[Congressional Record Volume 140, Number 112 (Friday, August 12, 1994)]
[House]
[Page H]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: August 12, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
       INTRODUCTION OF THE FINANCIAL SERVICES COMPETITIVENESS ACT

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from North Carolina [Mr. Neal] is recognized for 5 minutes.
  Mr. NEAL of North Carolina. Madam Speaker, with the 21st century 
rapidly approaching, it is time that the legal framework of the U.S. 
financial services industry catch up with the marketplace. The 
technology of today, from computers to communications, has changed the 
face of financial services.
  Unfortunately, our laws impose an antiquated legal structure on the 
new and competitive financial marketplace. As a result, we have a 
system that is tremendously inefficient and costly. It undercuts our 
international competitiveness, limits consumer choice and convenience, 
and ultimately suppresses economic growth.
  Dramatic shifts in financial distribution networks and product lines 
have resulted in a rapid decline in the relative role of banks and 
other depository intermediaries. From 1980 to 1990, banks' market share 
fell a full 10 percentage points, from 37 to 27 percent of total 
financial intermediary assets. By 1990, banks had lost more than one-
fourth of the market share with which they began the decade.
  Mr. Speaker, Congress has the ability to provide our financial system 
with the tools it needs to develop a better and more efficient system 
for the delivery of financial products while, at the same time, 
ensuring the safety and soundness of insured deposits. Our objective 
should be to ensure that our financial service firms are able to 
provide consumers and businesses with the most cost-efficient and 
highest quality financial products and to compete fairly in a global 
marketplace, while operating in a safe and sound manner.
  Our regulatory system for financial services providers must also move 
toward the 21st century. Our present system is a patchwork of market 
and institutional regulation resulting from ad hoc responses to the 
historical developments, with no central theme. It is a house built 
over time without any floor plan or, indeed, any plan at all.

  Even today, bills are introduced in Congress that react only to 
specific issues of immediate concern. One such example is H.R. 3447, 
the Securities Regulatory Equality Act of 1993, which responds to the 
narrow issue of bank sales of mutual funds.
  I know from personal experience that bills often are drafted and 
amendments are crafted, not to deal with regulatory problems in a 
comprehensive manner, but to avoid or attain jurisdiction by one 
congressional committee or another. We are left with a hodge-podge of 
partial solutions to larger problems, the creation of competitive 
inequities among market participants, uneven regulations for similar 
activities across industries and forum shopping by regulated parties. 
The inability of the House to deal with the larger problems of the 
financial services sector in a comprehensive manner increases costs for 
our economy, to the detriment of both efficiency and safety.
  One of my purposes in introducing this legislation, Mr. Speaker, is 
to try to get Members to focus on the need to deal with these issues in 
a comprehensive way. We should not keep careening from one narrow issue 
to another, be it mutual fund sales disclosures, the use of 
derivatives, or the underwriting of securities, while pretending that 
the underlying nature of the financial services industry is the same as 
it was in 1933.
  The world has changed in the past 60 years, but our financial 
services laws have not kept pace. It is time to recognize that the 
entire legal structure of the industry has become outmoded and is badly 
in need of change. Our response should not just be to try to apply 
another quick fix to whatever problem has caught our eye today. Sooner 
or later, and I believe sooner, we must break the cycle of temporary 
patchwork responses to innovations within the financial services 
industry and consider comprehensive reform. If not, we will be left 
with the financial services equivalent of hand-cranked telephones and 
quill pens in a world of cellular phones and fax machines.
  Mr. Speaker, the Financial Services Competitiveness Act, which I am 
introducing today, will facilitate a debate addressing the basic 
structure problems that are the result of outdated affiliation and 
activities restrictions contained in the Bank Holding Company Act, the 
Glass-Stegall Act and various other laws. It is designed to modernize 
the legal and regulatory framework while simultaneously imposing strong 
safeguards and more effective regulations. The legislation does not 
seek to realign the jurisdiction of regulators, but rather provide for 
the functional regulation of financial activities.
  Under the bill, federally insured depository institutions would be 
permitted to affiliate with other financial and nonfinancial 
businesses. Thus, a bank with federally insured deposits, an insurance 
company and a company underwriting securities could all be owned by the 
same diversified financial services holding company.
  Allowing affiliations would permit firms to increase their operating 
efficiencies and better serve their customers. Consumers would benefit 
from greater convenience, lower prices and enhanced competition. All 
financial services providers could offer similar options through the 
holding company structure. It provides competitive equality. It does 
not favor one industry over another. It encourages more effective 
competition.
  At the same time, there would be safeguards to protect the taxpayer-
backed deposit insurance funds. Each subsidiary of a holding company 
would be required to be separately capitalized. In addition, each 
holding company would be required to maintain adequate levels of 
capital in its depository institutions, and if it failed to do so, it 
would be required to divest the financial institutions and as well as 
infuse additional capital to bring the institutions into capital 
compliance. This provision in particular would insure that diversified 
financial services holding companies take seriously their 
responsibility of owning an insured depository institution subsidiary. 
It also would provide American taxpayers with an extra level of 
protection--a troubled bank would turn first to its diversified 
financial holding company, and not the taxpayer.
  In addition, banking subsidiaries would not be permitted to engage in 
nonbanking activities. Each subsidiary would be regulated by the 
appropriate regulator as under existing law, meaning that securities 
subsidiaries would be regulated by the Securities and Exchange 
Commission, insurance subsidiaries by State insurance regulators and 
financial institutions by the appropriate banking regulator.
  Mr. Speaker, it is readily apparent that the existing legal structure 
is not consistent with market realities and the globalization of the 
financial marketplace. It is time to craft our Nation's financial 
services policy to strengthen the system instead of restricting and 
detracting from the health and dynamism of the market.
  I recognize that we will not be modernizing our financial services 
industry this year. But the Financial Services Competitiveness Act will 
help focus the debate on the need to accomplish modernization. I am 
pleased that the bill has strong bipartisan cosponsorship--
Representatives McCollum, LaFalce, Frank, LaRocco, Orton, Dooley, 
Ridge, Baker of Louisiana, and King are joining me in introducing the 
bill today--and I look forward to working with them and others in this 
Congress to lay the groundwork for consideration of this extremely 
important issue.
  A section by section of this important legislation follows:

          The FSCA--``Financial Services Competitiveness Act''


                      section by section analysis

       To create an open and competitive marketplace for financial 
     services which ensures the safety and soundness of the 
     nation's financial system as well as the availability of 
     innovative financial products and services for consumers, 
     business and government at the lowest possible cost.

                            Section 1--Title

       This section provides that this Act may be cited as the 
     ``Financial Services Competitiveness Act''.

                    Section 2--Findings and Purpose

       The Congress finds that (1) outdated statutes and 
     regulations inhibit innovation, efficiency, and competition 
     in the financial services industry to the detriment of 
     consumers and providers, and (2) new legal framework for 
     financial services must be created which will accord all 
     financial services companies equal opportunity to serve the 
     full range of credit and financial needs in the marketplace 
     and (3) expanded product and service opportunities for all 
     components of the financial services industry would 
     strengthen individual intermediaries as well as the overall 
     financial system, and (4) rapid globalization of the 
     financial services marketplace and the emerging 
     interdependence of major financial markets further underscore 
     the necessity of modernizing domestic laws to maintain the 
     competitiveness of U.S. intermediaries and the preeminence of 
     U.S. financial markets, and (5) regulation of separate 
     segments, subsidiaries and affiliates along functional lines 
     without regard to ownership and control would serve national 
     priorities better than the present system.
       The purpose of the Act is to promote the safety and 
     soundness of the nation's financial system, the availability 
     of financial products and services to consumers, businesses, 
     charitable institutions and governments in an efficient and 
     cost-effective manner, to promote a legal structure governing 
     providers of financial services that permits open and fair 
     competition and affords all financial services companies 
     equal opportunity to serve the full range of credit and 
     financial needs in the marketplace, to ensure that domestic 
     financial institutions and companies are able to compete 
     effectively in international financial markets and to 
     encourage regulation of financial activities and companies 
     along functional lines without regard to ownership, control 
     or affiliation.
       Paragraph (1)--Affiliate--defines the term ``affiliate'' of 
     a company to mean any other company which controls, is 
     controlled by or is under common control with such company.
       Paragraph (2)--Adequately Capitalized--defines the term 
     ``adequately capitalized'' to have the same meaning as in 
     section 38(b) of the Federal Deposit Insurance Act.
       Paragraph (3)--Appropriate Federal Banking Agency--defines 
     ``appropriate Federal banking agency'' to mean the 
     Comptroller of the Currency in the case of national banks or 
     District banks, the Federal Reserve Board in the case of 
     member banks (other than national banks), the Federal Deposit 
     Insurance Corporation in the case of insured state banks that 
     are not members of the Federal Reserve System and the 
     Director of the Office of Thrift Supervision in the case of 
     savings associations.
       Paragraph (4)--Bank Holding Company--defines the term 
     ``bank holding company'' as it is defined in section 2(a) of 
     the Bank Holding Company Act of 1956, as amended.
       Paragraph (5)--Board--defines the term ``Board'' to mean 
     the Board of Governors of the Federal Reserve System.
       Paragraph (6)--Company--defines the term ``company'' to 
     mean any corporation, partnership, business trust, 
     association or similar organization. However, corporations 
     that are majority owned by the United States or any State are 
     excluded from the definition of company.
       Paragraph (7)--Control--defines the term ``control'' as the 
     power directly or indirectly to direct the management or 
     policies of a company or to vote 25% or more of any class of 
     voting securities of a company.
       There are four exceptions from the definition of control. 
     These pertain to ownership of voting securities acquired or 
     held by a company:
       (1) as agent, trustee or in some other fiduciary capacity;
       (2) as underwriter, for such period of time as will permit 
     the sale of those securities on a reasonable basis;
       (3) in connection with or incidental to market-making, 
     dealing, trading, brokerage or other securities-related 
     activities, provided that such shares are not acquired with a 
     view toward acquiring, exercising or transferring control 
     of the management or policies of the company;
       (4) for the purpose of securing or collecting of a prior 
     debt until two years after the date of acquisition.
       In addition, no company formed for the sole purpose of 
     proxy solicitation shall be deemed to be in control of 
     another company by virtue of its acquisition of voting rights 
     of the other company's securities.
       Paragraph (8)--Depository Institution Holding Company--
     defines the term ``depository institution holding company'' 
     as having the same meaning as in section 3(w)(1) of the 
     Federal Deposit Insurance Act.
       Paragraph (9)--Diversified Financial Services Holding 
     Company--defines a DFSHC to be any company that files a 
     notice with the Board that it intends to comply with the 
     provisions of this section, and controls an insured 
     depository institution or either:
       (i) has, within the preceding twelve months filed a notice 
     pursuant to subsection (b) of this section to establish or 
     acquire control of an insured depository institution or a 
     company owning such an insured depository, or
       (ii) controls a company which, within the preceding twelve 
     months, has filed an application for Federal deposit 
     insurance, provided, that such notice or application has not 
     been disapproved by the appropriate Federal banking agency.
       Paragraph (10)--Financial Institution--defines the term 
     ``financial institution'' to include any bank, savings 
     association, insurance company, finance company, real estate 
     company, securities company or other financial services 
     company that is regulated, supervised or examined under the 
     laws of any State.
       Paragraph (11)--Insured Depository Institution--defines the 
     term ``insured depository institution'' to have the same 
     meaning given to it in section 3(c)(2) of the Federal Deposit 
     Insurance Act.
       Paragraph (12)--Representative--defines the term 
     ``representative'' to include any agent, principal, 
     solicitor, broker, director, or officer, employee or other 
     representative of any company, insured depository institution 
     or affiliate thereof.
       Paragraph (13)--Savings and Loan Holding Company--defines 
     the term ``savings and loan holding company'' as having the 
     meaning given to it in section 10(a) of the Home Owner's Loan 
     Act.
       Paragraph (14)--Savings Association--defines the term 
     ``savings association'' as having the meaning given to it in 
     section 3(b) of the Federal Deposit Insurance Act.
       Paragraph (15)--State--``State'' is defined as having the 
     meaning given to it in section 3(a) of the Federal Deposit 
     Insurance Act.
       Section 4--Establishment of a Diversified Financial 
     Services Holding Company
       Section 4 creates a new type of financial company, a 
     diversified financial services holding company (DFSHC), and 
     sets out the terms and conditions under which a company can 
     be established and must be operated.
       No person may take any action which causes any company to 
     become a diversified financial services holding company 
     without submitting prior notice to the Board of such person's 
     intention to establish a diversified financial services 
     holding company. The Board shall establish requirements and 
     procedures for the submission of the notice.
       A bank holding company shall lose its status as a bank 
     holding company immediately upon filing the notice of its 
     election to become a DFSHC. Similarly, a savings and loan 
     holding company that elects to become a DFSHC will lose that 
     status upon filing the notice of its election to become a 
     DFSHC.
       To assure that each depository institution controlled by a 
     DFSHC would be subject to regulation and supervision by an 
     appropriate Federal banking agency, owners of an uninsured 
     depository institution would not be able to avail themselves 
     of the opportunity to become a DFSHC, unless they agree to 
     convert such uninsured institution into an insured depository 
     institution.
       The provisions of Glass-Steagall do not apply with respect 
     to the affiliation of any bank that is an affiliate of a 
     diversified financial services holding company with such 
     company or any other affiliate of the company.
       Section 5--Compliance With Change in Control Requirements
       This section provides that any DFSHC wishing to acquire 
     control of an insured depository institution or company 
     owning such institution must comply with the requirements of 
     the Change in Control Act.
       Section 6--Adequate Capitalization
       This section governs the capitalization of insured 
     depository institutions that are controlled by a DFSHC.
       Subsection (a)--Notification--in the event of a finding by 
     the appropriate Federal banking agency that an insured 
     depository institution controlled by a DFSHC is not 
     adequately capitalized, such agency shall immediately provide 
     a written notification of such non-compliance to the DFSHC.
       Subsection (b)--Bond, Guaranty, Deposit or Surplus 
     Account--At the time of the notification described in 
     subsection (a) or at any time thereafter, the appropriate 
     Federal banking agency may in its discretion require a DFSHC 
     in an amount equal to the capital deficiency set forth in the 
     notification to either:
       (A) provide a bond, guarantee or similar undertaking in a 
     form prescribed by the appropriate Federal banking agency,
       (B) place and thereafter maintain on deposit in a 
     segregated, earmarked account at the insured depository 
     institution cash or investment securities (i.e., securities 
     of the type that may be held by national banks for their own 
     account pursuant to section 5136 of the Revised Statutes, as 
     amended, or other liquid assets as the appropriate Federal 
     banking agency, may permit),
       (C) make a contribution to the surplus capital of the 
     insured depository institution which shall be segregated from 
     and not treated as capital, or
       (D) reduce the amount of total assets of the institution,

     until the insured depository institution is capitalized 
     pursuant to an agreement entered into between the DFSHC and 
     the appropriate Federal banking agency or is otherwise made 
     to become adequately capitalized; or the DFSHC has divested 
     control of the insured depository institution pursuant to 
     subsection (d) described below.
       Upon receipt of the notification described in subsection 
     (a) an insured depository institution shall not declare or 
     pay a dividend to any shareholder and, upon appointment of a 
     conservator pursuant to subsection (c), the DFSHC shall 
     immediately return to such insured depository institution any 
     dividends received from such insured depository institution 
     during the period beginning 270 days prior to the receipt 
     of the notification.
       Subsection (c)--Appointment of Conservator--If the DFSHC 
     fails to comply with any of the requirements of subsection 
     (b), or the DFSHC fails within 45 days of its receipt of the 
     notification described in subsection (a) to cause the insured 
     depository institution to become adequately capitalized or to 
     enter into an agreement with the appropriate Federal banking 
     agency to cause the insured depository institution to become 
     adequately capitalized, the appropriate Federal banking 
     agency to cause the insured depository institution to become 
     adequately capitalized, the appropriate Federal banking 
     agency shall appoint a conservator for the insured depository 
     institution.
       Subsection (d)--Divestiture--If within 90 days of receipt 
     of the notification described in subsection (a), a DFSHC has 
     not caused the depository institution to become adequately 
     capitalized or entered into an agreement acceptable to the 
     appropriate Federal banking agency to cause the insured 
     depository institution to become adequately capitalized, the 
     appropriate Federal banking agency shall order divestiture. 
     The appropriate Federal banking agency may cause the DFSHC to 
     infuse additional capital into the insured depository 
     institution if upon divestiture the insured depository 
     institution would not be adequately capitalized.
       Subsection (e)--Termination of 
     Conservatorship; Rescission of 
     Divestiture Order--If after the appointment of a conservator 
     or the issuance of a divestiture order a DFSHC causes the 
     insured depository institution to become adequately 
     capitalized, the appropriate Federal banking agency shall 
     immediately terminate such conservatorship or rescind such 
     order.
       Subsection (f)--Aggregate Limit on Required Capital 
     Infusions--The maximum liability of a DFSHC for any capital 
     infusion required by an appropriate Federal banking agency 
     shall not exceed the amounts necessary for the institution to 
     become adequately capitalized.
       Subsection (g)--Judicial Review--Within 10 days after the 
     appointment of a conservator or upon receipt of an order of 
     divestiture, the DFSHC may apply to the U.S. District Court 
     for the judicial district in which its principal office is 
     located or the U.S. District Court for the District of 
     Columbia for an order requiring the removal of the 
     conservator or for an injunction setting aside, limiting or 
     suspending the enforcement, operation or effectiveness of any 
     such order.
       Subsection (h)--Capital of DFSHC--The appropriate Federal 
     banking agency may not impose any requirement pertaining to 
     the capital of the DFSHC. Any agreement entered into pursuant 
     to this section between a DFSHC and an appropriate 
     Federal banking agency with respect to the capital of an 
     undercapitalized insured depository institution subsidiary 
     of such company shall terminate when the institution 
     becomes adequately capitalized.
       Section (7)--Additional Provisions Relating to Regulation 
     of Insured Depository Institution Subsidiaries
       This section accomplishes two objectives. First, it 
     prohibits adversely differential treatment of DFSHCs and 
     their affiliates, including their insured depository 
     institution affiliates, except as this Act specifically 
     provides. Second, the subsection insures that State and 
     Federal initiatives do not undermine achievement of the 
     purposes of this Act. Whether couched as affiliation, 
     licensing or agency restrictions or as constraints on access 
     to state courts, such laws effectively perpetuate market 
     barriers and deny consumers the opportunity to choose between 
     different financial products and services.
       Subsection (a)--Differential Treatment Prohibition--
     Preempts Federal and State laws, rules, regulations and 
     orders that differentiate between (i) insured depository 
     institutions controlled by a DFSHC from any other insured 
     depository institution in a manner adverse to DFSHC 
     controlled insured depository institutions or (ii) DFSHCs or 
     their affiliates from bank holding companies or savings and 
     loan holding companies and their affiliates in a manner 
     adverse to DFSHCs or their affiliates.
       Subsection (b)--Relation to State Law--Preempts State laws 
     that prevent or impede (i) any insured depository institution 
     or affiliate thereof from being affiliated with a DFSHC or 
     (ii) any DFSHC or affiliate thereof from marketing or 
     offering products and services of the DFSHC or any of its 
     affiliates. This preemption does not apply to any State law 
     relating to examination, supervision or regulation of 
     providers of financial services or to the protection of 
     consumers, except to the extent such laws are inconsistent 
     with this section or with the purposes of this Act. Creates a 
     private right of action to declare State laws to be in 
     violation of this section and to enjoin their application.
       Subsection (c)--Access to State Courts--Removes a common 
     uncertainty under State licensing and qualification to 
     conduct business statutes which leaves an out-of-state 
     insured depository institution's access to another State's 
     courts unresolved. So long as such an insured depository 
     institution limits its activities to those which do not 
     constitute the establishment or operations of a ``domestic 
     branch'' in that State, it can qualify to maintain or defend 
     in that State's court any action which could be maintained or 
     defended by a company which is not an insured depository 
     institution and is not located in that State, subject to the 
     same filing, fee and other condition or requirements as 
     may be imposed on such a company.
       Subsection (d)--Representatives--Makes clear that a State 
     may not impede or prevent any insured depository institution 
     affiliated with a DFSHC or any DFSHC or affiliate thereof 
     from marketing products and services in that State by 
     utilizing and compensating its agents, solicitors, brokers, 
     employees or other persons located in that State.
       Subsection (e)--Affiliate and Control Defined--Contains a 
     special definition of ``affiliate'' and ``control'' for 
     purposes of section 7 only. Control is deemed to occur where 
     a person or entity owns or has the power to vote 10% or more 
     of the voting securities of another entity or where a person 
     or entity directly or indirectly determines the management or 
     policies of another entity or person. Unlike the definition 
     of affiliate set forth in section 3, this definition 
     encompasses not only corporate affiliations but affiliations 
     between corporations and individuals.
       Section (8)--Insider Lending and Tying Provisions
       This section subjects DFSHCs to the tying provisions of 
     section 106 of the Bank Holding Company Act Amendments of 
     1970 and to the insider lender prohibitions of section 22(h) 
     of the Federal Reserve Act. These actions prohibit abusive 
     tying between products and services offered by insured 
     depository institutions and products and services offered by 
     the DFSHC itself or by any of its other affiliates. The tying 
     restrictions do not apply to products and services that do 
     not involve an insured depository institution. The insider 
     lending provisions severely limit loans by a depository 
     institution to officers and directors of the depository 
     institution. For purposes of both provisions, the appropriate 
     Federal banking agency will exercise the rulemaking authority 
     presently vested in the Federal Reserve with regard to these 
     limitations.
       Section (9)--Enforcement and Examination; Payment System 
     Services; Oversight
       This section details the jurisdiction and authority of the 
     appropriate Federal banking agencies.
       Subsection (a)--Administrative Enforcement--The appropriate 
     Federal banking agency shall enforce this Act by using its 
     examination and supervisory powers.
       Subsection (b)--Examination--The appropriate Federal 
     banking agency is empowered to examine or require reports 
     from any affiliate of an insured depository institution 
     controlled by a DFSHC to solely assure compliance with this 
     Act.
       Subsection (c)--Federal Reserve Payment Services--All 
     Federal Reserve services shall be available to all insured 
     depository institutions on the same terms and conditions, 
     except in instances that are necessary to avoid a material 
     adverse effect on a large dollar payment system. The Federal 
     Reserve may take enforcement action against an insured 
     depository institution that has engaged in an activity that 
     has resulted in a material adverse affect on a large dollar 
     payment system.
       Section (10)--Criminal and Civil Penalties
       This section provides for criminal penalties for knowing 
     and willful violations of the provisions of this Act. For 
     companies found to be in violation of the provisions of this 
     section the maximum penalty can be up to $1 million per day 
     for each day that the violation continues.
       For individuals found to be in violation of the provisions 
     of this section the penalty shall be a fine and/or a prison 
     term. The maximum fine could be up to $1 million per day for 
     each day during which the violation continues. The maximum 
     prison sentence shall be 5 years. In addition, individuals 
     violating the provisions of this section will also be subject 
     to the penalties provided for in Section 1005 of Title 18 for 
     false entries in any book, report or statement to the extent 
     that the violation included such false entries.

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