[Congressional Record Volume 144, Number 67 (Friday, May 22, 1998)]
[Extensions of Remarks]
[Pages E953-E954]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




               FINANCIAL SERVICES COMPETITION ACT OF 1997

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                               speech of

                           HON. MARGE ROUKEMA

                             of new jersey

                    in the house of representatives

                        Wednesday, May 13, 1998

       The House in Committee of the Whole House on the State of 
     the Union had under consideration the bill (H.R. 10) 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, and for other purposes:

  Mrs. ROUKEMA. Mr. Chairman, I rise today to express my strong support 
for H.R. 10, the Financial Services Act of 1998. This bill will 
modernize our Depression era banking and securities laws to permit U.S. 
companies to provide new products and services to their customers. The 
bill will permit banks, securities firms and insurance companies to 
freely affiliate, something which is not permitted today due to the 
Glass-Steagall Act, the Bank Holding Company Act and other provisions 
of federal and state law.
  One of the most important provisions in H.R. 10 is the ``commercial 
basket'' provision. This provision will permit financial holding 
companies to derive a modest amount of their aggregate annual gross 
revenue from commercial activities. It is important because it will 
permit securities firms and insurance companies which want to acquire 
banks to retain some of their commercial investment activities. In 
addition, the commercial basket will grant U.S. financial services 
companies some of the same investment flexibility which their foreign 
rivals currently enjoy. I was the sponsor of the 15% commercial basket 
amendment which was adopted by the Banking Committee on June 17, 1997 
by a 35-19 vote. While the Commerce Committee chose to cut back on the 
commercial basket provision, they nonetheless approved a bill which 
included a commercial basket for financial holding companies.
  Mr. Chairman, under the version of H.R. 10 we are considering today, 
financial holding companies would be permitted to make investments in 
commercial entities and derive a modest amount of their annual gross 
revenue from commercial activities. I would like to stress that only 
the holding company, and not its subsidiary banks or savings 
associations, would be permitted to make commercial investments. There 
are two commercial baskets in the bill--a general 5% basket for new 
financial holding companies which don't have any commercial activities 
and a 15% ``grandfather'' basket for those entities with commercial 
activities which become financial holding companies. I, along with Mr. 
Vento, Baker, LaFalce and McCollum, will be offering an amendment later 
today which would provide parity for all market participants. Our 
amendment would permit all market participants to have a commercial 
basket of 10% of annual gross revenues. A financial holding company 
could apply to the Federal Reserve Board for authority to receive up to 
an additional 5% revenue from commercial activities in excess of the 
10% cap. Mr. Leach will be offering an amendment which will eliminate 
the commercial basket and provide a 10 year sunset for the 
grandfathered commercial activities.
  Regardless of the outcome on the amendments on the commercial basket, 
I would like to clarify two aspects of how the commercial basket is 
supposed to be calculated. The commercial basket test focuses on the 
``activity'' as opposed to the ``entity''. The reason for this approach 
is that companies can engage in both financial and commercial 
activities. Therefore, a financial holding company shall only count the 
revenue it receives from nonfinancial activities--regardless of whether 
the commercial activity is engaged in directly by the holding company 
or indirectly through a subsidiary or is the pro rata commercial 
activity share of revenue received by the holding company from an 
investment. The result will be that only those revenues related to 
nonfinancial activities that are held pursuant to the commercial basket 
provisions will be counted towards the commercial basket revenue limit.
  The other aspect I would like to clarify is the treatment of revenue 
received from the sale, exchange or disposition of a nonfinancial 
investment or activity. Non-routine revenues--such as one time gains--
are not to be included in the commercial basket revenue test, while 
revenue from ongoing operations would be counted.
  Take for example the following situation. In December of 1997 a 
financial holding company sells a subsidiary for $25 million. The

[[Page E954]]

subsidiary, which is engaged in nonfinancial activities, produced $1 
million in aggregate gross annual revenues for the financial holding 
company in 1997. The sale revenue of $25 million will not be counted 
towards the commercial basket revenue test, while the $1 million in 
revenues from ongoing operations would be counted. The reason for 
excluding sale revenue is that it would have the effect of overstating 
a financial holding company's involvement in nonfinancial activities on 
an ongoing basis, which is the focus of the commercial basket revenue 
limit. The $1 million in revenues from the routine, ongoing operations 
of the subsidiary would be included, however. Accordingly, to the 
extent a financial holding company realizes revenues from a non-routine 
sale, exchange or other disposition of assets, or stock, or other 
interest in companies which engage in nonfinancial activities, the 
sales revenues will be disregarded for purposes of determining 
compliance with the commercial basket revenue test.

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