[Senate Hearing 108-892]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-892

 
               EXAMINATION OF THE GRAMM-LEACH-BLILEY ACT
                      FIVE YEARS AFTER ITS PASSAGE

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                                   ON

 THE GRAMM-LEACH-BLILEY ACT (P.L. 106-102), TO ENHANCE COMPETITION IN 
THE FINANCIAL SERVICES INDUSTRY BY PROVIDING A PRUDENTIAL FRAMEWORK FOR 
THE AFFILIATION OF BANKS, SECURITIES FIRMS, AND OTHER FINANCIAL SERVICE 
                               PROVIDERS

                               __________

                             JULY 13, 2004

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html



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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                       Mark F. Oesterle, Counsel

             Martin J. Gruenberg, Democratic Senior Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, JULY 13, 2004

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................    19
    Senator Crapo................................................    22
    Senator Bennett..............................................    25
    Senator Carper...............................................    27
    Senator Sununu...............................................    30

                               WITNESSES

Harry P. Doherty, First Vice Chairman, Board of Directors, 
  America's
  Community Bankers and Vice Chairman of the Board, Independence
  Community Bank Corporation, Brooklyn, New York on behalf of 
    America's
  Community Bankers..............................................     2
    Prepared statement...........................................    40
    Response to a written question of Senator Allard.............    88
Terry Jorde, Vice Chairman, Independent Community Bankers of 
  America and President and CEO, CountryBank, USA, Cando, North 
  Dakota.........................................................     3
    Prepared statement...........................................    44
    Response to a written question of Senator Allard.............    89
Travis Plunkett, Legislative Director, Consumer Federation of 
  America on behalf of the Consumer Federation of America, 
  Consumers Union, and the U.S. Public Interest Research Group...     6
    Prepared statement...........................................    50
Ronnie Tubertini, Chairman, Government Affairs Committee, the 
  Independent Insurance Agents and Brokers of America, Inc.......     8
    Prepared statement...........................................    61
Steve Bartlett, President and Chief Executive Officer, the 
  Financial Services Roundtable..................................    10
    Prepared statement...........................................    67
James D. McLaughlin, Director, Regulatory and Trust Affairs, 
  American Bankers Association...................................    11
    Prepared statement...........................................    71
    Response to written questions of Senator Allard..............    89
John Taylor, President and CEO, National Community Reinvestment
  Coalition......................................................    13
    Prepared statement...........................................    80
J. Steven Judge, Senior Vice President, Government Affairs, 
  Securities Industry Association................................    15
    Prepared statement...........................................    85

              Additional Material Supplied for the Record

Statement of Dennis W. Archer, President, American Bar 
  Association, dated July 13, 2004...............................    91
Statement of David F. Woods, CLU, ChFC, President, the National 
  Association of Insurance and Financial Advisors, dated July 13, 
  2004...........................................................    93

                                 (iii)


 EXAMINATION OF THE GRAMM-LEACH-BLILEY ACT FIVE YEARS AFTER ITS PASSAGE

                              ----------                              


                         TUESDAY, JULY 13, 2004

                                       U.S. Senate,
           Committee on Banking, Housing and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Richard C. Shelby (Chairman of 
the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order. I would 
like to thank our witnesses for appearing today. This morning, 
the Committee will engage in what is sometimes an overlooked 
but nevertheless an extremely important activity: Legislative 
oversight. I think we have a considerable responsibility to 
monitor the laws we pass and to periodically track developments 
in the markets governed by such laws and ultimately ask some 
basic questions, such as has the law been implemented as 
Congress intended? Has it achieved the ends we sought? Does it 
still work in the marketplace as it exists presently compared 
to when it was enacted?
    Today, we will be considering the Gramm-Leach-Bliley Act, 
one of the most significant laws to come out of this Committee 
in many years. The Act made profound changes to the laws 
governing the affiliation of banking, securities, and insurance 
firms in an attempt to promote the modernization of the 
financial services sector.
    Almost 5 years after passage, I think GLB merits this 
Committee's time and attention. We will begin our overview with 
witnesses who represent consumer groups and the industry 
sectors covered under the law. Hopefully, they will provide us 
with a real-world perspective about its operation and its 
effects.
    Later this year, we are planning to bring the regulators 
before the Banking Committee to complete our discussion about 
the law. We also plan to hold further hearings concerning the 
state of the insurance industry in the post-Gramm-Leach-Bliley 
environment.
    Again, I want to thank all the witnesses for appearing 
today, and I look forward to hearing their testimony.
    And we have with us a distinguished group: Harry Doherty, 
Vice Chairman of the Board, Independence Community Bank 
Corporation, Brooklyn, New York. He will be testifying on 
behalf of America's Community Bankers; Terry Jorde, President 
and CEO, CountryBank USA, Cando, North Dakota, testifying on 
behalf of the Independent Community Bankers of America; Travis 
B. Plunkett, Legislative Director, Consumer Federation of 
America; Ronnie Tubertini, President and CEO of SouthGroup 
Insurance and Financial Services, Jackson, Mississippi, 
testifying on behalf of the Independent Insurance Agents and 
Brokers of America; Steve Bartlett, a former Congressman, 
colleague of mine at one time, President and Chief Executive 
Officer, Financial Services Roundtable; James McLaughlin, 
Director, Regulatory and Trust Affairs, American Bankers 
Association; John Taylor, President and Chief Executive 
Officer, National Community Reinvestment Coalition; and Steve 
Judge, Senior Vice President, Government Affairs, Securities 
Industry Association.
    This is a full panel. We will start with you, Mr. Doherty, 
and all of your written testimony will be made part of the 
hearing record in its entirety. If you could, briefly sum up 
your toughest remarks.

                 STATEMENT OF HARRY P. DOHERTY

            FIRST VICE CHAIRMAN, BOARD OF DIRECTORS

                AMERICA'S COMMUNITY BANKERS AND

            VICE CHAIRMAN OF THE BOARD, INDEPENDENCE

         COMMUNITY BANK CORPORATION, BROOKLYN, NEW YORK

            ON BEHALF OF AMERICA'S COMMUNITY BANKERS

    Mr. Doherty. Thank you very much, Chairman Shelby and 
Members of the Committee.
    I am Harry P. Doherty, Vice Chairman of Independence 
Community Bank Corporation of Brooklyn, New York. Independence 
Community Bank is a New York State-chartered savings bank, 
operating within an OTS-regulated holding company. Our bank has 
more than $17 billion in assets, 121 branches, and 2,500 
employees. I am here this morning representing America's 
Community Bankers. I am First Vice Chair of ACB, and we are 
pleased to have this opportunity to participate in the 
Committee's review of the Gramm-Leach-Bliley Act.
    In 1999, as they do today, ACB's diverse members wanted 
financial organizations to have choices in their charters and 
business models. At the time, decades-old legislation stood as 
a barrier to the full integration of the banking, securities, 
and insurance industry, even though securities, insurance, and 
nonfinancial holding companies had been permitted to hold 
thrifts.
    ACB supported passage of the Gramm-Leach-Bliley Act. We did 
so because it created new options for financial companies that 
wanted to offer diversified financial services through a bank 
charter. One of the innovations of the Act was the creation of 
a notice and comment process for identifying new permissible 
financial activities for national banks and new financial 
holding companies.
    The process relies on the expertise of Treasury and the 
Federal Reserve. Congress wanted the primary consideration in 
that process to be the safety and soundness of the banking 
system. But then came the real estate brokerage rule. This was 
the first real test of the new system. Because of 
considerations other than safety and soundness, the 
nonpolitical process established by the Act has not been 
allowed to run its course.
    Despite the restrictions on new commercial affiliations 
imposed by the Act, the unitary savings and loan holding 
company remained an important choice for financial firms. The 
expertise of the OTS in regulating diverse holding companies is 
one of the reasons financial companies frequently choose the 
unitary savings and loan holding company structure.
    The Act made positive changes in the membership 
requirements, capital structure, and regulation of the Federal 
Home Loan Bank System. For example, Federal savings banks and 
savings associations became voluntary members instead of 
mandatory members. Voluntary membership enhances the 
cooperative nature of the system, and it provides incentives to 
the Federal Home Loan Banks to work for the benefit of their 
member-borrowers.
    The Act added stability to the system's capital base. It 
established a leverage and risk-based capital requirement for 
the Bank System. It created a stable base of new capital for 
the system. Nine of the twelve Federal Home Loan Banks have 
implemented a new capital plan as required by the Act. The 
remaining three are on track to implement their plans, but 
proposals to require the Federal Home Loan Banks to register 
stock with the Securities and Exchange Commission without first 
establishing exemptions consistent with the cooperative 
structure of the system could delay implementation of the 
remaining capital plans.
    The Act gave the Securities and Exchange Commission the 
opportunity to ensure that savings associations are regulated 
the same way as banks, when engaged in the same activities. 
Unfortunately, the most recent version of the SEC's proposed 
Push-Out rule does not treat savings associations the same as 
banks when they are engaged in the same broker activities. ACB 
believes that a legislative change is needed to ensure parity 
for savings associations under the Securities Exchange Act.
    The Act created important new privacy rights for consumers. 
However, some of these provisions created a significant 
regulatory burden for all deposit institutions. Not all of the 
new requirements provided a benefit to consumers, and they did 
not increase safety and soundness. Although compliance with 
these provisions can be costly for all depository institutions, 
compliance costs fall more heavily on community banks.
    Congress should act to reduce the unnecessary regulatory 
burden that results from these provisions. For example, 
Congress should eliminate the required annual privacy notices 
for banks that do not share information with nonaffiliated 
third parties.
    Finally, the Act eliminated the Savings Association 
Insurance Fund Special Reserve. This gave the FDIC more 
flexibility. ACB urges the Committee to act soon on the pending 
deposit insurance reform legislation that will give FDIC 
additional flexibility to manage FDIC's insurance funds.
    Thank you very much for the opportunity to testify, and I 
will be happy to answer questions later.
    Chairman Shelby. Ms. Jorde.

            STATEMENT OF TERRY JORDE, VICE CHAIRMAN,

          INDEPENDENT COMMUNITY BANKERS OF AMERICA AND

                       PRESIDENT AND CEO

              COUNTRYBANK USA, CANDO, NORTH DAKOTA

    Ms. Jorde. Thank you, Mr. Chairman, Ranking Member 
Sarbanes, and Members of the Committee, my name is Terry Jorde. 
I am Vice Chairman of the Independent Community Bankers of 
America and President and CEO of CountryBank USA, a community 
bank with $37 million in assets located in Cando, North Dakota. 
Cando is a small town of only 1,300 people, but we have three 
banks and a motto that you can do better in Cando.
    [Laughter.]
    Our bank is full service and progressive, offering our 
customers a full range of insurance and investment services, 
residential mortgages, check imaging, and fully transactional 
Internet banking.
    ICBA appreciates this opportunity to testify on the effect 
of the Gramm-Leach-Bliley Act and what it has had on the 
financial industry, the Nation, and, most importantly, our 
communities. The Act has had both positive and negative 
effects. The Federal Home Loan Bank reforms made it possible 
for community banks of all charter types to greatly increase 
their involvement in the system. Since the passage of GLB, the 
number of ICBA banks belonging to a Federal Home Loan Bank has 
increased from 17 to 76 percent.
    For community banks, the Federal Home Loan Bank System is 
more important than ever. My bank is taking advances for the 
first time in years because our deposits are down and loan 
demand has increased. I am fortunate in that my Federal Home 
Loan Bank of Des Moines has been a champion in accepting small 
business and agricultural assets as collateral for advances, 
which was permitted by GLB. However, some other Federal Home 
Loan Banks have been slow to use the authority, either by 
limiting the types of loans or severely haircutting values.
    ICBA is pleased that this Committee addressed this by 
adopting Senator Enzi's amendment to the GSE reform bill. It 
clarifies that the mission of the Federal Home Loan Banks 
includes providing liquidity and funds for these purposes. We 
hope this will stimulate increased use of this authority.
    GLB reaffirmed the Nation's longstanding policy maintaining 
the separation between banking and commerce by closing the 
unitary thrift loophole. This helps avoid the conflicts of 
interest and threats to safety and soundness that will arise if 
commercial firms, such as retailers and manufacturers, are 
permitted to own their own banks. Policymakers now must face 
the same issue with industrial loan companies that may be owned 
by commercial firms.
    The House's regulatory relief bill took steps to address 
the ILC loophole by adopting the Gilmore-Frank Amendment. 
However, ICBA strongly urges Congress to take the next step and 
bring ILC's under the Bank Holding Company Act, closing the ILC 
loophole completely.
    ICBA repeatedly warned that GLB would likely lead to 
increased financial concentration. GLB and the Riegle-Neal Act 
have together led to the creation of truly huge financial 
conglomerates. We now have three $1 trillion banks in the 
United States. This is certain to decrease competition and 
increase systemic risk.
    As financial conglomerates are allowed to grow 
exponentially, the corresponding regulatory burden falls 
disproportionately on the community bank. ICBA strongly urges 
you to reduce the burden on noncomplex community banks so that 
economic development and small businesses will not suffer, and 
competition will be maintained.
    We also urge you to complete action on deposit insurance 
reform legislation. Since community banks are not too big to 
fail, our depositors look to deposit insurance to protect their 
funds.
    ICBA is troubled by another aspect of increased 
concentration: The largest institutions appear to be too big to 
regulate and too big to punish. In case after case, regulators 
and courts impose only nominal fines for megabanks' misdeeds, 
while regulators go on to approve their massive mergers. 
Community banks undergo much harsher treatment for regulatory 
violations. State and Federal regulators properly hold 
management strictly accountable for everything that happens in 
the bank.
    Congress should direct the agencies to review their 
policies, comparing the fines and other punishments that they 
apply to the largest institutions they regulate with those they 
mete out to the rank and file. This is certainly not the time 
for Congress to take new steps, such as lifting the deposit 
caps in the Riegle-Neal Act that would further increase 
concentration, and ICBA will vigorously oppose any such 
proposals.
    GLB did not provide community banks with substantial new 
opportunities. Preexisting laws already allowed my own bank and 
many other community banks to offer insurance and investment 
brokerage. However, real estate brokerage is a retail service 
community banks believed they would have the opportunity to 
offer to their customers. We were disappointed that Congress 
has blocked the proposed real estate brokerage regulation. This 
new power would allow community banks to better serve customers 
by increasing choice, decreasing costs, and diversifying 
revenue sources.
    GLB also required burdensome and oftentimes irrelevant 
retail insurance disclosures. I have seen the dumbfounded look 
on my customers' faces when they have been told that their auto 
policy or their crop insurance is not a deposit and may go down 
in value, followed by their look of concern when we inform them 
that their insurance is not guaranteed. This waste and 
confusion puts us at a competitive disadvantage to other 
insurance agencies in my community that are not housed within a 
bank office. ICBA urges Congress to streamline these 
disclosures.
    The annual GLB privacy notice is another example of the 
disclosure blizzard that does little more than confuse and 
burden consumers with pages of incomprehensible legalese. Most 
community banks do not share their customers' financial 
information with outside marketers and the like. Congress 
should amend GLB to allow them to provide a short statement to 
that effect printed on the customer's bank statement. In 
addition, community banks and many other financial institutions 
maintain consistent privacy policies. They should be required 
to deliver the annual notice only if they change their policy. 
Customers would be more likely to pay attention to those 
notices.
    I would again like to compliment the Committee on holding 
this hearing on the Gramm-Leach-Bliley Act. Again, we urge 
Congress to complete action on the Enzi Federal Home Loan Bank 
Amendment, close the ILC loophole, address concerns raised by 
increase concentration, and streamline insurance and privacy 
disclosures.
    Thank you again for this opportunity to testify.
    Chairman Shelby. Mr. Plunkett.

                  STATEMENT OF TRAVIS PLUNKETT

                      LEGISLATIVE DIRECTOR

                 CONSUMER FEDERATION OF AMERICA

            ON BEHALF OF THE CONSUMER FEDERATION OF

                 AMERICA, CONSUMERS UNION, AND

              U.S. PUBLIC INTEREST RESEARCH GROUP

    Mr. Plunkett. Good morning, Mr. Chairman, Senator Sarbanes 
and Members of the Committee, my name is Travis Plunkett. I am 
the Legislative Director of the Consumer Federation of America. 
We appreciate the opportunity to offer our comments and those 
of Consumers Union and the U.S. Public Interest Research Group 
on the effect of the Gramm-Leach-Bliley Act on consumers.
    In the decade-long debate that led to enactment of the GLBA 
in 1999, Congress heard many extravagant promises from 
financial services industry representatives about how tearing 
down the barriers between banking, securities, and insurance 
sectors would be a boon to consumers. Banks, securities firms, 
and insurance companies would merge into financial services 
supermarkets, we were told, that would then offer increased 
consumer access to new, innovative products at lower costs, 
with improved privacy protections.
    Five years later, this rhetoric has proven to be mostly 
hype. Mergers have occurred but mostly within the banking 
industry, not across sectors. While some, primarily affluent 
consumers may benefit from larger, multistate ATM networks, 
from discounts offered for multiple account relationships, et 
cetera, we have seen no evidence that the mass of banking 
consumers have benefitted from the Gramm-Leach-Bliley Act.
    I would like to talk specifically about some of the key 
issues that arose during the debate and how we think consumers 
are faring on those issues 5 years later, and please note that 
my lengthy testimony includes a number of specific solutions on 
some of the concerns I am going to raise.
    Regarding financial privacy, the privacy requirements, as 
we have said many times, in the Gramm-Leach-Bliley Act are 
narrow and weak. Consumers have no control over the sharing of 
their confidential experience and transaction information if 
two separate parties enter joint marketing agreements to sell 
financial products, nor do consumers have any right to stop the 
sharing of any information among affiliates of financial 
institutions. Some financial institutions have hundreds of 
affiliates; others have thousands.
    Consumers can opt out of the sharing of information with 
third parties selling nonfinancial products, but because the 
burden is on the consumer to take this step, and because the 
privacy notices that many financial institutions have used to 
inform consumers of their limited rights are virtually 
incomprehensible, very few consumers have actually opted out.
    Let me turn now to safety and soundness issues. The 
corporate scandals of the last few years have exposed 
potentially significant safety and soundness risks in allowing 
banks to sell both credit and investment banking services. As 
you all are well aware, among the restrictions in the Glass-
Steagall Act that the Gramm-Leach-Bliley Act eliminated were 
those that prohibited commercial banks from combining with 
investment banks to sell both credit and investment banking 
services.
    At the time, consumer groups expressed many concerns that 
the banking/securities combination in particular could allow 
financial investors access to insured deposits for high-risk 
lending schemes. In my written testimony, I provide, at length, 
a case study that shows that just such a scandal has since 
occured. This is the Citigroup-WorldCom situation. It is a 
cautionary case study of the kinds of problems that can result 
when banks inappropriately link decisions about lending and 
investment banking.
    Initially, Salomon Smith Barney had a strong incentive to 
promote WorldCom stock and to continue to do so after 
WorldCom's prospects had begun to deteriorate in order to keep 
WorldCom as an investment banking client. After Travelers, Citi 
and Salomon combined, the conflicts got bigger and more 
complex. In one case, the bank apparently came up with a plan 
to let WorldCom's CEO Bernie Ebbers turn his WorldCom stock 
into cash without the scrutiny that would accompany such a sale 
normally. In another case, Citi agreed to a very risky loan to 
Ebbers, in this case, $43 million to buy a ranch, with the loan 
banked by 2.3 million shares of WorldCom stock.
    There are a number of significant lessons that we have 
learned from this debacle. We explore them at length in the 
testimony. A major lesson is that abuses are inevitable if 
businesses are allowed to create structures that are so big and 
complex that they require a major investment in regulatory 
oversight to prevent these abuses. However, once Congress 
allows these structures to be created, it had better be willing 
to provide the resources for regulatory oversight and to push 
regulatory agencies to be aggressive in enforcing the law.
    Let me turn now to some consumer services issues. Gramm-
Leach-Bliley has not slowed the continuing trend of rising bank 
fees, nor has it helped decrease the numbers of unbanked 
consumers. Indeed, rather than offering innovative, moderately 
priced products to middle-income consumers or to unbanked 
consumers to bring them into the financial mainstream, some 
banks have developed policies and services that deliver second 
class or downright predatory products at an extremely high 
cost.
    Let me point, for example, to KeyBank's checkless checking 
system: 1.9 percent charge per deposit for a paycheck deposited 
into an account accessed by ATM cards. Let me point your 
attention to stored value cards, payroll cards, and others, 
where charges are extremely high. Let me also point your 
attention to predatory products like bounce loans that are 
targeted at moderate income 
consumers with checking accounts. This is a new form of 
overdraft protection at some big banks, and there are a number 
of big banks, using it primarily to boost their fee revenue. We 
are talking here about interest rates starting at a low of 240 
percent and ranging as high as 540 percent.
    We urge the Committee to look into steps to better regulate 
all of these products, and in closing, let me also say on the 
safety and soundness front we completely agree that the 
industrial loan corporation loophole in the Bank Holding 
Company Act needs to be shut tight.
    Thank you.
    Chairman Shelby. Mr. Tubertini.

                 STATEMENT OF RONNIE TUBERTINI

            CHAIRMAN, GOVERNMENT AFFAIRS COMMITTEE,

                  INDEPENDENT INSURANCE AGENTS

                  AND BROKERS OF AMERICA, INC.

    Mr. Tubertini. Good morning, Chairman Shelby, Ranking 
Member Sarbanes, and Members of the Committee.
    My name is Ronnie Tubertini, and I am pleased to have the 
opportunity to give you the views of the Independent Insurance 
Agents and Brokers of America on the Gramm-Leach-Bliley Act and 
its effects on the insurance marketplace. I am President and 
CEO of SouthGroup Insurance and Financial Services, which is 
Mississippi's largest privately owned insurance agency, and I 
am also currently Chairman of the IIABA Government Affairs 
Committee.
    I would like to discuss three points and what lessons might 
be learned for possible next steps for Congress. First, the 
expected megamergers of various financial services providers 
into financial supermarkets, which has not taken place; second, 
the success of the GLBA NARAB provisions in promoting agents' 
licensing reform in the States; and third, the continued 
importance of functional regulation and the State insurance 
regulatory structure.
    One stop shopping for financial services has not come to 
pass. Some mergers certainly have occurred, but most have not 
been among the leading players in different fields. The 
convergence of products and services that began in the 1980's 
continues to occur but through smaller and more targeted merger 
activity.
    Instead of purchasing insurance companies, as was 
predicted, banks have bought individual securities firms and 
insurance agencies, although this trend has not been 
overwhelming. Announced bank-agency deals involve a relatively 
small number of independent agents, and the independent agency 
system continues to be a principal form of property and 
casualty insurance distribution, as well as life and health 
distribution.
    One of the most significant accomplishments of GLBA was the 
NARAB subtitle, known as the National Association of Registered 
Agents and Brokers, which launched agents' licensing reform 
that continues today. Prior to GLBA, there was no consistency 
or reciprocity among the States, but licensing has improved 
significantly over the last 5 years as a direct result of 
Congress' decision to address those issues in GLBA.
    The GLBA put the ball in the States' court by threatening 
the creation of a new national NASD-style licensing entity. The 
creation of NARAB was only averted when a majority of the 
States achieved a level of reciprocity within the 3-year 
period. Since GLBA, over 40 jurisdictions have been certified 
by the NAIC as meeting the NARAB mandate.
    The success of NARAB is a perfect example of what the 
Federal Government and States can accomplish in partnership and 
how Congress can assist the States to achieve the needed 
reforms. The NAIC and States made little progress toward 
reciprocal and uniform licensing until Congress set a deadline 
with specific goals. In fact, Congress set the bar at only a 
majority of the States. All but a handful of the States have 
met the NARAB reciprocity standard.
    While there is still more to do to get to full reciprocity 
and ultimately to uniformity, this success would not have 
occurred without what are now being called Federal tools.
    Perhaps GLBA's most important accomplishment in protecting 
insurance consumers was its focus on functional regulation. 
GLBA specifically reaffirmed the traditional authority of the 
States to regulate the business of insurance. Most observers 
agree that State regulation has worked effectively to protect 
consumers, because State officials are positioned to be 
responsive to the needs in the local marketplace for consumers.
    Insurance is a product about which consumers have many 
questions, and if a problem arises, they want to be able to 
resolve it with a local phone call. During 2001, for example, 
State regulators handled over 3.5 million consumer inquiries 
and complaints, and today, State insurance departments employ 
approximately 13,000 individuals who draw on over a century and 
a half of regulatory experience to protect consumers.
    The diversity of underlying State insurance laws and 
varying consumer needs from one region to another require local 
officials on the beat. Despite its merits, State insurance 
regulation is not without its share of problems. It takes too 
long to get new insurance products to market, and there is 
unnecessary duplicative regulatory oversight in licensing. The 
speed to market issue is the most pressing from both a consumer 
and an agent and broker perspective, because we all want new 
and innovative products.
    Banks and securities firms are able to develop new 
products, while insurers are hampered by lengthy and 
complicated filing and approval products in 50 States. As a 
result, insurance companies and agents selling their products 
are at a disadvantage.
    IIABA supports State regulation of insurance from all 
participants and for all activities in the marketplace, and we 
are opposed to any form of Federal regulation, optional or 
otherwise. But there are some problems in the State system 
which the States will not be able to resolve on their own. 
Therefore, IIABA believes that there is a vital role for 
Congress but that it need not replace or duplicate what is 
successful at the State level.
    IIABA believes that the best alternative is a pragmatic, 
middle ground approach that utilizes Federal legislative tools 
to improve the State-based system. Targeted Federal legislation 
is not a radical concept. There is the successful NARAB 
precedent. The Senate Banking Committee and the House Financial 
Services Committee have proven that that approach can work, and 
IIABA believes that the NARAB model can serve as a template for 
further reform of State insurance regulation.
    We understand the Senate Banking Committee still has much 
to consider on this subject and look forward to working with 
you in any review of State insurance regulation and potential 
reforms the Committee may conduct.
    Chairman Shelby. Thank you.
    Mr. Bartlett.

                  STATEMENT OF STEVE BARTLETT

             PRESIDENT AND CHIEF EXECUTIVE OFFICER

               THE FINANCIAL SERVICES ROUNDTABLE

    Mr. Bartlett. Thank you, Mr. Chairman and Members of the 
Committee, my name is Steve Bartlett. I represent the Financial 
Services Roundtable, which consists of 100 of the largest 
financial services companies in the United States. One of the 
key goals of Gramm-Leach-Bliley was to achieve a competitive 
marketplace; that is, a financial regulation that should be for 
the safety and soundness and for consumer protection, not for 
product allocation.
    More can be done to achieve this goal. I have prepared six 
recommendations on behalf of my members to further achieve 
competitiveness in the financial marketplace. Specifically, 
those are to establish uniform national privacy standards; to 
provide for optional Federal insurance chartering; to establish 
a national antipredatory lending law; to remove the sunset on 
nonfinancial activities; to remove the activity limitations on 
national and State banks; and to allow the Treasury and Federal 
Reserve to independently determine what activities are 
financial in nature.
    First, amend Gramm-Leach-Bliley to achieve uniform national 
privacy statements. Title V, Mr. Chairman, of GLB imposed a 
number of privacy requirements on financial institutions, 
including the distribution of an annual privacy notice to 
consumers. It also expressly acknowledged the right of States 
to adopt their own individual separate privacy laws. Those 
provisions have created, I believe, some unintended confusion 
and conflict.
    The annual privacy notice, as you have already heard, 
required by GLB is astoundingly complex. Federal regulators 
have requested to comment on alternative notices, but they lack 
the authority to make the notice truly consumer-friendly. A 
Federal court recently cited Title V of Gramm-Leach-Bliley in 
upholding California's privacy law, which, if that is allowed 
to stand, could end up repealing Gramm-Leach-Bliley with 50 
different State laws.
    Congress should eliminate this confusion and conflict by 
repealing the State law provisions and establishing national, 
uniform privacy standards for financial firms. Congress should 
also, Mr. Chairman, direct the Federal regulators to issue a 
simplified national privacy notice with a safe harbor.
    Number two, amend Gramm-Leach-Bliley to provide for 
optional Federal insurance charters. Title III of Gramm-Leach-
Bliley, I believe, mistakenly reaffirmed that the business of 
insurance is regulated primarily by the States. During the past 
5 years, all parties to insurance regulation, including State 
insurance commissioners, have concluded that the current system 
of insurance regulation is fundamentally flawed.
    The Roundtable believes that the best way to reform the 
regulation of insurance is to create a parallel system of 
chartering and supervision for insurance companies at the 
Federal level with a Federal option.
    Number three, amend Gramm-Leach-Bliley to establish a 
national antipredatory lending law. In the 5 years since the 
enactment of Gramm-Leach-Bliley, the regulation of mortgage 
lending has become a hot topic. A variety of State and local 
governments have enacted laws designed to stop predatory 
lending practices.
    The Roundtable urges this Committee to use this review of 
GLB as an opportunity to enact a national antipredatory lending 
law that establishes basic protections for mortgage borrowers. 
This Federal law should apply uniformly to all lenders 
regardless of charter and supersede State antipredatory lending 
laws.
    Number four, amend Gramm-Leach-Bliley to remove the sunset 
on nonfinancial activities. In a marketplace that is subject to 
rapid changes in technology and even more rapid changes in 
consumer demand, some companies need the flexibility to provide 
products and services outside the statutory list of activities 
that are financial in nature.
    Title I of Gramm-Leach-Bliley grandfathered the 
nonfinancial activities of companies that were not bank holding 
companies prior to GLB. This grandfather provision, 
unfortunately, is scheduled to sunset in 5 years, and thus, it 
is a limitation built into the law. We recommend that Congress 
make the grandfather permanent and remove the sunset.
    Number five, amend Gramm-Leach-Bliley to remove the 
activity limitation of national and State banks. Section 121 
authorized national banks to own financial subsidiaries and 
empowered those subsidiaries to engage in a range of financial 
activities. At the same time, GLB proposed a number of 
activities and other operating constraints of the financial 
subsidiaries of national banks and State banks that do not 
apply to financial holding companies.
    The Roundtable recommends that the activities and operating 
limitations imposed on national banks and State banks be 
removed.
    Number six, amend Gramm-Leach-Bliley to allow Treasury and 
the Federal Reserve to independently determine what activities 
are financial in nature. GLB established an overly complex 
notice and disapproval procedure for the authorization of new 
financial activities. The Roundtable recommends that the 
Treasury and the Federal Reserve should have independent 
authority to determine what is a permissible activity. The OCC 
and Federal Reserve would still have the authority to regulate 
for safety and soundness of financial affiliates.
    Thank you, Mr. Chairman.

                STATEMENT OF JAMES D. MCLAUGHLIN

             DIRECTOR, REGULATORY AND TRUST AFFAIRS

                  AMERICAN BANKERS ASSOCIATION

    Mr. McLaughlin. Mr. Chairman and Members of the Committee, 
I am Jim McLaughlin, speaking on behalf of the American Bankers 
Association.
    Congress took a forward-thinking approach to financial 
services regulation by enacting the GLB Act. Dynamic market 
forces were already dramatically changing the financial 
services market. By responding to this new reality and after 
many years of debate, Congress modernized our financial system, 
making it more sensible and straightforward, removing 
inefficiencies in structure and regulation.
    The Act lets market forces dictate what combinations of 
financial services would be appropriate. The Act has worked 
well. It has benefitted customers, diversified incomes of 
financial firms, and at the same time posed no new risks to the 
deposit insurance funds. While not all financial firms have 
rushed to become a financial holding company, they could if 
they so choose in the future.
    This is a critical point: The success of the Act should not 
be judged by the number of financial holding companies or 
whether the combination of activities they now offer were a 
direct result of the Act. Rather it is the very option to 
undertake combinations of activities to meet the needs of the 
customers that is the measure of success. But more can be done, 
however, to fully realize the benefits of the GLB Act. Let me 
touch on a few.
    First, Congress designed a flexible regulatory process to 
allow financial institutions to enter new lines of business. It 
appropriately delegated responsibilities to the two agencies 
most familiar with the financial services industry: The 
Treasury and Federal Reserve. Unfortunately, this important 
provision has been derailed, at least for now, in one of first 
proposed rulings under this Act having to do with real estate 
brokerage services.
    As a result, Congress is once again refereeing another 
competitive issue, the very thing it sought to avoid. We urge 
Congress to let the Treasury and the Federal Reserve undertake 
their legal responsibilities to assure that the financial 
services market remains fair and competitive.
    Second, the banking industry has serious concerns over the 
new SEC proposal known as the Broker Push-Out rule. We 
appreciate the SEC's responsiveness to many of our concerns. We 
hope that the remaining issues can be addressed during the 
current rulemaking process so our banks can continue to offer 
longstanding bank products and services such as IRA accounts 
and retirement plan services. During this process, we hope that 
the Congress will continue to exercise its oversight 
responsibilities.
    Third, a sensible crossmarketing approach for merchant 
banking is needed to provide equal footing for all financial 
companies. Many ABA members regard the merchant banking 
authority as the single most important new power granted by the 
GLB Act. As a result, the ability to crossmarket through 
Internet websites and statement stuffers is very important to 
let our customers know about new products that can meet their 
needs.
    And last, the most significant work left undone by the GLB 
Act is to modernize the State system of insurance regulation. 
The GLB Act did strongly encourage States to adopt licensing 
standards to which all insurance agents must adhere. 
Unfortunately, as we have already heard, uniformity across 
States is far from a reality, and duplicative and inefficient 
State insurance regulation reduces product availability and 
raises costs.
    One solution that ABA endorses is to create an optional 
Federal charter for insurance companies and agencies. Like the 
dual banking system, this would provide an alternative to 
State-by-State regulation and create uniformity and efficiency.
    In conclusion, the GLB Act went a long way toward removing 
obstacles to efficient provision of financial services. It 
responded to the needs of consumers and increased the 
competition among financial service providers. While we do not 
know what innovations will take place in the years ahead, we do 
know that free and fair competition creates an atmosphere that 
encourages innovation. The GLB Act was an essential ingredient 
in bringing about such competition.
    We congratulate you on holding this hearing, and we ask 
your continued oversight to assure the goals of the GLB Act are 
achieved.
    Thank you.
    Chairman Shelby. Mr. Taylor.

                    STATEMENT OF JOHN TAYLOR

                       PRESIDENT AND CEO

           NATIONAL COMMUNITY REINVESTMENT COALITION

    Mr. Taylor. Good morning, Chairman Shelby, Ranking Minority 
Member Sarbanes, and other distinguished Members of the 
Committee on Banking, Housing, and Urban Affairs.
    Thank you for the opportunity to testify today. I think it 
is pretty fitting that NCRC, which is the trade association for 
some 600 community organizations across the country whose main 
focus is the increased access to credit and capital for all 
Americans, it is particularly fitting that we get an 
opportunity to testify today about the Gramm-Leach-Bliley Act 
or GLBA, because we believe that it has weakened the Community 
Reinvestment Act and thus reduced Americans' access to credit 
and capital.
    We do believe that the United States banking system is the 
envy of the world. In great part, we believe this is 
attributable to our extensive regulatory oversight, which, 
among other things, ensures adequate capital reserves, safety 
and soundness, and fair and equal access to credit. GLBA has 
failed to ensure that the laws and regulations relating to fair 
access to credit have kept pace with safety and soundness 
regulation.
    Mr. Chairman, I am not used to actually testifying in favor 
of paperwork reduction for my friends in the banking world, but 
I find myself in the position to make that recommendation 
today. One area where I believe there is strong consensus among 
community groups and the lending industry is the so-called CRA 
sunshine requirements under GLBA. We believe these need to be 
repealed.
    The CRA sunshine provisions sought to quantify the amount 
of bank dollars granted to community groups. It was believed 
that such grants were used for operating support rather than 
for direct provision of financial services and products. Five 
years later, we now know the facts do not support this theory.
    In a report issued in 2002 by the National Community 
Reinvestment Coalition, NCRC found that of the $3.6 billion in 
the 707 CRA agreements during the period of 1999 to 2002, only 
$11.8 million, less than three-tenths of 1 percent, actually 
went to grants for operating support for community groups.
    CRA sunshine increases the paperwork burden on banks and 
community groups with no tangible benefit to the public. The 
repeal of this ill-advised section of GLBA must occur 
immediately.
    Mr. Chairman, another harm, from our perspective, of GLBA 
is the reduction of the frequency of small bank exams. Under 
GLBA, small banks with assets of $250 million are examined only 
once every 4 or 5 years. Our 600 community members have 
reported that less frequent exams have reduced the amount of 
lending by small banks to low- and moderate-income borrowers. 
We call upon Congress to commission a comprehensive study 
assessing the impacts of this, what we call ``stretch-out of 
CRA exams'' on working-class Americans, low- and moderate-
income borrowers, as well as minorities.
    Mr. Chairman, in anticipation of this testimony, I 
unfortunately had short notice on this testimony, but I took 
the opportunity just to look at the State of Alabama and to see 
how those lenders, who are covered under the small bank exam, 
and see how they were impacted with these less-frequent exams.
    Chairman Shelby. Take your time now.
    [Laughter.]
    Mr. Taylor. Okay; thank you very much.
    Senator Sarbanes. You just picked Alabama out of the hat.
    Mr. Taylor. Maryland was next, Senator.
    [Laughter.]
    Chairman Shelby. Absolutely, then Connecticut and then 
Utah.
    Mr. Taylor. Absolutely. I would be glad to do this for 
anybody, but again, it would be great if Congress might want to 
take a look at this itself.
    But in any event, what jumped out at us as the CRA exams 
became less frequent in Alabama, looking at the period of, say, 
2000 through 2002, small banks in Alabama, in terms of all of 
their single-family lending as a percentage of their loans to 
low- and moderate-income borrowers in 2000 was about 37 percent 
of all of the loans to small banks went to low-income 
borrowers. That steadily declined until 2002 by 30 percent. 
Today, it is down to 27 percent by those banks.
    If you just look at home purchase lending, Mr. Chairman, in 
Alabama, 33 percent of all the lending from banks who are 
covered under $250 million in assets, 33 percent of all the 
loans they made were made for home purchase lending. That 
dropped. That figure dropped to 27 percent, a 20 percent drop. 
So there has been this steady decline since the less frequent 
exams occurred, whereas for the small banks, when the examiners 
showed up every couple of years, there was this preparation, 
there was this thoughtfulness to make sure that they were 
making loans to low-income borrowers, and the impact has been, 
at least in the one State we had the opportunity to look at, 
has been negative.
    Mr. Chairman, I appreciate your giving me some time to talk 
about your home State, but I will finish my remarks if I could. 
Gramm-Leach-Bliley added a requirement that bank holding 
companies must ensure that all of their affiliates passed CRA 
exams in order to be allowed to take advantage of the new 
powers under GLBA. While well-intentioned, this requirement has 
not been applied in a single case, to our knowledge. A major 
reason for this is less than 2 percent of the banks and thrifts 
fail their CRA exams. Since failed ratings are so rare, the 
have and maintain requirement must be strengthened to ensure 
that merging institutions will continue to serve minority and 
lower-income communities.
    NCRC urges you to consider requiring merging institutions 
to submit a CRA plan with their application. In the past year, 
the merging activities has reached a frenzied pace and has 
included some of the largest mergers in our history: The Bank 
of America-Fleet merger, the J.P. Morgan Chase with BankOne, 
which create institutions with more than $1 trillion in assets.
    Despite the incredible magnitude of these mergers, the 
Federal Reserve Board does not require any meaningful CRA plan 
from the merging institutions. The CRA discussions and the 
merger applications usually consist of a one- or two-page boast 
about the bank's CRA performance. A meaningful CRA plan would 
require merging institutions to provide the number of loans, 
investments, and services they made by State, metropolitan 
area, and rural portions of the State in the past few years.
    Recognizing that my time has expired, I will try to 
conclude, Mr. Chairman. While GLBA created more powerful 
financial institutions, it has not been updated to keep pace 
with the dramatic changes in the financial services industry. 
GLBA did not apply the CRA to mortgage companies, insurance 
companies, or securities firms that are part of holding 
companies. As a result, a very real possibility exists that CRA 
will apply to fewer and fewer assets of holding companies.
    At the same time, CRA was not applied to credit unions. 
Again, we find ourselves in agreement with many of our 
colleagues in the banking industry that CRA needs to be 
expanded to credit unions, mortgage companies and other 
competitors of bank holding companies. The uneven application 
of CRA reduces the amount of community reinvestment and wealth 
building in these communities. The uneven application of CRA 
also undermines President Bush's call for more minority 
homeownership and subverts the dreams of millions of Americans 
seeking to build a future for their families. If Congress 
wishes to ensure that GLBA benefits all Americans, it must 
update CRA.
    Since I have hit all of my main points, Mr. Chairman, and 
my time has expired, and you have noted that my written 
testimony is in the record, I will end. Thank you very much, 
sir.
    Chairman Shelby. Thank you.
    Mr. Judge.

                  STATEMENT OF J. STEVEN JUDGE

           SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS

                SECURITIES INDUSTRY ASSOCIATION

    Mr. Judge. Chairman Shelby, Senator Sarbanes, and Members 
of the Committee, I am Steve Judge, Senior Vice President for 
Government Affairs at the Securities Industry Association. I 
appreciate the opportunity to testify on our views on the 
Gramm-Leach-Bliley Act as we approach the 5-year anniversary of 
the enactment of that landmark legislation.
    SIA commends this Committee for its efforts in enacting GLB 
and for holding these hearings to examine the effects of the 
Act. We hope that these hearings will initiate an important 
dialogue about identifying and eliminating obstacles that 
impede the ability of our financial service firms to develop 
and offer consumers a full range of financial services, 
structure themselves optimally, mitigate risk, and maintain 
global competitiveness. SIA looks forward to participating in 
this dialogue.
    In considering the effects of GLB, it is important to 
recall how constrained the financial services industry was 
before Congress acted. Financial service firms were operating 
under a hodgepodge of confusing rules and regulations. The 
regulatory environment failed to provide the full range of 
relief the industry sought and the consumers demanded and 
tilted the playing field in favor of one segment over another.
    The enactment of the Gramm-Leach-Bliley Act has, in many 
respects, rationalized and modernized the financial services 
regulatory environment. Banks, securities firms, and insurance 
companies can choose to affiliate under whatever structure best 
fits their business plan. Subsidiaries of financial service 
holding companies can engage in a wide variety of financial 
activities beyond banking, securities, and insurance. All 
financial service firms are subject to comprehensive privacy 
requirements far beyond those that exist for any other industry 
in the United States.
    Since enactment of the Gramm-Leach-Bliley Act, there have 
been a number of significant combinations of financial service 
firms. Some firms have chosen to combine with commercial banks. 
Other firms have chosen to remain independent, and that is how 
it should be. One of the overarching goals of the Gramm-Leach-
Bliley Act was to allow financial service firms to choose the 
optimal structure to best serve their customers' needs.
    Among SIA's membership, bank or financial services holding 
company ownership of broker-dealers has increased from 13.4 
percent in 1999 to 21 percent today. Moreover, banks affiliated 
with securities firms have significantly increased their 
presence in capital market activities. For example, banks 
affiliated with securities firms now lead/manage 58.2 percent 
of equity underwriting today versus only 36.8 percent in 1999.
    As a further example of Gramm-Leach-Bliley's effectiveness, 
newly affiliated firms have not had to shed significant lines 
of business or to artificially limit their revenues from 
securities underwriting and certain other activities. These 
combinations also have not required Federal regulators to 
provide the type of significant regulatory relief that was 
often necessary prior to the passage of GLB.
    When assessing the overall impact of the Gramm-Leach-Bliley 
Act, it is important to note various economic factors and 
significant changes in the capital markets over the last 5 
years have made it tenuous at best to determine the cause and 
effect relationships to specific provisions of the Act. What we 
do know is that the Act is a comprehensive statute regulating a 
diverse, dynamic, and constantly evolving financial services 
industry, and as a result, there have been and likely will 
continue to be issues concerning the implementation of the 
legislation.
    There are some weaknesses that exist with the Gramm-Leach-
Bliley Act. Among those, securities firms in a financial 
services holding company should be able to engage in a full 
range of commercial activities to the same extent as securities 
firms that are unaffiliated with a bank.
    There should be a national standard governing consumer 
privacy requirements. Requiring financial institutions to 
comply with Federal requirements and then the additional 
requirements potentially imposed by each State in which that 
firm operates is confusing to customers and unnecessarily 
burdensome on the industry.
    And similarly, there should be a uniform national standard 
for the regulatory of securities activities. To this end, SIA 
is working with the State securities commissioners to secure 
adoption of the Model Uniform Securities Act in each of the 
State legislatures.
    The U.S. capital markets and the financial service industry 
are stronger, healthier, and more dynamic since Congress 
enacted Gramm-Leach-Bliley. In spite of the tremendous 
challenges and changes over the last several years, consumers 
and financial service firms alike are better off as a result of 
increased opportunities and choices made possible by the Act.
    SIA commends this Committee for holding these hearings, and 
we look forward to working with you to ensure that our Nation's 
capital markets remain the most efficient, liquid, deepest, and 
dynamic in the world.
    Thank you.
    Chairman Shelby. I thank all of you.
    During the debate that led to the passage of Gramm-Leach-
Bliley, there were many predictions with respect to how the new 
law would radically change the appearance of the financial 
service industry. Mr. Doherty, you indicate in your written 
testimony where you quote statistics provided by the Federal 
Reserve Vice Chairman Roger Ferguson that significant 
structural change within the financial service industry has not 
occurred.
    Mr. Doherty. That is true.
    Chairman Shelby. Is that correct?
    Mr. Doherty. That is correct. I see no evidence to that 
effect that there have been significant changes.
    Chairman Shelby. Mr. Bartlett, are the great changes just 
around the next corner? Are they more likely to occur in fits 
and starts or what?
    Mr. Bartlett. Mr. Chairman, I think we have seen a series 
of changes.
    Chairman Shelby. Because there are changes.
    Mr. Bartlett. There are changes.
    Chairman Shelby. Evolution.
    Mr. Bartlett. And it is a continuum of changes. Gramm-
Leach-Bliley still has some challenges that have prevented 
additional changes. I cited one, the sunset provision, which 
is, in my opinion, the largest barrier that stops companies 
that are not bank holding companies from applying for a 
financial holding company charter.
    In my opinion, Mr. Chairman, what has happened is, as some 
of the other witnesses have said, is that there is a continuum 
of products and services. And 5 years post-Gramm-Leach-Bliley, 
companies are offering a much broader range of that continuum, 
both large and small companies, and that is as it should be. So 
the marketplace is much more driven now by the customer than by 
product regulation, but we still have a lot of vestiges of 
product regulation.
    Chairman Shelby. Has it helped the consumer that much?
    Mr. Bartlett. It has helped the consumer tremendously.
    Chairman Shelby. Brought more competition?
    Mr. Bartlett. Yes, more competition. Consumers now have 
additional choices of where to acquire an auto insurance loan, 
a home loan, an auto insurance product, auto insurance, or a 
mortgage; the choices are, if not infinite, at least close 
enough to infinite.
    Chairman Shelby. Have the changes, brought about by the 
law, better prepared U.S. firms for international competition, 
Mr. Bartlett, Mr. McLaughlin.
    Mr. McLaughlin. Definitely better prepared for 
international competition. We have seen foreign firms take a 
greater presence in the United States, and some of them have 
had powers that U.S. banks have not been able to compete with. 
So it has better prepared banks in the United States.
    Chairman Shelby. Mr. Tubertini, Gramm-Leach-Bliley took a 
targeted approach with respect to enhancing the insurance agent 
and broker licensing that worked within the State-based 
regulatory structure. Do you believe that this was the 
appropriate approach, and if not, why not?
    Mr. Tubertini. I do believe that it was the appropriate 
approach, Senator.
    Chairman Shelby. Do you think it is working?
    Mr. Tubertini. It has worked in that we now have over 40 
States that have been certified NARAB compliant. There are 
obviously still States that have not, but it was a giant step 
toward full reciprocity or uniformity.
    Chairman Shelby. In the State of Mississippi, do you 
operate all over Mississippi? Your firm is a large insurance 
firm.
    Mr. Tubertini. We do, Mr. Shelby. We are in 17 locations 
across the State. But we also provide insurance to our 
customers in over 20 States.
    Chairman Shelby. Other financial products including 
insurance?
    Mr. Tubertini. Not other than insurance products but 
across-the-board insurance products.
    Chairman Shelby. Mr. McLaughlin, in your testimony, you 
cite two research papers that essentially conclude, one, that 
most banks engage in permissible relationship banking 
privileges and two, that tying is not a rational strategy for 
banks. You recall that.
    Mr. McLaughlin. That is right.
    Chairman Shelby. How would you respond to the following 
statements, including, in the executive summary of the 
Association for Financial Professionals 2004 credit access 
survey, and I am quoting from them, ``a significant number of 
survey respondents note that their company has been subject to 
activities that the Federal Reserve indicates would violate 
Section 106 of the Bank Holding Company Act; further, many 
companies continue to report that the pressure to award 
business has increased over the past year.'' How do you respond 
to that?
    Mr. McLaughlin. First, Mr. Chairman, that is an attitudinal 
survey. The bank regulators and the GAO have consistently 
looked at banking practices in this area. And we have to 
recognize that Section 106 of the Bank Holding Company Act 
provides a higher standard for banks and banking organizations 
than the rest of the world that they are competing with have to 
comply with.
    There is a very strict standard that applies to banks. What 
I think we are hearing from some of the financial treasurers 
and the like from that group is that they are saying they feel 
the fact that there is this one-stop-shopping, and that the 
marketing is intense. At the same time, we are hearing from our 
member banks that the corporate treasurers are putting greater 
pressure on the banks to provide better deals and packages of 
services. So the marketplace is working.
    Chairman Shelby. Good.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Mr. Chairman, let me just first follow up 
on your question. The Wall Street Journal, when it reported on 
this survey of the Association for Financial Professionals, 
said just this past June in an article headlined ``Executives 
See Rise in Tying Loans to Other Fees,'' began its story as 
follows: ``Corporate finance officers say banks are 
increasingly squeezing lucrative fees out of them by 
conditioning loans on the purchase of other services.''
    Now, tying is not permitted; is that correct?
    Mr. McLaughlin. Well, you have to look at the law. It is a 
very complex section of the law, Section 106, Senator, and 
tying is permitted to traditional banking services. There is 
some tying that is permitted.
    Chairman Shelby. And how is traditional banking services 
defined?
    Mr. McLaughlin. Traditional banking services are loan, 
deposits, trust services, cash management services, and the 
like.
    Senator Sarbanes. Now, do you agree that the Federal 
Reserve, in its interpretation of the antitying restrictions of 
Section 106 of the Bank Holding Company Act Amendments of 1970, 
states that a bank would violate Section 106 if the bank 
informs a customer seeking only a loan from the bank that the 
bank will make the loan only if the customer commits to hire 
the bank's securities affiliate to underwrite an upcoming bond 
offering for the customer?
    One out of seven large companies report that in the past 5 
years, they have been explicitly required by a commercial bank 
to obtain corporate debt and/or equity underwriting services 
from an affiliate of the bank in order to obtain a loan from 
the bank. What is your view on this?
    Mr. McLaughlin. I am sorry. I do not follow where that one 
out of seven comes from, who is saying that.
    Senator Sarbanes. This is the credit access survey that I 
made reference to.
    Mr. McLaughlin. Oh, the credit access survey? Because the 
Fed's statement of the law is accurate, that you cannot tie 
underwriting of securities and condition that service for a 
loan.
    Senator Sarbanes. Right.
    Mr. McLaughlin. That is clear.
    Senator Sarbanes. Yes, do you think that is taking place?
    Mr. McLaughlin. I cannot say, but I can tell you that the 
GAO has examined it twice. The bank regulators have been in and 
examined it. The Federal Reserve on the request of this 
Committee has gone in and looked again at the banks, and they 
cannot find more than one or two isolated cases, and there have 
been, I think, one or two cases enforcement cases.
    Senator Sarbanes. To the extent it happens, as I have read 
it here, it is contrary to the law; is that correct?
    Mr. McLaughlin. To tie underwriting services to the 
granting of a loan?
    Senator Sarbanes. Right.
    Mr. McLaughlin. That is correct.
    Mr. Plunkett. Senator, to that point----
    Senator Sarbanes. Yes?
    Mr. Plunkett. I have looked at the GAO study as well, and 
they do point to a lack of documentation regarding the tying of 
availability or the price of credit to the purchase of debt 
underwriting services. But they also say that there may be good 
reasons for the lack of documentation, that the Federal 
regulators need to look at. For example, a lot of those deals 
are conducted orally. Second reason, borrowers may be reluctant 
to file formal complaints. And then, they point out that the 
Federal banking regulators need to look for indirect evidence 
of tying and do more to investigate these problems.
    Senator Sarbanes. Mr. Chairman, I want to diverge for just 
a moment, because I want to make sure I understand the 
constituencies of some of the groups at the table.
    Mr. McLaughlin, the American Bankers Association 
encompasses all banks as potential members; is that correct?
    Mr. McLaughlin. That is correct. Large banks, small banks, 
savings associations, commercial banks, trust companies, all 
banks.
    Senator Sarbanes. Yes; now, what about the Community 
Bankers? What is the definition or the parameters for your 
membership?
    Mr. Doherty. We also service savings banks, savings and 
loans, Federal savings, commercial banks. We run the gamut.
    Senator Sarbanes. Regardless of size?
    Mr. Doherty. Regardless of size, regardless of charter.
    Senator Sarbanes. So you, in effect, duplicate the 
membership of the ABA? Would that be correct? I mean, 
potentially.
    Mr. Doherty. The potential; that is correct.
    Senator Sarbanes. Okay; and some banks would be members of 
both groups presumably?
    Mr. Doherty. There are dual memberships; that is correct.
    Senator Sarbanes. Okay; now, what about the Independent 
Community Bankers of America?
    Ms. Jorde. The ICBA does not have a size limitation. 
However, members of the ICBA generally subscribe to the 
philosophy that there is a symbiotic relationship between the 
bank and the community that it serves. The bank is dependent on 
its community. It is generally locally owned, or the board of 
directors is normally from that local area. We have nearly 
5,000 member banks throughout the country, primarily 
independent banks and thrifts as well.
    Senator Sarbanes. And I take it your institutions would be, 
by and large, smaller in their asset size; would that be 
correct?
    Ms. Jorde. We have banks as small as $10 million in size, 
and we have banks that are well into the billions of dollars in 
size, too. Again, it goes back to the philosophy of the bank. 
Many of those multibillion dollar banks started as community 
banks, remain as community banks and share that philosophy.
    Senator Sarbanes. Right.
    And the Financial Services Roundtable, what are the 
parameters for your membership?
    Mr. Bartlett. Our membership is 100 of the largest 
financial services companies. We believe that size matters; 
that when you get to a certain size, you are able to offer a 
variety of products to your customers. We believe our companies 
share the philosophy of a competitive marketplace; that is, the 
marketplace or our customers should determine what products 
they wish to buy and not laws or regulations.
    Senator Sarbanes. What size does a financial institution 
have to be in order to qualify for membership in the 
Roundtable?
    Mr. Bartlett. We measure our size by market cap or by worth 
of the enterprise, and I think our smallest is around $2 
billion, $2.5 billion of market cap.
    Senator Sarbanes. $2.5 billion?
    Mr. Bartlett. Yes, sir.
    Senator Sarbanes. And when you say you have 100, 
presumably, that does not encompass all institutions above that 
size; is that correct?
    Mr. Bartlett. That is correct.
    Senator Sarbanes. What percentage of the institutions above 
that size would be members of the Roundtable, if you know?
    Mr. Bartlett. I do not know exactly, but I would guess two-
thirds.
    Senator Sarbanes. Two-thirds?
    Mr. Bartlett. Yes, sir.
    Senator Sarbanes. And are all of the largest institutions 
members of the Roundtable?
    Mr. Bartlett. Not all, no, sir; most but not all.
    Senator Sarbanes. But as you say, two-thirds above $2.5 
billion. But presumably, at the higher sizes, you have a larger 
percentage, is that correct, of the banks?
    Mr. Bartlett. Yes, sir, yes, sir; it is a voluntary 
association, so people choose to join.
    Senator Sarbanes. Let me put it this way: The 10 largest 
institutions, are they all members of the Roundtable?
    Mr. Bartlett. I think, as I recall, 7 or 8 are. I think a 
couple of them are not.
    Senator Sarbanes. Mr. Chairman, could I ask just one more 
question?
    Chairman Shelby. Go ahead.
    Senator Sarbanes. I wanted to ask about this insurance to 
get some sense of it. On this optional Federal charter would 
regulate the insurance companies that chose an optional Federal 
charter?
    Mr. Bartlett. The Congress would choose a regulator. There 
are various varieties. We prefer what is known as the OCC model 
or an independent regulatory agency like the OCC.
    Senator Sarbanes. A Federal regulator.
    Mr. Bartlett. A Federal regulator.
    Senator Sarbanes. And how would that regulator get its 
budget?
    Mr. Bartlett. From the industry, I presume, similar to the 
OCC. We think that there is a good model of the dual banking 
system that should be replicated in the insurance system.
    Senator Sarbanes. And if you chose an optional Federal 
charter, by making that choice, you could remove yourself from 
State insurance regulation, would that be correct? And then be 
subject only to whatever Federal insurance regulations?
    Mr. Bartlett. That is correct, yes, sir.
    Senator Sarbanes. And the institution would have the choice 
to pick that; is that correct?
    Mr. Bartlett. Comparable to the dual banking system.
    Senator Sarbanes. Mr. Tubertini and Mr. Plunkett, what is 
your view of that proposed arrangement?
    Mr. Tubertini. Mr. Sarbanes, we are opposed to any type of 
Federal regulation of insurance. Regulation of insurance, by 
its nature, protects the consumer. And consumer protection 
becomes much more difficult at a Federal level than it does at 
a local level, a State level. The State regulation of insurance 
has worked for 150 years.
    There are certainly needs for reforms. GLBA provided a 
number of those reforms. We believe that instead of a Federal 
regulator of insurance that the Congress can take additional 
action, following in the footsteps of the NARAB provisions of 
GLBA, to further reform State insurance regulation, provide for 
the consumers in a way that no Federal regulation can do.
    Senator Sarbanes. Mr. Plunkett.
    Mr. Plunkett. Senator, we are strongly opposed to the 
optional Federal charter proposal for one significant reason: 
If you give the regulated a choice of regulator, you are going 
to end up with State and Federal officials competing to lower 
standards, and that will absolutely harm consumers.
    We look at the dual banking system, and we see a cautionary 
tale on this point. To some extent, we have seen competition 
between State and Federal regulators to lower standards to 
govern more of the regulated, and that dynamic in insurance 
could be a disaster.
    Senator Sarbanes. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Crapo.

               STATEMENT OF SENATOR MICHAEL CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman.
    I want to use the time that I have for questions to address 
the issue of the different treatment of thrifts and banks under 
the Investment Advisors Act and the Securities and Exchange 
Act, and I suppose that my questions would be most directed to 
those that Senator Sarbanes just discussed about your 
membership, the banking groups here, but I would be glad to 
hear from any members of the panel.
    As you know, the Investment Advisors Act and the Securities 
and Exchange Act of 1934 together created different treatment 
for thrifts as opposed to banks with regard to the statutory 
investment advisor and broker-dealer registration requirements. 
And there is a proposal to legislatively eliminate that 
difference.
    In response to that proposal, the SEC has now put out a 
proposed rule that is under discussion and which supposedly 
would eliminate the need for legislative action. And I would 
just like to know, frankly, what the opinion of those here on 
the panel is with regard to whether we need to move 
legislatively or whether the SEC proposal is adequate.
    Mr. McLaughlin.
    Mr. McLaughlin. Senator, I would be glad to respond. In 
fact, we have, if we have not filed it yet, we are filing today 
a letter addressing that very SEC proposal. We think it does 
not go nearly far enough. We think that there should be full 
competitive equity and parity between savings associations and 
commercial banks with respect to both the broker-dealer rules 
and the investment advisor rules. We have testified to that 
effect on the House side in the reg burden release bill, there 
are provisions there, and we understand that they are over here 
in the Senate now.
    Senator Crapo. And the SEC proposal does not----
    Mr. McLaughlin. The SEC proposal provides some relief, but 
it goes probably halfway if that.
    Senator Crapo. All right; thank you.
    Mr. Doherty or Ms. Jorde.
    Mr. Doherty. I would agree with the analogy that it goes 
less than halfway. My comment would be it is half a loaf. It 
has to go further.
    Senator Crapo. All right.
    Ms. Jorde. And I think the ICBA also agrees that there 
should be competitive equity between the banks and thrifts and 
that the SEC proposal that came out also needs to be looked at 
in terms of making it less complex, if possible.
    Senator Crapo. Thank you.
    Mr. Bartlett, did you want to comment on this?
    Mr. Bartlett. I think that the SEC proposal is a good 
start, but it does not go far enough, and it is similar to the 
other comments.
    Senator Crapo. Thank you.
    Any other members of the panel want to weigh in on this 
issue?
    Let me just ask if there is any disagreement on the panel 
with the apparently unanimous position of those who have spoken 
up about the fact that this issue needs to be addressed 
legislatively.
    All right; thank you.
    I would like to also go to the question that Senator 
Sarbanes also just talked about with regard to whether the 
Gramm-Leach-Bliley provisions for the insurance marketplace 
under the NARAB subtitle were adequate. Mr. Tubertini, you 
indicated that you felt significant progress has been made. We 
still have not got all the States into a uniform system, but 
could you elaborate a little bit about your position that we do 
not need to go further with a uniform national standard at this 
point?
    Mr. Tubertini. Senator, we believe that only Congress has 
the ability to set standards that the States will then follow. 
We have to admit, certainly, that the National Association of 
Insurance Commissioners has been trying to create for many 
years a set of standards for total reciprocity or uniformity in 
licensing and have not been able to do it. And when you are 
dealing with 50 different legislatures, I do not know if you 
would ever be able to do it.
    However, if the next step is taken in creating a set of 
standards that then every State would adopt, continue to be 
regulated by the commissioners in each local jurisdiction, 
then, we would be able to achieve the objectives that we are 
trying to achieve and, frankly, be able to achieve most of the 
objectives that are outlined in some of the optional Federal 
chartering proposals.
    Senator Crapo. You are not opposed to a national standard 
as much as the optional Federal charter.
    Mr. Tubertini. That is correct. We believe that creating a 
new Federal regulatory system would be the equivalent of 
throwing the baby out with the bath water. We just need to make 
the necessary changes to reach the objectives that we all 
desire.
    Senator Crapo. And Mr. Bartlett, you have a different 
position on that.
    Mr. Bartlett. Mr. Chairman, I have to tell you that among 
my 100 companies, of those that are involved in the insurance 
marketplace, which is most, they believe that the current 
system is an absolutely chaotic disaster that is a disaster for 
their customers, and they see the higher costs, the higher 
confusion, and the inability of their customers to buy products 
as they will in a number of areas.
    First, insurance is a financial product. It is a financial 
product that is similar to other kinds of financial products. 
Sometimes, the difference between an insurance and something 
that is not an insurance product is almost identical: Annuities 
and mutual funds, for example. And yet, an annuity product has 
to be rolled out and approved in 50 different States with 50 
different commissioners, 50 different sets of rules, sometimes 
as long as 2, 3, or 4 years to get approval, whereas a mutual 
fund is essentially at the national level.
    Second, many of the companies offer the products on an 
interstate basis. They can better serve their customers 
interstate, as many do now, but they have to do it one State at 
a time. And many of the customers are buying insurance products 
on an interstate basis, both commercial and consumers, and are 
denied the right to do so.
    And then last is on a global competitive basis, Mr. 
Chairman. We hear from our Europeans colleagues particularly 
that this is the number one trade barrier that the United 
States puts up that denies their entry into the marketplace. So 
we think it is a disaster, and it can be solved by a similar 
system to the dual banking system that would be an optional 
Federal charter or a dual insurance charter system.
    Senator Crapo. Mr. Chairman, I see that I have stirred a 
little thing up here. There are several more who want to 
respond. May I have time to let them do so?
    Chairman Shelby. Okay; yes, sir.
    Senator Crapo. Mr. McLaughlin.
    Mr. McLaughlin. Senator, I will be brief. I just want to 
point out that there is a huge market. The State of California 
is not a part of the NARAB process, and that is a market that 
just is not available; NARAB is not working. That is one 
example, because that consists of a huge potential market for 
the companies that want to market insurance products 
interstate.
    Senator Crapo. Mr. Plunkett.
    Mr. Plunkett. Senator, you have already heard our opinion 
on the national charter approach. Let me turn your attention to 
something else regarding national uniformity: consumer groups 
are not opposed to uniform standards at the State level, with 
Congress pushing the States to try to come up with more 
uniformity. If inefficiencies exist, consumers pay for that.
    What we are concerned about and oppose are weak uniform 
standards, and let me just flag something for the entire 
Committee. Over on the House side, we have seen a proposal 
circulating for so-called ``Federal tools,'' that takes the 
``pragmatic middle ground approach'' of actually preempting all 
States, and there are a number of them, that regulate insurance 
rates.
    Now, that is not an appropriate role for the Federal 
Government to be playing. Some of you would oppose rate 
regulation; some of you would support it. Let us put that aside 
and say that after over 100 years of State insurance 
regulation, Congress should not be preempting, blocking 
individual States from the approach they have chosen on 
regulating insurance rates.
    Senator Crapo. Mr. Taylor.
    Mr. Taylor. Senator Crapo, thank you.
    A related issue but something that was very much discussed 
in the original passage of GLBA was trying to get a handle on 
the picture of where exactly these insurance companies are 
making their policies and products available. You have heard 
the assertion from Mr. Bartlett and others that it is very 
fluid; that it happens across State lines and so on. And we 
have always had the concern through our experience that these 
policies, whether it is various forms of insurance; whether it 
is for commercial or personal that it disproportionately is not 
offered in the same fair and equitable manner to working class 
Americans as well as people of color.
    And so, we asked that GLBA include a provision that at 
least allows us to get a handle on the picture, what is 
happening out there, because it does affect the ability of 
people to own homes, people to start or expand businesses. 
Unfortunately, we were unsuccessful on that. Perhaps you would 
reconsider it this time. There are some States, the Great State 
of Massachusetts; I have a bias, obviously, if you cannot tell 
from my accent, that they have this coverage. The insurance 
companies have to report; they have learned to live with it, 
and it has been very helpful. They also, by the way, have CRA 
coverage for credit unions, another good thing happening in 
that State.
    And it would be great if this Committee would really 
consider, even if it was only temporarily, trying to get a 
handle on what is the impact and the application of these 
policies and whether or not it is occurring cross the board in 
a fair and equitable marketing manner.
    Senator Crapo. Thank you, and I thank the Chairman for 
indulging me on that.
    Chairman Shelby. Thank you, Senator Crapo.
    Senator Bennett.

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Thank you, Mr. Chairman.
    Following a little Senator Crapo's methodology, trying to 
determine where there is some degree of unanimity here, I have 
heard two things asked for, and I did not hear any objections, 
and so, now, we will give people some of the opportunity to 
object if, in fact, they do.
    First, there should be a national standard on privacy. 
Several said that there should be. I did not hear anybody say 
that there should not be. Could we get a response to that? Does 
everybody agree that there should be a national standard on 
privacy?
    Mr. Judge. Absolutely.
    Mr. Doherty. Absolutely.
    Mr. Plunkett. Senator, we have a different take.
    Senator Bennett. Somehow, I expected you might.
    [Laughter.]
    Mr. Plunkett. It is similar to our rather pragmatic 
approach on insurance. I mean, there are advantages and 
disadvantages to national regulation versus State regulation of 
insurance. Same on privacy. What we are concerned about is a 
weak national privacy standard, and that is what we have now. 
And the fact is that Section 507 of the Gramm-Leach-Bliley Act 
permits the States to fill in the gaps in the national privacy 
standard.
    In response, what we are seeing are some proposals to 
eliminate that; let us eliminate the ability of the States to 
fill in the gaps, to improve what is a very weak national 
standard and then let the existing standard or something 
similar that is fairly weak stand. And that is the approach 
that we would oppose.
    Senator Bennett. Thank you.
    Next, I heard several people say the sunset should 
disappear. Some are nodding yes. Now, once again, is there 
anybody who thinks that that is not good policy?
    If we were to eliminate the sunset, that would be 
relatively noncontroversial, and if I listen to you, a 
beneficial thing that would happen.
    Mr. Judge. We would support that, yes.
    Senator Bennett. Okay; we are getting some degree of 
unanimity here.
    Mr. Plunkett, you talked about the few consumers who have 
opted out, and you blamed the complexity of opting out for that 
fact and said if it were much easier to opt out, a whole lot 
more would. Do you have any evidence or empirical studies that 
indicate that the reason people are not opting out is because 
the Government created barriers? Or maybe the reason that they 
are not opting out is that they do not want out?
    Mr. Plunkett. We have a readability study done by the 
Privacy Rights Clearing Center that determined that the reading 
level in the privacy notices was close to graduate level as 
opposed to what is normally determined to be the appropriate 
reading level for these kinds of things which is at about age 
12.
    Senator Bennett. You are singing Ms. Jorde's song a little 
bit, in that she is complaining that the reading level for some 
of the things that she has to tell her customers is absolutely 
impenetrable. And of course, that goes with Federal service. I 
think that kind of is part of the entrance exam when you become 
a bureaucrat is that you have to be able to speak 
unintelligibly.
    I get in trouble with that, but I made the point in here 
that one of the best ways to hide something is to completely 
surround it with impenetrable verbiage, and then, no one 
understands what you are talking about. So, I will grant you 
that, but that is not my question. Do you have any studies or 
empirical evidence that would suggest that if the ability to go 
through the process were much clearer that a much higher 
percentage of consumers would, in fact, opt out?
    Mr. Plunkett. We do not have a study, Senator. What we do 
have is a great deal of anecdotal evidence from talking to 
consumers, from talking to bankers, frankly, many of whom are 
quite critical of the privacy notices, from talking to others 
who all are consistent in saying two things: First, if you go 
the opt out approach versus the opt in approach, by definition, 
you will have fewer people choosing to protect their privacy, 
including some, we can agree on some, who would like to. Maybe 
it is not at the top of their priority list, but they would 
like to.
    You compound that problem with very difficult to read 
privacy notices, and you have even fewer. The estimates I have 
heard overall of people opting out are 5 to 10 percent. That is 
extremely low, and we know from surveys of the American public 
on privacy issues that it is a popular issue. We would assume 
that many more people would opt out or choose privacy if there 
were an opt in approach, if the notices were easier to read, 
and if they had the opt in approach available to them.
    Senator Bennett. We have had the opt out/opt in debate in 
this Committee for a number of years, and I imagine we will 
have for a number more.
    Ms. Jorde, you want to comment.
    Ms. Jorde. I was just going to mention, though, that I 
think it would be interesting to look at the evidence as to how 
many banks or financial institutions are actually sharing any 
financial information. I think if we were able to eliminate the 
disclosure requirements for banks that are not sharing, those 
that are would be read, and now, we all know that we are 
getting privacy notices annually from our banks or insurance 
companies or insurance agencies, and it is just a statement 
stuffer, and it gets thrown out. It is very long, and the 
customer does not read it.
    If the financial institution is not sharing information, 
then, we do not believe that they should need to send that 
privacy notice. If the customer knows that if they get a 
notice, that there is something to look at, we think it would 
be far more effective and efficient.
    Senator Bennett. Well, it is said, the old adage is that 
the best place to hide a leaf is on the floor of the forest in 
plain sight, surrounded by all the other leaves. And that is 
the phenomenon that you are seeing here.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. What was that? The best place to hide a 
leaf ? On the floor of the forest?
    Senator Bennett. The best place to hide a leaf is on the 
floor of the forest, surrounded by all the other leaves.
    Senator Carper. That is great. I pick up some new material 
here. I always like to say if a tree falls in the forest, and 
there is no one there to hear it, is there really----
    Senator Bennett. I am not going there.
    [Laughter.]
    Senator Carper. Now, I can switch off. I can use yours, and 
I will use mine some of the time.
    Some familiar faces out here, Mr. Chairman. In fact, I 
think one fellow maybe you and I once served with on the House 
Banking Committee a fellow from down around Texas. It is nice 
to see Steve Bartlett, who had the best staff, I think, of any 
Committee in that House, and one of the great staff people 
there was Steve Judge. Steve, it is nice of you to be here 
today.
    I want to go back and just pick up on a point that--is it 
Jorde? Ms. Jorde?
    Ms. Jorde. Jorde.
    Senator Carper. Jorde? Ms. Jorde was making and try to tie 
it in with what Mr. Plunkett was saying. Go back and make your 
point for us again about who should be required to send out the 
notices. Just go back and make that. I think that is a point 
worth revisiting. I do not want this to be a leaf in the forest 
that nobody notices.
    Ms. Jorde. We believe that financial institutions that are 
not sharing financial information on their customers, have 
never and do not intend to, should not have to send a notice to 
their customer that they do not share their financial 
information. I have been a banker for 25 years; we have never 
shared financial information. Suddenly my customers are getting 
notices annually that we do not share customer information. And 
they are confused by it, because suddenly, they think we are 
sharing information, or maybe we did.
    So if you take some of those leaves out of the forest, the 
ones that are left are really going to be focused upon by those 
customers. They may be able to make better-informed decisions 
because of something that they have not just been getting a 
blizzard full of paperwork throughout the year.
    Mr. Plunkett. Senator, could I offer some thoughts on that?
    Senator Carper. Well, I was going to ask you to, if you 
would, so go right ahead, please.
    Mr. Plunkett. I have no doubt that the vast majority of Ms. 
Jorde's members are honest, and if they say they are not 
sharing information, they are not sharing information. Let me 
point out the obvious, though, that of course, the consumer 
groups are most concerned about people who are sharing 
information and that their consumers know about that and have 
an opportunity to prohibit that, stop it.
    But, of course, the obvious issue is enforcement. And it 
strikes me as an enforcement nightmare. The FTC and State 
enforcement authorities have dealt with a number of cases where 
companies have said that they are not sharing information, and 
then, they do. So it strikes me as a very difficult thing to 
assure, given that we have some track record of some companies 
promising no sharing and then doing it.
    Senator Carper. Let me just ask the panel: Would there be 
some way of, if a company was asserting that they are not 
sharing information, a financial services company, and then, 
they turned around and did that, would there be some way to 
pick that up in a regulatory check?
    Mr. McLaughlin. Obviously, nobody on this panel has--with 
the exception of the two bankers down at the end--have ever 
undergone a bank regulatory agency compliance exam, where they 
check for everything and anything. I think the bankers on our 
panel would attest to that. The examiners would pick it up, 
believe me, and they would then take enforcement action. Bank 
compliance exams are incredibly thorough, and incredibly 
detailed.
    Ms. Jorde. My bank is scheduled for an FDIC compliance exam 
at the end of August, and just the preexamination process--and 
again, I am a $37 million bank in North Dakota--the preexam-
ination process consists of 17 typewritten pages of information 
that is requested that we send to the examiners in advance of 
them coming in to do the bank examination. So it is a highly 
regulated process, and the disclosure requirements that we have 
continued to have burdened upon us in the last few years are 
just overwhelming, and I believe it is truly driving 
consolidation of the community banking industry.
    Senator Carper. How many pages?
    Ms. Jorde. Seventeen.
    Senator Carper. Typed?
    Ms. Jorde. Yes, typed.
    Senator Carper. Small type?
    [Laughter.]
    Senator Carper. Ten point?
    Ms. Jorde. About six point.
    [Laughter.]
    Senator Carper. That is pretty small. Pretty small.
    Go ahead.
    Mr. Doherty. I would agree with those comments. I think 
that with what has been happening in this area with the 
compliance, I think that the regulators would find, if someone 
made the statement that they were not sharing, that they would 
find it if you were sharing.
    And I agree with my colleague down there about the 
examinations. They are very thorough. I have gone through them 
for 38 years, so I know what they are like. They were not all 
compliance all the time, but they are getting more and more 
difficult as each day goes by.
    Senator Carper. Okay; anybody else here who has not had a 
chance to say anything?
    Mr. Bartlett.
    Mr. Bartlett. Senator, I would just suggest that Ms. 
Jorde's solution is a good step, but a better step is to solve 
the underlying problem, and that would be to require that the 
institution tell their customers what their policies are in 
this information sharing when a new account is opened; to 
provide it in a short form that is authorized by the regulators 
and to give a safe harbor so that companies can depend upon 
that form as being reliable.
    That solves the problem across the board as opposed to 
trying to pick and choose as to who provides notices and who 
does not.
    Senator Carper. I think Mr. Taylor had his hand up and then 
Mr. McLaughlin.
    Mr. Taylor. Senator Carper----
    Senator Carper. Mr. Taylor, where are you from?
    Mr. Taylor. Boston, Massachusetts.
    Senator Carper. Would you say my name one more time?
    Mr. Taylor. Carper.
    Senator Carper. Thank you.
    [Laughter.]
    It rhymes with pucker. I have been called a lot worse.
    [Laughter.]
    Mr. Taylor. I think I did sit with a panel of lenders very 
recently on the House side, and they talked a lot about the 
regulatory burden, and one after one mentioned the increased 
burden associated with the USA PATRIOT Act and the Bank Secrecy 
Act, and I have also made a recommendation to Mr. Bennett as 
well as the rest of the panel which I also heard unanimity of 
support that the sunshine regulation, not the sunset but the 
sunshine regulation that requires these banks to issue all 
these reports--and I am sure Ms. Jorde has relationships with 
community groups in her community that she works with, small, 
but maybe there are not a lot of community organizations.
    But for most banks and lenders, they have to issue these 
reports that end up in some vault somewhere gathering dust and 
piling up and are of no apparent benefit to anybody. And so, I 
have made a recommendation to you to help my brothers and 
sisters in the banking industry reduce their regulatory burden. 
One is to eliminate this sunshine reporting requirement but 
also look at just how effective and how useful the Bank Secrecy 
and the Bank Privacy Acts have been.
    Senator Carper. All right; thank you.
    Mr. McLaughlin. I just wanted to add to Mr. Bartlett's 
comment. It seems to me that it would be sensible and also 
environmentally sensitive to not require continued mailings, 
especially the privacy notices, especially when there has been 
no change in policy from year to year or the bank does not 
share information. That is just plain overkill.
    Senator Carper. All right.
    Mr. Judge, last word.
    Mr. Judge. We think it would make a lot of sense to make 
those privacy notices understandable, readable; it would save 
money, reduce confusion, and it is something that should be 
done.
    Senator Carper. It is a good benediction. Thank you.
    Chairman Shelby. Senator Sununu.

              STATEMENT OF SENATOR JOHN E. SUNUNU

    Senator Sununu. Thank you, Mr. Chairman.
    I would like to go back to some of the questions and 
responses that were offered by Senator Crapo, and if I 
transcribed your responses correctly, Mr. Tubertini, you said 
that your association was against any Federal regulation of 
insurance but for enacting national standards.
    Mr. Plunkett, you said you are not against tough standards, 
but you are against an optional charter that would establish a 
Federal regulator to establish national standards.
    And Mr. Bartlett, you said that you are for a Federal 
charter that would address a lot of the inefficiencies in the 
insurance system that you talked about in your testimony and 
your responses.
    My question for the panel is: Do any of you believe that 
these problems or concerns with the current affairs of 
insurance regulation could be dealt with without some Federal 
action or legislation? Who would like to begin?
    Mr. Bartlett. Absolutely not.
    Senator Sununu. No?
    Mr. Bartlett. Could not be done.
    Mr. McLaughlin. If any of us can picture the day when 50 
different State regulators will be able to persuade 50 
different State legislatures to grant the authority and then 
reach an agreement as to what that authority is, maybe. I do 
not believe that that is going to happen in my lifetime.
    Mr. Plunkett. I will just add that if you define the 
problem as merely a lack of uniformity, then, the answer would 
probably be no. You could not do that without the Federal 
Government pushing the States a little.
    We define the problem differently. We see a number of 
States that have gotten very weak in providing consumer 
protections to insurance consumers. So we feel like part of the 
discussion here has to be the quality of protection that is 
offered, not just the uniformity.
    Senator Sununu. And to that point, I think there was some 
discussion of international competition and other issues that I 
think moved beyond the issue of just uniformity, but your point 
about quality is very well-taken.
    Anyone else? Mr. Doherty.
    Mr. Doherty. In one of my other lives, in one of the other 
hats that I wear, I am a board member of an insurance company, 
and we are a New York State-chartered insurance company, and we 
want to go nationwide. And we have gone through the process for 
the last 3 years of getting the approvals from all 48--the 
lower States, 48 States, and it took us 4 years to get 40 
States, and we are still working on the other 8.
    So it does take a very long time to get it done. And then, 
when you add a language component into it to have a Spanish 
component, that makes it even more difficult.
    Mr. Tubertini. Senator, to put a positive spin on it, I 
think that the enactment of Federal regulation that sets a set 
of standards, Federal tools, if you will, will accomplish the 
objectives that we talked about here today.
    Senator Sununu. With regard to that proposal that you and 
the independent agents have advocated, when you talk about 
national standards, you are suggesting standards that would 
preempt States in those areas, correct?
    Mr. Bartlett. That is correct.
    Senator Sununu. Now, it would seem to me that an argument 
could be made that an optional charter system is more in 
keeping with the idea of choice and not completely preempting 
States, because it would leave a State regulatory system 
intact. Why do you see that as an inferior alternative to 
completely preempting States in a number of areas?
    Mr. Tubertini. Because, Senator, I would have to disagree 
that it would not leave the State regulatory system intact. You 
would have a confusing set of standards for most consumers, and 
in different areas of the insurance industry, what is called, 
what has been referred to as an optional Federal charter is not 
optional. From my position, for example, as an independent 
agent, the optional Federal charter proposals are not optional 
at all for me.
    I would have to be licensed to do business on a Federal 
level with those who choose to be federally licensed, I would 
have to be licensed on a State level with those who choose to 
be State-regulated and add an entire level of bureaucracy and 
licensing problems to my part of the industry.
    Senator Sununu. Well, let us talk more about that. One area 
where there was an attempt to establish uniform standards is in 
the area of licensing with the NARAB provisions of Gramm-Leach-
Bliley. Have they been successful? Has that approach been 
successful? And I would certainly like to hear from Mr. 
McLaughlin on this as well.
    Mr. Tubertini. Are you asking me next?
    Senator Sununu. Yes.
    Mr. Tubertini. Yes, it has been successful in that a limit 
was set in the number of States, the majority of States, which 
I believe was interpreted at 29.
    Senator Sununu. How many States are yet to adopt the 
licensing provisions of Gramm-Leach-Bliley?
    Mr. Tubertini. The last I was told, Senator, that there 
were, I think, 47 States that had adopted regulatory reform, 
and 40 of those States have been certified by the NAIC as 
compliant with the NARAB provisions.
    Senator Sununu. Mr. McLaughlin.
    Mr. McLaughlin. I think that number is closer to 40, and 
obviously, that is after 5 years, not the 3-year goal set in 
Gramm-Leach-Bliley. And there is a huge State, California, 
which is not part of it. And if you are an insurance company 
that wants to market a product, that is a big market to be out 
of.
    Senator Sununu. Mr. Bartlett, we have not seen a great 
number of financial service holding companies form since Gramm-
Leach-Bliley was enacted. What are the key reasons for the slow 
pace of creating a truly integrated marketplace?
    Mr. Bartlett. The key reason in my opinion, the principal 
reason, has been the financial activities that were sunsetted, 
so that a company that is not a bank holding company has a set 
of activities that they can participate in, but if they become 
a financial holding company, then, those activities are 
sunsetted, and they cannot continue them after 5 years.
    So they give up a whole set of activities, and it is just a 
glaring reason why a company would not choose to do that. I 
think that has been the principal reason. There have been 
others, mostly marketplace-driven; just companies make their 
choices as to what kind of charter that they want, but I think 
that is the principal reason.
    Senator Sununu. Yes, Ms. Jorde.
    Ms. Jorde. I would just say that from the standpoint of the 
community banks, they were really able to do a lot of the 
activities that were authorized under Gramm-Leach-Bliley. We 
have been selling insurance in our bank since 1974. We have 
been selling investments through a third-party brokerage since 
1987. So we were already able to do that.
    What we got out of Gramm-Leach-Bliley, though, was 
tremendous disclosure regulations that had not been there in 
the past. And so now, as I alluded in my testimony, for 
example, with insurance, if a customer calls us on the phone, 
and they have a question about auto insurance, the first thing 
we have to do is say, well, I am obligated to inform you that 
this is not a deposit product. It is not insured by the FDIC. 
It may go down in value.
    And then, we have to mail the disclosure to them, ask them 
to sign it and send it back to us so we hold it in their file, 
and they may not even buy the insurance from us. So the 
protections that were put in place to, you know, prevent some 
self-dealing and cross-dealing really have just resulted in an 
exorbitant amount of disclosure requirements from banks that 
have very successfully and safely been providing these products 
all along.
    Mr. Plunkett. Senator, I understand that this is a burden, 
but the question is whether it is a necessary burden, this kind 
of disclosure. If you recall, leading up to Gramm-Leach-Bliley, 
we had a situation, for example, with NationsBank and 
NationsSecurities. And NationsSecurities was peddling a very, 
very risky derivative product to NationsBank customers. And the 
majority of them had bought very, as you know, conservative 
certificates of deposit.
    So these were not at all the kind of consumers that should 
have been approached on a derivative product. Some of them 
bought them; some of them lost portions of their life savings. 
Those were the kinds of problems that led to these types of 
disclosures, and the question is whether they are necessary, 
and we think telling somebody that it is not a depository 
product is a necessary disclosure.
    Senator Sununu. Ms. Jorde, do you want to respond to that 
specific example?
    Ms. Jorde. I think we have to give our customers more 
credit. They understand that car insurance is not a deposit. I 
mean, they are smarter than that, you know. And so, when we 
tell them that it may go down in value, they do not understand 
that, and we have to say, well, you know, they messed up a 
little bit in the legislation, and they did not really define 
what insurance is.
    True, if it was an annuity product, that might be an 
adequate disclosure. Our insurance agency does not even sell 
annuities. We only sell property and casualty and life 
insurance and that thing. And we have 1,500 insurance 
customers. So we just have created this blizzard of paperwork 
and killed a lot of trees in the process.
    Senator Sununu. And a lot of leaves.
    Ms. Jorde. In the forest.
    Senator Sununu. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. I am tempted to ask the panel the 
question whether you believe in the Federal system of 
Government.
    [Laughter.]
    I mean, is there indeed a role for the States? And I have 
to be very candid with you: My perception is that those who are 
pushing for the States not to have a role are assuming that the 
Federal substantive standard will be weak and therefore 
accommodate their interests.
    And of course, that may or may not be the case at a 
particular time, but I dare say I have the suspicion that if it 
were perceived that here in the Congress, if we went to a 
uniform Federal standard, it would be a very high and rigorous 
standard, that some at the table who now seem to favor that 
would say ``now, wait a second: We have a Federal system of 
Government in this country, and there is a role for the States 
to play.'' And I just throw that out.
    And I want to follow up on Senator Bennett's question: When 
you all accede to removing the sunset, what was it you 
understood you were acceding to? Or let me put the question 
this way: How many at the table do not believe there should be 
a separation between banking and commerce and that financial 
institutions should be free, in effect, to engage in commerce 
and commercial institutions to engage in banking?
    And we have had a line, generally speaking. We have tried 
to hold that line. I am sure the Federal Reserve would disagree 
with this, because they have been quite strong on this point, 
that we should maintain the separation between banking and 
commerce. And we have this small exception, this 
grandfathering, which there is an constantly effort to erode 
it.
    But how many at the table think we ought discard the old 
separation between banking and commerce? Mr. Bartlett.
    Mr. Bartlett. Senator, I believe that the marketplace 
should be regulated for safety and soundness and for consumer 
protection, but product allocation should be set by the 
marketplace, not by either State or Federal Governments.
    Senator Sarbanes. So you have no problem if a major 
commercial outfit, Wal-Mart, to take an example, establishes a 
Wal-Mart Bank; is that right?
    Mr. Bartlett. Mr. Chairman, virtually every supermarket in 
America has a bank within the supermarket.
    Senator Sarbanes. Yes, but it is not their bank.
    What about you, Mr. Doherty? What do you think about that?
    Mr. Doherty. I think that the savings and loan and the 
savings bank industry has had a long history with commercial 
owners. It has worked. The OTS has been working with us over a 
long period of time, and we have not had any safety and 
soundness issues on this issue.
    Back in the 1980's and 1990's, when the industry needed 
equity, they needed funding, the commercial firms came in and 
helped. So, I think it is a positive.
    Senator Sarbanes. Ms. Jorde.
    Ms. Jorde. I guess I do not agree at all. I think that 
there was a reason that the unitary thrift loophole was closed 
in Gramm-Leach-Bliley. There was a reason that the nonbank bank 
loophole was closed back in 1987. And I think that it makes a 
lot of sense to close the loophole right now on ILC's. And the 
world has changed.
    Senator Sarbanes. The ILC's? I understand that Merrill 
Lynch has an ILC with $60 billion in assets in it, right?
    Ms. Jorde. Yes, that is pretty big.
    Senator Sarbanes. And they sweep it in, and they get 
Federal deposit insurance coverage, if I am not mistaken; is 
that correct?
    Ms. Jorde. That is correct.
    Senator Sarbanes. I also understand that since the 
insurance fund does not need to be replenished, since it was 
built up by previous premium payments by other financial 
institutions that they do not pay anything into the deposit 
insurance fund, even though they are sweeping in tens and tens 
of billions of dollars; is that correct?
    Ms. Jorde. That is exactly correct.
    Senator Sarbanes. That does not sound very fair to me to 
the other financial institutions. It seems to me something of a 
free rider situation.
    Ms. Jorde. That is a very good term.
    Senator Sarbanes. All right.
    Mr. Plunkett. Senator, on your commerce and----
    Senator Sarbanes. I will come across. I am coming across, 
yes.
    [Laughter.]
    No problem. Just bide your time.
    [Laughter.]
    Mr. Plunkett.
    Ms. Jorde. Can I just follow up just to----
    Senator Sarbanes. I am sorry.
    Ms. Jorde. --just to finish?
    You know, Wal-Mart, and I hate to pick on poor Wal-Mart, 
but, you know----
    [Laughter.]
    Ms. Jorde. --they are kind of infamous for controlling the 
supplier. And when Wal-Mart has a bank, or if they had a bank, 
I think that it would be pretty reasonable to assume that they 
would control the bank. And when you have a commercial firm 
like Wal-Mart, the largest retailer company in the world, 
controlling a financial institution, you deal with a lot of 
issues regarding impartial allocation of credit. If the local 
hardware store wants to go to the Wal-Mart bank to borrow 
money, why would Wal-Mart lend them a loan to expand their 
business when they would just as soon that their customers went 
into the department 27 to purchase hardware?
    So the world has changed, and I think now, more than ever, 
it makes sense to look at ILC's and how they have evolved and 
how they have grown to the $60 billion institutions and how 
they have exploited the deposit insurance fund. And again, I 
really urge you to look at passing deposit insurance reform 
which will begin to address the free rider issues.
    Senator Sarbanes. Mr. Plunkett.
    Mr. Plunkett. Senator, we strongly support maintaining 
policies separating commerce and banking. Let me just give you 
five names to help you figure out why: Sunbeam, Enron, 
WorldCom, Tyco, and Adelphia.
    Chairman Shelby. Say it slowly. We know who they are, but I 
want people to hear this.
    Mr. Plunkett. Sunbeam, Enron, WorldCom, Tyco, and Adelphia. 
If those companies had owned banks, not only would employees, 
investors, and the economy have suffered but taxpayers as well. 
On the ILC situation, not only have we had an exponential 
growth of ILC's, and we are starting to see them become a 
shadow banking system; but we also have the handful of States 
that are chartering these ILC's going out and saying hey, we do 
not regulate you all in the way that the Federal Reserve does 
under the Federal Bank Holding Company Act. We do not do it as 
well, essentially. Come to us.
    That is a very tricky situation, and I think it is 
incumbent on Congress to shut that loophole tight just as they 
did on the unitary thrift loophole.
    Senator Sarbanes. Mr. Tubertini.
    Mr. Tubertini. Well, Senator, since I am here representing 
the independent agents and brokers----
    Senator Sarbanes. You are going to take a pass, right?
    Mr. Tubertini. Well, as they would say in my area of the 
country and Senator Shelby's, we do not have a dog in that 
hunt, so we will pass.
    Chairman Shelby. Not today.
    Mr. Tubertini. Not today.
    Senator Sarbanes. Mr. Bartlett.
    Mr. Bartlett. We have a bunch of dogs in that hunt. It is a 
free-fire zone, so I am not sure where to start.
    First of all, we believe that the customers should make the 
decisions, and that is whether it is Wal-Mart or Merrill Lynch 
or others, the customers are the ones that ask for the products 
and the services. The hardware store has a gazillion outlets 
for their commercial loans of all kinds of financial 
institutions, and that hardware store should make the decision 
on where they want to get their loans.
    As far as Merrill Lynch, Merrill Lynch is regulated for 
safety and soundness. Their Merrill Lynch ILC is regulated for 
safety and soundness by the FDIC, as it should be, and Merrill 
Lynch would pay whatever deposit insurance premiums were 
required of them by the FDIC. And as far as safety and 
soundness, safety and soundness has been long-proven.
    Senator Sarbanes. The FDIC does not exercise holding 
company supervision the way the Federal Reserve does, and that 
is quite a difference. So, I do not think we should just gloss 
over that.
    Mr. Plunkett. Or look at capital standards for holding 
companies.
    Senator Sarbanes. Yes.
    Mr. McLaughlin.
    Mr. McLaughlin. Senator, the American Bankers Association 
continues to support the separation of commerce and banking, 
but what we are seeing is that the line between banking and 
finance is becoming blurred, witness the Gramm-Leach-Bliley Act 
itself. And as that happens, it becomes a little bit more 
difficult to figure out exactly where that line should be, but 
there are some obvious commerce activities that we believe 
should be kept separate from banking.
    Senator Sarbanes. Mr. Taylor.
    Mr. Taylor. NCRC continues to support a strong firewall 
between commerce and banking.
    Senator Sarbanes. Mr. Judge.
    Mr. Judge. We would support removal of the cap, and we do 
support the notion of increased synergy between banking and 
commerce. We think that the ILC's have proven to be a valuable 
tool for consumers as well as for companies. They have 
regulation from the FDIC, the States, and the State banking 
commissioner, and we think that they provide an important 
opportunity for investors and for companies.
    Senator Sarbanes. So when you say you want to remove the 
sunset, it would not be just to permit the continuation of the 
15 percent commercial basket; it would be to eliminate that 
limitation altogether; is that correct?
    Mr. Judge. We would first support removal of the sunset, 
but we would like to see removal of the entire--make it open 
for all and remove the 15 percent as well.
    Senator Sarbanes. Yes, but when you say remove the sunset, 
you encompass within it the removal of the 15 percent 
limitation?
    Mr. Judge. That is the second step, yes.
    Senator Sarbanes. Okay; thank you, Mr. Chairman.
    Chairman Shelby. Mr. Bartlett, would you tell us what 
companies would have to do in order to comply with the 
divestiture requirements in practical terms?
    Mr. Bartlett. The divestiture requirement, as a practical 
matter, means that a company would have to stop providing 
products or services to their customers the customers are 
trying to buy once the sunset comes into place. So if a 
company, for example, owns a financial adviser and also a 
travel agency, they would have to divest of one or the other.
    And yet, their customers may well want to engage in both. 
There are all kinds of other examples, but they would have to 
stop selling products to their customers that their customers 
want to buy.
    Senator Sarbanes. Do you encompass, as Mr. Judge does, in 
the elimination of the sunset the elimination of the 15 percent 
limitation?
    Mr. Bartlett. It is a two-step process. The elimination of 
the sunset is what is urgent to make the system work. On a 
theoretical basis, a long-term basis, I think eliminating the 
15 percent is also called for. They are two different 
decisions.
    Chairman Shelby. Mr. Bartlett, you represent mostly the 100 
largest financial institutions. And what you are saying is that 
you are for the blending of commerce and banking? In other 
words, if Wal-Mart wanted to start them a bank, and you can 
imagine how large they would be in just a little while or 
Target or any of these companies, Sears Roebuck, that is okay?
    Mr. Bartlett. We think that the ownership, the ownership of 
a financial services company is not the financial services 
company. The regulation for safety and soundness should be at 
the level of financial services, not with the ownership. And 
so, if a company, a Wal-Mart or a supermarket, owns another 
company that is financial services, the financial services 
should be regulated.
    Chairman Shelby. So if Wal-Mart was in the business, Kroger 
would be in the banking business, all of them would be in the 
banking business.
    Mr. Bartlett. Yes, sir, and those products are being 
offered today in Krogers and supermarkets all over the country 
because the customers want them, and they can be regulated for 
safety and soundness.
    Chairman Shelby. Well, that would change banking as we know 
it big time in this country, though, would it not, Ms. Jorde?
    Ms. Jorde. It certainly would. I mean, we have an ATM in 
the local convenience store in Cando, North Dakota also, but 
the convenience store does not own the bank. And there is a 
difference between providing financial products in a commercial 
entity and actually owning it. And I think if you look to the 
experience of Japan, where there has been cross-ownership of 
banking companies and commercial firms, the experience has not 
been good.
    Chairman Shelby. Right.
    Mr. Plunkett. Senator, could I point out that----
    Chairman Shelby. Go ahead, Mr. Plunkett.
    Mr. Plunkett. Thank you.
    I would like to point out here that the concern is not just 
commerce and banking but the ILC loophole being used by 
financial companies like those that own ILC's now, Merrill 
Lynch, for example, American Express, for example, as a way 
around the bank holding company regulatory structure, because 
they do not face the kind of bank holding company regulation 
through ownership of an ILC that they would if they exercised 
their right under Gramm-Leach-Bliley to buy a bank. That is the 
issue as well.
    And then, you get deposits drawn to this new system because 
they do not have to go through the regulatory structure under 
the Bank Holding Company Act, and then, it becomes a very large 
shadow system.
    Mr. Judge. Mr. Chairman, if I could: We cannot leave the 
impression that this is an unregulated financial institution. 
The ILC's existed prior to Gramm-Leach-Bliley. Gramm-Leach-
Bliley allowed them to continue. They are regulated by the 
State banking commissioner. They are looked at in terms of the 
relationship with the other company by the FDIC. And they are 
subject to, if they are part of a thrift charter, or if they 
are part of a securities firm, they are subject to either OTS 
or CSE regulation.
    It is not an unregulated entity. They pay deposit insurance 
at the same rate that everybody else does for the marginal 
increase in the deposits.
    Chairman Shelby. That is why we hold these hearings. We are 
dealing with very complex issues with great ramifications to 
our economy, to everybody in America. That is why we intend to 
continue to hold these oversight hearings and probably learn 
more about it.
    Senator Sarbanes, did you have any other questions?
    Senator Sarbanes. I cannot let Mr. Judge's final comment 
go--just to stand. Under the Bank Holding Company Act, from 
which the ILC's are exempt, if they were under the Act, the 
Federal Reserve would conduct examinations of the safety and 
soundness, not just of banks but of the parent or holding 
company of these banks. And the Bank Holding Company Act grants 
the Federal Reserve the power to place capital requirements and 
impose sanctions on the holding companies.
    The FDIC does not have those powers. So this is a very 
marked difference between the nature of the regulatory regime 
which I think has important implications for safety and 
soundness of the banking system.
    Mr. Judge. The regulatory system is different. I mean, the 
bank holding company----
    Senator Sarbanes. No doubt about it.
    Mr. Judge. --regulatory model is different than the FDIC.
    That does not mean that it is not as effective or does not 
protect the safety and soundness of the financial system as 
well in the FDIC----
    Senator Sarbanes. I mean, we can argue that. I feel very 
strongly that the authorities under the Bank Holding Company 
Act exercised by the Federal Reserve do provide greater 
protection for safety and soundness than what exists with 
respect to these institutions that are not subjected to those 
Bank Holding Company authorities.
    Mr. Plunkett. To protect taxpayers and deposits, you have 
to look at the holding company. You cannot just look at the 
institution itself. That is the only sure way to protect the 
depository system and taxpayers.
    Senator Sarbanes. In fact, even Chairman Powell, in 
testimony before this Committee--I said: Do you have regular 
annual examinations of the holding companies?
    He said: No, sir.
    I said: The process you follow does not begin to be the 
equivalent in terms of reviewing banking practices to the one 
that is followed by the Federal Reserve; is that correct?
    Mr. Powell. That is correct.
    Thank you, Mr. Chairman.
    Chairman Shelby. I thank all of you. This has been an 
interesting panel, and as I said, these are very complex 
issues.
    Senator Sarbanes. Could I just say to Ms. Jorde, you really 
gave meaning, I thought, today, in your testimony to Cando in 
North Dakota. Thank you very much, all of you for coming.
    Chairman Shelby. Thank you. The hearing is adjourned.
    [Whereupon, at 12:01 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]

                 PREPARED STATEMENT OF HARRY P. DOHERTY
                       Vice Chairman of the Board
                   Independence Community Bank Corp.
                First Vice Chairman, Board of Directors
                      America's Community Bankers
                             July 12, 2004

Introduction
    Chairman Shelby, Ranking Member Sarbanes, and Members of the 
Committee, I am Harry P. Doherty, Vice Chairman of the Board of 
Directors of Independence Community Bank Corp of Brooklyn, New York. 
Independence Community Bank is a New York State-chartered savings bank, 
operating within an OTS-regulated holding company. Independence 
Community Bank has more than $17 billion in assets, 121 branches and 
2,500 employees.
    I am here this morning representing America's Community Bankers. I 
am the First Vice Chairman of ACB's Board of Directors and will become 
Chairman in October. ACB is pleased to have this opportunity to 
participate in the Committee's review of the Gramm-Leach-Bliley Act.
    America's Community Bankers supported the passage of the Gramm-
Leach-Bliley Act in 1999 because, overall, it created new options for 
financial companies that wanted to offer diversified financial 
services. It also made positive changes in the capital structure and 
regulation of the Federal Home Loan Bank System and the law governing 
the FDIC's Savings Association Insurance Fund. However, the GLBA was in 
some ways a step backwards for an evolving financial services industry. 
After a lengthy and trying debate, it was decided in GLBA to undo 
provisions that had successfully permitted the creation of diversified 
financial services holding companies and to prohibit commercial firms 
from making any new acquisitions of savings associations. That change 
limited choices and holding company options for 
existing savings associations and deprived the financial services 
industry of an important source of capital, without any positive effect 
on the safety and soundness of the banking system.
    GLBA has not always been implemented in a way to maximize its 
potential for bringing financial services to consumers efficiently. For 
example, savings associations have yet to achieve regulatory parity 
with banks under the securities laws. Savings associations should be 
given the same regulatory treatment as banks when they engage in the 
same securities activities as banks. The lack of parity requires 
savings association customers to pay more for services only because of 
their financial institution's charter. While ACB continues to work 
through the SEC's regulatory process to achieve parity, ACB believes 
that only a statutory change can 
ensure parity for savings associations under the securities laws.
    Furthermore, the regulatory process established by GLBA to 
authorize new financial activities for banking organizations has not 
been allowed to work as intended, that is, through a notice and comment 
regulatory process that is based on safety and soundness considerations 
and administered by expert banking and financial regulators. As a 
result of a highly politicized campaign by the realtor community, the 
Treasury and Federal Reserve have been unable to finalize a rulemaking 
allowing national banks and financial holding companies to offer real 
estate services.
    GLBA created important new privacy rights for consumers and made 
other changes to consumer laws, such as the Community Reinvestment Act. 
However, some of these provisions created significant regulatory burden 
for all insured depository institutions without any benefit to 
consumers or safety and soundness. 
Congress and Federal regulators should act to reduce the unnecessary 
regulatory burdens that result from these provisions.
    I am pleased today to provide a more detailed discussion of ACB's 
views on these and other provisions in the GLBA.

Why Financial Modernization Was Important
    In 1999, as they do today, ACB's members supported providing 
financial organizations choices in charters and business models that 
reflected the reality of integration of the financial services 
industry. Provisions of the Glass-Steagall Act, enacted during the 
Depression, and the Bank Holding Company Act of 1956 stood as barriers 
to the full integration of the banking, securities, and insurance 
industry for those organizations that wanted to provide bank services 
through a bank charter, rather than a savings association charter. For 
years prior to 1999, securities, insurance, and nonfinancial holding 
companies had owned savings associations. These institutions had given 
their holding companies the ability to offer an important array of 
financial services to their customers.
    However, the Glass-Steagall Act hampered affiliations between 
commercial banks and bank holding companies, on one hand, and 
securities businesses, on the other. Although the Federal Reserve had 
loosened this restriction considerably, Glass-Stegall remained an 
anticompetitive anachronism. Bank holding companies could only acquire 
securities firms that fit within arbitrary size limits, while major 
securities firms were unable to acquire banks.
    In a similar vein, the Bank Holding Company Act did not permit 
banks to associate with insurance underwriters. Beyond that, the Bank 
Holding Company Act limited banks to affiliations with firms ``closely 
related'' to banking. Banks that wished to sell insurance products 
faced a patchwork of State and Federal statutes, as well as court and 
agency interpretations that sometimes permitted and sometimes 
prohibited insurance activities. Because ACB members firmly believed 
that each financial institution should have a full range of choices to 
meet the needs of their customers and communities, ACB urged Congress 
to expand choices for financial institutions by repealing these 
decades-old restrictions on affiliations.

The Pace of Financial Integration Has Been Slow
    GLBA repealed the restrictions on the integration of banking, 
insurance, and securities, and established a framework of functional 
regulation to supervise banking, insurance and securities activities of 
financial conglomerates. However, passage of the Act has had only a 
modest impact on the pace of integration of these activities.
    Federal Reserve Vice Chairman Ferguson reported in a speech last 
November that while there were about 600 financial holding companies at 
the end of 2002, less than one-third reported actually engaging in any 
new activities authorized by the GLBA. Eighty percent of those 
activities were insurance agency activities, probably the ``least new'' 
and least risky of the activities authorized by the new law. Only 40 
institutions reported broker-dealer assets, around 30 reported 
insurance underwriting assets, and less than 20 held significant 
merchant banking assets using GLBA authority. Ferguson concluded that 
even accounting for the size of some these financial holding companies, 
and the activities conducted in previously authorized section 20 
affiliates, no evidence exists that the overall market structure of the 
financial services industry has changed since the passage of the GLBA.
    One of the promises of the GLBA was the relatively easy 
authorization of new financial activities for banking organizations. 
GLBA established a joint Federal Reserve and Treasury regulatory 
process for the authorization of permissible new financial activities 
for banking organizations. The hope was that under this process, safety 
and soundness would be the dominant factor in the decisionmaking 
process. However, in the first real test of this authority, the two 
agencies have not been able to complete their work on a regulation that 
would authorize for national banks and financial holding companies an 
activity, which is already authorized for Federal savings associations 
and roughly half the State-chartered banks.
    In January 2001, the Treasury and the Federal Reserve issued a 
proposed regulation to permit national bank financial subsidiaries and 
financial holding companies to provide real estate brokerage and real 
estate management services to their customers. However, due to a highly 
politicized campaign by the realtor community, Treasury and the Federal 
Reserve have not been allowed to complete their work on the regulation. 
In this particular instance, considerations other than safety and 
soundness have held sway.

GLBA Restricted an Important Holding Company Option
    In 1999, we also urged Congress not to reduce choice by restricting 
the unitary savings and loan holding company. However, policymakers, 
ignoring the past success of the unitary savings and loan holding 
company, chose to reduce the benefits of the charter by prohibiting 
commercial (nonfinancial) firms from acquiring savings associations and 
grandfathered unitary savings and loan holding companies. Critics 
justified this limit by citing their concerns about mixing banking and 
commerce. However, unitary thrift holding companies did not then, and 
do not now, mix banking and commerce in any meaningful way. Savings 
associations are not permitted to lend to commercial affiliates under 
any circumstances. Savings associations' permissible commercial lending 
is strictly limited to 20 percent of assets, half of which must be 
small business loans. As a result of GLBA's restrictions on unitary 
savings and loan holding companies, the banking industry and its 
customers lost a potentially important source of capital.
    Nevertheless, the unitary savings and loan holding company 
structure remains an important choice for financial firms. The 
expertise of the OTS in regulating diversified holding companies is one 
reason that firms continue to consider this holding company option to 
be an efficient choice.

SEC ``Push-Out'' Rule and Parity for Savings Associations
    Before GLBA, banks--but not savings associations--enjoyed a blanket 
exemption from broker-dealer registration requirements for certain 
activities under the Securities Exchange Act of 1934 (Securities 
Exchange Act). The GLBA removed the blanket exemption and permitted 
banks to engage only in specified activities without having to register 
as a broker-dealer. All other broker-dealer activities must be ``pushed 
out'' to a registered broker-dealer affiliate. The SEC issued interim 
broker-dealer rules on May 11, 2001, to implement the new ``push-out'' 
requirements. As part of the broker-dealer ``push out'' rules, the SEC 
exercised its authority to include savings associations within the bank 
exemption. This interim rule treated savings associations the same as 
banks for the first time for purposes of broker-dealer registration. In 
the interim rule, the SEC recognized it would be wrong to continue 
disparate, anomalous treatment between savings associations and banks.
    The SEC postponed the effective date of the interim rule several 
times. It published proposed amendments to the interim dealer rule on 
October 20, 2002 and the final dealer rule on February 24, 2003. The 
proposed rules gave savings associations the same exemptions as banks. 
On June 2, 2004, the SEC approved a new proposed rule governing when a 
bank or thrift must register as a broker.
    Unlike the SEC's interim broker rule, the new proposal would no 
longer treat savings associations the same as banks in all respects. 
Although savings associations would be treated the same as banks for 
purposes of the 11 statutory activities they may engage in without 
registering as a broker with the SEC, as provided by the GLBA, three 
nonstatutory exemptions provided banks would not be extended to savings 
associations. The SEC describes the three nonstatutory exemptions as 
targeted exemptions that recognize the existing business practices of 
some banks. We understand that the SEC staff does not believe savings 
associations are engaged in the exempted securities activities and will 
only extend relief for savings associations to the securities 
activities they are currently performing. OTS General Counsel John 
Bowman recently testified that it appears that savings associations 
currently engage in some, if not all, of the securities activities 
covered by the three additional exemptions. The SEC's discriminatory 
approach makes no sense because the bank exemption applies to all 
banks--whether or not they are currently engaged in one of the exempted 
activities.
    ACB vigorously supports providing parity for savings associations 
with banks under the Securities Exchange Act. As more savings 
associations engage in trust activities, there is no substantive reason 
to subject them to different requirements. They should be subject to 
the same regulatory conditions as banks engaged in the same services. 
ACB intends to file comments with the SEC opposing the discriminatory 
treatment of savings associations. However, the latest proposal from 
the SEC demonstrates that a legislative change is needed in order to 
ensure parity for savings associations under the Securities Exchange 
Act.

FHLBank Modernization
    Title VI of GLBA made important and welcome changes to the laws 
governing the regulation, membership, and capital structure of the 
Federal Home Loan Bank System. One of the important changes involved 
the membership status of Federal savings banks and savings 
associations. Prior to the 1999 law, the institutions were 
required to be members of the Federal Home Loan Bank System, while 
other financial institutions' membership was voluntary. GLBA put 
Federal savings associations on the same footing as others by making 
their membership voluntary. Voluntary membership enhances the 
cooperative nature of the System and provides incentives to Federal 
Home Loan Banks to work for the benefit of their member-borrowers. 
After eliminating mandatory membership, GLBA added stability to the 
System's capital base by establishing a leverage and risk-based capital 
requirement for the FHLBanks and by creating ``permanent capital'' 
through a second class of stock with a 5-year ``put'' period.
    The conversion of the FHLBanks to this new capital system has been 
a complex process. Nevertheless, 9 of the 12 Banks have already 
implemented their capital plans, and the other 3 are in the process of 
implementation. However, regulatory proposals to require the Banks to 
register certain equity securities with the SEC could significantly 
complicate the implementation of the remaining capital plans.
    The GLBA also shifted much authority over the day-to-day operation 
of the FHLBanks from the Federal Housing Finance Board to the Banks 
themselves. The role of the Finance Board became more that of safety 
and soundness regulator 
rather than a co-equal or superior in the management of the system. For 
example, the GLBA gave the Finance Board new regulatory powers, such as 
the authority to issue cease-and-desist orders and to impose civil 
money penalties.
    Title VI of GLBA made an important change to the formula for the 
FHLBanks' contribution to the debt service of the REFCorp bonds, issued 
in 1989 to fund the resolution activities of the Resolution Trust 
Corporation. The GLBA formula requires the Banks to pay 20 percent of 
net income to REFCorp. The old formula, eliminated by GLBA, had the 
potential to create disincentives for FHLBanks to provide advances for 
SAIF-insured financial institutions.

Financial Privacy
    In Title V of GLBA, Congress passed the most sweeping law in 
American history to protect the privacy of consumers' financial 
information. Among other things, Title V requires each financial 
institution to disclose its privacy policy to the consumers and 
customers it serves and to restrict the sharing of nonpublic personal 
information sharing with most nonaffiliated third parties without first 
providing individuals the ability to prevent the exchange of their 
information (opt out). In addition to an initial disclosure of an 
institution's privacy policy and an initial opt out notice, GLBA 
requires a financial institution to provide annual disclosures and 
notices to its customers. GLBA required compliance with these 
provisions by July 1, 2001.
    At the end of 2001, ACB conducted a survey to measure the costs 
incurred to comply with GLBA's privacy policy and opt out disclosure 
requirements. The survey concluded that community banks spent a 
disproportionately higher amount than larger banks in providing 
customers copies of their privacy policies and opt-out disclosures. The 
survey also found that customers rarely exercised the option of 
prohibiting their bank from sharing customer financial information with 
nonaffiliated third parties, and that a majority of customers did not 
find the disclosures useful.
    The average compliance cost was $1.37 per customer, with total 
estimated compliance costs per bank ranging widely from as little as 
$1,000 to more than $2 million. The survey found the cost per customer 
averaged 27 cents at banks with assets of $10 billion or more, compared 
with per customer costs of $2.37 at banks with assets of less than $50 
million--almost nine times as much. As a percentage of noninterest 
expenses (salaries, employee benefits, occupancy costs, etc.), banks 
with less than $50 million in assets paid almost four times as much as 
the group of banks with assets of $10 billion or more. The survey 
interpreted these results to mean that larger banks with in-house legal 
and consulting staff were able to do most of the compliance work 
themselves, while smaller banks sought outside legal help and 
consultants.
    A 2002 survey found that while compliance costs were reduced 
significantly,--as initial policies and procedures developed in 2001 
have become institutionalized--they remained high. In 2002, ACB found 
that the estimated average compliance per customer was about $0.65 per 
customer. These costs are likely to increase.
    I will tell you, community banks guard their depositors' 
information like Fort Knox and have built their reputations on the 
trust of their customers that their bank will actually do so. Most 
community banks do not share information in any way whatsoever. Others 
share information only under very controlled circumstances when certain 
operational functions are outsourced to a vendor. We suggest that 
Congress eliminate annual privacy notices for banks that do not share 
information with nonaffiliated third parties. Banks with limited 
information sharing practices should be allowed to provide customers 
with an initial notice, and provide subsequent notices only when terms 
are modified.
    I am sure that you are all inundated by privacy statements each 
fall. I am equally confident that most or all of them remain unread. 
The complexity of the statements--which is dictated by GLBA and the 
implementing privacy regulations--certainly contributes to customers' 
disregard of the notices. ACB suggests that the 
regulators improve the quality and utility of GLBA privacy notices by 
developing an easy-to-understand, short-form notice, and that Congress 
provide statutory relief as necessary to accommodate these changes.

Information Security Program
    GLBA established new standards for ensuring the security and 
confidentiality of customer records and information. While the 
confidentiality and security of customer information has always been a 
cornerstone of community banking, the new GLBA information security 
standards brought increased focus to this issue.
    The GLBA information security standards require every bank to 
conduct a risk assessment to identify and assess risks that may 
threaten the security, confidentiality, or integrity of customer 
information. Each bank is then expected to implement a comprehensive 
written information security program appropriate to the size and 
complexity of the institution. Review of the information security 
program is a part of the regular safety and soundness examination of 
every depository institution.
    In response to recent high profile cases of compromised personal 
information such as credit and debit card numbers, Congress and the 
banking regulators have considered what additional measures may be 
necessary to protect consumer financial information. Community banks 
were not involved in any of the recent high profile cases of 
compromised consumer financial information. The development and 
maintenance of a formal information security program is a significant 
responsibility for all banks, but the burden is especially hard felt by 
small community banks. Congress and the regulators should carefully 
study the causes of these recent security breaches and avoid new 
information security requirements that unnecessarily increase the 
regulatory burden of the banking industry.

CRA Sunshine Law
    Section 711 of the GLBA enacted the so-called ``CRA Sunshine Law.'' 
Under the CRA Sunshine Law, parties to certain CRA-related agreements 
must make the agreements available to the public and the appropriate 
Federal banking agency. Section 711 applies to written contracts, 
arrangements, and understandings that are entered into by an insured 
depository institution or an affiliate and a nongovernmental entity or 
person; and which are entered into pursuant to or in connection with 
the fulfillment of CRA; and which call for an insured depository 
institution or affiliate to provide cash payments or other 
consideration with an aggregate value of more than $10,000 in any year, 
or loans with an aggregate value of more than $50,000 in any year. The 
law requires both depository institutions and nongovernmental groups 
(consumer groups) to make a report of all such agreements annually to 
the appropriate Federal banking agency.
    The regulations implementing the CRA Sunshine Law are overly broad 
and impose significant paperwork, regulatory and cost burdens on banks 
that far outweigh possible benefits. Community banks, especially small- 
and mid-sized banks, are forced to spend considerable resources 
complying with the disclosure, reporting and recordkeeping requirements 
associated with CRA-related agreements rather than doing what really 
matters--serving their communities with affordable credit and financial 
services. As a result of the CRA Sunshine Law and these regulations, 
fewer creative and innovative partnerships are formed because of 
competitive and privacy concerns. According to FDIC Vice Chairman 
Reich, both banks and consumer groups share these views. ACB believes 
that the CRA Sunshine Law should be repealed in order to reduce 
regulatory burden on depository institutions, consumer groups and 
Federal banking agencies.

Deposit Insurance Reform
    Finally, another important provision of GLBA eliminated the Savings 
Association Insurance Fund Special Reserve. The Deposit Insurance Funds 
Act of 1996 created a special reserve, effective as of January 1, 1999, 
of amounts in excess of the statutory designated reserve ratio of 1.25 
percent. As a result, nearly $1 billion was removed from the SAIF on 
January 1, 1999. On the effective date of GLBA, November 12, 1999, 
those funds were restored to the SAIF, which resulted in an increase in 
the SAIF reserve ratio from 1.29 to 1.43 percent. The elimination of 
the reserve reduced the risk that the SAIF reserve ratio would fall 
below 1.25 percent, which triggers an FDIC insurance assessment on 
SAIF-insured deposits. ACB strongly supported the elimination of this costly, unnecessary reserve.
    This change also established greater flexibility for the FDIC that 
improved the ability of the FDIC to manage the SAIF. ACB notes that 
many of the provisions currently being considered by the Committee to 
reform the Federal deposit insurance system similarly increase the 
FDIC's operating flexibility, and would contribute to the security of 
the Federal deposit insurance system. ACB urges the 
Committee to act on pending legislation as soon as possible.

Conclusion
    I wish to again express ACB's appreciation for this opportunity to 
present its perspectives in connection with the Committee's review of 
the impact of the GLBA.

                               ----------
                   PREPARED STATEMENT OF TERRY JORDE
        President and CEO, CountryBank, USA, Cando, North Dakota
        Vice Chairman, Independent Community Bankers of America
                             July 13, 2004

    Mr. Chairman, Ranking Member Sarbanes, and Members of the 
Committee, my name is Terry Jorde. I am Vice Chairman of the 
Independent Community Bankers of America (ICBA) \1\ and President and 
CEO of CountryBank USA, a community bank with $37 million-in-assets 
located in Cando, North Dakota. Cando is a small town of only 1,300 
people, but we have three banks and a motto that ``You Can Do Better in 
Cando.'' Our bank is full service and progressive, offering our 
customers a full range of insurance and investment services, 
residential mortgages, check imaging, and fully transactional Internet 
banking.
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    \1\ The Independent Community Bankers of America represents the 
largest constituency of community banks of all sizes and charter types 
in the Nation, and is dedicated exclusively to 
protecting the interests of the community banking industry. ICBA 
aggregates the power of its members to provide a voice for community 
banking interests in Washington, resources to enhance community bank 
education and marketability, and profitability options to help 
community banks compete in an ever-changing marketplace. For more 
information, visit ICBA's website at www.icba.org.
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    I would like to compliment this Committee on exercising its 
oversight role by calling this hearing on the effect the Gramm-Leach-
Bliley Act has had on the financial industry, the Nation, and--most 
importantly--on our communities. We conclude that the Act has had a 
number of effects, many positive, and some negative:

 The Federal Home Loan Bank reform provisions have been very 
    helpful to community banks and could be further improved by the 
    passage of Senator Enzi's amendment to this Committee's GSE reform 
    legislation. It clarified the FHLBank's mission to provide 
    community financial institutions with funding for agricultural and 
    small business loans.
 GLB closed the unitary thrift loophole--which allowed any 
    commercial firm to purchase a thrift institution--but Congress now 
    needs to close the industrial loan company loophole to maintain the 
    separation of banking and commerce;
 GLB contributed to increased financial concentration;
 Community banks have made limited use of the Act's new 
    financial holding company structure, most likely to engage in 
    insurance agency activities;
 The notice requirements under the privacy provisions should be 
    streamlined, especially for the majority of community banks that do 
    not share information with outside parties.

FHLBank System
    The Federal Home Loan Bank reforms provided the Act's most 
significant benefits to community banks. Frankly, during the time the 
bill was being considered, ICBA concluded that these provisions and the 
closing of the unitary thrift loophole offset the bill's problematic 
aspects.
    From our perspective, the FHLBank reforms included these 
significant benefits:

 Permitted any ``community financial institution'' (now--with 
    indexing--any FDIC-insured institution with less than $550 million 
    in total assets) to become a member. Previously, an institution had 
    to have at least 10 percent of total assets in ``residential 
    mortgage assets'' to qualify. Changing this was particularly 
    important to many agricultural banks that found the 10 percent test 
    difficult to meet in their markets.
 Allowed community financial institutions to use small 
    business, small farm, and small agri-business loans as collateral 
    for advances.
 Equalized membership requirements for commercial banks and 
    thrifts. This was a win-win for community banks of all charter 
    types, since it made membership for Federal thrifts voluntary and 
    eliminated second-class membership status for commercial banks.
 Eliminated an emerging problem by repealing the 30 percent 
    ceiling on FHLBank System advances to institutions that did not 
    meet the qualified thrift lender test.

    As a result of these reforms, community banks of all charter types 
have greatly increased their involvement in the System. Approximately 
76 percent of ICBA members are now also members of the System, compared 
to 17 percent immediately after passage of GLB.
    ICBA members are increasing their use of the FHLBanks' advances to 
fund local loans. I am sure my experience is typical of many new 
members. My bank was a member before GLB, but not an active advance 
user. For the first time in years, we are borrowing from our FHLBank 
because our deposits are down and loan demand has increased. Because of 
these liquidity pressures, the FHLBank System is more important than 
ever for our members.
    While FHLBank access has provided community financial institutions 
like CountryBank needed liquidity, it has also helped us better serve 
our customers. FHLBanks provide many different types of advances that 
help bankers better meet the needs of our customers who are seeking 
longer-term, fixed-rate loans for residential mortgages, commercial and 
agricultural real estate mortgages, and other types of loans that our 
deposit base does not permit without unduly exposing the bank to 
interest rate risk.
    My bank belongs to the Federal Home Loan Bank of Des Moines that 
has been a champion in accepting small business and agricultural assets 
as collateral for advances. Some FHLBanks have been slow to accept the 
new collateral types permitted by the Act and have place severe 
constraints on pledging small business, small agri-business and small 
farm loans, such as limiting the types of loans or severely haircutting 
values. Thus, some community financial institutions have not been able 
to use this collateral to obtain advances as Congress envisioned. While 
any institution needs to be cautious about moving into a new type of 
business, the FHLBanks have had sufficient time since the Act's passage 
to develop the expertise and the policies and procedures to more 
readily accept these new collateral types. As the economy strengthens 
and loan demand increases, many community financial institutions will 
need the ability to pledge this collateral.
    ICBA is pleased that this Committee addressed this issue by 
adopting an amendment by Senator Enzi to the GSE reform bill, S. 1508. 
That amendment clarified that the mission of the FHLBanks includes 
providing liquidity and funds to community financial institutions for 
agriculture and small business lending. We are hopeful that your 
endorsement of this will stimulate the FHLBanks to use the authority 
provided in GLB. ICBA will continue to support Senator Enzi's effort as 
this legislation moves through the process.

Maintaining the Separation of Banking and Commerce
    GLB reaffirmed the Nation's long-standing policy maintaining the 
separation between banking and commerce by closing the unitary thrift 
loophole that permitted any commercial firm to acquire a single thrift 
institution. By maintaining the separation of banking and commerce, 
Congress helped ensure that our financial system would avoid the 
conflicts of interest and threats to safety and soundness that would 
arise if commercial firms--such as retailers and manufacturers--were 
permitted to own their own banks.
    While GLB grandfathered the few existing commercial/unitary thrift 
combinations, it effectively cut off Wal-Mart's application to acquire 
an Oklahoma thrift. This prevented Wal-Mart from engaging in dangerous 
self-dealing between its huge retail operation and a federally insured 
thrift institution. And, since many banks already have branches in 
thousands of Wal-Mart stores, customers will continue to have 
convenient access to banking services. However, the banks will maintain 
their legal independence from Wal-Mart and will be able to lend on an 
arm's length basis to all businesses in their communities.
    Congress also successfully addressed the banking and commerce issue 
before GLB. In 1987, the Competitive Equality Banking Act closed the 
nonbank bank loophole that permitted commercial firms to establish 
banks. In 1972, Congress closed a loophole that would have permitted 
any commercial firm to own a single bank.
    All of these loopholes existed for many years before they were 
closed. However, Congress acted as soon as it became clear that they 
could be exploited in a major way. Policymakers now must face the same 
issue with industrial loan companies. Several years ago, Wal-Mart 
attempted to buy a California ILC. Fortunately, the California 
legislature quickly acted to block that attempt by closing the ILC 
banking and commerce loophole in its State. Unfortunately, the loophole 
remains in place in several other States and has been exploited most 
enthusiastically in Utah. ICBA joins with the Federal Reserve in urging 
Congress to reassert its authority and close the ILC loophole for the 
entire Nation by bringing the ILC's under the Bank Holding Company Act. 
This would prevent additional commercial/ILC affiliations and extend 
effective holding company regulation to the parents of ILC's.
    In its regulatory relief bill, H.R. 1375, the House took steps to 
address the ILC loophole by adopting the Gillmor-Frank Amendment that 
would prevent newly formed ILC's with commercial affiliations from 
using the bill's new de novo interstate branching authority or the 
interstate banking and branching powers provided by the Riegle-Neal 
Interstate Banking and Branching Efficiency Act of 1994.\2\ 
Unfortunately, the House did not include similar restrictions in the 
business checking provisions of H.R. 1375. As a result, ILC's--
including those owned by commercial firms--would be granted completely 
new authority to offer business checking accounts, plus be permitted to 
pay interest on those accounts. This would make ILC's the functional 
equivalent of full service banks and negate the original rationale--a 
limited charter--for excluding them from the BHCA.
---------------------------------------------------------------------------
    \2\ Without the Gillmor-Frank Amendment, Wal-Mart could buy or 
charter an ILC and establish a nationwide network by setting up 
branches of the ILC in each one of its stores.
---------------------------------------------------------------------------
    While the Gillmor-Frank language was a positive first step, ICBA 
strongly urges Congress to take the next step and close the ILC 
loophole completely.

Increased Concentration
    As Congress considered the financial modernization legislation that 
ultimately became GLB, ICBA repeatedly warned that it would likely lead 
to increased financial concentration. That has certainly proven to be 
the case. GLB and the Riegle-Neal Act have together led to the creation 
of truly huge financial conglomerates. We now have three $1 trillion 
banks in the United States. This is certain to decrease competition and 
increase systemic risk.
    While it is too late to turn back the clock on these developments, 
ICBA recommends that Congress take steps to improve the competitive 
landscape so that consumers and businesses continue to have robust 
financial services choices. In this regard, ICBA has particular concern 
about the competitive position of community banks in this environment. 
Just last month, ICBA submitted testimony that highlighted the 
detrimental effects than increasing regulatory burden is having on 
community banks' ability to compete. We again strongly urge you to 
reduce this burden to improve our ability to serve our customers and 
communities. This burden falls disproportionately on community banks 
that cannot spread their costs across a large asset and personnel base. 
Unless Congress and the regulators can lift it soon in material ways, 
economic development and small businesses will suffer. Therefore, we 
urge you to follow up on our recommendations and those the financial 
regulatory agencies develop under the EGRPRA regulatory review.\3\
---------------------------------------------------------------------------
    \3\ The agencies are in the midst of reviewing 129 banking 
regulations to identify provisions that are outdated, unnecessary, or 
unduly burdensome, as required by the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996.
---------------------------------------------------------------------------
    In addition, we hope that Congress will complete action on deposit 
insurance reform legislation this year. Deposit insurance provides the 
bedrock for community bank competitiveness. Since community banks are 
not too-big-to-fail, our depositors look to deposit insurance to 
protect their transaction and savings accounts. While we continue to 
favor immediate increases in coverage--especially for retirement 
funds--ICBA hopes that at least Congress can pass legislation that will 
provide a robust indexing system, along with other key reforms such as 
eliminating the 23-basis-point premium cliff and ending the free ride 
for rapidly growing institutions.
    I would also like to draw your attention to another aspect of 
increased concentration, the fact that the largest institutions appear 
to be too big to regulate and too big to punish for their 
transgressions. Community bankers from around the country are 
increasingly concerned about what they perceive as a regulatory double 
standard. In case after case, they note that regulators and courts 
impose only nominal fines for megabanks' misdeeds and regulators go on 
to approve their mergers. For example, Citigroup agreed to pay 
investors $2.7 billion for its part in WorldCom's bankruptcy. J.P. 
Morgan paid $135 million for its part in the Enron scandal. This proved 
to be less than a speed bump for its acquisition of Bank One; the case 
was barely alluded to in the 63-page approval decision. UBS was fined 
$100 million for providing U.S. currency to Cuba, Libya, Iran, and 
Yugoslavia. While it was also ordered out of this line of business, it 
had not been particularly profitable or significant to the institution.
    While some of the fines and settlements may seem large to the 
average person, they are tiny when applied to these companies. 
Commenting on Citi's WorldCom settlement, an analyst wrote that, 
``Citi's earning power and existing capital levels allow it to take 
such a charge without any material adverse impact to capital levels and 
[with] no impact on dividend policy.'' \4\
---------------------------------------------------------------------------
    \4\ (Susan Roth, Credit Suisse First Boston, quoted in ``For Citi, 
$5B Is Price of `Moving On' ''; American Banker, 5/11/04)
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    A relatively large community bank like Riggs ($6 billion) in 
Washington, DC, suffered more serious consequences when it failed to 
file Suspicious Activity Reports on certain embassy transactions. 
Regulators forced significant management changes and the bank is 
exiting its signature line of business, handling the banking needs of 
the diplomatic community. The $25 million fine assessed against Riggs 
was more than its annual earnings for each of the last 4 years. 
Analysts believe Riggs may even lose its independence.
    The vast majority of community banks undergo even harsher 
treatment. State and Federal regulators (properly) hold management 
strictly accountable for everything that happens in the bank--from its 
culture to the actions and deeds (and misdeeds) of its staff and 
alliance partners. If they cross the line, both the bank and management 
are punished. There are no exceptions.
    ICBA urges Congress to direct the agencies to review their 
policies, comparing the fines and other punishments that they apply to 
the largest institutions they regulate with those they mete out to the 
rank and file. It is important to eliminate the perception that large 
institutions are above the law and can commit serious offenses without 
facing serious consequences.
    In the face of these concerns, this is certainly not the time for 
Congress to take further steps, such as lifting the deposit caps in the 
Riegle-Neal legislation, that would further increase concentration. 
ICBA will vigorously oppose any such proposals.

Additional Financial Services
    GLB did not provide community banks with substantial new 
opportunities to provide financial services to their customers. In the 
years prior to enactment, State action, plus court and regulatory 
interpretations allowed virtually all banks to offer retail financial 
services--primarily insurance and securities--as agents. One exception 
to this general rule are the provisions of GLB that permit financial 
holding companies and financial subsidiaries of national banks to sell 
insurance even if they are not headquartered in towns of less than 
5,000 in population or in States that granted insurance agency powers 
to State-chartered banks. A number of community banks have formed FHC's 
or financial subsidiaries, apparently for the purpose of engaging in 
insurance sales. However, only the largest financial institutions were 
interested in affiliating with underwriting companies. Indeed, it was 
the apparently illegal merger between Citibank and Travelers' Insurance 
that provided the final impetus to the legislation.
    While community banks did not seek the new financial affiliation 
authority under GLB, a significant number of ICBA member community 
banks offer retail insurance and securities services. Just under half 
of the banks under $1 billion in assets earned fee income from 
insurance activities in 2003. That same year, nearly 23 percent of 
those banks earned income from mutual fund and annuity activity.\5\
---------------------------------------------------------------------------
    \5\ Michael White's Bank Insurance & Investment Fee Income Report, 
2003 Year-end Edition, pp. 13 & 109.
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    My own bank is active in insurance sales and investment brokerage, 
though we did not need GLB to enter these fields. Insurance sales are 
particularly important for our bank and we are having good success. We 
have just purchased our third agency. In fact, 30 percent of our bank's 
employees are dedicated to insurance sales.
    Real estate brokerage is another retail service community banks 
would like the opportunity to offer to our customers. Therefore, ICBA 
is disappointed that Congress has repeatedly used the appropriations 
process to block the Treasury from finalizing the proposed regulation 
to allow financial holding companies and financial subsidiaries of 
national banks to engage in real estate brokerage and management. We 
believe that GLB provides the Treasury and the Federal Reserve full 
authority to permit these activities. More importantly, these new 
powers will allow FHC's and financial subsidiaries to better serve 
customers by increasing choice and decreasing costs. And, it will allow 
community banks to diversify their sources of income by engaging in a 
low-risk agency activity analogous to securities and insurance 
brokerage.
    The financial market is rapidly changing and evolving, and it is 
important for community banks to have the means and opportunity to 
serve all of their customers' financial needs. Many other entities 
already offer one-stop-shopping for real estate brokerage, mortgage 
lending, and real estate settlement services. It flies in the face of 
the GLB Act's fundamental purpose to continue blocking the proposed 
Treasury/Federal Reserve regulation.
    While GLB did not greatly increase retail sales opportunities for 
community banks, it did make substantial changes in how these sales are 
conducted today.
    Prior to GLB, banks were specifically excluded from the definition 
of ``broker'' contained in the Securities Exchange Act of 1934. As a 
result, banks could engage in securities sales activities and did not 
have to be concerned about registering as a broker with the SEC. With 
the enactment of GLB, banks are excluded from the definition of 
'broker'' only to the extent that their securities sales activities 
fall into one or more of the eleven statutory functional exceptions. 
Each of these exceptions permits a bank to act as an agent with respect 
to specified securities products or in transactions that meet specific 
statutory conditions. In particular, Section 3(a)(4) of the Exchange 
Act provides conditional exceptions from the definition of broker for 
banks that engage in third party brokerage arrangements; trust and 
fiduciary activities; permissible securities transactions; certain 
stock purchase plans; sweep accounts; affiliate transactions; private 
securities offerings; safekeeping and custody activities; municipal 
securities; and de minimis transactions.
    In 2001, the Commission adopted interim final rules designed to 
provide banks with guidance regarding the GLB by defining certain key 
terms used in the new statutory exceptions. These interim final rules 
were suspended after the trade associations and members of the banking 
industry expressed serious concerns about the complexity and regulatory 
burden of the new rules and the negative impact they would have on 
banks' ability to engage in traditional banking activities such as 
trust, fiduciary, and custody activities.
    On June 17, 2004, after discussions with representatives of the 
industry, the SEC published new proposed rules (with comments due in 
August). These new rules, which are 228 pages long, are designed to 
define and clarify a number of the statutory exceptions from the 
definition of ``broker'' in GLB.
    Although ICBA is pleased that the SEC has modified its original 
proposal made in 2001--particularly with respect to the definition of 
what is considered a ``nominal'' fee under the network exemption and 
raising the small bank threshold to $500 million under the custody 
exception--ICBA still is concerned about the overall complexity of the 
proposed rules. The regulatory burden on community banks is already 
significant and these rules will just add to that burden by requiring 
community banks to adopt compliance programs to ensure that they comply 
with one of the complex exceptions under the regulations. The SEC 
should make an effort to simplify the proposed rules, particularly with 
regard to the trust and fiduciary activity exemption.
    The banking agencies have long since finalized the consumer 
protection regulations regarding the retail sale of insurance required 
under GLB. Like so many consumer disclosures, these regulations--which 
closely follow the legislative language--require far more information than consumers are prepared to absorb as they complete a financial transaction. Even more troubling, the disclosures are often irrelevant. For example, we must give all new insurance customers a disclosure that informs them that 
the insurance product they are inquiring about is not a deposit, not 
guaranteed by the bank, not insured by the FDIC, and may go down in 
value. This disclosure must be given even if the insurance product has 
no investment risk. In fact, none of the products that my agency sells 
have investment risk. I have seen the dumbfound look on my customers' 
faces when they have been told that their auto policy or their crop 
insurance is not a deposit and may go down in value, followed by their 
look of concern when we inform them that their insurance is not 
guaranteed. If the customer inquires about insurance over the 
telephone, we must make these disclosures orally and then follow up 
with written disclosures. And we need for them to sign the disclosure 
document and retain it in our file. The end result is a waste of time, 
paper, and postage and puts us at a competitive disadvantage to other 
insurance agencies in my community that are not housed within a bank 
office. ICBA urges Congress to ask the agencies to recommend specific 
changes in GLB to streamline and simplify these disclosures, while 
maintaining adequate consumer protection.
    Increased financial conglomeration of the kind permitted under GLB 
has had a mixed competitive effect on community banks. Some report that 
insurance companies like State Farm (which bought a thrift while GLB 
was moving through Congress) present stiff competition by offering 
extremely attractive rates on deposits. Others report an opposite 
effect; some new financial conglomerates turn their attention away from 
traditional banking, opening up competitive opportunities for community 
banks. Still others report little direct effect at this time.

Privacy
    GLB requires financial institutions to provide annual notices 
regarding their privacy policies to each of their customers. Many 
community bankers view the annual privacy notice as ineffective and 
unnecessary. They have become another example of the disclosure 
blizzard that has done little more than confuse and burden consumers 
with pages of incomprehensible legalese.
    Most community banks do not share their customers' financial 
information with outside marketing companies and the like. They share 
information with vendors like check printers and data processors that 
use it strictly to help the bank provide essential services. Therefore, 
ICBA recommends that Congress amend GLB to allow these institutions to 
provide a short statement to that effect printed on the customer's bank 
statement.
    In addition, community banks--and doubtless many other financial 
institutions--maintain consistent privacy policies from year to year. 
These institutions should have the option not to deliver the annual 
notice unless they have changed their privacy policy. Not only would 
this relieve them of a costly paperwork burden, it would make it more 
likely consumers would pay attention to the notices. The current 
requirement that banks furnish all customers with an annual privacy 
notice actually has a very serious unintended consequence: It 
encourages customers to disregard the information that is provided, 
making them increasingly less likely to pay heed to notices.
    These notices are particularly pointless for my bank and our 
customers, since North Dakota has such restrictive privacy laws that 
the Federal requirements are a moot point. Yet we are required to mail 
thousands of privacy notices to our customers every year just to tell 
them that we will not break the law. It is this type of unnecessary 
burden that is driving community banks to sell out, often times leaving 
the very consumer that these laws are meant to protect with fewer 
choices for financial services.

Conclusion
    I would again like to compliment the Committee on holding this 
oversight hearing on the Gramm-Leach-Bliley Act. Most of the benefits 
we anticipated have been borne out, especially with regard to the 
FHLBank System (although more must be done to implement the community 
financial institution provisions regarding use of advances for 
agriculture and small business lending). The Act successfully closed 
the unitary thrift loophole, but a new one--the ILC loophole--is 
emerging as an important threat. The Act has led to increased 
concentration, though has provided some limited new opportunities for 
community banks to offer insurance products. The impact of the 
securities push-out provisions on community banks will depend on the 
final rule expected to be issued by the SEC later this year. Finally, 
Congress should streamline the privacy notice provisions and will need 
to continue its oversight efforts if states seek to impose their own 
privacy restrictions.
    Thank you again for this opportunity to testify.

                               ----------
                 PREPARED STATEMENT OF TRAVIS PLUNKETT
          Legislative Director, Consumer Federation of America
            on Behalf of the Consumer Federation of America,
      Consumers Union, and the U.S. Public Interest Research Group
                             July 13, 2004

     Mr. Chairman, Senator Sarbanes, and Members of the Committee, my 
name is Travis Plunkett and I am the Legislative Director of the 
Consumer Federation of America.\1\ We appreciate the opportunity to 
offer our comments on the effect of the Gramm-Leach-Bliley Act on 
consumers. This testimony is also being delivered on behalf of two 
other national consumer organizations, Consumers Union,\2\ and the U.S. 
Public Interest Research Group.\3\
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    \1\ The Consumer Federation of America is a nonprofit association 
of over 280 proconsumer groups, with a combined membership of 50 
million people. CFA was founded in 1968 to advance consumers' interests 
through advocacy and education.
    \2\ Consumers Union is the nonprofit publisher of Consumer Reports 
magazine. Consumers Union was created to provide consumers with 
information, education and counsel about goods, services, health, and 
personal finance; and to initiate and cooperate with individual and 
group efforts to maintain and enhance the quality of life for 
consumers. Consumers Union's income is solely derived from the sale of 
Consumer Reports, its other publications and from noncommercial 
contributions, grants, and fees. Consumers Union's publications carry 
no advertising and receive no commercial support.
    \3\ The U.S. Public Interest Research Group is the national 
lobbying office for State PIRG's, which are nonprofit, nonpartisan 
consumer advocacy groups with half a million citizen members around the 
country.
---------------------------------------------------------------------------
    In the decade-long debate that led to enactment of the Gramm-Leach-
Bliley Act (GLBA) in 1999, Congress heard many promises from financial 
services industry representatives about how tearing down the barriers 
between banking, securities, and insurance sectors would be a boon to 
consumers. Banks, securities firms and insurance companies would merge 
into financial services ``supermarkets'' that offer increased consumer 
access to new, innovative products at lower costs with improved privacy 
protections.
    Five years later, this rhetoric has proven to be mostly hype. 
Mergers have occurred, but mostly within the banking industry, not 
across sectors. While some, primarily affluent consumers may benefit 
from larger multistate ATM networks, from discounts offered for 
multiple account relationships or from sophisticated financial products 
offered by boutique units to high-balance customers, we have seen no 
evidence that GLBA has positively affected the mass of banking 
consumers. It has not slowed the continuing trend of rising bank fees, 
nor has it helped decrease the numbers of unbanked consumers. Indeed, 
rather than offering innovative, moderately priced products to middle-
income consumers, or to unbanked consumers to bring them into the 
financial mainstream, some banks are developing policies and services 
that deliver second class or downright predatory products at an 
extremely high cost.
    The corporate scandals of the last few years have also exposed 
potentially significant safety and soundness risks in allowing banks to 
sell both credit and investment banking services with inadequate 
regulatory oversight. The exponential growth of Industrial Loan 
Companies, which were allowed to continue to exist under GLBA without 
facing the rigorous regulatory scrutiny required of bank holding 
companies, has also started to create concerns that this shadow banking 
system could put taxpayer-backed deposits at risk.
    Finally, the privacy requirements Congress ended up enacting as 
part of GLBA are narrow and weak. They do not provide consumers with a 
meaningful right to stop the sharing of much financial information with 
third parties or any financial information with corporate affiliates. 
Congress also missed an opportunity to modernize the Community 
Reinvestment Act by placing reinvestment requirements on nonbank firms 
that are performing bank-like functions. Instead, under the ``CRA 
sunshine'' provision, it placed burdensome and poorly crafted reporting 
requirements on both banks and community organizations.

Financial Privacy
    During the decade-long debate that led to enactment of GLBA, our 
organizations repeatedly raised concerns about an almost total lack of 
Federal financial privacy protections for consumers. Unfortunately, 
this situation has not changed demonstrably since the enactment of 
GLBA. The financial privacy requirements that 
Congress imposed on financial institutions in exchange for eliminating 
the barriers between banks, insurers, and securities firms are narrow 
and weak. These requirements put the burden on consumers to stop the 
sharing of only some of the information shared by financial 
institutions with third parties. Even worse, these requirements offer 
consumers no ability at all to stop the sharing of sensitive financial 
data among financial affiliates. Moreover, the privacy notices that 
financial institutions are required to use to inform consumers of these 
limited rights are virtually incomprehensible. As a result, they are 
widely ignored by consumers.
    Under Title V of GLBA, financial institutions only have to give 
consumers the opportunity to say no to (``opt out'' of) the sharing of 
their financial information with certain nonaffiliated third parties 
selling nonfinancial products. However, sharing is allowed with other 
third parties that have joint marketing agreements with financial 
institutions to sell financial products. In other words, consumers have 
no control over the sharing of their confidential ``experience and 
transaction'' information if two separate parties enter joint marketing 
agreements, nor do consumers have any right to stop the sharing of 
information among affiliates of a financial institution. Some financial 
institutions have hundreds of affiliates. A few have thousands of 
affiliates.\4\
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    \4\ See testimony before this committee of Vermont Assistant 
Attorney General Julie Brill for a detailed list of some institutions' 
affiliates. Senate Banking Committee, Hearing On Affiliate Sharing 
Practices and Their Relationship to the Fair Credit Reporting Act, 26 
June 2003 available at http://banking.senate.gov/
index.cfm?Fuseaction=Hearings.Detail&HearingID=46.
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    The implications on consumer privacy of GLBA's establishment of 
one-stop-shopping financial supermarkets are very serious, as decisions 
about the type of and prices for services and products offered to a 
consumer from one financial entity might be determined by information 
provided in the past to an affiliate. The type of information that is 
collected and shared often includes: Account balance, payment history, 
parties paid by financial transactions, all credit card usage, 
employment, and demographic information.
    By combining all of these data about a particular consumer, 
financial institutions are able to create customer profiles. Profiles 
may then be used to determine how much a consumer will pay for a 
product or service or whether or not the consumer will be offered the 
product in the first place. Because this information sharing occurs 
among affiliates of a financial institution, these profiles are created 
and used without subjecting the firm to the requirements of or allowing 
consumers the protections of the Federal Fair Credit Reporting Act (15 
U.S.C. 1681 et seq).
    The widespread sharing and selling of personal financial 
information is also one of the reasons why consumers have become more 
vulnerable to identity theft in recent years. Many financial 
institutions have hundreds of affiliates that they share their 
customers' financial information with, and sell that same information 
to other third parties like telemarketers and direct mail firms. The 
more this information is disbursed, the greater the likelihood it will 
fall into the wrong hands and be used for illicit purposes. In Fall 
2003, a Bank of America employee in Santa Ana, California was sentenced 
to State prison for stealing identity and account information for over 
740 Bank of America customers. Obviously, financial institutions cannot 
ensure that information is perfectly secure at all times. Therefore, it 
is imperative to at least give consumers the ability to do everything 
they can to protect themselves against this crime.
    Perhaps even more importantly, these business practices represent a 
fundamental invasion of consumers' privacy. Most of us are very 
selective when it comes to disclosing private financial information to 
others. When banks and other financial institutions share or sell 
information about our account balances or spending habits without first 
getting our permission, they are violating our desire to keep this 
information private.
    To make matters worse, the privacy notices required under GLBA are 
at best extremely confusing, if not altogether deceptive. These were 
intended to serve two purposes. First, they were supposed to provide 
consumers directions on how to exercise their limited rights. Second, 
they were intended to inform consumers of the financial institution's 
privacy policies. Unfortunately, because they are so confusing and hard 
to understand they fail on both counts.
    A July 2001 readability analysis of 60 financial privacy notices by 
the Privacy Rights Clearinghouse found that they are written at a 3rd-
4th year college reading level. This is significantly higher than the 
junior high school level that is recommended for materials written for 
the general public. While we have heard anecdotal evidence that some 
privacy notices are getting clearer, they are still a far cry from 
sufficient.
    If consumers are unable to read and comprehend their notices, they 
will simply throw them away and not exercise their limited rights. The 
Wall Street Journal summed up this situation accurately:

        (I)n crafting the new law, known as the Gramm-Leach-Bliley Act, 
        the Government failed to ensure a vital detail: The mailers 
        have to be readable to do any good. Indeed, many recipients, 
        unwilling or unable to plough through the jargon and marketing 
        talk, have simply tossed them in the trash. This only plays 
        into the hands of the companies: A nonresponse to the mailer 
        gives them a green light to sell that person's data.\5\
---------------------------------------------------------------------------
    \5\ ``Privacy Notice Offers Little Help,'' By Russell Gold, Wall 
Street Journal, May 31, 2002.

    Our organizations argued in 1999 that financial institutions should 
get the affirmative consent of consumers before sharing information 
with any outside party whether an affiliate or a third party. Our 
position has not changed, and if Congress chooses to address this issue 
again, the standard should be opt in for information sharing among both 
affiliates and 3rd parties.
    A number of financial institutions have been very active in recent 
rulemaking proceedings to improve the privacy notices. While consumer 
groups are generally supportive of these efforts to make the notices 
clearer,\6\ the exercise is, to some extent, like rearranging deck 
chairs on the Titanic. Better notices will only help consumers more 
clearly understand that their underlying right to protect their 
financial information is very limited. Privacy notices are not privacy 
rights.
---------------------------------------------------------------------------
    \6\ For example, one widely-supported proposal would be to require 
that the highlights of the privacy notice be summarized in a statutory 
box with express terms, similar to the widely-used nutrition labels 
required by the Food and Drug Administration. However, consumer groups 
would oppose efforts to have that be the only information consumers 
receive--it would not be acceptable, for example, to have privacy 
rights details exclusively available in a second ``layer'' that only 
appears on the Internet.
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Safety and Soundness Issues
The Industrial Loan Company Loophole is Dangerous to the Banking System
and Taxpayers and Should be Eliminated
    As part of GLBA, Congress eliminated the unitary thrift loophole. 
This sent a clear message that it was the intent of Congress to slam 
the door on the mixing of banking and commerce. Consumer groups 
applauded this measure as an important step in better protecting 
taxpayers and the safety and soundness of the Nation's banking system. 
At the same time, the GLBA made it possible for the first time for 
securities and insurance firms to own banks, but only if they were 
subject to the rigorous safety and soundness oversight required in the 
Bank Holding Company Act (BHCA).
    Unfortunately, Congress left a little-noticed exception to the BHCA 
for Industrial Loan Companies (ILC's) in place when it put GLBA on the 
books. Commercial firms, such as General Motors, own ILC's, as do huge 
financial firms like Merrill Lynch, American Express, and Morgan 
Stanley. Moreover, ILC's are subject to much less rigorous oversight 
than that received by bank holding companies from the Federal Reserve 
Board. Not surprisingly, ILC's have grown exponentially in recent years 
and are now threatening to become a parallel banking system that will 
siphon commercial deposits from properly regulated bank holding 
companies. Even worse, these commercial and financial firms are now 
urging Congress to expand ILC powers, allowing them to offer business 
checking and to branch to all 50 States.
    This trend has enormous negative implications for the safety and 
soundness of ILC's and thus for taxpayers, who, of course, support the 
deposit insurance system. Our organizations strongly urge the Committee 
to consider legislation that would plug the ILC loophole before it is 
too late, and to reject legislation that would broaden ILC powers, for 
the following reasons:

    1. The ILC loophole to the Bank Holding Company Act is being abused 
and should be closed, not expanded. ILC's were never intended to be 
large, Nationwide banks that offered services indistinguishable from 
commercial banks. In 1987, Congress granted an exception to the BHCA 
for ILC's because there were few of them, they were only sporadically 
chartered in a small number of States, they held very few assets and 
were limited in the lending and services they offered. In fact, this 
exception specifically applied only to ILC's chartered in five States 
(Utah, California, Colorado, Nevada, and Minnesota) that have either 
assets of $100 million or do not offer checking services. Since that 
time, however, everything about ILC's has grown: The number that exist, 
the amount of assets, and federally insured deposits in them and the 
services and lending products that they can offer.
    According to the Federal Reserve, the majority of ILC's had less 
than $50 million in assets in 1987, with assets at the largest ILC at 
less than $400 million. As of 2003, one ILC owned by Merrill Lynch had 
more than $60 billion in assets (and more than $50 billion in federally 
insured deposits) while eight other large ILC's had at least $1 billion 
in assets and a collective total of more than $13 billion in insured 
deposits. Moreover, the five States cited in the law are aggressively 
chartering new ILC's, allowing them to call themselves ``banks'' and 
giving them almost all of the powers of their State-chartered 
commercial banks. These States, especially Utah, are also promoting 
their oversight as a less rigorous alternative to those pesky 
regulators at the Federal Reserve. For example, the website of the Utah 
Department of Financial Institutions trumpets its ``positive regulatory 
environment'' and states that ``ILC's offer a versatile depository 
charter for companies that are not permitted to, or that choose not to, 
become subject to the limitations of the Bank Holding Company Act . . .''
    2. Large financial firms should not be permitted to skirt the GLBA 
by establishing a parallel banking system that is not subject to the 
rigorous oversight required for real banks. This represents an enormous 
and unacceptable risk to taxpayers. If large financial firms were to 
place their commercial banks under ILC oversight rather than Federal 
Reserve oversight, this could rapidly increase the number of ILC's and 
dilute the number of large financial systems that are subject to the 
important safety and soundness rules that the current system requires. 
Securities firms that own ILC's have taken the lead in promoting the 
expansion of ILC powers. They have not been shy about stating that they 
want to expand ILC powers because they do not want to deal with the 
regulatory oversight they would face from the Federal Reserve if they 
purchased a bank, as allowed under the Gramm-Leach-Bliley Act. Instead, 
they prefer to set up a ``shadow'' banking system through ILC's. They 
want to be able to offer the same services and loans as commercial 
banks without the same regulatory oversight.
    According to the Federal Reserve, however, the deposits in ILC 
accounts are not as secure as those in real banks. As mentioned above, 
ILC's are exempt from BHCA, which allows the Federal Reserve to conduct 
examinations of the safety and soundness not just of banks, but of the 
parent or holding company of these banks. The BHCA also grants the 
Federal Reserve the power to place capital requirements and impose 
sanctions on these holding companies. The Federal Deposit Insurance 
Corporation (FDIC), which regulates ILC's, does not have these powers.
    Oversight of the holding company is the key to protecting the 
safety and soundness of the banking system. It is immaterial whether 
the owner of the bank is a financial or a commercial entity. Holding 
company regulation is essential to ensuring that financial weaknesses, 
conflicts of interest, malfeasance, or incompetent leadership at the 
parent company will not endanger the taxpayer-insured deposits at the 
bank. Years of experience and bank failures have shown this to be true.
    Moreover, the involvement of investment banking firms in recent 
corporate scandals has provided plenty of evidence of the need for 
rigorous scrutiny of these 
companies as they get more involved in the banking industry. In 
particular, the participation of some securities firms in the Enron and 
Wall Street analyst scandals has shown that these firms were rife with 
conflicts-of-interest that caused them to take actions that ultimately 
harmed their investors. Given this track record, it would be a serious 
dereliction of duty on the part of Congress to tie the hands of 
regulators in looking at bank holding companies.
    3. The ILC loophole violates long-standing principles of banking 
law that commerce and banking should not mix. Recent corporate scandals 
show the serious risks involved in allowing any commercial entity to 
own a bank without significant regulatory scrutiny at the holding 
company level. Accounting scandals at Sunbeam, Enron, Worldcom, Tyco, 
Adelphia, and many others involved deliberate deception about the 
financial health of the companies involved. If these companies had 
owned banks, not only would employees, investors, and the economy have 
suffered, but also taxpayers.
    As ILC's grow larger, so does commercial involvement in banking. 
Under current law, without any expansion of ILC powers, commercial 
firms can charter ILC's in several States. Under the Riegle-Neal Act's 
``opt in'' provision for reciprocal State agreements (that allows banks 
chartered in each state to compete in all of them), 17 States already 
allow ILC's to branch into their territories. As stated above, firms 
such as General Motors, Pitney Bowes, BMW, Volkswagen, and Volvo 
already own ILC's. States that have not restricted commercial ownership 
of ILC's, like Utah, are aggressively encouraging other commercial 
firms to purchase ILC's.
    Instead of moving to close the ILC loophole, legislators in both 
the Senate and the House are actually seeking to expand ILC powers. 
H.R. 1375 would allow many existing and new ILC's to branch into all 50 
States, whether these States approve or not, and to offer business 
checking services. (Business checking can only be provided by very 
small ILC's with less than $100 million in deposits.)
    A Senate bill, S. 1967, would also allow industrial loan companies 
to offer interest bearing checking accounts to businesses after 2 
years. Although there is a requirement that the Secretary of the 
Treasury and the Federal banking agencies issue joint regulations 
within 2 years after the date of enactment, the authority goes into 
effect after this period whether the joint regulations are issued or 
not. As it is highly unlikely that the FDIC and the Federal Reserve 
Board in particular would agree on joint regulations, our organizations 
view this bill as a straightforward expansion of the authorities of 
industrial loans companies.
    We strongly urge the Committee to stop both of these dangerous 
proposals in their tracks.

Banking/Securities Conflicts of Interest
    Among the restrictions in the Glass-Steagall Act that GLBA 
eliminated were those that prohibited commercial banks from combining 
with investment banks to sell both credit and investment banking 
services. Consumer groups expressed many concerns through the 1990's 
that the banking/securities combination in particular could allow 
financial investors access to insured deposits for high-risk lending 
schemes. This could, our groups predicted, subject consumers and 
shareholders to an increased potential for deception, leading to higher 
costs for consumers and taxpayers. Our organizations also expressed 
concern that complete elimination of the Glass-Steagall barriers also 
meant increased concentration, creating institutions of a size, and 
complexity that would be impossible to regulate effectively.
    Unfortunately, the corporate scandals of the last few years have 
provided widespread evidence of the kind of deception we were concerned 
about, as well as proof that financial regulators were not equipped to 
prevent these kinds of problems before they occurred, harming millions 
of small investors and--in some cases--putting deposits insured by 
taxpayers at risk. The involvement of investment banking firms like 
Citigroup in these scandals have provided a cautionary ``case study'' 
of the kinds of problems that can result when banks inappropriately 
``tie'' decisions about lending and investment banking.

WorldCom and Citigroup
    For example, let's examine Citigroup's involvement in the WorldCom 
scandal, as documented in great depth in an Emmy award-winning segment 
for the Public Broadcasting series Frontline. \7\ Before Citibank 
merged with Solomon Smith Barney and Travelers Insurance to become 
CitiGroup, WorldCom had already become a very important investment 
banking client of Solomon Smith Barney. As a telecommunications firm 
whose business plan was to grow through mergers and acquisitions, 
WorldCom produced lucrative fees for the investment bankers chosen to 
handle these transactions. Solomon wanted that investment banking 
business, and Solomon's star technology analyst Jack Grubman was 
apparently willing to be a cheerleader for WorldCom's stock to keep 
this business. (As evidence that investment banking considerations 
influenced the research, Grubman justified his bonuses based on the 
investment banking business he was bringing into the firm.)
---------------------------------------------------------------------------
    \7\ The Wall Street Fix, Frontline, May 8, 2003.
---------------------------------------------------------------------------
    So, the first conflict that existed was that Grubman had a strong 
incentive to promote WorldCom's stock, and to continue to do so after 
its prospects had begun to deteriorate, in order to keep WorldCom as an 
investment banking client for Solomon. When Citibank CEO Sanford Weill 
consolidated Solomon, Travelers, and Citibank into a single entity, the 
conflicts just got bigger and more complex, with conflicts related to 
commercial loans added to the mix.
    With WorldCom's stock having risen considerably, thanks in no small 
part to Grubman's cheerleading, Ebbers had a huge portion of his 
personal wealth in the form of WorldCom stock. He wanted cash, but he 
did not want to sell the stock to get it, as cashing out his stock 
would have been looked on as a bad sign on Wall Street. In one case, 
the bank apparently came up with a plan to let Ebbers turn his stock 
into cash without the scrutiny that would accompany a sale. To 
accomplish that, the bank agreed to lend Ebbers the money, in the form 
of a $1 billion mortgage to a company he controlled. Once the property 
was purchased, Ebbers was able to turn around and sell a portion of the 
property for cash.
    In another case, Citibank agreed to lend Ebbers money--in this case 
$43 million to buy a ranch--with the loan backed by 2.3 million shares 
of WorldCom stock. This transaction was questionable for a variety of 
reasons. First, stock is very risky collateral for a loan because of 
its inherent volatility. Telecom stock is especially risky because, as 
events later showed, telecom is a volatile business. It is, in our 
view, highly unlikely that Citibank would have entered into such a 
risky transaction had it not been seeking to curry favor with Ebbers 
and WorldCom. That also added a second dimension to the conflicts of 
interest--Citibank needed WorldCom's stock price to stay high in order 
to maintain adequate backing for its loans.
    We know now that WorldCom's strategy of constant mergers served in 
part to hide its deteriorating financial condition. When the Sprint 
merger fell apart, however, WorldCom could no longer keep up the 
facade. There was a telecommunications capacity glut. Long distance 
prices were plummeting. Other Wall Street analysts were turning more 
negative on the company's prospects. WordCom's stock price began to 
drop precipitously.
    The company desperately needed cash, and Citibank came through 
again. This time, it led a bank syndicate that sold investors $17 
billion of WorldCom bonds. WorldCom turned around and used some of that 
money to pay off its debts, and Citibank used that payment to reduce 
its exposure to loans backed by WorldCom stock. This brings us to a 
third major conflict of interest. Citibank's need to reduce its 
exposure to WorldCom loans appears to have been a factor in its 
investment bankers' willingness to approve a bond underwriting deal 
without appropriate due diligence on WorldCom's ability to repay the 
loans that those bonds represent and without adequate disclosure to 
investors of WorldCom's deteriorating financial condition.
    Meanwhile, analyst Grubman was still doing his part, touting 
WorldCom's stock and calling it ``an incredible bargain'' at its newly 
reduced price. Given his access to top officers at WorldCom--he 
attended more than one board meeting and was listed as an adviser on 
the failed Sprint merger deal--it is hard to believe that Grubman could 
have been so oblivious to its deteriorating financial condition. At 
best, it seems logical to conclude that he ignored red flags because he 
had a strong incentive to ignore them.
    There are three major lessons from this debacle for our discussion 
on GLBA today that are relevant. First, when major conflicts of 
interest exist and huge sums of money are at stake, abuses will occur. 
When Federal law has eliminated barriers to many of these potential 
conflicts, allowing them to flourish, it is naive to think that 
regulators can stop potential conflicts from becoming real conflicts 
through the erection of a few prohibitions.
    Second, abuses are inevitable if businesses are allowed to create 
structures that are so big and complex that they require a major 
investment in regulatory oversight to prevent these abuses. However, 
once Congress allows these structures to be created, it had better be 
willing to provide the resources for regulatory oversight and to push 
regulatory agencies to be aggressive in enforcing the law. Third, 
investors will always be the ones left holding the bag when abuses 
occur. The system is not very good at restoring those losses once the 
damage is done.
    Congress has in recent years given the Securities and Exchange 
Commission a much needed infusion of funding, though it is still not 
clear whether its funding matches its workload. Embarrassed by the New 
York Attorney General's Office, which has shown itself more than ready 
to step in and take action when it perceives there is an abuse that is 
not being addressed, the Commission appears to have made a new 
commitment to maintaining an aggressive enforcement program. Only time 
will tell whether the agency is up to the task. However, the SEC is not 
alone in bearing responsibility, and a ``solution'' that focuses 
entirely on the SEC and ignores Federal banking regulators will not 
solve the whole problem.
    In the Citigroup/WorldCom affair, the balance of power in the 
relationship seems to have tipped toward WorldCom. The picture that 
comes through is this: Because Citigroup was desperate for WorldCom's 
investment banking business, it was willing not only to abandon all 
objectivity in its research, but also to overlook sound lending 
practices by offering loans to WorldCom and Ebbers that were not 
justified by WorldCom's underlying financial condition.
    The conflicts that created this scandal are really the inverse of 
traditional ``tying,'' when banks condition the availability or terms 
of loans or other credit products on the purchase of other products and 
services. In that situation, the balance of power tips toward the 
lender. There is some evidence that traditional tying may also be alive 
and well under GLBA.
    A survey of corporate financial officers issued last year by the 
Association for Financial Professionals found that commercial banks 
frequently make access to credit contingent upon the purchase of other 
financial services.\8\ Survey respondents indicated that they were 
concerned that if they did not award other business to their creditors, 
they would not receive credit in the future, would receive less credit, 
or pay a higher price.
---------------------------------------------------------------------------
    \8\ Credit Access Survey: Linking Corporate Credit to the Awarding 
of Other Financial Services; Association for Financial Professionals, 
March 2003.
---------------------------------------------------------------------------
    While tying of this type is only a threat to the safety and 
soundness of the banking system if the bank offers loans at less than 
the market rate, or at otherwise more favorable terms to an unqualified 
borrower, it does represent a potential threat to shareholders, albeit 
one that is hard to quantify. For example, when a company is forced to 
pay more than it should for credit, that can affect the share price. 
Similarly, when a company selects investment bankers based not on which 
are the best qualified to do the deal or which are offering the most 
favorable terms to do the deal, but because of who is providing the 
company with credit services, this could drive up the cost of 
investment banking services. Those costs would also be absorbed by 
shareholders. We urge the Committee to investigate this problem further 
to examine what might be the ultimate costs and risks to shareholders.
    Late last year, the GAO found a lack of documentation regarding 
tying the availability or price of credit to the purchase of debt 
underwriting services.\9\ However, the GAO also stated that ``the lack 
of documentary evidence might be due to the fact that negotiations over 
credit terms and conditions (during which a tying arrangement could be 
imposed) were generally conducted orally'' and that ``borrowers were 
reluctant to file formal complaints with banking regulators.'' GAO 
recommended that the Federal Reserve and the OCC take additional steps 
to enforce the antitying requirements in GLBA (in Sections 106 and 23B) 
and look for indirect evidence to assess whether banks unlawfully tie 
products and services. We strongly agree with this recommendation.
---------------------------------------------------------------------------
    \9\ ``Bank Tying: Additional Steps Needed to Ensure Effective 
Enforcement of Tying Prohibitions,'' General Accounting Office, October 
2003.
---------------------------------------------------------------------------
Consumer Services Issues
Bank Fees Still a Problem
    In the debates leading up to the enactment of GLBA, consumer 
advocates focused attention on bank services and fees and bank policies 
for retail bank products and services. While big banks are more likely 
to advertise ``free checking'' these days, a close examination of the 
Federal Reserve's annual report to Congress on bank fees will show that 
the cost of having and using a bank account has simply been shifted 
around.
    Checking accounts are now viewed by banks with expanding branch 
locations as the entry point for new customers for cross-selling of 
other products and services. Banks are more likely now to offer 
accounts without monthly maintenance fees or a minimum balance to avoid 
fees (required to advertise as ``free'' checking by TISA), but make up 
the revenue on penalty fees. As a result, bank noninterest income and 
service fee income overall continues to rise. As noted by the Federal 
Reserve reports and U.S. PIRG bank fee reports \10\ over the years, 
banks continue to charge more fees, higher fees, and make it harder to 
avoid paying fees. In addition, both the Federal Reserve and the PIRG 
studies document that larger, multistate institutions impose higher 
fees than local banks or credit unions.
---------------------------------------------------------------------------
    \10\ For example, Big Banks, Bigger Fees 2001, U.S. Public Interest 
Research Group, November 2001.
---------------------------------------------------------------------------
    Our groups are most concerned about growing fees that penalize 
consumers who have trouble making ends meet, including the insufficient 
funds fee, deposit item return fees, and overdraft fees. According to 
the Federal Reserve, NSF fees averaged $21.73 in 2002, an increase over 
the prior year. Bank fee surveys find that NSF fees range up to $35 per 
item at some banks. Seventy-five percent of banks now charge when items 
are deposited and returned for insufficient funds, averaging $6.88 in 
2002. On average, banks charged $21.83 in 2002 for overdraft 
transactions, up over 1 percent from the prior year.

A Continuing Problem: The Unbanked
    Millions of American consumers continue to conduct their routine 
financial transactions outside mainstream banking, a situation that has 
not significantly improved since GLBA was enacted. Despite high level 
regulatory attention to the problem of ``banking the unbanked,'' 
including the FDIC's Symposium held last November, modest First 
Accounts grants from Treasury over the last 2 years, and roll out of 
the Electronic Transaction Account program of Treasury to implement 
EFT '99 goals of enabling direct deposit of Federal benefits, 
conservative estimates find that 10 percent of American families still 
do not have a transaction account at a bank or credit union.
    Consumers without bank accounts are more likely to be young, lower 
income, minorities, renters, and have less formal education, according 
to the Federal Reserve Survey of Consumer Finances and academic and 
regulatory agency studies. One in three low- to moderate-income 
consumers in New York City and Los Angeles does not have a bank 
account. Twenty-two percent of low-income households (8.4 million 
families making less than $25,000 a year) do not have a bank account.
    The high cost of being unbanked includes paying fees to cash 
checks, buying money orders to pay bills, paying to wire funds to 
distant locations, and lacking a safe place to save money. The unbanked 
live paycheck to paycheck, without savings to meet emergencies, making 
them susceptible to high cost forms of credit, including rent to own, 
car title pawn, and secured credit cards. While retailers such as Wal-
Mart have entered the check cashing business, charging a flat rate $3 
to cash a payroll or government check, banks increasingly charge 
noncustomers fees to cash checks drawn on the bank.

Second Class Financial Products for the Unbanked
    Instead of bringing unbanked consumers into the mainstream by 
designing fairly priced products and services that meet the needs of 
consumers, banks and others are developing policies and services that 
deliver subprime protections. For example, KeyBank is now offering a 
``checkless'' checking service, Key Checkless Access, for a fee of 1.9 
percent per deposit to have paychecks direct deposited into a KeyBank 
account accessed by an ATM card. (The account is being marketed to 
consumers blacklisted on ChexSystems for nonfraudulent account 
mismanagement in the past.) Instead of providing account management 
training through such programs as Get Checking (developed by the 
University of Wisconsin Extension Service) and a free or low-cost 
direct deposit account that cannot be overdrawn, KeyBank is charging 
check cashing fees for a limited use bank account.
    Payroll cards and other stored value cards are growing in use as a 
way to deliver money without providing real bank accounts to unbanked 
consumers. Instead of opening bank accounts in the employees' names, 
some employers and their banks provide ATM cards that permit employees 
to withdraw their pay electronically from a pooled account. As the OCC 
noted in an Advisory Letter issued in May, unsettled regulatory issues 
include whether FDIC deposit insurance is available to cardholders, 
whether Regulation E applies to payroll card systems, whether Section 
326 of the USA PATRIOT Act (verification of new customers) applies, and 
whether Regulation CC (Availability of Funds) applies. Non-bank 
involvement in payroll card programs raises the risk for both consumers 
and banks if the nonbank becomes insolvent.
    Financial services are being increasingly delivered via stored 
value cards rather than through accounts open in the consumer's name. 
The explosive growth of stored value gift cards and delivery of tax 
refunds and refund anticipation loans through stored value cards is 
taking place without adequate Federal consumer protections. While 
consumers have Federal protections when they use credit cards and debit 
cards, there is no Federal stored value card law and it is unclear what 
Federal protections apply to stored value cards. Convergence of plastic 
is not being supported by upgrading of consumer protections.
    Stored value cards do not provide a means of asset development or a 
way to build credit worthiness. It is regrettable that mainstream banks 
are choosing to serve the financial needs of low- to moderate-income, 
unbanked consumers through second-class financial products and 
services.

Not What Congress Had in Mind: Mainstream Banks Offer High-Cost Credit
    GLBA was intended to modernize banking law and to permit banks to 
affiliate with other financial entities to offer a wide variety of 
mainstream products and services to benefit American consumers. As 
stated above, we see no evidence that the ``synergies'' that the 
proponents of the law promised have led to substantial benefits for 
consumers. While some, primarily affluent consumers may benefit from 
larger multistate ATM networks, from discounts offered for multiple 
account relationships or from sophisticated financial products offered 
by boutique units to high-balance customers, we have seen no evidence 
that GLBA has slowed the continuing trend of rising bank fee income 
(that is from service fees on deposit accounts, from penalty fees on 
credit cards and from ATM surcharges) nor has it helped decrease the 
numbers of the unbanked.
    Indeed, some banks have chosen to go beyond the scope of mainstream 
financial services contemplated in GLBA and now participate in the 
triple-digit-interest rate ``fringe lending'' market, or offer 
predatory products like ``bounce protection'' that are all-but-
indistinguishable from many fringe lending products. Given the number 
of banks now offering these high-cost products, or--in some cases--
affiliating with lenders who do, it is legitimate to ask whether 
Congress was fooled by the promise of innovative, affordable financial 
services products, only to find that the new products that are really 
being promoted have an outrageously high price tag.

Payday Lending and GLBA
    For example, a handful of banks have chosen to ``rent'' their bank 
powers to pawn shops and small loan companies to assist those nonbank 
companies to make small loans at costs that would violate State laws. 
Payday loans are small loans made to cash-strapped consumers, secured 
by a post-dated check or access to the borrower's bank account. Loans 
for up to $500 plus a finance charge of $15 to $30 per $100 borrowed 
are due in full on the borrower's next payday. Payday loans are made 
without regard for the borrower's ability to repay. The cost of payday 
loans averages 470 percent APR, far in excess of some State usury or 
small loan laws.
    Under a ``rent-a-charter'' arrangement, the payday lender markets 
the loans, solicits borrowers, accepts applications, disburses loan 
proceeds, services and collects the loans. The bank generally takes 
only a small percentage of the loan revenues--often as little as 5 
percent--while it is so-called ``agent'' takes the vast majority of the 
revenues generated by the loan.
    While GLBA provided for bank affiliation with other mainstream 
financial entities, we are certain that Congress never intended to 
empower banks to rent their interest rate exportation powers to third 
party entities to make predatory loans or to undercut State authority 
to enforce usury laws, small loan regulations, and, even State payday 
loan laws. That is not what the payday lending industry thinks though. 
The industry filed an amicus brief in the U.S. Court of Appeals for the 
Eleventh Circuit, claiming that Georgia's law violated Section 104 of 
GLBA, despite the fact that Section 104 is clearly intended to govern 
the relationship between State laws and the sale of insurance by 
financial institutions. The Court rejected the brief on grounds that it 
made arguments not included in the District Court case.
    Ten State-chartered FDIC-supervised banks partner with pawn chains, 
check cashers, and payday lenders,\11\ according to CFA's latest 
report, Unsafe and Unsound: Payday Lenders Hide Behind FDIC Bank 
Charters to Peddle Usury. No federally chartered financial institutions 
or state member banks partner with payday lenders, following regulatory 
action by the Comptroller of the Currency, Office of Thrift 
Supervision, and Federal Reserve. These regulators found that payday 
lending exposes federally insured banks to unacceptable safety and 
soundness risks, undermines consumer protections, and carries serious 
reputational risk.
---------------------------------------------------------------------------
    \11\ State-chartered, nonmember banks currently partnering with 
payday lenders are County Bank of Rehoboth Beach, DE; First Bank of 
Delaware; BankWest, Inc., SD; First Fidelity Bank, SD: Community State 
Bank, SD; American Bank & Trust, SD: Bryant State Bank, SD: Reliabank 
Dakota, SD: Republic Bank & Trust, KY; and Venture Bank, WA.
---------------------------------------------------------------------------
    Eleven of the thirteen largest payday loan chains use bank partners 
in States with consumer protection laws that do not permit unregulated 
payday lending, such as Pennsylvania, Arkansas, New York, North 
Carolina, Michigan, and Texas. Georgia recently enacted a law 
strengthening enforcement tools to prevent usury and to prohibit rent-
a-bank payday lending where the local storefront gets the majority of 
the money.
    State banking officials and Attorneys General in several States 
have challenged the claims of payday lenders that banks' exportation 
powers extended to them and alleged that rent-a-bank arrangements are 
fraudulent tactics to cloak illegal loan terms. States from California 
to Maryland have enacted antibroker clauses in an attempt to prevent 
local lenders from partnering with banks to evade State consumer 
protections. In court litigation to date, none of these state 
antibroker laws have been overturned. Federal courts in New York, 
Florida, Maryland, Colorado, North Carolina, and Georgia have denied 
bank/payday lender claims to total preemption of State law and have 
remanded payday loan cases to State court. Yet the FDIC continues to 
permit the banks it supervises to aid storefront lenders in evading 
State consumer protections.
    As the Committee reviews the Gramm-Leach-Bliley Act, we urge you to 
clarify that bank charters are not for rent and halt the misuse of bank 
charters by third party lenders to make loans under terms prohibited by 
States.

Bounce Loans
    Bounce loans \12\ are a high-cost new form of overdraft protection 
that some banks are using primarily to boost their fee revenue, not to 
assist consumers.\13\ Bounce loans represent a systematic attempt to 
induce consumers into using overdrafts as a form of high-cost credit. 
These plans offer short-term credit at triple-digit rates. For example, 
a $100 overdraft will incur at least a $20 fee. If the consumer pays 
the overdraft back in 30 days, the APR is 243 percent. If the consumer 
pays the overdraft bank in 14 days, which is probably more typical for 
a wage earner, the APR is 541 percent.
---------------------------------------------------------------------------
    \12\ Bounce ``protection'' is a euphemism used by banks to describe 
this high-cost credit product.
    \13\ For more information on bounce credit, see Consumer Federation 
of America & National Consumer Law Center, Bounce Protection: How Banks 
Turn Rubber Into Gold By Enticing Consumers to Write Bad Checks (2003), 
available at www.consumerlaw.org/initiatives/test--and--comm/
appendix.shtml.
---------------------------------------------------------------------------
    Bounce loans also permit consumers to overdraw their accounts at 
the ATM, at Point of Sale terminals, and through preauthorized 
electronic payments. For many banks, the available balance displayed on 
the ATM screen includes the overdraft amount, misleading consumers 
about the true balance in accounts. Bounce loan plans turn debit cards 
into credit cards without consumer consent or disclosure of the cost of 
borrowing the bank's money.
    Over 1,000 banks have implemented bounce protection plans. Although 
many of these banks are small community banks, several very large 
national banks and thrifts offer this product as well, including 
Washington Mutual Bank, Charter One, TCF of Minneapolis, and Fifth 
Third of Cincinnati.
    This arrangement is much more expensive than alternatives that most 
banks offer, such as overdraft lines of credit, linking the account to 
a credit card, and transfers from savings. When a consumer uses bounce 
credit, the bank deducts the amount covered by the plan plus the fee by 
setting off the consumer's next deposit, even where that deposit is 
protected income, such as a welfare or Social Security check. Consumers 
who do not want such an expensive ``courtesy'' must explicitly opt out 
by contacting the bank. The fee is often the same amount charged for an 
NSF fee on a returned check, and in some cases the bank also charges an 
additional, per-day fee. The Office of Comptroller of Currency has 
recognized that bounce loans are credit as defined by TILA.\14\ Some 
State regulators have reached the same conclusion.\15\
---------------------------------------------------------------------------
    \14\ Daniel P. Stipano, Deputy Chief Counsel, Office of Comptroller 
of Currency, Interpretive Letter #914, September 2001.
    \15\ Indiana Department of Financial Institutions, Newsletter--
Winter 2002 Edition (Nov. 2002), at 2, Clearinghouse No. (D/E: Fill in 
number); Letter from Assistant Attorney General Paul Chessin, Colorado 
Department of Law, Consumer Credit Unit, Mar. 21, 2001 (in response to 
referral from the Administrator for the Colorado Uniform Consumer 
Credit Code).
---------------------------------------------------------------------------
    There is considerable confusion and misunderstanding among 
consumers about the rules and obligations of bounce loans. Consumers 
often do not understand the full cost of these loans, and they do not 
understand the recurring nature and exorbitant cost of the ongoing use 
of bounce loans. In most cases, consumers do not affirmatively agree to 
this coverage. Instead, the bank imposes coverage to a subset of 
accountholders as a ``courtesy'' or additional service feature of their 
account. Consumers would benefit enormously from application of TILA's 
open-end credit disclosure rules to these expensive and deceptive 
products.
    The Federal Reserve Board recently announced new, proposed rules to 
govern bounce loans, but chose to cover them under the Truth in Savings 
Act, Reg DD. That is a completely inadequate response to the real need 
consumers have for information about the exorbitant costs of these loan 
products. Congress should step in and require--at the least--that 
bounce loans be treated just as all other extensions of credit are 
treated under the Federal Truth in Lending Act. This equivalent 
treatment would simply--and most importantly--require that creditors of 
bounce loans inform consumers about the true costs of this credit and 
give consumers the right to affirmatively choose this product.
    Ultimately, the irresponsible actions of banks in offering bounce 
loans will lead to more unbanked consumers. Instead of discouraging 
overdrafts and encouraging sound financial management, these banks are 
now encouraging consumers to overdraw their accounts and use high-cost 
credit. By permitting overdrafts, not just through checks but ATM's and 
debit cards (where it was impossible or much harder to overdraft 
before), these banks are creating more ways to impose exorbitant fees 
and create financial hardship. These banks may ultimately drive 
consumers away from bank accounts, either through consumer disgust at 
high fees or involuntarily through the Chexsystem blacklist. Consumers 
who are reported in the Chexsystems database for alleged bounced check 
activity find it nearly impossible to open a new account.

GLBA and the Community Reinvestment Act
    The Community Reinvestment Act (CRA) for over 25 years has been a 
major tool in bringing capital and better banking services to the 
Nation's underserved urban and rural communities. Yet given the changes 
well underway in banking and mortgage lending CRA is in need of some 
updating.
    Two trends pose perhaps the greatest challenge to CRA. First, the 
increasing consolidation among banks, increased competition in the 
financial services industry, and the advent of new technologies have 
combined to shift financial assets out of traditional banks covered by 
CRA and into nonbank financial services providers, such as insurance, 
consumer finance companies, and mutual funds. Moreover, the rise of 
nonbank mortgage lending companies and the secondary mortgage market 
have reduced the importance of depository institutions as a source of 
mortgage funding. Consequently, CRA-covered institutions today make 
less than 30 percent of home purchase loans, compared with more than 80 
percent they made when the law was first enacted, which has limited 
CRA's effectiveness.
    The second important trend is the emergence of alternative delivery 
systems for promoting banking products, such as the Internet and 
telephone banking, instead of traditional brick-and-mortar branching 
networks. The changing way in which banks offer products to consumers 
poses a challenge to CRA, which traditionally relied upon a place-based 
definition to determine a bank's compliance responsibilities.
    Two key changes to CRA would help to modernize the law and keep 
pace with these trends. First, CRA should be broadened to encompass a 
larger share of nonbank financial service providers. This can be done 
by extending CRA-like requirements to nonbank firms that are performing 
bank-like functions. The second key adjustment to CRA would be to 
broaden the definition of community beyond those areas where banks have 
physical branches. The expanding use of new technologies means that a 
bank's community for CRA purposes can no longer serve as a reasonable 
proxy for the location of a bank's customer base anymore. The banking 
regulators have discussed making such adjustments via regulations but 
have yet to act on these proposals.
    GLBA provided an important opportunity to ``modernize'' CRA by 
applying these types of requirements to nonbank mortgage companies, 
insurance firms, and other financial institutions that affiliate with 
CRA covered banking institutions. Unfortunately, this did not happen. 
We encourage the Committee to update CRA along the lines we discuss as 
part of future legislation.
    While failing to update CRA, GLBA includes a CRA-related provision 
that is not particularly constructive. I am referring to the so-called 
``CRA Sunshine Requirements,'' as contained in Section 711 of the Act. 
The provision requires banks and community groups to report to Federal 
regulators about certain ``CRA agreements'' made pursuant to or ``in 
fulfillment of'' CRA.
    Over the years, CRA agreements between banks and local community 
groups have been frequently used to resolve disputes about lending 
practices and to target special efforts and facilitate local community 
reinvestment partnerships. Often these ``CRA agreements'' are reached 
while bank expansion requests are pending before regulators, although 
in recent years more and more institutions have elected to use pending 
mergers to announce unilateral CRA pledges.
    Whatever the merits of requiring the reporting and disclosure of 
such agreements this statutory provision has not proven terribly useful 
to anyone concerned with these issues.
    For one thing, the CRA sunshine provision is not particularly well-
crafted, requiring some CRA agreements to be reported and but not 
others. For example, it does not require banks to report unilateral CRA 
pledges, which now have become the predominate form that these 
commitments take. At the same time, CRA sunshine continues to impose 
reporting burdens on those banks and their community group entering 
into the more traditional types of two-party agreements. This is an 
inequity that neither the statute nor its regulations address.
    Further, the CRA sunshine requirements were premised on what 
appears to be a faulty assumption--that community groups are somehow 
using the CRA process to extort money from banks for themselves. In 
fact, a study by the National Community Reinvestment Coalition that 
reviewed CRA agreements filed with Federal regulators found that only 
.3 percent of the total funding contained in these agreement to be 
devoted toward general operating support for the nonbank parties. The 
disclosures confirm that the vast majority of these funds are directed 
to legitimate 
lending activities. (CRA Sunshine Reveals Benefits of Bank-Community 
Group Partnerships, National Community Reinvestment Coalition, 2002, at 
3).
    We believe that the CRA sunshine provision has outlasted its 
usefulness, if indeed it truly ever had one. We favor, therefore, 
repeal. Should the requirement be maintained, however, we believe that 
it should be overhauled to reduce its inequities and to minimize the 
reporting burdens and inconvenience this reporting provision imposes on 
the affected parties.

                               ----------
                 PREPARED STATEMENT OF RONNIE TUBERTINI
                 Chairman, Government Affairs Committee
        The Independent Insurance Agents and Brokers of America
                             July 13, 2004

     Good morning Chairman Shelby, Ranking Member Sarbanes, and Members 
of the Committee. My name is Ronnie Tubertini, and I am pleased to have 
the opportunity to give you the views of the Independent Insurance 
Agents & Brokers of America (IIABA) on the Gramm-Leach-Bliley Act 
(GLBA) \1\ and its effects on the insurance marketplace. I am President 
and CEO of SouthGroup Insurance and Financial Services, Mississippi's 
largest privately owned insurance agency. SouthGroup is a Jackson-based 
insurance agency employing 120 people in 17 locations across the State. 
Although based in Mississippi, SouthGroup writes business in over 20 
States and provides foreign coverage for clients operating outside of 
the United States. My agency represents over 50 insurance companies. I 
am also the current Chairman of IIABA's Government Affairs Committee.
---------------------------------------------------------------------------
    \1\ Gramm-Leach-Bliley Act of 1999, Pub. L. No. 106-102, 113 Stat. 
1338 (1999).
---------------------------------------------------------------------------
    IIABA is the Nation's oldest and largest national trade association 
of independent insurance agents and brokers. We represent more than 
300,000 agents, brokers and agency employees nationwide. IIABA members 
are small, medium, and large businesses that offer customers a choice 
of policies from a variety of insurance companies. Independent agents 
and brokers offer all lines of insurance--property, 
casualty, life, health, employee benefit plans, and retirement 
products.

Overview
    The Gramm-Leach-Bliley Act,\2\ signed on November 12, 1999, was the 
culmination of nearly two decades of effort by Congress and the 
financial services industry to eliminate the Depression-era laws and 
regulations which prevented depository institutions from affiliating 
with both insurance companies/producers and with securities firms. The 
GLBA also clarified the respective regulatory duties and powers of 
Federal and State regulators as these industries began to engage in 
each other's businesses.
---------------------------------------------------------------------------
    \2\ Previously known as the ``Financial Services Modernization Act 
of 1999.''
---------------------------------------------------------------------------
    We would like to focus on three parts of GLBA that directly affect 
insurance: (1) Title I, which facilitates affiliation between banks and 
securities firms and insurance companies by repealing major portions of 
the Glass-Steagall Act,\3\ the Bank Holding Company Act of 1956 \4\ and 
other Federal banking laws; (2) Title III, Subtitle C, ``National 
Association of Registered Agents & Brokers,'' which was designed to 
encourage the States to establish a reciprocal or uniform agent 
licensing system; and (3) Title III, Subtitle A, ``State Regulation of 
Insurance,'' which reaffirms the traditional and primary authority of 
the States to functionally regulate the business of insurance in the 
United States and clarifies the extent to which banks, or their direct 
subsidiaries, may engage in insurance.\5\ Below we will describe these 
three aspects \6\ and the effect each has had so far on the insurance 
marketplace in general and the independent agency system in particular. 
We will also discuss what lessons may be learned from them when 
considering potential reforms to the insurance regulatory structure.
---------------------------------------------------------------------------
    \3\ The Banking Act of 1933, Pub. L. No. 73-66, 48 Stat. 162 
(1933).
    \4\ The Bank Holding Company Act of 1956, Pub. L. No. 84-511, 70 
Stat. 133 (1956).
    \5\ GLBA Tit. I, Subtit. B, Sec. 112 (Authority of State Insurance 
Regulators) also confirms the responsibility of States for the 
functional regulation of insurance; Tit. I, Subtit. C, Sec. 121 
(Subsidiaries of National Banks) similarly restricts banks' ability to 
engage in insurance activities through operating subsidiaries.
    \6\ GLBA Tit. III, Subtit. B, (Redomestication of Mutual Insurers) 
and Subtit. D (Rental Car Agency Insurance Activities) also relate to 
specialized insurance issues. In addition, Title V (Privacy) affects 
insurance entities as well as other financial services, but that Title 
makes clear--consistent with Tit. III Subtit. A's reaffirmation of the 
State role--that State insurance regulators are responsible for privacy 
supervision of the insurance sector.
---------------------------------------------------------------------------
The Experience under Gramm-Leach-Bliley
Affiliation Among Banks, Securities Firms, and Insurance Companies
    Title I of the GLBA (Facilitating Affiliation Among Banks, 
Securities Firms, and Insurance Companies) allows depository 
institutions, securities firms, insurance companies, and other firms 
engaged in financial services to affiliate under a new financial 
holding company (FHC) structure. Title I also provides for the 
supervision of these new FHC's, streamlines somewhat the preexisting 
bank holding company (BHC) supervision and specifies what financial 
activities could be conducted directly in a bank or its subsidiary and 
which were required to be conducted through other nonbank affiliates 
within the FHC.
    With the authorization of these new FHC systems, many industry 
experts predicted that mega-mergers among the largest players in the 
banking, securities, and insurance industries would transform the 
financial services landscape. The expectation was that convergence 
would lead to only a few, large diversified companies left standing to 
offer consumers ``one-stop-shopping''--a smorgasborg of financial 
services products.
    However, this has not come to pass. So far there has not been a 
massive move toward consolidation of the country's major financial 
services companies. Some mergers have occurred, but most have not been 
among the leading players--two exceptions to that general rule being 
the Citicorp-Travelers Group deal, which was on the table when GLBA was 
enacted; \7\ and more recently the Bank One purchase of key components 
of Zurich Life from Zurich Financial Services Group in 2003. The 
convergence of products and services that began in the 1980's continues 
to occur but through smaller and more targeted merger activity. Banks 
have bought individual securities firms and insurance agencies instead 
of insurance companies as had been predicted, and insurance companies 
and agencies have also begun to offer a wider variety of products.
---------------------------------------------------------------------------
    \7\ It should be noted, however, that in 2002 Citigroup spun off 
Travelers Property Casualty Group while retaining Travelers Life and 
Annuity Company.
---------------------------------------------------------------------------
    Banks have been reluctant to get into the insurance business, the 
underwriting side if not sales, for a couple of reasons. First, the 
insurance industry typically has a lower return on equity than the rest 
of the financial services industry. Over the last decade, diversified 
financial firms have earned nearly a 20 percent rate of return, banks 
around 15 percent, and insurance companies generally between 5-10 
percent. Put simply, acquiring insurers oftentimes does not make 
economic sense for banks.
    Second, there is philosophical conflict between the two industries 
and, it seems, limited opportunity for synergies. Banks are by nature 
risk averse and the insurance industry is inherently volatile and 
risky. After all, insurance at its core is the aggregation of risk. The 
insurance marketplace differs from most other financial services in 
that insurers must price and sell their policies before the full cost 
of coverage is known. This is especially true in the property/casualty 
marketplace where insurers must try to anticipate losses such as 
catastrophic exposures like earthquakes, hurricanes, and now terrorism. 
Insurer results are also whipsawed by unexpected changes in the legal 
system, such as Superfund or asbestos-related expenses, which can have 
a negative effect on company surplus. Property/casualty insurers 
typically break even or lose money on their underlying business, the 
underwriting of risk--that is before investment income is taken into 
account. The first half of this year was only the second time the U.S. 
property/casualty industry has posted a collective underwriting profit 
since 1986. It appears that banks are not willing to use available 
capital to get into underwriting insurance as it is a very complicated 
and difficult business.
    Banks have been more inclined to get into the sale of insurance 
through the acquisition of insurance agencies; however, this trend has 
not been overwhelming. According to the Financial Services Fact Book 
2004,\8\ banks acquired 60 securities firms and 74 insurance agencies 
in 2002 \9\ (latest data available). While the number of bank purchases 
of insurance agencies increased in 2002 by 17 percent from 2001, the 
value of those deals decreased in that same year by 68 percent.\10\ In 
fact, the number of bank/agency deals in the period from 1999-2002 has 
remained relatively constant with 66 in 1999, 77 in 2000, 63 in 2001, 
and 74 in 2002.\11\
---------------------------------------------------------------------------
    \8\ Insurance Information Institute and the Financial Services 
Roundtable, The Financial Services Fact Book 2004 (Dec. 15, 2003), 
available at www.financialservicesfacts.org. (FS Fact Book)
    \9\ Id. at V.
    \10\ Id. at 76.
    \11\ Id.
---------------------------------------------------------------------------
    On the flip side, more insurance trade associations and a few 
individual carriers have now entered the banking market. This has come 
more in the form of applications for thrift charters to open new OTS-
supervised banks instead of buying existing banks. Examples of 
insurers--or their trade associations--wading into the banking market 
are the National Association of Mutual Insurance Companies, State Farm, 
and Metlife. The IIABA has done the same with InsurBanc, the Federal 
savings bank developed jointly by the IIABA and the W.R. Berkley 
Corporation to serve independent agents and brokers as well as their 
clients. InsurBanc opened on April 30, 2001. Three years later, 
InsurBanc has more than $32 million in deposits and $60 million in 
assets, including the investment of nearly $30 million in agency-
related loans.\12\ Along with agency financing products and services, 
InsurBanc offers working capital lines of credit, commercial term 
loans, and commercial real estate loans. InsurBanc also provides an 
array of consumer banking products that agents and brokers can offer to 
their clients, including consumer loans, credit cards, home equity 
loans, mortgages, certificates of deposit, and money market accounts.
---------------------------------------------------------------------------
    \12\ For more information on InsurBanc's products and services, go 
to www.insurbanc.com.
---------------------------------------------------------------------------
    While the mega-mergers that some envisioned have not occurred, 
consolidations within most financial services sectors have boosted the 
market share of the largest players in those sectors. This trend, which 
began in the mid-1990's, has continued in this decade for the insurance 
industry. From 1996 to 2002 the market share of the top 10 companies 
grew from 38 to 51 percent in the life/health insurance market and from 
35 to 55 percent in the property/casualty marketplace.\13\
---------------------------------------------------------------------------
    \13\ FS Fact Book at V.
---------------------------------------------------------------------------
    As life insurers, who are perhaps the most challenged by product 
convergence from noninsurance players, attempt to diversify their 
revenue streams and gain economies of scale, further consolidation 
among the remaining 1,462 U.S. life/health insurers is expected.\14\ 
One commentator predicts that the market share of the top 10 life 
insurers will approach 75 percent by the end of the decade.\15\ 
Continued consolidation is also anticipated in the property/casualty 
industry. Some expect the number of U.S. property/casualty insurers, 
now numbering approximately 3,300, to fall by 30 percent over the next 
decade.\16\ With the fractured capital that this current large number 
of players in both the life/health and property/casualty industries 
represents and the inherent volatility of the business, it is perhaps 
not surprising that return on equity has been lower for insurance 
underwriters than the rest of the financial services industry.
---------------------------------------------------------------------------
    \14\ Meg Green, Bulking Up, Best's Review, July 2004, July 2004, at 
22-23
    \15\ Id.
    \16\ FS Fact Book at 1.
---------------------------------------------------------------------------
    Industry experts are currently divided on whether the industry 
consolidation will occur through large companies merging with or making 
wholesale acquisitions of others (that is the St. Paul Cos.-Travelers 
Property Casualty deal of 2003) or insurers taking only selected bits 
and pieces of other companies in the form of purchases of specific 
lines or blocks of business. Regardless, the result is largely expected 
to be the same: Increased consolidation in the insurance marketplace.
    The independent agency system has followed the overall insurance 
industry trend toward consolidation. In 2002 (latest data available), 
there were 192 announced mergers and acquisitions in the agent/broker 
community. The number of deals has remained relatively constant over 
the 5-year period from 1998 to 2002 with 184 deals in 1998, 235 deals 
in 1999, 188 deals in 2000, and 179 deals in 2001.\17\ This however 
involves a relatively small number of all independent agencies, which 
continues to be a principal form of p/c insurance product distribution.
---------------------------------------------------------------------------
    \17\ FS Fact Book at 3.
---------------------------------------------------------------------------
National Association of Registered Agents and Brokers (NARAB)
    One of the most significant accomplishments of GLBA for the 
insurance marketplace was the NARAB Subtitle, which launched a producer 
licensing reform effort that continues today. Prior to the enactment of 
GLBA, each State managed its agent/broker licensing process in a 
distinct and independent manner, and there was virtually no consistency 
or reciprocity among the States. For agents and brokers, who 
increasingly operate in multiple jurisdictions, the financial and 
paperwork burdens associated with multi-State licensing compliance 
became overwhelming; and consumers suffered as duplicative and 
redundant regulatory requirements made it difficult for producers to be 
responsive to their needs. However, insurance producer licensing has 
improved dramatically over the last 5 years, and these changes are a 
direct result of Congress' decision to address these issues in Subtitle 
C.
    The Subtitle put the ball in the States' court by threatening the 
creation of a new national, NASD-style licensing entity--known as the 
National Association of Registered Agents and Brokers--if the States 
did not satisfy the licensing reform objectives articulated by 
Congress. The creation of NARAB was only averted when a 
majority of the States and territories (interpreted to be 29 
jurisdictions) achieved a specified level of licensing reciprocity 
within a 3-year period.
    To their credit, the National Association of Insurance 
Commissioners (NAIC) and most States took swift and unprecedented 
action in response to ``act-or-else'' licensing provision. Nearly every 
State enacted new legislation that established licensing reciprocity 
among the States and instituted interstate uniformity in certain 
critical areas. According to the NAIC, at least 48 States have passed 
licensing reform legislation since the enactment of GLBA, and over 40 
jurisdictions have been formally certified as meeting the NARAB 
mandates. There is no dispute that the NARAB provisions had their 
intended effect and initiated the move toward licensing modernization 
at the State level. Although more improvement is undoubtedly needed, 
the States have made significant progress in the 5 years since the 
passage of GLBA.
    The success of the NARAB licensing provisions is a perfect example 
of what the Federal Government and the States can accomplish in 
partnership and how Congress can assist the States to achieve much 
needed marketplace reforms. The NAIC and State policymakers had been 
trying to move toward reciprocal and uniform licensing for over a 
century, but little progress was made until Congress set a specific 
deadline and attached specific goals and repercussions. In fact, 
Congress set the bar at only a majority of the States and now all but a 
handful of States have met the NARAB reciprocity standard. This success 
would not have occurred without targeted Federal legislation, or what 
some are now calling ``Federal tools.''
    Some may argue that the bar was not set high enough--because 
uniformity was not required and several States have not adopted the 
reciprocity standards--but there is no arguing with the provision's 
effectiveness so far. There is certainly much more to do to get to full 
agent licensing reciprocity and the ultimate goal of licensing 
uniformity, but NARAB has set State insurance regulators on the right 
path, and Congress can now easily move the bar higher in follow-up 
legislation.

Functional Regulation--State Insurance Regulation
    Perhaps the most important accomplishment of GLBA in protecting 
insurance consumers was its focus on functional regulation. The concept 
of functional regulation provides that insurance regulators oversee the 
business of insurance, banking regulators oversee banking activity, and 
securities regulators likewise are responsible for securities activity. 
GLBA specifically reaffirmed the traditional authority of the States to 
regulate the business of insurance in the United States.
    GLBA expressly states that the McCarran-Ferguson Act \18\ remains 
the law of the United States and further states that no person shall 
engage in the business of insurance in a State as principal or agent 
unless such person is licensed as required by the appropriate insurance 
regulator of such State. Title III also unequivocally provides that 
``[t]he insurance activities of any person (including a national bank 
exercising its powers to act as agent . . .) shall be functionally 
regulated by the States,'' subject only to certain exceptions which are 
intended to prevent a State from thereby frustrating the new 
affiliation policy adopted in Title I of GLBA. These provisions 
collectively ensured that State insurance regulators retained 
regulatory authority over all insurance activities, including those 
conducted by financial institutions and their insurance affiliates. 
Title III also provided for expedited judicial review of disputes 
between State officials and Federal financial regulators, with the 
courts being directed to give equalized deference to the rulings or 
actions of both the States and the Federal regulator. These mandates 
were intended in large part to draw the appropriate boundaries among 
the financial regulators, boundaries that unfortunately continue to be 
challenged.
---------------------------------------------------------------------------
    \18\ McCarran-Ferguson Act, ch. 20, 59 Stat. 33 (1945) (codified as 
amended at 15 U.S.C. Sec. Sec. 1011-1015 (1994)).
---------------------------------------------------------------------------
    Since GLBA codified this important principle, the focus has largely 
shifted to the success of functional regulation in the insurance 
marketplace and the effectiveness and efficiency of State insurance 
regulation. The discussion has taken on more urgency as the perceived 
need for regulatory reform has increased due to the emergence of a more 
global financial services industry.
    From the beginning of the insurance business in this country, it is 
the States that have carried out the essential task of regulating the 
insurance marketplace to protect consumers. The current State insurance 
regulatory framework has its roots in the 19th century with New 
Hampshire appointing the first insurance commissioner in 1851, and 
insurance regulators' responsibilities have grown in scope and 
complexity as the industry has evolved. When a Supreme Court decision 
raised questions about the role of the authority of the States, 
Congress quickly adopted the McCarran-Ferguson Act in 1945. That Act, 
which was reaffirmed by Congress 5 years ago, declared that States 
should regulate the business of insurance and that the continued 
regulation of the insurance industry by the States was in the public's 
best interest.
    Most observers agree that State regulation has worked effectively 
to protect consumers, largely because State officials are positioned to 
be responsive to the needs of the local marketplace and local 
consumers. Unlike most other financial products, the purchaser of an 
insurance policy will not be able to fully determine the value of the 
product purchased until after a claim is presented--when it is too late 
to decide that a different insurer or a different product might make a 
better choice. As a result, insurance is a product with which consumers 
have many issues and questions and if a problem arises they want to 
resolve it with a local call. During 2001, State insurance regulators 
handled approximately 3.6 million consumer inquiries and complaints. 
Today, State insurance departments employ approximately 13,000 
individuals who draw on over a century-and-a-half of regulatory 
experience to protect insurance consumers.
    Unlike banking and securities, insurance policies are inextricably 
bound to the separate legal systems of each State, and the policies 
themselves are contracts written and interpreted under the laws of each 
State. When property, casualty, and life claims arise, their legitimacy 
and amounts must be determined according to individual State legal 
codes. Consequently, the constitutions and statue books of every State 
are thick with language laying out the rights and responsibilities of 
insurers, agents, policyholders, and claimants. State courts have more 
than 100 years of experience interpreting and applying these State laws 
and judgments. The diversity of underlying State reparations laws, 
varying consumer needs from one region to another, and differing public 
expectations about the proper role of insurance regulation require 
local officials ``on the beat.''
    Protecting policyholders against excessive insurer insolvency risk 
is one of the primary goals of insurance regulation. If insurers do not 
remain solvent, they cannot meet their obligations to pay claims. State 
insurance regulation gets high marks for the financial regulation of 
insurance underwriters. State regulators protect policyholders' 
interests by requiring insurers to meet certain financial standards and 
to act prudently in managing their affairs. The States, through the 
NAIC, have developed an effective accreditation system for financial 
regulation that is built on the concept of domiciliary deference (the 
State where the insurer is domiciled takes the lead role). When 
insolvencies do occur, a State safety net is employed: The State 
guaranty fund system. The system has paid out over $11 billion to cover 
claims asserted against insolvent insurers since they were first 
created in the mid-1970's. States also supervise insurance sales and 
marketing practices and policy terms and conditions to ensure that 
consumers are treated fairly when they purchase products and file 
claims.
    Despite its many benefits, State insurance regulation it not 
without its share of problems. The shortcomings of State regulation of 
insurance fall into two primary categories--it simply takes too long to 
get a new insurance product to market, and there is unnecessary 
duplicative regulatory oversight in the licensing and post-licensure 
auditing process.
    In many ways, the ``speed-to-market'' issue is the most pressing 
and the most vexing from both a consumer and an agent/broker 
perspective because we all want access to new and innovative products 
that respond to identified needs. The reality of today's marketplace is 
that banking institutions and securities firms are able to develop and 
market new and more innovative products and services quickly, while 
insurance companies are hampered by lengthy and complicated filing and 
approval requirements in 50 States. As a result, insurance companies--
and, derivatively, agents and brokers selling their products and 
services--are at a competitive disadvantage compared to their 
counterparts in other financial services sectors.
    Today, insurance rates and policy forms are subject to some form of 
regulatory review in nearly every State, and the manner in which rates 
and forms are approved and otherwise regulated can differ dramatically 
from State-to-State and from one insurance line to the next. Such 
requirements are significant because they not only affect the products 
and prices that can be implemented, but also the timing of product and 
rate changes in today's competitive and dynamic marketplace. The 
current system, which may involve seeking approval for a new product or 
service in up to 55 different jurisdictions, is too often inefficient, 
paper intensive, time-consuming, and inconsistent with the advance of 
technology and regulatory reforms made in other industries. Cumbersome 
inefficiencies create opportunity costs, and the regulatory regime in 
many States is likely responsible for driving many consumers into 
alternative market mechanisms. In order to keep insurers competitive 
with other financial services entities and maximize consumer choice in 
terms of the range of products available to them, changes and 
improvements are needed.
    Similarly, insurers are required to be licensed in every State in 
which they offer insurance products, and the regulators in those States 
have an independent right to determine whether an insurer should be 
licensed, to audit its market-conduct practices, to review mergers and 
acquisitions, and to dictate how the insurer should be governed. It is 
difficult to discern how the great cost of this duplicative regulatory 
oversight is justified.
IIABA's Support for the NARAB Approach of Targeted Reforms
    As we have for over 100 years, IIABA supports State regulation of 
insurance--for all participants and for all activities in the 
marketplace--and we are opposed to any form of Federal regulation, 
optional or otherwise. Yet despite this historic and longstanding 
support for State insurance regulation, we are not confident that the 
State system will be able to resolve its problems on its own. For the 
most part, reforms must be made by statute, and State lawmakers 
inevitably face practical and political hurdles and collective action 
challenges in their pursuit of improvements on a national basis.
    Therefore, IIABA believes that there is a vital role for Congress 
to play in helping to reform the State regulatory system, but that such 
an effort need not replace or duplicate at the Federal level what is 
already in place and successful at the State level. We propose that two 
overarching principles should guide any such efforts in this regard. 
First, Congress should attempt to fix only those components of the 
State system that are broken. Second, no actions should be taken that 
in any way jeopardize the protection of the insurance consumer, which 
is the fundamental objective of insurance regulation and of paramount 
importance to the IIABA as our members represent consumers in the 
insurance marketplace.
    IIABA believes the best alternative for addressing the current 
deficiencies in the State-based regulatory system is a pragmatic, 
middle ground approach that utilizes Federal legislative tools to 
foster a more uniform system and to streamline the regulatory oversight 
process at the State level. By using targeted and limited Federal 
legislation to overcome the structural impediments to reform at the 
State level, we can improve rather than replace the current State-based 
system and in the process promote a more efficient and effective 
regulatory framework. Rather than employ a one-size-fits-all regulatory 
approach, a variety of legislative tools could be employed on an issue-
by-issue basis to take into account the realities of today's 
increasingly global marketplace. There are only a handful of regulatory 
areas where 
uniformity and consistency are imperative, and Congress has the ability 
to address each of these core issues on a national basis in a single 
legislative act.
    Congress's work in this area need not jeopardize or undermine the 
knowledge, skills, and experience that State regulators have developed 
over decades. While IIABA believes such a proposal must modernize those 
areas where existing requirements or procedures are outdated, it is 
important to ensure that this is done without displacing the components 
of the current system that work well. In this way, we can assure that 
insurance regulation will continue to be grounded on the proven 
expertise of State regulators at the local level.
    The enactment of targeted Federal legislation to address certain, 
clearly identified problems with State regulation is not a radical 
concept. The Senate Banking Committee and the House Financial Services 
Committee have already proven that this approach can work with the 
NARAB provisions of GLBA that we have already discussed. The IIABA 
believes the NARAB model can serve as a template for further reform of 
State insurance regulation. The leadership of the House Financial 
Services Committee has recently decided to take the NARAB approach of 
``targeted reform'' after conducting a 3-year, in-depth review of 
insurance regulation. We understand the Senate Banking Committee still 
has much to consider on this subject and the IIABA looks forward to 
working with you in any review of State insurance regulation and 
potential reforms that the Committee may conduct.

Conclusion
    In conclusion, we can say that the GLBA has not fundamentally 
altered the insurance landscape for consumers. While the consolidation 
within the insurance marketplace that began in the 1990's has continued 
and perhaps increased, the mega-mergers of financial services providers 
that were expected have generally not occurred. GLBA reaffirmed the 
authority of the States to functionally regulate insurance, and led to 
substantial reform in the multi-State licensing of agents and brokers 
through the NARAB Subtitle. This was an important precedent in 
insurance regulation that Congress can look to in the future.

                               ----------
                  PREPARED STATEMENT OF STEVE BARTLETT
                 President and Chief Executive Officer
                   The Financial Services Roundtable
                             July 13, 2004

    Mr. Chairman and Members of the Committee, I am Steve Bartlett, and 
I am President and Chief Executive Office of The Financial Services 
Roundtable.
    I particularly appreciate the opportunity to testify on the impact 
of the Gramm-Leach-Bliley Act (GLBA). The Roundtable's membership 
reflects the spirit of that landmark law. The Roundtable members are 
100 of the Nation's largest integrated financial services companies 
providing banking, insurance, and investment products and services to 
the American consumer.
    With the enactment of GLBA, Congress acknowledged the contribution 
of the financial services industry to our economy. Not only are 
financial services firms directly responsible for almost 10 percent of 
our Nation's total gross domestic product (GDP), but they also 
contribute to the Nation's GDP by financing the activities of 
individual consumers and businesses. It is, therefore, appropriate for 
the Committee to review the impact of GLBA on the financial services 
industry and the economy as a whole.
    One of the principal goals of GLBA was to maintain the 
competitiveness of the financial services industry so that all 
Americans could have access to financial services. Indeed, in writing 
GLBA, lawmakers set out to create an environment whereby the 
marketplace would determine through what channels consumers are able to 
purchase financial services. The environment is governed by regulations 
that ensure safety and soundness and consumer protection, but not what 
products can be offered, or by whom. By this standards GLBA has, in 
large measure, been a success. The U.S. financial services industry is 
the envy of the world. U.S. financial services firms are among the 
world's largest and best capitalized firms. The Roundtable members 
offer American consumers and businesses an ever-increasing array of 
financial products and services designed to address needs ranging from 
home loans, life insurance, securities brokerage, and retirement 
services.
    However, in the past 5 years it has become apparent that some 
modifications to GLBA are necessary. In the remainder of my statement,I 
will outline some of the changes to GLBA that The Roundtable 
recommends.

Amend GLBA to Establish Uniform, National Privacy, Insurance, and
Mortgage Lending Standards
    In the past 5 years, it has become increasingly apparent that a 
number of financial services firms operate on a nationwide basis. They 
offer financial products and services to consumers and businesses not 
only through physical offices, but also over the Internet and 
telephone. Therefore, The Roundtable recommends that GLBA be amended to 
subject national financial services firms to uniform, national 
regulation.
    This is not a call for the elimination of regulation. It is a 
recommendation that financial firms that operate on a national basis be 
subject to a single set of national standards rather than a 
multiplicity of State and local regulatory requirements.
    More importantly, this is a recommendation that is intended to 
benefit the consumers of financial products and services. Overlapping 
and conflicting State and local regulatory requirements increase the 
operating costs of national firms, and these costs, inevitably, are 
passed along to consumers. Overlapping and conflicting State and local 
regulatory requirements also impair the ability of national firms to 
offer uniform products and services, This complicates life for the 
homeowner that moves from one State to another and seeks to receive the 
same financial products and services in his or her new home State. It 
also prevents a company that operates in multiple States from 
purchasing the same financial product or service for all of the 
company's facilities.
    This Committee recently recognized the importance of uniform, 
national laws in the reauthorization of the Fair Credit Reporting Act. 
The principle of uniform, national financial regulation also is 
embedded in the National Bank Act, which applies to national banks, and 
the Home Owners' Loan Act, which applies to Federal savings 
associations.
    The need for national standards is most evident in three areas: 
Privacy, insurance, and mortgage lending.

Privacy
    Title V of GLBA imposed a number of privacy requirements upon 
financial institutions. These requirements include the distribution of 
an annual privacy notice to consumers, and they permit consumers to 
prevent the sharing of personal financial information with unaffiliated 
third parties. Title V of GLBA also expressly authorizes the States to 
adopt privacy notice and disclosure laws that afford consumers greater 
protection. The Roundtable urges the Committee to modify this provision 
of GLBA and establish uniform, national privacy standards for financial 
institutions.
    Two examples illustrate the confusion and conflict created by 
current law. First, like many consumers, The Roundtable member 
companies have found that the annual privacy notice required by GLBA is 
overly confusing, and largely ignored by many consumers. Extensive 
research indicates that consumers have difficulty processing notices 
that contain more than seven elements, and that require a reader to 
translate vocabulary used in the notice into concepts they understand. 
Consumer surveys also indicate that over 60 percent of consumers would 
prefer a shorter notice than the lengthy privacy policy mandated by 
GLBA.
    The Federal banking agencies, in conjunction with the Federal Trade 
Commission, the National Credit Union Administration, the Commodities 
Futures Trading Commission, and the Securities and Exchange Commission, 
recently requested comment on alternative notices that would be more 
readable and useful to consumers. Yet, even if these agencies develop a 
simplified notice, they lack the authority to make the notice truly 
consumer-friendly because GLBA leaves the States free to adopt their 
own, additional, notice requirements.
    An illustration of the conflict created by GLBA's deference to 
State privacy laws arose just 2 weeks ago, when a Federal court 
affirmed the application of a California privacy law to financial 
institutions operating in that State. The California law, SB 1, permits 
consumers to prevent the sharing of information with affiliates (for 
example opt out) and requires that consumers affirmatively authorize 
the sharing of information with nonaffiliated third parties (for 
example, opt in). In ruling that the FCRA does not preempt the 
application of this law to financial institutions operating in 
California, the court based its opinion in part on the provisions of 
GLBA that allow States to adopt more stringent privacy laws, and that 
the Federal preemption applicable to affiliate sharing in the Fair 
Credit Reporting Act is limited strictly to credit reports. As the 
court stated: ``. . . Title V of the Gramm-Leach-Bliley Act of 1999, 
which sets forth basic privacy protections that must be provided to 
consumers by financial institutions, demonstrates that it, and not the 
FCRA, encompasses the kind of information sharing at issue in this 
case.'' \1\ This decision, if not reversed, amounts to an invitation to 
other States to pass their own privacy laws, thereby subjecting 
financial institutions, and their customers, to a variety of different 
and conflicting privacy regulations contrary to the clear intent of 
Congress to establish national uniform standards for affiliate sharing.
---------------------------------------------------------------------------
    \1\ American Bankers Assoc. et. al. v. Lockyer, at page, 10.
---------------------------------------------------------------------------
    To avoid this consumer confusion and reaulatory conflict, the 
privacy standards in GLBA should be national, uniform standards. Also, 
the Federal regulators should be directed to promulgate a simplified, 
national privacy notice with a safeharbor.

Insurance
    Title III of GLBA reaffirmed that the business of insurance is 
regulated primarily by the States. During the past 5 years, however, 
all parties to insurance regulation, including the State insurance 
commissioners, have concluded that the current system of insurance 
regulation is flawed. Indeed, the regulatory regime should be 
updated to reflect the needs of our mobile, transient population. As 
the former President of the National Association of Insurance 
Commissioners, Mike Pickens, told the House Financial Services 
Committee last year: ``We agree with critics that there is a need to 
make the [insurance regulatory] system more uniform, reciprocal, and 
efficient.'' \2\
---------------------------------------------------------------------------
    \2\ Hearing on ``Reforming Insurance Regulation'' before the 
Capital Markets, Insurance and Government Sponsored Enterprises 
Subcommittee of the House Financial Services Committee, November 5, 
2003.
---------------------------------------------------------------------------
    The Roundtable has concluded that the best way to reform the 
regulation of insurance is to create a parallel system of chartering 
and supervision for insurance companies at the Federal level. This so-
called ``optional Federal chartering'' system would not replace State 
insurance regulation. Instead, it would give insurance companies a 
supervisory alternative, similar to that available to banks and 
thrifts.
    A soon-to-be published study that was partially funded by The 
Roundtable has found that the competition between the States and the 
Federal Government inherent in the dual banking system has generated 
significant benefits for banks, their regulators and their customers. 
Those benefits include enhanced product and regulatory innovation, 
expanded consumer choices, and expanded efficiencies in bank activities 
and regulations.\3\ These same benefits would flow to the insurance 
industry, its regulators and its customers through the introduction of 
optional Federal regulation of insurance.
---------------------------------------------------------------------------
    \3\ ``The Benefits of Competition in Financial Regulation: 
Innovation, Choice and Efficiency,'' a paper by James A. Wilcox, 
Kruttschnitt Family Professor of Financial Institutions, Haas School of 
Business, University of California, Berkeley. We will provide the 
Committee a copy of this study upon publication.
---------------------------------------------------------------------------
Mortgage Lending
    GLBA addressed mortgage lending through provisions in Title I, 
which authorized financial holding companies to engage in mortgage 
lending, and Title VI, which made various reforms to the Federal Home 
Loan Bank System. In the 5 years since the enactment of GLBA, however, 
the regulation of mortgage lending has become a ``hot'' topic, as a 
variety of State and local governments have enacted laws designed to 
stop predatory lending practices, and as this Committee has debated the 
supervision of not only the Federal Home Loan Banks, but also Fannie 
Mae and Freddie Mac.
    Accordingly, The Roundtable urges the Committee to amend GLBA and 
enact a national mortgage lending law that establishes basic 
antipredatory lending protections for mortgage borrowers. This Federal 
law should apply uniformly to all lenders, regardless of charter, and 
should supersede State antipredatory lending laws.
    The rationale for a uniform, national mortgage lending law is the 
same as the rationale for a uniform, national privacy law: A single, 
Federal standard avoids consumer confusion and the potential for 
conflict between competing State and local laws.

Amend GLBA to Remove Sunset on Non-Financial Activities
    One of the central features of GLBA was the creation of financial 
holding companies. It is now apparent that this feature of the bill has 
been only marginally successful. While most of the Nation's largest 
banking firms have become financial holding companies, only a handful 
of securities firms and insurance firms have chosen to do so. The 
financial holding company structure significantly expanded the scope of 
activities permissible for banking firms; it did not offer insurance 
firms and securities firms a similar benefit. Outside of the financial 
holding company structure, securities and insurance firms are subject 
to few limitations on affiliations. Thus, it is not surprising that 
only a handful of securities and insurance firms have become financial 
holding companies.
    In a marketplace that is subject to rapid changes in technology and 
even more rapid changes in consumer demands, some companies need the 
flexibility to provide products and services outside the statutory list 
of activities that are financial in nature. Title I of GLBA took a step 
in this direction when it grandfathered the nonfinancial activities of 
companies that were not bank holding companies prior to GLBA, but 
became financial holding companies after the enactment of GLBA. This 
grandfather, however, only protects nonfinancial activities that 
constitute less than 15 percent of the financial holding company's 
gross revenues, and is scheduled to sunset in 5 years. We recommend 
that the Committee remove this sunset.

Amend GLBA to Remove Activity Limitations Applicable to Financial
Subsidiaries of National Banks and State Banks
    Section 121 of GLBA authorized national banks to own financial 
subsidiaries, and empowered these subsidiaries to engage in a range of 
financial activities. At the same time, however, GLBA imposed a number 
of activity and other operating constraints on the financial 
subsidiaries of national banks and State banks that do not apply to 
financial holding companies. These constraints should be removed.\4\
---------------------------------------------------------------------------
    \4\ For example, financial subsidiaries of national banks may not 
underwrite insurance, may not engage in merchant banking activities, 
and may not engage in real estate development or investment. Moreover, 
the total assets of all financial subsidiaries of national banks cannot 
exceed a certain limit.
---------------------------------------------------------------------------
    The activity and operational limitations applicable to the 
financial subsidiaries of national and banks were imposed to eliminate 
a presumed subsidy enjoyed by banks as a result of the Federal safety 
net, but not available to uninsured bank holding companies. Thus, the 
activity and operational limitations were intended to ensure regulatory 
parity between banks and bank holding companies.
    The problem with these limitations is that the case for the 
presumed subsidy was rather weak. Studies done by both the Office of 
the Comptroller of the Currency (OCC) and the Federal Deposit Insurance 
Corporation (FDIC) have found little, if any, evidence that banks, on 
net balance, receive a subsidy because of the Federal safety net. 
Therefore, instead of establishing regulatory parity between bank 
holding companies and banks, the limitations have had the effect of 
making the financial holding company structure, which is not subject to 
similar limitations, the more viable corporate vehicle for banking 
institutions seeking to engage in expanded financial activities.
    Removing the activity and operational limitations on national and 
State banks would allow banking organizations to select between 
alternative corporate vehicles through which they could offer financial 
products and services.
    State-chartered banks are subject to another activity limitation, 
which predates GLBA, and which also should be removed. In 1991, 
Congress barred State banks from engaging in any activity, as a 
principal, that is not permissible for a national bank. While the FDIC 
can overcome this prohibition by determining that a particular activity 
poses no significant risk to the deposit insurance fund, the 
prohibition is fundamentally at odds with the philosophy behind our 
dual banking system. The dual banking system is premised upon the 
operation of two, independent regulatory systems. Therefore, linking 
the powers of state banks to those permissible for national banks 
diminishes the independence of the State banking system. Moreover, this 
limitation cannot be justified on safety and soundness grounds. Both 
Federal regulators of State banks, the Federal Reserve Board and the 
Federal Deposit Insurance Corporation, have the authority to take 
actions against State banks if the activities of subsidiaries 
jeopardize the financial condition of the parent bank.\5\
---------------------------------------------------------------------------
    \5\ For example, the prompt corrective action provisions in the 
Federal Deposit Insurance Act permit Federal regulators to restrictthe 
activities of subsidiaries or even require the divestiture of 
subsidiaries. Also, Section 114 of GLBA authorized the Federal banking 
regulators to impose restrictions or requirements on relationships and 
transactions between depository institutions and affiliated companies 
to ensure the safety and soundness ofthe depository institutions.
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Amend GLBA to Allow Treasury and the Federal Reserve Board to
Independently Determine What Activities are Financial in Nature
    When it comes to determining whether or not a new activity should 
be permissible for a financial subsidiary of a national or State bank 
or a subsidiary of a financial holding company, GLBA establishes a 
complex notice and disapproval procedure involving the Secretary of the 
Treasury and the Federal Reserve Board. This procedure gives each 
agency a veto over new activities. It also ensures that the activities 
permissible for financial subsidiaries of national and State banks will 
be the same as the activities permissible for subsidiaries of financial 
holding companies.
    In the 5 years since GLBA was enacted, the Treasury and Federal 
Reserve Board have authorized few new activities. This suggests that 
the current procedure is overly cumbersome. Therefore The Roundtable 
recommends that the Treasury Department and the Federal Reserve Board 
should have independent authority to determine what a permissible 
financial activity is. 6 This would stimulate a positive competition 
between regulators that will benefit the customers of financial 
services firms and the financial services industry. This proposed 
change should not jeopardize the safety and soundness of affiliated 
depository institutions since the OCC and Federal Reserve have separate 
authority to ensure that the operations of financial affiliates do not 
harm depository institutions.

The Importance of National Laws, Federal Preemption, and
Regulatory Competition
    Three regulatory principles run throughout our testimony. The first 
is the need for uniform, national laws for the financial services 
sector of our economy. Today's financial services markets are 
characterized by a handful of large, national financial services firms, 
and thousands of smaller, local firms. The top 10 property and casualty 
insurers, for example, control roughly 55 percent of that industry's 
assets. Similarly, the top 10 banks account for 45 percent of all 
assets in the banking industry. Uniform, national regulation is in the 
best interest of these national firms, and more importantly, their 
customers. Uniform national regulation promotes efficiencies that can 
be passed along to consumers. It also permits the development of 
standard products and services that can be offered to consumers, 
regardless of their location. Therefore, we urge the Committee to 
incorporate the principle of uniform, national laws into GLBA in key 
areas such as privacy, insurance, and mortgage lending.
    The regulatory companion to uniform, national laws is Federal 
preemption. Without Federal preemption, the goal of uniformity cannot 
be realized. Congress has 
recognized the Treasury also should have the ability to determine that 
certain activities are ``complimentary'' to financial activities; a 
power that Congress extended to the Federal Reserve Board when GLBA was 
enacted, but not to Treasury. Importance of preemption in other key 
sectors of our economy, such as drugs, airline safety, and 
communications. This principle needs to be applied more broadly to 
financial services.
    Finally, the benefits of competition in financial regulation stand 
behind several of our recommended modifications to GLBA. As James 
Wilcox explains in his forthcoming paper, the competition between State 
and Federal banking regulations that is inherent in the dual banking 
system has produced numerous benefits to consumers, the industry and 
regulators. Therefore, we urge the Committee to modify GLBA in these 
concrete ways:

 Create national uniform privacy standards;
 Create national uniform protections against predatory lending;
 Create and optional Federal charter for life and property & 
    casualty insurance companies;
 Remove the sunset on nonfinancial activities;
 Remove activity limitations on both national and State banks; 
    and
 Allow Treasury and the Fed to determine independently what 
    activities are financial in nature

    Thank you for the opportunity to testify on this most important 
topic.

                               ----------
               PREPARED STATEMENT OF JAMES D. McLAUGHLIN
                 Director, Regulatory and Trust Affairs
                      American Bankers Association
                             July 13, 2004

    Mr. Chairman and Members of the Committee, my name is James D. 
McLaughlin, Director, Regulatory and Trust Affairs of the American 
Bankers Association (ABA). The ABA brings together all categories of 
banking institutions to best represent the interests of this rapidly 
changing industry. Its membership--which includes community, regional 
and money center banks and holding companies, as well as savings 
associations, trust companies, and savings banks--makes ABA the largest 
banking trade association in the country.
    I am glad to be here today to present the views of the ABA on the 
impact of the Gramm-Leach-Bliley Act (GLB Act) on our businesses and 
customers. Consumers of financial services are a diverse group, ranging 
from individuals, small businesses, churches, and schools to large 
corporations and governments. The specific needs of each customer group 
differ, but they all expect--and deserve--efficient and convenient 
provision of financial services.
    In 1999, Congress addressed the inefficiencies in the then-current 
structure and regulation of financial services by taking a forward-
thinking approach to financial services regulation. By enacting the GLB 
Act, Congress streamlined the regulatory approval process and let 
market forces dictate what combinations of financial services would be 
most appropriate. Thus, by any measure, the GLB Act was one of the most 
significant laws affecting the financial services industry, providing 
the framework for the next century. It was not, however, a sea change. 
Dynamic market forces, aided by changing technologies and demographics, 
were already changing the market. While we do not know what future 
innovations will take place, we do know that free and fair competition 
creates an atmosphere that encourages innovation. The GLB act was an 
essential ingredient in bringing about such competition.
    In my statement today, I would like to emphasize three points:

 The GLB Act was critical to modernizing our financial system, 
    making it more sensible and straightforward, removing 
    inefficiencies in structure and regulation, and letting market 
    forces dictate what combinations of financial services would be 
    appropriate;
 The GLB Act has worked well, benefiting customers, 
    diversifying incomes of financial firms, and posing no new risks to 
    the financial system or the deposit insurance funds; and
 More can be done to fully realize the benefits of the GLB Act, 
    including preserving the regulatory flexibility given to the 
    Federal Reserve and Treasury to adjust to a dynamic financial 
    services market; assuring that regulatory proposals on broker 
    ``push out'' address key industry concerns; providing a sensible 
    cross marketing approach for merchant banking activities; 
    encouraging the Federal Home Loan Banks to fully embrace the 
    expanded collateral provisions in the Act; and creating uniformity 
    of insurance regulation and supervision.

    I will touch on each of these points in the remainder of my 
statement.

The GLB Act was Critical to Modernizing our Financial System
    Economics, demographics, and technology created a whole new genre 
of financial consumers. Over the last 20 years, customers put a premium 
on efficiency and convenience; they are not intimidated by automated 
delivery systems; they are willing to use a wide variety of service 
providers--not just banks--to meet their financial needs; and they are 
much more active managers of their savings and investment dollars than 
previous generations. As a result, the mix of assets held by households 
changed significantly (see Chart 1). 



    Financial firms began to adapt to these changes. Securities firms 
offered a full array of loan and loan-substitute products and mutual 
funds (that compete directly with deposits). Today, mutual and money 
market funds exceed bank deposits by $1.4 trillion (see Chart 2). Large 
corporate borrowers increasingly went directly to the financial markets 
for funding (See Chart 3). Diversified firms, like General Electric, 
offered a wide array of financial services--earning a substantial 
portion of their income from them. While the competing products were 
similar, the regulation was not. 



    Internationally, U.S. financial firms were in danger of falling 
behind foreign competitors, which typically were able to provide 
securities, insurance, and real estate services within ``universal'' 
banks. This gave foreign financial firms a competitive edge over the 
United States in attracting global financial business.
    Banks were forced to be creative in finding ways to combine 
services, often in convoluted and expensive ways. Regulatory decisions 
helped--such as those permitting the establishment of so-called 
``Section 20 Subsidiaries'' to allow bank holding companies to engage 
to a limited extent in securities underwriting and the approval for 
national banks to engage in the sale of insurance from towns of 5,000--
but were not enough. Regulatory decisions were often challenged in 
court, slowing the evolution of the market. And the strict limits 
placed on the activities in which they could engage prevented U.S. 
banks--and their customers--from reaching all customers demanding these 
services. Thus, customers of banks were unable to take advantage of a 
full menu of financial services.
    Responding to the need to modernize the financial system and after 
many years of deliberation, Congress enacted the Gramm-Leach-Bliley 
Act. It broke down decades-old barriers, allowed bank-affiliated firms 
to recognize the synergies associated with full affiliation of banking 
with underwriting and agency activities in securities and insurance. It 
also broadened the definition of financial services to enhance 
competition among all providers and it streamlined the approval process 
for acquisitions.
    To avoid the need for Congress to continually referee disputes 
among financial service providers, the GLB Act gave to the Federal 
Reserve and the Treasury authority to define new activities that are 
financial in nature, or incidental to financial activities. This was 
designed to assure that regulation remains responsive to the evolving 
marketplace in financial services and to assure there was a level 
competitive playing field. As will be discussed briefly below, the real 
estate lobby has worked to derail this essential process in order to 
protect its own business interests rather than those of consumers of 
real estate services.
    Importantly, while more efficient combinations can occur as a 
result of the GLB Act, they can do so without excessive risk taking or 
additional exposure to the FDIC fund. Several provisions help to ensure 
any risk is controlled and poses no threat to the deposit insurance 
fund. First, new products and services can now be provided to 
customers, thus helping to diversify income and improve the overall 
health of the financial institution. Second, the newly permissible 
activities, for the most part, are placed in financial subsidiaries or 
affiliates of the holding company, which are legally separate entities 
from the bank and thus pose no risk to insured deposits. Third, to 
utilize any of the new powers authorized in the GLB Act, all of the 
banks of the banking organization must be well-capitalized and well-
managed and continue to be so. Failure to maintain these standards 
means that they would have to divest themselves of the new activity. 
And fourth, the Act also requires the large insured financial 
institutions have at least one issue of outstanding subordinated debt 
that is rated within the three highest investment grades. This 
provision was adopted ``in order to bring market force and discipline 
to bear on their operation and the assessment of their viability'' and 
applies, by regulation, to the largest 50 institutions.
    The GLB Act also kept banking and commerce separate, giving the 
Federal Reserve the authority to determine when some nonfinancial 
activities are complementary to financial services.

The GLB Act Has Worked Well, Benefiting Customers and Posing No New
Risks
    By ratifying and rationalizing the regulatory structure of what was 
already occurring in the marketplace, the GLB Act has already been 
successful. The diversification of income sources most certainly helped 
many banks through the periods of slow economic growth while at the 
same time posing no new risks to the financial system or the deposit 
insurance funds. In fact, the banking industry has posted strong 
earnings since the enactment of the GLB Act, and now has capital and 
reserves exceeding $900 billion. The financial services industry 
continues to be a major driver in our economy, now accounting for over 
20 percent of GDP (see Chart 4). Jobs within banking, and financial 
services generally, have continued to be created even during the recent 
slow economic times (see Chart 5). 



    As of July 2004, 647 financial holding companies--a new financial 
structure established in the GLB Act--had been formed (about 12 percent 
of banking organizations, holding 80 percent of the domestic banking-
industry assets). There are many reasons for establishing a financial 
holding company (FHC). Some banks just wanted the streamlined approval 
process for acquisitions. Others wanted the market to know that their 
bank was well-capitalized and well-managed--a requirement to forming an 
FHC. Others were interested in merchant banking. About 25 percent are 
engaged in insurance agency activities and 5 percent in insurance 
underwriting (unrelated to the extension of credit).\1\ Generally, all 
the BHC's with Section 20 subsidiaries have converted to FHC's. The 
reason for this is simple: These firms would no longer have to 
calculate the 75-to-25 ratio of permissible to impermissible income for 
a bank holding company--a burdensome and wasteful exercise.
---------------------------------------------------------------------------
    \1\ As of June 2003, 52 percent of banks below $1 billion in assets 
were selling insurance with 33 percent selling general insurance 
(products other than credit related insurance and annuities).
---------------------------------------------------------------------------
    While not all financial firms have rushed to become a financial 
holding company, they could if they so choose in the future. This is a 
critical point: The success of the GLB Act should not be judged by the 
number of financial holding companies or whether the combination of 
activities that firms now offer were a direct result of the GLB Act. 
Rather it is the very option to undertake combinations of activities to 
meet the needs of customers that is the measure of success. 
Importantly, the streamlined approval process for nondepository 
acquisitions has made a tremendous difference. FHC's now notify the 
Federal Reserve after the acquisition. Banking firms are now more 
competitive because they are able to make quick business decisions and 
implement programs to meet the changing market needs. No longer do they 
have to wait many months for regulatory approval of an acquisition, 
thereby losing business to firms that did not have such impediments. 
This is the way a dynamic, competitive market is supposed to work.
    It should also be remembered that banks and other financial firms 
had already established relationships with securities and insurance 
firms prior to enactment of the GLB Act. The removal of the arbitrary 
restrictions, such as the eligibility revenue limits, has helped expand 
existing businesses that banks had underway. Smaller banks have used 
the GLB authorities to expand insurance brokerage activities without 
the artificial constraint of locating in a town of 5,000 residents.
    There have been other benefits as well. About two dozen FHC's have 
used the GLB Act authorities to establish merchant banking operations. 
As the economy gains momentum, merchant banking activity is expected to 
increase. Many members of the ABA and the ABA Securities Association 
regard the authority to engage in expanded merchant banking activities 
as the single most important new power granted by the GLB Act. As a 
result, our members have a strong interest in ensuring that they can 
engage in merchant banking activities to the full extent allowed under 
the law. A particular concern, explained in more detail in Section III 
of this testimony, relates to provisions that restrict cross-marketing 
with respect to merchant banking for some firms (affiliated with 
securities companies) but not for others (affiliated with insurance 
companies). A sensible approach by Congress to cross marketing that is 
not based on ownership of one financial firm or another is needed.
    The GLB Act established a two-way street allowing banking companies 
to efficiently enter securities, insurance, and other financial 
businesses as well as allowing these financial firms to enter the 
banking business. This enhances competition within the financial 
services market as all firms have the opportunity to provide a full 
range of financial services. It should be noted in this context, that 
the BHC Act continues to impose a more stringent antitying standard on 
bank and financial holding companies than on other firms competing in 
the financial services market.
    In spite of the fact that nonbank financial firms offer bundled 
products, that they can form a FHC just like banking firms, and that 
banking firms are subject to more stringent antitying standards, some 
observers have claimed that banking organizations' ability to providing 
bundled services is somehow unfair, or even in violation of antitying 
statutes. These claims are serious and unfortunately are too often 
accepted without legal understanding or economic analysis. Two recent 
papers help to fill this analytical void. The first, ``Legality of 
Relationship Banking Under Bank Antitying Restrictions'' by Covington & 
Burling concludes that there are many permissible approaches for banks 
to expand customer relationships, including cross-selling and cross-
marketing, engaging in certain forms of discount pricing based on the 
volume of services purchased, and legal tying involving traditional 
bank products under statutory and regulatory exceptions. This broad 
range of permissible relationship banking practices is consistent with 
the limited scope of Section 106, the antitying restrictions of the 
antitrust laws, and benefits of bundled products and services.\2\
---------------------------------------------------------------------------
    \2\ ``Memorandum: Legality Of Relationship Banking Under Bank 
Antitying Restrictions,'' Covington and Burling, Washington, DC, May 
28, 2003. This paper and the one by Dr. Mullineaux were supported by 
the American Bankers Association and the ABA Securities Association. 
The views expressed herein are strictly my own and do not necessarily 
represent the views of the American Bankers Association, ABASA or its 
members.
---------------------------------------------------------------------------
    The second paper, ``Tying and Subsidized Loans: A Doubtful 
Problem'' by Donald J. Mullineaux, DuPont Chair in Banking and 
Financial Services at the University of Kentucky, analyzes whether 
tying makes any sense from an economic perspective and evaluates the 
so-called ``evidence of tying'' that is based on comparisons of 
relative interest rates on syndicated loans and other types of 
financial contracts. This paper concludes that tying is not a rational 
strategy in today's financial environment and that no valid inferences 
about tying can be drawn from simple comparisons of rates on loans with 
those on bonds or credit default swaps.\3\
---------------------------------------------------------------------------
    \3\ ``Tying and Subsidized Loans: A Doubtful Problem'' by Dr. 
Donald J. Mullineaux, Director, School of Management DuPont Chair in 
Banking and Financial Services, Gatton College of Business and 
Economics, University of Kentucky, May 2003.
---------------------------------------------------------------------------
    To summarize, the law no longer constrains the natural evolution of 
the financial services market--that will be the legacy of the GLB Act. 
The market will continue to evolve slowly as firms experiment and 
innovate, trying to find the best combination of services to meet the 
needs of their customers. Importantly, new combinations of services 
have been provided without excessive risk taking or additional exposure 
to the FDIC fund.
More Needs to be Done to Fully Realize the Benefits of the GLB Act
    There are several issues of concern that limit or threaten the 
benefits of fair and open competition envisioned in the GLB Act:

 The flexible regulatory process designed to allow financial 
    institutions to enter new lines of business must be allowed to work 
    as envisioned in the Act;
 The banking industry has serious concerns over a new proposal 
    by the Securities and Exchange Commission (SEC) regarding 
    Regulation B (a.k.a., broker ``push-out'' rules) that should be 
    addressed;
 A sensible cross-marketing approach for merchant banking 
    activities is needed;
 More rapid adoption of expanded collateral provisions for 
    Federal Home Loan Bank advances provided for in the GLB Act is 
    needed to facilitate small business and small agri-business 
    lending, and;
 Insurance regulatory reform is the next natural legislative 
    step following the GLB Act to modernize the financial services 
    industry.

Regulatory Flexibility to Adjust to the Marketplace Should Be Preserved
    In the more than 15 years of debate prior to enactment of the GLB 
Act, Congress often found itself in the middle of arguments between 
financial services industries about who should do what. The result was 
gridlock and an out-of-date financial system that did not reflect 
changes in consumer needs or in the use of technology. Congress also 
recognized that the statutory standard for regulatory approval of new 
activities for bank holding companies--the ``closely related to 
banking'' standard--was woefully inadequate in an economy transformed 
by technological progress.
    To be sure that the procompetitive goals of the GLB Act continued 
to be met in a dynamic marketplace, Congress: (1) established a 
flexible regulatory process that would permit the financial industry to 
``compete effectively with any company seeking to provide financial 
services in the Unitied States'' without the need for further 
legislation; and (2) set forth a new, considerably broader, standard to 
enable banks and bank holding companies to remain competitive no matter 
in what direction financial services evolved. That new standard--
activities that are financial in nature or incidental to a financial 
activity--was intended to provide the flexibility Congress knew would 
be necessary. In an abundance of caution, those activities, even very 
low-risk agency activities, can only be conducted in FHC's or financial 
subsidiaries.
    Unfortunately, this important provision has been derailed, at least 
for now, in one of first proposed rulings under this Act, having to do 
with real estate brokerage and management services. The merits of this 
proposal are not the subject of this hearing, and I will not belabor 
this matter beyond pointing out that real estate brokerage firms are 
competing directly with banks in providing financial services. They 
have even admitted so in testimony before this Committee and yet are 
working to frustrate the procompetitive process that Congress put into 
place in the GLB Act. What is central to this hearing is that an 
extremely important provision of the GLB Act--one that appropriately 
delegates responsibilities to the two agencies most familiar with the 
financial services industry--is not working. As a result, Congress has 
once again become embroiled in another competitive issue--the very 
thing it sought to avoid. We urge Congress to let the Treasury and the 
Federal Reserve undertake their responsibilities to assure that the 
financial services market remains fair and competitive.

Concerns Remain over Regulation B (Broker ``Push-Out'' Rules) Proposed 
        by SEC
    As part of its financial modernization scheme, the GLB Act removed 
the blanket exemption from SEC registration for banks that engage in 
securities activities. The blanket exemption was replaced with a set of 
narrow exceptions for bank ``broker'' and ``dealer'' activities. Under 
the GLB Act, any securities activities that fall outside of the 
exceptions may no longer be handled directly in the bank and, for 
practical reasons, must be ``pushed out'' into an SEC-supervised 
securities affiliate of the bank. The SEC delayed implementation of its 
rules several times, eventually putting in place a temporary exemption 
that effectively preserved the blanket exemption until the new rules 
could be rewritten. This action was very appropriate as the banking 
industry made clear that the rules suggested at that time, in a variety 
of respects, were burdensome, disruptive, costly, and unworkable.
    In late 2002, the Commission took a dual track approach and issued 
final rules implementing the ``dealer'' part of the exceptions only. 
The ``dealer'' exception rules, including an exemption for securities 
lending activities, were issued in February 2003, and compliance became 
mandatory on September 30, 2003. On June 17, 2004, the SEC made public 
the proposed ``Regulation B'' rules to implement the bank exceptions 
from the definition of ``broker'' under Section 3(a)(4) of the 
Securities Exchange Act of 1934, as amended by Title II of the GLB Act. 
In crafting proposed Regulation B, the SEC sought input from the ABA, 
the ABA Securities Association, and others. Bank trust officers, 
employee benefit professionals, custody managers, securities 
professionals, and private bankers all share a keen interest in the 
practical application of these rules.
    While the proposal, in most respects, is a significant improvement 
over the earlier proposal, much work remains to be done. The regulation 
defines and clarifies a number of the statutory exceptions from the 
definition of ``broker'' and grants several new exemptions from the 
``broker'' definition to banks and certain other financial institutions 
(which would supplement the statutory exceptions). Among the key issues 
that still need to be addressed are the following:

 The complexity of the ``chiefly compensated'' test under the 
    trust and fiduciary exception;
 The inability of banks to offer order-taking to many new 
    custodial clients after July 30, 2004, including, most importantly, 
    IRA custodial accounts;
 The incompatibility of the employee benefit plan exception 
    with current pension plan operations;
 The uncertainty posed by the proposal to current bank bonus 
    and referral fee plans;
 The impact the rule will have on bank sweep programs; and,
 The proposal's refusal to treat equally thrifts and commercial 
    banking organizations.

    Over the last 3 years, the ABA has worked closely with the SEC on 
these issues and the proposal, in most, but not all respects, is a 
significant improvement over the earlier one. We appreciate the SEC's 
responsiveness to many of our concerns and hope that these additional 
problem areas can be adequately addressed in the next several months so 
that our member banks and savings institutions can continue to offer 
products and services, such as IRA accounts and pension plan services, 
which our customers have come to enjoy. During this process, we would 
hope that the Congress would continue to exercise its oversight 
responsibilities.

A Sensible Cross-Marketing Approach for Merchant Banking Activities Is 
        Needed
    There are two important changes in law that are needed that apply 
to the new merchant banking powers authorized under the GLB Act. The 
first change would allow all FHC's engaged in merchant banking 
activities to cross-market products and services offered by both the 
bank and the portfolio company in which the investment is made so long 
as the financial holding company has a noncontrolling investment stake 
in the portfolio company. The second change would permit all FHC's, 
whether or not their investment in the portfolio company was 
controlling, a limited ability to cross-market bank and portfolio 
company products and services. This latter change is necessary to 
ensure that FHC's affiliated with securities underwriting firms are not 
unfairly disadvantaged vis-a-vis those FHC's affiliated with insurance 
underwriting firms.
    As background, the GLB Act generally imposes cross-marketing 
restrictions on FHC's engaged in merchant banking activities. The Act 
prohibits a depository institution controlled by an FHC from marketing 
any product or service of a company in which the FHC has made a 
merchant banking investment. The reverse is also true: The company in 
which the FHC has invested may not market the products and services of 
the FHC's affiliated depository institution to its customers.
    An exception from this prohibition is provided, however, for 
merchant banking investments made by insurance companies owned by an 
FHC. Thus, insurance underwriting firms that affiliate with depository 
institutions are able to cross-market through statement stuffers, 
Internet websites products, or through the company in which they have 
made a merchant banking investment. Moreover, products and services 
offered by the company in which the insurance underwriting firm has 
invested also may be marketed via the depository institution that is 
affiliated with the insurance underwriting firm.
    Nearly all of the members of the ABA Securities Association are 
FHC's that are able to make merchant banking investments because of 
their affiliation with securities firms; very few, however, own 
insurance companies that could engage in the type of insurance company 
merchant banking permitted by the GLB Act. As a result, our FHC members 
could not take advantage of the website/statement-stuffer exception, 
while other FHC's with insurance company merchant banking operations 
would be permitted to do so.
    There is simply no rational or public policy reason for this plain 
competitive inequity. The ability to cross-market through Internet 
websites is important to banks. Current business practices often 
require an FHC to invest in an Internet firm in order for its banks' 
products to be posted on or linked to that firm's website.
    Taken together, the amendments suggested above would allow banks to 
cross-market bank products and services to customers of a portfolio 
company and vice versa, so long as the FHC's investment stake was 
noncontrolling (which is defined as owning or controlling 25 percent or 
more of the total equity or any class of voting securities). In 
addition, we believe that even where a control situation existed, 
limited cross-marketing through websites and statement stuffers should 
be permitted for all FHC's.
    Such changes will not only put our members on an equal footing with 
those insurance underwriting firms that engage in merchant banking, but 
they will also allow all FHC's to engage in cross-marketing so long as 
their merchant banking stake is noncontrolling. This latter provision 
is very important to level the playing field between FHC's and other 
non-FHC financial firms not similarly constrained by the GLB Act's bar 
on cross-marketing.

Federal Home Loan Banks Should Fully Embrace the Expanded Collateral 
        Provisions
 of the GLB Act
    Title VI of the GLB Act included a provision long advocated by the 
ABA that expanded categories of eligible collateral for community 
financial institution members of the Federal Home Loan Banks (FHLB's) 
to include ``secured loans for small business, agriculture, or 
securities representing a whole interest in such secured loans.'' \4\ 
Unfortunately, the acceptance of small business, small agri-business, 
and small farm collateral for loan advances by the Federal Home Loan 
Banks (FHLB's) has been spotty at best. In regions of the country where 
agricultural lending is a major line of business for member banks of 
the individual FHLB's, there has been some acceptance of the 
collateral. The Dallas and Topeka Federal Home Loan Banks have 
increased lending on this collateral the most, each accepting over $2 
billion in small business, small agri-business or small farm collateral 
thus far this year. The Des Moines Bank has accepted $1.1 billion in 
this collateral thus far this year. However, even in these areas, 
agricultural loans (real estate secured and nonreal estate secured) 
continue to be heavily discounted for collateral advances. The 
individual FHLB's assured the public that as they gained experience 
with these loans that the discounting would be reduced if the loans 
performed as anticipated--and some have begun to do so. As an example, 
on July 1, 2004, the Dallas Bank increased the acceptable limit on this 
type of collateral from two times a member's Tier 1 capital to three 
times the member's Tier 1 capital. We applaud this move and encourage 
other FHLB's to follow suit.
---------------------------------------------------------------------------
    \4\ 12 U.S.C. 1430(a)3E. Community financial institutions are FDIC 
insured institutions with less than $530 million in assets (adjusted 
for inflation from $500 million at the time of enactment). The FHLB's' 
regulator, the Federal Housing Finance Board, implemented this 
provision in 2000 allowing the FHLB's to accept small business, small 
agri-business, and small farm collateral.
---------------------------------------------------------------------------
    In regions where agricultural lending does not dominate the 
business lines of the member banks, there has been little or no 
acceptance of these loans for collateral advances. Banks in these 
regions generally have required that members exhaust all other 
acceptable collateral before accepting the new categories.
    To be fair to the FHLB's, some of the slowness is a result of the 
slowed down in the agricultural and rural economy due to a rapid 
decline in farm commodity prices and a decline in the manufacturing 
sector. Member banks have needed less borrowed funds to meet loan 
demand. Today, agricultural commodity prices have recovered, and a 
robust farm real estate market is occurring in all regions of the 
country. We are disappointed that more of the FHLB's are not positioned 
to meet what could potentially be a renewed need for lendable funds.
    A related issue that is particularly disappointing to us is the on-
going problem our members have faced when attempting to use Small 
Business Administration (SBA) and U.S. Department of Agriculture (USDA) 
guaranteed loans as collateral for FHLB advances. The Federal Housing 
Finance Board has made it clear that these loans, backed by the full 
faith and credit of the U.S. Government, are eligible collateral for 
purposes of borrowing from the FHLB's. However, due to technical issues 
related to SBA and USDA regulations on the terms and conditions of the 
Federal guarantees, most FHLB's place no value on the ``full faith and 
credit'' guaranty of the Federal Government. At best, some of the 
FHLB's discount the Federal guaranty and give the pledging banks no 
break on the collateral haircut; at other FHLB's, these loans are not 
acceptable collateral at all. Despite efforts of both the ABA and 
representatives from several FHLB's, officials that administer the loan 
programs at USDA and SBA have been less than willing to resolve this 
issue. Guaranteed loans are extended to the most economically 
vulnerable small farmers and small business people, and they deserve 
the best rates and terms possible. USDA and SBA should be encouraged to 
modify their regulations to solve this problem.

Insurance Regulatory Reform
    The most significant work left undone by the GLB Act is 
modernization of the State system of insurance regulation. The American 
system of insurance regulation was set in place at about the same time 
as Allied forces were fighting the Battle of the Bulge in 1945. In 
March of that year, Congress delegated its authority to regulate 
insurance to the States with the passage of the McCarran-Ferguson 
Act.\5\ This system is now more than half a century old and in dire 
need of modernization. Congress began to recognize this need in 1999 by 
including a provision within the GLB Act that encouraged the States to 
adopt either uniform or reciprocal licensing standards for insurance 
agents. The so-called ``NARAB provision'' called for the establishment 
of a national licensing standard and required that standard to be 
adopted by a majority of the States.\6\
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    \5\ 15 U.S.C. Section 6701.
    \6\ The National Association of Insurance Commissioners (NAIC) 
created the NARAB Working Group in December 1999 to help States 
implement Subtitle C requirements in Title III of the Gramm-Leach-
Bliley Act. That subtitle requires State insurance regulators to meet 
Federal statutory requirements affecting insurance agent licensing, and 
provides for establishing a new organization named the National 
Association of Registered Agents and Brokers (NARAB) if the States fail 
to achieve the goals set forth in Subtitle C. The mission of the NARAB 
Working Group is to coordinate State regulatory actions related to 
NARAB, so that we can fully and promptly comply with all requirements 
in the GLB Act.
---------------------------------------------------------------------------
    Accordingly, we were hopeful that a uniform licensing regime would 
be created, but that has not happened. Instead, a reciprocal licensing 
regime has been created, and while a majority of States have enacted 
this system, significant variations in licensing standards are still 
permitted. Unfortunately, the goal of creating just one set of 
licensing standards to which all insurance agents must adhere has yet 
to be realized. On a more positive note, NARAB's inclusion in the GLB 
Act began the discussion of why Congress is needed to resolve the 
problems inherent in the State insurance regulatory system. Although 
NARAB's success is limited, the States would not have achieved even 
such little uniformity as currently exists absent a Congressional 
mandate to do so. However, the narrow scope of the NARAB provision (for 
example, addressing only agent licensing) left unaddressed the myriad 
other problems of State insurance regulation that urgently need reform. 
The most glaring among them are:

 Non-uniform or duplicative agent and company licensing 
    criteria;
 Inconsistent market conduct standards;
 Non-uniform privacy standards;
 Price controls; and,
 Prior approval barriers to product introduction and 
    innovation.

    All of these are fundamental problems associated with product 
availability and cost that duplicative and inefficient State regulation 
has created.
    Witness the fact that most States require prior approval of 
insurance products and rates before the product can be sold. The same 
product--term life insurance, for example--must be modified to meet the 
different requirements imposed by every State and as a result, can take 
as long as 2 years to roll out a new product nationally.
    Regulation of this sort impedes product innovation and introduction 
as the cost of complying with so many different laws restricts the 
ability of smaller companies to enter the marketplace. Similarly, rate 
regulation, or price controls as they should more appropriately be 
known, prevent some insurers from offering their products at prices 
that are profitable. Accordingly, highly regulated States, like 
Massachusetts and New Jersey, have a fraction of the insurance 
companies offering products for sale compared to States like Illinois 
and South Carolina where market forces set prices.
    One solution to these problems endorsed by the ABA and its 
insurance affiliate, the American Bankers Insurance Association (ABIA), 
is to create an Optional Federal Charter (OFC) for insurance companies 
and agencies. Like the dual-banking system, an OFC would provide an 
alternative to the current State-by-State system of regulation and 
create the uniformity and efficiency that is unattainable under State 
regulation. Perhaps as important, an OFC would preclude or diminish the 
harmful effects of having State regulators create many different 
interpretations of a Federal standard. If uniformity is the goal, we 
can see no benefit to replacing the universe of differing State laws 
with a universe of differing State interpretations of a Federal law.
    By leaving the State system intact, however, an OFC would preserve 
state regulation for those companies and agents preferring that system 
while providing choice for those that prefer the uniformity and 
efficiency of a single Federal regulator and the uniform regulations 
Federal oversight would provide. As with the dual-banking system, 
providing this choice for the insurance industry will create a critical 
dynamic that inures to the betterment of insurance regulation as a 
whole and insurance consumers in particular.
    The problems inherent in State insurance regulation grow worse 
every day. We urge this Committee to examine State regulation of 
insurance in separate hearings and to debate solutions to these most 
urgent problems.

Conclusion
    The GLB Act has helped to remove an obstacle to efficient provision 
of financial services. It responded to the needs of consumers and has 
increased the competition among financial service providers, each vying 
to design new and creative products by rebundling the four basic 
financial services--transactions services, intermediation, risk 
management, and advice. In this new competitive environment, customers 
look to suppliers who can provide combinations of services tailored to 
meet their needs. As Senator Phil Gramm said at the signing ceremony 
for this Act: ``The world changes, and Congress and the laws have to 
change with it . . . . We have learned that we promote economic growth 
and we promote stability by having competition and freedom.''

                               ----------
                   PREPARED STATEMENT OF JOHN TAYLOR
  President and CEO, National Community Reinvestment Coalition (NCRC)
                             July 13, 2004

    Good morning Chairman Shelby and Ranking Minority Member Sarbanes. 
I am honored to be testifying this morning and representing the views 
of community organizations regarding a law that revolutionized the 
banking industry. My name is John Taylor; I am the President and CEO of 
the National Community Reinvestment Coalition (NCRC).
     NCRC is the Nation's economic justice trade association of 600 
community organizations and public agencies dedicated to increasing 
access to capital and credit for minority and working class 
communities. NCRC was founded to protect and strengthen the Community 
Reinvestment Act (CRA) since CRA increases access to credit by insuring 
that banks have an affirmative obligation to serve all communities in 
which they are chartered.
     It is particularly fitting that NCRC is testifying today because 
the Gramm-Leach-Bliley Act (GLBA) has directly and indirectly weakened 
CRA. If the flaws of GLBA are not fixed soon, Americans' access to 
credit and capital will diminish dramatically. The U.S. banking system 
is the envy of the world. In great part, this is directly attributable 
to our extensive regulatory oversight, which ensures adequate capital 
reserves, safety and soundness, and fair and equal access to credit. 
GLBA has failed to ensure that regulations relating to fair and equal 
access to credit and capital have kept pace with safety and soundness 
regulation.
     In order for fair lending regulation to keep pace with the changes 
in the financial industry unleashed by GLBA, CRA must be updated and 
applied to more institutions as one of GLBA's authors, Rep. James 
Leach, supported. In particular, community reinvestment obligations 
must apply to all affiliates of holding companies and to lending 
institutions that are not part of holding companies. Data disclosure 
requirements also must be enhanced. In addition, the harmful aspects of 
GLBA that must be repealed immediately are CRA Sunshine and the 
reduction in frequency of small bank CRA exams.

CRA Sunshine
     The one area of strong consensus among community leaders and the 
lending industry is that the so-called ``CRA sunshine requirements'' of 
GLBA must be repealed. The CRA sunshine provision sought to quantify 
the amount of bank dollars granted to community groups. It was believed 
that such grants were used for operating support rather than for the 
direct provision of financial services and products. Five years later, 
we now know that the facts do not support this theory.
     In fall 2002, NCRC released a report called CRA Sunshine Reveals 
Benefits of Bank-Community Group Partnerships. In this report, NCRC 
used the Freedom of Information Act (FOIA) to obtain 707 CRA agreements 
made during 1999 through 2001 subject to the CRA sunshine disclosure 
requirements. As defined by GLBA, a CRA agreement is a commitment in 
writing by a bank to a nongovernmental enterprise exceeding $10,000 in 
grants or $50,000 in loans. If the nongovernmental enterprise such as a 
community group commented to the bank or a regulatory agency about the 
CRA performance of the bank, the bank and community group must disclose 
the initial CRA agreement to Federal regulatory agencies and must 
disclose subsequent expenditures of funds received by the community 
group under the agreement.
     NCRC found that of the $3.6 billion in the 707 agreements, only 
$11.8 million or less than three tenths of 1 percent was grants or 
other funding for community groups (I have submitted a copy of our 
report for the record).* These grants supported the vital missions of 
nonprofit homeless shelters, housing developers, and other 
neighborhoodbased groups engaged in housing and economic development. 
The grants also helped lenders meet community credit needs and increase 
their lending, investing, and services in low- and moderate-income 
neighborhoods, as required by CRA.
---------------------------------------------------------------------------
    * Report held in Committee files.
---------------------------------------------------------------------------
    CRA sunshine frustrates the essential purpose of CRA, which is to 
ensure that banks affirmatively meet credit needs. Further, CRA 
sunshine increases paperwork burden on banks and community groups with 
no tangible net benefit to the public. The repeal of this ill-advised 
and useless section of GLBA must occur immediately.

Less Frequent Exams for Small Banks
     Another direct harm of the GLBA is the reduction in frequency of 
small bank CRA exams. Under GLBA, small banks with assets of under $250 
million are examined only once every 4 years if they have a 
Satisfactory CRA rating and once every 5 years if they have an 
Outstanding rating.
     When small banks are examined that infrequently, they have little 
incentive to affirmatively and continually adhere to their reinvestment 
obligations. They will have reduced incentives to make sufficient 
numbers of loans to low- and moderate-income borrowers during the 
entire 4- or 5-year time period between exams, and may only focus their 
efforts during the last year or two before exams. It is commonsense 
that infrequent examinations lead to infrequent commitments to 
reinvestment, while more frequent examinations lead to more consistent 
commitments to reinvestment.
     NCRC's 600 community organization members have reported that less 
frequent exams have reduced the amount of lending by small banks to 
low- and moderate-income borrowers. NCRC would have preferred to 
present quantifiable evidence to the Committee today, but we found out 
about testifying a mere 2 days before our testimony was due. We call 
upon Congress to commission a comprehensive study assessing the impacts 
of the CRA exam stretch-out on lending to working class Americans.
     This reduction in frequency responded to industry complaints about 
so-called ``burden of CRA exams.'' What continues to astonish NCRC, 
however, is that the Federal regulatory agencies appear to accept 
industry arguments about burden although the Federal regulators 
themselves have yet to conduct their own comprehensive cost-benefit 
analysis regarding CRA's application to small banks.
     The lack of a thoughtful cost-benefit analysis is readily apparent 
in the GLBA stretch-out of the small bank CRA exam schedule. The small 
bank exam is a quick and straightforward exam that focuses on lending 
and dispenses with the investment and service test of the large bank 
exam. For any small bank that is true to the mission of a ``community 
banker,'' the small bank CRA exam is a relatively easy exam. If Members 
of this Committee actually looked at small bank CRA exams, they would 
be astonished that all of this noise about burden can be generated by 
exams that rarely exceed 10 pages in length.
     Despite the brevity of the exam, its importance cannot be 
underestimated. In too many poor rural communities, the CRA exam 
process is the only mechanism that holds small banks accountable for 
serving low- and moderate-income borrowers and communities. Smaller 
banks do not merge nearly as often as their larger counterparts, 
rendering the merger application process a seldom-used avenue for 
holding smaller banks accountable. Community groups are also not as 
prevalent in smaller rural communities as in large cities. Thus, the 
major mechanism for holding small banks accountable is the CRA exam.
     Yet, GLBA has greatly diminished the most important means of 
accountability of small banks. Instead of once every 2 or 3 years, CRA 
exams for small banks now occur once every 4 or 5 years. In reality, 
the exams are probably less frequent since scheduled exams often get 
cancelled and rescheduled. In too many cases, the result of the 
stretch-out of CRA exams means that small banks may be examined only 
once or twice in a decade as opposed to 3 or 4 times.
     In their scanty amount of analysis on small bank burdens, the 
Federal banking agencies have found that CRA regulations ``impose a 
modest information collection burden on small institutions--an average 
of 10 burden hours per institution per year.'' \1\ In addition, the 
relatively few trade articles on small bank CRA exams also reveal few 
complaints about burden. In fact, an American Banker article shortly 
after the CRA regulation reform in 1995 is entitled ``Small Banks Give 
Thumbs-Up to Streamlined CRA Exams.'' In this article, small bankers 
are quoted as saying that the exams were not burdensome and that CRA 
examiners took less than 1 day of their time.\2\
---------------------------------------------------------------------------
    \1\ Federal Register, May 28, 1999 (Volume 64, Number 103), pages 
29083 through 29086.
    \2\ ``Small Banks Give Thumbs-Up To Steamlined CRA Exams,'' Jaret 
Seiberg of the American Banker, Thursday, February 1, 1996.
---------------------------------------------------------------------------
     The available evidence suggests minimal burden, but great benefits 
due to CRA exams. But since the 1995 regulatory changes to CRA exams, 
the only action by policymakers has been to reduce the rigor of CRA 
exams. First, GLBA reduces the frequency of small bank CRA exams. Now, 
the regulatory agencies wish to apply the streamlined small bank CRA 
exam to more than 1,000 additional institutions. Recently, the Senate 
Banking Committee asked NCRC to document the damage caused by this 
proposed change; NCRC eagerly responded, documenting in great detail 
the loss in community reinvestment due to this latest proposal.
     Mr. Chairman, it is clear to us that CRA is not burdensome and has 
greatly benefited both banks and community groups by increasing the 
number of profitable loans, investments, and services made to low- and 
moderate-income communities. We urge you to halt and reverse the trend 
of CRA deregulation. A place to begin would be to repeal the stretchout 
of small bank CRA exams.

Have and Maintain Satisfactory CRA Requirement
     GLBA added a requirement that bank holding companies must ensure 
that all of their affiliates pass CRA exams (at least Satisfactory 
ratings) in order to be allowed to merge with nonbank financial 
institutions and take advantage of the new powers under GLBA. This 
requirement sends a signal that banks must comply with their 
obligations under CRA if they wish to enjoy the privileges afforded to 
them by GLBA. While well-intentioned, this requirement has not been 
applied in one case to our knowledge. A major reason for this is less 
than 2 percent of banks and thrifts fail their CRA exams, and the great 
majority of failing banks are smaller institutions less likely to merge 
or engage in nonbank financial business authorized by GLBA.
     In fact, the Federal Reserve Board had one opportunity in a large 
and controversial merger to apply this requirement, but arbitrarily and 
capriciously adopted a narrow reading of the GLBA requirement. During 
2000, Citigroup acquired the notorious lender Associates First Capital 
Corporation. A subsidiary of Associates, Associates National Bank, had 
a Needs-to-Improve CRA rating. Once Citigroup owned Associates National 
Bank, it would have had an affiliate with a Needs-to-Improve CRA 
rating, rendering it ineligible for GLBA powers and privileges. 
Confronted with the first opportunity to enforce the ``Have and 
Maintain'' requirement, the Federal Reserve punted. The Federal Reserve 
reasoned that the GLBA requirement applied only to the holding company 
that is the acquirer, not to the institution being acquired. Yet, this 
hair-splitting distinction is not present in the GLB Act.

Strengthening the ``Have and Maintain'' Requirement
     The intention of the ``Have and Maintain'' requirement was to 
ensure that institutions engaging in large scale mergers and embarking 
on broad new powers adhered to their CRA obligation to serve all 
communities, including low- and moderate-income ones. Unintentional 
loopholes have subverted Congress' ambitious and laudatory intention. 
Congress must close this loophole by specifying that the ``Have and 
Maintain'' requirement must apply to the institution being acquired as 
well as to the acquirer.
     Furthermore, since failing ratings are so rare, the ``Have and 
Maintain'' requirement must be strengthened by imposing significant 
affirmative obligations on institutions that wish to merge. NCRC urges 
you to consider requiring merging institutions to submit a CRA plan 
with their merger application.
    In the past year, merger activity has reached a frenzied pace and 
has included the largest mergers in history. The Bank of America and 
Fleet merger and the JP Morgan Chase and Bank One merger will create 
institutions with more than $1 trillion in assets. Despite the 
incredible magnitude of these and other recent mergers, the Federal 
Reserve Board does not require any meaningful CRA plan from merging 
institutions. The CRA ``convenience and needs'' discussions in the 
merger applications usually consist of one or two page boasts about how 
great the banks' CRA performance are. The presentations also usually 
contain predications that the banks' CRA performance will improve once 
they get bigger after mergers. Yet, NCRC has too often documented with 
HMDA and CRA small business lending data that the amount of loans 
decrease dramatically after large mergers. In too many cases, banks 
close branches and lay-off loan offices in order to achieve merger 
``efficiencies.''
     A requirement for a meaningful CRA plan holds out hope for 
communities that mergers will not result in significant reductions in 
loans, investments, and services. A meaningful CRA plan would require 
merging institutions to provide the number of loans, investments, and 
services they made by State, metropolitan area, and rural portions of 
States in past years. The plan would then describe how the institution 
would increase their number of loans, investments, and services to 
minority and low- and moderate-income communities and borrowers. In 
addition, the plan would require meaningful performance measures such 
as comparisons between the percentages of loans a bank made to low- and 
moderate-income borrowers and communities, and the percentages of loans 
that the bank's peers made to these borrowers and communities. The plan 
would identify geographical areas (on a State, urban, and rural level) 
in which the bank lags its peers on the performance measures and would 
indicate how the bank will do better in these geographical areas.
    Finally, and importantly, the CRA plan would include a fair lending 
component. Large institutions seeking expanded GLBA powers are often 
involved in making high-cost subprime mortgage loans or purchasing 
these loans. The Federal Reserve Board and the other banking agencies, 
however, are not requiring specific promises and reforms that would 
ensure that these loans are not predatory. In addition, large banks 
involved in the mega-mergers are financing payday lenders, car title 
lenders, pawnbrokers, and other fringe lenders. The Federal Reserve 
Board, however, is not requiring due diligence mechanisms for these 
financial arrangements although the Federal Reserve Board has used its 
supervisory powers to make sure that none of the banks it regulates 
engages in payday lending.
    The CRA and fair lending plan would become the focus of discussion 
among banks, the regulators, and the general public during public 
comment periods and hearings. Currently, banks submit applications with 
no meaningful discussion of CRA and fair lending compliance; community 
groups comment on these glaring inadequacies; and the Federal Reserve 
then approves the merger applications with no conditions. In contrast, 
meaningful CRA plans would stimulate meaningful discussions about 
strengths and weaknesses in banks' CRA performance. The Federal Reserve 
Board would then encourage and/or require banks to specifically address 
weaknesses in their CRA and fair lending performance. The end result 
would be an increase in safe and sound lending for traditionally 
underserved communities.
     NCRC believes that meaningful CRA and fair lending plans should be 
required in every merger application proceeding. At the very least, 
this requirement should apply to the larger mergers, involving 
institutions with $1 billion or more in assets. Public hearings held by 
the regulatory agencies in States most affected by the mergers must 
also be automatic for the larger mergers. In addition, the CRA plan 
requirement could also focus on geographical areas or parts of CRA 
exams in which a lender scored Low Satisfactory or below.

Updating CRA to Keep Pace with Sweeping Changes in the Financial
Industry
     As lawmakers debated GLBA, NCRC and our 600 member organizations 
continually pointed out that while GLBA would create larger and vastly 
more powerful financial institutions, CRA was not being updated to keep 
pace with the dramatic changes in the financial industry unleashed by 
GLBA. GLBA did not apply CRA or CRA-like requirements to mortgage 
company affiliates, other affiliates that made loans, insurance 
companies or securities firms that would become part of holding 
companies. As a result, a very real possibility exists that CRA will 
apply to fewer and fewer assets of holding companies. At the same time, 
CRA was not applied to credit unions, mortgage companies, and other 
competitors of bank holding companies. This creates an uneven playing 
field for bank holding companies that must comply with CRA and with 
institutions with no community reinvestment obligations. Of more 
concern to communities, the uneven application of CRA reduces the 
amount of community reinvestment, financial activity, and wealth 
building in their communities. The uneven application of CRA also 
undermines President Bush's call for more minority homeownership and 
more importantly subverts the dreams and aspirations of millions of 
Americans seeking to build a future for their families.
     Since GLBA, NCRC worked with Congressman Gutierrez, Barrett, and 
34 other Members of Congress to craft the CRA Modernization Act that 
would apply CRA to all parts of bank holding companies as well as to 
institutions outside of bank holding companies. If Congress wishes to 
ensure that GLBA benefits all Americans, it must take up all or at 
least parts of the CRA Modernization Act. A good place to begin would 
be to apply CRA and fair lending exams to all affiliates of holding 
companies that lend since the Federal Reserve still hesitates to act on 
the GAO's recommendation of fair lending reviews for affiliates.\3\ 
Second, Congress can then 
expand CRA to all lending institutions, including credit unions and 
mortgage companies.
---------------------------------------------------------------------------
    \3\ General Accounting Office, Consumer Protection: Federal and 
State Agencies Face Challenges in Combating Predatory Lending, January 
2004, GAO-04-280.
---------------------------------------------------------------------------
     Third, Congress must increase the amount of data disclosure on 
lending activity. Expanding upon a provision in the CRA Modernization 
Act, Rep. James McGovern has sponsored H.R. 1748, the Access and 
Openness in Small Business Lending Act of 2003.
     This bill amends the Equal Credit Opportunity Act (specifically 
Federal Reserve Regulation B) to permit the collection of demographic 
information in connection with small business loans with the 
applicant's consent. Currently, CRA only requires banks and thrifts to 
report the census tract location of small businesses receiving loans.
     Unlike publicly available home loan data, the small business loan 
data lacks demographic characteristics of borrowers. In particular, the 
small business loan data does not have information on the race and 
gender of the small business owner. H.R. 1748 would update the CRA data 
to require the collection and dissemination of race and gender of the 
small business owner. Other data enhancements include the revenue size 
of the small business and data on denials as well as approvals.
     The home loan data has stimulated a significant increase in 
lending to minorities, women, and low- and moderate-income borrowers 
precisely because its public availability holds lenders accountable for 
reaching formerly neglected borrowers. Enhancing the small business 
data would similarly increase lending to women- and 
minority-owned small businesses. We know from studies conducted by the 
Milken Institute and others that women-owned businesses are in the dark 
ages when it comes to access for credit. Improvements in small business 
lending data would be a great benefit to half of the American 
population by providing women with greater chances of securing loans 
for their businesses.
     Research has proven that CRA works to expand access to capital and 
credit. Using NCRC's database of CRA agreements, Harvard University, 
the Department of Treasury and Federal Reserve economists have shown 
that banks made more loans to low- and moderate-income communities in 
geographical areas in which they made CRA agreements. Moreover, the 
research concluded that banks made more loans in geographical areas in 
which they had branches and underwent CRA exams than in geographical 
areas outside the purview of the CRA exams (often because their 
mortgage company affiliates were not included on their CRA exams but 
made considerable numbers of loans in a large number of geographical 
areas).\4\
---------------------------------------------------------------------------
    \4\ The Joint Center for Housing Studies at Harvard University, The 
25th Anniversary of the Community Reinvestment Act: Access to Capitol 
in an Evolving Financial Services System, March 2002; Robert Litan, 
Nicolas Retsinas, Eric Belsky and Susan White Haag, The Community 
Reinvestment Act After Financial Modernization: A Baseline Report, 
produced for the U.S. Department of the Treasury, April 2000; The 
Performance and Profitability of CRA-Related Lending, Report by the 
Board of Governors of the Federal Reserve System, July 17, 2000; 
Raphael Bostic and Breck Robinson, Do CRA Agreements Influence Lending 
Patterns? July 2002, available via [email protected].
---------------------------------------------------------------------------
     Lending is good for America. Access to credit and capital is the 
traditional method that allows any family to build equity and create 
wealth. CRA brings more wealth, more stakeholders, and more parity.

Uneven Regulatory Regime Threatens Sustainability of U.S. Banking
Success
     Banks are highly regulated, but securities companies and insurance 
firms are not. By allowing banks and nonbank financial companies to 
merge, GLBA exposes banks to higher levels of risk from their lightly 
regulated affiliates. At the same time, banks themselves are taking on 
more risk by outsourcing their serving operations to foreign countries. 
This creates job loss here at home and makes it more difficult for 
banks to control and monitor their operations.
     In addition to the safety and soundness risks, the increased 
financial industry consolidation and globalization creates access 
difficulties for low- and moderate-income borrowers. For example, 
consumers need insurance policies in order to secure home mortgage 
loans. Their bank may be covered by CRA, but the bank's insurance 
company affiliate is not. What happens to CRA enforcement when the 
bank's insurance company unfairly denies a low-income borrower for a 
homeowner's insurance policy? NCRC does not believe that lawmakers 
completely thought through the implications of industry consolidation 
on CRA enforcement when passing GLBA.
     Clearly, the safety and soundness and fair lending oversight of 
nonbank financial affiliates of bank holding companies must be 
increased. At the same time, stronger firewalls must be created between 
Federal regulatory agencies and financial institutions. Recently, we 
have all become alarmed by the case of the OCC examiner for Riggs 
leaving the OCC and working for Riggs while the bank was not enacting 
sufficient safeguards against money laundering. In the financial world 
shaped by GLBA, the integrity and rigor of supervisory and examiner 
officials assumes paramount importance. For this reason, NCRC 
recommends that regulatory officials be barred from working at 
financial institutions for a period of 5 years after they leave their 
agencies. With all due respect, the same requirement should be imposed 
upon members of Congress.

Conclusion
     If research has shown beyond a reasonable doubt that CRA works, 
why not update CRA and apply it evenly across the financial industry? 
Firstly, lawmakers should do no harm to CRA and must repeal GLBA's CRA 
sunshine requirement and small bank exam stretch-out. Second, lawmakers 
must apply CRA to all parts of holding companies that lend and to 
lending institutions outside of holding companies. Third, lawmakers 
then must consider CRA-like requirements for nonbank financial 
institutions including insurance companies and securities firms.
     Mr. Chairman, communities cannot afford another 5 years of GLBA 
and missed reinvestment opportunities. NCRC stands ready to support 
Congressional efforts to update CRA and make capitalism and the 
American Dream available to all Americans who work hard and play by the 
rules.

                               ----------
                 PREPARED STATEMENT OF J. STEVEN JUDGE
               Senior Vice President, Government Affairs
                    Securities Industry Association
                             July 13, 2004

    Chairman Shelby, Senator Sarbanes, and Members of the Committee, I 
am Steve Judge, Senior Vice President of Government Affairs, Securities 
Industry Association (SIA).\1\ I appreciate the opportunity to present 
our views on the Gramm-Leach-Bliley Act (GLBA) as we approach the 5-
year anniversary ofthe enactment of that landmark legislation.
---------------------------------------------------------------------------
    \1\ The Securities Industry Association, established in 1972 
through the merger of the Association of Stock Exchange Firms and the 
Investment Banker's Association, brings together the shared interests 
of nearly 600 securities firms to accomplish common goals. SIA member-
firms (including investment banks, broker-dealers, and mutual fund 
companies) are active in all U.S. and foreign markets and in all phases 
of corporate and public finance. According to the Bureau of Labor 
Statistics, the U.S. securities industry employs 780,000 individuals. 
Industry personnel manage the accounts of nearly 93 million investors 
directly and indirectly through corporate, thrift, and pension plans. 
In 2003, the industry generated an estimated $209 billion in domestic 
revenue and $278 billion in global revenues. (More information about 
SIA is available on its home page: www.sia.com.)
---------------------------------------------------------------------------
    SIA commends this Committee for its efforts in enacting the GLBA, 
and for holding these hearings to examine the effects of the Act. SIA 
believes that these hearings will initiate an important dialogue in the 
financial services industry and with policymakers about identifying and 
eliminating unnecessary regulatory restrictions that impede the ability 
of our financial services firms to: Develop and offer consumers a full 
range of financial services and products; structure themselves 
optimally; mitigate risk for themselves and for the broader financial 
markets, and; maintain global competitiveness and preeminence. SIA 
looks forward to participating in that dialogue.
    In considering the effects of the GLBA, it is useful to recall how 
constrained the financial services industry would have been without 
enactment of GLBA. The ability of financial services firms to affiliate 
was primarily governed by the Glass-Steagall Act, a Depression-era law 
that ceased to reflect the realities of the modern financial services 
industry. That law's prohibition on affiliations between banks and 
securities firms, for example, had long since lost any rationale it 
might once have had. In the 66 years since enactment of the Glass-
Steagall Act, banks and securities firms had begun to offer an array of 
competing products and services to their retail and institutional 
clients, and many banks and securities firms determined that they could 
best serve their customers by offering ``one-stop-financial-shopping.''
    The banking regulators, in particular, had adopted a variety of 
regulations that permitted banks to acquire certain securities firms, 
although securities firms were prohibited from affiliating with banks. 
The result was a ``mish-mash'' of confusing rules and regulations, 
which were never able to provide the full range of relief the industry 
sought and consumers needed, and which tilted the playing field in 
favor of the banks. For example, national banks could own subsidiaries 
that engaged in securities brokerage activities as long as the 
subsidiary did not engage in dealer or underwriting activities. 
Securities firms owned by bank holding companies could engage in a 
limited amount of dealer and underwriting activities, but those 
activities could not account for more than 20 percent (and eventually 
25 percent) of that firm's revenues. Securities firms were prohibited 
from owning banks, although they were able to affiliate with thrifts 
and certain other types of financial institutions. State laws further 
complicated the regulatory picture, and banking and securities 
regulators occasionally wrestled in court over various jurisdictional 
issues.
    The resulting legislative restrictions and regulatory uncertainties 
artificially restricted affiliations among financial services firms. 
Such restrictions undermined their competitive position, their ability 
to develop and offer new services and products, and consumers' access 
to a full range of financial products and services from a single 
financial institution.
    SIA and various members of the financial services community had 
been working with Congress for decades to pass legislation to permit 
affiliations between and among securities firms, banks and insurance 
companies. We sought legislation that would create a ``two-way street'' 
by allowing banks, securities firms, or insurance companies to 
affiliate on an equal footing. Essential to that goal was the assurance 
that competition, not regulatory fiat, would dictate when and how 
financial services firms could affiliate. We sought legislation that 
protected consumers by ensuring that each affiliated financial services 
entity would be functionally regulated--that is, regulated by the 
regulator with the regulatory expertise and statutory mandate to 
regulate the activities in which that entity engaged.
    The enactment of GLBA has in many respects rationalized and 
modernized the untenable and antiquated financial institution 
regulatory environment that existed prior to its passage. Under the 
GLBA:

 Banks, securities firms, and insurance companies can now 
    affiliate under a financial services holding company (FSHC) 
    structure. The FSHC is regulated by the Federal Reserve Board 
    (FRB), and each of the subsidiary financial services firms are 
    regulated by their respective functional regulators. A securities 
    firm in a FSHC structure is not limited to an artificial cap on the 
    amount of revenue it can derive from underwriting and principal 
    transactions (such as the 20 percent, and then 25 percent, caps 
    imposed under the Bank Holding Company Act). The ability of 
    financial services firms to more easily affiliate under a FSHC 
    structure should permit larger firms to become more diversified, 
    which should in turn result in greater product and services 
    offerings, increased domestic and international competitiveness, 
    and greater financial stability.
 Financial services firms also have a number of other 
    structural options available to them, further increasing their 
    flexibility and competitiveness. For example, bank holding 
    companies can elect to remain under the same structure as they did 
    prior to the enactment of the GLBA. Holding companies that own 
    securities firms, but that do not have substantial commercial 
    banking activities, can elect to be regulated as investment bank 
    holding companies, which are subject to the jurisdiction of the 
    Securities and Exchange Commission (SEC). Well-capitalized and 
    well-managed banks can own securities firms. And securities firms 
    and certain other companies that owned thrifts and other nonbank 
    banks prior to the enactment of the GLBA may continue to own those 
    entities.
 Subsidiaries of FSHC's can engage in a wide variety of 
    financial activities beyond banking, securities, and insurance 
    activities, including merchant-banking activities. Notably, the 
    intent of the GLBA was to permit securities firms in a FSHC 
    structure to engage in merchant-banking activities to the same 
    extent as securities firms that are unaffiliated with a bank. 
    Securities firms that are subsidiaries of FSHC's also are permitted 
    to continue to engage in certain preexisting commercial lines of 
    business until 2009.
 Banks are permitted to engage in a variety of specified 
    securities activities without being required to register as broker-
    dealers. The SEC has recently reproposed regulations (proposed 
    Regulation B) that would implement these provisions.
 Financial services firms (regardless of whether they are 
    affiliated with FSHC's) are subject to comprehensive privacy 
    requirements, which among other things require disclosure of the 
    firm's privacy policies, and impose substantive limitations on the 
    circumstances in which a financial services firm can share 
    confidential financial information about a customer or consumer. 
    Financial services firms are required to implement policies and 
    procedures to safeguard confidential customer information. To SIA's 
    knowledge, no other industry in the United States is subject to the 
    comprehensive Federal privacy requirements that now apply to 
    financial services firms.

    Since the enactment of the GLBA, there have been a number of 
significant combinations of financial services firms. Some firms have 
chosen to combine with commercial banks. Other firms have chosen to 
remain independent. That is how it should be. One of the overarching 
goals of the GLBA was to allow financial services firms to choose the 
optimal structure to best serve their customers' needs. Among SIA's 
membership, bank or financial-holding company-ownership has increased 
from 13.4 percent in 1999 to 21 percent today. Moreover, banks have 
significantly increased their presence in capital markets activities. 
For example, banks now lead-manage 58.2 percent of equity underwriting 
deals versus only 36.8 percent in 1999.
    As a further example of the effectiveness of the GLBA, these 
combinations generally have not resulted in the newly affiliated firms 
having to shed significant lines of business or having to artificially 
limit their revenues from securities underwriting and certain other 
activities, as was often the case prior to the GLBA. These combinations 
also generally have not required Federal regulators to provide the type 
of significant regulatory relief that was often necessary pre-GLBA.
    When examining the overall effectiveness of the GLBA, it is 
important to note that various economic factors and significant changes 
in the capital markets over the last 5 years have made it tenuous, at 
best, to determine cause-and-effect relationships post-GLBA. We need 
more time and experience to get the full picture of the GLBA's effects. 
What we do know is that the GLBA is a comprehensive statute regulating 
a diverse, dynamic, and constantly evolving financial services 
industry. As a result, there have been, and likely will continue to be, 
issues concerning the implementation of the legislation. SIA and other 
industry participants have questioned how, for example, the FRB 
proposed to implement the merchant-banking provisions of the GLBA, and 
how the Federal Trade Commission and other regulatory agencies proposed 
to implement the Act's privacy provisions. Currently, the SEC has 
reproposed rules governing the scope of bank-securities activities; the 
reproposed rules are intended to respond to the significant criticism 
of the rules as they were initially proposed.
    Neither these nor similar implementation issues, however, 
necessarily suggest structural problems with the GLBA. Rather, they may 
well be normal transition issues that are almost inevitable when first 
permitting combinations of companies that had largely been prohibited, 
or significantly restricted, from combining for over 60 years. In this 
regard, GLBA is notable for the fact that, despite its complexity and 
scope, it was so carefully drafted that not a single technical or 
similar amendment has been enacted to correct any of its provisions.
    Moreover, there are some weaknesses that have always existed with 
GLBA that this Committee could address. Among the most significant of 
those are:

 Securities firms in a FSHC should be able to engage in a full 
    range of commercial activities to the same extent as securities 
    firms that are unaffiliated with a bank. Currently, the GLBA only 
    permits securities firms in a FSHC structure to continue engaging 
    in preexisting commercial activities until 2009.
 There should be solely national standards governing customer 
    privacy requirements, especially given the national scope of many 
    financial institutions, and the fact that even many smaller 
    financial institutions now have customers from a number of States. 
    Requiring financial institutions to comply with Federal 
    requirements and then the additional requirements potentially 
    imposed by each State in which that firm operates is burdensome, 
    cumbersome, and contrary to an overarching goal of the GLBA of 
    increasing efficiency in the regulation of financial services 
    companies.
 There should be uniform national standards for securities. The 
    National Conference of Commissioners on Uniform State Laws (NCCUSL) 
    has adopted a Model Uniform Securities Act that brings uniformity 
    to the registration process, facilitates electronic signatures, 
    filing and records, and adopts additional investor protections. SIA 
    is actively working with State securities commissioners for 
    adoption of the Uniform Securities Act by their State legislatures.

    The U.S. capital markets and financial services industry are 
stronger, healthier, and more dynamic since Congress enacted the GLBA 
in 1999. In spite of the tremendous challenges and changes of the last 
several years, consumers and financial services firms alike are better 
off as a result of the increased opportunities and choices that the 
GLBA made possible. SIA commends this Committee for holding these 
hearings, and looks forward to working with you, the regulators, and 
other industry participants to maintain our Nation's preeminent capital 
markets.
RESPONSE TO A WRITTEN QUESTION OF SENATOR ALLARD FROM HARRY P. 
                            DOHERTY

Q.1. In your testimony your write, ``However, due to a highly 
politicized campaign by the Realtor community, Treasury and the 
Federal Reserve have not been allowed to complete their work on 
the regulation. In this particular instance, considerations 
other than safety and soundness have held sway.''
    As the Senate sponsor of the Community Choice in Real 
Estate Act, what considerations are alleging that I am acting 
upon? Doesn't this statement call into questions the integrity 
of the bill's supporters?
    Do you believe that the consideration of Congressional 
intent, which is my motivation for introducing the Community 
Choice in Real Estate Act, is inappropriate?
    If Congress believes that a regulation is moving forward 
contrary to legislative intent, what should it do?

A.1. On July 13, 2004, I testified about the implementation and 
impact of the Gramm-Leach-Bliley Act on the financial services 
industry. In my written statement, I had the following to say 
about the joint Treasury-Federal Reserve process for 
determining permissible new financial activities for financial 
holding companies and financial subsidiaries of national banks:

    One of the promises of the GLBA was the relatively easy 
authorization of new financial activities for banking 
organizations. GLBA established a joint Federal Reserve and 
Treasury regulatory process for the authorization of 
permissible new financial activities for banking organizations. 
The hope was that under this process, safety-and-soundness 
would be the dominant factor in the decisionmaking process. 
However, in the first real test of this authority, the two 
agencies have not been able to complete their work on a 
regulation that would authorize for national banks and 
financial holding companies an activity, which is already 
authorized for Federal savings associations and roughly half 
the State-chartered banks.
    In January 2001, the Treasury and the Federal Reserve 
issued a proposed regulation to permit national bank financial 
subsidiaries and financial holding companies to provide real 
estate brokerage and real estate management services to their 
customers. However, due to a highly politicized campaign by the 
realtor community, Treasury and the Federal Reserve have not 
been allowed to complete their work on the regulation. In this 
particular instance, considerations other than safety and 
soundness have held sway.

    It was not my intent, or the intent of America's Community 
Bankers, to call into question the integrity of any Senator for 
his or her sponsorship of the Community Choice in Real Estate 
Act (S. 98) or any other legislation. It was, however, my 
intent to make the observation that appropriations riders have 
circumvented the process established by Congress in GLBA--a 
process that is based on safety and soundness and related 
statutory considerations. Moreover, because real estate 
activities have been authorized for years and safely conducted 
by Federal savings associations and State-chartered banks, we 
believe that safety and soundness considerations should lead 
the Treasury and the Federal Reserve to finalize regulations to 
permit financial holding companies and national bank financial 
subsidiaries to conduct real estate brokerage and management 
activities.
    Congress clearly has the right to change the policy 
established in the GLBA and carve out, through subsequent 
legislation, real estate brokerage and management activities 
from the list of permissible activities for financial holding 
companies and financial 
subsidiaries. ACB does not support such legislation. ACB 
believes that permitting these banking organizations to engage 
in these real estate activities will bring additional, healthy 
competition to the real estate sector, which can only benefit 
consumers. Clearly, many in the real estate industry and in 
Congress disagree with our position. But, ours is a 
disagreement about policy, not about motives.

 RESPONSE TO A WRITTEN QUESTIONS OF SENATOR ALLARD FROM TERRY 
                             JORDE

Q.1. Regarding real estate management and brokerage activities 
you testified, ``We believe that GLB provides the Treasury and 
the Federal Reserve full authority to permit these 
activities.'' Do you at least acknowledge that a number of 
House and Senate Members, including a number of Members who 
wrote the GLB bill, would disagree with the characterization 
that GLB permits these activities?
    Do you consider it insignificant or unimportant that more 
than half of the Members of Congress have indicated that they 
disagree with your characterization of GLB by cosponsoring 
bills to prohibit implementation of the regulations?
    What place should the views of the Congress have in the 
regulatory process?

A.1. I hesitate to speculate on the motives or opinions of 
Members of Congress who have cosponsored legislation to block 
the real estate brokerage and management rule proposed by the 
Treasury and Federal Reserve. They may believe that the 
agencies lack the authority to adopt the regulation or that the 
agencies have the authority and they wish to take it away. 
Whatever the case, I do 
believe that it is significant when over half of the Members of 
Congress cosponsor any piece of legislation. And, as I 
indicated in my testimony, ICBA strongly encourages Congress to 
maintain active oversight of the legislation it enacts.
    Nevertheless, in this case ICBA believes that GLB does 
provide the Treasury and the Federal Reserve the authority to 
adopt the real estate brokerage and management proposal and 
that it would provide community banks and their customers 
significant benefits. Therefore, we hope that Congress does not 
adopt permanent legislation blocking the rule or continue 
blocking it through the appropriations process.

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR ALLARD FROM JAMES D. 
                           MCLAUGHLIN

Q.1. You testified that, ``What is central to this hearing is 
that an extremely important provision of the GLB Act--one that 
appropriately delegates responsibilities to the two agencies 
most familiar with the financial services industry--is not 
working.'' But doesn't Congress retain the authority, and in 
fact the duty, to oversee implementation of the laws is has 
passed?

A.1. Of course Congress should oversee the manner in which the 
laws it enacts are implemented. The July 13 hearing was such an 
example of the appropriate exercise of Congress's oversight 
duty--a review by the Committee holding substantive expertise 
in and jurisdiction over the law enacted.

Q.2. Once a law is enacted, does Congress become irrelevant? If 
not, what role should Congress play? If Congress believes that 
a regulation is moving forward contrary to legislative intent, 
what should it do?

A.2. Where the Congress sees an incorrect interpretation or an 
inadequate implementation of a law it can and should bring it 
to the attention of the agency. If further action is deemed 
necessary Congress has the power, through the substantive 
legislative process involving the Committees of jurisdiction, 
to change the law.

                     STATEMENT OF DENNIS W. ARCHER
                  President, American Bar Association
                             July 13, 2004

    Mr. Chairman and Members of the Committee, I am Dennis W. Archer, 
President of the American Bar Association. Thank you for holding this 
oversight hearing on the Gramm-Leach-Bliley Act 5 years after its 
passage. I applaud your leadership in conducting the Committee's 
oversight role in this important area. I respectfully submit to you 
this statement with the request that it be made part of the hearing 
record.
    The American Bar Association is the world's largest voluntary 
professional association with more than 400,000 members. As the 
national umbrella organization of the legal field, our mission is to 
serve the public and the profession by promoting justice, professional 
excellence, and respect for the law.
    In June 2001, attorneys nationwide awoke to find that the Federal 
Trade Commission had interpreted the Gramm-Leach-Bliley Act (GLBA), the 
most sweeping reform of the banking, securities, and insurance 
industries since Glass-Stegall, as amending the attorney's duty of 
confidentiality to clients and imposing unnecessary and 
counterproductive measures that confused consumers regarding the 
attorney-client relationship.
    There was no evidence before and leading up to the passage of the 
GLBA to indicate that Congress intended to treat lawyers as ``financial 
institutions'' within the meaning of the Act. In fact, in the record of 
the 106th Congress' consideration of S. 900, the legislation that would 
become the GLBA, the only mention of attorneys were two references to 
the stringent and effective confidentiality rules with which attorneys 
must comply.\1\ In the debate on the Conference Report of S. 900, 
Senator Conrad R. Burns confirmed that there was no intent that the 
privacy provisions of the GLBA apply to lawyers when he stated:
---------------------------------------------------------------------------
    \1\ Please see 145 Cong. Rec. S13891 (daily ed. Nov. 4 1999) and 
145 Cong Rec. S13908 (daily ed. Nov. 4, 1999).

        Paramount to our freedom is the right to privacy; to be left 
        alone and to be secure in the belief that our business is just 
        that, ours and no one else's. When we do share our personal 
        business information with others, it is with the real and 
        reasonable expectation that it remains our property. When 
        dealing with our doctor or lawyer we know that the 
        communication is privileged.\2\
---------------------------------------------------------------------------
    \2\ 145 Cong Rec. S13908 at S13908.

    The ABA contributes to the high standards of conduct of the legal 
profession expected by the public through our development and 
promulgation of the Model Rules of Professional Conduct and, its 
predecessor, of the Model Code of Professional Responsibility. The 
Model Rules and its predecessor are the source of the vast majority of 
the professional conduct codes that are enforced in every State and 
every territory of the United States and with which attorneys must 
comply in order to retain the right to practice law in this country.
    Each of the 50 States and 6 territories, including the District of 
Columbia, has either adopted Model Rule 1.6, Confidentiality of 
Information, has adopted its equivalent from the Model Code, Canon 5, 
or, as in the case of California, has developed a similar rule for its 
own jurisdiction. The text of Model Rule 1.6 is as follows:

        (a) A lawyer shall not reveal information relating to the 
        representation of a client unless the client consents after 
        consultation, except for disclosures that are impliedly 
        authorized in order to carry out the representation, and except 
        as stated in paragraph (b).
        (b) A lawyer may reveal such information to the extent the 
        lawyer reasonably believes necessary:

          (1) to prevent the client from committing a criminal act that 
        the lawyer believes is likely to result in imminent death or 
        substantial bodily harm; or
          (2) to establish a claim or defense on behalf of the lawyer 
        in a controversy between the lawyer and the client, to 
        establish a defense to a criminal charge or a civil claim 
        against the lawyer based upon conduct in which the client was 
        involved, or to respond to allegations in any proceeding 
        concerning the lawyer's representation of the client.\3\
---------------------------------------------------------------------------
    \3\ Model Code of Professional Responsibility Rule 1.6 (1998).

    The California rule states, in pertinent part: ``It is the duty of 
an attorney to . . . maintain inviolate the confidences, and at every 
peril to himself or herself to preserve the secrets, of his or her 
client.'' \4\
---------------------------------------------------------------------------
    \4\ Cal. Bus. & Prof. Code, Section 6068 (2001).
---------------------------------------------------------------------------
    Professional conduct rules for attorneys are enacted under the 
authority of the court of highest appellate authority within the State 
or territory, or, in some cases, the State legislature. Attorneys, as 
officers of the court, are answerable for their ethical conduct to the 
court. Violations are prosecuted through sui generis disciplinary 
proceedings that result from the inherent regulatory authority of the 
courts.\5\
---------------------------------------------------------------------------
    \5\ See Middlesex County Ethics Committee v. Garden State Bar 
Association, 457 U.S. 423 (1982).
---------------------------------------------------------------------------
    To date, there have been no allegations of insufficient enforcement 
of client confidentiality rules at the state or territory level, nor 
has there been a call for Federal intervention. The current system for 
protecting clients' rights has remained in place and been effectively 
applied for decades. Application of the privacy provisions of the GLBA 
to attorneys--including requiring attorneys to mail confusing privacy 
notices to their clients--will not increase protection for the public 
above that which the State-based system currently requires.
    These State and territory conduct codes, along with the attorney-
client privilege and the work product doctrine found in common law, 
form the foundation of the attorney's duty of confidentiality. This 
duty exists in all matters related to the client's representation. It 
applies not only to communications from the client but to all 
information relating to the representation, whatever its source. These 
codes flatly prohibit disclosure of any information relating to a representation without prior discussion with, and consent by, the affected client, except in limited and legally mandated circumstances. Affiliate 
sharing, as envisioned by the GLBA, does not occur in the practice of 
law.
    GLBA was enacted ``to enhance competition in the financial services 
industry by providing a prudential framework for the affiliation of 
banks, securities firms, insurance companies, and other financial 
service providers. . .'' \6\ Its broad privacy protection provisions 
were added to enable consumers to limit the use of their personal 
information by financial institutions and their affiliates. These 
protections were deemed necessary because of the potential for abuse 
that the ability to merge affiliate records. and the increased ease of 
dissemination through technological advances in data storage and 
retrieval afforded the post-GLBA financial institution.
---------------------------------------------------------------------------
    \6\ H.R. Conf. Rep. No. 106-434, at 245 (1999), reprinted in 1999 
U.S.C.C.A.N. 245, 245.
---------------------------------------------------------------------------
    The scope and application of the GLBA privacy provisions at issue 
hinge on the term ``financial institution.'' The term was defined by 
Congress as ``any institution the business of which is engaging in 
financial activities as described in Section 1843(k) of Title 12 
[Section 4(k) of the Bank Holding Company Act of 1956].'' \7\ 
Regulations promulgated by the Federal Reserve Board pursuant to the 
Bank Holding Company Act provide that the term ``financial activities'' 
should include real estate settlement services, tax-planning and tax-
preparation services, and collection of overdue accounts receivable. 
Based on the fact that some of the activities on this list are 
performed by attorneys, the Federal Trade Commission has taken the 
position that lawyers and law firms who engage in any of these 
activities in the course of practicing law are ``financial 
institutions'' within the meaning of the GLBA. This interpretation of 
the GLBA is overbroad and ignores both the common sense meaning of 
``financial institution'' and the legislative history and purpose of 
the GLBA.
---------------------------------------------------------------------------
    \7\ 15 U.S.C. Sec. 6809(3)(A).
---------------------------------------------------------------------------
    Imposing the burdens of the GLBA privacy provisions on the legal 
profession does not further any of the legislative objectives of the 
statute. Worse yet, it has been counterproductive because it has, and 
could continue to, create confusion among consumers regarding the scope 
of attorney-client confidentiality. Many attorneys have already 
contacted the ABA regarding the confusion and consternation that has 
been caused among clients as a result of the GLBA privacy notices 
mandated by the FTC's interpretation. They report instances in which 
the sending of privacy notices have revealed the fact of legal 
representation to adverse parties residing at the same address as the 
client, of anxious phone calls requesting detailed explanations of the 
notices' meaning in the context of a confidential relationship and of 
money wasted on needless mailings of confidentiality policies that 
already were well understood.
    Clients know that their information is protected by the duty of 
confidentiality, by professional conduct codes and by court recognized 
privileges. When they receive privacy notices from their attorney 
listing the GLBA mandated exceptions in statutorily mandated terms, 
however, they question how the relationship between them and their 
attorney could have changed. Clients know they have the right to an opt 
in disclosure policy with their attorneys; that no information will be 
disclosed unless the client wishes to do so. The GLBA privacy 
provisions provide for an opt out policy, with disclosure as the 
default. This is contradictory and misleading to consumers. Confusion 
naturally results.
    The ABA and several State bar associations petitioned the Federal 
Trade Commission for relief. When the Commission refused those 
requests, the New York State Bar Association and the ABA filed suit in 
the U.S. District Court for the District of Columbia. Twenty-five State 
and local bar associations \8\ and the Conference of Chief Justices 
joined the litigation as amici curiae. On May 12, 2004, the District 
Court for the District of Columbia entered a final judgment in favor of 
the ABA. On July 12, 2004, the day before this hearing, the FTC filed 
notice of appeal, which presents the prospect of a lengthy period of 
litigation resulting in sustained uncertainty for more than a half-
million attorneys and millions of their clients. This situation is 
untenable.
---------------------------------------------------------------------------
    \8\ The State and local bar associations are: the Arizona Bar, 
Arkansas Bar Association, Atlanta Bar Association, Beverley Hills Bar 
Association, Cleveland Bar Association, Colorado Bar Association, 
Connecticut Bar Association, Cuyahoga County Bar Association, The 
Florida Bar, Illinois State Bar Association, Lawyer's Club of Los 
Angeles County, Maryland State Bar Association, Nashville Bar 
Association, New Orleans Bar Association, Ohio Bar Association, 
Oklahoma Bar Association, New Jersey State Bar Association, State Bar 
Association of North Dakota, Pennsylvania Bar Association, South 
Carolina Bar Association, the State Bar of Wisconsin, Tennessee Bar 
Association, Vermont Bar Association, Virginia State Bar, and West 
Virginia Bar Association.
---------------------------------------------------------------------------
    We urge, the Committee, as it reexamines the efficacy of GLBA, to 
use its authority to clarify the original intent of Congress as to the 
application of Title V. Attorneys are not financial institutions and 
should not be treated as such. Thank you for the opportunity to present 
the views of the American Bar Association at this time.

                               ----------
                 STATEMENT OF DAVID F. WOODS, CLU, ChFC
President, The National Association of Insurance and Financial Advisors
                             July 13, 2004

    The National Association of Insurance and Financial Advisors 
(NAIFA) is delighted to have the opportunity to share with the Senate 
Banking Committee our views regarding the performance and impact of the 
Gramm-Leach-Bliley Act (GLBA) 5 years after its passage.
    NAIFA is a federation of approximately 800 State and local 
associations representing over 225,000 life and health insurance agents 
and advisers and their 
employees. Originally founded in 1890 as the National Association of 
Life Underwriters, NAIFA is the Nation's oldest and largest trade 
association of life and health insurance agents and financial advisers. 
NAIFA's mission is to enhance the business and professional skills, and 
promote the ethical conduct, of our members, and to advocate for a 
positive legislative and regulatory environment.
    At the outset, NAIFA commends Chairman Shelby, Senator Sarbanes, 
and the Committee Members for holding this hearing. Passage of the 
Gramm-Leach-Bliley Act was a watershed event in the financial services 
industry. It is critical that we understand the impact of the law since 
its enactment and how it will affect financial services entities, 
including life insurance agents and financial advisers, in the future.
    NAIFA supported passage of GLBA because we believed the law would 
benefit agents and consumers. We believed that breaking down Federal 
and State law barriers among the banking, securities, and insurance 
industries would lead to a more vibrant financial services marketplace 
and help to ensure that insurance agents are on an even playing field 
with our colleagues and competitors in the banking and securities 
sectors. Since its enactment, NAIFA members have worked diligently with 
State and Federal regulators and lawmakers to ensure that GLBA 
implementation is carried out in a way that benefits consumers and 
benefits, or does not unduly burden, industry.
    While there have been some tangible and important benefits arising 
from GLBA, overall the results have been mixed. On the broad scale, we 
have not seen the market convergence that was predicted with the repeal 
of the Glass-Steagall Act. The mixing of insurance and banking has 
taken place almost entirely at the agent level. There has been little 
in the way of mergers among banks, securities firms, and insurance 
companies. This is not necessarily a bad thing. In fact, the benefit of 
GLBA is that it has allowed the industry, rather than regulators, to 
make decisions based on the workings of the marketplace. Citigroup's 
divestiture of its property and casualty insurance divisions is clear 
evidence of the marketplace at work.
    GLBA has also had mixed results on the narrower insurance-specific 
issues. Licensing of insurance agents and brokers (also referred to 
herein as insurance producers), privacy, preemption, coordination and 
cooperation among regulators, and consumer protection are all addressed 
in GLBA and all significantly affect insurance agents and our clients. 
Although there are a number of reasons we have not realized the full 
benefit of these GLBA provisions, NAIFA believes one of the most 
critical roadblocks is the current cumbersome, duplicative insurance 
regulatory system. The States have made solid efforts to improve the 
current regulatory system, and we strongly support their work. It has 
become increasingly clear, however, that the State system needs help. 
NAIFA believes it is imperative that the problems and inefficiencies in 
the State regulatory system be corrected quickly, and supports the 
active involvement of the Congress in the reform process.
    This statement addresses the performance and impact of GLBA from 
the perspective of a life insurance agent. Life insurance agents 
generally sell products including standard life insurance policies, 
annuities, disability income, and long-term care products. The 
statement focuses on two areas: (i) the impact of GLBA on the life 
insurance agent community and NAIFA's work with State legislators, 
State insurance regulators, and Federal financial services regulators 
in its implementation; and (ii) the need for Congressional involvement 
in insurance regulatory reform, which is necessary to help us realize 
the full potential of the Gramm-Leach-Bliley Act.

GLBA Five Years Later--Mixed Results for Insurance Agents
    GLBA affects the insurance industry, including insurance producers, 
in numerous ways, including:

 reform of the producer licensing system and providing for 
    creation of the National Association of Registered Agents and 
    Brokers (NARAB);
 imposing notice and opt out obligations on financial services 
    entities to protect consumer privacy;
 preempting State insurance laws, potentially giving Federal 
    banking regulators significant input into insurance regulation; and
 enlarging the role of the Federal Government in insurance 
    regulation through provisions including Federal consumer protection 
    requirements, ``functional regulation,'' and coordination among 
    State and Federal regulators.

NARAB/Producer Licensing
    NAIFA has worked for years to get the NAIC and State insurance 
regulators to fix the cumbersome, duplicative State-based system of 
producer licensing. GLBA's NARAB provision successfully pushed the 
States to enact reform. In 2000, the NAIC adopted the Producer 
Licensing Model Act (PLMA), which provides for a system of reciprocal 
licensing in the States pursuant to the NARAB requirements. The PLMA 
has been enacted in some form in 49 States and the District of 
Columbia.
    NAIFA and our State affiliates have been extremely active and are, 
in large part, responsible for enactment of the PLMA in the States. 
NAIFA is also working with the NAIC in the development of specific 
recommendations for greater uniformity in producer licensing 
requirements, and we have been a board member of the National Insurance 
Producer Registry (NIPR), which operates the electronic database of 
producer information that has made licensing significantly faster and 
easier.
    Passage of NARAB gave the States the needed incentive to streamline 
the insurance producer licensing system, but it did not go far enough. 
Today, there are approximately 40 States that the NAIC has deemed 
``reciprocal'' for NARAB purposes. Although other States have adopted 
portions of the PLMA, there remain a significant number of States--
including major markets such as California and Florida--that are not 
reciprocal and therefore not in compliance.
    In addition, reciprocal States sometimes have similar legal 
requirements but differing standards for licensure--thus creating a 
patchwork of approaches across the country.
    Full reciprocity, uniformity of standards and, ultimately, uniform 
laws in every State are needed before NARAB can be considered a 
complete success.

Privacy of Consumer Information
    GLBA imposes obligations on financial services entities to protect 
the privacy of certain consumer information. The Federal banking and 
securities agencies promulgated regulations for banks and securities 
firms, and the State insurance regulators were delegated the task of 
promulgating regulations for the insurance industry. NAIFA worked with 
the NAIC Privacy Working Group to draft a model privacy regulation 
outlining a uniform regime for all elements of the financial services 
industry, and worked with the States to ensure that the model 
regulation was promulgated as uniformly as possible across the country. 
To assist NAIFA members in complying with the new privacy obligations, 
NAIFA produced an Insurance Producer Privacy Guide that outlines the 
requirements and compliance steps for producers.
    The requirements of the GLBA privacy provisions have been met by 
regulators and industry, but they fall short of their potential. In the 
insurance sector, the lack of uniformity in privacy requirements makes 
it burdensome for insurers and producers to comply. Many States have 
promulgated the NAIC's privacy model regulation, but a significant 
number have different laws on their books, many based on an older NAIC 
model. In addition, the lack of preemption of State privacy laws makes 
it possible that the States could change their privacy requirements at 
any time, as demonstrated by California's privacy law, which was 
recently found to be not preempted by the Fair Credit Reporting Act 
(FCRA).
    Finally, to add to the complexity of the GLBA privacy requirements, 
the FCRA and HIPPA also impose privacy requirements with which insurers 
and producers must comply. These multiple layers of protection arguably 
confuse, rather than help, consumers, who must work through pages of 
disclosure to decipher what their financial services company's policies 
are and to determine what their options are. It is worth noting that 
the State insurance regulators and the Federal agencies have deemed it 
necessary to review GLBA privacy notices to determine if the disclosure 
can be simplified to be more understandable.

Preemption of State Insurance Laws
    Although GLBA prohibits the States from taking certain actions with 
respect to the insurance activities of banks, the parameters of these 
preemption provisions are not clear in the statutes and have not been 
firmly established by the courts. Two important preemption cases have 
been decided recently--one by the U.S. Court of Appeals for the First 
Circuit and one by the Fourth Circuit.\1\ In the Fourth Circuit case, 
the court rejected the State of West Virginia's challenge to an OCC 
``preemption opinion'' finding that certain West Virginia bank sales of 
insurance provisions were preempted because, in the court's view, the 
OCC has full authority to make that determination.\2\ In the First 
Circuit case, the court took exactly the opposite view, ruling that an 
OCC ``preemption opinion'' opining that certain Massachusetts bank 
sales of insurance provisions were preempted by Section 104(d)(2) was 
entitled to no consideration whatsoever and that the Massachusetts 
challenge to that opinion letter was therefore moot.\3\ The 
Massachusetts banks have begun a court challenge against those 
provisions but without OCC participation.
---------------------------------------------------------------------------
    \1\ A third case, Association of Banks in Insurance, Inc. v. 
Duryee, 270 F.3d 397, (6th Cir. 2001), was decided in 2001. In that 
case, the 6th Circuit ruled that the challenged Ohio law was preempted 
because it imposed a prohibition on bank insurance sales activity. 
Therefore, the court did not make a holding on the parameters of the 
``significant interference'' test.
    \2\ Cline v. Hawke, No. 02-2100 (4th Cir. Nov. 19, 2002), cert. 
denied (U.S. October 6, 2003) (No. 02-1620).
    \3\ Bowler v. Hawke, 320 F.3d 59 (1st Cir. 2003).
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    Clarification of GLBA's preemption provisions is important to all 
participants in the insurance marketplace, particularly producers. 
NAIFA supports equal treatment of all producers--whether or not they 
are bank-affiliated. However, we would oppose any effort to unfairly 
favor a particular group of producers through Federal preemption. Most 
important, we need to have a clear standard, so that we can make 
business decisions based on full knowledge of the law and marketplace.

Other Provisions
    There are many other provisions of GLBA that affect insurance 
producers, many of them involving Federal regulators and their 
interaction with State insurance regulators. GLBA establishes a system 
of ``functional regulation,'' in which responsibility for enforcement 
of laws generally is determined according to the function of the 
activity rather than the type of institution performing the activity. 
In addition, the law requires coordination and communication among 
State and Federal financial services regulators. This coordination was 
most evident in the implementation of GLBA's consumer protection 
provisions, a process that NAIFA was also heavily involved in. The 
Federal agencies and State regulators consulted each other closely in 
the promulgation of Federal rules and the amendment of the NAIC Unfair 
Claims Practices Model Act.
    NAIFA supports interaction between the Federal and State 
regulators. As supporters of State regulation, however, we do not want 
the Federal banking and securities agencies to exert undue influence on 
the insurance regulatory process. Insurance is different from banking 
and securities, and it is important for regulation of the industry to 
be handled by insurance experts. Having said that, it would be 
extremely beneficial to have an insurance presence at the Federal 
level. Although the NAIC and State insurance regulators do their best 
to assist the Federal agencies and Congress on insurance issues, the 
lack of a knowledgeable insurance professional at the Federal level 
makes the education process much more difficult. An expert at the 
Federal level of Government would be able to educate policymakers so 
the implications of their decisions on the insurance market are well-
understood. In addition, a Federal presence could serve an important 
role in international and trade issues, where it is important to speak 
with one voice. Banking and securities regulators currently serve this 
role with respect to the industries they regulate, and we believe it is 
sensible to add an insurance voice to the mix.

Full Promise of GLBA Requires Insurance Regulatory Reform
    NAIFA members are long-time supporters of State regulation and 
remain steadfastly committed to this tradition. We believe, as others 
do, that fixing the problems with the insurance regulatory system will 
yield a strong and healthy insurance marketplace, ultimately providing 
better and greater choices for consumers.
    Having said that, we also recognize the challenges facing State 
regulators in their efforts to achieve reform. In addition, the 
changing dynamics of the financial services industry in the 21st 
century compel NAIFA to be open to all promising options to improve the 
regulation of the industry. There is widespread agreement that the 
State insurance regulatory system is in need of improvement in numerous 
areas and that reform is critical to protect consumers and ensure a 
strong and healthy insurance marketplace. Insurance producers have been 
working with State insurance regulators for years to encourage sensible 
reforms to make the quilt of State insurance laws and regulations more 
uniform, thus enabling producers to better compete in an increasingly 
crowded financial services marketplace. Improvements in regulation 
benefit consumers, as well, who share the heavy burden of paying for 
the costs of complying with the current system.
    Although State insurance regulators have made great efforts in the 
past several years to reform and modernize the system, the necessary 
improvements have not been made. Insurance regulation has failed to 
adapt to changes in the industry and the markets it serves, resulting 
in the significant regulatory deficiencies that exist today. 
Unnecessary distinctions among the States and inconsistencies within 
the States on issues such as licensing, product approval, and consumer 
protection, thwart competition, reduce predictability and add 
unnecessary expenses to the cost of doing business. Similarly, these 
outdated rules and practices do not serve the goals of regulation in 
today's converging financial services marketplace.
    It has proved to be very difficult for State regulators and their 
legislatures to unilaterally correct the identified deficiencies in 
State insurance regulation. Both practical and political realities 
dictate that, if identical bills are proposed in 50 State 
legislatures, 50 different bills will emerge from those 50 separate 
legislative processes. There are numerous reasons for this lack of 
success--lack of will, disagreements over substantive details, 
structural impediments, and the fact that it is simply very difficult 
to get 50 different jurisdictions to act in a coordinated fashion, and 
act quickly in a constantly changing global marketplace.
    To their credit, the State insurance regulators have recognized to 
some degree the need to improve and modernize the insurance regulatory 
system currently under their control. Ernst Csiszar, the South Carolina 
Insurance Director and current President of the National Association of 
Insurance Commissioners (NAIC), has acknowledged publicly that change 
is needed and that holding the regulators' ``feet to the fire'' could 
lead to improvements in the regulatory system. The Commissioners have 
adopted an ``Action Plan for Regulatory Modernization'' that outlines 
their plan for reform.
    Despite their good intentions, however, the commissioners' action 
plan is limited in scope and sparse on details. It is unclear what the 
States will accomplish or how long it will take to achieve the reforms 
that are so important for the insurance marketplace. Even for those 
initiatives that are clearly addressed in the action plan, the 
commissioners' ultimate goal is less than ambitious. For example, the 
State regulators have drafted an interstate compact establishing a 
single point of filing for regulatory review and approval of certain 
life, annuity, disability income, and long-term care insurance 
products. This is extremely important to NAIFA members, and NAIFA 
supports the compact wholeheartedly. We are disheartened to note, 
however, that its implementation is not on a fast track. Very few 
States have adopted the compact and obtaining timely enactment of the 
compact in identical form in every State presents a very challenging 
legislative obstacle. Moreover, even if the compact is someday adopted 
in a substantial number of States, the compact itself permits States to 
opt out of particular products, which would undermine the uniformity 
that is needed in the product approval process. These circumstances 
lead us to conclude that Congressional involvement in the reform effort 
could help improve the regulatory environment.
    Since 2002, NAIFA policy has supported Congressional action to 
improve and augment the regulation of insurance, provided such action 
meets NAIFA's specific guidelines aimed at maintaining fairness to 
agents and protection for the consumers they serve. Early this year, we 
clarified this policy to highlight our support for the NAIC's 
regulatory modernization action plan and to identify certain Federal 
proposals that could, if properly crafted, improve the regulation of 
our industry. A copy of our current Insurance Regulatory Reform Policy 
is attached as Addendum A.
    While our regulatory reform policy continues our century-long 
support for State regulation of insurance and confirms our commitment 
to improve the State-based system, we believe the status quo of 
insurance regulation is detrimental to consumers and NAIFA members. 
Thus, the recent strengthening of the policy was necessary to 
acknowledge that all options are on the table and that NAIFA is willing 
to consider a breadth of alternatives in our desire to fix the problems 
confronting us. As a result, we have adopted a policy that embraces 
Federal initiatives to improve the regulation of insurance. Simply put, 
NAIFA favors reform, improvement, and progress over the status quo.
Conclusion
    It is still early to judge the ultimate effectiveness of the Gramm-
Leach-Bliley Act because the full impact of such sweeping legislation 
may not be evident for years, if not decades. Nonetheless, discussion 
of the benefits and drawbacks of the law is worthwhile to determine if 
changes need to be made to realize the full potential of the law. As 
this statement makes clear, there are several specific areas in which 
changes can be made to improve GLBA's effectiveness. Most important in 
the view of NAIFA members is insurance regulatory reform, which is 
critical to enable insurance producers to enjoy streamlined, effect 
regulation and take full advantage of GLBA's promise for the benefit of 
insurance consumers.

                             *  *  *  *  *

                               Addendum A
              NAIFA Policy on Insurance Regulatory Reform

    NAIFA supports the principles underlying State regulation of the 
business of insurance and efforts to improve the State-based system of 
insurance regulation, including support for the National Association of 
Insurance Commissioners' Action Plan for Regulatory Modernization. 
NAIFA also supports Congressional initiatives to improve and augment 
the regulation of the business of insurance, such as the creation of a 
Federal insurance regulator, optional Federal charters for insurance 
companies and agencies, a national producer's license for insurance 
professionals, and other Federal efforts to improve the insurance 
regulatory system. NAIFA supports reform of the insurance regulatory 
system that meets the following guidelines:

    (1) With respect to producer licensing and continuing education 
requirements:

 All insurance producers must be licensed.
 All duplicative licensing requirements should be eliminated to 
    ensure that each insurance producer will be required to demonstrate 
    to only one regulator that he/she is qualified to receive a license 
    to engage in insurance representing either a State-chartered or 
    Federally chartered insurer.
 Uniform substantive and procedural licensing requirements 
    should be established for each class of similarly situated 
    producers.
 The uniform licensing requirements should include the mandated 
    performance of a criminal background check on all applicants for 
    licensure.
 A database to which only financial services regulators have 
    access should be established to help ensure that individuals who 
    have committed fraud or engaged in other behavior which should bar 
    their participation in the business of insurance are identified and 
    tracked.
 Each insurance producer should need to satisfy only a single 
    set of continuing education requirements for each line of business 
    for which he/she is licensed.
 Uniform continuing education requirements should be 
    established for each class of similarly situated producers.

    (2) With respect to other consumer protection requirements:

 The tax incentives supporting life and other insurance 
    products must be preserved.
 Uniform trade practices and consumer protection requirements 
    should apply to all insurance sales and service activities.
 Adequate solvency requirements for insurers must be in place 
    such as guarantee funds or comparable fail safe mechanisms.
 Regulators' responsiveness and accessibility to consumers must 
    be preserved.

    (3) With respect to rate and form filing and approval requirements:

 Duplicative filing and approval requirements should be 
    eliminated.
 Unifonn filing and approval requirements should be 
    established.
 ``Quality to market'' concerns should not be sacrificed for 
    ``speed to market.''

    (4) With respect to changes in regulatory rules, structures and 
procedures:

 Current regulatory expertise should be preserved to the 
    maximum extent possible as consistent with efficient regulation.
 Any ``reform'' should be viable for both accumulation and 
    risk-shifting products.
 Submission to the jurisdiction of any additional newly created 
    regulatory authority should be truly optional for all producers.
 Producers should have an institutionalized role in the 
    development and application of all new regulatory rules, 
    structures, and procedures.

    Approved by the NAIFA Board of Trustees 1/16/04
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