[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]





                             JOINT HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                                AND THE

                            SUBCOMMITTEE ON

                                 OF THE


                     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

70-889                     WASHINGTON : 2001

 For sale by the Superintendent of Documents, U.S. Government Printing 
 Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2550
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                    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
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         

            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


       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
MIKE FERGUSON, New Jersey            JOSEPH CROWLEY, New York

                            C O N T E N T S

Hearing held on:
    March 6, 2001................................................     1
    March 6, 2001................................................    47

                         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


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

                     CONGRESS DO TO HELP FINANCIAL


                         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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    [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.


    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 
    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 


    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 
    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 
    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 
    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.


    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.

                    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.

                       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 
    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 
    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.

                      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.


    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 
    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.


    Mr. Smith. We could both do that, talk about that a little 
    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.

                      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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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