997. Therefore, by mid 1998, Barnett Bank no longer existed. 
Barnett Bank had sold securities from unlicensed offices [Attachment 
30] using marketing scripts [Attachment 31] and disguising the risk of 
loss. [Attachment 29] On April 8, 1998, we wrote to the OCC requesting 
certain examination reports and a letter which the OCC had previously 
sent to the President of Barnett Banks. [Attachments 32-39] On April 
10, 1998, the OCC responded, requesting that we return confidential 
information which we had received, which we believed might establish 
Barnett Bank's illicit activities. [Attachment 41] Then, the OCC 
processed our request for information, and, as might be expected, on 
June 3, 1998, denied it. [Attachments 42-43]
    As mentioned, Barnett Bank did not exist in 1998 and, therefore, 
there were no safety or soundness concerns that might justify 
withholding the information we requested. As a result of the OCC's 
refusal to even minimally cooperate, we were hampered in obtaining the 
evidence to establish the full extent and scope of Barnett's 
noncompliance with both state and federal law.
    The OCC stated to Ms. DeMint her remedy was private litigation. Yet 
it refused to provide even the most basic assistance through the 
production of documents in private litigation involving the Barnett 
lawsuit. The OCC refused both to take regulatory action and also tried 
to frustrate private legal action to redress Barnett's wrongs. The 
reaction of the OCC to the request regarding Barnett Bank should be 
placed in context: The Comptroller of the Currency is documented to 
have exchanged 24 phone calls and 27 faxes and letters in the 7 month 
period between May 14, 1996 and January 13, 1997 with the Chairman of 
Barnett Bank. [Attachment 44] This raises serious questions.
    Unfortunately, the OCC has never taken any action against Barnett 
Bank; has never taken any action against First Union; has taken only 
reluctant and minimal action against NationsBank, now Bank of America; 
and, has never taken any action against even Amsouth Bank, even though 
state (primarily Florida) or federal security regulators, including the 
NASD, have taken action against the brokerage subsidiaries of all of 
these banks. It is our understanding that the OCC has actively blocked 
or resisted the actions of securities regulators who have tried to 
protect the American people from the predatory activities which we have 
described. I had the personal experience of objecting to a bank 
regulator about the inordinate profits which the banks were making from 
their improper securities activities and being told that some in the 
banking regulatory community would be in favor of such profits, even 
though illicit, because, after all, it would positively impact the 
balance sheet of the banks.
                               conclusion
    Given the opportunities for abuse, such as the accompanying copies 
of the advertisements for the NationsBank Tax Deductible Smart Loan 
[Attachment 46] and the NationsBank Tax Relief Municipal Bond Fund 
[Attachment 47], the banks continue to exploit the government 
subsidized bank franchise. Whether that exploitation is a good or bad 
thing on a macro-economic level is for this Committee and this Congress 
to determine.
    I would point out in closing that, although we believe that bank-
brokerage practices have become more sophisticated, the current 
prosperity has papered over many of the continuing improper practices. 
We are told, for example, that customers in First Union still do not 
understand that their cap account or money market account is an 
uninsured mutual fund, not an FDIC insured depository account. Many 
NationsBank supervisors, who were involved in earlier illicit 
activities, continue to occupy high positions in the financial services 
industry, even though NationsBank has paid $60,000,000.00 (sixty 
million dollars) in compensation as a result of our work.
    Financial modernization should include meaningful regulatory 
protection so as to preserve the independence of the state securities, 
insurance, and banking regulators in the interest of federalism. Also, 
the functional independence of the federal and state banking and 
securities regulators should be maintained. Securities functions belong 
in holding company affiliates so that they may be properly regulated by 
securities regulators with protections for both safety and soundness 
and customers.
    A final note: We are unable to share with the Committee some of the 
worst examples of bank misconduct because of confidentiality orders, 
legal requirements, and OCC legal interpretations.
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    Mr. Upton. That's next week's hearing.
    Mr. Green, would you like to make an opening statement?
    Mr. Green. No, Mr. Chairman. I'm just surprised that this 
information is 5 years old and not that the boiler room effect 
wasn't wrong and the penalty may have been too low and my staff 
suggested maybe from now on we put a scarlet A on the brokers' 
business cards. But anyway, I'm anxious to hear and also from 
other questions, but I have one question I would like to ask. 
And I will do it in my time.
    Mr. Upton. Okay. I would like to note that all members will 
have a chance to make a part of their opening statement as part 
of the record.
    Mrs. Crawford, when the State of Texas has realized that 
there are some problems with some of the relationships that are 
out there, has there been a pattern or a history of checking 
with the OCC to see if they might be helpful as you pursue your 
own State regulatory issues within the State when you've 
identified some type of problem?
    Ms. Crawford. Mr. Chairman, as a matter of course, our 
investigators in the enforcement division of the Texas State 
Securities Board always make attempts to contact the banking 
regulators. In the case of Nations Securities, that was done. 
No assistance was forthcoming in that case.
    Mr. Upton. It sounds a little troubling. Was it made--did 
you get a flat no? Did the request just come unanswered?
    Ms. Crawford. I would say, Mr. Chairman, that the Office of 
the Comptroller of the Currency was unresponsive.
    Mr. Upton. You can't help us a little more than that?
    Ms. Crawford. Well, it basically boiled down to our 
notifying that office of the problems, requesting any 
assistance that they might provide and then not receiving any 
assistance in return.
    Mr. Upton. Now, as you might deal with associates from 
other States, Michigan in my case, California and other States, 
is there some national meetings where that view is also 
prevalent and, in fact, they were not helpful in other cases?
    Ms. Crawford. Yes, yes, Mr. Chairman. That has been the 
talk, if you will, among State securities regulators. And I 
want to very quickly disabuse this committee of the notion that 
there are no continuing problems. That is absolutely untrue. 
State securities regulators are actively investigating bank 
securities activities. There are ongoing enforcement efforts 
being made. It just so happens that this particular case has so 
many elements to it that it makes for a good example.
    Mr. Upton. Mr. Alpert, you checked off a number of cases. 
How did you get access to information like that? Did they come 
to you for help?
    Mr. Alpert. Brokers and customers came to me for help. And 
what's interesting is that when we got--and sometimes we got 
unanimously people who felt upset. We got an anonymous batch of 
documents in the mail about Barnett Bank which was Florida's 
largest bank, and included in those documents was a letter from 
the OCC to the chairman of Barnett Banks, which was highly 
critical. We were not authorized by law to have that letter, so 
we advised the OCC that we had it.
    We also asked the OCC for information on Barnett Bank, and 
this is in 1998 when Barnett Bank had ceased to exist. And, 
therefore, there were no safety or soundness concerns. And the 
OCC, I would point out in its handbook in section 413, has a 
supervisory responsibility of all bank-related activities.
    So we asked the OCC if we could have this letter to help 
some elderly consumers in a private action and although the OCC 
in 1995 had told one of our clients that she could not--that 
the OCC would not be of any assistance and would do nothing 
because it was private litigation, in 1998, the OCC blocked our 
efforts to obtain information in private litigation.
    So it's almost like, if you will pardon the expression, 
you're dammed if you do and dammed if you don't. And as a 
private lawyer trying to get assistance for people, it's much 
more difficult for me to get information than it is for the 
OCC, which is in there with examinations.
    There is presently ongoing Federal criminal investigations. 
And I am obviously not privy to the interworkings of the United 
States Attorney's office, but once again I seriously question 
whether there is the cooperation with the United States 
Attorney and the Department of Justice by the OCC, because that 
information is being hidden from the American people, and 
that's the concern.
    Mr. Upton. Thank you.
    Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. And I would like to ask 
each of the witnesses clearly there are massive problems with 
NationsBank and Nations Security, and the line between banking 
and selling securities was blurred during the early 1980's. 
Many people, in fact, lost a great deal of money because of the 
deceptive practices. I see the SEC fined $4 million, securities 
2 million, OCC the 750,000, and the private class-action suits 
resulted in a--I guess, judgments of $40 million.
    Nevertheless, here we are in 1999. I would like to know 
what evidence do we have that shows is there still a continuing 
problem with Nations Securities, or NationsBank. If it's still 
continuing, can witnesses point to specific banks, not just 
Nations but other banks, and describe the activities which you 
believe to be the problem? And if they are continuing, what 
could this committee do to address this problem, 
investigations, legislations that you would make suggestions 
on.
    Ms. Crawford. Congressman Green, as I indicated before, I 
think it's very important for members of the committee to 
understand and appreciate that the Nations Securities case was 
not an isolated incident and that there are ongoing 
investigations.
    Mr. Green. Ongoing investigations relating to banks--and I 
know there are investigations of SEC and the State agencies on 
securities issues. But in relation to banks?
    Ms. Crawford. In relation to banks. And as a matter of 
fact, in the State of Texas, banks are not exempt from being 
registered as dealers, so my own office periodically does send 
teams of examiners out to banks.
    Now, we are uncovering problems. One of the things that 
happens when you're a regulator is if you have to make hard 
decisions about the utilization of resources. As it so happens, 
I have been the designated spokesperson for a number of years 
on financial services modernization. I have been extremely 
hopeful, and I communicated these hopes to my colleagues along 
the lines of at some point Congress is going to act and take 
care of some of these problems.
    A lot of things have been on hold, frankly, both from the 
regulator's side and from the regulated. I believe that banks 
in many instances are doing everything in their power to make 
sure that investors who are bank customers do not complain to 
regulators. They are hoping that Congress will not act, that 
Congress will not address the problems created by financial 
services modernization realities, and that if they can stay out 
of the press, and if they can keep these actions from being 
taken against them, then eventually they will be okay.
    Legislation will protect them, because the banks would 
really like to see the banking regulators in charge. They see 
what's happening with the OCC and its continuous deregulation 
that isn't even subject to public scrutiny or public comment. 
And they're very hopeful that at the end of the day that 
process will prevail.
    So I guess, Mr. Green, this is a long-winded way of saying 
that we're all on hold; we've got actions ready to go. The 
banks are trying their very best to keep these things from 
percolating to the attention of the public.
    Mr. Green. Okay. Miss Griffin.
    Mrs. Griffin. Well, in terms of NationsBank specifically, I 
can't speak to anything I've heard recently about their 
specific practices. I can tell you in the area of privacy, I 
walked into the NationsBank last week and asked them for a 
financial privacy--I asked a manager for their financial 
privacy policy. Ane he said I don't know what you're talking 
about, what's a privacy policy. So you know it's how you share 
information or what you do with the information.
    And he said well, we don't have a privacy policy, but I can 
tell you we don't share information with anyone. I advised him 
that he might want to go on-line and look at their Web site to 
look at their privacy policy, which does, you know, show that 
they do share information.
    Mr. Green. That's a subject of an amendment that our 
committee talked about for a long time. I understand.
    Mrs. Griffin. Which we appreciate very much and are fully 
support of and hope the Rules Committee allows it to go forward 
next week. But in terms of other--I mean the NationsBank case 
has been one case cited. In addition of that, the studies have 
shown over the years every time there's been studies about 
this, including FDIC's own study, that banks are not informing 
people about the risk. They are misleading people, in some 
cases. They even told people that the products were insured.
    And one of the things to highlight about the NationsBank 
case is, you were talking about a securities--a registered 
securities broker there, and you do have securities regulators, 
you do have the investor protection rules there, but banks--if 
those people were purchasing directly from bank employees, 
there's no investor protection rules that apply. The banks are 
exempt from those investor protection rules when they sell 
directly. And that's one area where we really would like to see 
some changes. And this committee's version of H.R. 10 goes a 
long way to close what we think is a huge loophole in the law.
    Mr. Green. Mr. Chairman, and not--I know my time is up, but 
if somewhere in the other questioning if they could address 
whether H.R. 10, I know out of this committee, but compare the 
Banking Committee's H.R. 10 as relationship to the SEC still 
having regulation over securities that even though the OCC may 
have jurisdiction also, and did H.R. 10--I know our committee 
didn't, but as it came out of the Banking Committee, did it 
take away regulation authority over securities in banks from 
the SEC?
    Mrs. Griffin. Well, the banking committee--the exceptions 
contained in the Banking Committee's version of H.R. 10 are 
much broader and don't close that loophole. The Commerce 
Committee's version goes much further in terms of making sure 
that most bank security activities come under the protections 
of the securities laws. But the Banking Committee did not--
there are still huge loopholes in their version, and I'm not 
sure about their new version.
    Mr. Green. Thank you very much for your patience.
    Mr. Upton. I would like to add an editorial comment. It's 
my understanding that the Rules Committee--Chairman Drier made 
an announcement on the floor earlier today about going to Rules 
and having that bill on the floor, and it appears as though the 
Banking Committee's version will be part of the base bill that 
we will consider.
    And I know that an amendment is being drafted to bring the 
Commerce Committee's version of this to the floor, and that's 
one of the reasons why we thought we would have the hearing 
today.
    Mr. Green. I would hope the Rules Committee will make that 
option an order.
    Mr. Upton. I think they will allow that amendment, I hope.
    Mr. Burr.
    Mr. Burr. Thank you, Mr. Chairman.
    Ms. Griffin, let me just show you the documents I've got 
since I was--they accommodated me better than they did your 
request. This is a disclosure statement for NationsBank, 
application for brokerage account application. I will just 
point to you above the signatures it says not FDIC insured, may 
lose value, no bank guarantee. It doesn't get to the privacy 
issue.
    Every one of their documents about their products very 
clearly stated on the front page in the left bottom says ``not 
FDIC insured, may lose value, no bank guarantee.''
    Mrs. Griffin. We wouldn't dispute the fact that on those 
disclosures they've made progress, definitely.
    Mr. Burr. My question would be is that prominently 
displayed enough with the suggestion that it is not insured, 
that a person might lose money and that the bank does not 
guarantee it? Does that meet what you think is sufficient?
    Mrs. Griffin. I would say that being a NationsBank's 
customer and receiving a lot of mail from NationsBank and going 
in there a lot, a number of those disclosures, yes, are 
prominent and they're very bold. Some however are not. So I 
cannot say across the board we've given them a high mark. But 
they've definitely improved in terms of their disclosure about 
the risk in some areas.
    Mr. Burr. Ms. Crawford, in the issue that you were talking 
about, where you had--you sought the OCC's help on a securities 
issue, was the SEC involved in that investigation?
    Ms. Crawford. No, sir, the SEC was not involved at that 
time.
    Mr. Burr. It was a securities issue though, wasn't it?
    Ms. Crawford. It was a securities issue, yes.
    Mr. Burr. Would it have been the primary jurisdiction of 
the SEC or the OCC there, if you know?
    Ms. Crawford. Actually, we have primary jurisdiction, the 
Texas State Securities did.
    Mr. Burr. Texas State?
    Ms. Crawford. Yes, because there were transactions 
occurring within our State. Now, the SEC would have also had 
jurisdiction over that. But as these matters tend to work out, 
the local regulator more often than not gets evidence of 
problems through investor complaints or--as one example of the 
way that we get that information and will take action first. 
The SEC, as you know, did take action against NationsBank last 
year, and it was exactly the same case that we brought in 
Texas.
    Mr. Burr. So most of the preliminary investigation would be 
the role of the Texas----
    Ms. Crawford. In this particular instance, that turned out 
to be the case, but it does vary.
    Mr. Burr. Mr. Alpert, let me ask you, I looked at your 
resume. You have quite a remarkable history of not only cases, 
but books published and speeches given on various subjects. You 
read a number of letters.
    Did all of those letters come to you unsolicited?
    Mr. Alpert. Yes, they came unsolicited. There are also a 
thousand more letters that are hidden because we can't look at 
them under confidentiality orders.
    Mr. Burr. How did they know about you? Did they read 
something like this, that said he's an expert?
    Mr. Alpert. A lot of them--no, a lot of them came to us--
they sent us old letters that they had sent after they heard 
about us. These are letters typically not addressed to us, but 
addressed to, quite often to, regulators. The problems of this, 
by the way, are continuing.
    Mr. Burr. Have you had an opportunity to look at 
NationsBank disclosure forms lately?
    Mr. Alpert. Yes.
    Mr. Burr. Do you believe they are sufficient now?
    Mr. Alpert. I believe them entirely inadequate, because it 
is a positional and situational fraud.
    Mr. Burr. Are you currently in litigation with any banks 
over disclosure issues?
    Mr. Alpert. No, sir.
    Mr. Burr. Have you settled all of the cases that you had, 
all of the class actions?
    Mr. Alpert. Yes and no. Most of them were not out--class 
actions because of the difficulty of establishing class actions 
and the impediments to consumers that have been created.
    Mr. Burr. But you did have a class action, didn't you?
    Mr. Alpert. Oh, yes.
    Mr. Burr. How many people were a party to that class-action 
suit?
    Mr. Alpert. There are probably in the thousands.
    Mr. Burr. And that's been settled, hasn't it?
    Mr. Alpert. That has been resolved.
    Mr. Burr. Was it settled sufficiently for your clients?
    Mr. Alpert. It was settled as good as we could get for our 
clients.
    Mr. Burr. How much did you make off of it?
    Mr. Alpert. Well, the total class action--I think everyone 
is interested in lawyers--the total class action settlements 
were $60 million.
    Mr. Burr. How much of that did you get?
    Mr. Alpert. I wish I could say I got 30 percent, which 
would have been $18 million or 20 percent which would have been 
$10 million or 10 percent which would have been $6 million. 
After you consider the costs and expenses that we've expended, 
we've gotten less than 2 percent, probably less than 1 percent, 
because litigation with the banks you need to understand, they 
want to drive their opponents into the dirt, and everything is 
harder and harder to litigate, because of that, and they make 
litigation as difficult and as expensive as possible, because 
they don't want to continue to litigate as an example. Case 
in----
    Mr. Burr. I'm not sure whether you made $600,000 or $1.2 
million, what did you make?
    Mr. Alpert. I'm not sure either, because of the expenses 
were enormous in these cases, and it was--and the problem, for 
example, in the Barnett Bank case where they have a statutory 
obligation was not a class action, they're still litigating and 
resisting, paying us for our work, because if you can get rid 
of the lawyers, you can--the consumers are as helpless as 
turtles on their back. The purpose here is to get rid of the 
lawyers and everyone, of course, is of the view that, well, 
lawyers somehow shouldn't be paid, where bankers make $4 or $5 
or $10 million a year.
    Mr. Burr. I serve with a bunch of lawyers up here, which I 
am not, and never have wished to be one, quite honestly.
    Mr. Alpert. I commend you for that, Congressman.
    Mr. Burr. I know what thats like.
    Mr. Alpert. I commend you for that, Congressman.
    Mr. Burr. Let me ask you--with the Chairman's indulgence, I 
would ask unanimous consent for 2 additional minutes. You said 
in your testimony--I want to be accurate--that the scripts that 
you referred to by First Union were technically right, but not 
meaningfully revealing of nonexistence of FDIC insurance.
    What do you mean? What's technically right, but not 
meaningful?
    Mr. Alpert. Technically right is exactly what you have in 
your hand of these so-called disclosures. You give a disclosure 
like that to somebody in a bank lobby on a bank platform by a 
person who----
    Mr. Burr. So these are not sufficient to you?
    Mr. Alpert. As I said to you earlier, in my view, those are 
not sufficient, because of the positional and situational 
confusion that is created. These people are being told and 
they're being told that today, they're being told that a mile 
from this capitol building that they are safe because they are 
purchasing these things in the bank.
    Mr. Burr. Mr. Alpert, according to the Florida Times Union, 
by your own accounts you said you've sued every big bank in 
Florida. Is that an accurate portrayal? Have you sued them?
    Mr. Alpert. I sued First Union, NationsBank, Barnett Bank, 
and AMSouth. I believe they were the largest banks in Florida 
at the time.
    Mr. Burr. And you said that you had sued them for alleged 
technical infractions. What is a technical infraction?
    Mr. Alpert. Well, the technical infractions are where they 
do not disclose there is a security.
    Mr. Burr. But is this a technical infraction that you just 
referred to? You said it was technically right, but it was 
meaningfully wrong?
    Mr. Alpert. No, that is not a technical infraction.
    Mr. Burr. What's a technical infraction?
    Mr. Alpert. A technical infraction--a good example of a 
technical infraction would be where they call up and say, I am 
calling you from the First Union branch and they are not 
disclosing that they're calling from a brokerage. That's a 
technical infraction.
    Mr. Burr. Even if they did do all the disclosure 
information within that script?
    Mr. Alpert. Not necessarily. It depends how they do it and 
when they do and where it's being done. And the problem that 
you have, Congressman, is that you--these people rely on the 
safety and soundness of the bank that we have encouraged by 
government subsidies, saying that we are going to protect our 
financial system, and the people feel safe in a national bank, 
so you take that aura of safety, that aura of trust and you 
utilize it, and it's essentially, Congressman, like dollars 
flowing from your pocket, because they're your tax dollars just 
like they're mine into the hands of the national banks, to use 
in selling securities.
    If we're going to have a level playing field, let's let 
Smith Barney, Merrill Lynch, Paine Webber have the same 
government subsidies of safety and soundness and trust so they 
can sell garbage to their customers too.
    Mr. Burr. What's the status of your class-action suit 
against Humana?
    Mr. Alpert. That was certified at the trial level. It was 
decertified at the second district court of appeal, and it is 
presently on discriminatory review in the Florida Supreme 
Court.
    Mr. Burr. Have you ever sued the Federal Government?
    Mr. Alpert. Have I ever sued the Federal Government?
    Mr. Burr. I was just curious.
    Mr. Alpert. I can't think of any occasion when I have. I 
don't know any instance where the Federal Government has 
defrauded anyone or has injured someone in their medical care.
    Mr. Burr. I thank you, and I would yield back. Mr. 
Chairman.
    Mr. Alpert. If the Federal Government did, it shouldn't.
    Mr. Burr. I feel confident you would.
    Mr. Alpert. I would hope so. There's an old saying in the 
law, by the way, Congressman. It's from common law that 
although some live in the meanest hut in the kingdom and 
although the door be off the hinges and although the wind goes 
through the windows, the king Of England may not enter. And the 
point of this is that the law protects the people.
    And if we don't protect the American people, we are sowing 
the seeds of our own destruction. Years ago, this committee 
under the chairmanship of Congressman Dingell did its best to 
protect the people with--this committee has a continuing 
obligation to do that as does this Congress.
    Mr. Burr. And I assure you, Mr. Alpert, it's the intent of 
this subcommittee, full committee and Congress, to assure that 
we protect the individuals in this country. We also have a 
balance, I will remind you, in policy to protect the rights of 
businesses, to set structures that they follow that are 
understandable, that don't move, that are not reinterpreted 
different than what the congressional meaning was; and 
hopefully if we do our job right, it's not something that's 
left up to you or to courts for the interpretation. It's in 
fact to live to the letter of the law of what the congressional 
legislation says. We're here today----
    Mr. Alpert. I couldn't agree with you more.
    Mr. Burr. It's my time now. We're today trying to determine 
what that balance is, and I think given the fact that the 
Commerce Committee addressed it in a different way than 
Banking, we see the process at work hopefully for Ms. Griffin 
and her concerns, Ms. Crawford and her concerns. We will 
address this in a way that the comfort level is higher at the 
end than it was at the beginning.
    To some degree, I resent the fact that banks aren't here to 
defend themselves. To some degree I resent the fact that you're 
here and some of the analogies that have been made about issues 
that had been resolved, issues that apparently guilt was 
admitted, or at least restitution was made and that we would 
use those examples to drive policy that is not necessarily the 
policy of today is, in fact, misleading to Congress.
    Now, it was the decision of this committee to follow this 
path. I will follow it, but I will also make sure that we 
delineate the difference between the past, the present, and the 
future. And I'm hopeful we will all be together in the future. 
And I yield back.
    Mr. Alpert. Congressman, I couldn't agree with you more. At 
the present, the same activities are continuing. They have what 
are called ``dual employees.''
    Mr. Burr. Mr. Alpert, I would have suggested that the 
information that you showed us was not letters from 4 years 
ago, but the documents today that don't meet the technical 
but--don't meet the meaningful, but meet the technical 
meanings.
    Mr. Alpert. The problem is in 4 years I will be showing you 
what's happening today, because I can assure you, Congressman, 
that the NationsBank/Bank America, First Union, and the other 
banks don't come to me and say by the way Mr. Alpert, last week 
we defrauded another 10,000 customers. There is a lapse and it 
takes a bit of time. It is still going on. And it is still 
occurring.
    Regarding your point on the law and the obligation of 
Congress, there's been some discussion of the 10 commandments, 
and in some ways I think maybe if we could just have the 10 
Commandments as a sole statute and wipe out all the other laws, 
we would cover everything, because people would ask me when I 
got started doing this, well, what laws did the banks violate, 
and I was just learning them; and I said, well, I said, there 
are two that occur to me right off the bat. One is thou shalt 
not steal and the second one is honor thy father and thy 
mother.
    And those are two of the 10 commandments; and perhaps if we 
all honored the 10 commandments, we wouldn't need lawyers. We 
wouldn't even need bankers, and maybe we wouldn't need to be in 
congressional session.
    Mr. Burr. I think that is truly heaven you have just 
described.
    Mr. Alpert. Thank you, sir.
    Mr. Upton. I would note that the gentleman's additional 2 
minutes is now expired. The gentleman from Kentucky, Mr. 
Whitfield.
    Mr. Whitfield. I'm sorry I came in a little late. This 
seems like a pretty interesting hearing. Mr. Alpert, what--I am 
sure that in your testimony, maybe you did cover this, and it 
is lengthy, so I haven't had the opportunity to review it, but 
what actually--what was the total amount of money that was 
recovered by the victims of this episode?
    Mr. Alpert. There was a little over $60 million from Bank 
America. First Union has--I believe those are confidential. I 
believe that the other ones are confidential of the past 
episodes. Publicly, it's over $60 million. That's one of the 
problems, by the way; we have to represent our clients, and we 
sometimes can't tell everything that happened.
    Mr. Whitfield. Okay. So there are settlements in excess of 
$60 million?
    Mr. Alpert. Yes. And there was some others that I don't 
know about. There were individual cases, for example.
    Mr. Whitfield. And could you describe what was the actual 
basis of the lawsuits. Was it fraud?
    Mr. Alpert. There are several. There's one--there is was 
one set where they committed violations of prospectuses. In 
other words, they didn't have the proper information in their 
prospectus, nor did they give it to their customers. What's 
interesting about that, and one of the reasons why I know it's 
continuing is, one of the State managers of Bank America 
claimed to me under oath that she had given her brokers word-
by-word instruction and instruction on what the prospectus was. 
Well, the prospectus contained derivatives. So I asked her what 
the LIBOR was and she didn't know. I asked her what a tranche 
was and she didn't know.
    I asked her what a PO was, and she didn't know. I asked her 
what an IO was, and she didn't know. And this person is still 
in a high position in Bank America Securities. There was that.
    There was then the issue of nondisclosure of the risk of 
loss aside from the prospectuses. And these nondisclosures were 
involved in a typical securities fraud case. You then have a 
deception by the banks. One of them--it is still continuing, 
First Union, where they have dual employees where the same 
person is wearing the hat of the banker and the broker. So the 
customer doesn't know what they're talking to that person for 
at that particular time.
    And these people, many of them series 6--and we're getting 
technical--they're not supervised; there's no one to supervise 
them. So you have those kinds of issues, some of the First 
Union cases, by the way, there are individual cases filed. They 
were lost, because the lawyers on an individual basis could not 
afford to litigate against the bank, and only in the class-
action case were we able to protect the consumers and our 
clients, though we didn't protect all of them, unfortunately.
    Mr. Whitfield. And how many known victims were there of 
this?
    Mr. Alpert. I have seen over a thousand letters. And I have 
examined Mr. McCall under oath about those, and I can't discuss 
that examination, because that's confidential. But I've seen 
personally over a thousand. I've heard horror stories of--in 
the thousands from Bank America, First Union, AMSouth, Barnett 
Bank customers, as well as banks we haven't sued--we haven't 
sued everybody--as well as banks in States as far away as 
Hawaii, Michigan, and New York. And unfortunately, we can't sue 
them all.
    Mr. Whitfield. During this entire episode, did you have any 
contact with or work with the Office of Comptroller of the 
Currency?
    Mr. Alpert. Yes, sir.
    Mr. Whitfield. What, were you simply notifying them of what 
you thought was going on or what?
    Mr. Alpert. We had a meeting with bank securities 
regulators in August 1994. They came to Tampa, and there was a 
meeting in our office with some folks from the OCC and the SEC 
both. Many of our clients before we got involved had written to 
the OCC. In 1995, the OCC told Leilani DeMint, one of our 
clients, a retired toll taker who thought she was buying Sears 
EE bonds, that she was not--that the OCC was closing its file 
on her case, because they thought--because there was a lawsuit 
pending. I never heard of that. I haven't seen that in their 
regulations. And then in 1998, we requested assistance from the 
OCC in terms of disclosure of some examination reports of a 
bank that no longer existed, Barnett Bank.
    And the OCC, just refused to offer any assistance 
whatsoever at all. And I'm puzzled--in terms of disclosing 
documents for private litigation. And I'm puzzled by that 
attitude toward the constituents. And I think sometimes perhaps 
they don't--they may have thought we would just go away.
    Mr. Whitfield. Okay.
    Mr. Upton. Thank you. I would note to our witnesses that 
there are a number of activities going on this morning, and I'm 
going to ask unanimous consent that all members of the 
subcommittee may, particularly those that are not here, that 
they may follow up with some questions in writing, and if you 
would respond to those--that we can make part of the record, 
that would be terrific.
    Mr. Burr. Mr. Chairman, could I also ask unanimous consent 
that Ms. Crawford be allowed once the House has completed their 
work on H.R. 10 to share in whatever form she feels appropriate 
any suggestions that she has relative to the final drafting and 
where concerns still might exist that might have gone 
undetected in the passage of that bill.
    Mr. Upton. Without objection, I think that would be a 
terrific idea.
    Ms. Crawford. Thank you.
    Mr. Upton. If we have no further questions, you are 
excused. Thank you for your time this morning.
    Our next panel includes Julie Williams, who is the Chief 
Counsel, Office of the Comptroller of the Currency, OCC.
    Hello, Ms. Williams. We have a longstanding tradition and 
rule in this subcommittee that we take testimony under oath. Do 
you have any objection to that?
    Ms. Williams. No, not at all.
    Mr. Upton. The rules of the House provide that you are 
allowed counsel if you so desire. Do you need to have counsel?
    Ms. Williams. No.
    [Witness sworn.]
    Mr. Upton. Thank you. Thank you very much. Traditionally 
your statement is made part of the record, and we would like to 
keep you to 5 minutes if we can in terms of your summary that 
would be great. This little bell will keep us in time.
    Ms. Williams. I'm familiar with those.
    Mr. Upton. Yeah, me too.

 TESTIMONY OF JULIE L. WILLIAMS, CHIEF COUNSEL, OFFICE OF THE 
                  COMPTROLLER OF THE CURRENCY

    Ms. Williams. Mr. Chairman and members of the subcommittee, 
I appreciate this opportunity to discuss the OCC's role and 
supervisory approach with respect to subsidiaries of national 
banks that are registered broker- dealers and to review the 
NationsSecurities matter. As I begin, however, I want to 
express my sympathy for the victims in the NationsSecurities 
matter. The sales abuses that occurred would be intolerable 
under any circumstances and it is deplorable that they occurred 
in connection with an entity affiliated with a national bank.
    Let me now briefly discuss each regulator's role in the 
supervisory process. When a broker is a subsidiary of a 
national bank, as you know, the SEC and the NASDR are the 
primary supervisors of registered broker-dealers, including 
those who are subsidiaries or affiliates of national banks. The 
OCC recognizes these securities regulators have primary 
responsibility for overseeing the compliance by brokerage 
subsidiaries with banks with comprehensive securities law 
requirements.
    However, because we are responsible for supervising the 
affiliated bank, the OCC also has an interest in 
responsibilities that pertain to the activities of bank 
subsidiaries. Our approach begins with identifying risks these 
activities pose and determining if those risks are being 
managed appropriately. We emphasize the risk identification and 
risk management systems applicable to the subsidiary's 
operations. Risk may be present, for example, if the bank and 
the subsidiary do not have in place procedures to assure the 
bank customers receive full and accurate disclosures about the 
uninsured status and risks of investment products they buy 
through the bank subsidiary. Failure to do so may injure the 
bank's customers, damage their relationship with the bank, 
lower the bank's reputation and expose the bank to liability. 
Thus, we fully share the goals of the SEC and the NASDR to 
assure fair treatment of customers.
    In the case of a brokerage affiliate or subsidiary that 
operates on bank premises or effects sales through banks, a 
review of a bank's management and control systems for that 
activity will inevitably touch on aspects of the operations of 
the broker as well.
    However, we do not seek to duplicate or intrude into the 
responsibilities or activities of securities regulators. If as 
a result of our oversight of a bank's compliance and risk 
management systems the OCC becomes aware of conduct or 
activities that raise concerns about securities law compliance, 
by a brokerage affiliate or subsidiary of a national bank, we 
would consult with the primary regulator to determine 
appropriate examination efforts and supervisory responses by 
each regulator to the situation.
    My written statement describes a recent situation involving 
this type of coordination and summarizes the various areas 
where we coordinate productively with the SEC and the NASDR. 
OCC policies on functional oversight of broker-dealers that are 
affiliated with national banks are reflected in revisions to 
the OCC's bank examination handbook that have been underway for 
some time and will be published shortly in a new examination 
handbook.
    My written statement also describes in some detail the 
sequence of events that occurred in the NationsSecurities 
matter.
    I will add just this: Those lapses were deplorable. They 
were corrected by the bank and NationsSecurities, however in 
1995, in response to OCC exams that contained significant 
criticisms of the customer safeguards applied in connection 
with investment product sales by NationsSecurities through the 
bank. The OCC, SEC and NASDR coordinated effectively and 
ultimately brought coordinated enforcement actions imposing 
various sanctions in 1998.
    I would be pleased to respond to any questions you have.
    [The prepared statement of Julie L. Williams follows:]
 Prepared Statement of Julie L. Williams, Chief Counsel, Office of the 
                      Comptroller of the Currency
    Mr. Chairman and members of the subcommittee, I appreciate this 
opportunity to discuss the Office of the Comptroller of the Currency's 
(``OCC'') role and supervisory approach with respect to subsidiaries of 
national banks that are registered broker-dealers, and to review the 
NationsSecurities matter. The OCC is the primary supervisor for 
national banks. The National Association of Securities Dealers 
Regulations, Inc., (``NASDR'') and the Securities and Exchange 
Commission (``SEC'') are the primary supervisors for registered broker-
dealers, including those that are subsidiaries of national banks. The 
OCC recognizes that these securities regulators have primary 
responsibility for overseeing the operations of brokerage subsidiaries 
of national banks and their compliance with comprehensive securities 
law requirements.
    However, because we are responsible for supervising the parent 
bank, the OCC also has an interest in--and responsibilities that 
pertain to--the activities of bank subsidiaries. Our approach begins 
with identifying risks these activities pose and determining if those 
risks are being managed appropriately. Risk may be present, for 
example, if the bank and its subsidiary do not have in place procedures 
to assure that bank customers receive full and accurate disclosures 
about the uninsured status and risks of investment products they buy 
through the bank's subsidiary. Failure to do so may injure the bank's 
customers, damage their relationship with the bank, mar the bank's 
reputation, and expose the bank to liability. We thus fully share the 
goals of the SEC and the NASDR to assure fair treatment of customers. 
We do not, however, seek to duplicate or intrude into the 
responsibilities or activities of the securities regulatory bodies with 
respect to registered broker-dealers.
    In that regard, we have learned a great deal about effective 
regulatory coordination in this area since our efforts in 1993 and 1994 
to establish disclosure and operational guidance for sales of 
investment products on bank premises. We have learned, for example, 
that no regulator's supervisory interests need be compromised simply 
because different regulators have different direct and indirect 
interests with respect to the same entities. We have worked hard to 
coordinate on individual cases as well as larger policy and regulatory 
issues with the SEC and the NASDR. And we have learned that recognition 
of each agency's respective responsibilities, and effective inter-
agency coordination, maximizes both safety and soundness of national 
banks and investor protection, and helps securities and bank regulators 
achieve their goals.
OCC's Supervisory Approach
    It is in that spirit that I will explain in more detail the OCC's 
current supervisory approach to broker-dealer subsidiaries of national 
banks, and our particular experiences in the NationsSecurities matter. 
As noted at the outset, in determining our role with respect to broker-
dealers that are subsidiaries of national banks, the OCC has been 
mindful of the vital primary supervisory role of the SEC and the NASDR. 
One recent industry survey suggests that 96 percent of the sales force 
involved with bank-related investment sales are registered with the 
NASDR and are subject fully to regulation as brokers.
    Brokerage subsidiaries of national banks must register with the 
securities regulators and comply with a comprehensive securities law 
regulatory scheme that offers significant customer protection, to the 
same extent as brokers that are not affiliated with banks. The NASDR 
and SEC have primary responsibility for inspecting these subsidiaries, 
interpreting and applying securities law and regulatory standards, and 
addressing any compliance concerns. We fully understand the SEC's 
interest in maintaining its primacy in this area, as the SEC has 
clearly communicated, and fully support its supervisory efforts to 
assure adequate protections for investors. Accordingly, the OCC defers 
to the SEC and the NASDR to conduct inspections, address securities law 
compliance concerns and generally supervise brokers that are 
subsidiaries of banks.
    At the same time, due to our responsibilities for the safety and 
soundness of national banks, the OCC also has an interest in the 
operations of bank subsidiaries. We seek to assure that the parent bank 
effectively monitors and controls risks presented by the subsidiary's 
operations. We focus on the adequacy of policies, procedures and risk 
management systems, and we test and verify to determine whether those 
systems work. With respect to brokerage subsidiaries of banks, we 
emphasize risk identification and risk management systems applicable to 
a subsidiary's operations, rather than attempting to duplicate the work 
of the SEC or the NASDR by examining the subsidiary's daily operations. 
In the case of a brokerage subsidiary that operates on bank premises or 
effects sales through banks, however, a review of the bank's management 
and control systems for that activity will inevitably touch on aspects 
of the operations of the brokerage subsidiary as well.
    If, as a result of our oversight of a bank's compliance and risk 
management systems, the OCC becomes aware of conduct or activities that 
raise concerns about securities law compliance by a brokerage 
subsidiary or affiliate, we would promptly consult with the primary 
regulator to determine appropriate examination efforts and supervisory 
responses by each regulator to the situation. A recent example of how 
this functional approach works involved a national bank brokerage 
subsidiary with plans to significantly expand its securities sales 
program through the parent bank. OCC examination staff had concerns 
with the sales program based on our knowledge of compliance function 
issues at the bank itself, and prior SEC inspections. Accordingly, 
prior to the expansion of the bank's sales program, the OCC invited the 
SEC to participate in an examination that reviewed these sales 
activities.
    Collaborative efforts between examiners on-site and the local SEC 
office contributed to the success of the examination. An SEC examiner 
participated directly in the examination and OCC staff met with 
representatives of the local SEC office before, during and at the 
conclusion of the examination. Since that review, OCC and SEC examiners 
have continued to share information and maintain communication. Another 
joint examination is planned within the next twelve months. Staff from 
both agencies found this approach efficient and effective.
    The OCC coordinates in other respects with the primary regulators 
for brokerage subsidiaries of national banks because of our related 
areas of responsibility. In January of l995, the OCC and the other 
federal financial institution regulators signed an agreement with the 
NASDR relating to sharing information and coordinating efforts. Shortly 
thereafter, the OCC exchanged lists of local contacts with the NASDR to 
facilitate exchanges of information and coordination at the local 
level, where coordination concerning individual institutions is most 
effective. The OCC also coordinates and shares information with the 
SEC. As noted above, we have contacted the SEC when it appears that a 
substantive issue, subject to SEC's jurisdiction, exists with respect 
to a broker subsidiary of a bank. We also make examination reports 
available to the SEC relating to investigations and provide access to 
examiner work papers, internal documents and examination staff. The OCC 
also has provided examination staff as witnesses in SEC enforcement 
actions.
    The OCC's policies on functional oversight of brokerage 
subsidiaries are reflected in revisions to the OCC's bank examination 
handbook that have been underway for some time and will be published 
shortly in a new examination handbook. Under these policies, examiners 
defer to the primary role of the securities regulators, while reviewing 
risks to the bank from the subsidiaries' operations in evaluating the 
composite risk profile of the parent bank. Examiners are instructed 
that if they have concerns with the securities activities of a 
subsidiary, they should contact the primary regulator and work with the 
regulator to obtain necessary information and determine appropriate 
action. Examiners also are advised to maintain communications with the 
local contacts for the primary regulators on an ongoing basis to keep 
abreast of any developments that could affect the bank. The handbook 
also reminds examiners of the OCC's policy to refer evidence of 
potential violations of law that fall within the jurisdiction of 
another primary regulator. All of these steps will enhance information 
sharing and coordination between our examination staff and securities 
regulators.
    In addition to the guidance contained in revisions to the OCC's 
bank examination handbook, OCC bank supervision staff have held 
meetings with representatives of the SEC in Washington, D.C., to 
identify areas where it is productive to exchange supervisory 
information. We intend to continue this dialogue. The intent of these 
meetings is to establish avenues of communication similar to those that 
have traditionally existed with other federal and state bank 
supervisory agencies.
Development of Consumer Protection Standards For Securities Sales
    As noted at the outset, the OCC and the securities regulators share 
a common concern that bank customers understand the risks involved in 
securities investments and not mistakenly believe these products are 
FDIC-insured or guaranteed by the bank. In July of 1993, the OCC issued 
Banking Circular 274, which established standards for national banks 
offering mutual funds, annuities and other nondeposit investment 
products. The Circular stressed that ``[b]anks should view customers' 
interests as critical to all aspects of their sales programs.'' It 
directed banks to disclose that securities products are not FDIC-
insured, not backed by the bank and involve investment risks, including 
possible loss of principal. In addition, the Circular further directed 
that banks obtain signed statements from customers acknowledging 
receipt and understanding of these disclosures. The Circular also 
addressed program management, physical separation of securities and 
depository activities, advertising, suitability, qualifications and 
training, and other consumer protection issues.
    Shortly after the issuance of Banking Circular 274, the OCC worked 
with the other federal banking regulators to establish uniform 
interagency guidance for securities sales through banks. In February of 
1994, the agencies issued the Interagency Statement on Retail Sales of 
Nondeposit Investment Products, which embraced the standards from 
Banking Circular 274 and provided more detailed guidance on sales 
programs. The OCC also issued detailed examination procedures for 
examiners on evaluating compliance with the Interagency Statement. The 
banking agencies developed these standards due to the absence--at the 
time--of securities regulatory requirements directed at the special 
concerns that arise from sales by registered broker-dealers through 
banks.
    In 1998, the NASDR adopted its final rule applicable to broker-
dealers governing their securities sales through banks. The new NASDR 
standards incorporate many of the standards in the Interagency 
Statement. We appreciate the efforts of the NASDR to coordinate and 
establish consistent standards with the banking agencies, and since 
then, the OCC and the other federal banking agencies have undertaken a 
project to codify the Interagency Statement standards, in a manner 
consistent with the NASDR rules. We anticipate our proposal will focus 
on activities and obligations that apply directly to banks, and should 
therefore mesh with the NASDR rules, which focus on the activities of 
the broker-dealer.
OCC Supervisory Efforts Relating to NationsSecurities
    I would now like to turn to the matter of securities sales abuses 
involving NationsSecurities in late l993 and early 1994.
    On April 9, l993, the OCC approved a partnership between a 
NationsBank subsidiary and Dean Witter named ``NationsSecurities.'' It 
was contemplated that the partnership would operate from some 
NationsBank offices and would offer securities to bank customers. 
Before approving the proposal, the OCC required representations and 
imposed enforceable conditions of approval designed to establish proper 
management oversight of and basic customer protection standards for 
securities sales effected by the partnership on the premises of, or 
otherwise through, NationsBank.
    For example, one condition required that the partnership disclose 
that the products were not FDIC-insured, were not backed by the bank 
and involved investment risks, including loss of principal. The 
condition also required that a signed statement be obtained from 
customers acknowledging receipt and understanding of these disclosures. 
Another condition required that the partnership's products not be 
marketed in a manner that would mislead or deceive consumers as to the 
products' uninsured nature and lack of any guarantee by the bank or the 
partnership. Various other disclosure and operational requirements 
designed to protect bank customers were established in the 12 
conditions imposed on this approval. The OCC approval noted that the 
partnership would be registered as a broker-dealer and subject to the 
requirements of the federal securities laws and Rules of Fair Practice 
of the NASDR. Shortly after the partnership commenced operations on 
June 7, l993, the OCC adopted Banking Circular 274, which imposed 
additional consumer protection standards for banks offering securities 
on bank premises designed to avoid customer confusion.
    On November 1, l993, the OCC commenced an examination of 
NationsBank to evaluate the bank's progress towards compliance with the 
conditions in the OCC's approval and Banking Circular 274. At that time 
there was great interest in the adequacy of disclosures of the 
uninsured nature of investment products sold on bank premises, and the 
SEC had just issued its ``Chubb Letter'' addressing the propriety of 
payment of referral fees to unregistered employees of financial 
institutions. Thus, the examination concentrated on the disclosures 
being provided to customers and reviewed the operational policies and 
procedures of the bank, particularly with respect to whether the 
incentives made available to bank employees for referring business to 
the partnership were appropriate. Our examiners issued an examination 
report that was critical of compliance efforts in general, stemming 
from a lack of coordinated effort by bank management to achieve 
compliance. The report found specific noncompliance with Banking 
Circular 274 provisions relating to advertising, compliance management, 
disclosures and employee compensation.
    On reviewing our examination findings, the bank took corrective 
actions to address areas criticized by the OCC and to ensure future 
compliance with the Interagency Statement. Bank management's response 
commenced during the examination with the formation of a compliance 
committee in January of 1994 to establish a corrective action response 
plan. The plan was drafted by February of 1994 and the response was in 
place by April of 1994.
    In late spring and summer of l994, the OCC received customer and 
broker complaints about sales abuses relating to sales of Term Trusts 
1 that had occurred between August and September of 1993 and 
January and February of l994. After learning of these complaints, OCC 
examination staff immediately began a review, including interviewing 
employees of the bank and NationsSecurities and doing on-site reviews 
in the bank's Tampa locations. The OCC also met with the SEC and other 
regulators and began sharing information regarding their work and their 
findings. At roughly the same time, our on-site examination staff 
conducted additional inquiries regarding the sales practices at issue 
and planned and organized an intensive examination of the bank's 
nondeposit investment products sales practices.2 This exam 
formally began in January of 1995, using resident examiners and a cadre 
of expert examiners brought in from other parts of the country. During 
that examination, OCC examination staff advised the bank of major 
deficiencies in the customer suitability and product selection process. 
Between May and September of 1995, at the direction of the OCC, the 
bank and NationsSecurities responded to OCC concerns and took actions 
to correct the customer suitability and product selection deficiencies.
---------------------------------------------------------------------------
    \1\ The 2003 and 2004 Term Trusts were two closed-end investment 
companies that were sold by NationsSecurities and other broker-dealers.
    \2\ In November of l994, NationsBank bought out Dean Witter's 
interest in NationsSecurities. We were informed by the bank that it 
made these structural changes to assure greater control over securities 
sales through the bank and compliance with regulatory standards, and to 
facilitate correction of the kinds of problems experienced with the 
sales of the Term Trusts.
---------------------------------------------------------------------------
    On July 24, l996, the OCC commenced another examination of 
NationsBank's retail sales program. Following that exam, our examiners 
confirmed that corrective action had been taken to resolve concerns 
identified in the l995 examination and noted no instances of 
noncompliance with the Interagency Statement.
The OCC, SEC and NASDR Coordinated their Efforts Along Functional Lines 
        of Regulation
    The OCC and securities regulators pursued our examination and 
investigation reviews and enforcement actions consistent with our 
functional lines of regulation. The SEC primarily investigated 
potential violations of securities laws by NationsSecurities and the 
bank, while the OCC focused on the bank's compliance with banking laws 
and standards applicable to the bank that were relevant to customer 
protection.
    On learning of the sales practice abuses, the OCC and SEC staff 
consulted with one another and exchanged formal requests for access to 
each other's documents. The OCC provided the SEC access to our 
examination information and set up meetings between OCC examination 
staff and SEC investigators, which occurred in August of l994.
    In September of l994, the SEC opened a formal Order of 
Investigation. Subsequently, the SEC would be conducting an in-depth 
investigation, including depositions of customers, and would share 
information from the investigation with the OCC. The SEC shared with 
the OCC information gathered from its investigation. The OCC also 
shared with the SEC our examination reports, work papers and other 
internal information relating to the securities sales programs.
    During the negotiation of settlement actions, the OCC, the SEC and 
the NASDR effectively coordinated our respective enforcement efforts 
and announced the settlements together on the same date. At a joint 
press conference, the agencies expressed appreciation for each other's 
coordination and cooperation in these enforcement endeavors. The 
agencies' final enforcement actions reflect a functional regulation 
approach. The OCC brought an action against the bank based on the 
bank's failure to comply with the OCC's condition requiring that the 
bank assure that securities products not be marketed in a manner that 
would mislead or deceive bank consumers as to the products' uninsured 
nature and lack of any guaranty by the bank. Through the bank's 
noncompliance with this condition, the bank failed to adhere to the 
OCC's standards on retail nondeposit investment sales contained in 
Banking Circular 274. The OCC assessed a civil money penalty of 
$750,000 against the bank for this violation. The OCC also suspended 
from engaging in bank securities activities and assessed a penalty 
against a bank employee who had been involved in the sales practice 
abuses and entered into agreements with two other individuals to 
prevent them from engaging in securities activities within banks during 
the period they had been suspended by the NASDR. In addition, the SEC 
assessed a $4 million penalty and the NASDR assessed a $2 million 
penalty against NationsSecurities for securities law violations. The 
SEC also entered into a consent order with the bank in which it agreed 
to cease and desist from causing or engaging in violations of certain 
securities law provisions. The NASDR also fined and suspended three 
individuals based on violations of the federal securities laws falling 
within their jurisdiction. The agencies relied upon information 
developed by each other in completing their respective enforcement 
actions.
Legislative Proposals Affecting the Bank Regulators' Role
    In closing, I would like to briefly note a development that could 
impair much of the progress that has been made in recent years in 
coordination between bank regulators and securities regulators who are 
working toward that common goal of fair treatment of customers. The 
current system of functional regulation involves different regulators 
on the lookout--from their different perspectives--for customer 
concerns arising from securities sales through banks. We are concerned 
that H.R. 10 could diminish these safeguards. Under Section 117, the 
ability of a bank or thrift regulator to seek information from, or 
examine a functionally regulated bank affiliate or subsidiary, would be 
severely limited. As a practical matter, this could preclude a bank 
regulator from promptly taking reasonable steps to verify the existence 
of information relevant to a potential problem that would warrant a 
contact with the appropriate functional regulator.
    We would respectfully suggest that setting a framework for 
cooperation and coordination between, rather than segregation of, 
regulators would be preferable and would enhance both investor 
protection and the safety and soundness of all types of financial 
institutions that have functionally regulated affiliates and 
subsidiaries.
Conclusion
    We appreciate this opportunity to explain to the Subcommittee the 
OCC's role with respect to brokerage subsidiaries of banks and our 
coordination with their primary regulators, and hope you will find this 
information useful in your oversight activities. I would be pleased to 
answer any questions you have.

    Mr. Upton. Thank you again for appearing before this panel 
this morning. I don't know whether you have seen this national 
bank securities service audit. It actually dates back from 
April 1996. It says a profit market research consulting second 
annual national bank securities service audit, which benchmarks 
services provided by bank based retail securities brokers. And 
it asks a number of questions, in this particular case 
comparing results with August 1994 and April 1996: Did not 
complete a customer profile before the pitch was made--
actually, sadly, it went up from 12 percent to 27 percent in 
that year and a half period of time--did not find out 
prospect's income level--again went up from 44 to 51 percent. 
Tax bracket, et cetera.
    I don't know whether a report has been done since this was 
out. Are you aware of any follow up? The reason why this is 
timely is that in 1994 I think was when the regulations were 
just coming out in terms of what operating subsidiaries were 
going to have to do. Yet despite more regulations that were 
coming out, yet in fact, the trend lines got worse. And I'm 
just wondering has there been any follow up to this, have those 
numbers, percentages come back down in terms of compliance? Are 
you aware of anything?
    Ms. Williams. I'm not personally familiar with that report 
that you have. The most, by far the bulk of the sales 
activities that occur on bank premises or through banks are 
being conducted by third party broker-dealers, either related 
third parties, affiliates of the bank or subsidiaries of the 
bank. So they are fully subject to all of the broker-dealer 
standards and requirements.
    In addition, as I'm sure you know, the NASDR adopted, 
finalized recently, specific regulations imposing special 
safeguards where registered broker-dealers are selling on bank 
premises. The interagency statement that the banking regulators 
adopted was finalized in 1994. And that has comparable 
standards applicable to the bank to ensure appropriate 
disclosures and appropriate safeguards are in place.
    So I would expect that as a result of all of those 
activities, that the type of information that you have, if you 
looked at information that is more current, it would reflect 
significant improvement. But I'm not aware of any comparable 
survey for a more recent time.
    Mr. Upton. Okay. I don't know if you heard Ms. Crawford's 
testimony to the first panel. She's a securities commissioner 
for the State of Texas, Texas State Securities Board, and she 
spoke earlier this morning. And she indicated that the OCC 
really had a record of not being responsive--I'm paraphrasing 
here--not being responsive to the needs of the State of Texas 
and thought that as she had heard from her peers in other 
States that in fact that was also prevalent.
    Ms. Williams. I----
    Mr. Upton. How would you react to that?
    Ms. Williams. I don't know what her experience was dealing 
with us, but in the particular NationsSecurities matter we did 
coordinate with several State securities regulators to share 
information and documents. So I'm not sure what gave rise to 
her concern. It certainly is our intention and desire to 
cooperate with both the Federal and the State securities 
regulators.
    Mr. Upton. Mr. Dingell, a member of this committee and 
subcommittee as well, I don't know if you saw the statement 
that he gave almost a year ago, 1998, he says the office--
``NationsBank and subsidiary NationsSecurities''--let me just 
finish this if I may--``conspired to defraud elderly and 
retired citizens who held maturing certificates of deposit 
worth hundreds of millions of dollars by selling them toxic 
derivatives disguised as safe government backed term trusts. 
The OCC during Eugene Ludwig's tenure identified these 
fraudulent sales practices while conducting routine exams in 
1994 1995, yet did nothing to stop them. Only after the SEC 
presented the OCC with its findings and conclusions did the OCC 
act. This begs the question of whether the OCC was negligent, 
corrupt or an active participant in wrongdoing by NationsBank.
    ``That question deserves a thorough investigation and an 
answer. Unfortunately I predicted such shenanigans when I 
conducted O&I hearings into these issues back in 1994. This 
sorry episode provides definitive albeit regrettable proof why 
true separation and functional regulation must be in any 
financial modernization legislation.''.
    What do you think about--where are you since he made this 
statement a year ago?
    Ms. Williams. I think that there are----
    Mr. Upton. His office is just down the hall, by the way.
    Ms. Williams. There are two points that that statement 
raises. First of all, we did identify the problems and obtained 
immediate corrective action from the bank and with respect to 
the procedures employed by the subsidiary. That occurred in 
1995.
    The question about functional regulation and the larger 
issues of how bank securities activities should be regulated, 
is I think a separate issue. And we're very well aware that 
that's comprehensively addressed or would be comprehensively 
addressed in the financial modernization bills that are 
pending. We've had issues with some provisions of the 
modernization bills, but we are not taking issue with the 
functional regulations titles in the financial modernization 
bills.
    Mr. Upton. Okay. If I just might ask one question then I'll 
pass to my colleague, Mr. Burr. Have you compared the Banking 
versus the Commerce Committee versions with regard to your 
role? In terms of working with the op subs?
    Ms. Williams. Specifically with respect to the activities 
on the op subs?
    Mr. Upton. It's my understanding that the Banking 
Committee's version is much broader in terms of its allowances 
by the OCC whereas the Commerce version, as most would probably 
indicate, tightens the loopholes and calls for stronger fire 
walls allowing for a better enforcement.
    Ms. Williams. I would have to go back and look more 
closely. Because I thought that there were differences but I'm 
not familiar right now with all of the details of the 
activities that would be exempt under the Commerce version 
versus the Banking Committee version; but they're not 
substantial issues. Both bills fundamentally repeal the broker-
dealer exemptions from the Federal securities laws that the 
banks currently enjoy.
    Mr. Upton. Okay. Mr. Burr.
    Mr. Burr. Thank you, Mr. Chairman. And my understanding, 
there's quite a few more changes as it relates to the Office of 
the Comptroller of the Currency. So I do suggest that you look 
at that closely.
    Let me ask you, banks that have operating subsidiaries 
selling securities, can one conclude today that they have twice 
the regulation of banks that don't?
    Ms. Williams. Well, I think if you talk to bankers that's 
probably what they would say.
    Mr. Burr. I'm asking you though.
    Ms. Williams. I think they get oversight directly from the 
SEC or the NASDR and then they get systemic oversight from the 
bank regulator who's looking at policies and procedures and 
systems, whether risk control systems work, and is testing 
whether those systems work.
    Mr. Burr. Well, when you look at the situation with the 
NationsBank case, let me ask you specifically, did the 
procedures that you have set up in the other regulatory 
agencies, did it work?
    Ms. Williams. Ultimately it did.
    Mr. Burr. So there may have been a lag in identification of 
a problem, but the procedures that were set up worked.
    Ms. Williams. That's correct.
    Mr. Burr. Are there any procedural changes that you've made 
as the result of that case?
    Ms. Williams. I think we have done a variety of things in 
terms of our own internal policies of interacting with 
functional regulators and I refer to that in both my written 
statement and alluded to it in my oral. To make quite clear the 
recognition of the respective agency's responsibilities and our 
practice of where we have information contacting----
    Mr. Burr. There's no confusion by agencies as to their role 
and responsibilities in those procedures, is there?
    Ms. Williams. I don't think there should be. No, sir.
    Mr. Burr. Let me ask you about one of Mr. Alpert's 
statements and I just want your view on it. Mr. Alpert said in 
his testimony First Union/NationsBank also engaged in what 
amounted to be money laundering, a practice more characteristic 
to racketeering than banking. When you look back as legal 
counsel of the OCC, what do you think about that statement?
    Ms. Williams. Well, I don't think this is money laundering 
or racketeering. It was a failure to have in place good systems 
and controls and customer safeguards.
    Mr. Burr. If it were you would refer it somewhere, wouldn't 
you?
    Ms. Williams. Yes, we would be filing all sorts of criminal 
referrals and taking other action that we take when we have 
evidence of money laundering.
    Mr. Burr. But you never did.
    Ms. Williams. No, I would not characterize these activities 
that way.
    Mr. Burr. Ms. Williams, I thank you for your testimony. I 
want to allow the rest of my colleagues to try to get questions 
in prior to us breaking for a vote. So I thank you and I would 
yield back, Mr. Chairman.
    Mr. Upton. Mr. Whitfield.
    Mr. Whitfield. I would also like to ask you to respond to 
the statement that Mr. Alpert made in his testimony. You had 
mentioned in your testimony that various sanctions had been 
issued to the volleying banks. Mr. Alpert said unfortunately 
the OCC has never taken any action against Barnett Bank, has 
never taken any action against First Union Bank, has taken only 
reluctant and minimal action against NationsBank, has never 
taken any action against Amsouth, even though State and Federal 
security regulators, including the NASD, have taken action 
against the brokerage subsidiaries of those banks. And it is 
our understanding that the OCC has actively blocked or resisted 
the action of security regulators who have tried to protect the 
American people. How would you respond to that?
    Ms. Williams. Well, first of all, as to that last statement 
that's absolutely untrue. We cooperate and place great 
importance on having good cooperative relationships with fellow 
regulators, including the SEC, the NASD and the State 
securities regulators. With respect to the institutions other 
than NationsSecurities, I just don't have information about 
those particular institutions. I had understood the focus of 
today's hearing was on our general approach to supervision and 
the NationsSecurities matters. So I would be happy to respond 
if there are any additional questions. I would add we don't 
regulate Amsouth. That's a State bank.
    Mr. Whitfield. But do you feel comfortable in the changes 
that you have brought about as a result of what happened in 
NationsBank?
    Ms. Williams. I think you always look back and think what 
could you have done differently and how can you learn from 
experiences. And I think that we have made a great deal of 
progress in our cooperative and coordinating relationships with 
securities regulators in the last several years.
    Mr. Whitfield. I yield back the balance of my time.
    Mr. Upton. Mr. Bilbray.
    Mr. Bilbray. I have no questions, Mr. Chairman.
    Mr. Upton. I have--we are in a vote. And I have two 
questions and I'm sort of at that point done with my questions 
at the moment. I just historically when we saw something like 
NationsBank come up--and I don't know how involved you may have 
been in that process--did you--in that particular case did the 
OCC actually talk with any of the customers? Did they interview 
any customers that claimed to have been defrauded?
    Ms. Williams. Mr. Chairman, I don't believe we did. Our 
exam focus was on the bank, on the bank's systems controls and 
safeguards. And I think that we ultimately were looking at 
records which enabled us to compare certain transactions which 
flagged for us the need to express criticism to the bank of 
their procedures and their suitability processes.
    Mr. Upton. When you did flag that criticism and 
investigation clearly was beginning to undergo, to proceed, why 
was it that it was virtually the same year that all of that 
started happening that in fact it's my understanding that you 
all gave the satisfactory rating, a 2 rating, 1 being the best, 
2 next, 5 being the worst, 2 rating to their activities? I mean 
how does that comport?
    Ms. Williams. The 2 rating or any rating that we give a 
bank is a composite rating. And it reflects everything that 
they do. Unlike, for example, the Community Reinvestment Act, 
we don't give a rating that is specific to how the bank is 
involved in selling retail uninsured investment products.
    Mr. Upton. Because my staff shows that these financial 
institutions are in substantial compliance with laws and 
regulations, overall risk management practices are satisfactory 
relative to the institution's size and complexity, and there 
are no material supervisory concerns as part of what's part of 
2. No material supervisory concerns. And as a result 
supervisory response is informal and limited.
    Ms. Williams. And in this case when we brought the 
particular criticisms and concerns to the attention of the bank 
management as a result of our exam, they immediately took 
corrective action. Corrective actions were in place before we 
had an exit meeting in the conclusion of the exam.
    Mr. Upton. Okay. Any more questions?
    Mr. Whitfield. No.
    Mr. Bilbray. No.
    Mr. Upton. We have a vote. Again, we may follow up with 
additional questions. But this hearing is adjourned. Thank you.
    [Whereupon, at 11:28 a.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
   Prepared Statement of The U.S. Securities and Exchange Commission
    Thank you for giving the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the opportunity to present this statement 
concerning bank securities issues. You have asked us to address the 
following issues: (i) the securities regulatory scheme as it compares 
with the bank regulatory scheme, including recent SEC enforcement cases 
involving bank securities activities; (ii) the Commission's examination 
program, including the SEC's coordination with federal bank regulators; 
and (iii) bank securities regulation under Section 12(i) of the 
Securities Exchange Act of 1934 (``Exchange Act''). This statement 
addresses each of these issues in turn.
          i. overview of the u.s. securities regulatory scheme
    Our securities markets today are strong, vibrant, and healthy. They 
are relied on both by individual investors who are increasingly putting 
their savings in stocks, bonds, and mutual funds,1 and by 
American businesses that need to raise capital.2 The success 
of our securities markets is based on the high level of public 
confidence inspired by a strong system of investor protection, and on 
the entrepreneurial and innovative efforts of securities firms.
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    \1\ As of December 1998, mutual fund assets totaled $5.5 trillion. 
Investment Company Institute, Trends in Mutual Fund Investing: December 
1998 (Jan. 28, 1999).
    \2\ In 1998, businesses raised a record $1.8 trillion from 
investors, $1.31 trillion in 1997, and $967 billion in 1996. (These 
figures include firm commitment public offerings and private placements 
but do not include best efforts underwritings.) Securities Data 
Corporation.
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    The Commission has been the nation's primary securities regulator 
for 65 years. The Commission's statutory mandate focuses on investor 
protection, the maintenance of fair and orderly markets, and full 
disclosure. Moreover, securities regulation encourages innovation on 
the part of brokerage firms, subject to securities capital requirements 
that are tailored to support any risk-taking activities. Significantly, 
securities regulation--unlike banking regulation--does not protect 
broker-dealers from failure. Securities firms are expected to have 
strong risk-management controls and procedures. Ultimately, however, 
securities regulation relies on market discipline, rather than a 
federal safety net. An additional capital cushion and customer 
segregation requirements insulate customers and the markets from the 
losses of broker-dealer firms. Moreover, protection of customer funds 
has been further assured by the Securities Investor Protection 
Corporation (``SIPC'').3
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    \3\ SIPC is a non-profit membership corporation created by the 
Securities Investor Protection Act of 1970. SIPC membership is required 
of nearly all registered broker-dealers, and SIPC is funded by annual 
assessments on its members. If a broker-dealer were to fail and have 
insufficient assets to satisfy the claims of its customers, SIPC funds 
would be used to pay the broker-dealer's customers (up to $100,000 in 
cash, and $500,000 in total claims, per customer).
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    This Subcommittee is well aware of the many securities activities 
in which the banking industry now engages. While these market 
developments have provided banks with greater flexibility and new areas 
for innovation, they have also left U.S. markets and investors 
potentially at risk. Because banks have, to date, retained their 
blanket exemptions from most federal securities laws, their securities 
activities have been governed by banking statutes and regulations that 
have not necessarily kept pace with market practices or needs for 
investor protection. As you know, banking regulation properly focuses 
on preserving the safety and soundness of banking institutions and 
their deposits, and preventing bank failures. But, because market 
integrity and investor protection are not the primary focus of banking 
regulation, banking regulation is not an adequate substitute for 
securities regulation. In order for banks to be fully liberated from 
the outdated Glass-Steagall Act restrictions on their ability to 
conduct securities activities, banks must be willing to take on the 
responsibility for full compliance with U.S. securities laws, with 
which all other securities market participants must comply.
    The following is a more detailed discussion of several key elements 
of the securities regulatory scheme, highlighting some of the 
fundamental differences between the Commission's program and that of 
the federal bank regulatory scheme. The key elements of the securities 
regulatory scheme include:

 Aggressive SEC policing and oversight of securities 
        activities;
 Safeguarding customers and markets through market-sensitive 
        SEC net capital rules; and
 Protecting investors by applying SEC sales practice rules to 
        securities activities.
A. Aggressive SEC Policing and Oversight of All Securities Activities
    Public confidence in our securities markets hinges on their 
integrity. As the Supreme Court recently stated: ``an animating purpose 
of the Exchange Act . . . [is] to insure honest securities markets and 
thereby promote investor confidence.'' 4 The Commission has 
an active enforcement division, whose first priority is to investigate 
and prosecute securities fraud. The banking regulators, on the other 
hand, are required to focus their efforts on protecting the safety and 
soundness of banks. As a former Commission Chairman said in recent 
Congressional testimony, detecting securities fraud is a full-time job, 
and it is a far cry from formulating monetary policy.5
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    \4\ United States v. O'Hagan, 521 U.S. 642, 117 S.Ct. 2199, 2210 
(1997).
    \5\ See Testimony of Richard C. Breeden, President, Richard C. 
Breeden & Co., Before the Subcomm. on Finance and Hazardous Materials, 
House Comm. on Commerce (May 14, 1997).
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    Examinations. To effectively police and oversee the markets, the 
Commission must be able to monitor the securities activities of market 
participants through regular examinations and inspections, which 
includes access to all books and records involving securities 
activities. This is currently not the case with respect to banks. The 
following is an important example of this problem.
    Banks increasingly advise SEC-registered mutual funds. In fact, we 
understand that the trend in banking has been to convert bank trust 
funds into mutual funds. Mutual funds allow their shareholders to 
monitor the value of their investments on a daily basis because mutual 
funds are required to price their shares at their current market value 
on a daily basis, and those prices are widely published in newspapers. 
In contrast, bank trust accounts are not marked-to-market daily, and 
there is no transparency--that is, wide dissemination--of their daily 
market value. Although banks are increasingly active as investment 
advisers to mutual funds, banks are exempt, under outmoded bank 
exemptions from the securities laws, from regulation under the 
Investment Advisers Act.
    As a practical matter, this means that SEC examiners only have 
access to part of the information necessary to assess the integrity of 
mutual funds. Key documents concerning bank advisory activities that 
could impact the integrity of bank-advised mutual funds are not readily 
available to SEC examiners. Without access to bank advisory records, 
for example, SEC examiners cannot examine bank advisers to detect 
front-running, abusive trading by portfolio managers, and conflicts of 
interest (involving, for example, soft-dollar arrangements, allocation 
of orders, and personal securities transactions by fund managers). As 
part of its review for conflicts of interest with respect to the 
activities of a bank mutual fund adviser, Commission examiners must be 
able to compare trading activity in the funds' portfolios to that in 
the bank's trust accounts. Because the Commission has had difficulty 
obtaining full access to all relevant information involving the 
securities activities of banks that advise mutual funds, shareholders 
of bank-advised mutual funds may be at risk.
    As requested by the Subcommittee, a more detailed discussion of the 
Commission's examination program and coordination with bank regulators 
is contained in Section II.
    Enforcement. There is a significant difference between the 
enforcement programs of the SEC and the banking regulators. The 
Commission's enforcement program fully informs the investing public of 
enforcement actions brought under the federal securities laws. 
Commission and self-regulatory organization (``SRO'') disciplinary 
proceedings are matters of public record. Commission press releases 
fully describe the nature of the proceedings and the identity of the 
parties disciplined. In addition, as mandated by the Exchange Act, the 
National Association of Securities Dealers (``NASD'') operates an 
``800'' number hotline that allows investors to obtain information 
about the disciplinary records of broker-dealers' registered 
representatives. In contrast, while the banking agencies are required 
to ``publish and make available to the public'' final orders issued in 
connection with enforcement proceedings,6 the banking 
agencies' releases typically do not describe the nature of the 
violation and the enforcement action taken. It is thus difficult for an 
investor to determine which proceedings are of interest in order to 
request copies of documents relating to specific final actions from the 
banking agencies.
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    \6\ 12 U.S.C. Sec. 1818(u).
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B. SEC Capital and Financial Responsibility Rules
    Securities positions can be highly volatile. The Commission's 
capital requirements recognize this fact and are, with respect to 
protection from market risk, more rigorous than those imposed by bank 
regulators. Market exposures and volatility are risks that the net 
capital rule was designed to address, unlike bank capital requirements, 
which focus more on credit exposure. Thus, the Commission's net capital 
rule is designed to protect the liquidity of any entity engaging in 
often volatile securities transactions.
    In addition to promoting firm liquidity, the Commission's net 
capital rule is a critical tool to protect investors and securities 
markets because the Commission also uses the net capital rule to 
address abusive or problematic practices in the market. For example, 
the Commission can expand on the margin rules with respect to 
particularly risky stocks by increasing capital charges. In addition, 
the net capital rule's 100-percent capital charge for illiquid 
securities serves to constrain the market for securities that have no 
liquidity or transparency. Without the ability to uniformly apply its 
net capital rule to securities businesses, the Commission's ability to 
oversee and influence U.S. securities markets is severely inhibited.
    In addition to detailed net capital requirements that require 
broker-dealers to set aside additional capital for their securities 
positions, the Commission's customer segregation rule prohibits the 
commingling of customer assets with firm assets. Thus, customer funds 
and securities are segregated from firm assets and are well-insulated 
from any potential losses that may occur due to a broker-dealer's 
proprietary activities. Furthermore, federal securities law, unlike 
banking law, requires intermediaries to maintain a detailed stock 
record that tracks the location and status of any securities held on 
behalf of customers. For example, the broker-dealers must ``close for 
inventory'' every quarter and count and verify the location of all 
securities positions. Because banks are not subject to such explicit 
requirements, the interests of customers in their securities positions 
may not be fully protected.
    Because the Commission's financial responsibility requirements are 
so effective at insulating customers from the risk-taking activities of 
broker-dealers, the back-up protection provided by SIPC is seldomly 
used. Although there have been broker-dealer failures, there have been 
no significant draws on SIPC, and there have been no draws on public 
funds. In fact, because there have been few draws on SIPC funds, SIPC 
has been able to satisfy the claims of broker-dealer customers solely 
from its interest earnings and has never had to use its member firm 
assessments to protect customers. This is in sharp contrast to the 
many, often extensive, draws on the bank insurance funds to protect 
depositors in failed banks.
C. SEC Sales Practice Rules Applied to All Securities Activities
    All investors deserve the same protections regardless of where they 
choose to purchase their securities. Unfortunately, gaps in the current 
bifurcated regulatory scheme leave investors at risk. For example, 
broker-dealers are subject to a number of key enforceable requirements 
to which banks are not, including requirements to:

 recommend only suitable investments;
 arbitrate disputes with customers;
 ensure that only fully licensed and qualified personnel sell 
        securities to customers;
 disclose to investors, through the NASD, the disciplinary 
        history of employees; and
 adequately supervise all employees.
Investors are generally not aware of these gaps in regulation and the 
risks that such gaps create.
    In addition, federal banking statutes do not provide customers with 
a private right of action for meritorious claims. Although some 
customer protections have been suggested by the bank regulators, they 
are less comprehensive than the federal securities laws and serve to 
perpetuate the disparities between the bank and securities regulatory 
schemes.7
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    \7\ The federal bank regulatory agencies have issued guidelines 
that address some bank sales practice issues. See Board of Governors of 
the Federal Reserve System, Federal Deposit Insurance Corporation, 
Office of the Comptroller of the Currency, and Office of Thrift 
Supervision, ``Interagency Statement on Retail Sales of Nondeposit 
Investment Products'' (Feb. 15, 1994). These guidelines are advisory 
and therefore not legally binding, and they may not be legally 
enforceable by bank regulators.
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    Two recent Commission enforcement actions highlight the need for 
more universal application of strict sales practices rules to all 
entities engaged in securities activities.
    In the Matter of Michael P. Traba 8: In this case, the 
Commission is alleging that the portfolio manager of two money market 
mutual funds sponsored by a bank committed a number of illegal acts. 
First, the portfolio manager purchased a number of volatile derivative 
instruments for the funds, and then caused the funds to improperly 
price the securities. This caused the funds to ``break the buck.'' 
Then, in an attempt to conceal the funds' losses, the portfolio manager 
fraudulently transferred the securities among the funds, a number of 
bank trust funds, and other bank accounts over which he had control. 
The Commission investigated and has initiated an enforcement action 
against the mutual funds' portfolio manager for violating the antifraud 
provisions of the Securities Act of 1933 and the Exchange Act, as well 
as for causing the funds' violations of the Investment Company Act. 
However, because of the current bank exemptions from federal securities 
laws, the Commission was unable to bring charges against the bank or 
its personnel for failing to adequately supervise the fund manager. 
Under these facts, the Commission ordinarily would have brought charges 
against any of its regulated entities for similar misconduct, and the 
Commission considers its ability to bring ``failure to supervise'' 
claims to be critical to investor protection. Securities fraud of this 
type--where transactions occur both in mutual funds and in bank trust 
accounts--illustrates the need for securities regulators to have access 
to books and records involving all securities activities conducted by 
banks.
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    \8\ See In the Matter of Michael P. Traba, File No. 3-9788, Release 
No. 33-7617 (Dec. 10, 1998).
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    In the Matter of NationsSecurities and NationsBank, 
N.A.9: In this case, employees of a bank and its affiliated 
broker-dealer blurred the distinction between the two entities and 
their respective products during sales presentations to customers and 
in marketing materials. For example:
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    \9\ In the Matter of NationsSecurities and NationsBank, N.A., 
Release No. 33-7532 (May 4, 1998).

 The bank provided the affiliated broker-dealer with maturing 
        CD lists and lists of likely prospective investors. The broker-
        dealer's employees also received other bank customer 
        information such as financial statements and account balances.
 Some broker-dealer representatives sat at desks in the bank 
        that were not physically demarked from the bank's retail 
        banking business, used bank stationery for correspondence, and 
        suggested that the products being sold were ``accounts at the 
        bank'' rather than mutual funds or securities.
 The broker-dealer's employees mischaracterized certain 
        products as conservative ``safe'' investments when, in fact, 
        they were highly leveraged funds that invested in interest-
        rate-sensitive derivatives.
    The combination of improper sales practices and practices that 
blurred the distinction between the bank and the affiliated broker-
dealer resulted in unsuitable purchases by investors. Many of these 
customers were elderly and thought they were purchasing investments in 
stable government bond funds, rather than making unsuitable purchases 
of high-risk funds. This case is also evidence of how partial 
securities regulation split between banks and their securities 
affiliates is inadequate to fully protect investors.
                   ii. the sec's examination program
A. Introduction
    In response to your request for detailed information regarding the 
Commission's examination process, this section describes in more detail 
the Commission's examination process and coordination with bank 
regulators.
    The Commission's primary mission is to protect investors and 
maintain fair and orderly markets. As part of the Commission's broad 
mission, the examination program's mandate is to protect investors 
through fostering compliance with the securities laws, detecting 
violative conduct, ensuring that violations are remedied, overseeing 
self-regulation in the securities industry, and informing the 
Commission of developments in the regulated community. To carry out its 
mission, the Commission's examination staff selects registrants for 
examination, conducts on-site reviews of their operations, and then 
takes steps to remedy the problems it finds. Examinations do not 
interfere with the competitive discipline of the marketplace. To use 
Adam Smith's words, the Commission's mission is to ``hold the ring'' in 
which securities firms compete. So long as they play by the rules, 
securities firms are free to innovate, to enjoy the profits of 
creativity, and also to fail.
    In essence, the work of the Commission's examination program is a 
practical application of functional regulation. The program examines 
the functions of the securities industry. Because the Commission's 
authority is generally coextensive with the securities markets, the 
Commission's examiners can follow the evidence wherever it leads. In 
other words, because the examination staff has the authority to examine 
the underwriter who brought the securities to market, the traders who 
maintained the secondary market, the investment adviser who recommended 
the product as a good buy, the registered representative who made the 
sale, and the SRO that allowed the registered representative to enter 
the business, the staff can follow the evidence until the staff tracks 
down the source of a compliance problem. A notable exception to the 
Commission's authority arises with respect to banks performing 
securities functions. The Commission is handicapped if an exempt bank 
is a major market participant.
B. The Examination Process
    The securities laws establish a comprehensive examination system 
for the securities industry. The Commission examines broker-dealers, 
investment advisers, investment companies, and transfer agents. The 
SROs for broker-dealers examine their members.10 In turn, 
the SEC provides quality control and programmatic oversight of the 
SROs' work. This system provides a great deal of flexibility in the 
broker-dealer program. SROs conduct the bulk of front-line routine 
examinations, allowing the SEC to focus on more serious or systemic 
issues. In areas other than broker-dealers, the Commission provides 
both front-line and more systemic oversight.
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    \10\ The SROs, including the New York Stock Exchange and the NASD, 
conduct regular examinations of their members pursuant to examination 
cycles that are tailored to each member firm.
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    The Office of Compliance Inspections and Examinations (``OCIE'') 
administers the Commission's examination program. OCIE ensures 
consistency among examinations, flexibility in directing resources 
where they are needed most, and, perhaps most importantly, an improved 
capacity for taking a coordinated approach to industry-wide 
developments. OCIE has embarked on a number of recent initiatives to 
enhance its oversight of industry-wide developments. But most 
importantly, whether an issue involves the entire market, or only one 
firm, the Commission's examiners are trained specialists in this type 
of oversight.
    To deal with the tremendous growth and innovation in the securities 
markets, OCIE increasingly targets firms through a risk-based and 
systematic methodology. Registrants are targeted for examination based 
on factors suggesting that the firm poses a heightened compliance risk 
to investors. These factors can include: the nature and size of the 
registrant's business; the number of public customers it serves; 
whether it holds customer funds and securities; the length of time it 
has been registered; its examination history; the products it offers; 
its disciplinary history; customer complaints; regulatory problems of 
employees; its advertising and performance claims; and information 
obtained from other regulators. Financial and operational soundness may 
be a factor, but it is only one of many types of compliance risk that 
are considered.
    It is important to note that risk factors help us prioritize firms 
for examination. They do not necessarily indicate that violations are 
in progress. Instead, they indicate a possibility of heightened risk or 
weaknesses that may lead to deficiencies or violations.
    To properly implement this approach, examiners are trained to have 
an overall view of the regulated community. For example, examiners 
participate in many different examinations, so they can see how a 
variety of firms operate. Examiners are sent to different parts of the 
country in teams from different offices and specializations, and 
receive extensive classroom and field training. Commission staff are 
trained to recognize when a firm is deviating from an industry norm. 
This approach also allows the Commission to obtain a broad overview of 
compliance practices in the industry.
    In addition, SEC examiners conduct numerous stand-alone systematic 
reviews--special purpose examinations often called ``sweeps.'' Recent 
sweeps have reviewed day trading, on-line brokerage, compliance systems 
creating informational barriers within firms (previously known as 
``Chinese Walls''), consistently high performing money managers, 
internal controls at trading firms, the use of soft dollars, salesmen 
with career profiles of disciplinary and compliance problems (what some 
call ``rogue'' brokers), sales practices for variable annuity products, 
supervisory systems for firms registered as both brokers and investment 
advisers, compliance practices by financial planners, and operations by 
certain types of transfer agencies.
    Once a registrant has been selected for review, examiners visit its 
offices, interview management, review documents and analyze its 
operations. Examiners often ask for downloads of data relating to 
trading, portfolio activity, and other matters, for analysis back at 
the Commission. The examiners use the information to check for 
irregularities--often called ``red flags''--that signal that the firm 
may be violating the securities laws and related rules, or engaging in 
practices that heighten the likelihood of such violations.
    During examinations, the staff digs deeply into the areas selected 
for review. For example, to examine for sales practice violations, or 
other abusive mistreatment of customers, SEC examiners review the 
details of specific transactions and accounts. As many broker-dealers 
know, it is not uncommon for examiners to ask them why they thought a 
particular security was suitable for a particular customer, or why the 
portfolio in a particular account turned over as often as it did, or 
why a particular customer made multiple purchases of mutual fund 
shares, when a single purchase would have entitled them to a discount 
on the sales charge. Broker-dealers are also asked to produce the books 
and records of the firm documenting what they tell the examiners. The 
SEC's examiners are trained to follow the evidence, wherever it may 
lead.
    Deficiencies identified during examinations range from record-
keeping problems and sloppy compliance practices, to serious violations 
such as hidden insolvencies threatening customers and the market, 
misrepresentations, conflicts of interest, market manipulation and 
sales practice abuses.
    Many examinations conclude with the issuance of a deficiency letter 
to the registrant. A deficiency letter describes the problems the staff 
found and requires the registrant to correct them. This provides highly 
focused specific deterrence. SEC examiners have developed a new 
computer-based tracking system to better monitor deficiencies and 
firms' follow-up. When a deficiency letter notes more serious 
supervisory impact, examiners often send the deficiency letter to the 
firm's board of directors, hold a conference call or a face-to face 
meeting with the firm to emphasize examiners' concerns, and take other, 
similar actions.
    Examinations also frequently conclude with a recommendation for 
additional examination work at other firms. For example, if, during an 
examination of an investment adviser, the staff discovers that the 
adviser is engaging in questionable soft dollar transactions with a 
particular broker-dealer, then an examination of the broker-dealer may 
be warranted. Similarly, if, during an inspection of a variable product 
sponsor, the staff discovers evidence of sales practice abuses by the 
product's distributors, then examinations of those salesmen or their 
broker-dealer employers may be warranted.
    When examiners discover serious violations, such as fraud or sales 
practice abuses, they refer the matter to the SEC's Division of 
Enforcement (or to an SRO enforcement department for broker-dealers) 
for possible further investigation and enforcement action. Every year, 
somewhere on the order of 20 to 30 percent of broker-dealer 
examinations, 4 to 6 percent of investment adviser and investment 
company examinations, and 6 to 8 percent of transfer agent examinations 
result in enforcement referrals. Cases brought against regulated 
entities make up a significant portion of the enforcement cases that 
the Commission brings each year. Many of those cases originated with 
referrals from the examination program.
    The Subcommittee's primary interest is in how the examination 
program relates to bank affiliates, including SEC-registered broker-
dealers and bank-advised mutual funds. With respect to broker-dealers, 
the Commission's examination program applies equally to all broker-
dealers. Affiliations play a role in the Commission's oversight, such 
as, for example, when the staff reviews broker-dealers' quarterly risk 
assessment reports. But fundamentally, the examinations of broker-
dealers operating on the premises of banks are the same as for other 
broker-dealers-- SEC and SRO examiners review firms for compliance with 
net capital, customer protection, and sales practice 
rules.11
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    \11\ The NASD also examines broker-dealers operating on bank 
premises for compliance with, among other rules, NASD Rule 2350, which 
governs the sale of securities on the premises of a bank.
---------------------------------------------------------------------------
    Like its program for broker-dealers, OCIE is generally interested 
in the same issues when the staff examines a bank-advised mutual fund 
as when the staff examines any other fund.12 Of course, the 
adviser's status and affiliations play a role in our oversight, such 
as, for example, when the staff examines for conflicts of interest.
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    \12\ While banks are excepted from the Investment Advisers Act, 
Sec. 202(a)(11), 15 U.S.C. Sec. 80b-2(a)(11), many own or are 
affiliated with registered advisers.
---------------------------------------------------------------------------
    The one way in which SEC (and SRO) examinations of firms affiliated 
with a bank differ from examinations of other types of firms is with 
respect to examiners' review of disclosure. When investors purchase an 
investment in a bank, they may be confused about whether their 
investment is federally insured. To address this concern, whenever the 
staff examines a bank-advised fund or a broker-dealer operating on the 
premises of a bank, the staff (or the SRO) carefully reviews how the 
fund markets itself, and what types of disclosures are made to 
potential investors, to make sure they understand that a mutual fund or 
the securities sold are not protected by deposit insurance.
C. Coordination with Bank Regulators
    As noted above, there is a fundamental difference between the 
Commission's program and that of the bank regulators. Bank regulators 
are concerned about the safety and soundness of banking institutions 
and the prevention of bank failures. The Commission, on the other hand, 
focuses on disclosure, investor protection, and the maintenance of fair 
and orderly markets. The Commission is very interested in risks posed 
to securities firms by their significant affiliated companies. However, 
the Commission's fundamental mission is the same whether the securities 
firm is affiliated with a bank, an insurance company, or has no 
affiliations at all.
    The Commission defers to bank examiners on issues related to bank 
functions. At the same time, because of the Commission's expertise in 
the securities markets, the Commission should receive deference with 
respect to the functions that the Commission oversees.
    Improving the Commission's coordination with other regulators is a 
high priority.13 To further this goal, the examination 
program has embarked on a number of initiatives.14 Over the 
past several years, the Commission has increased its coordination with 
the bank regulators. In particular, with the bank regulators, we have 
worked to heighten our mutual understanding and appreciation for each 
other's mission. To this end, the staff has held discussions with the 
Federal Reserve Board and the Office of the Comptroller of the Currency 
(``OCC''). In addition, beginning in 1995, the Commission and the OCC 
conducted a pilot program of joint examinations of mutual funds advised 
by national banks and national banks that provide investment services 
to banks. We believe these regulator-to-regulator links can play an 
important role in enhancing our overall coordination.
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    \13\ Arthur Levitt, The SEC and the States, Toward a More Perfect 
Union, Remarks to the North American Securities Administrators 
Association Conference (October 23, 1995).
    \14\ For example, among other things, the Commission has entered 
into a Memorandum Of Understanding with SRO and state broker-dealer 
regulators to enhance coordination of broker-dealer examinations. In 
the international arena, OCIE has worked with foreign securities 
regulators to conduct coordinated global inspections of multinational 
money managers.
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    The Commission's examination programs and the bank regulators have 
also been cooperating for many years with respect to transfer agents. 
Prior to examining any bank transfer agent, the staff notifies its bank 
regulator and consults on the feasibility and desirability of 
coordinating examinations.15 In many instances, the bank 
regulator will participate in the staff's examination. Every year, the 
Commission also refers the results of several transfer agent 
examinations to the appropriate federal bank regulator for further 
action.16
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    \15\ The procedure is set forth in Exchange Act Sec. 17(b), 15 
U.S.C. Sec. 78q(b).
    \16\ The Commission also consults with bank regulators prior to 
conducting examinations of clearing agencies and municipal securities 
dealers. See id.
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    Finally, the Commission coordinates with bank regulators when the 
Commission finds that bank-affiliated registrants have committed 
serious securities laws violations. The Commission's Division of 
Enforcement contacts the appropriate bank regulator when the staff is 
considering recommending that the Commission bring an enforcement 
action against a bank-affiliated firm. Through these processes, the 
Commission has established a long-term working relationship with all of 
the federal bank regulators. The Commission is hopeful this 
coordination will continue, and that a relationship will develop in 
which each regulator's functions are coordinated in the public 
interest.
D. Conclusion
    Through careful risk-based selection, systematic oversight, and 
solid examination work and follow-up, the Commission's examination 
program protects investors and maintains fair and orderly markets. The 
Commission, through its examination program, also oversees complex 
market phenomena, such as transactions or abuses involving multiple 
firms and multiple parties. Artificial barriers within the securities 
industry that shield certain players from the SEC's ability to follow 
the evidence undercut the SEC's compliance mission, and, ultimately, 
the integrity of our markets.
       iii. section 12(i) of the securities exchange act of 1934
    Some have suggested that bank securities regulation could be 
achieved by a system of parallel securities regulation by the banking 
regulators. Such a system would be similar to the system currently in 
place under Section 12(i) of the Exchange Act, which governs securities 
reporting by bank issuers. Briefly, under Section 12(i) of the Exchange 
Act,17 banking regulators are required to adopt rules 
``substantially similar'' to the Commission's rules within 60 days 
after the Commission's publication of its final rules.
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    \17\ 15 U.S.C. Sec. 78l(i).
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    The current Section 12(i) model confers on four separate federal 
banking regulators--not the Commission--the authority to administer and 
enforce the most important disclosure and reporting provisions of the 
Exchange Act with respect to publicly held banks and thrifts: Sections 
12, 13, 14, and 16. The OCC is assigned responsibility for national 
banks; the Federal Deposit Insurance Corporation (``FDIC''), for state 
banks that are not members of the Federal Reserve System; the Federal 
Reserve, for state member banks; and the Office of Thrift Supervision, 
for savings and loan associations.18
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    \18\ Bank holding companies and savings and loan holding companies 
are not covered by Section 12(i). Rather, these companies, like all 
other of the approximately 12,500 public companies, file their annual 
and other periodic reports with the Commission and the Commission has 
full power to enforce compliance with all provisions of the securities 
laws.
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    The anomaly in this arrangement is that while approximately 12,500 
public companies, including 915 publicly owned bank holding companies 
and savings and loan holding companies, are subject to the Commission's 
jurisdiction, approximately 280 publicly held banks and thrifts are 
exempted from the Commission's jurisdiction under this provision. 
Section 12(i) thus carves out an exception to the jurisdiction of the 
Commission, the agency primarily responsible for administering and 
enforcing the integrated disclosure system, the Williams Act (which 
addresses beneficial ownership disclosure, tender offers, and changes 
in control), the proxy rules, and the short-swing trading provisions of 
the Exchange Act.
    This treatment dates back to the 1964 amendments to the Exchange 
Act. When the Exchange Act's coverage was expanded to require periodic 
reporting by all publicly held companies with securities traded in the 
over-the-counter markets, Congress subjected banks to the new 
requirements but conferred jurisdiction over the reporting obligations 
of banks and thrifts on their respective regulators.
    Section 12(i) contains an assumption that banks and thrifts should 
be treated differently from other public companies. If that assumption 
ever justified the separate treatment of banks and thrifts found in 
Section 12(i), it no longer does. The resulting fragmented reporting 
structure creates a barrier to the flow of meaningful, comparable 
information about publicly held companies. Section 12(i) perpetuates, 
for a small number of Exchange Act registrants, an arrangement that 
permits differences in the interpretation, administration, and pattern 
of enforcement of the securities disclosure laws. This arrangement 
unnecessarily limits the flow of full, comparable, and accurate 
information to our financial markets.
    The legislative history of Section 12(i) reflects a tacit 
subordination of the interests of public investors, who depend for 
their protection upon readily accessible and uniform periodic 
disclosure of financial and other material results, to the interests of 
banks. The effect of the provision is to involve bank regulatory 
agencies in a difficult and potentially dangerous conflict between 
their efforts to protect the banking system and the deposit insurance 
fund, on the one hand, and the integrity of the public securities 
market, on the other. This conflict becomes greatest at the very moment 
when a bank is in trouble and an investor's need-to-know becomes most 
urgent. In such moments, the first casualty is apt to be market 
discipline, with its corollary principle of prompt disclosure.
    Section 12(i) in operation has had some anomalous results. First, 
Section 12(i) makes it difficult for many investors to know where to 
find the reports of a particular financial institution. Investors must 
first know the institution's organizational structure and details of 
its business operations--for example, whether it is owned by a holding 
company or not; whether it is a bank or a thrift; whether it is a state 
bank or a national bank; whether it is a member bank or a non-member 
bank.19
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    \19\ Reports of publicly held banks and thrifts are not available 
to the public through EDGAR because they are not filed with the 
Commission.
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    Second, even when investors can locate financial institution 
reports under the current system, they may be unable to make meaningful 
use of the information they find. Whenever five agencies, rather than 
one, have responsibility for interpreting and administering a single 
body of law, differences among interpretations are likely to result.
    Third, the current allocation of jurisdiction under Section 12(i) 
requires each of the four federal banking agencies to maintain a 
separate securities disclosure staff. It is unnecessarily duplicative 
and inefficient to have ``mini-SECs'' at the four banking agencies.
    Fourth, enforcement is hampered. The fact that enforcement of the 
Exchange Act can only be, at best, a secondary focus for banking 
regulators is indicated by the raw numbers of securities enforcement 
actions filed by the respective agencies over the last few years. From 
fiscal year 1988 through fiscal year 1997, the Commission commenced 36 
injunctive and administrative proceedings involving depository 
institutions.20 The banking agencies, by contrast, have 
brought relatively few securities enforcement cases.
---------------------------------------------------------------------------
    \20\ Figure includes proceedings involving banks, bank holding 
companies, thrifts, and state savings banks.
---------------------------------------------------------------------------
    The Commission notes that the 12(i) model for regulation of bank 
issuer reporting has not achieved the objectives of the federal 
securities laws. Notably, one commentator has stated that ``final 
action by the [banking] regulators in promulgating `substantially 
similar' Exchange Act rules has been delayed in some cases over five 
years after pertinent SEC amendments have been issued.'' 21
---------------------------------------------------------------------------
    \21\ Michael P. Malloy, The 12(i)'ed Monster: Administration of the 
Securities Exchange Act of 1934 by the Federal Bank Regulatory 
Agencies, 19 Hofstra L. Rev. 269, 285 (1990).
---------------------------------------------------------------------------
    As the Subcommittee may be aware, the Commission has long advocated 
repeal of Section 12(i) of the Exchange Act. The Commission's position 
is part of a broad consensus that Section 12(i) should be repealed. In 
1984, the Bush Task Group on Regulation of Financial Services proposed 
repeal of Section 12(i):
        The registration requirements of the Securities Act of 1933 
        should be made applicable to publicly offered securities of 
        banks and thrifts (but not deposit instruments), and 
        administration and enforcement of disclosure and other 
        requirements of the Securities Exchange Act of 1934 for bank 
        and thrift securities should be transferred from the bank and 
        thrift regulatory agencies to the SEC, as is currently the case 
        for securities of all other types of companies (including bank 
        and thrift holding companies).22
---------------------------------------------------------------------------
    \22\ Blueprint for Reform: The Report of the Task Group on 
Regulation of Financial Services, July 1984, at 91.
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The report was signed by, among others, the Comptroller of the 
Currency, the Chairman of the FDIC, and the Chairman of the Board of 
Governors of the Federal Reserve System. In addition, more recently, in 
1997, the Department of the Treasury's proposal for Glass-Steagall 
reform also included a provision repealing Section 12(i).23
---------------------------------------------------------------------------
    \23\ Although the Treasury's proposal was not introduced as a 
separate piece of legislation, a hearing was held by the House Banking 
Committee on the Treasury's proposal on June 3, 1997.
---------------------------------------------------------------------------
                             iv. conclusion
    The Commission has testified many times during the past decade in 
support of financial modernization.24 Whatever version of 
financial modernization legislation is finally enacted, as the nation's 
primary securities regulator, it is critical that the Commission be 
able to continue to fulfill its mandate of investor protection and to 
safeguard the integrity, fairness, transparency, and liquidity of U.S. 
capital markets. The Commission cannot ensure the integrity of U.S. 
markets if it is only able to supervise a portion of the participants 
in those markets. Neither can it ensure fair and orderly markets if 
market participants operate by different rules and investors receive 
different levels of protection.
---------------------------------------------------------------------------
    \24\ See, e.g., Testimony of Arthur Levitt, Chairman, U.S. 
Securities and Exchange Commission, Concerning H.R. 10 ``The Financial 
Services Act of 1999,'' Before the Subcomm. on Finance and Hazardous 
Materials of the House Comm. on Commerce (May 5, 1999); Testimony of 
Arthur Levitt, Chairman, U.S. Securities and Exchange Committee, 
Concerning Financial Modernization Legislation Before the Senate Comm. 
on Banking, Housing, and Urban Affairs (Feb. 24, 1999); Testimony of 
Harvey J. Goldschmid, General Counsel, U.S. Securities and Exchange 
Commission, Concerning H.R. 10, The ``Financial Services Act of 1999,'' 
Before the House Comm. on Banking and Financial Services (Feb. 12, 
1999); Testimony of Arthur Levitt, Chairman, U.S. Securities and 
Exchange Commission, Concerning H.R. 10, The ``Financial Services Act 
of 1998,'' Before the Senate Comm. on Banking, Housing, and Urban 
Affairs (June 25, 1998). For additional Commission testimony prior to 
1998, see note 16 of Testimony of Arthur Levitt, Chairman, U.S. 
Securities and Exchange Commission, Concerning H.R. 10 ``The Financial 
Services Act of 1999,'' Before the Subcomm. on Finance and Hazardous 
Materials of the House Comm. on Commerce (May 5, 1999).
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                                 ______
                                 
                                Comptroller of the Currency
                                                       July 8, 1999
The Honorable Tom Bliley
Chairman
Committee on Commerce
U.S. House of Representatives
Washington, D.C. 20515-6115
    Dear Chairman Bliley: This letter responds to the questions you 
raised in a letter dated June 25, 1999, following the Subcommittee on 
Oversight and Investigations' hearing on operating subsidiaries. Each 
question is listed below followed by our response.
    Question 1: How much money did investors lose in the NationsBank 
operating subsidiary fraud?
    Answer: We do not know the exact amount of money investors lost as 
a result of their investments in the 2003 and 2004 Term Trusts. It is 
our understanding, however, that NationsBank and NationsSecurities 
contributed approximately $60 million in reimbursement and compensation 
to investors in the 2003 and 2004 Term Trusts.
    Question 2: Did NationsBank own the operating subsidiary?
    Answer: NationsBank of North Carolina, N.A. (the ``Bank''), through 
its wholly owned operating subsidiary, NationsBanc Enterprise, Inc. 
(``NBEI''), owned a 50 percent interest in NationsSecurities. At all 
times relevant to the sales of the Term Trusts, NationsSecurities was 
jointly owned by NBEI and Dean Witter.
    Question 3: Are the profits and losses of the operating subsidiary 
represented in the bank's GAAP Accounting statements?
    Answer: Yes. Fifty percent of profits and losses arising from 
NBEI's joint ownership interest in NationsSecurities would have been 
represented in the Bank's accounting statements under the equity method 
of accounting. Under this method, losses would generally be limited to 
the amount of the Bank's investment in NationsSecurities.
    Questions 4-6: Do the officers of NationsBank have the authority to 
supervise the operating subsidiary? Do they have the duty to supervise 
the operating subsidiary? Does the OCC require banks to supervise their 
operating subsidiaries?
    Answers: NationsBank has the authority to oversee the activities of 
the operating subsidiary and in fact the OCC requires oversight by a 
national bank of its operating subsidiaries. The Comptroller's 
Handbook--Large Bank Supervision (July 1998) provides that in order to 
properly identify, manage and monitor risks, ``a bank must recognize 
and understand existing risks or risks that may arise from new business 
initiatives, including risks that originate in nonbank subsidiaries and 
affiliates.'' The Handbook also states that ``[f]or large, complex 
companies, monitoring [risk] is essential to ensure that management's 
decisions are implemented for all geographies, products, and legal 
entities.'' The attached 1993 approval letter for the NationsBank-Dean 
Witter Joint Venture includes additional details regarding the level of 
oversight of NationsSecurities by the Bank under this arrangement.
    Question 7: Did NationsBank receive customer complaints about 
activities in the operating subsidiary?
    Answer: Yes.
    Questions 8-9 Did the OCC interview any person who made complaints 
as part of its investigation of the operating subsidiary fraud? How 
many?
    Answers: As the primary regulator of the Bank, our review focused 
upon the role of the Bank in this matter and we did not interview the 
customers of the broker-dealer subsidiary. In conducting its review, 
the OCC considered customer complaints that were filed directly with 
the OCC as well as complaints that were submitted by customers to the 
Bank and information about particular investors obtained pursuant to 
customer suitability procedures. In addition, OCC staff reviewed notes 
taken by SEC staff attorneys during their telephone interviews of Bank 
customers as well as transcripts of depositions taken by state, 
federal, and self-regulatory organizations of NationsSecurities 
employees who sold the Term Trusts to the investing public.
    Question 10: Why did you interview no victims. How can you do an 
investigation if you only interview the people supervising the fraud?
    Answer: Because the transactions at issue were effected by a 
broker-dealer affiliated with the Bank and not the Bank itself, the 
primary regulators of the broker-dealer conducted the interviews with 
the affected customers of that firm. The OCC relied upon information 
obtained through bank examinations, which reviewed bank policies, 
procedures, internal bank records, and customer complaints. In 
addition, the OCC reviewed information concerning individual investors 
and obtained access to notes of telephone interviews conducted by the 
SEC and deposition transcripts of NationsSecurities sales 
representatives taken by state, federal and self-regulatory 
organizations. The OCC did not need to duplicate the efforts of the SEC 
and others in this area.
    The information and documentation collected by the OCC established 
that the Term Trusts were marketed in a manner that violated Condition 
4 of the Approval Letter. Condition 4 required that NationsSecurities 
not mislead or deceive customers as to the products' uninsured nature 
and lack of guarantee by either the Bank or NationsSecurities.
    Question 11: What were the assets of NationsBank at the time of the 
operating subsidiary fraud?
    Answer: As of December 31, 1993, the Bank's assets were 
approximately $25 billion. (At that time, the assets of the holding 
company were approximately $160 billion.)
    Question 12: What was the compensation of CEO Hugh McColl, 
including stock options, that year?
    Answer: According to the March 25, 1996, proxy materials filed by 
the holding company with the SEC, Mr. McColl, who was Chairman and CEO 
of the holding company, received in 1993 a salary of $800,000, a bonus 
of $1,800,000, and other compensation of $183,042. In 1994, Mr. McColl 
received a salary of $900,000, a bonus of $2,100,000, restricted stock 
awards valued at $10,725,000, and other compensation of $203,298. The 
proxy materials provide additional explanation about the specifics of 
Mr. McColl's compensation.
    Question 13: How much did defrauded investors recover in private 
lawsuits against the NationsBank operating subsidiary?
    Answer: Please see Answers 1 and 15.
    Question 14: How much did the OCC fine NationsBank for failure to 
supervise and control its operating subsidiary?
    Answer: The OCC assessed a $750,000 civil money penalty against the 
Bank.
    Question 15: How can a $750,000 fine have a deterrent effect on a 
$100 billion entity?
    Answer: The OCC's fine was only one element of the penalties, 
sanctions and remedial actions resulting from the sales of the Term 
Trusts. Importantly, as a result of OCC intervention as part of its 
supervision of the Bank, the Bank was directed to take and did take 
significant corrective actions with respect to the activities of 
NationsSecurities. These remedial actions, together with the actions 
brought against NationsSecurities and the Bank by private litigants, 
state and federal securities regulators, and the OCC relating to the 
sales practice abuses, and the attendant adverse publicity, should 
together serve as a powerful deterrent against similar misconduct. We 
note that NationsSecurities and/or the Bank paid in excess of $59 
million to settle private actions, $1.375 million to resolve actions 
brought by state securities regulators, $2 million to settle an action 
brought by the NASD, $4 million to settle an action brought by the SEC, 
and $750,000 to settle an OCC action, or a total of approximately $67 
million relating to these sales practice abuses.
    Questions 16-17: Why was NationsBank given a satisfactory rating 
the year of the operating subsidiary fraud? How is defrauding elderly 
people out of over $100 million satisfactory?
    Answer: As I said in response to a question at the hearing, the 
rating is a composite rating based on the ``CAMEL'' rating system used 
by all the bank regulators. The components of the rating refer to a 
bank's capital, assets, management, earnings, and liquidity, and are 
evaluated on a bankwide basis. A bank's rating will also be affected by 
whether any identified problems or weaknesses have been corrected by a 
bank. As I also said at the hearing, the conduct at issue was 
deplorable, but we do not give separate ratings to bank subsidiaries 
and affiliates.
    I hope this information is helpful to you. Please contact me if you 
have any additional questions.
            Sincerely,
                                          Julie L. Williams
                                                      Chief Counsel
                                 ______
                                 
                                                      April 9, 1993
Interpretive Letter No. 622

Mr. Paul J. Polking
NationsBank Corporation
Legal Department
NationsBank Corporate Center
Charlotte, North Carolina 28255-0065

Re: NationsBank of North Carolina, N.A., Operating Subsidiary Notice; 
Control Number 92 ML08010

    Dear Mr. Polking: This letter responds to the notification filed on 
October 26, 1992, on behalf of NationsBank of North Carolina, N.A. 
(``Bank'') pursuant to 12 C.F.R. Sec. 5.34, of the Bank's intent to 
establish a wholly-owned operating subsidiary (``Subsidiary'') to 
participate, as a general partner, in a proposed general partnership 
(``Partnership'') with a subsidiary of Dean Witter Financial Services 
Group (``DW''). The Partnership will be created pursuant to a joint 
venture agreement (``Joint Venture'') between the Bank and DW relating 
to the sale, on a retail basis through the partnership of various types 
of investment products, including securities and annuities.
    Based on the information and representations in the Bank's 
notification letter, accompanying legal memorandum, supplemental 
documentation, and other materials, we conclude that the proposed 
activities are permissible for national banks and their operating 
subsidiaries and are consistent with prior opinions of the Office of 
the Comptroller of the Currency (``OCC''). Accordingly, the Bank may 
implement its proposal pursuant to 12 C.F.R. Sec. 5.34, based on the 
facts as described and in accordance with all the representations made 
in the submitted materials. This determination also subjects the Bank, 
the Subsidiary, and the Partnership to all the conditions set forth in 
this letter.
                          the bank's proposal
    Under the proposal, the Bank's Subsidiary and a newly established 
subsidiary of DW will enter into a general partnership, each with a 
fifty (50%) percent interest. The Partnership will be a separate and 
distinct entity from the Bank, DW, and their affiliates. The 
Partnership will not provide or permit access to a partner of 
confidential and proprietary information received from the other 
partner or any of its affiliates.\1\ As such, DW will not have direct 
access to Partnership customers.
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    \1\ Customer lists of the Partnership also will be accorded 
confidential treatment by the Partners, including DW, and, except for 
customers who have a relationship with a Partner or its affiliate 
outside of the Partnership, will not be provided by a Partner to any 
affiliate or other third party other than in connection with services 
provided to the Partnership.
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    The day-to-day business of the Partnership will be managed by a 
chief operating officer who will have the authority to make decisions 
within operating guidelines set forth in the Partnership agreement. The 
initial chief operating officer will be a former senior officer of DW 
or an affiliate thereof, and the next ranking officer will be a former 
senior officer of NationsBank Corporation (``NBC'') or a subsidiary 
thereof. The chief operating officer and next ranking officer will 
completely sever their previous employment relationships with DW or its 
affiliates, and the Bank or its affiliates, respectively. These 
individuals will be employed exclusively by the Partnership.\2\ The 
Partnership agreement will specify that all major decisions of the 
Partnership and any changes in the operating guidelines must be 
approved by both Partners. Each partner in effect has veto power over 
actions proposed by the other partner. Accordingly, the Subsidiary 
could not be precluded by the other partner from having the 
Partnership's operations and activities conform to the national banking 
laws, including any condition imposed pursuant to 12 C.F.R. Sec. 5.34.
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    \2\ We understand that this also will be true of any other 
employees of the Partnership previously employed by the Bank, DW or 
their affiliates.
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    The Partnership agreement will fully delineate the activities of 
the Partnership, which activities will be limited to those permissible 
for a national bank or its operating subsidiary. Further, the 
Partnership agreement will provide that the Partnership will be subject 
to full OCC regulation, supervision and examination, including an 
undertaking by the Partnership to cease engaging in any activity which 
the OCC formally determines not to be permissible. While the 
Partnership contemplates an initial five year term, certain events, 
such as an adverse regulatory decision, could trigger an earlier 
termination of the Partnership. Under the submitted proposal, the 
Partnership will not own or control any subsidiaries. If the 
Partnership intends or proposes such ownership or control of 
subsidiaries in the future then the OCC would require the submission of 
a notice pursuant to 12 C.F.R. Sec. 5.34.
    The proposed name of the Partnership is ``Nations Securities, a 
Dean Witter/NationsBank Company.'' The principal executive office of 
the Partnership will be located in Charlotte, North Carolina,\3\ 
however, the Partnership will establish offices at other NBC locations, 
including branch offices of bank subsidiaries of NBC, and other 
locations. The Bank has assured us that various efforts will be made by 
the Partnership to promote separateness between the Bank's operations 
and those of the Partnership. In particular, the Bank has represented 
that the Partnership office typically will be segregated by panels, 
planters, walls or similar physical elements. Each Partnership office 
will be separately identified as an office of the Partnership through 
appropriate signs, which will include the Partnership's name and logo. 
The Partnership's logo will be distinct from the logo of the Bank. The 
Partnership also will have different telephone numbers.
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    \3\ The Subsidiary's principal office also will be located in 
Charlotte, North Carolina.
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    The Partnership will be registered as a broker/dealer under the 
Securities Exchange Act of 1934 (``Act'') and under applicable state 
securities laws. The Partnership also will be a member of the National 
Association of Securities Dealers, Inc. (``NASD'') and a licensed 
insurance agent to sell fixed and variable annuities in states where so 
required.\4\ The Partnership will be subject to all applicable 
requirements of the federal securities laws and the Rules of Fair 
Practice of the NASD.
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    \4\ The Bank states that the Partnership will not be registered as 
an investment advisor under the Investment Advisors Act of 1940, as the 
advice provided by the Partnership will be incidental to the conduct of 
its brokerage business and the Partnership will not receive special 
compensation for providing such advice. See 15 U.S.C. Sec. 80b-
2(a)(11).
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                 proposed activities of the partnership
The Bank Program
    The business of the Joint Venture will consist initially of the 
Bank Program and subsequently of the Syndication Program. The Bank 
Program will consist of sales, entirely on an agency basis, to existing 
customers and new customers of the Bank and DW or their 
subsidiaries.\5\ The brokerage activities of the Partnership will 
involve primarily the sale of ``packaged products,'' such as mutual 
funds, fixed and variable annuities,\6\ unit investment trusts, and 
equity and fixed income securities. The mutual funds sold will include 
funds advised by the Bank and its affiliate banks,\7\ mutual funds 
sponsored, distributed and advised by DW and its affiliates, and mutual 
funds sponsored, distributed and advised by parties not affiliated with 
either the Bank or DW. The compensation received by the Partnership for 
its brokerage activities will be consistent with that customarily 
received by an agent and not that of a principal or dealer. Nor will 
Bank employees receive direct compensation for referring customers to 
the Partnership based upon completed sales.
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    \5\ The Bank represents that the Partnership will not act as a 
``principal'' in connection with any investment products. However, as 
part of its brokerage activities, the Partnership may engage in so-
called ``riskless principal'' transactions, whereby the Partnership on 
behalf of a customer may effect the purchase and sale of a security on 
a principal basis but only if it can conduct a concurrent offsetting 
sale and purchase of the same security with another party. In no event 
will the Partnership maintain an account for the purchase and sale of 
securities on its own behalf or initiate an order or hold the 
securities for its own account.
    \6\ The fixed and variable annuities sold may be issued/
underwritten by an insurance company affiliated with DW, although 
unaffiliated with the Subsidiary or the Bank.
    \7\ The funds are sponsored and distributed by an independent 
party.
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    The Partnership also may provide investment advice to customers in 
connection with the purchase and sale of the investment products. The 
ultimate investment decision, however, will rest exclusively with the 
customer. The Partnership will not have any accounts over which it has 
discretionary authority. The Partnership may, in a manner consistent 
with all applicable rules governing broker/dealers in such 
circumstances, recommend or suggest certain mutual funds. If it is the 
case with any such recommended mutual fund, customers will be advised 
that the Bank or an affiliate is the advisor to the mutual fund.
    In addition, the Bank has represented that the Partnership will not 
provide brokerage services to the Bank's trust account customers or 
Bank customers with other fiduciary relationships, except where 
explicitly authorized by the customer and in accordance with all 
applicable laws, including the applicable provisions of 12 C.F.R. Part 
9 and interpretations thereunder. Further, if the Partnership provides 
any services to Keogh accounts, self-directed individual retirement 
accounts, or other similar accounts of the Bank, such activities will 
be consistent with prior OCC precedents requiring specific customer 
authorization and full disclosure of the arrangements, including fees 
or commissions. See Trust Interpretive Letter No. 88 (March 24, 1987); 
Interpretive Letter No. 302 (February 21, 1984), reprinted in [1985-87 
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,472. We also 
remind the Bank of its fiduciary obligations under state law and 
pursuant to the OCC's self-dealing regulation, 12 C.F.R. Sec. 9.12, 
which reflects a trustee's duty of loyalty, a basic principle of trust 
law. As such, the Bank must carefully consider all applicable laws with 
respect to the purchase in a fiduciary capacity of any products 
underwritten by DW or other products in which DW has an interest.
    The Partnership will provide full disclosure to insure that 
customers who purchase on bank premises are not confusing the 
investment products with insured deposits. The information provided by 
the Partnership will advise customers that the products are not 
endorsed or guaranteed by, and do not constitute obligations of, the 
Partnership, the Subsidiary, the Bank, or their affiliates, and that 
the products are not insured by the Federal Deposit Insurance 
Corporation (``FDIC''). The Partnership also will provide disclosure to 
customers explaining the relationship of the Partnership and the 
products that it sells, to the Bank and its affiliates and to DW and 
its affiliates. The Bank has represented that customers will receive 
these disclosures in several ways, including (1) disclosures built into 
the customer account agreements or additional disclosure documents 
provided when the customer relationship is initiated; (2) in connection 
with a particular product, disclosures in the prospectus, sales 
literature, or other materials;\8\ (3) verbal disclosures and 
explanations by the sales staff;\9\ and (4) confirmations to customers 
of the securities transactions in accordance with securities laws.
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    \8\ In addition, the Bank has represented that internal policies 
and procedures concerning appropriate disclosures may be adopted with 
respect to particular products.
    \9\ If the Partnership determines to recommend any DW or Bank 
product in which either has a financial interest, the Bank has given 
assurances that the Partnership representative will be mindful of 
suitability requirements and will confirm that the nature of the 
financial interest of DW or the Bank in such products has been 
disclosed to the customer.
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    In particular, with respect to mutual funds, customers will be 
fully informed if the Bank or an affiliate is an advisor to a fund or 
if DW or an affiliate is a sponsor/distributor or advisor to a fund. 
Similarly, regarding annuities, customers will be fully informed if the 
products are issued or underwritten by a company affiliated with DW or 
an affiliate. Similar to recent OCC precedents relating to annuities 
activities, as a condition of this approval, a signed statement will be 
obtained from a customer prior to the purchase of any non-deposit 
investment product indicating that the customer understands the nature 
of the investment product being purchased. See Interpretive Letter No. 
499 (February 12, 1990), reprinted in [1989-90 Transfer Binder] Fed. 
Banking L. Rep. (CCH) para. 83,090.
    The Bank has described various plans which may be put into effect 
to market the Partnership's services. These include making lobby 
materials on the Partnership available to Bank customers; putting 
advertisements in newspapers; sending statement stuffers; and providing 
other descriptions of the variety of services that are available. The 
Bank points out that these marketing tools are the same as those 
currently in use by the Bank's brokerage subsidiary, NationsBank 
Securities, Inc. (``NSI''), and will be in conjunction with all the 
disclosures and representations previously discussed. All such 
marketing activities by the Partnership and any by the Bank would seek 
to minimize the possibility of customer confusion with respect to the 
products being offered and the relationship between the entities. For 
example, all sales materials will clearly describe the relationship 
between the Partnership, the Bank, and DW and its affiliates. Further, 
the confidentiality requirements between the involved entities and the 
restrictions of the sharing of customer lists will apply. The Bank has 
indicated that it does not plan on specific references to DW products 
in the materials describing the Partnership and, instead, emphasizes 
that its marketing will focus on the Partnership rather than DW.
    The Bank has represented that the Partnership will not be deemed an 
underwriter or dealer within the meaning of any provision of the 
federal securities laws.\10\ The Partnership is prohibited from acting 
as a sponsor or distributor of any of the mutual funds it sells as 
agent. Moreover, the Partnership will have no obligation to sell any 
securities which DW or any of its affiliates underwrite or participate 
in underwriting in any way, serve as a market maker in, or hold in any 
principal position.\11\ With respect to securities underwritten by DW 
or its affiliates, the Partnership will not participate in any 
underwriting activities, or act as a selling group member, and will 
only act in the same capacity as any other broker/dealer not engaged in 
the underwriting. While it is contemplated that DW or an affiliate will 
provide the Partnership certain clearing services, these services will 
be of a type customarily provided by a clearing broker and consistent 
with general brokerage industry practices. The Partnership and the DW 
affiliate acting as clearing broker, as registered broker/dealers, will 
be subject to the requirements of the federal securities laws, as well 
as the Rules of Fair Practice of the NASD, regarding their respective 
activities.
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    \10\ This includes being deemed a ``principal underwriter'' under 
the Investment Company Act of 1940 of any mutual fund it sells because 
the Bank represents that the Partnership will not be in privity of 
contract with any mutual fund. See 15 U.S.C. Sec. 80a-2(a)(29).
    \11\ Bank counsel has represented that DW currently engages 
predominantly in retail brokerage and only conducts limited 
underwriting activities.
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                        the syndication program
    The Partnership also plans on entering into arrangements with other 
unaffiliated depository institutions in the future to operate 
essentially a third-party managed securities and annuities program at 
the branch locations of those depository institutions. The Syndication 
Program will involve generally the same brokerage and investment advice 
activities as described above in connection with the Bank Program. All 
activities in connection with the Syndication Program will be 
permissible for national banks and their subsidiaries. Clear 
identification and disclosure will be made to customers that the 
Partnership and the depository institution are separate businesses, 
that the employees of the Partnership are not employees of the 
depository institution, that the products being offered are not 
obligations of the institution and are not FDIC insured. In addition, 
the same disclosures with respect to the Bank Program discussed above 
will be made to customers concerning the relationship of the 
Partnership, the Bank, or DW, to the products themselves.
    As in leasing arrangements previously approved by the OCC with 
unaffiliated tenants, the Partnership contemplates leasing space at 
branch locations of these depository institutions on a ``gross 
receipts'' basis. In the event the Partnership intends to engage in any 
new activities with respect to the Syndication Program, the OCC would 
require submission of a notice pursuant to 12 C.F.R. Sec. 5.34.
    We understand that the operations of the Bank, the Subsidiary, and 
the Partnership will be conducted in accordance with all applicable 
laws and regulations. The Bank, the Subsidiary, and the Partnership 
also will be expected to conduct these activities in a prudent manner, 
consistent with safe and sound banking practices.
                               discussion
    National banks may choose to engage in activities which are part of 
or incidental to banking by means of an operating subsidiary. See 12 
C.F.R. Sec. 5.34(c). The activities to be conducted by the Subsidiary 
through the Partnership are permissible banking and securities 
activities and are consistent with previous opinions of the OCC.
    It is well-established that national banks and their subsidiaries 
may perform brokerage services for their customers. See e.g., 
Securities Industry Association v. Comptroller of the Currency, 557 F. 
Supp. 252 (D.D.C. 1983), aff'd per curiam, 758 F.2d 739 (D.C. Cir. 
1985), cert. denied, 474 U.S. 1054 (1986) (brokerage issue), rev'd, 479 
U.S. 388 (1987) (branching issue) (``Security Pacific''). The Glass 
Steagall Act (``GSA'') permits securities brokerage activities by 
national banks including the purchase and/or sale, as agent, of shares 
in mutual funds, units in unit investment trusts, or annuities.\12\ See 
e.g. Interpretive Letter No. 499 (February 12, 1990), reprinted in 
[1989-90 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,090; 
Interpretive Letter No. 403 (December 9, 1987), reprinted in [1988-89 
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,627; Interpretive 
Letter No. 386 (June 19, 1987), reprinted in [1988-89 Transfer Binder] 
Fed. Banking L. Rep. (CCH) para. 85,610; Interpretive Letter No. 363 
(May 23, 1986), reprinted in [1985-87 Transfer Binder], Fed. Banking L. 
Rep. (CCH) para. 85,533. Moreover, the OCC has permitted bank operating 
subsidiaries to engage in riskless principal brokerage. See 
Interpretive Letter No. 371 (June 13, 1986), reprinted in Fed. Banking 
L. Rep. (CCH) para. 85,541. The combination of investment advice and 
brokerage services in the same subsidiary also has been previously 
approved by the OCC. See e.g., Interpretive Letter No. 403, supra; 
Interpretive Letter No. 386, supra.
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    \12\ As you know, however, insurance industry trade groups have 
filed suit in federal court challenging the OCC's approval of the sale 
of fixed rate annuities by national bank operating subsidiaries. See 
Variable Annuity Life Insurance Co. [VALIC] v. Clarke, 786 F. Supp. 639 
(S.D. Tex. 1991); National Association of Life Underwriters v. Clarke, 
761 F. Supp. 1285 (W.D. Tex. 1991). While the lower court decision in 
VALIC upheld the OCC's approval, this case presently is on appeal. The 
final resolution of this litigation could result in a different outcome 
and possibly affect the Partnership's ability to engage is such 
activities.
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    The conduct of these activities for national banks through a 
partnership structure also is permissible. In prior instances, the OCC 
has permitted the subsidiary of a national bank to enter into a general 
partnership with another general partner, so long as the partnership 
will engage only in activities that are permissible for a national 
bank. See e.g., Interpretive Letter No. 516 (July 12, 1990), reprinted 
in [1990-91 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,220; 
Interpretive Letter No. 411 (January 20, 1988), reprinted in [1988-89 
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,635; Interpretive 
Letter No. 289 (May 15, 1984), [1983-84 Transfer Binder] Fed. Banking 
L. Rep. (CCH) para. 85,453. Moreover, the OCC has not objected to 
operating subsidiary notices involving joint venture/partnership 
proposals between national bank subsidiaries and subsidiaries of 
investment banks. See Interpretive Letter No. 516, supra; OCC Letter 
from J. Michael Shepherd to Kenneth L. Bachman, Jr. (March 26, 1990); 
Interpretive Letter No. 411, supra. As in these earlier letters, the 
partnership structure poses no problems provided certain conditions are 
met. See id.
    As discussed in detail in earlier letters involving partnerships 
between bank operating subsidiaries and investment banks or 
subsidiaries thereof, and analogous here, the proposed Partnership 
would not be prohibited by section 20 of the Glass-Steagall Act, 12 
U.S.C. Sec. 377, or section 32 of the Act, 12 U.S.C. Sec. 78. See 
Interpretive Letter No. 516, supra; Interpretive Letter No. 411, supra. 
Section 20 provides that a member bank shall not be affiliated in any 
manner described in 12 U.S.C. Sec. 221a with a business organization 
engaged principally in the issue, flotation, underwriting, public sale 
or distribution of securities. Assuming arguendo that DW is so engaged, 
since no affiliation under section 221a will occur, the proposed 
Partnership would not cause the Bank to become affiliated with DW or 
its subsidiaries in any manner prohibited by section 20. Section 32 
provides that no officer, director, or employee of any business 
organization primarily engaged in the issue, flotation, underwriting, 
public sale or distribution of securities shall serve at the same time 
as an officer, director or employee of a member bank. Under the 
proposed Partnership, no Bank officer, director or employee will serve 
as such in the parent investment bank and no investment bank officer, 
director or employee will serve as such in the Bank; thus, there are no 
prohibited relationships. See id.
    While certain Partnership employees previously may have been 
employees of the Bank, DW, or their affiliates, the Bank has 
represented that no Partnership employees will concurrently be 
directors, officers, or employees of either the Bank, DW, or their 
respective affiliates. The OCC has taken the position that a 
partnership's management and staff are not ordinarily attributed to the 
parent firms of the business entities involved. See id.
    The Syndication Program feature of the Bank's proposal also is 
permissible for national banks and their operating subsidiaries under 
the facts described. The OCC has approved percentage leasing where an 
unaffiliated tenant makes its services or products available, through 
its own employees, on bank premises. See e.g., Interpretive Letter No. 
533 (October 5, 1990), reprinted in [1990-91 Transfer Binder] Fed. 
Banking L. Rep. (CCH) para. 83,244; Interpretive Letter No. 406 (August 
4, 1987), reprinted in [1988-89 Transfer Binder] Fed. Banking L. Rep. 
(CCH) para. 85,630. The Partnership will conduct the Syndication 
Program's activities in accordance with previous precedents and will 
maintain the Partnership's operations separate from those of the other 
unaffiliated depository institutions.
    Further, the Bank's proposal is consistent with branching 
limitations on national banks. See 12 U.S.C. Sec. 36; Securities 
Industry Association v. Comptroller of the Currency, 577 F. Supp. 252 
(D.D.C. 1983), aff'd per curiam, 758 F.2d 739 (D.C. Cir 1985), cert. 
denied, 474 U.S. 1054 (1986) (brokerage), rev'd, 479 U.S. 388 (1987) 
(branching). While the Partnership need not limit its brokerage 
activities to its parent bank's branch locations, to the extent the 
Partnership is required to perform any activity at a bank branch 
location, it represents that it will do so.
    While the OCC has carefully considered the potential for customer 
confusion or misunderstanding inherent in the Bank's proposal, the Bank 
has provided that multiple opportunities will exist for the appropriate 
disclosures to customers concerning the nature of the products being 
sold and the relationship of the involved entities to the products. 
Specifically, the Bank has represented that disclosures on mutual funds 
and annuities will conform with those required in previous OCC 
opinions. The conditions relating to disclosures to customers and 
compliance with state laws imposed in the recent letters are, likewise, 
imposed on the Partnership as well as the Bank and its operating 
subsidiary.\13\ See e.g., Letter from J. Michael Shepherd, Senior 
Deputy Comptroller for Corporate and Economic Programs (March 20, 1990) 
(fixed and variable annuities); Interpretive Letter No. 403, supra 
(mutual funds and unit investment trusts); see also Letter from William 
P. Bowden, Jr., Chief Counsel (October 14, 1992).
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    \13\ These conditions are deemed to be ``conditions imposed in 
writing by the agency in connection with the granting of any 
application or other request'' within the meaning of 12 U.S.C. 
Sec. 1818.
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    Given the nature of the joint venture proposed by the Bank, the OCC 
is particularly concerned that bank customers understand that products 
being offered or recommended by the Partnership are uninsured, not 
obligations of the Bank or the Partnership, and not deposit substitutes 
and that in some instances the Bank or DW or their affiliates may have 
a relationship to and a financial interest in the products themselves. 
The OCC cautions the Partnership to use special care in ensuring that 
the interests of customers are protected and that customers are able to 
evaluate any potential conflicts of interest that may exist when a DW 
product is sold or recommended. As stated earlier, the Bank has 
represented that the Partnership will comply with all applicable 
disclosure requirements under the federal securities laws, the Rules of 
Fair Practice of the NASD, previous OCC precedents, and any state 
securities laws requirements.
    The Partnership's activities are permitted subject to the 
conditions and representations as provided in this letter and based on 
the Bank's assurances that full and adequate information will be 
provided to the Partnership's customers to ensure full disclosure of 
the relationship with DW when the Partnership recommends a DW product. 
Please be advised that if compliance difficulties arise related to this 
activity (including any evidence that customers were unaware of or did 
not understand the relationships involved), the OCC may impose 
additional limitations on the Partnership's activities with respect to 
DW products.
                         supervisory conditions
    The OCC's approval of the Bank's operating subsidiary notice is 
subject to the following conditions, in addition to the representations 
and conditions specified in your notification letter and other 
materials:
    (1) The Partnership shall disclose to customers at the time an 
account is established that the investment products offered by the 
Partnership (a) are not FDIC insured; (b) are not obligations of the 
Bank or the Partnership; (c) are not guaranteed by the Bank or the 
Partnership; and (d) involve investment risks, including possible loss 
of principal. These disclosures shall be provided using the above 
language or substantially similar language. The Partnership shall also 
obtain at the time an account is established a signed statement 
acknowledging that the customer has received and understands the above 
disclosures.
    (2) The disclosures described in condition (1) above also must be 
conspicuously disclosed to customers in all written sales 
presentations, advertising and promotional materials, confirmation 
forms, and periodic statements.
    (3) The Partnership shall provide full disclosure to customers at 
the time an account is established explaining the relationships between 
the Partnership, the Bank, and DW, and the products sold by the 
Partnership, and also shall disclose that from time to time the 
products offered by the Partnership may involve entities having other 
relationships, including lending relationships with the Bank and DW.
    (4) The Partnership may not offer uninsured investment products 
with a name identical to the Bank. The Partnership's products may not 
be marketed in a manner that would mislead or deceive consumers as to 
the products' uninsured nature and lack of any guarantee by the Bank or 
the Partnership.
    (5) The Partnership will maintain an operations manual and other 
written materials addressing the conduct of retail sales activities of 
the Partnership, which will be made available for OCC review. Customer 
suitability judgment procedures and compliance with 12 C.F.R. Part 9 
conflict of interest prohibitions should be emphasized.
    (6) The Subsidiary will be adequately capitalized.
    (7) The Partnership will be managed to minimize the risk of 
piercing the corporate veil.
    (8) The Partnership agreement will fully delineate the activities 
of the Partnership.
    (9) The Bank, through the Subsidiary, will have veto power over the 
activities of the Partnership and its major decisions.
    (10) The Partnership will be subject to OCC regulation, supervision 
and examination.
    (11) The Bank's aggregate direct and indirect investments in and 
advances to the Subsidiary and the Partnership shall not exceed an 
amount equal to the Bank's legal lending limit.\14\
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    \14\ Neither the Bank nor the Partnership will be obligated or 
committed to extend credit to any customer of the Partnership for 
purposes of purchasing any product through the Partnership. All credit 
so extended will be on an arm's length basis and consistent with safe 
and sound banking.
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    (12) The Bank must submit a notice to us pursuant to 12 C.F.R. 
Sec. 5.34 if the Partnership at some future time decides to engage in 
new activities, i.e., activities not covered by your current notice and 
our response thereto. This submission must be made even though the 
activities have been found to be permissible for national banks.
    Please be advised that the conditions of this approval are deemed 
to be ``conditions imposed in writing by the agency in connection with 
the granting of any application or other request'' within the meaning 
of 12 U.S.C. Sec. 1818.
                               conclusion
    Subject to the representations and conditions specified in your 
notification letter and other submitted materials, as well as those in 
this response, the Bank may proceed with its proposal. This response is 
based solely on the facts as represented and any changes in the facts 
might require a different result. Our analysis also reflects current 
legal and prudential standards, and may be subject to revision as 
future developments warrant.
            Sincerely,
             Frank Maguire Acting Senior Deputy Comptroller
                             Corporate Policy and Economic Analysis
