[Congressional Record Volume 144, Number 72 (Friday, June 5, 1998)]
[Extensions of Remarks]
[Pages E1054-E1056]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




               FINANCIAL SERVICES COMPETITION ACT OF 1997

                                 ______
                                 

                               speech of

                            HON. TOM BLILEY

                              of virginia

                          HON. JOHN D. DINGELL

                              of michigan

                    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:

  Mr. BLILEY. Mr. Chairman, my colleague, Mr. Dingell, and I strongly 
support H.R. 10, The Financial Services Act of 1998, which will create 
new opportunities for all financial services providers, make our 
nation's financial services businesses more competitive both 
domestically and internationally, and benefit consumers by providing 
for fair competition, investor protection, and the protection of 
American taxpayers. Several important aspects of this historic 
legislation merit further emphasis, which we provide below.

     a. h.r. 10 protects american taxpayers and provides for fair 
                              competition

       H.R. 10 permits bank operating subsidiaries to engage in 
     all financial agency activities. The bill protects American 
     taxpayers and ensures that all financial services providers 
     will be able to fairly compete with one another. The 
     legislation specifically repudiates any interpretation of the 
     Comptroller of the Currency of the National Bank Act as 
     authorizing bank operating subsidiaries to engage in 
     principal activities that a bank could not conduct directly, 
     such as insurance or securities underwriting.
       Banks, unlike other forms of business organizations, 
     benefit from access to the federal safety net--which refers 
     to FDIC deposit insurance and access to the Federal Reserve's 
     discount window and payment system. Because of their access 
     to the federal safety net, banks can raise funds at a lower 
     cost than other nonbank entities. Allowing banks to establish 
     and fund operating subsidiaries engaged in activities 
     prohibited for the bank (including speculative securities 
     activities), as the amendments offered by Messrs. LaFalce and 
     Vento and Mr. Baker would have done, to different degrees, 
     would directly extend the subsidy inherent in the federal 
     safety net to cover a variety of activities that Congress has 
     decided should not be protected by governmental guarantees. 
     It would do so by permitting national banks to establish 
     operating subsidiaries with equity capital raised at 
     subsidized rates through the bank's access to the federal 
     safety net. Because each of those amendments was defeated, 
     the LaFalce/Vento amendment by a vote of 115 to 306 and the 
     Baker amendment by a vote of 140 to 281, the bill ensures 
     that banks will not be able to use the subsidy provided by 
     the federal safety net to fund a wide range of activities 
     that a bank cannot engage in directly.
       The Treasury Department's contention that H.R. 10 would 
     ``harm consumers'' by limiting the benefits of improved 
     services and lower costs is incorrect. H.R. 10 will 
     dramatically help consumers by achieving these benefits 
     through the full affiliation of banks, insurance companies, 
     securities firms and other financial service providers 
     through a holding company. There is no greater benefit to be 
     achieved from allowing these new activities to be conducted 
     through an operating subsidiary of a bank unless Congress 
     desires to permit the operating subsidiary to fund these 
     activities with subsidized funds raised through the parent 
     bank's access to the federal safety net--and in that case, 
     the benefit would be to the bank, not financial services 
     consumers, and certainly not American taxpayers. Such 
     subsidization would undermine the benefits that consumers 
     reap through vigorous industry competition by unfairly 
     discriminating against securities, insurance and other 
     financial service providers that do not have access to such 
     subsidies,

[[Page E1055]]

     and would pose financial risks to the federal safety net and 
     American taxpayers.
       Furthermore, the bill would not ``force innovation out of 
     banks.'' The bill does not scale back any power that national 
     banks currently have to conduct banking activities, or 
     require any national bank to terminate any of its existing 
     activities. National bank subsidiaries are currently not 
     authorized to engage in any ineligible securities or 
     insurance underwriting activities (other than limited credit 
     life underwriting). The bill would simply limit the ability 
     of the Comptroller to authorize a subsidiary of a national 
     bank to engage in new activities as principal that Congress 
     has determined are beyond the scope of activities permissible 
     for the parent national bank. To put it plainly, the bill 
     prevents national banks from doing indirectly what Congress 
     has determined to be imprudent for banks to do directly. This 
     limit is necessary and appropriate to protect banks, the 
     federal safety net and the taxpayer, as well as to ensure 
     fair competition among all financial service providers.
       We note that proponents of expanding the powers of bank 
     operating subsidiaries have argued that a national bank is 
     equally exposed to its subsidiaries and to its affiliates 
     because a national bank can issue dividends to its holding 
     company and thereby indirectly fund a nonbank affiliate 
     engaged in activities that are not permissible for the bank 
     to engage in directly. The federal banking laws, however, 
     limit the ability of a national bank to pay dividends where 
     the payment would impair the bank's capital. This arrangement 
     also ignores the requirements of GAPP, which mandates that 
     the entire loss incurred by a subsidiary be reflected in the 
     financial statements of the parent bank. There is no similar 
     requirement applicable to its affiliates. Thus, a parent 
     bank's financial statements must reflect all the losses 
     experienced by a subsidiary, even when those losses far 
     exceed the capital of the parent bank, while a bank's 
     financial statements do not need to reflect losses incurred 
     by an affiliate (beyond any limited amount that the bank may 
     have lent to the affiliate in accordance with federal law). 
     Because losses incurred by a holding company subsidiary do 
     not directly impact the financial condition of an affiliated 
     bank, the bank may face less pressure to support a subsidiary 
     of a holding company than a subsidiary of the bank.

   b. federal reserve board regulation of financial holding companies

       Title I of the bill addresses the establishment of capital 
     requirements for financial holding companies by the Federal 
     Reserve Board. It is our intention that, in establishing 
     capital adequacy guidelines or requirements, the Board take 
     into account that certain holding companies predominantly 
     engaged in nonbanking financial activities have been 
     organized in non-corporate structures, and should treat as 
     common equity such interests as limited company memberships 
     and partnership interests where such interests are accepted 
     in the marketplace as equity available to absorb losses.
       In addition, Section 116 of the bill forbids the Board to 
     take any action under or pursuant to the Bank Holding Company 
     Act or Section 8 of the Federal Deposit Insurance Act against 
     or with respect to a regulated subsidiary of a bank holding 
     company except in two circumstances: where action is 
     necessary to prevent or redress an unsafe or unsound 
     practice or breach of fiduciary duty that poses a material 
     risk to the financial safety, soundness, or stability of 
     an affiliated depository institution or the domestic or 
     international payment system, or where the action is 
     appropriate to enforce compliance with federal law that 
     the Board has specific jurisdiction to enforce. Section 
     10A prohibits the Board from taking any action under the 
     specified statutes where the purpose or effect of doing so 
     would be to override a determination that an activity is 
     financial in nature and thereby exclude regulated 
     subsidiaries from a line of business that is financial in 
     nature or prevent regulated subsidiaries from offering a 
     product or services that is financial in nature. None of 
     the above would prevent the board from taking action in an 
     individual case where the manner in which an activity is 
     conducted renders action necessary to prevent or redress 
     an unsafe or unsound practice or breach of fiduciary duty 
     by a regulated subsidiary that poses a material risk to 
     the financial safety and soundness or stability of an 
     affiliated depository institution or to the domestic or 
     international payment system.
       In determining whether or not it is reasonably possible to 
     effectively protect against the material risk at issue 
     through action directed at or against the affiliated 
     depository institution or against depository institutions 
     generally, the Board must consider the full scope of any 
     statutory authority it and the other federal banking agencies 
     may have over any type of depository institution, including 
     national banks and state nonmember banks, under any statute 
     which the Board and the other federal banking agencies are 
     authorized to administer. In this regard, we expect the 
     Board, if necessary and possible, to request other federal 
     banking agencies to exercise their authority in order to 
     protect against any feared risk, and we expect the other 
     agencies to coordinate with and accommodate requests for 
     action by the Board.


   c. h.r. 10 provides for fair competition and investor protection 
                     through functional regulation

       H.R. 10 recognizes that blanket exceptions from securities 
     regulation are no longer appropriate for banks that are 
     actively participating in securities activities. It reflects 
     our belief that functional regulation is necessary to ensure 
     that all entities engaged in securities activities, and all 
     securities professionals, are regulated by the functional 
     regulator with over 60 years of expertise focused 
     specifically on these activities--the SEC. We recognize, 
     however, that certain limited existing bank securities 
     activities may remain excepted from SEC regulation without 
     creating significant opportunities for regulatory arbitrage. 
     We believe these exceptions are appropriate, based on the 
     limited nature of some activities and the existing scheme of 
     regulation of other activities. For instance, the way that 
     banking regulators oversee bank trust activities--including 
     those involving securities products--may more closely 
     approximate the scheme of regulation embodied in the federal 
     securities laws than the banking regulations applicable to 
     other parts of a bank.
       H.R. 10 eliminates the blanket exceptions for banks from 
     the definitions of ``broker'' and ``dealer,'' and, instead, 
     includes limited exceptions from these definitions available 
     to banks.


              1. trust and fiduciary activities exception

       H.R. 10 permits banks to effect transactions in a trustee 
     or fiduciary capacity without being considered to be broker-
     dealers under the securities laws. Banks would be permitted 
     to effect such transactions so long as the department in 
     which they are conducting the activities is regularly 
     examined by bank regulators for compliance with fiduciary 
     principles. It is our intent that such examinations be 
     specifically focused on these activities and rigorous in 
     nature. Banks that use this exception may also be primarily 
     compensated by an annual fee, a percentage of assets under 
     management, or a flat or capped per-order processing fee, or 
     any combination of such fees, and may not receive brokerage 
     commissions exceeding the banks' execution costs. Such fees 
     must not be structured in such a way that they give rise to 
     the sales incentives inherent in brokerage commissions.


          2. employee and shareholder benefit plans exception

       Under H.R. 10, a bank will not be considered a ``broker'' 
     when, acting in its transfer agent capacity, it conducts 
     brokerage transactions for: (1) employee benefit plans; (2) 
     dividend reinvestment plans; and (3) open enrollment plans.
       In connection with all three types of plans, banks may not 
     solicit transactions or provide investment advice concerning 
     the purchase or sale of securities. In addition, banks using 
     this exception may only receive compensation consisting of 
     administrative fees, flat or capped per order processing 
     fees, or both, and may not receive brokerage commissions 
     exceeding the banks' execution costs. As to both dividend 
     reinvestment plans and open enrollment plans, the substitute 
     bill clarifies that banks also may not net shareholders' buy 
     and sell orders except for odd-lot holders or plans 
     registered with the SEC.


                  3. definition of ``banking product''

       The bill attempts to preserve the ability of the SEC to 
     determine what is a ``security'' under the federal securities 
     laws, and when new bank products are ``securities,'' by 
     putting the definition of ``traditional banking product'' 
     into a stand-alone statute--not in the federal securities 
     laws or the banking laws. As in the bill reported by the 
     Commerce Committee, this bill's definition of traditional 
     banking product includes such things as deposit accounts, 
     letters or credit, credit card debit accounts, certain loan 
     participations, and certain derivative instruments that 
     traditionally have not been regulated as securities. If banks 
     sell products within the scope of this definition, they are 
     not required to register as a broker or a dealer.
       We have also expanded the types of derivative products that 
     come within the definition of traditional banking product. In 
     addition to derivatives involving or relating to foreign 
     currencies, under the substitute bill, banks may also sell as 
     traditional banking products derivatives involving or 
     relating to interest rates, commodities, other rates, indices 
     or other assets, except instruments (i) that are based on a 
     security or a group or index of securities, (ii) that provide 
     for the delivery of one or more securities, or (iii) that 
     trade on a national securities exchange. However, if a 
     derivative other than an interest rate swap or a foreign 
     currency swap is a security, it would not qualify as a 
     traditional banking product unless it were based on a 
     government security, commercial paper, banker's acceptance or 
     commercial bill of a group of index of one or more of these 
     products.
       H.R. 10 includes a new provision that establishes a process 
     by which the SEC shall decide whether banks that sell ``new 
     banking products'' that are securities must register with the 
     SEC as brokers, dealers, or both. Specifically, the SEC must 
     engage in a rulemaking proceeding and must determine (1) that 
     the new product is a security and (2) that imposing a 
     registration requirement on a bank to sell the new product is 
     necessary or appropriate in the public interest and for the 
     protection of investors. In addition, during the rulemaking 
     process, when considering whether an action is for the 
     protection investors, the SEC also must consider whether the 
     action will promote efficiency, competition and capital 
     formation as set forth in

[[Page E1056]]

     Section 3(f) of the Exchange Act. Under this provision, 
     during the rulemaking process, the SEC is also required to 
     consult with and consider the views of the appropriate 
     banking agencies concerning the proposed rules and the impact 
     of those rules on the banking industry.
       H.R. 10 is clear that the classification of a product as a 
     traditional banking product does not imply that such product 
     (i) is or is not a security for purposes of the securities 
     laws, or (ii) is or is not an account, agreement, contract, 
     or transaction for purposes of the Commodity Exchange Act.

     

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