[Congressional Record Volume 143, Number 17 (Tuesday, February 11, 1997)]
[Senate]
[Pages S1226-S1232]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. D'AMATO (for himself, Mr. Grams, Mr. Gramm and Mr. 
        Bennett):
  S. 298. A bill to enhance competition in the financial services 
sector, and for other purposes; to the Committee on Banking, Housing, 
and Urban Affairs.


           THE DEPOSITORY INSTITUTION AFFILIATION ACT OF 1997

  Mr. D'AMATO. Mr. President, today with the cosponsorship of my 
colleagues, Senators Gramm, Grams, and Bennett, I am introducing the 
``Depository Institutions Affiliation Act of 1997,'' to modernize the 
laws governing the financial services industry in a comprehensive, 
progressive fashion. I am pleased that Representative Richard Baker, 
chairman of the Housing Banking Subcommittee on Capital Markets, 
Securities and Government Sponsored Enterprises, will introduce similar 
legislation, joined by Representatives McCollum, La Falce, and Dreier. 
This legislation will promote efficiency and fair competition between 
all financial service providers and make U.S. financial firms stronger 
in global competition.
  Mr. President, Congress has been struggling to modernize the 
financial system since before I became a member of the Banking 
Committee in 1981. That effort must continue and should conclude 
successfully in this Congress. Our existing legal framework is 
fundamentally outdated. The Glass-Steagall and Bank Holding Company 
Acts impose regulatory structures that are inadequate for today's 
global marketplace and the financial needs of consumers.
  Mr. President, our Nation's entire financial system --including 
traditional banks, insurance companies, and securities firms--faces a 
future that is somewhat unsettled. Competitive developments in the 
marketplace and the

[[Page S1227]]

technological revolution that is well underway have brought about 
significant changes in the financial system, domestic and 
international. And these changes have already had a significant 
influence on all financial services providers and their customers.
  Mr. President, there is widespread recognition that the United States 
must adopt a regulatory regime that recognizes market realities and 
assesses and controls risk. Our present patchwork of financial laws 
protects particular industries, restrains competition, prevents 
diversification that would limit risks, restricts potential sources of 
capital, and undermines the efficient delivery of financial services 
and the competitive position of our financial institutions in world 
markets.
  Mr. President, Congress' reform effort in the 105th Congress must be 
forward-looking, not merely a reengineering of the legacy and laws from 
the New Deal. Our reform effort must not be limited in its design by 
unfounded fears and outdated philosophies. The far-reaching changes we 
are witnessing require a top-to-bottom examination of long-standing 
conventions about the way our financial system should be structured and 
regulated as we approach the 21st century. Already, banks and 
competitors from outside the conventional banking system are jockeying 
for position and advantage as competition heats up for control of 
market share and customers in a world of electronic commerce.
  Existing institutions that fight for legislative restrictions to 
protect their markets are fighting the last war. Debate over financial 
modernization that focuses primarily on issues like the future of the 
banking franchise or gerrymandering markets through piecemeal 
legislation to protect a particular market segment is too narrow from a 
public policy standpoint. Such a narrow approach addresses questions 
and solves problems that existed in the 1970's and 1980's; however, the 
year 2000 is quickly approaching and the policy debate in Congress and 
among industry leaders should be oriented toward the future. Technology 
and new financial competitors from outside the traditional arena will 
now provide an important and new catalyst for meaningful change and 
long overdue comprehensive financial modernization.
  Mr. President, in its consideration of financial modernization, the 
new Congress will need to explore a number of new and important issues, 
including:
  Given all the technological changes and new players in the market, 
what does it mean to be a bank? Does it make sense to maintain an 
artificial distinction between banks and nonbanks? Does it make sense 
to preserve the fiction that banking and commerce are somehow separate? 
Does it make sense to prohibit information-driven firms from owning or 
affiliating with banks now that financial services are in large part 
information processing activities?
  How will the old system of deposit insurance fit into this 
environment? Should more complex institutions be required to give up 
deposit insurance, as was suggested by one of the Federal Reserve Bank 
presidents?
  How do we ensure that technology results in greater choice, lower 
fees and fair, readily available access by consumers? The experience we 
are having with ATM's raises questions about whether consumers will 
share in the benefits of technology or whether the benefits will go 
primarily to the owners of that technology.
  How can we protect individual privacy now that computers make it so 
easy to collect and disseminate personal information? This is such a 
sensitive concern that the Congress directed the Federal Reserve to 
conduct a study.
  I do not know the answers, but these are provocative questions which 
require careful study and debate.
  Others are studying these issues as well.
  Last year, Congress directed the Treasury Department to conduct a 
study of all issues relating to a common charter for all federally 
insured depository institutions as part of the law stabilizing and 
eventually merging the two Federal deposit insurance funds (BIF and 
SAIF) (P.L. 104-208). The Treasury Department is expected to submit 
that study next month.
  The Treasury Department appointed a consumer electronic payments task 
force which will include the principal Federal agencies involved in the 
payments system.
  In addition, the Treasury Department is completing a study on the 
strengths and weaknesses of our financial services system in meeting 
the needs of the system's users.
  Most recently, Federal Reserve Chairman Greenspan announced formation 
of a committee that will look at the Fed's role in the payments system 
of the future.

  Mr. President, I introduce the Depository Institution Affiliation Act 
as a prelude to a vigorous debate about the future of our financial 
system. Let me explain how the Depository Institution Affiliation Act 
[DIAA] will make the financial system safer, more stable, and more 
competitive. I will submit a more detailed section-by-section 
explanation of the bill at the end of my remarks. The bill is virtually 
identical to legislation that I have previously sponsored or 
cosponsored in 1987 (S. 1905) and in 1989 (S. 530). In the previous 
Congress, it was S. 337. With the exception of technical and conforming 
changes to reflect the enactment of banking laws since its original 
introduction, the text of the bill is unchanged.
  Mr. President, comprehensive financial modernization as proposed in 
this reform legislation would produce many beneficial changes for all 
financial intermediaries.
  First, the legislation will enable all financial intermediaries--
commercial banks, investment banks, thrifts, and so forth--to attract 
financial capital and managerial expertise by eliminating existing 
restrictions on ownership by and affiliations among depository and 
nondepository firms. However, the DIAA preserves all the safety-and-
soundness and conflict-of-interest protections of the present system, 
while providing legal flexibility for a company to meet the financial 
needs of consumers, businesses, and others.
  Mr. President, some detractors of DIAA describe it as too radical 
because it permits these affiliations. However, this type of common 
ownership is already allowed by our laws and has existed for decades 
without any evidence of problems. Federal law and public policy 
expressly allows commercial companies to own and affiliate with a 
variety of federally insured banks--for example, credit card banks, 
limited purpose banks, trust companies, and so forth--and savings and 
loans. For example, unitary thrift holding companies have proven that 
finance and commerce can be mixed safely. In fact, the lack of 
ownership restrictions on thrifts has worked to expand the capital and 
managerial talent available to thrifts. And the successful record of 
unitary holding companies demonstrates that broader ownership 
affiliations can actually strengthen depository institutions through 
greater diversification and financial strength. Moreover, the reality 
is that nonbank organizations, including telecommunications, cable 
companies, and software firms are designing and delivering banklike 
financial services and products over the Internet and World Wide Web 
without owning a bank.
  Second, this bill will facilitate diversification and assure fair 
competition by creating a new charter alternative for all companies 
interested in entering or diversifying in the financial services 
field--a financial services holding company--FSHC. These FSHC's will be 
authorized to engage in any financial activity through separately 
regulated affiliates of the holding company. The bill would permit the 
merging of banking and commerce under carefully regulated circumstances 
by allowing a FSHC to own both a depository institution and companies 
engaged in both financial and nonfinancial activities.
  Third, this legislation will insulate insured subsidiaries--for 
example, banks--from the more risky business activities of its 
affiliates, as well as the parent holding company. It would not 
authorize or allow these activities to be conducted in a bank's 
operating subsidiary.
  Mr. President, by authorizing this alternative regulatory framework, 
the legislation would essentially exempt a FSHC's subsidiaries and 
affiliates from those sections of the Glass-Steagall and Bank Holding 
Company Acts that restrict mixing commercial banking with other 
financial--securities, investment banking, and so forth--and

[[Page S1228]]

nonfinancial activities--retailing, technology, manufacturing. A FSHC 
would be able to diversify into any activity through affiliates of the 
holding company, with such affiliates subject to enhanced regulation.
  Fourth, this bill will enhance substantially the quality and 
effectiveness of regulation through functional regulation. The 
regulation of the bank and nonbank affiliates of financial services 
holding companies would be along functional lines. The insured bank 
affiliate would be regulated by Federal and State bank regulators, the 
securities affiliate by the Securities and Exchange Commission, and so 
on. Thus, for each affiliate, existing regulatory expertise and 
resources will be applied to protect consumers, investors, and 
taxpayers. Functional regulation will also assure that competition in 
discrete products and services is fair by eliminating advantages 
attributable to current loopholes, regulatory gaps, and cost subsidies.
  Finally, the bill would improve coordination and supervision of the 
overall financial system by permitting more effective analysis and 
monitoring of aggregate stability and vulnerability to severe 
disruptions and breakdown.
  By removing unnecessary barriers to competition between providers of 
financial service in the United States, this legislation will permit 
U.S. capital markets to maintain their preeminence, and will allow U.S. 
financial intermediaries to respond to growing competition from foreign 
companies.
  Mr. President, I want to underscore that the DIAA would not require 
existing firms to alter their regulatory structure. By permitting 
financial services providers to become FSHC's, such providers will have 
the option to phase gradually into, or expand within, the financial 
services industry.
  Mr. President, the DIAA provides a solid platform and a sound 
approach to modernizing our financial structure. I recognize that this 
bill can be improved, and I am specifically requesting constructive and 
helpful comments to improve and to refine the major principles 
underlying the bill. As the committee proceeds to hearings and further 
consideration of the bill, I intend to make changes and adjustments in 
order to ensure competitive fairness, promote safety and soundness; 
achieve depositor, investor, and consumer protection; and assure 
effective and efficient functional regulation. Modernization of the 
financial services industry should not include the preemption of State 
consumer protection laws.
  Mr. President, in the absence of congressional action, the 
Comptroller of the Currency and the Federal Reserve Board have acted to 
achieve limited modernization with results often of questionable legal 
authority and public policy results. Specifically, I am concerned about 
the OCC's action to permit a bank's operating subsidiaries to engage in 
activities that are not permissible for the bank. I believe this 
regulation is unwise. And I am deeply concerned that the Comptrollers 
action may subject federally insured banks to excessive risks and 
expose the bank insurance funds, and therefore taxpayers, to 
unnecessary liability. Congress can never forget the lessons of the 
savings and loan crisis in the late 1980's. In addition, the Fed's 
recent actions to increase the aggregate level of business a section 20 
securities affiliate may engage in and its proposal to reduce or even 
eliminate important firewalls and safeguards that have existed for over 
a decade are also imprudent.

  Mr. President, the rivalry between regulators to attempt unilaterally 
to set public policy and alter the competitive balance for their 
constituencies is not wholesome or helpful. The regulators actions will 
never be a substitute for comprehensive and balanced congressional 
action. For far too long, Congress has ceded the field to piecemeal 
deregulation by bank regulators and the courts. The time has come for 
Congress to decide on a legal and policy framework that prepares our 
financial institutions for the new century and the challenges of a 
rapidly changing global economy. The 105th Congress must address and 
resolve the important questions relating to the health and future of 
the banking industry in the broader context of a financial system that 
is increasingly composed of nonbank financial service providers. We 
must focus on the needs of our economy for credit and growth in the 
future and the next century. We must focus on financial stability, 
safety and soundness, fair competition, and functional regulation of 
all financial service providers--whether they are banks, investment 
banks, insurance companies, finance companies or even 
telecommunications or computer companies.
  Mr. President, the benchmark provisions, principles, and purposes of 
DIAA, as stated above, have been tested and explored over the years. 
During a decade of debate several studies, including a 1991 study by 
the Treasury Department entitled, ``Modernizing the Financial System: 
Recommendations for Safer More Competitive Banks'', these principles 
and the framework of the bill have become the centerpiece of an 
emerging consensus in favor of forward-looking, balanced and prudent 
approach to modernization. I am hopeful that a new study underway by 
the Treasury Department and due to be submitted to Congress in March 
related to a common bank and thrift charter will reach similar 
conclusions.
  Mr. President, by continuing to work together, as demonstrated by the 
BIF/SAIF bill last year, the Congress and the administration can 
overcome the complaints of vested interests and reform our antiquated 
financial services laws. We should not miss this opportunity for 
constructive bipartisanship. I believe that this bill provides a good 
starting point for the 105th Congress to act on financial 
modernization. Passage of this bill will be a high priority for the 
Banking Committee. I believe this is a realistic objective.
  Mr. President, I ask unanimous consent that a more detailed section-
by-section summary of the bill be reprinted in the Record.
  There being no objection, the summary was ordered to printed in the 
Record, as follows:

  Depository Institution Affiliation Act--Section-by-Section Analysis

     Section 1: Short title
       Section 1 provides that this Act be cited as the 
     ``Depository Institution Affiliation Act''.
     Section 2: Findings and purpose
       The purpose of this Act is to promote the safety and 
     soundness of the nation's financial system, to increase the 
     availability of financial products and services to consumers, 
     businesses, charitable institutions and government in an 
     efficient and cost effective manner. In addition, this Act 
     aims 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. This Act also aims to ensure that domestic 
     financial institutions and companies are able to compete 
     effectively in international financial markets. Finally, this 
     Act aims to regulate financial activities and companies along 
     functional lines without regard to ownership, control, or 
     affiliation.


    TITLE I--CREATION AND CONTROL OF DEPOSITORY INSTITUTION HOLDING 
                               COMPANIES

     Section 101
       This section creates a new type of financial company, a 
     depository institution holding company (DIHC), and sets out 
     the terms and conditions under which such a company can be 
     established and must be operated.
       Subsection (a) Definitions. This subsection defines terms 
     used in this section.
       Paragraph (a)(1) defines a DIHC to be any company that 
     files a notice with the National Financial Services Committee 
     (see Title II of this Act) that it intends to comply with the 
     provisions of this section, and controls an insured 
     depository institution, or, either (i) has, within the 
     preceding 12 months filed a notice under subsection (b) of 
     this section to establish or acquire control of a federally 
     insured depository institution or a company owning such a 
     federal insured depository institution, or (ii) controls a 
     company which, within the preceding 12 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 or withdrawn. Any holding 
     company which elects to become a DIHC and which does not 
     control any banks that are not FDIC insured, will lose its 
     status as a bank holding company immediately upon filing the 
     notice of its election to become a DIHC. Similarly, a savings 
     and loan holding company that elects to become a DIHC will 
     lose that status upon filing the notice of its election to 
     become a DIHC. To assure that each bank controlled by a DIHC 
     would be subject to regulation and supervision by an 
     appropriate federal banking agency, owners of uninsured banks 
     would not be able to avail themselves of the opportunity to 
     become a DIHC, unless they agreed to convert such uninsured 
     banks into federally insured depository institutions.
       Paragraph (a)(2) gives the term `bank holding company' the 
     meaning given to it in Section 2(a) of the Bank Holding 
     Company Act of 1956, as amended.

[[Page S1229]]

       Paragraph (a)(3) gives the term `savings and loan holding 
     company' the meaning given to it in section 10(a) of the Home 
     Owners' Loan Act.
       Paragraph (a)(4) defines for this section, except paragraph 
     (5) of subsection (f), the term `affiliate' of a company as 
     any company which controls, is controlled by, or is under 
     common control with such a company.
       Paragraph (a)(5) gives the term `appropriate Federal 
     banking agency' (AFBA) the meaning given to it in section 3 
     of the Federal Deposit Insurance Act.
       Paragraph (a)(6) gives the term `insured depository 
     institution' the meaning given to it in section 3(c)(2) of 
     the Federal Deposit Insurance Act.
       Paragraph (a)(7) gives the term `State' the meaning given 
     to it in section 3(a) of the Federal Deposit Insurance Act.
       Paragraph (a)(8) defines the term `company' to mean any 
     corporation, partnership, business trust, association or 
     similar organization. However, corporations that are majority 
     owned by the Untied States or any State are excluded from the 
     definition of company.
       Paragraph (a)(9) defines control by one company over 
     another. For purposes of this section, the term ``control'' 
     means 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 three exceptions from the definition of control. 
     These pertain to ownership of voting securities acquired or 
     held:
       1. as agent, trustee or in some other fiduciary capacity;
       2. as underwriter for such a period of time as will permit 
     the sale of these securities on a reasonable basis; or 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;
       3. for the purpose of securing or collection of a prior 
     debt until two years after the date of the acquisition; and
       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 the voting 
     rights of the other company's securities.
       Paragraph (a)(10) defines the term `adequately capitalized' 
     with respect to an insured depository institution has the 
     meaning given to it in section 38(b)(1) of the Federal 
     Deposit Insurance Act.
       Paragraph (a)(11) defines the term `well capitalized' with 
     respect to an insured depository institution has the meaning 
     given to it in section 38(b)(1)(A) of the Federal Deposit 
     Insurance Act.
       Paragraph (a)(12) defines the term `minimum required 
     capital' with respect to an insured depository institution as 
     the amount of capital that is required to be adequately 
     capitalized.
       Subsection (b): Changes in Control of Insured Depository 
     Institutions. This subsection provides that any DIHC wishing 
     to acquire control of an insured depository institution or 
     company owning such insured depository institution must 
     comply with the requirements of the Change in Bank Control 
     Act. Failure to comply with these requirements will subject 
     the relevant DIHC to the penalties and procedures provided in 
     subsections (i) through (m) of this section, in addition to 
     otherwise applicable penalties.
       Subsection (c): Affiliate Transactions. This subsection 
     authorizes supplemental regulation of the transactions of 
     insured depository institutions controlled by DIHCs with 
     their affiliates. These regulations would be in addition to 
     the restrictions on interaffiliate transactions provided for 
     under sections 23A or 23B of the Federal Reserve Act. This 
     subsection gives each AFBA some flexibility to promulgate and 
     adapt rules and regulations in response to changing market 
     conditions so that the AFBA has at all times the capability 
     to prevent insured depository institutions under its 
     supervision that are controlled by DIHCs from engaging in 
     transactions that would compromise the safety and soundness 
     of such insured depository institutions or that would 
     jeopardize the deposit insurance funds.
       Moreover, other provisions of this Act assure that the AFBA 
     will have the capability to enforce these regulations 
     vigorously (subsection (i) of this section) and that any 
     violations of these regulations will be more severely 
     punished than violations of regulations applicable to insured 
     depository institutions that are not controlled by DIHCs 
     (subsections (i), (j), (k) and (l) of this section).
       Subparagraph (c)(1)(A) empowers the AFBA to develop rules 
     and regulations to prevent insured depository institutions 
     under its supervision that are also controlled by a DIHC from 
     engaging in unsafe or unsound practices involving the DIHC or 
     any of its affiliates, including unsafe and unsound practices 
     that may arise in connection with transactions covered by 
     sections 23A and 23B of the Federal Reserve Act.
       Subparagraph (c)(1)(B) empowers the AFBA to create certain 
     exceptions to the provisions of the preceding subparagraph, 
     if the AFBA deems that such exceptions are reasonable and in 
     the public interest and not inconsistent with the purposes of 
     this Act. These exemptions may relate to certain institutions 
     or classes of institutions, or to certain transactions or 
     classes of transactions, including transactions covered 
     under Sections 23A or 23B of the Federal Reserve Act.
       Paragraph (c)(2) provides that any rules adopted under 
     subparagraph (c)(1)(A) shall be issued in accordance with 
     normal rulemaking procedures and shall afford interested 
     parties the opportunity to comment in writing and orally on 
     any proposed rule.
       Paragraph (c)(3) grandfathers specific interaffiliate 
     transactions approved by a Federal regulatory agency prior to 
     the enactment of this Act, exempting them from rules and 
     regulations promulgated under subparagraph (c)(1)(A).
       Paragraph (c)(4) makes it clear that sections 23A and 23B 
     of the Federal Reserve Act will apply to every insured 
     depository institution controlled by a depository institution 
     holding company.
       Paragraphs (c)(5) and (c)(6) prohibit any insured 
     depository institution in a DIHC from extending credit to or 
     purchasing the assets of a securities affiliate and providing 
     other types of financial support to that DIHC's securities 
     affiliate except for daylight overdrafts that relate to U.S. 
     government securities transactions if the daylight overdrafts 
     are fully collateralized by U.S. government securities as to 
     principal and interest.
       Paragraph (c)(7) prohibits insured depository institutions 
     in a DIHC from issuing various guarantees for the enhancement 
     of the marketability of a securities issue underwritten or 
     distributed by a securities affiliate of that DIHC.
       Paragraph (c)(8) prohibits insured depository institutions 
     in a DIHC from extending credit secured by or for the 
     purposes of purchasing any security during an underwriting 
     period of for 30 days thereafter where a securities affiliate 
     of such institution participates as an underwritten or member 
     of a selling group.
       Paragraph (c)(9) prohibits insured depository institutions 
     in a DIHC from extending credit to an issuer of securities 
     underwritten by a securities affiliate for the purpose of 
     paying the principal of those securities or interest for 
     dividends on those securities.
       Paragraph (c)(10) defines ``securities affiliate'' for the 
     purposes of paragraphs (c)(5), (6), (7), (8) and (9).
       Subsection (d): Capitalization. This subsection regulates 
     the capitalization of insured depository institutions that 
     are controlled by a DIHC.
       Paragraph (d)(1) requires that insured depository 
     institutions controlled by a DIHC be well capitalized.
       Paragraph (d)(2) provides that if the AFBA finds that an 
     insured depository institution subsidiary of a DIHC is not 
     well capitalized, the DIHC shall have thirty days to reach 
     an agreement with the AFBA concerning how and according to 
     what schedule the insured depository institution will 
     bring its minimum capital back into conference with 
     requirements. During that time the insured depository 
     institution shall operate under the close supervision of 
     the AFBA.
       In the event that the DIHC does not reach an agreement 
     within thirty days with the AFBA on how and according to what 
     schedule the capital of the insured depository institution 
     will be replenished, the DIHC will be required to divest the 
     insured depository institution in an orderly manner within a 
     period of six months, or such additional period of time as 
     the AFBA may determine is reasonably required in order to 
     effect such divestiture.
       Paragraph (d)(3) states that in view of the enhanced 
     regulatory control over insured depository institutions 
     controlled by DIHCs, no AFBA may regulate the capital of the 
     DIHC. Thus, no AFBA may require the DIHC itself to enter into 
     any other agreement regarding the maintenance of capital in 
     its insured depository institution affiliates. The capital of 
     the DIHC would, however, be regulated by any other agency 
     having jurisdiction over it. For example, if the DIHC were 
     also a registered broker/dealer, it would have to conform to 
     the minimum capital requirements mandated by the SEC.
       Subsection (e): Interstate Acquisitions and Activities of 
     Insured Depository Institutions. This subsection subjects 
     interstate acquisitions of an insured depository institution 
     by a DIHC to the same restrictions as those applicable to 
     bank holding companies under section 3(d) of the Bank Holding 
     Company Act of 1956, as amended, and it subjects interstate 
     acquisitions of savings associations by a DIHC to the same 
     restrictions as those applicable to savings and loan holding 
     companies.
       Subsection (f): Differential Treatment Prohibition; Laws 
     Inconsistent with this Act. This subsection does two things. 
     First, it prohibits adversely differential treatment of DIHCs 
     and their affiliates, including their insured depository 
     institution affiliates, except as this Act specifically 
     provides. Second, this subsection ensures 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.
       Paragraph (f)(1) notwithstanding any other federal law, 
     prohibits states from enacting laws that discriminate against 
     DIHCs or against their affiliates, including their insured 
     depository institution affiliates. This paragraph also 
     prohibits, notwithstanding any other federal law, federal and 
     state regulatory agencies from discriminating by rule, 
     regulation, order or any other means against DIHCs or against 
     their affiliates, including

[[Page S1230]]

     their insured depository institution affiliates, except as 
     this Act specifically provides. This is intended to assure 
     that the primary purpose of this Act--the enhancement of 
     competition in the depository institution sector--will be 
     fulfilled.
       Paragraph (f)(2) finds that certain State affiliation and 
     licensing laws restrain legitimate competition in interstate 
     commerce, deny consumers freedom of choice in selecting an 
     insured depository institution and threaten the long-term 
     safety and soundness of insured depository institutions by 
     limiting their access to capital.
       Accordingly, with the exception of certain laws related to 
     insurance and real estate brokerage which are treated in 
     Subsection (g), this paragraph preempts any provision of 
     federal or state law, rule, regulation or order that is 
     expressly or impliedly inconsistent with the provisions of 
     this section. The preempted statutes include state banking, 
     savings and loan, securities, finance company, retail or 
     other laws which restrict the affiliation of insured 
     depository institutions or their owners, agents, principals, 
     brokers, directors, officers, employees or other 
     representatives with other firms. Similarly, laws prohibiting 
     cross marketing of products and services are preempted 
     insofar as such cross marketing activities are conducted by 
     DIHCs, their affiliates, or by any agent, principal, broker, 
     director, officer, employee or other representative. By 
     contrast, nondiscriminatory state approval, examination, 
     supervisory, regulatory, reporting, licensing, and similar 
     requirements are not affected.
       Paragraph (f)(3) removes a common uncertainty under state 
     licensing and qualification to do business statutes, which 
     leaves an out-of-state insured depository institution's 
     access to another state's courts unresolved. Under this 
     provision, so long as such an insured depository institution 
     limits its activities to those which do not constitute the 
     establishment or operation of a ``domestic branch'' of an 
     insured depository institution in that other 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 conditions as may be imposed on such a company. This 
     paragraph is not intended to grant states any power that they 
     do not currently have to regulate the activities of out-of-
     state insured depository institutions.
       Paragraph (f)(4) makes clear that a state, except subject 
     to the provisions of this Act, may not impede or prevent any 
     insured depository institution affiliated with a DIHC or any 
     DIHC or affiliate thereof from marketing products and 
     services in that state by utilizing and compensating its 
     agents, solicitors, brokers, employees and other persons 
     located in that state and representing such a insured 
     depository institution, company, or affiliate. However, to 
     the extent such persons are performing loan origination, 
     deposit solicitation or other activities in which an insured 
     depository institution may engage, those activities cannot 
     constitute the establishment or operation of a ``domestic 
     branch'' at any location other than the main or branch 
     offices of the insured depository institution.
       Paragraph (f)(5) contains a special definition of 
     ``affiliate'' and ``control'' for purposes of paragraphs (2) 
     through (4) this subsection only. Control is deemed to occur 
     where a person or entity owns or has the power to vote 10% 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 paragraph (4) of subsection (a), 
     this definition encompasses not only corporate affiliations 
     but affiliations between corporations and individuals.
       Subsection (q): Securities, Insurance and Real Estate 
     Activities of Insured Depository Institutions. In order to 
     facilitate functional regulation of the activities of DIHCs 
     this section prohibits insured depository institutions 
     controlled by DIHCs from conducting certain securities, 
     insurance and real estate activities currently permissible 
     for some insured depository institutions.
       Subparagraph (g)(1)(A) provides that no insured depository 
     institution controlled by a DIHC shall directly engage in 
     dealing in or underwriting securities, or purchasing or 
     selling securities as agent, except to the extent such 
     activities are performed with regard to obligations of the 
     United States or are the type of activities that could be 
     performed by a national bank's trust department (12 U.S.C. 
     92a).
       Subparagraph (g)(1)(B) provides that no insured depository 
     institution controlled by a DIHC shall directly engage in 
     insurance underwriting.
       Subparagraph (g)(1)(C) provides that no insured depository 
     institution controlled by a DIHC shall directly engage in 
     real estate investment or development except insofar as these 
     activities are incidental to the insured depository 
     institution's investment in or operation of its own premises, 
     result from foreclosure on collateral securing a loan, or are 
     the type of activities that could be performed by a national 
     bank's trust department.
       Paragraph (g)(2) clarifies that nothing in this subsection 
     shall be construed to prohibit or impede a DIHC or any of its 
     affiliates (other than an insured depository institution) 
     from engaging in any of the activities set forth in paragraph 
     (1) or to prohibit an employee of an insured depository 
     institution that is an affiliate of a DIHC from offering or 
     marketing products or services of an affiliate of such an 
     insured depository institution as set forth in paragraph (1).
       Paragraph (g)(3), however, contains significant limits on 
     DIHC entry into the businesses of insurance agency and real 
     estate brokerage. No DIHC could enter these fields de novo. 
     Rather, they would have to purchase either an insurance 
     agency or real estate brokerage business which had been in 
     business for at least five years prior to passage of the Act.
       Paragraph (g)(4) provides that nothing in this subsection 
     will require the breach of a contract entered into prior to 
     enactment of this Act.
       Subsection (h): Tying and Insider Lender Provisions. This 
     section subjects DIHCs to the tying provisions of section 106 
     of the Bank Holding Company Act Amendments of 1970 and to the 
     insider lending prohibitions of section 22(h) of the Federal 
     Reserve Act. These sections prohibit tying between products 
     and services offered by insured depository institutions and 
     products and services offered by the DIHC itself or by any 
     of its other affiliates. Note, however, that these tying 
     provisions do not apply to products and services that do 
     not involve an insured depository institution. The insider 
     lending provisions severely limit loans by an insured 
     depository institution to officers and directors of the 
     insured depository institution. For purposes of both 
     provisions, the AFBA will exercise the rulemaking 
     authority vested in the Federal Reserve with regard to 
     these limitations.
       Subsection (i): Examination and Enforcement. This 
     subsection provides that the AFBA shall use its examination 
     and supervision authority to enforce the provisions of this 
     section, including any rules and regulations promulgated 
     under subsection (c). In particular, it is intended that each 
     AFBA should structure its examination process so as to 
     uncover possible violations of the provisions of this section 
     and that the agency should not hesitate to make full use of 
     its cease-and-desist powers or to impose as warranted the 
     special penalties discussed below, if it believes that an 
     insured depository institution under its supervision that is 
     controlled by a DIHC is in violation of any provisions of 
     this section.
       This subsection also grants the AFBA authority to examine 
     any other affiliate of the DIHC as well as the DIHC itself in 
     order to ensure compliance with the limitations of this 
     section or other provisions of law made applicable by this 
     section such as sections 23A and 23B of the Federal Reserve 
     Act.
       In addition, this subsection grants each AFBA the right to 
     apply to the appropriate district court of the United States 
     for a temporary or permanent injunction or a restraining 
     order to enjoin any person or company from violation of the 
     provisions of this section or any regulation prescribed under 
     this section. The AFBA may seek such an injunction or 
     restraining order whenever it considers that an insured 
     depository institution under its supervision or any DIHC 
     controlling such an insured depository institution is 
     violating, has violated or is about to violate any provision 
     of this section or any regulation prescribed under this 
     section. In seeking such an injunction or restraining order 
     the AFBA may also request such equitable relief as may be 
     necessary to prevent the violation in question. This relief 
     may include a requirement that the DIHC divest itself of 
     control of the insured depository institution, if this is the 
     only way in which the violation can be prevented.
       This injunctive power will enable the AFBA to move speedily 
     to stop practices that it believes endanger the safety and 
     soundness of an insured depository institution under its 
     supervision that is controlled by a DIHC. If necessary to 
     protect the depositors and safeguard the deposit insurance 
     funds, the AFBA may request that the injunction proceedings 
     be held in camera, so as not to provoke a run on the insured 
     depository institution.
       Subsection (j): Divestiture. This subsection states that an 
     AFBA may require a DIHC to divest itself of an insured 
     depository institution, if the agency finds that the insured 
     depository institution is engaging in a continuing course of 
     action involving the DIHC or any of its affiliates that would 
     endanger the safety and soundness of that insured depository 
     institution. Although the DIHC would have the right to a 
     hearing and to judicial review and have one year in which to 
     divest the insured depository institution, it should be 
     emphasized that the insured depository institution would 
     operate under the close supervision of the AFBA from the 
     date of the initial order until the date the divestiture 
     is completed. This is intended to safeguard the insured 
     depository institution in question, its depositors and the 
     deposit insurance funds.
       Subsection (k): Criminal Penalties: This subsection 
     provides for criminal penalties for knowing and willful 
     violations of the provisions of this section, even if these 
     violations do not result in an initial or final order 
     requiring divestiture of the insured depository institution. 
     For companies found to be in violation of the provisions of 
     this section the maximum penalty shall be the greater of (a) 
     $250,000 per day for each day that the violation continues or 
     (b) one percent of the minimum required capital of the 
     insured depository institution per day for each day that the 
     violation continues, up to a maximum of 10% of the minimum 
     capital of the insured depository institution--a fine that

[[Page S1231]]

     could amount to tens of millions of dollars for a large 
     insured depository institution. Such a fine is designed to be 
     large enough to deter even large insured depository 
     institutions from violating the provisions of this section.
       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 shall be the greater of (a) $250,000 
     or (b) twice the individual's annual rate of total 
     compensation at the time the violation occurred. The maximum 
     prison sentence shall be one year. 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.
       A DIHC and its affiliates shall also be subject to the 
     Criminal penalties provisions of the Financial Institutions 
     Reform, Recovery and Enforcement Act of 1989 and the 
     Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer 
     Recovery Act of 1990 to the same extent as a registered bank 
     holding company, savings and loan holding company or any 
     affiliate of such companies.
       Subsection (1): Civil Enforcement, Cease-and-Desist Orders, 
     Civil Money Penalties. This subsection provides for civil 
     enforcement, cease-and-desist orders and civil money 
     penalties consistent with subsections (b) through (s) and 
     subsection (u) of section 1818 of Title 123 for any company 
     or person that violates the provisions of this section in the 
     same manner as they apply to a state member insured bank, and 
     grants the AFBA the power to impose such penalties after 
     providing the company or person accused of such violation the 
     opportunity to object in writing to its finding.
       Subsection (m): Judicial Review. This subsection provides 
     for judicial review of decisions reached by an AFBA under the 
     provisions of this section. This right to review includes a 
     right of judicial review of statutes, rules, regulations, 
     orders and other actions that would discriminate against 
     DIHCs or affiliates controlled by such companies.
     Section 102: Amendment to the Bank Holding Company Act of 
         1956
       This section contains a conforming amendment to the 
     definition of the term ``bank'' in the Bank Holding Company 
     Act to ensure that a DIHC owning an insured depository 
     institution will be regulated under this Act rather than 
     the Bank Holding Company Act.
     Section 103: Amendments to the Federal Reserve Act
       This section clarifies the application of Section 23A of 
     the Federal Reserve Act to certain loans and extensions of 
     credit to persons who are not affiliated with a member bank. 
     Section 23A contains a provision that was intended to prevent 
     the use of ``straw man'' intermediaries to evade section 
     23A's limitations on loans and extensions of credit to 
     affiliates. Contrary to its original purpose, the provision 
     may also be literally read to restrict a bona fide loan or 
     extension of credit to a third party who happens to use the 
     proceeds to purchase goods or services from an affiliate of 
     the insured depository institution; such a loan could occur, 
     for example, if a customer happened to use a credit card 
     issued by an insured depository institution to buy an item 
     sold by the insured depository institution's affiliate. This 
     section clarifies that such loans and extensions of credit 
     are not covered by section 23A as long as (i) the insured 
     depository institution approves them in accordance with 
     substantially the same standards and procedures and on 
     substantially the same terms that it applies to similar loans 
     or extensions of credit that do not involve the payment of 
     the proceeds to an affiliate, and (ii) the loans or 
     extensions of credit are not made for the purpose of evading 
     any requirement of section 23A.
     Section 104: Amendments to the Banking Act of 1933
       Subsection (a) amends section 20 of the Glass-Steagall Act 
     so that it does not apply to member banks that are controlled 
     by DIHCs.
       Subsection (b) amends section 32 of the Glass-Steagall Act 
     so that it does not apply to officers, directors and 
     employees of affiliates of a single depository institution 
     holding company.
     Section 105: Amendment to the Federal Deposit Insurance Act
       This section amends the Change in Bank Control Act to 
     provide that an acquisition of a DIHC controlling an insured 
     depository institution may only be accomplished after 
     complying with that Act's procedures. It also modifies the 
     definition of ``control'' in the Change in Savings and Loan 
     Control Act to conform it to the definition in section 
     101(a)(9) of this Act.
     Section 106: Amendment to the Securities Exchange Act of 1934
       This section amends the Securities Exchange Act of 1934 to 
     provide for the registration and regulation of Broker 
     Dealers.
     Section 107: Amendment to the Home Owners' Loan Act
       This section amends section 11 of the Home Owners' Loan Act 
     in order to apply Section 101(c)(1)(B) of this section to 
     savings associations.
     Section 108: Amendment to the Community Reinvestment Act
       This section amends the Community Reinvestment Act to make 
     it applicable to acquisitions of insured depository 
     institutions by DIHC's.


                   TITLE II--SUPERVISORY IMPROVEMENTS

     Section 201: National Financial Services Committee
       This section establishes a standing committee, the National 
     Financial Services Oversight Committee (Committee), in order 
     to provide a forum in which federal and state regulators can 
     reach a consensus regarding how the regulation of insured 
     depository institutions should evolve in response to changing 
     market conditions. In addition, the Committee also provides a 
     mechanism through which various federal regulatory agencies 
     could coordinate their responses to a financial crisis, if 
     such a crisis were to occur. The Committee comprises all 
     federal agencies responsible for regulating financial 
     institutions or financial activities, and it is structured to 
     allow state regulators to participate in its deliberations.
       The Committee consists of the Chairman of the Secretary of 
     the Treasury, who is also the Chairman of the Committee, the 
     Chairman of the Board of Governors of the Federal Reserve 
     System, the Chairman of the FDIC, the Director of the Office 
     of Thrift Supervision, the Comptroller of the Currency, the 
     Secretary of Commerce, the Attorney General, the Chairman of 
     the SEC, and the Chairman of the CFTC.
       The Committee is directed to report to Congress within one 
     year of enactment of this Act on proposed legislative or 
     regulatory actions that will improve the examination process 
     to permit better oversight of all insured depository 
     institutions. It is also directed to establish uniform 
     principles and standards for examinations.


                               TITLE III

     Section 301: Effective date
       The Act will become effective on the date of enactment.

  Mr. GRAMS. Mr. President, I rise today in support of the Depository 
Institution Affiliation Act, which has been drafted by Senate Banking 
Committee Chairman Alfonse D'Amato. This landmark piece of legislation 
will modernize the archaic laws that govern our financial services 
industry. Passage of this legislation will benefit consumers, increase 
the availability of venture capital for job creation, and bolster the 
international competitiveness of America's financial services industry.
  There is a clear need to modernize the outdated laws that govern 
America's financial services industry, because financial services play 
a vital role in our daily lives. We take out loans to go to college, to 
buy a car, and to purchase a home. We buy insurance to provide greater 
security to ourselves and our families. We make investments throughout 
our life so that we may retire in comfort and dignity.
  Today, technological advancements and increased innovation in the 
delivery of financial services make it easier than ever for consumers 
to get loans, purchase insurance, and invest their earnings. 
Unfortunately, our archaic and burdensome laws governing financial 
institutions continue to discourage, rather than encourage, such 
advancement and innovation.
  The laws to which I am referring are not those governing the safety 
and soundness of financial institutions, such as setting minimum 
capital requirements or requiring periodic oversight by Federal or 
State regulators. Safety and soundness laws and regulations are 
beneficial and necessary, as they enhance the security of the consumer 
whenever he or she deposits money in a bank or purchases an insurance 
policy.
  The outdated laws to which I am referring are the laws that create 
barriers to competition by artificially compartmentalizing the three 
major sectors of financial services--banking, securities, and 
insurance. For example, under the Banking Act of 1933, more commonly 
known as the Glass-Steagall Act, banks are generally barred from 
directly investing in corporate securities, underwriting new corporate 
issues or sponsoring mutual funds. Under the Bank Holding Company Act 
of 1956, securities underwriters, insurance underwriters, and 
nonfinancial companies are generally prohibited from owning banks or 
being owned by a bank holding company.
  These outdated financial institution laws hurt consumers by 
artificially increasing the costs of financial services, reducing the 
availability of financial products, and reducing the level of 
convenience in the delivery of financial services. These laws hurt 
small businesses--an engine of job growth in the American economy--by 
artifically limiting the amount of equity capital available for 
expanded activity. These

[[Page S1232]]

laws weaken the international competitiveness of America's financial 
institutions by prohibiting them from offering the range of financial 
services that foreign financial institutions may offer.

  It should be noted that the Glass-Steagall Act--which created the 
compartmentalized structure of financial services that we have today--
was based upon the false premise that the massive amount of bank 
failures that occurred during the Great Depression was caused by the 
securities activities that these banks conducted. However, just the 
opposite is true: Diversification in financial services actually 
increased the safety and soundness of the banks. Between 1929 and 1933, 
26.3 percent of all national banks failed. However, the failure rate 
for those banks that conducted securities activities was lower. Of the 
national banks in 1929 that either had securities affiliates or had 
internal bond departments, only 7.2 percent had failed by 1933. The 
message from these statistics is clear: We should encourage competition 
and diversification, not discourage it.
  Last year, Congress passed a bipartisan and comprehensive legislative 
initiative to reform the Telecommunications Act and stimulate 
competition and innovation in the telecommunications industry. Similar 
action is needed this year to stimulate the growth and global 
competitiveness of our financial services industry.
  The Depository Institution Affiliation Act creates a new Financial 
Services Holding Company structure that will permit banks, thrifts, 
securities companies and insurance companies to affiliate and cross-
market their products. This structure will do this while maintaining 
consumer protections and the safety and soundness of the Federal 
deposit insurance system.
  This legislation will greatly benefit consumers. The D'Amato bill's 
termination of affiliation restrictions will significantly increase 
competition in the financial services industry. Consumers' costs in the 
purchase of insurance, securities and banking products will be lowered. 
The bill's termination of crossmarketing restrictions will increase 
consumer convenience, as consumers will be able to do one-stop shopping 
for all of their financial services needs. The D'Amato bill does all of 
this while maintaining the statues and regulations that protect 
consumers from fraud and discrimination.
  This legislation will maintain the safety and soundness of the 
Federal deposit insurance system. The D'Amato bill protects banks from 
being affected by affiliate and holding company insolvency by 
implementing firewalls that prohibit affiliates from raiding the 
insured bank. As added protection, it requires that if a bank becomes 
anything less than satisfactorily capitalized, the Financial Services 
Holding Company must immediately divest of the bank.
  This legislation will provide for competitive equality among all 
financial services providers. Its provisions have been carefully 
crafted to provide a level playing field for banks, thrifts, securities 
companies and insurance companies. This charter up approach will permit 
all of these companies to become Financial Services Holding Companies, 
and will not prevent current financial institutions from conducting any 
activities that they currently conduct.
  In closing, I look forward to supporting Chairman D'Amato in his 
efforts to pass financial modernization legislation. It is my hope that 
1997 will be the year that we join together and create a bipartisan 
bill that will reform our laws so that America's financial institutions 
will be able to compete, innovate and grow to meet the challenges of 
the 21st century.
                                 ______