[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
PROTECTING CONSUMERS: WHAT CAN CONGRESS
DO TO HELP FINANCIAL REGULATORS
COORDINATE EFFORTS TO FIGHT FRAUD?
=======================================================================
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
AND THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MARCH 6, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-2
U.S. GOVERNMENT PRINTING OFFICE
70-889 WASHINGTON : 2001
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office
Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2550
Mail: Stop WWOP, Washington DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Texas JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, General Counsel and Staff Director
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Ohio, Vice Chairman LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York KEN BENTSEN, Texas
ROBERT W. NEY, Texas JAY INSLEE, Washington
CHRISTOPHER COX, California JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina MICHAEL CAPUANO, Massachusetts
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia WILLIAM LACY CLAY, Missouri
PATRICK J. TIBERI, Ohio
------
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
DAVE WELDON, Florida, Vice Chairman MAXINE WATERS, California
MARGE ROUKEMA, New Jersey CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware KEN BENTSEN, Texas
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma MAX SANDLIN, Texas
BOB BARR, Georgia GREGORY W. MEEKS, New York
SUE W. KELLY, New York LUIS V. GUTIERREZ, Illinois
PAUL E. GILLMOR, Ohio FRANK MASCARA, Pennsylvania
JIM RYUN, Kansas DENNIS MOORE, Kansas
BOB RILEY, Alabama CHARLES A. GONZALEZ, Texas
STEVEN C. LaTOURETTE, Ohio PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois JAMES H. MALONEY, Connecticut
WALTER B. JONES, North Carolina DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania BARBARA LEE, California
ERIC CANTOR, Virginia HAROLD E. FORD, Jr., Tennessee
FELIX J. GRUCCI, Jr, New York RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania KEN LUCAS, Kentucky
SHELLEY MOORE CAPITO, West Virginia RONNIE SHOWS, Mississippi
MIKE FERGUSON, New Jersey JOSEPH CROWLEY, New York
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
C O N T E N T S
----------
Page
Hearing held on:
March 6, 2001................................................ 1
Appendix:
March 6, 2001................................................ 47
WITNESSES
Tuesday, March 6, 2001
Albinson, Scott, Managing Director, Examinations and Supervision,
Office of Thrift Supervision................................... 10
Bartlett, Hon. Steve, President, Financial Services Roundtable... 32
Becker, David M., General Counsel, U.S. Securities and Exchange
Commission..................................................... 15
Hillman, Richard J., Director, Financial Markets and Community
Investment, U.S. General Accounting Office..................... 26
Lormel, Dennis M., Chief, Financial Crimes Section, Federal
Bureau of Investigation........................................ 14
Rodell, Thomas J., Executive Vice President and Chief Operating
Officer, Aon Risk Services, Inc., Chairman of the Council of
Insurance Agents and Brokers, on behalf of the Council......... 29
Smith, Ronald A., President, Smith, Sawyer & Smith, Inc., State
Government Affairs Chairman, Independent Insurance Agents of
America, on behalf of IIAA, National Association of Insurance
and Financial Advisors and the National Association of
Professional Insurance Agents.................................. 31
Vaughan, Hon. Terri M., Iowa Commissioner of Insurance, Vice
President of the National Association of Insurance
Commissioners, on behalf of NAIC............................... 12
Williams, Hon. Julie L., First Senior Deputy Comptroller and
Chief Counsel, Office of the Comptroller of the Currency....... 8
Wuertz, Karen K., Senior Vice President, Strategic Planning and
Development, National Futures Association...................... 28
APPENDIX
Prepared statements:
Kelly, Hon. Sue W............................................ 197
Bachus, Hon. Spencer......................................... 198
Oxley, Hon. Michael G........................................ 199
Albinson, Scott.............................................. 68
Bartlett, Hon. Steve......................................... 183
Becker, David M.............................................. 124
Hillman, Richard J........................................... 139
Lormel, Dennis M............................................. 113
Rodell, Thomas J............................................. 166
Smith, Ronald A.............................................. 173
Vaughan, Hon. Terri M........................................ 96
Williams, Hon. Julie L....................................... 48
Wuertz, Karen K.............................................. 160
Additional Material Submitted for the Record
Albinson, Scott:
Written resonse to questions from Hon. Sue Kelly and Hon.
Spencer Bachus............................................. 93
Becker, David M.:
Written resonse to questions from Hon. Sue Kelly and Hon.
Spencer Bachus............................................. 136
Hillman, Richard J.:
Written resonse to questions from Hon. Sue Kelly and Hon.
Spencer Bachus............................................. 157
Vaughan, Hon. Terri M.:
Written resonse to questions from Hon. Sue Kelly and Hon.
Spencer Bachus............................................. 109
Williams, Hon. Julie L.:
Written resonse to questions from Hon. Sue Kelly and Hon.
Spencer Bachus............................................. 61
Wuertz, Karen K.:
Written resonse to questions from Hon. Sue Kelly and Hon.
Spencer Bachus............................................. 164
National Association of Mutual Insurance Companies, prepared
statement...................................................... 190
North American Securities Administrators Association, prepared
statement...................................................... 192
PROTECTING CONSUMERS: WHAT CAN
CONGRESS DO TO HELP FINANCIAL
REGULATORS COORDINATE EFFORTS TO FIGHT FRAUD?
----------
TUESDAY, MARCH 6, 2001
U.S. House of Representatives,
Subcommittee Oversight and Investigations, and
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, DC.
The joint subcommittees met, pursuant to call, at 2:00
p.m., in room 2128, Rayburn House Office Building, Hon. Sue W.
Kelly, [chair of the Subcommittee on Oversight and
Investigations],
presiding.
Present for the Subcommittee on Oversight and
Investigations: Chair Kelly; Representatives Cantor, Gutierrez,
Bentsen, Inslee, Capuano and Clay.
Present for the Subcommittee on Financial Institutions and
Consumer Credit: Representatives Bachus, Castle, Ryun, Biggert,
Toomey, Cantor, Grucci, Hart, Capito, Rogers, Tiberi, Waters,
Bentsen, Sherman, Gutierrez, Moore, Gonzalez, Hooley, Hinojosa
and Lucas of Kentucky.
Also Present: Representative Oxley.
Chairwoman Kelly. This joint hearing of the Subcommittee on
Oversight and Investigations and the Subcommittee on Financial
Institutions and Consumer Credit will come to order.
Without objection, all Members' opening statements will be
made part of the record. Today we are here to hold the first of
many subcommittee hearings on issues of importance to
consumers, regulators and the financial services industries.
As this is a joint hearing of the Subcommittee on Oversight
and Investigations and my colleague from Birmingham, Mr.
Bachus', Subcommittee on Financial Institutions, I want to
thank him for allowing me to chair this hearing and for his
invaluable thoughts and observations on the issues before us.
In addition, I want to thank the Ranking Member of our
Subcommittee on Oversight and Investigations, the gentleman
from Chicago, Mr. Gutierrez, and the Ranking Member of the
Subcommittee on Financial Institutions, the gentlewoman from
Los Angeles, Ms. Waters, for their work on this issue and for
agreeing to hold the hearing on this very important issue.
I look forward to continuing to work with you, along with
all the Members of our committee, as we consider potential
legislation that may result from the information that we gather
at this hearing today.
With the recent enactment of the Gramm-Leach-Bliley Act,
Congress required ``functional regulation'' of our financial
services industry. In order to make functional regulation work,
Congress directed regulators to work together in the policing
of their industries. Particularly in the insurance industry,
since the enactment of the 1994 Insurance Fraud Prevention Act,
the insurance industry has been unable to access the necessary
information to enforce this law. This act prohibits anyone who
has been convicted of a felony involving dishonesty or a breach
of trust from engaging in the business of insurance. However,
the law did not provide any means for potential employers or
insurance regulators to check for criminal background.
Proper implementation of these acts clearly requires both
increased coordination and communication among the regulators
and the highest of standards for those who work in the
financial services industry. We must ensure that the regulators
have all the tools they need to meet these goals. To add to
this problem, we have clear cases where criminals, after being
banned from one financial industry, have gone to another
financial industry to continue their fraud. The best example of
this is the case of Martin Frankel, who was just reported to
have been extradited back to the United States to face charges
for his crimes after his failed escape attempt in Germany last
week.
After being permanently banned from the securities industry
in August of 1992, Mr. Frankel migrated to the insurance
industry, where he is charged with perpetrating an investment
scam which stole more than $200 million from insurance
companies. Representatives from the General Accounting Office
are here with us today who will provide some details of his
alleged activities before he fled the country in 1999. Mr.
Frankel now faces a 36-count indictment, with 20 counts of wire
fraud, 13 counts of money laundering, and one count each of
securities fraud, racketeering, and conspiracy.
We have called this hearing to gain a better understanding
of these issues from the perspective of regulators and the
industry. It is our hope that this can lead to legislation to
facilitate communication, which can prevent criminals from
exploiting this perceived weakness, as was perpetrated by Mr.
Martin Frankel.
At issue before us is the impact these problems have upon
consumers and what we can do to further protect consumers by
better regulatory oversight.
Before us today we are honored to have two distinguished
panels of witnesses to share their thoughts and observations
about this problem. I thank all of you for taking time out of
your schedules and fighting the snow to get down here to
discuss the issues with us.
At this point, I would like to let Members of the Committee
and their staff know that it is my intention to enforce the 5-
minute rule. I would appreciate their cooperation in this, and
I would ask staff to inform their Members of this, should their
Member arrive late for the hearing.
Now let me recognize Mr. Sherman, my colleague from
California, for his opening statement.
[The prepared statement of Hon. Sue W. Kelly can be found
on page 197 in the appendix.]
Mr. Sherman. Thank you, Madam Chairwoman.
Consumer fraud is an important issue, and I am glad both
subcommittees have come together to hold this hearing. We need
better coordination, and the example you gave is a perfect one
as to how being banned from one industry should certainly be
acknowledged by and usually lead to a ban from the other
industries as well. There is more that can be done to
coordinate the financial services regulatory scheme.
I think, though, if we are going to fight fraud, there are
other areas to look at as well as coordination. One of those is
funding.
In the next day or two, the Capital Markets Subcommittee is
going to have a hearing on reducing the fees imposed on
transactions, I believe with a focus of reducing the fee of 1/
300 of 1 percent down to 1/500 of 1 percent.
It may very well be that is an appropriate reduction, but
we should not assume that we are doing all that we need to do
and accordingly can cut the fees to as low as they possibly
could go to keep that continuing effort alive.
I have been in public life for a while at the State and
Federal level. No one has ever come to me and complained about
a 1/300 of 1 percent fee, or explained that their life would be
better if it was only 1/500 of 1 percent.
But not a year goes by when I do not hear several stories
of people who are victimized by financial services fraud,
usually securities fraud. We need to do more to protect
investors from securities fraud. We need to devote the adequate
resources to this. We need also to have the resources to
increase our efforts. We have to devote the resources necessary
to provide parity for those employed by the SEC, and we need to
look at new techniques for enforcement.
One thing that troubles me a bit, and I am not ready,
without hearing from other experts, to embrace the complete
solution to this, is that the SEC is prohibited by its own
policies or perhaps by statute from having its people pretend
to be investors, which would be the best way, it would seem, to
find out what investors are being told, what investments are
being marketed. Yet I am told, even if an SEC employee is
called by one of these boiler room operations, they have to
say, ``Oh, by the way, I am with the SEC.'' Click.
What instead we ought to explore authorizing and directing
the SEC to do is to have its people pose as investors, get on
the lists, hear the telephone calls, and at least be allowed to
search the web the way investors or potential investors do to
see what is being offered. That I think is an effective way to
make sure that securities that are being offered according to
law and the claims being made for them are at least within the
realm of reason, and either those claims are legal or at least
close to being legal.
I have heard from so many people who have lost so much
money by the marketing of securities that are so far outside
what is legally allowed that I have to wonder whether we do not
need more effort in that area.
I would point out that most crimes take place in private or
in the dark. Securities fraud and other investment fraud has to
take place openly. The victim does not have a gun to their
head, the victim is there in the open, and certainly we should
be able to spot crimes that take place in the daylight even
more easily than we are able to prevent crimes that take place
in the dark of night.
So, Madam Chairwoman, thank you for the hearing, and thanks
for the opportunity to make an opening statement.
Chairwoman Kelly. Thank you very much.
We have been joined by a number of other Members. I just
simply would like to remind them, if their staff has not told
them, that I would like to enforce the 5-minute rule. I would
really appreciate their cooperation in this.
Next we turn to the Chairman of the Subcommittee on
Financial Institutions, Mr. Bachus.
Mr. Bachus. Thank you, Madam Chairwoman.
I can think of no better topic which this committee can
begin our work with in this Congress than the one that brings
us here together today, that is, protecting consumers by making
sure our financial watchdog agencies have the necessary tools
to combat fraud and that they cooperate and coordinate their
efforts in fighting fraud.
We have nearly 200 State and Federal regulators, so it is
very important. They each have separate filing systems. They
maintain separate records. It only makes good common sense that
they would coordinate and cooperate together.
I think, as Chairwoman Kelly has said, with Mr. Frankel
being extradited over the weekend back to the United States, he
is certainly a high-profile poster boy for why cooperation
between Federal and State financial regulators is so critical
and what happens when there is not that cooperation and
coordination.
I want to thank Madam Chairwoman for convening this joint
hearing to consider the issue. This is, as I said, the first
hearing of the full committee. I am excited about the new
Financial Services Committee. I am excited that Chairman Oxley
will be our leader. He is a very exciting person to work with.
As a former FBI agent, I know he has a personal interest in
this hearing. I know he will be traveling back to Ohio tomorrow
because of Governor Rhodes' death for that funeral, and I know
we are all saddened by that.
I want to thank my Ranking Member, Ms. Waters. She and I
have now been the Chairman and Ranking Member of three separate
subcommittees on the Financial Services Committee. We have
always had a spirit of collegiality and candor. We work well
together. I am sure that is going to continue.
So I look forward, Ms. Waters, to working with you in this
Congress. She and I are both very concerned about consumer
fraud. Again, this is an appropriate place to start.
I also want to say, we have some staff changes on the
Financial Services Committee, and I want to just right up front
thank Robert Gordon and Charles Symington in the preparation
for this hearing. It was outstanding. If we come into something
prepared and well-briefed, it can be so much more fruitful. I
feel like you all have done an excellent job preparing it. It
tells me that you already have an expertise in this area, so
thank you for that.
The concept of linking together already existing databases
maintained by various financial regulators and law enforcement
agents to combat fraud ought to be something that we just do,
not something that we really have to work hard to do, because
it does, as I say, make good common sense. If implemented
properly, such an increase can serve as an effective early
warning system when con artists like Mr. Frankel attempt to
expand the frontiers of their criminal enterprises to new
industries and new locations.
As with any effort to promote cooperation between
regulators of different industries across jurisdictional lines,
achieving that objective is easier said than done. Anyone who
has spent a significant time inside the Beltway knows how
difficult it is to get different Government bureaucracies to
coordinate their activities, each in an area such as this where
the benefits of such cooperation are so obvious, but, despite
that, turf battles are one of Washington's favorite pastimes.
But for the sake of the consumer, we ought to put those aside.
As I mentioned, there are logistical questions related to
these different antifraud databases maintained by the agencies,
and they should be concerned about confidentiality. We should
work very hard to see that, while this kind of information is
available, that we protect it and make sure it does not get
disseminated where it should not be.
I will close again by just saying, Mrs. Kelly, I look
forward to working with you and the staff. We have some new
freshman Members on the committee, and I can tell you that they
are some of the stars of the freshman class, so we are
fortunate that we have got some new Members of this committee
that are very sharp. They have come into this Congress with a
lot of accomplishments. I think they are going to be of great
assistance to us right off the bat.
Some of them are in attendance today. I am looking forward
to working with them and Chairman Oxley and the staff as we
consider legislative proposals to advance the fight against
financial fraud. That fight begins by listening to those who
are out there on the front lines combatting it every day, our
regulators. So we look forward to this panel and the next panel
sharing that information with us and getting us informed enough
to make the right decisions on what to do from this day
forward.
Thank you, Madam Chairwoman.
[The prepared statement of Hon. Spencer Bachus can be found
on page 198 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Bachus.
We will next go in order of appearance for the committee
hearing to Mr. Gonzalez.
Mr. Gonzalez. I do not have an opening statement. Thank you
very much, Madam Chairwoman.
Chairwoman Kelly. Thank you very much, Mr. Gonzalez.
Next we will go to Mr. Rogers.
Mr. Rogers. I will pass. Thank you, Madam Chairwoman.
Chairwoman Kelly. Next we will go to the Ranking Member of
the Subcommittee on Oversight and Investigations and someone I
look forward to working with, Mr. Gutierrez.
Mr. Gutierrez. Thank you very much, Chairwoman Kelly and
Ranking Member Waters and Chairman Bachus. I am pleased to be
here today. Addressing the importance of sharing information
between regulators at different financial services sectors is
long overdue, and I want to congratulate you, Chairwoman Kelly,
for calling this hearing.
The problem of financial fraud has tremendously affected
not only the financial services industry, but also the
consumers. Consumers and taxpayers in States around the country
ultimately pay the consequences of lacking a centralized
network to help prevent fraud.
Clearly, the problem of financial fraud cannot be solved
unilaterally by legislators, no more than it can be solved
unilaterally by the private sector. If we are to identify and
respond to the problem, we have to unite our efforts of
industry and legislators at the national level, on the national
level, because I don't think any State can do this alone. This
really requires the cooperation and, more importantly, the
coordination of States alongside the Federal level.
I recognize the importance of providing all Federal and
State financial services regulators with a single network where
they can obtain necessary disciplinary information regarding a
financial services company or individual. However, it is
imperative that we maintain and respect confidentiality and
privacy of unrelated items or information.
Regulators across America must be able to spot, investigate
and halt such actions as Martin Frankel's. Congress must help
by providing the necessary legal framework to help achieve
this.
I hope with the information gathered here today Congress
will be able to take a firm step toward fighting financial
fraud. In doing so, we will not only be helping the industry
and the public coffer first, but also the consumers.
I look forward to hearing all of the testimony here this
afternoon. Thank you very much.
Chairwoman Kelly. Thank you, Mr. Gutierrez.
Next we are going to Ms. Hart.
Ms. Hart. I will pass, Madam Chairwoman. Thank you.
Chairwoman Kelly. Next we will go to Mr. Grucci. Mr.
Grucci, have you an opening statement?
Mr. Grucci. Madam Chairwoman, I don't have an opening
statement, but I am interested in hearing what is going to be
taking place. I may have some questions. I reserve the ability
to ask those questions later.
Chairwoman Kelly. Thank you very much.
Ms. Hooley.
Ms. Hooley. I have no opening statement. Thank you.
Chairwoman Kelly. Ms. Waters.
Ms. Waters. Thank you very much, Madam Chairwoman.
I don't have an opening statement, but I would like to
first congratulate you and Chairman Bachus on your new
responsibilities and to say to you that I think this is a good
start, that we have two subcommittees cooperating. Oftentimes,
we kind of run off and do duplicative work. This is a good sign
that we will be able to move forward together.
As you know, Mr. Bachus and I did work very well on the
Domestic and International Monetary Policy Subcommittee, where
we had the honor of being in the forefront of the debt relief
initiative that has been supported by almost everybody in this
House and passed.
So I am looking forward to the opportunity not only to
serve as Ranking Member on the Subcommittee on Financial
Institutions and Consumer Credit with Mr. Bachus, but, again,
on working with you and the other chairs of committees.
I would also like to thank Mr. Gutierrez for accepting the
responsibility to serve as the Ranking Member on the
Subcommittee on Oversight and Investigations.
Let me just say that even though we don't have a detailed
proposal before us, that this is an important subject matter.
It appears to me that some thought has gone into what we can do
to begin to collect information and data and compile it in ways
where we can have information on consumers in this country.
That may be a good thing, but, of course, you know, as a strong
civil libertarian, I have to always be concerned about whether
or not we are invading privacy, whether or not we are literally
eliminating the opportunity for someone to pursue careers and
to pursue their goals in these industries unfairly in ways that
will harm them if the information is not correct and complete
and well vetted.
So we must be careful when we begin to compile data and
information that will eliminate one's ability to work or to
perform their duties and their careers.
I also would like to hear as we go forward in this why the
Treasury Department has not been included, and maybe this is
just the first draft or the first shot at how the Antifraud
Subcommittee of the Federal Financial Institutions Examination
Council will be created.
So I look forward to hearing from our witnesses here today;
and, again, thank you for holding this hearing.
Chairwoman Kelly. Thank you very much, Ms. Waters.
Next we go to Mr. Cantor.
Mr. Cantor. Madam Chairwoman, I have no opening statement.
Thank you.
Chairwoman Kelly. Thank you.
Mrs. Biggert.
Mrs. Biggert. Thank you, Madam Chairwoman. I have no
opening statement.
Chairwoman Kelly. Thank you.
Mr. Capuano.
Mr. Capuano. No, thank you.
Chairwoman Kelly. Mr. Clay.
Mr. Clay. Madam Chairwoman, I don't have an opening
statement. I am just looking forward to hearing the testimony
of the two panels. Thank you.
Chairwoman Kelly. Thank you, Mr. Clay.
Mr. Hinojosa.
Mr. Hinojosa. Thank you, Madam Chairwoman. I have no
opening statement, and I look forward to listening to the
panelists and asking questions at that time.
Chairwoman Kelly. Thank you.
Mr. Lucas.
Mr. Lucas. I have no opening statement. Thank you.
Chairwoman Kelly. Mr. Bentsen.
Mr. Bentsen. No, thank you.
Chairwoman Kelly. Thank you very much.
If there are no more opening statements, let us begin with
our first panel.
Before us today we have Julie Williams, First Senior Deputy
Controller and Chief Counsel for the Office of the Comptroller
of the Currency.
We have Mr. Scott Albinson, the Managing Director for
Examination and Supervision in the Office of Thrift
Supervision.
We have Terri Vaughan, the Iowa Commissioner of Insurance
and the Vice President of the National Association of Insurance
Commissioners, who is here on behalf of the National
Association of Insurance Commissioners.
We have Mr. Dennis Lormel, the Section Chief for the
Financial Crimes Section of the Federal Bureau of
Investigation.
Finally, we have Mr. David M. Becker, the General Counsel
for the Securities and Exchange Commission.
We thank all of you for joining us here today to share your
thoughts on this issue.
Without objection, your written statements will be made
part of the record. You will each be recognized for a 5-minute
summary of your testimony.
Let us begin with Ms. Williams.
STATEMENT OF HON. JULIE L. WILLIAMS, FIRST SENIOR DEPUTY
COMPTROLLER AND CHIEF COUNSEL, OFFICE OF THE COMPTROLLER OF THE
CURRENCY
Ms. Williams. Thank you.
Madam Chairwoman, Mr. Chairman, Ranking Members Gutierrez
and Waters and Members of the subcommittees, thank you for
inviting the Office of the Comptroller of the Currency to
participate in this hearing.
In view of the integration of the financial services
industries that is permitted by the Gramm-Leach-Bliley Act and
the resulting potential for individuals to move among the
banking, securities and insurance industries, it is
particularly important for each functional regulator to know
whether individuals or entities have been subject to
enforcement or disciplinary actions by another functional
regulator. On behalf of the Comptroller, I would like to thank
you for your efforts to further these objectives.
My written statement describes the most significant ways in
which the OCC currently shares information with other Federal
and State regulators. I will not repeat all that detail here,
but I will just note that we have various arrangements in place
to share different types of information with the other Federal
banking agencies, with the SEC and with State insurance
regulators.
I would also like to especially mention the progress that
has occurred in just a few years in cooperative efforts between
the banking agencies and the insurance regulatory community.
As you consider the design of a new system for enhanced
enforcement-related information sharing among functional
regulators, there are two areas that I would like to highlight
in my remarks this afternoon.
First is the need to ensure that disclosure of the
information is not prohibited or restricted by Federal law;
and, if disclosure is authorized, that applicable privileges
are properly preserved.
Certain Federal laws, which are discussed in greater detail
in my written statement, prohibit or restrict some types of
non-public information in the possession of one regulator from
being shared with other Federal and State regulators. Even if a
statutory exception permits the sharing of information,
statutory and common law privileges may still be waived or
destroyed by the unprotected disclosure of privileged
information. Thus, any new system for enhanced sharing of non-
public information among Federal and State regulators needs to
take account of and preserve all these different types of
privileges.
Second, we need to recognize that expanded information
sharing can raise very sensitive issues regarding the nature
and reliability of the information collected and how that
information is used when it is shared. Disclosure to other
regulators of preliminary suspicions, the reliability of which
could vary widely, would raise significant privacy issues,
including the possibility that dissemination of potentially
inaccurate accusations against individuals or institutions
could cause unwarranted harm to the reputation of the
individual or the entity.
Disclosure of preliminary information also could hamper
ongoing investigations by law enforcement agencies or Federal
banking agencies and might even expose agencies to some
potential liability for falsely accusing individuals.
We respectfully suggest that a balance between addressing
these concerns and promoting the benefits of interagency
information sharing could be achieved if new legislation first
were to focus on establishing a system for ready and convenient
access by each functional regulator to information regarding
final enforcement and disciplinary actions taken by all the
functional regulators.
If Congress chose to include additional types of
information in such a system, we would urge that the additional
information focus on formally commenced enforcement and
disciplinary actions by the participating Federal and State
agencies.
Congress could direct the relevant agencies to build on
their existing systems to create an automated, linked system
accessible to functional regulators that contains public
information on enforcement actions taken, potentially with the
limited edition of non-public information concerning the
initiation of formal actions and with provision for the role of
the NAIC on behalf of the State insurance supervisor in that
process.
This approach would make it unnecessary to create any new
governmental agency to manage information sharing among
functional regulators.
In closing, let me again state our appreciation that the
subcommittees are addressing these issues. Many of the issues
in this area can be quite complex, and we would be happy to
work with you and your staffs to provide technical assistance
as you develop specific legislative proposals.
Thank you, and I would be happy to try to answer any
questions.
[The prepared statement of Hon. Julie L. Williams can be
found on page 48 in the appendix.]
Chairwoman Kelly. Thank you so much, Ms. Williams.
Next let us go to Mr. Albinson; and thank you, Mr.
Albinson, for being here.
STATEMENT OF SCOTT ALBINSON, MANAGING DIRECTOR, EXAMINATIONS
AND SUPERVISION, OFFICE OF THRIFT
SUPERVISION
Mr. Albinson. Thank you.
Good afternoon, Madam Chairwoman and Members of the
subcommittees. Thank you for the opportunity to discuss the
information-sharing systems we have in place at OTS.
We support efforts to improve information sharing among the
function regulators. Safeguarding thrifts from fraudulent
activities and from individuals and entities responsible for
financial fraud is of paramount concern to OTS.
We also appreciate the attention that has been directed at
the need to protect sensitive information in attempting to
craft an interagency database network.
Finally, we support efforts to include confidentiality and
liability protections for all shared information so that
financial regulators do not compromise existing legal
privileges when sharing information with other financial
regulators and law enforcement organizations.
Since 1997, 43 insurance groups and 15 securities firms
have acquired or affiliated with OTS-regulated thrifts. In each
instance, OTS reviewed and evaluated the financial and
managerial resources of the applicant in order to identify the
extent to which the acquisition or affiliation posed risks to
the safety and soundness of the thrift. This often required us
to contact numerous State and Federal regulators to obtain
information on the applicant and its affiliates.
For an insurance company, for example, that operates on a
nationwide basis, this means that relevant information may be
available from virtually every State insurance commissioner.
Where an applicant has both securities and insurance
operations, the information trail extends to the SEC, NASD and
State securities commissioners. Thus, our interest in
efficiently obtaining access to interagency regulatory
information is compelling.
Because of these needs, OTS has been sharing information
with various State and Federal regulators for some years. Our
cooperative arrangements are both formal and informal. We work
closely with our sister banking agencies and State bank
regulators. We have a long-standing working relationship with
the SEC; and, in 1995, we executed a joint interagency
information-sharing agreement with the NASD.
Our most recent agreements were developed as a result of
the influx of insurance company applicants for thrift charters
during the late 1990's. This prompted us a few years ago to
develop a close working relationship with the NAIC, which has
led to the development of a model agreement that is the basis
for written information-sharing agreements with 41 State
Insurance Commissioners. These agreements extend significantly
beyond the sharing of consumer complaint data and include the
sharing of financial and enforcement information. We hope
ultimately to have agreements in place with every State
insurance commissioner.
Notwithstanding the relationships we have developed with
other financial regulators, the information agreements we have
in place and the databases that we currently maintain and
access, we share the interests of our fellow regulators in
improving our access to information that can help us do our
jobs.
In my written statement, we discuss a number of approaches
to interagency information sharing. A practical first step is
linking or aggregating the existing public databases of
financial regulators. This could be accomplished in a variety
of ways that would make each regulator's database information
accessible simultaneously. Each solution, of course, raises
more difficult issues, both logistical and substantive,
including security, information integrity, confidentiality and
liability protections.
For any type of database-sharing system to be useful in
tracking individuals involved in financial fraud, however, the
quality and integrity of the information fed into the system
must be consistent and sustained.
Currently, the Federal banking agencies are only provided
information regarding the addition of new senior officers and
directors if the depository institution is in a troubled or
undercapitalized condition. A streamlined after-the-fact notice
regarding appointments from institutions not otherwise covered
by this requirement would address this information void.
OTS will soon issue a regulation that affords thrifts some
degree of corporate governance self-defense against
perpetrators of financial fraud. This regulation will permit
thrifts to adopt a preapproved bylaw that would preclude
persons under indictment for or convicted of crimes or subject
to a cease and desist order for fiduciary violations from
serving on the institution's board of directors.
Financial regulators spend considerable resources tracking
down fraudulent activities and the perpetrators of financial
fraud. To the extent we can combine and leverage our collective
experiences and information, consumers will benefit through a
more effective process. We support the committee's efforts to
achieve this objective.
Thank you. I will be happy to take any questions.
[The prepared statement of Scott Albinson can be found on
page 68 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Albinson.
Next we have Terri Vaughan. Thank you, Ms. Vaughan, for
testifying.
STATEMENT OF HON. TERRI M. VAUGHAN, IOWA COMMISSIONER OF
INSURANCE, VICE PRESIDENT, NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS, ON BEHALF OF NAIC
Ms. Vaughan. Good afternoon. Thank you, Madam Chairwoman,
Mr. Chairman, and subcommittee Members. I am pleased to be here
on behalf of the NAIC and State insurance regulators to help
the Financial Services Committee as you work to establish an
effective anti-fraud information network.
Today I would like to make three major points regarding
regulatory information sharing.
First, the NAIC and State insurance regulators believe
information sharing is the cornerstone for implementing
functional regulation under the Gramm-Leach-Bliley Act. As
regulators, we exist to protect consumers. To do so, we must
have access to criminal history information for routine
background checks and to keep tabs on the bad actors in all
areas of the financial services industry.
We started the process of sharing information with Federal
regulators well before the enactment of the Gramm-Leach-Bliley
Act. Our first priority has been to negotiate written
cooperation agreements that can be used to open information
channels between State insurance departments and Federal
banking and securities regulators.
Scott touched on the agreements we have with the Office of
Thrift Supervision. In addition to the OTS agreements, we
recently completed negotiating agreements with the Federal
Reserve Board, the OCC and the FDIC. These agreements cover
broad exchanges of information, including information on
financial solvency, enforcement matters, routine licensing and
consumer complaints; and we expect that most States will sign
these agreements during this year.
My second point: As a State-based system, we have
considerable experience in information sharing. The NAIC
already has sophisticated online systems for sharing
information among the States concerning licensing, financial
condition, enforcement and consumer complaints.
The NAIC annually spends about $20 million and dedicates
roughly 170 staff people to maintaining our databases at the
NAIC. As a result of this commitment, we currently have the
technical infrastructure in place to share regulatory
information with Federal agencies.
As the central database manager and the link to individual
State insurance department computer systems, the NAIC is fully
capable of receiving and handling both public and confidential
regulator information.
We believe effective information sharing must be structured
on the following principles:
First, we need to create a national information antifraud
network based on information-sharing agreements among
functional regulators and law enforcement agencies.
We need to establish a central database authority that
would set the policy and technical standards for sharing this
regulator and law enforcement information.
We need to link databases, rather than create new ones.
Each of us has a significant investment in our current
databases, including training and integration. These should be
preserved and enhanced by permitting mutual access.
Finally, we need to provide all participants in an
antifraud network with legal immunity for good-faith reporting
and handling of regulator information.
My third point: While the NAIC supports congressional
efforts to create a broad antifraud information-sharing
network, we strongly urge you to fix two glaring problems with
the current system immediately.
The first relates to our ability to access the FBI's
fingerprint identification record system. Madam Chairwoman, I
appreciated your opening comments regarding the need for
insurance regulators to be able to access this database. As you
know, State insurance regulators are the only functional
regulators who do not currently have access to this system
operated by the FBI.
Permitting States to run national fingerprint background
checks on insurance agents and company personnel is the best
way to weed out known wrongdoers before they get a chance to
commit insurance fraud. It is also critical if Congress expects
the States to enforce the Federal insurance fraud laws and to
establish a national agents licensing system, as envisioned by
Gramm-Leach-Bliley.
Second, we need Congress to help us gain access to the
national securities enforcement database maintained by the
National Association of Securities Dealers. We have been
working with the NASD to try to negotiate access for
approximately two years, and to date we have not been
successful.
I understand there are potentially some legal issues that
they may have that you might be able to help us with. In
return, we are willing to share with the NASD the extensive
database that the NAIC maintains on insurance agents and
companies.
In conclusion, the State insurance regulators and the NAIC
fully support a move to create a nationwide network of
information sharing among regulators to fight financial fraud.
We are ready and able to share the information in our own
regulatory databases in exchange for receiving the information
held by banking and securities regulators.
The most urgent need, in our opinion, is for Congress to
open the doors to the FBI fingerprint and the NASD enforcement
databases. These critical tools should not be left waiting
while Congress determines how other elements of a national
antifraud information program should be implemented.
We pledge our commitment and cooperation, and we appreciate
the opportunity to participate in this important initiative. I
would be pleased to answer any questions you may have.
[The prepared statement of Hon. Terri M. Vaughan can be
found on page 96 in the appendix.]
Chairwoman Kelly. Thank you very much, Ms. Vaughan.
Next we would like to hear from you, Mr. Lormel.
STATEMENT OF DENNIS M. LORMEL, CHIEF, FINANCIAL CRIMES SECTION,
FEDERAL BUREAU OF INVESTIGATION
Mr. Lormel. Thank you, ma'am.
We have a bit of a different perspective. Ours, obviously,
is law-enforcement-driven. Yet we are here in support of this
initiative, and we appreciate the opportunity to speak with you
today and to participate in the forum.
What I would like to do would be to defer most of my
comments to questions, but certainly my written statement
speaks to two things.
It is to, as my colleague to my right stated, to the
information that we have available through our record check
capabilities, through our CJIS--Criminal Justice Information
Services Division--facility and in other means, and also to the
importance of us sharing information, as regulators, as an
industry, as a law enforcement community in the opportunity to
work together on the crime problems.
The Department of Justice has not yet, with the new
Administration, come out with a policy statement, so certainly
I am not in a position to talk to policy at this point. But we
are here as a sign of cooperation and are interested in working
with everybody to further this initiative.
The insurance industry in particular is an industry that
is--the enormity of the industry in terms of size, in terms of
opportunity for exploitation and control weaknesses is
certainly in need of a uniform approach to looking at the crime
problems. Lack of uniformity and systemic control weaknesses
encourage individuals such as Martin Frankel to enter and
fraudulently exploit the insurance industry.
A few of you have spoken about the Frankel case.
Unfortunately, the Frankel case is one of a number of cases
that speak to the enormity of the crime problem.
We have over 500 investigations ongoing involving the
insurance industry. Unfortunately, there have been a few, like
the Frankel case, like the Shalom Weiss case out of Tampa,
which has been, again, a multi-million dollar case causing
multi-million dollar losses; and in that particular case the
criminal--I think the convictions in those cases, the sentences
were among the most significant sentences given by a judge in
financial crimes cases.
Just summing up my position, then, we are here, again, to
support this initiative. We look to see that, from our
standpoint, anything that the Bureau can support in working
with our colleagues--and the essence of the comments that were
made by members of the panel and members down here in terms of
the necessity for cooperation and coordination, I could not
stress that enough.
[The prepared statement of Dennis M. Lormel can be found on
page 113 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Lormel.
Mr. Becker.
STATEMENT OF DAVID M. BECKER, GENERAL COUNSEL, U.S. SECURITIES
AND EXCHANGE COMMISSION
Mr. Becker. Chairwoman Kelly, Chairman Bachus, Ranking
Members Waters and Gutierrez and Members of the subcommittee,
we at the Securities and Exchange Commission appreciate very
much your efforts in helping us and other regulators coordinate
efforts to fight financial fraud. We all share the goal of
staying a step ahead of cynical scofflaws who, having been
barred from one financial industry sector, move to a different
sector in the hope that the regulators there will not know of
their taint, or if they do know about it, they won't have the
authority to stop them from entering a new industry.
In the securities industry, the Central Registration
Depository system supplies useful information on broker dealers
and their registered employees. The CRD is maintained by the
National Association of Securities Dealers, which is a private
organization under the SEC's oversight.
The NASD is also implementing a similar system for
investment advisors, so we are familiar with these systems and
their benefits and costs.
The Commission also has a long-standing practice of sharing
information with other Federal and State law enforcement
agencies. Particularly our Enforcement Division, I must say,
has worked out modes of rather effective cooperation with other
law enforcement agencies.
Of course, in light of the Gramm-Leach-Bliley Act, we are
improving, along with banking regulators, our information-
sharing arrangements. We are quite enthusiastic in supporting
the goal of enhancing information sharing among regulators. We
look forward to working with you and your staff in developing
an effective system.
We think that any such effort should follow a few general
principles, which I will now discuss.
First, any system should provide information that is
accurate. We need to develop safeguards to ensure that not only
the information that goes in is accurate, but that it stays
accurate and does not degrade over time.
Any system should also be secure, with access restricted
only to those who need the information to fight fraud. Any
system that facilitates sharing among regulators of
individuals' personal and non-public information increases the
risk that private information somehow finds its way into the
public.
We should think carefully about where to draw lines on
access. I think our view is that there should be multiple
lines. That is reflected in the CRD system as now designed
where different folks at different levels of access can get
different details of information.
Any system, of course, should be cost-efficient and should
take into account the extra burden on some entities,
particularly non-governmental entities like the NASD, who have
a role in administering the system. These folks may face a
liability risk that increases in proportion to the increased
access to their system. They also may face increased costs.
The CRD system costs about $50 million a year to maintain
and costs about another $50 million to establish. The cost of
establishing and maintaining that system is borne by NASD
members who are private citizens who operate in the securities
industry.
Any system should be nimble enough to respond to
technological changes. We see potential problems with creating
a mega-system which could well be obsolete before it is online.
At this point, we think the best approach is to maximize
the ability of financial regulators to interact with each
other's systems, rather than trying to develop a central
omnibus system administered jointly or by some new entity
created for that purpose.
Finally, any system of sharing information is only as
useful as an agency's ability to make use of the information
that it gets. As things now stand, the SEC's statutory
authority does not allow it to bar an individual from the
securities industry on the basis of, for example, a State
insurance regulator's finding of fraud.
We encourage you to consider these kinds of gaps in
authority as you address these issues. Let me repeat again that
we are enthusiastic supporters of the goal of improving
information flow among regulators and that we appreciate the
receptiveness of the subcommittees and your openness to our
concerns.
Thank you very much.
[The prepared statement of David M. Becker can be found on
page 124 in the appendix.]
Chairwoman Kelly. Thank you, Mr. Becker.
The Chair notes that we have been joined by the Chairman of
the Committee on Financial Services, my colleague, Mr. Oxley
from Ohio.
Mr. Oxley, we would like now to have you make an opening
statement and ask any questions, if you would like.
Mr. Oxley. Thank you very much.
Congratulations to you and your subcommittee on this
hearing. It is certainly timely and a good start on oversight.
As you know, Madam Chairwoman, the Frankel case has been
much discussed. I won't go into details on that. But,
obviously, if we are not willing to invest now to coordinate
the antifraud systems of our financial regulators, I guarantee
that the next Frankel is waiting to take advantage of us again
certainly at a much higher cost.
Overall, the regulators here today have done a good job in
protecting consumers and should be commended for upgrading
their computer systems and beginning discussions of cross-
industry coordination.
But their efforts are not enough, and they can never be
enough when done solely on an ad hoc basis. We need a
coordinated antifraud computer system that establishes an
automated information connection among regulators.
Each regulator keeps a database of individuals and entities
that have been censured for wrongful acts. In most cases, these
violations are already publicly accessible on each agency's
website. There is no way for any regulator to look the
information up without manually going to each website.
Yes, the State insurance regulators could have gone to the
SEC website and discovered Frankel had been barred from the
securities industry, but with literally millions of agents and
company licenses being processed each year, I think we can all
understand the difficulty of that endeavor. It is something
that every business and international organization is doing,
but it is not happening in the Government because there is no
entity tasked with coordinating regulators across all financial
industries; thus, the need for this hearing.
An anti-fraud coordination mechanism can be put together
without requiring any new collection of information, with no
additional bureaucracy or regulation, and with long-term cost
savings for consumers. The network would only be accessible to
regulators and only include data on financial professionals,
not individual consumers.
Even if this coordination effort only catches one future
Martin Frankel, it would pay for itself many times over.
Madam Chairwoman, two years ago the Members of this
committee helped enact historic financial services
modernization to integrate the cornerstones of our financial
world. Today we are taking the next step forward.
Having begun integration of the industries, we must now
turn to integrating financial regulation to create a
coordinated and seamless antifraud system to protect consumers.
I want to thank you, Madam Chairwoman, for braving the
snowstorms in New York to come down and chair the hearing
today, and my friends, Chairman Bachus, Ranking Members Maxine
Waters and Luis Gutierrez, for their leadership in putting this
hearing together.
I ask that my full statement be made part of the record,
and I yield back the balance of my time.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 199 in the appendix.]
Chairwoman Kelly. Thank you very much, Chairman Oxley.
With that, I would like to open the questions. I would like
to ask the entire panel for a simple yes-or-no answer to a few
questions that we have put together here.
I just would like to ask you to hold off any further
elaboration until the committee submits written questions to
you for further analysis, so this is sort of just off the top
of your head, a quick answer yes or no: Won't consumers be
better protected if the financial regulators use an automated
background check of all agency databases for all financial
licenses and applications, as opposed to making specific
occasional inquiries?
Let us start with you, Ms. Williams.
Ms. Williams. Yes.
Mr. Albinson. Yes.
Ms. Vaughan. Yes.
Mr. Lormel. Yes.
Mr. Becker. Yes.
Chairwoman Kelly. Thank you very much. It is unanimous.
Wouldn't consumers be better protected if all background
checks for licenses and applications included a check of all
financial regulators' databases for comprehensive and seamless
coverage and not just those where individual information-
sharing agreements exist?
Ms. Williams.
Ms. Williams. Yes.
Mr. Albinson. Yes.
Ms. Vaughan. Yes.
Mr. Lormel. Yes.
Mr. Becker. Yes.
Chairwoman Kelly. Isn't it cheaper or more effective to
create one coordinated antifraud network to exchange
information than to rely on numerous individual agreements and
computer connections?
Ms. Williams. Now, this is hard for a lawyer to do, just to
answer with one word. Yes.
Chairwoman Kelly. You have done it before.
Mr. Albinson. Yes.
Ms. Vaughan. Fortunately, I am not a lawyer. Yes.
Mr. Lormel. Yes.
Mr. Becker. Yes.
Chairwoman Kelly. Wouldn't regulators be better able to
fight fraud if they could share materials without risk of
losing critical confidentiality and liability protections?
Ms. Williams.
Ms. Williams. Yes.
Mr. Albinson. Yes.
Ms. Vaughan. Yes.
Mr. Lormel. Yes.
Mr. Becker. Yes.
Chairwoman Kelly. Thank you all for your cooperation.
I have a few more. Wouldn't it be more efficient for
financial institutions to allow the regulators to use a single
coordinated entity for sharing information to reduce
duplicative examinations and reporting? This is dear to my
heart, Ms. Williams. Caution on how you respond.
Ms. Williams. Not necessarily.
Chairwoman Kelly. That doesn't qualify. It has to be yes
or no.
Ms. Williams. Then I am on the yes side.
Mr. Albinson. Yes.
Ms. Vaughan. Yes.
Mr. Lormel. Yes.
Mr. Becker. I am afraid I just don't know.
Chairwoman Kelly. We will give you a pass on that, Mr.
Becker, but we will give you a written question to follow up.
Could a coordinated network be used by the regulators as it
evolved over time to share other materials and financial data
to reduce duplicative filings and examinations?
Ms. Williams.
Ms. Williams. Yes.
Mr. Albinson. Yes.
Ms. Vaughan. Yes.
Mr. Lormel. Yes.
Mr. Becker. Yes.
Chairwoman Kelly. Would it improve consumer protection in
the financial services industry if Congress created an anti-
fraud network coordinating limited information among regulators
with full confidentiality protections?
Ms. Williams.
Ms. Williams. Yes.
Mr. Lormel. Yes.
Ms. Vaughan. Yes.
Mr. Albison. Yes.
Mr. Becker. Yes.
Chairwoman Kelly. Thank you. I appreciate you responding to
my questions that way.
Let's go to the committee Members and begin with Mr.
Sherman. Is he still here? All right.
Mr. Gonzalez, Mr. Gutierrez. No questions?
Ms. Hooley, is she still here?
Ms. Waters.
Ms. Waters. Well, this agreement and cooperation is too
much for me. I have got to find out whether or not we have any
concerns whatsoever. We had a little bit of caution that was
urged by Mr. Becker, who said we must make sure that the
systems are accurate that they're well maintained and that they
are cost effective.
Mr. Becker, would you care to elaborate on any of your mild
cautions on what the system must do to protect individuals or
agencies or companies. Why did you tell us that and what do you
mean?
Mr. Becker. Well, we certainly support the goals of sharing
information, and we think it is possible to do that in a way
that meets the concerns that I have mentioned. But we do have
to be attentive to them and we do not think that the obstacles
to doing that are great, but we do need the help of this
committee. There are concerns. The NASD, for example, which
maintains the securities database, is a private entity and
there are concerns about liability. There are concerns about
how the data are maintained over time. We do want to make sure
that the data are accurate. We want to make sure that what is
shared is what is most useful, and at the same time, the least
likely to intrude on people's privacy.
I think you heard from Ms. Williams her support for sharing
of proceedings, of formal action. Those are the contexts in
which people have procedural protections and have opportunities
to contest information. That is the type of thing that we are,
I think, most enthusiastic about sharing broadly.
Ms. Waters. I suppose confidentiality is built into this
proposed system. Ms. Williams, how do you ensure
confidentiality when so many people will have access to this
information?
Ms. Williams. Congresswoman, it obviously becomes more of
an issue the more dispersed the information is. There is a
balancing test here with the sensitivity of the information
that might be included in an expanded database and the extent
of access. There is a spectrum of information. The more
sensitive the information in the system, the more sensitive we
should be to the extent of access.
Ms. Waters. Should there be penalties of violation of
confidentiality?
Ms. Williams. I think so, yes.
Ms. Waters. Is it proposed anywhere in the broad proposal
that we have here?
Ms. Williams. I think it is mentioned in the outline that I
have seen.
Ms. Waters. Have any of you given input to what kind of
penalties you think would be fair and effective to protect
sensitive information?
Ms. Williams. Not yet specifically, but we've been asked to
work with committee staff.
Ms. Waters. Thank you.
And finally, Mr. Lormel, do you support the performance
regulators having access to fingerprint identification record
system?
Mr. Lormel. Yes, ma'am, I do.
Ms. Waters. Why don't they have it now? Somebody.
Mr. Lormel. The----
Ms. Waters. What has stopped them from having access in the
past? I guess the other regulators had it. Insurance never had
it. Why not?
Mr. Lormel. I am not exactly sure, ma'am, of the insurance
industry regulations.
Ms. Vaughan. I can take a stab at that. We do have laws in
a handful of States that would permit access to the first
database. We do not have laws in all the States. I think there
are laws in about 15 or 17 States. So we can get at this one of
two ways: We can try to go to all 50 States and enact laws that
meet the Department of Justice requirements for protecting the
confidentiality of data and so forth, or we can try to do it in
one fell swoop in this forum. And we are hoping that we might
be able to get it this way--that it would be a more efficient
way. We can get it done more quickly than trying to go on a
State-by-State basis.
Ms. Waters. Thank you. I yield back the balance of my time.
Chairwoman Kelly. Thank you so much, Ms. Waters.
Mr. Bachus.
Mr. Bachus. Thank you, Madam Chairwoman.
Madam Chairwoman, I am going to defer questions. I know it
was a pretty traumatic experience having to answer yes or no.
In fact, it made me uncomfortable up here. But I appreciate
your testimony and your acknowledgment that we all agree that
there is an agreement for coordination and cooperation. I am
going to defer to Ms. Hart and Mr. Rogers, particularly Mr.
Rogers, being a former FBI agent. I think we are all going to
look for him for his experiences, but I will pass to him. The
two of you are newer and very capable Members.
Chairwoman Kelly. Thank you, Mr. Bachus. All right.
Mr. Rogers.
Mr. Rogers. Thank you, Madam Chairwoman. We can only go
down the hill from him. Thank you, Mr. Chairman, I appreciate
it. Although I would encourage Madam Chairwoman that we bring
Mr. Greenspan back to the committee and ask the same yes or no
questions. And I, also as a former FBI agent, never pass up the
opportunity to ask questions of an FBI agent, Mr. Lormel. Thank
you for being here. I have waited for this for a very long
time.
Mr. Lormel. I appreciate that, Mr. Rogers.
Mr. Rogers. Thank you, sir. Do you think there is a need
for insurance investigators to obtain any history record
checks?
Mr. Lormel. Yes, sir, I do. We believe that the more we can
do in terms of offering information, that will help give us
accountable measures in establishing preventative and deterrent
type of situations is certainly warranted.
Mr. Rogers. If the States decide to adopt the statute, who
would you recommend be fingerprinted in the industry?
Mr. Lormel. Anybody in a fiduciary position, sir.
Mr. Rogers. Is that consistent with the other financial
industries?
Mr. Lormel. Yes, it is.
Mr. Rogers. Would the guidelines and could the guidelines
be the same for every industry?
Mr. Lormel. I think they can be somewhat consistent. I
think we need to certainly look at all of the regulatory
considerations among the different industries.
Mr. Rogers. Is it going to be a problem because we have
industries that have different regulatory standards? Do you
foresee a problem here when we try to merge this?
Mr. Lormel. In import sir, I think where at the outset,
when I mentioned the need for consistency. I think for
instance, when you bring the banking and insurance interests
together, we need to have better uniformity.
Mr. Rogers. Are there any of those industries that do
backgrounds checks that don't request criminal history record
from the FBI right now?
Mr. Lormel. Yes, sir. I think, for instance, the banking
industry. Banking is voluntary, sir.
Mr. Rogers. Would you recommend any changes to that as we--
--
Ms. Williams. If I could clarify on that, Congressman. We
require background checks and fingerprinting in connection with
certain situations where we are involved in clearing people for
positions at banks. Senior executive officers of institutions
that are in troubled condition, for example, or when we charter
a newly-established institution, a new bank, and we are looking
at the proposed new management and directors. But if a bank is
healthy and well managed and it is putting a new person on its
board or retaining a new vice president for something or other,
there is not a requirement to go through that kind of
background check in those situations. The detailed background
check applies only in connection with particular situations.
Mr. Rogers. Given that we are broadening our scope ma'am,
would you consider that something we should deal with in this
legislation?
Ms. Williams. I think I would want to have an opportunity
to think about it a little bit more. The current approach for
us, with the situations that I have described, seems to have
worked well. The most extensive clearance process focuses on
those situations that are the most sensitive in terms of entry
into the banking system of particular individuals.
Mr. Rogers. Thank you.
Mr. Albison, you talk that you have joint information
sharing agreements with 41 commissioners, and that has been in
effect how long, sir?
Mr. Albison. We began the process early last year. And we
are still in the midst of it. So the agreements are relatively
new in nature.
Mr. Rogers. Have you experienced any breach of
confidentiality problems in the process of obtaining that
information?
Mr. Albison. Not to date, no. We have exchanged some
information, not a whole lot, because the agreements are
relatively new in the preponderance of evidence of the States.
Mr. Rogers. Thank you, Madam Chairwoman.
Chairwoman Kelly. Next we will go to Mr. Clay.
Mr. Clay. Madam Chairwoman, I don't have any questions at
this time. Thank you.
Chairwoman Kelly. Thank you, Mr. Clay.
Next we will go to Mr. Hinojosa.
Mr. Hinojosa. Thank you, Madam Chairwoman. I would like to
get some clarification, because I have heard most of the
presenters say that you want to keep your current database
systems and try to share them more efficiently. Is this
technologically possible without creating a new system? I will
ask Terry if you could answer that.
Ms. Vaughan. I am not a systems person. But we have talked
to our systems people at the NAIC and they believe very
strongly that it is. And I suspect that is true given our
experience in the State system. Because we are a State-based
system, we have had to network our systems already. And the
NAIC serves as that capability for facilitating information
sharing among the various States. So we have an internet-based
system now that allows us to communicate with the systems in
the various States, and we think it is not a big stretch to
expand our communication capability to the other Federal
regulators.
Mr. Hinojosa. Would the business computer systems languages
be able to speak to one another?
Ms. Vaughan. Again, I am not a systems person, but I am
told if you agree on the protocols, then you can do that kind
of information sharing. That is why we have suggested we need
some kind of other coordinating body that would decide on a
standard protocol for communication.
Mr. Hinojosa. How much time would it take to be able to
determine that they could without changes of languages of
business computer systems?
Ms. Vaughan. We don't have an answer for you, but we would
be happy to talk to our information people and get back to you
about that.
Mr. Lormel. If I may follow up. We have a suspicious
activities reporting mechanism that FinCEN coordinates, and I
think that could kind of serve as a parallel model here.
Mr. Hinojosa. Would you repeat the response for the FBI?
Mr. Lormel. Yes. Through FinCEN, the Federal Reserve a few
years back in the banking industry, to better coordinate what
we are talking about doing here today, they established a
reporting mechanism known as the Suspicious Activity Reports,
and it deals, from the banking standpoint, with the different
banking regulators, and we came together in a bank fraud
working group, and were able to set up criteria to put in to a
database, and it is all run through FinCEN, which is kind of a
repository under the direction of the Treasury Department.
Mr. Hinojosa. Very good. That is the only question I have,
Madam Chairwoman.
Chairwoman Kelly. Thank you very much. Next we will go to
Ms. Hart.
Ms. Hart. I have no questions at this time.
Chairwoman Kelly. Thank you, Ms. Hart.
Mr. Grucci.
Mr. Grucci. Thank you, Madam Chairwoman. The question that
I have, and first let me thank this panel for being here today
and dealing with this critical issue. It is my understanding
that we are trying to come up with an anti-fraud network that
permits the regulators of each industry to share information on
those who have experienced disciplinary actions for
misrepresentation, dishonesty, fraudulent and suspicious
activities. And I recognize that we have an issue that we face
that deals with privacy. But my question is if the intent of
this legislation is to inform like industries where an
individual with less than upstanding moral character may find
themselves, but yet did not commit any kind of act that would
lend itself to a criminal act, because then, quite frankly,
they would be plucked from the system by the current laws and
rules and regulations that are out there.
My question is what happens in the instance when a company
would identify one of these individuals through this
information network and sharing of information, but it is not a
more reputable company. It is a company that may just be
starting up, and the earning potential that an individual may
have that may be coming to this company is a good one. They
have the capabilities of bringing in a lot of money for either
the insurance company or the securities or whoever they may be
going to work for.
How does the consumer know this? How does the consumer get
that information? Is there a way that the consumer with all of
the safeguards for confidentiality in place be able to access
this information so they can make the determination whether or
not they wish to deal with that corporation, that entity that
may or may not be hiring that individual? And I will open it up
to anyone on the panel that may want to take a stab at that
answer.
Mr. Becker. The NASD has what it refers to as the public
disclosure program. And what one can get over the web is
information about your individual broker or about the firm, and
you can get fairly complete information about the existence, or
most importantly, the nonexistence of any sort of disciplinary
history. And it is really quite useful and quite effective.
Mr. Grucci. Why then isn't that sufficient? Why are we then
embarking upon this piece of legislation to be able to share
information? If that information is already readily available,
it would--and I am not suggesting we shouldn't do this, I am
just trying to understand where--we are trying to make sure we
do not have dishonest and unreputable people in places where
they are going to be making decisions on or for the consumer
when it deals with their money. Our concern that the consumer
may not know that they are going to be dealing with unreputable
or dishonest individuals if indeed their acts lended itself to
a criminal act, but maybe one that lends itself to a company of
stature no longer wanting that individual in their employ, and
they share that information with others. But that may not get
that in the hands of a consumer and that consumer may be
subject to a dishonest or unreputable individual.
Ms. Vaughan. If I can respond from the insurance
perspective. I would like to make two points. First, we have
public information also available that consumers can access. In
most States and perhaps all States, consumers can--certainly
regulatory actions are public, and in many cases on websites.
But consumer complaints are also public information. In Iowa, a
consumer can contact us and ask if any complaints have been
filed against an agent and we will give information on what
kind of complaints have been seen against that agent. Although
we have good information in the insurance sector, we do not
have ready access to information in the other sectors.
So the problem we have, for example, when we are
considering licensing a new agent, and that agent fills out an
application and we ask whether disciplinary actions have ever
been taken against that individual in another sector or in
another position and they might answer no. Well, unfortunately
they are not always answering those questions truthfully. And
if we were to do a cross-check against the securities, the NASD
CRD we would find they did, in fact, previously have a
securities license and regulatory action was taken against
them. And that would then affect our decision on whether or not
to issue a license to that individual.
So we are looking for--we are trying to build an automated
producer licensing system that would give us electronic
efficient access to the NASD CRD so we can do those kinds of
cross-checks in a very efficient manner recognizing that we
have roughly over 3.2 million agents that are currently
licensed in this country.
Mr. Grucci. Thank you. My last question, Madam Chairwoman.
Chairwoman Kelly. Mr. Grucci, you are over time. If you
would submit the question in writing, I would appreciate it.
Thank you. Now I will move on to Mr. Cantor.
Mr. Cantor. Thank you, Madam Chairwoman. I thank the
panelists for entertaining our questions. I think generally the
way that I read Graham-Leach-Bliley, and wherein, Congress
instructed the financial regulators across the country to
coordinate their efforts, I think this is a terrific place and
I want to salute the two chairpersons here for starting our
inquiry into how we were going to coordinate oversight in the
area of anti-fraud activities. And I am hearing a lot and
reading in your testimony, a lot about information sharing
agreements between regulators and just expanding it across the
country.
There seems to be a need, if we go that route, for an awful
lot of information sharing agreements, and my question, I guess
to you, is on the one hand, is it feasible how many information
sharing agreements would be necessary, and if not, if you are
looking at one central anti-fraud network so to speak, Mr.
Becker alluded to the cost of NASD's members, and they are
having to support it, and perhaps Ms. Vaughan, your licensees
or the licensees in each of the States are impacted with cost
of creating this one network, and I have, I guess, a lot of
angles to this question. But one of you had mentioned the needs
for a central database authority, I think, laying out some
policy if we were going to have one network, and how do we see
that authority coming into being, empowering, I think, itself?
And as far as requiring licensees to offer information up
in a way that would be uniform, so we do not go through
duplicative information filing that we are trying to get away
from as well. Probably not a coherent question, but I will be
glad to restate it if you did not get it.
Ms. Vaughan. Well, since I was the one that mentioned the
central database authority, I guess I will start. That really
stemmed from our recognition that we needed to have some set of
technical standards in order to share the information. I don't
have strong feelings about how that authority is created. I
know there has been some discussion about it being part of the
FFIEC. There needs to be some way, however, for those
regulators that are going to share information, to agree on the
technical specifications for the information sharing.
To answer your question about regulatory cooperation
agreements, in the insurance sector, because we are a State-
based system, if you say the 50 States plus the District of
Columbia, we have 51 agreements that we need to sign with the
OCC, the FDIC, the OTS, the Federal Reserve. We have made great
progress on the OTS. We have three States that have problems
with their State laws that need to be fixed in order to get
those information sharing agreements in place. And I believe we
have drafted some legislation that at some point proposed to
deal with confidentiality issues at the State level that we
would be happy to share with you. Again, that would allow us to
shortcut that process.
Ms. Williams. Congressman, I think that regarding the
mechanism for determining the protocols for data sharing, Mr.
Lormel was referring to the Bank Fraud Working Group, which is
an interagency working group that did come up with the
protocols for the system that maintains the suspicious activity
reports database. That was not a new entity that was created.
It was a working group of the affected financial regulators
that got together and agreed on how to make the system come
about.
Mr. Cantor. If I could ask Mr. Becker, and I see him going
for the microphone. Could you comment on your suggestion that
perhaps we benefit and build on the strength of the existing
networks among the agencies rather than, and I am just, there
is a question of approach rather than creating some new mega
network that could perhaps go into obsolescence before it even
came online.
Mr. Becker. On the licensing side, which is really what we
are talking about here, I think we are comfortable that it is
possible to sit folks down in a room without forming a new
entity and arrive at ways to share information. In terms of
active investigations, I think we have found that informal
mechanisms work extremely well. I know that I came to the SEC a
little more than 2\1/2\ years ago after representing private
clients in the enforcement world, and every time I had a bank
client, I think it is safe to say that folks from the SEC and a
banking agency showed up, so I think the cooperation has been
very effective.
Chairwoman Kelly. Thank you very much, Mr. Cantor.
Mr. Cantor. Thank you, Madam Chairwoman.
Chairwoman Kelly. Next we go to Mr. Tiberi.
Mr. Tiberi. No questions.
Chairwoman Kelly. No questions. All right then. I think
that it appears that some Members may have opening statements
or have additional questions for this panel and they may wish
to submit those in writing. So without objection, the hearing
record will remain open for 30 days for Members to submit
written questions to this witness and place their responses in
the question.
Oh, Mr. Lucas I am so sorry I didn't see you come in. Do
you have any questions?
Mr. Lucas. No.
Chairwoman Kelly. Thank you.
The first panel is excused. As the second panel will take
their seats at the witness table, I will begin the
introductions of the second panel. Thank you very much.
For our second panel we are thankful that Richard J.
Hillman can join us. He is the Director of Financial Markets
and Community Investments Division of the U.S. General
Accounting Office. Mr. Hillman, we welcome you today.
Then we have Karen Wuertz, the Senior Vice President of
Strategic Planning and Development for the National Futures
Association.
We have Thomas Rodell, Executive Vice President and Chief
Operating Officer of Aon Risk Services, Incorporated, and the
Chairman of the Council of Insurance Agents and Brokers
testifying on behalf of the council.
After which we will hear from Mr. Ronald Smith, the
President of Smith Sawyer and Smith, Incorporated, who also
serves as the State Government Affairs Chairman of the
Independent Insurance Agents of America who will be testifying
on behalf of Point Association, the National Association of
Insurance and Financial Advisors and the National Association
of Professional Insurance Agents. We welcome you, Mr. Smith.
And finally, we will hear from Mr. Steve Bartlett, the
President of the Financial Services Roundtable. We welcome all
of you and thank you very much for joining us today to share
your thoughts on this issue.
So, without objection, your written statements will be made
a part of record. With one minor exception, you will each be
recognized for a 5-minute summary of your testimony so let us
begin with you, Mr. Hillman.
STATEMENT OF RICHARD J. HILLMAN, DIRECTOR, FINANCIAL MARKETS
AND COMMUNITY INVESTMENT, U.S. GENERAL
ACCOUNTING OFFICE
Mr. Hillman. Thank you very much. I am pleased to be here
today to discuss GAO's observations on the sharing of
regulatory and criminal history data among financial services
regulators. GAO has long held the view that financial
regulators can benefit from greater information sharing and
with the passage of the Graham-Leach-Bliley Act, the need for
information sharing capabilities among financial services
regulators becomes even more evident.
My prepared statement released today focuses on: One, an
overview of the systems used by financial regulators for
tracking regulatory history data; Two, the types of regulatory
history data needs of regulators to help them prevent rogue
migration and limit fraud; Three, criminal history data needs
among financial regulators; and, four, challenges and
considerations for implementing an information sharing system
among financial regulators.
Overall, we found substantial agreement among the
regulators about the potential benefits of improved information
sharing, particularly related to licensing or registration data
and adjudicated regulatory actions. Most also concurred that it
would be useful to share regulatory and criminal history
information in a more automated fashion. However, Congress will
need to address concerns raised by regulators related to
confidentiality, liability, and privacy issues for greater
information sharing to occur.
Regarding the first topic, the systems used by financial
regulators for tracking regulatory history data, we found that
systems are operated and maintained separately in each of the
industries. Systems and databases provide background
information on some individuals and entities, consumer
complaints and disciplinary records within that industry.
Within the insurance, securities, and futures industries, where
there are registration and licensing requirements, this
information is largely centrally maintained. In contrast, such
systems and databases are decentralized among banking
regulators. As a result, to find out about an enforcement
action in banking, you would have to query databases maintained
by each of the five banking regulators.
Regarding the second topic, in discussions with the
financial regulators and committee staff, we have found that
regulatory history data useful to help prevent rogue migration
and limit fraud include information on completed disciplinary
and enforcement actions, ongoing investigations, consumer
complaints and reports of suspicious activity. Most regulators
are in agreement about the sharing of this information,
particularly information on registration and licensing status,
and closed or completed adjudicated regulatory actions.
Regarding criminal history data needs of regulators, our
third topic, we have found insurance regulators are not on
equal par with their counterparts in the banking, securities
and futures industries, since many cannot obtain such data. As
we noted in the previous work, we believe insurance regulators
need to have this capability to help prevent criminals from
entering the industry and the representatives from NAIC and the
FBI have been working on solutions to facilitate insurance
regulators' ability to conduct routine criminal backgrounds
checks.
Finally, regarding my last topic, we have found that
information sharing concerns are more legal than technical. As
previously discussed, the financial regulators we contacted did
not express concern about sharing basic regulatory history data
on closed, disciplinary or enforcement actions. The majority of
such information is already publicly available, although not
necessarily easily accessible. The threshold of the concern
rises as the sensitivity of the regulatory data rises,
particularly when unsubstantiated regulatory and ongoing
investigation data is involved.
While more work would need to be done to explore the most
viable solutions, GAO believes that these issues are
addressable. Fraud prevention efforts among financial services
regulators can be enhanced, and the benefits are many. This
past September, we reported on the activities of just one rogue
who had been barred for life from the securities industry and
moved to the insurance industry where he allegedly stole about
$200 million over an 8-year period. Our report noted that those
losses may have been avoided had more information been shared
among regulators.
GAO also believes that the subcommittees' continued
endorsement and encouragement in developing and implementing
improvements to facilitate the sharing of regulatory and
criminal information will provide an important impetus for
success.
Madam Chair, this completes my prepared remarks. I would be
pleased to respond to any questions you or other Members of the
subcommittees may have.
[The prepared statement of Richard J. Hillman can be found
on page 139 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Hillman.
Next we go to Ms. Karen Wuertz. Ms. Wuertz, thank you very
much for being with us.
STATEMENT OF KAREN K. WUERTZ, SENIOR VICE PRESIDENT, STRATEGIC
PLANNING AND DEVELOPMENT, NATIONAL
FUTURES ASSOCIATION
Ms. Wuertz. Thank you. NFA appreciates the opportunity to
be here today to present our views on increasing data sharing
between financial services industry regulators. NFA has a long
history of cooperating with other regulators and welcomes the
opportunity to work with this committee to develop an efficient
and effective method of systematically sharing information. I
would like to take just a minute to describe NFA and its
regulatory mission. For close to 20 years, NFA has been the
nationwide self-regulatory organization for the futures
industry here in the U.S., and the only registered futures
association under the Commodity Exchange Act.
NFA's primary mission is to protect the public from
unscrupulous, fraudulent, and unethical business practices
through efficient and effective regulations of its members. Our
regulatory process begins by screening individuals and firms
when they seek registration to conduct futures related business
and continues with regular examinations throughout their
business lives. As a result of our activities, and because we
are the sole nationwide SRO in the futures industry, we have a
large centralized and comprehensive database containing
disciplinary, registration, and background and financial
information about the firms and individuals operating in the
futures industry. We are all too well aware of the damage that
rogue brokers can do when they use their unscrupulous practices
to take advantage of unsuspecting investors.
Since our inception, NFA has tracked their migration within
the futures industry. Because of our well-designed rules and
our effective disciplinary process, the number of rogue brokers
in our industry has decreased by over 75 percent. And the
number of customer complaints has also decreased by over 70
percent. NFA has always provided futures industry disciplinary
information to regulators and to the public at large.
In 1999, NFA became the first financial services industry
SRO to make disciplinary information available to the public on
the web when it introduced its BASIC system. BASIC contains not
only disciplinary information, but also registration status and
history information about all firms and individuals ever
registered in the futures industry. Last month alone, there
were over 35,000 BASIC searches, and this trend continues to go
upward. We expect that through this year, we will have over
400,000 BASIC searches on the system. We also maintain
information in our databases that we do not make public, but
that we routinely share with regulators on request. This
includes information on customer complaints, open
investigations, arbitration matters and other information that
individuals and firms have provided in their application forms.
The value of this information to other regulators would be
significantly increased if there was an efficient and effective
means for sharing this information. NFA agrees with the
committee's concern that disreputable individuals could easily
move from one financial services industry to another, and this
problem will be greater as the various sectors of the financial
services industries meld together.
I would like to close by saying that NFA is committed to
exploring every avenue that will assist in maintaining the
integrity of the financial services industry. We have a strong
background in developing our own tracking systems and
information databases. We have significant amounts of futures
industry data in our databases, and we are the front line
regulator in the futures industry. We believe that we would be
an extremely helpful participant in developing an anti-fraud
network, and we would be willing to help in any effort that is
deemed appropriate. Thank you.
[The prepared statement of Karen K. Wuertz can be found on
page 160 in the appendix.]
Chairwoman Kelly. I thank you, Ms. Wuertz.
Next we are going to split the time between two witnesses.
They will each be recognized for 3 minutes each. That is Mr.
Rodell and Mr. Smith, and we are glad to have you have both
testify and Mr. Rodell will you please begin.
STATEMENT OF THOMAS J. RODELL, EXECUTIVE VICE PRESIDENT AND
CHIEF OPERATING OFFICER, AON RISK SERVICES, INC., CHAIRMAN OF
THE COUNCIL OF INSURANCE AGENTS AND BROKERS, ON BEHALF OF THE
COUNCIL
Mr. Rodell. Thank you, Madam Chairwoman. The firm that I
represent, Aon, is the second largest insurance broker, both
globally and in the United States. I am testifying on behalf of
the Council of Insurance Agents and Brokers. Madam Chairwoman,
on behalf of my firm and the members of our association, I want
to express our gratitude to you for the essential role you
played in the enactment of NARAB provision of the Graham-Leach-
Bliley Act. After decades of effort to improve producer
licensing burden, the enactment of NARAB is a guarantee that at
last these reforms will occur. Tens of thousands of producers
around the country will benefit from the legislation that the
Members of this committee and especially you, they have to
thank.
Graham-Leach-Bliley tore down the firewalls separating the
banking, securities, and insurance industry, creating a brave
new world in which banking, securities, and insurance
transactions could occur in one place in a seamless manner.
Instead of just selling or servicing insurance policies, we are
now members of the financial services industry, an industry
that can provide both its members and its customers with
innovative new products and services. We believe the expanded
ability to provide consumers with these choices will lead to a
more competitive market that can only benefit consumers.
However, the market freedom engendered by these reforms comes
with a price, the price of increased freedom to offer financial
services to consumers is the increased potential for bad actors
to move among the banking, securities and insurance sectors
without detection. The Council is extremely concerned about
this issue. As intermediaries between insurance companies and
consumers, our members must be concerned about bad actors
entering the market not only as intermediaries, but also as
insurance company executives.
One only needs to listen to panel one for some examples of
that today. As we move toward a more integrated financial
services industry, our paramount concern is for good regulation
that will not only provide necessary consumer protections, but
also foster growth and prosperity for our industry. In our
view, the means of regulation in this case is subsidiary to the
end goal of strong and efficient regulation. The approach will
assist financial service regulators in detecting patterns of
fraud and coordinating their anti-fraud efforts. It will also
reduce duplicative requests for information among regulators.
In short, it will give Federal and State financial services
regulators the tools they need to protect consumers and to
preserve our newly found market.
Many State insurance regulators do not currently have the
ability to directly access the Federal criminal history records
maintained by the FBI. Also, there is no system to share
criminal history records between insurance regulators and the
National Association of Securities Dealers. Many of our
insurance brokers are both licensed insurance agents and
licensed securities dealers. There is an additional benefit to
the proposal for consumers and financial services as a whole,
but one not readily apparent on the face of legislation.
The multiple add-ons to non-resident insurance licensing
applications and the State laws that limit the activities on
non-resident producers have little to do with enforcing
standards of professionalism, and much to do, in our view, with
increasing the hassles involved in obtaining non-resident
licenses. We believe NARAB enactment, if NARAB does come into
existence, will only serve to lift the licensing burden, but
also to raise the standards of professionalism involved in
producer licensing. The proposal under the committees
consideration will contribute much to this goal and strengthen
our support. On behalf of Council, I would like to thank you
for providing me this opportunity to testify today.
[The prepared statement of Thomas J. Rodell can be found on
page 166 in the appendix.]
Chairwoman Kelly. I thank you, Mr. Rodell. Darn it, if I
had known you were going to talk about NARAB, I would have
given you a little more time.
Mr. Smith.
STATEMENT OF RONALD A. SMITH, PRESIDENT, SMITH, SAWYER & SMITH,
INC., STATE GOVERNMENT AFFAIRS CHAIRMAN OF THE INDEPENDENT
INSURANCE AGENTS OF AMERICA, ON BEHALF OF IIAA, NATIONAL
ASSOCIATION OF INSURANCE AND FINANCIAL ADVISORS AND THE
NATIONAL ASSOCIATION OF PROFESSIONAL INSURANCE AGENTS
Mr. Smith. We could both do that, talk about that a little
bit.
Thank you, Madam Chairwoman, Chairman Bachus. We appreciate
being here. We represent the three groups that I am speaking
for, represent approximately a million insurance agents and
employees across the country. We would be remiss not to mention
the good work that we think Chairman Oxley has done on behalf
of this entire committee and all of us involved in financial
services. I will try and be very brief. Three minutes is moving
by rather rapidly. Obviously, I think you have been hearing
that we do believe that access to Federal crime databases is an
important thing for insurance licensing.
A couple of the areas of concern that we would have as an
agents group is number one, many times we have to do different
things for different States. So we should be compelled to act
only one time in supplying the data information that is needed
for our background check. And number two, in conjunction with
that and then I will give you a few other specific concerns,
but in conjunction with that, you mentioned, Madam Chairwoman,
the Violent Crime Control Act of 1994 and the provisions in
that, the 1033 provisions have been a problem for insurance
agents, and how in the world we are supposed to conform to
those. There are no rules, regulations for those.
So our concerns would magnify around these points, really
on those two various concerns. Any information that is made
available should be limited to information regarding crimes
included within the scope of section 1033, and that is part of
the Crime Act. Insurance professionals should be required to
have a criminal background check performed only once, not have
to do it several times.
My agent friend here was saying the same thing essentially.
The administrative requirements for performing a check should
be minimized as much as possible. The determination of a State
insurance regulator that an applicant satisfies the 1033
requirements should be sufficient to satisfy any and all 1033
requirements. Once satisfied, we think we should not have to do
that again. I won't elaborate on two or three other points that
we think that are important. They are in my formal written
testimony to you.
We do think and are in favor, also, of the creation of a
functional regulator anti-fraud network. Again, we would want
to be careful that we would only supply that information that
is needed and that it would be, we think, shared from regulator
to regulator, that we could make the systems talk back and
forth to each other as was talked about on the first panel.
We do appreciate having this time today. We look forward to
working with you closer as we move forward in this project. We
think it is a good and worthwhile thing that we are trying to
accomplish here. Thank you.
[The prepared statement of Ronald A. Smith can be found on
page 173 in the appendix.]
Chairwoman Kelly. I thank you, Mr. Smith, and we go to you
Mr. Bartlett.
STATEMENT OF HON. STEVE BARTLETT, PRESIDENT, THE FINANCIAL
SERVICES ROUNDTABLE
Mr. Bartlett. Thank you, Madam Chairwoman. Thank you, Mr.
Chair and Ranking Member Waters. I thank you for the
opportunity to testify. I commend the two subcommittees for
their leadership early in the session on this important issue.
The Financial Services Roundtable membership consists of
100 of the largest financial services companies across the
breadth of the industry, banking, insurance, securities,
diversified. We are, in a way, the poster child of Graham-
Leach-Bliley. The Roundtable and our member companies support
the concept of this legislation as you have outlined it. We
believe it is important, critical indeed, that there be a
uniform standard for sharing of information relating to fraud
by regulatory agencies. Legislation is needed to allow that,
and such legislation would help to prevent fraud. Fraud within
our industry costs our industry and ultimately all consumers,
by our estimates anyway, about $100 billion a year.
As an industry we have taken several steps ourselves to
identify and prevent that fraud. I will cite two, but I note
for the record that both of these steps I will cite support
that the appropriate use of information sharing as a key
component to combat fraud. One is the Roundtable recently
completed a study by Ernst and Young entitled ``The Customer
Benefits Of Current Information Sharing by Financial Services
Companies,'' and I submitted this, Madam Chairwoman, as a part
of my testimony for the record. One of the principal benefits
that we identified for appropriate information integration is
the reduction of fraud. And in fact, it is that use of
information that reduces a great deal of consumer fraud.
Second, our technology affiliate, known as BITS, has
established what is called a fraud reduction steering
committee. That committee cuts across all sectors in the
financial services industry. It is based on the same concept as
this legislation, that is, communicating known information
about fraudulent activities from company to company and sector
to sector will help to prevent fraud. It has helped reduce the
growth of check fraud from 17.5 percent a year to 11.7 percent
a year.
So in support of this legislation the key points of my
written testimony, which I have submitted for the record, are
as follows: One, functional regulation as envisioned by Graham-
Leach-Bliley is the goal, but it is not yet working entirely
smoothly. This legislation would help with functional
regulation, but we have a ways to go.
Madam Chairwoman, as it has been alluded to earlier, our
industry has over 200 regulatory agencies, and my members tell
me that oftentimes each of the 200 chooses to show up at one
location on the same day.
Second, the enforcement information exchanged in this
legislation should be limited to areas that relate to
enforcement activities with no information about customers
exchanged per se.
Third, the terms and form of information exchanged should
be uniform across all 50 States and within all sectors,
banking, securities and insurance.
Fourth, this legislation should establish no new collecting
or reporting requirements, but rather should focus on sharing
with appropriate agencies the information that is already
collected. I will repeat, this legislation should establish no
new collecting or reporting requirements, but focus on
disseminating or sharing the information that has already been
collected.
Fifth, confidentiality and liability protections should
migrate with the information. For example, if information is
protected under Freedom of Information in its original location
where it is collected, that protection should hold to the next
agency where it is disseminated.
Sixth, the committee should consider reintroducing or
incorporating into this legislation, legislation or proposed
legislation known as the Bank Examination Report Privilege Act
introduced last session by committee Vice Chair Marge Roukema.
This bank examination legislation would be a compelling
companion piece to the anti-fraud legislation that is under
your consideration today. The Roundtable supports this anti-
fraud legislation based on the concepts you have provided, and
we look forward to working with you to comment on the details
as they develop. Thank you.
[The prepared statement of Hon. Steve Bartlett can be found
on page 183 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Bartlett.
At this time, I would like to go to the panel with some
questions, and I am going to ask you the same set of questions
that I asked the first panel, because I would like to hear your
answers. Just answer, please, if you were in the room before a
simple yes or no.
Number one, wouldn't consumers be better protected if the
financial regulators use an automated background check of all
agency databases for all financial licenses and applications as
opposed to making specific occasional inquiries? Yes or no.
Mr. Hillman.
Mr. Hillman. Yes.
Ms. Wuertz. Yes.
Mr. Rodell. Yes.
Mr. Smith. Yes.
Mr. Bartlett. Yes.
Chairwoman Kelly. Thank you.
Wouldn't consumers be better protected if all background
checks for licenses and applications included a check of all
financial regulators databases for comprehensive and seamless
coverage, not just those where individual information sharing
agreements exist?
Mr. Hillman. Yes.
Ms. Wuertz. Yes.
Mr. Rodell. Yes.
Mr. Smith. Yes.
Mr. Bartlett. Yes.
Chairwoman Kelly. Isn't it cheaper and more effective to
create one coordinated anti-fraud network to exchange
information then to rely on numerous individual agreements and
computer connections?
Mr. Hillman.
Mr. Hillman. Yes.
Ms. Wuertz. Yes.
Mr. Rodell. Yes.
Mr. Smith. Yes.
Mr. Bartlett. Yes.
Chairwoman Kelly. Mr. Bartlett.
Mr. Bartlett. Yes.
Chairwoman Kelly. Thank you.
Wouldn't regulators be better able to fight fraud if they
could share materials without risk of losing critical
confidentiality and liability protections?
Mr. Hillman. Absolutely, yes.
Ms. Wuertz. Yes.
Mr. Rodell. Yes.
Mr. Smith. Yes.
Mr. Bartlett. Yes.
Chairwoman Kelly. Wouldn't it be more efficient for
financial institutions to allow the regulators to use a single
coordinated entity for sharing information to reduce
duplicative examinations and reporting?
Mr. Hillman. Yes.
Ms. Wuertz. Yes.
Mr. Rodell. Yes.
Mr. Smith. Yes.
Mr. Bartlett. Yes.
Chairwoman Kelly. Thank you.
Could a coordinated network be used by the regulators as it
evolved over time to share other materials and financial data
to reduce duplicative filings and examinations?
Mr. Hillman.
Mr. Hillman. Yes, that would be terrific.
Ms. Wuertz. Yes.
Mr. Rodell. Yes.
Mr. Smith. Yes.
Mr. Bartlett. I want to think about that one, and I will
submit that one for the record.
Chairwoman Kelly. Well, do you think you want to say yes or
no, or do you want to say you don't know? I am giving you three
choices. That is all we get on the floor of the House, so yes
or no, Mr. Bartlett.
Mr. Bartlett. I don't know.
Chairwoman Kelly. We will talk to you later.
Mr. Bartlett. Perhaps, Madam Chairwoman, I didn't
understand the question.
Chairwoman Kelly. I will repeat it. Could a coordinated
network be used by the regulators as it evolved over time to
share other materials and financial data to reduce duplicative
filings and examinations?
Mr. Bartlett. Madam Chairwoman, without straining the
point, my testimony was that this should be used only for
dissemination of regulatory information and not other data. So
I am concerned about the term ``other data,'' to use this
system for other data. Again, I would have to see what the
other data is.
Chairwoman Kelly. Fair enough. I left you a lot of opening
there. Would it improve customer protection in the financial
services industry if Congress created an anti-fraud network
coordinating limited information among regulators with full
confidentiality protections?
Mr. Hillman. Yes.
Ms. Wuertz. Yes.
Mr. Rodell. Yes.
Mr. Smith. Yes, again, I would refer those 1033 pieces that
I mentioned in the Crime Act.
Chairwoman Kelly. Mr. Bartlett.
Mr. Bartlett. Yes.
Chairwoman Kelly. You can answer that one?
Mr. Bartlett. Yes.
Chairwoman Kelly. All right. That is good. I appreciate
your trying to answer it within the context of your testimony.
I really very much appreciate all of you for stepping up to the
plate and taking a choice here, because it is important for us
to know how you feel about these questions. So I have thank you
very, very much.
At this time, I would like to go now to the next Member,
Ms. Waters.
Ms. Waters. Well, you are such wonderful and cooperative,
all-agreeing witnesses. I don't have a lot to ask, but I am
curious about something. In California, we had the unfortunate
and regrettable experience of having an insurance company
conspire with the insurance commissioner to set up a fund, a
501C3, or a fund of some kind where they would contribute to
nonprofits. And this fund substituted for the reconciling, I
believe, of claims of consumers who were harmed during the
Northridge earthquake, I believe. Now, would this whole company
go into this database? Would the CEO go in the database? How
does that work? Did the State regulatory agencies have to do
something about them? I don't know exactly what happened, but
it was a big scandal, terrible things. Does this database
encompass that kind of information?
Mr. Smith. I will take a stab at it.
Ms. Waters. Why do not we let Mr. Hillman take a stab at it
first.
Mr. Hillman. I am not familiar with that particular
instance, but the information housed in any system would depend
upon who the enforcement action was against. Systems maintain
information on both individuals and entities that were
considered to be bad actors in an industry.
Ms. Waters. So it could be a whole company? It could be a
company that is on the databases having been fined or
reprimanded or something.
Mr. Hillman. It could be a company or one of the officers,
depending on who the specific action was being taken against.
Ms. Waters. Now who would make that decision about an
insurance company? For example, in the State, would the State
regulator make that decision? What if the company is a member
of the, what is it, the Roundtable?
Mr. Bartlett. Financial Services Roundtable.
Ms. Waters. Yeah, what if a company is a member of
Financial Services Roundtable?
Mr. Bartlett. It would not make any difference,
Congresswoman. As I understand the question and the answer,
whatever enforcement action is taken then in the State of
California against either individuals or the company would then
be transmitted in this database to regulatory agencies in other
States or at the Federal level, so that a regulator in Alabama
then, if one of the officers that had an enforcement activity
in California moves to Alabama and applies to do the same kind
of thing, then the regulatory agency, whether it is securities
or insurance or banking in Alabama, would know about it, would,
in essence, have the same information, no more, no less than
the enforcement agent in the State of California had.
Ms. Waters. How could a consumer in that State access that
information?
Mr. Bartlett. As I understand the legislation, I have
testified that the consumer would not be accessing the
information unless that information were available to consumers
in California. So this is for enforcement agencies or
regulatory agencies, as I understand the proposed legislation,
and whatever rights the consumers of California have would
migrate to the consumers of Alabama, but would not establish
new types of information or new types of disclosure.
Ms. Waters. I will have to take a look at this so that I
can understand, because this is about trying to protect the
consumer. While the regulatory agencies would be able to make
decisions about everything from licensing to other kinds of
things, if a consumer was suspicious of or had heard about or
thought they knew something about this company that had, in
fact, reneged on its obligations to satisfy claims, they would
have to try and get this information someplace else because it
would not be available to them from this source.
Mr. Bartlett. It would be available, Congresswoman, in the
same way it would be available if they were a consumer of
California, no more and no less. So this legislation, it seems
to me, is appropriate in that it creates a dissemination of
information among regulatory agencies, and then leaves for
another day and another forum if that dissemination should be
expanded or contracted. This simply allows the regulatory
agencies that are regulating the right to look at the
legislation that other regulatory agencies have.
Ms. Waters. My time is up. Thank you.
Chairwoman Kelly. Thank you, Ms. Waters.
Mr. Bachus.
Mr. Bachus. Thank you.
As I understand it, what we are talking about here is
presently collected information, sharing that to enforce
present requirements and enforce present laws.
So, Mr. Bartlett, on the question that you were asked, I
think maybe we could change the question and it would be clear,
and that is, could a coordinated network be used by the
regulators as it evolved over time to share existing, as
opposed to other--we will just say existing material?
Mr. Bartlett. I would answer yes to that. This legislation
should be used for dissemination of existing information, but
not to create new information that needs to be collected.
Our industry seems to have sufficient information collected
about us. We do not have a scarcity of that.
Mr. Bachus. Right. I think the insurance commissioners were
saying no new requirements, no new fingerprints, just share
what you already have. I think that is what we are all talking
about.
I am going to pass, with unanimous consent, to Ms. Hart,
and then at the end, with permission, I would like to ask maybe
some questions, if they have not been asked.
Chairwoman Kelly. Ms. Hart.
Ms. Hart. Thank you, Madam Chairwoman.
Obviously, as a freshman, I am a little new to some of this
stuff, but on the State level, one of the things that I worked
with quite a bit was this vicious protection of States rights.
I know some of you addressed in your comments that you
still support State regulation, but you do also support this
proposal for some type of information sharing.
I guess the question I have for you is, and you can all
answer this, or a couple of you, if you choose, I don't really
have anybody specific in mind, but do you envision this
basically as a databank that you would be able to access to
determine if this company or individual is clean? Or do you
envision it as something beyond simply a databank, or just sort
of a repository of information?
Mr. Smith. I think from our standpoint, the independent
insurance agents, professional insurance agents and life
agents, we see this as a means of sharing the data. It is a
database.
I think the problem Mr. Bartlett had referred to, the
problem is, I am from Indiana. We could have an agent that is a
rogue in Indiana that decides to move to Arizona, and Arizona
does not have access or presently is not accessing Indiana's
information. This would do it seamlessly. Indiana could pass
that information, and they would have certain guarantees that
sharing that information would not incur additional
liabilities, things of that nature, so that we could hopefully
eliminate a rogue agent from going to 50 different States and
doing his damage in 50 different places.
Ms. Hart. Just to get a little more specific, would you
expect that there would be a physical sharing from Indiana to
Arizona, or would you expect that the person in Arizona dealing
with this individual would go back to this national bank to
which Indiana would be required to submit that information?
Mr. Smith. I would anticipate that the information would be
given to the national database, and then that could be accessed
by any other State.
Ms. Hart. Do you think it should be mandatory that every
State submit that information to the national--I am going to
call it the databank, just for my own term?
Mr. Smith. We are big supporters of State regulation,
functional regulation. I always hate the word ``mandatory,''
but certainly we are in favor of protecting consumers from
anti-rogue agents. So if we have to go to some extreme to make
sure we get that accomplished, we need to do that.
Ms. Wuertz. I would like to comment on that, as far as it
being a databank. One of the things we were envisioning,
because I was the one who developed the BASIC system for NFA,
and it was a difficult process because the CFTC contributes
data, the various futures exchanges contribute data, we were
envisioning that if an individual were applying to the futures
industry, and we could go to this network and put in some key
information, that it would then say there is a hit on the
insurance industry, or there is a hit in the securities
industry, and then we could find the means to go get that
information.
I think it is just because of the level of information that
each industry maintains, to contribute that to a massive
database to me seems a little overwhelming. But I think very
efficiently, if you would just get hits, and you could follow
up on those, I think that would work very efficiently.
Mr. Bartlett. Congresswoman, if I might elaborate a bit, we
would see that the databank concept would be a rather old,
antiquated and costly concept. It ought to be much more in the
21st century; it is more a linkage or network in which access
is provided.
The last thing we want to do, in my opinion, is to create
some new Federal agency to collect data. It ought to be linked,
and access to it. Sort of think of it as a giant search engine,
with protection so only the appropriate agencies can get to it,
but not a place where the data resides.
Ms. Hart. One final question. This is also general.
If this is created--and I like Mr. Bartlett's idea of
having it be more or less a linkage, since different States
have different standards and have different requirements for
participation in the agency, and also, I guess, baselines for
problems within those industries--how would one who is
accessing that information be able to determine the rightness
or wrongness of the person's status?
Sometimes if you are going from one State to another, what
is a violation in one State would not appear to be a violation
of the other, and I appear to be out of time.
Mr. Smith. Hopefully, the reciprocity that we are striving
for right now that the insurance commissioners are working on,
if you are licensed and in good standing in Indiana, can be
licensed and in good standing in any other State. So it goes
back to the individual State to make sure that they keep their
licenses straight and up to date. Then they would have to share
with the network that information on bad agents.
Ms. Hart. Thank you.
Chairwoman Kelly. Thank you very much, Ms. Hart.
Next we will go to Mr. Rogers.
Mr. Rogers. Thank you, Madam Chairwoman.
You mentioned earlier that there were some 400,000
searches.
Ms. Wuertz. On our BASIC system.
Mr. Rogers. Was that by consumer or by regulatory searches?
Ms. Wuertz. It is a combination of many things. We promoted
it very extensively to the consumers. We also promote it to
other firms that are thinking of hiring. It helps them
determine the supervisory procedures they should be putting in
place so they can do their own background checks before making
any types of hiring decisions, as well as other regulators use
it, but I don't have the breakdown of that.
Mr. Rogers. I'm sure you are familiar with the 41
agreements with NAIC for their information sharing and the
things that were listed by the panel previous to you.
Given those 400,000 searches that you have, and apparently
you anticipate that getting larger, and those information-
sharing agreements, to any of your knowledge, has there been a
breach of confidentiality that has posed a problem serious
enough for your attention?
Ms. Wuertz. First, I will have to say I am not that
familiar with the 41 agreements, but as far as we are
concerned, the National Futures Association, there have not
been any breaches of confidentiality that have caused us any
concerns.
Mr. Rogers. Would that be consistent with the remainder of
the panel?
Mr. Bartlett. Yes.
Mr. Smith. Yes.
Mr. Rogers. If you are not familiar with the agreement,
that is probably a good standard, because it does involve your
industry, and it means there is not a problem with those
agreements. Am I assuming that correctly?
Mr. Bartlett. Congressman, as far as I know, there have
been no breaches. There could have been. The companies in this
industry are quite sophisticated at building firewalls and
developing ways--technology is the answer. But the companies
themselves figure out ways to provide this protection, as would
these agencies.
So my experience in the industry would tell me that that is
not only not a problem, it has probably already been solved,
and will be solved on a daily basis as far as the potential
breaches.
Mr. Rodell. I would also say that virtually all these
disciplinary actions are a matter of public record with the
State insurance departments.
Mr. Rogers. Who do you think should be fingerprinted now
that we are getting into the insurance industry? Consistent
with the same that is done in the other financial----
Mr. Smith. I'm sorry, you are asking who should be?
Mr. Rogers. Who do you think should be fingerprinted under
this?
Mr. Smith. As of now, we think it is consistent with State
law, but our feeling would be--for instance, I am an agent in
Indiana. I do not have to be fingerprinted. I happen to have a
license in the great State of California. I had to be
fingerprinted. I have done that.
We believe that once you are fingerprinted, then that
should suffice for any jurisdiction that has that requirement.
We think that that could stand outside of reciprocity and still
not get into conflict with the State regulation of insurance.
Mr. Rogers. If I can follow up on that question, you
mentioned earlier in your testimony, Mr. Smith, that you didn't
want to have repeated criminal checks, obviously repeated
fingerprintings.
Is there an occasion that is occurring now, and obviously
you just mentioned one with fingerprints in California, but not
in Indiana. We don't certainly want to impose more burdens on
you.
Mr. Smith. That has been, I think, the most common. I
believe there are about 11 or 12 jurisdictions that require
fingerprints, and if people operate in all of those States and
have to provide those independently, that is a burden.
Mr. Rogers. Would that also be the same with the criminal
history checks? We would have duplicative efforts.
Mr. Smith. I can't answer that specifically, but if you do
the fingerprints, then the criminal background check would flow
from that. So, yes, I am sure that would be the case.
Mr. Rodell. Also, I would like to point out that our
interest and the Council's interest is that we are working
across the financial services industry, so we are licensed as
insurance brokers, as securities agents, and we are having to
do this a multiple of times across this industry. We feel we
should only have to do it once.
Mr. Rogers. Madam Chairwoman, I am very encouraged by the
testimony today. Very rarely will you have a panel of
regulators and a panel of those who are regulated in
concurrence with something that we need to do in Congress.
I look forward to working with you all as we craft that
legislation.
Thank you, and I yield back the remainder of my time.
Chairwoman Kelly. Thank you very much, Mr. Rogers.
Mr. Grucci.
Mr. Grucci. Thank you, Madam Chairwoman.
The question that I have really is in line with the
question I had asked earlier of the first panel.
The information and the words that I kept hearing, things
like unscrupulous individuals, disreputable individuals, rogue
individuals, and the need to protect the vulnerable consumer or
the vulnerable public, do you see any reason why the public
should not also have access to this information? Anyone who
wishes to answer.
Mr. Bartlett. Congressman, let me perhaps start. It depends
on which information.
There is a whole body of law and regulations by each of
these 200 regulatory agencies I cited in each of the 50 States,
and in which there is a well-established pattern of what is
available to the public, what is not available to the public.
It is a little bit more complicated than making it all
available to the good consumers, because sometimes the good
consumers are also the bad competitors or the bad actors or
other people who may do harm. So the question is, what within a
regulatory activity should be public, and what should be
limited to the regulatory agencies.
My sense is that this legislation--there is not a problem
there to solve, in my sense. I have not heard of one.
This legislation should focus on a more orderly
dissemination of the information that is already being
collected. Clearly just simply opening all information that is
ever collected for any reason, opening it up and putting it on
the Web, is another way to approach it. I don't think that
would be a productive way to approach it.
This legislation would say, let us make the information
available to one of the regulatory agencies available to the
other regulatory agencies, and I think that is the right step,
the right approach.
Mr. Grucci. How would you then prevent a company that would
hire someone with the kind of attributes we have been hearing
that were not criminal, that they obviously did not conduct any
criminal activity to suffer any criminal punishment for, but
yet are not the type of people that some companies would want
to represent them, yet they are still out there, and some
companies may hire these types of people?
Why shouldn't the public have that same kind of access so
they can make a decision on how to invest their money, whether
it is to buy a life insurance product or whether it is to buy
an annuity plan for their child's education? Why wouldn't you
want them to have that kind of information to determine whether
or not the person they are dealing with is reputable?
Mr. Bartlett. Congressman, I do want the public to have
that information. For that purpose we set up 200 regulatory
agencies to try to regulate the activities and regulate who can
get a license and who cannot. So I think that system, other
than the dissemination of the information, is pretty well in
place.
The fact is, there is a competitive marketplace that helps
to make that decision, so individual consumers decide who they
want to do business with. That is sort of the basis of our
industry, is to promote the full competition within that
industry.
But as far as the licensing of who is allowed to be hired
in a particular license, that is pretty well established and we
think is working pretty well.
Mr. Grucci. Thank you for your answer.
I yield back the remainder of my time.
Chairwoman Kelly. Mr. Hillman, did you want to make a
comment?
Mr. Hillman. There was one point that I wanted to add. That
is that some of the most important information that the public
would need would be information on disciplinary actions or
enforcement actions that were taken against an individual in
any one of these industries that we are talking about.
Right now today that information is currently available to
the public, but it is not readily accessible. One of the
important things that would be done through this provision
would be to make that information more easily available to
others.
Mr. Grucci. Madam Chairwoman, if I could just follow up?
Chairwoman Kelly. Yes.
Mr. Grucci. I just wanted to ask the question, those
examples that you just pointed out would be for someone who
committed some sort of a criminal act, and there would be some
sort of a trail indicating that to the public. Is that my
understanding of your answer?
Mr. Hillman. It would be a regulatory action that would
have been taken by a banking securities or insurance----
Mr. Grucci. Is this not designed to cover those people who
have yet to commit or are not committing a criminal act, but
they are not reputable, they are not acting with the utmost
concern for the general public?
Mr. Hillman. There is interest in sharing information in
addition to enforcement actions and disciplinary actions, to
include things like consumer complaints, information on open
investigations, and the like. That information also would be
very useful to regulators to help them ask more probing
questions of applicants in those industries to make sure that
they are fit.
Chairwoman Kelly. Thank you very much, Mr. Grucci.
Mr. Grucci. Thank you, Madam Chairwoman.
Chairwoman Kelly. Mr. Cantor.
Mr. Cantor. Thank you, Madam Chairwoman.
Just briefly, throughout the testimony of this panel, as
well as the prior panel, my concern has been the risk of
duplicative reporting requirements and the creation of new
bureaucracy. I am sensing that there really is not much concern
for that among this panel. Is it fair to say that the risk of
duplicative reporting requirements under the proposed
legislation really has been obviated by the uniform licensing
requirements inherent in the NARAB provisions of the Gramm-
Leach-Bliley bill?
Mr. Bartlett. Congressman, the reason you do not hear a lot
of concern on this side is we have not seen the details of the
legislation yet. So the risk is in the way the legislation is
drafted.
We have full confidence in both the sponsors and leaders of
this committee and Members that that will not happen, but that
is always the risk, because it is easy, and I was on your side
of the bench for a while, and it is easy to sit on your side of
the bench and sort of say, would it not be a neat idea if we
just added a few extra requirements here? Well, how about a few
more and a few more?
So the risk is the way it is drafted, not in the concepts.
Mr. Cantor. If I could just follow that up, one of the
discussions I was having had to do with, you know, each State
has different requirements as far as applications for
licensure, and so forth. My question really is, does Gramm-
Leach-Bliley speak to that specifically, and the sort of threat
of the NARAB provisions hanging over it, does that sort of take
care of any duplicative requirement for information under a
proposed bill here, because it has already been required under
Gramm-Leach-Bliley, and are we going to really be entering an
age where there is uniformity among specifically--let's say in
the insurance area, is there going to be uniformity in
licensing that would automatically be accessible, as
Congresswoman Hart said, be accessible through a network
search?
Mr. Smith. As far as the insurance industry is concerned,
Gramm-Leach-Bliley has moved the needle precipitously. The
insurance commissioners are committed to trying to get to the
reciprocity requirements.
I think there are a lot of things taking place as we speak
in various State legislatures, and if we can indeed get to
reciprocity--I think if we get to 29, because that is the
number in the bill, and we stop there, that will not do us a
whole lot of good. We are assuming once we get to 29, then we
will get to 37, 38, then we will get up to 50 or 51. Then we
will make sure we are right where we need to be.
Yes, that would take care of a lot of other requirements.
Mr. Cantor. Because there are specific sort of offenses, if
you will, that an individual may have had on their record that
will be there in the databank at the State level that will then
be retrieved up to this sort of national linkage?
Mr. Smith. Absolutely correct. They will be shared from
State to State in whatever fashion that would finally take.
Mr. Rodell. Again, I would just like to point out that part
of that act really is to look at this as one financial services
industry. So certainly NARAB helps insurance, but it does not
help the duplicative issues across the entire sector.
Mr. Cantor. Thank you. I yield back the balance of my time,
Madam Chairwoman.
Chairwoman Kelly. Thank you very much, Mr. Cantor.
Mr. Bachus, you have really not had a chance to ask your
questions. Would you like to do that now?
Mr. Bachus. Thank you. I did reserve my questions.
Mr. Bartlett, you talk about a superagency being created. I
think we created--in Gramm-Leach-Bliley we had the Federal
Financial Institution Examination Council, which was tasked
with coordinating the information-gathering efforts within the
financial industry, the banking industry.
It does make sense to have some mechanism for coordinating
efforts between the industries. So do you think maybe it makes
sense to have that same examination council as the gathering
body?
Mr. Bartlett. Mr. Chairman, I do. I think that the Federal
role should be as limited as possible, sort of setting up the
ground rules, making sure the information is uniform,
establishing uniform standards, and making sure it is
accessible.
My caution is to make sure that we don't set up a place
where more information is gathered and sort of put into that
place. There are warehouses in Washington, as you know, that
are the gathering places of all kinds of information that is
not accessible. They are just simply gathered.
I just would caution--and I know the committee, from the
drafts I have seen, the drafts of the concepts I have seen, is
avoiding that. I just want to be sure it is on the record to
continue to resist that temptation.
Mr. Bachus. I think that is why the proposal is to use that
examination council so you do not have to set up a new body.
Mr. Bartlett. We think that is actually the appropriate
body to provide the supervision or the oversight on this
function.
Mr. Bachus. Thank you.
You mentioned $100 billion. If we can create an anti-fraud
network with a cost of $5 million or $10 million that even
eliminates a fraction of this $100 billion price tag, plus--
also it could have a savings element there, or could save
agencies and individuals money by not having to respond to
duplicative requests for information. It could actually be
maybe--it could save the States money, the agencies money, and
individuals money and at the same time prevent a lot of fraud.
So I think it could be a very good bargain for the citizens and
the consumers.
I would also use an analogy. This may be a stretch, but we
now require repeat sex offenders and child molesters in certain
States to register when they go into a neighborhood. I see this
as sort of a way of registering some of these not only good
agents, but bad agents, and informing people when they do move
around from industry to industry or from State to State.
Mr. Hillman, one thing that I have heard time and time
again is that in order to implement this information-sharing
agreement, these information-sharing agreements, that someone--
and I think only Congress would be the one--someone should
supply some confidentiality, liability, and corporation
requirements; in other words, legal immunity in certain cases.
Do you see any way of doing it without congressional
involvement?
Mr. Hillman. I believe congressional involvement would be a
very critical component. Let me give you one example. Within
the securities industry they have this CRD system that
maintains information on disciplinary actions, as well as
information on open complaints dealing with sales practices
against brokers in that industry.
Open complaint information is sometimes unsubstantiated and
very sensitive. What they have done in the securities industry
is to give Federal immunity to the NASDR, that protects them
from any disclosures that have been made in good faith. That
would be somewhat of an appropriate model to consider for a
system that we are talking about today.
Mr. Bachus. OK.
Ms. Wuertz, you mentioned that your association has
decreased the number of rogue agents by 75 percent by
developing a coordinated tracking system. I think that model
could be used throughout the industry.
Ms. Wuertz. It was actually a combination of many things.
The rules we have put in place are sales practice rules.
If someone does have something in their history that they
are concerned about, we require the firms to have extra
supervisory procedures. So we do a lot if we have any
information that someone has a questionable background.
Mr. Bachus. Thank you.
Chairwoman Kelly. Thank you very much, Mr. Bachus.
Ms. Waters, you have been very patient. I think you have a
follow-up question, so I would like to call on you at this
time.
Ms. Waters. Thank you very much, Madam Chairwoman.
Instead of doing the follow-up question, I would like to
kind of wind it up.
There are a lot of questions that I still have about what
it is, a database or linkage, and what the technology is for
the linkage, if that is what it is; whether or not it is for
regulatory agencies or regulatory agencies and consumers;
whether or not someone has taken a look at the various States,
and the fact that some States are very, very consumer-oriented
and you can have numerous violations, whereas in another State
they may not be violations at all, and what you do with that
kind of reporting.
All, of course, we have not talked about costs. I don't
think it is $5- to $10 million, as Mr. Bachus kind of alluded
to. He is hoping, but I think it is a lot more costly than
that.
What I am hearing is this, that while we have a concept, it
does not appear that those of you in the industries with
certain responsibilities, certainly regulatory
responsibilities, and so forth, and those of you who are in the
industries where you try and form associations so that you can
have standards, all of that, it does not appear to me that you
have really been deeply involved in writing this or helping to
develop this.
So I guess what I want to leave with you and these
subcommittees is this, that rather than go down the path of
good ideas that turn out to be nightmares later on, let's make
sure that there is enough input and involvement and real
critique of the concept so that we can fix it.
Most people are concerned about fraud and rogues and all of
that, and others are concerned about fraud and rogues and
privacy and confidentiality and effectiveness. So let us make
sure you are involved, because you know what you are talking
about. You know what you are trying to get at, and know what we
are trying to get at and what the owners of the concept are
trying to get at. Don't let it run away with the good ideas so
that it will not work and will not make good sense.
So I am just going to close by saying, Madam Chairwoman, I
think it is very important that we spend the time on this
concept to make sure we know what we are doing and how to best
do it, rather than move too quickly and create more problems
than we ever dreamed we could create.
Thank you. I yield back the balance of my time.
Chairwoman Kelly. Thank you very much for your comments,
Ms. Waters.
Mr. Bachus, did you have an additional question?
Mr. Bachus. Just in closing, I would like to commend both
panels. I thought their mood and their demeanor and testimony
was one of cooperation. We appreciate that.
What Representative Rogers said I think should encourage us
and give us optimism. That is that both panels, both the
industry and the regulators--there was agreement between them
and a consensus on many things. That ought to assist us in the
future.
Chairwoman Kelly. Thank you very much.
Yes, we do appreciate both panels and the fact that you
spent as much time as you did. It does give us a strong charge
to get this right, but it is good that we have a lot of
agreement on where we are going with this.
The Chair notes that some Members may have additional
questions for the panel which they may wish to submit in
writing, so without objection, the hearing record is going to
remain open for 30 days for Members to submit written questions
for the witnesses, and for the witnesses to place their
responses in the record.
The second panel is excused, with the committee's deep
appreciation for your time.
I would like to ask unanimous consent for Members to have 1
week to submit opening statements or handwritten follow-up
questions to our witnesses.
I would like to thank the staff, Mr. Robert Gordon, Charlie
Symington, and especially my friends and colleagues, Mr. Bachus
and Ms. Waters for their work on this hearing.
Thank you very much. This hearing is adjourned.
[Whereupon, at 4:37 p.m., the hearing was adjourned.]
A P P E N D I X
March 6, 2001
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