[Senate Report 105-336]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 588
105th Congress                                                   Report
                                 SENATE

 2d Session                                                     105-336
_______________________________________________________________________


 
                   THE FINANCIAL SERVICES ACT OF 1998

                               __________

                              R E P O R T

                                 OF THE

                     COMMITTEE ON BANKING, HOUSING,

                           AND URBAN AFFAIRS

                          UNITED STATES SENATE

                              to accompany

                                H.R. 10

                             together with

                            ADDITIONAL VIEWS





               September 18, 1998.--Ordered to be printed


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                 ALFONSE M. D'AMATO, New York, Chairman

PHIL GRAMM, Texas                    PAUL S. SARBANES, Maryland
RICHARD C. SHELBY, Alabama           CHRISTOPHER J. DODD, Connecticut
CONNIE MACK, Florida                 JOHN F. KERRY, Massachusetts
LAUCH FAIRCLOTH, North Carolina      RICHARD H. BRYAN, Nevada
ROBERT F. BENNETT, Utah              BARBARA BOXER, California
ROD GRAMS, Minnesota                 CAROL MOSELEY-BRAUN, Illinois
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska

                    Howard A. Menell, Staff Director

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                    Philip E. Bechtel, Chief Counsel

                       Douglas R. Nappi, Counsel

                       Angela Sitilides, Counsel

                    Peggy Kuhn, Financial Economist

                  Rob Drozdowski, Financial Economist

                 Allison Shulman, Legislative Assistant

               Rachel Forward, Professional Staff Member

             Martin J. Gruenberg, Democratic Senior Counsel

                   Mitchell Feuer, Democratic Counsel

        Michael T. Beresik, Democratic Professional Staff Member

                   Dean Shahinian, Democratic Counsel

         Andrew Lowenthal, Democratic Professional Staff Member

               Patience R. Singleton, Democratic Counsel

    Joseph R. Kolinski, Chief Clerk & Computer Systems Administrator

                       George E. Whittle, Editor



                            C O N T E N T S

                               __________
                                                                   Page
Introduction.....................................................     1
History of the Legislation.......................................     1
Need for Legislation.............................................     3
Background.......................................................     3
Purpose and Scope of the Legislation.............................     6
Section-by-Section Analysis......................................    18
Changes in Existing Law (Cordon Rule)............................    47
Regulatory Impact Statement......................................    46
Cost Estimate....................................................    46
Additional Views of:
    Senator Mack.................................................    48
    Senator Grams................................................    51
    Senator Allard...............................................    50
    Senators Sarbanes, Dodd, Kerry, Bryan, Boxer, Moseley-Braun, 
      Johnson, and Reed..........................................    53
    Senator Reed.................................................    59

                                     
                                                       Calendar No. 588
105th Congress                                                   Report
                                 SENATE

 2d Session                                                     105-336
_______________________________________________________________________


                   THE FINANCIAL SERVICES ACT OF 1998
                                _______
                                

               September 18, 1998.--Ordered to be printed

_______________________________________________________________________


Mr. D'Amato, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                         [To accompany H.R. 10]

    The Committee on Banking, Housing, and Urban Affairs, to 
which was referred the bill (H.R. 10), having considered the 
same, reports favorably thereon with an amendment and 
recommends that the bill as amended do pass.

                              INTRODUCTION

    On September 11, 1998, the Senate Committee on Banking, 
Housing, and Urban Affairs (the ``Committee'') marked up and 
ordered to be reported H.R. 10, the ``Financial Services Act of 
1998,'' 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. The Committee 
reports the bill favorably with amendments, and recommends that 
the bill do pass.

                         HISTORY OF LEGISLATION

    On May 14, 1998, H.R. 10, the ``Financial Services Act of 
1998,'' was referred to the Committee after passage in the 
House of Representatives. The Committee held four days of 
hearings on this landmark legislation to modernize the 
financial system and the laws governing financial 
intermediaries. At the first hearing on Wednesday, June 17, 
Secretary of the Treasury Robert Rubin and Federal Reserve 
Chairman Alan Greenspan testified. On Thursday, June 18, the 
Committee received testimony from James F. Higgins, President 
and Chief Operating Officer, Morgan Stanley, Dean Witter and 
Company, representing the Securities Industry Association, 
Washington, D.C.; Matthew P. Fink, President, the Investment 
Company Institute, Washington, D.C.; William A. Fitzgerald, 
Chairman and CEO, Commercial Federal Bank, representing 
America's Community Bankers, Omaha, NE.; John Heimann, 
Chairman, Global Financial Institutions, Merrill Lynch & 
Company, representing the Financial Services Council, 
Washington, D.C.; John H. Biggs, Chairman of the Board and CEO, 
Teachers Insurance and Annuity Association, representing 
American Council of Life Insurance, American Insurance 
Association, National Association of Mutual Insurance 
Companies, National Association of Independent Insurers, 
Alliance of American Insurers, Washington, D.C.; Robert A. 
Miller, Chairman, the National Association of Life Underwriters 
Financial Institutions Task Force, also representing the 
Independent Insurance Agents of America, the Council of 
Insurance Agents and Brokers, the National Association of 
Professional Insurance Agents, Washington, D.C.; William T. 
McConnell, President, American Bankers Association, Washington, 
D.C.; Richard M. Kovacevich, Chairman and CEO, Norwest 
Corporation, representing the Bankers Roundtable, Washington, 
D.C.; and William McQuillan, Chairman, President, and CEO, the 
City National Bank, President of the Independent Bankers 
Association, Greeley, NE.
    On the third day of hearings, Wednesday, June 24, the 
following witnesses and organizations presented testimony to 
the Committee: Ralph Nader, Consumer Advocate, Washington, 
D.C.; Mary Griffin, Insurance Counsel, on behalf of Consumers 
Union and the Consumer Federation of America, Washington, D.C.; 
Edmund Mierzwinski, Consumer Program Director, U.S. Public 
Interest Research Group, Washington, D.C.; Allen Fishbein, 
General Counsel, Center for Community Change, Washington, D.C.; 
and John Taylor, President and CEO, National Community 
Reinvestment Coalition.
    On Thursday, June 25, at the final hearing, the following 
Federal regulatory agencies and organizations representing 
State regulators appeared and testified: Julie L. Williams, 
Acting Comptroller of the Currency; Ellen Seidman, Director, 
Office of Thrift Supervision; Arthur Levitt, Chairman, 
Securities and Exchange Commission; Donna Tanoue, Chairman, 
Federal Deposit Insurance Corporation; Timothy R. McTaggart, 
Bank Commissioner, Delaware Department of Banking, on behalf of 
the Conference of State Bank Supervisors, Washington, D.C.; 
George Nichols, III, Commissioner of Insurance, State of 
Kentucky and Chairman of NAIC Special Committee on Banks and 
Insurance, on behalf of the National Association of Insurance 
Commissioners, Washington, D.C.; Denise Voight Crawford, Texas 
Securities Commissioner and President of the North American 
Securities Administrators Association, Washington, D.C.; and 
James Pledger, Commissioner, TexasSavings and Loan Department, 
on behalf of the American Council of State Savings Supervisors, Austin, 
Texas.
    On September 11, the Committee met in Executive Session to 
mark-up H.R. 10. The Committee considered and adopted, without 
objection, a Manager's Amendment that was offered by Chairman 
D'Amato and the Ranking Member, Senator Sarbanes, that 
incorporated amendments submitted by other Committee Members 
that were agreed to on a bipartisan basis.
    During the mark-up, the Committee considered several other 
amendments. Senator Allard offered an amendment which was 
adopted on a 10 to 8 vote to delete the low cost banking 
account provisions of the House-passed bill. On behalf of 
himself and Senator Dodd, Senator Sarbanes offered an amendment 
to direct the Federal bank and securities regulators to issue 
rules to require financial institutions, before selling or 
sharing customers' confidential financial information, such as 
account balances or other transaction or experience data, to 
give customers prior notice, to give customers an opportunity 
to verify the accuracy of information and to obtain customers' 
consent to such disclosures. The amendment failed on a 10 to 8 
vote. Chairman D'Amato and Senator Bryan then offered, and the 
Committee adopted on a voice vote, an amendment to protect the 
confidentiality of consumer financial information from so-
called ``information brokers'' attempting to obtain personal 
information under false pretenses.
    The Committee then voted 16-2 to report H.R. 10 to the 
Senate for consideration. Senators Gramm and Shelby voted 
against the motion to report the bill from the Committee.

                               BACKGROUND

    For over a decade, the Committee has been concerned that 
the statutory framework governing financial services has become 
outdated. Many of the statutes addressing financial services, 
dating from the Great Depression or even earlier, are not well 
adapted to the changes taking place in the financial services 
industry. In particular, developments in technology, 
globalization of financial services, and changes in the capital 
markets have rendered the laws governing financial services 
unsuitable and outdated in many respects. In 1988 and in 1991, 
the Committee reported bills that would have modernized the 
regulation of financial services.\1\ In reporting H.R. 10 to 
the Senate, the Committee resumes its bipartisan effort to 
provide a regulatory framework suitable for financial services 
in the twenty-first century.
---------------------------------------------------------------------------
    \1\ In 1988 the Committee reported S. 1886, the Financial 
Modernization Act of 1988. While the Senate passed this legislation, 
the full House took no action. In 1991 the Committee reported S. 543, 
the Comprehensive Deposit Insurance Reform and Taxpayer Protection Act 
of 1991. While portions of this bill were enacted as the ``FDIC 
Improvement Act of 1991'', the provisions restructuring the financial 
services industry were not enacted into law.
---------------------------------------------------------------------------

                        NEED FOR THE LEGISLATION

    The Committee believes that overhaul of our financial 
services regulatory framework is necessary in order to maintain 
the competitiveness of our financial institutions, to preserve 
the safety and soundness of our financial system, and to ensure 
that American consumers enjoy the best and broadest access to 
financial services possible with adequate consumer protections. 
It is important that the statutes regulating financial services 
promote these goals because of the crucial role that financial 
services play in the American economy. Not only does the 
financial services industry account for 7.5 percent of our 
nation's gross domestic product and employ 5 percent of our 
workforce, it is vital to the growth of the rest of the economy 
by serving as a channel for capital and credit. The financial 
services industry provides opportunities for savers, investors, 
borrowers, and businesses to realize their goals. It allows for 
the transfer of various kinds of risk to those most able to 
bear those risks. The pace of economic growth in this country 
depends in large part on the ability of the financial services 
industry to function efficiently.
    The financial services industry is currently constrained by 
statutes that impose hurdles or outright prohibitions on the 
affiliation of banks on the one hand and securities firms and 
insurance companies on the other. These restrictions, many of 
which were enacted after the bank failures of the Great 
Depression, were intended to protect the financial system by 
insulating commercial banking from other forms of risk. Over 
time, these restrictions have hampered the ability of financial 
institutions to diversify their products. This inability to 
diversify actually increases risks to the financial system. By 
limiting competition, the outdated statutes also reduce 
incentives to develop new and more efficient products and 
services. This deprives consumers of the benefits of the 
marketplace.
    Federal Deposit Insurance Corporation (FDIC) Chairman Donna 
Tanoue indicated that the current system, which divides the 
various sectors of the financial services industry, should be 
updated:

          The rapidly evolving financial marketplace is subject 
        to the oversight of a regulatory structure that was 
        formed when financial products, services, and 
        organizations were well-differentiated. Today, many 
        banking, securities, and insurance products overlap in 
        purpose, effect, and appearance. The recent 
        announcements of mergers between very large banking 
        organizations and between banking organizations and 
        other financial entities highlight the extensive 
        changes taking place. To ensure that the oversight 
        system for the financial industry is adequate for the 
        task of maintaining stability while allowing orderly 
        evolution, the system's statutory foundations require 
        modernization.\2\
---------------------------------------------------------------------------
    \2\ Tanoue Testimony at 2.

    As the various sectors of financial services converge, 
providers of financial services are seeking to serve customers 
better by combining those sectors in one organization. 
Testifying for the Financial Services Council, John Heimann, a 
former Comptroller of the Currency, described the blurring of 
---------------------------------------------------------------------------
the divisions between the financial services sectors:

          Consumer needs have prompted the development of 
        financial services that were rare or unknown not long 
        ago--services like mutual funds, money market accounts, 
        credit cards, mortgages, individual retirement 
        accounts, home equity loans, stored value cards, and a 
        variety of products geared to the business owner. Many 
        of these new products are the result of an increasing 
        level of competition by financial services providers 
        across industry lines, providing alternatives to 
        services once available only from a single source. 
        Thus, money market mutual funds were developed by the 
        securities industry to provide an investment 
        opportunity for funds that consumers were holding in 
        bank accounts. Banks offer loan syndications and 
        private placements of securities to business clients as 
        an alternative to services offered by securities firms. 
        Life insurance companies developed single premium 
        annuities to compete with bank certificates of 
        deposit.\3\
---------------------------------------------------------------------------
    \3\ Heimann Testimony at 9-10.

    In addition, as the number of nations participating in the 
global capital markets increases, providers of financial 
services are seeking greater economies of scale. John Heimann described 
the pressure that U.S. firms are experiencing:

          Despite the consolidation occurring in the U.S., most 
        of the largest financial services companies are today 
        still headquartered outside this country. If our 
        industry is to remain competitive around the world--
        especially as financial reform comes to the European 
        Union--we must take steps to maintain the global 
        preeminence of U.S.-based financial corporations and of 
        our nation's financial markets.\4\
---------------------------------------------------------------------------
    \4\ Heimann Testimony at 4.

    As banks, insurance companies, and securities firms enter 
one another's markets, regulation of financial services has 
become increasingly arbitrary. Witnesses identified numerous 
examples of this phenomenon to the Committee. Under current 
regulatory interpretation, national banks may sell insurance 
nationwide so long as such sales are based in a place of less 
than 5,000 people. Sales of insurance products may be subject 
to significantly different regulation depending on whether 
those sales are made by a bank or an insurance agent. 
Similarly, sales of securities may be regulated differently 
depending on whether they take place through a bank or a 
securities broker.
    In many cases, existing statutes create impediments and 
inefficiencies for the affiliations occurring in the 
marketplace. Regulators and courts have on occasion fashioned 
paths around these impediments, but such actions are no 
substitute for the establishment of fundamental policy by 
Congress. As Federal Reserve Chairman Alan Greenspan testified:

          Without Congressional action, changes will occur 
        through exploitation of loopholes and marginal 
        interpretations of the law that courts feel obliged to 
        sanction. This type of response to market forces lead 
        to inefficiencies, expansion of the Federal safety net, 
        potentially increased risk exposure to the Federal 
        Deposit insurance funds, and a system that will 
        undermine the competitiveness and innovative edge of 
        major segments of the financial services industry.\5\
---------------------------------------------------------------------------
    \5\ Greenspan Testimony at 2.

Creating a new statutory framework for the financial services 
industry should translate into greater safety and soundness for 
the financial system, increased efficiency for financial 
services providers, and more choices and lower costs for 
consumers.

                  PURPOSE AND SCOPE OF THE LEGISLATION

    H.R.10, as reported by the Committee, employs the same 
general approach as the House-passed version of H.R.10 and as 
the bills reported by the Committee in 1988 and 1991. First, 
the bill repeals the provisions of the Glass-Steagall Act that 
restrict the ability of banks and securities underwriters to 
affiliate with one another. Second, within the framework of the 
Bank Holding Company Act, the bill creates a new category of 
``financial holding company.'' The financial holding company 
vehicle allows for a broader range of financial services to be 
affiliated, including commercial banking, insurance 
underwriting and merchant banking as defined in the 
legislation. The bill maintains the current separation of 
banking and commerce in our financial system. It also contains 
provisions intended to provide appropriate regulation of bank 
sales of insurance.

Permissible affiliations

    The core of the legislation is the creation of a new type 
of bank holding company called a ``financial holding company.'' 
Banks, securities firms, and insurance companies will be able 
to affiliate with one another through the financial holding 
company model. Financial holding companies will be allowed to 
engage in activities that are ``financial in nature.'' This is 
a broader standard than the ``closely related to banking'' 
standard that currently delineates the permissible activities 
of bank holding companies.
    The Committee believes that allowing broader affiliations 
within the financial holding company should place no segment of 
the financial services industry at a disadvantage. Banks, 
insurance companies, and securities firms should have equal 
opportunities to affiliate with one another. At the same time, 
financial holding companies should not compete unfairly with 
banks, insurance companies, and securities firms that choose to 
remain unaffiliated.
    Broader affiliations within the holding company structure 
will present new challenges for safety and soundness regulation 
of financial institutions. To meet these challenges, the bill 
provides for regulation of financial holding companies by the 
Federal Reserve Board (the ``Board''). The bill also provides 
for functional regulation of activities; that is, similar 
activities should be subject to the same regulatory scheme.

Organizational structure

    The Committee carefully analyzed whether the holding 
company or the operating subsidiary approach is the appropriate 
organizational structure for newactivities conducted by an 
insured bank. Some have characterized this debate as solely one of 
jurisdiction between the Board and the Treasury. The Committee 
disagrees. This is a fundamental issue which must be handled carefully 
in the context of the significant reforms in activities that we are 
considering.
    Congress must be careful to provide sufficient safeguards 
for our new financial framework. The Committee does not want to 
see a repeat of the savings and loan crisis where the taxpayer 
had to bail out federally insured institutions that assumed 
excessive risks and operated without effective management, 
internal controls, and supervision. Congress must ensure that 
the Federal safety net is not extended in any way. The deposit 
insurance funds must be adequately insulated from paying the 
losses of firms which are affiliated with insured banks. The 
Committee believes that the holding company structure best 
achieves this purpose. Under this approach, if an affiliate 
fails, the losses will not affect the bank.
    The Committee took into consideration Federal Reserve 
Chairman Greenspan's views on this topic. Many distinguished 
former regulators share his views. In a recent editorial, 
former Federal Reserve Chairman Paul Volcker recently wrote:

          The commercial bank must be a separate organization, 
        insulated legally from its sister entities providing 
        financial services. Moreover, that arrangement is more 
        easily compatible with continued ``functional'' 
        supervision of the component parts * * *. \6\
---------------------------------------------------------------------------
    \6\ Volcker, Paul. ``Boost for Banking''. Washington Post. 
September 10, 1998.

    Finally, the Committee has previously endorsed the holding 
company framework. In 1991, the Committee approved S. 543, 
which repealed the Glass-Steagall Act and allowed banks to 
affiliate with securities firms using the holding company 
structure to ensure safety and soundness, a level competitive 
playing field, and protection of the taxpayer. H.R. 10 uses the 
same holding company framework as S. 543, but expands the range 
of permissible financial affiliations to include insurance 
underwriting and merchant banking.

Permissible activities

    Not only does the bill allow for broader affiliations 
between banks and other providers of financial services, but 
the bill also expands the activities in which banks may engage. 
Section 121 of the bill allows national bank subsidiaries to 
engage in any type of financial agency activity. With respect 
to agency activities other than the sale of insurance products, 
the bill would prohibit States from preventing or restricting 
bank activities in these areas.
            Insurance activities
    The Committee recognizes that insurance sales and other 
insurance activities present a unique set of problems and 
challenges. Insurance, unlike either banking or securities 
activities, is wholly governed by the regulatory apparatus 
established in each State--an arrangement confirmed by the 
McCarran-Ferguson Act of 1945.\7\
---------------------------------------------------------------------------
    \7\ The Act of March 9, 1945.
---------------------------------------------------------------------------
    Although banks have previously been allowed to sell 
insurance in places with a population of 5,000 people or less 
(Section 92 of the National Bank Act), there is no Federal 
insurance law analogous to either the Federal securities laws 
(such as the Securities Act of 1933, the Securities Exchange 
Act of 1934, the Investment Company Act of 1940, or the 
Investment Advisors Act of 1940) or the Federal banking laws 
(such as the National Bank Act, the Bank Holding Company Act or 
the Consumer Credit Protection Act).
    As a result, the relationship between the banking industry 
and State insurance regulators has been uneasy at best, and 
uncertainty over regulation of bank insurance sales has often 
been exacerbated by certain Federal bank regulators that have 
often been clumsy or heavy-handed in their attempts to 
establish regulatory parameters for insurance sales. Moreover, 
there has been ample evidence that some State statutes--either 
on their face or in their application--have made it virtually 
impossible for a bank to sell insurance products effectively.
    In order to strike a careful balance that recognizes the 
need and desirability of continued State regulation of 
insurance activities as well as the necessity to remove unfair 
impediments placed on bank activities in this area, the 
Committee made several changes to Section 104 of the bill.
    The bill permits banks to sell any type of insurance 
product from any location, in contrast to the increasingly 
artificial construction of the ``place of 5,000'' requirement. 
However, the bill clearly establishes that it is the State 
insurance regulator--not Federal bank regulators--that is the 
appropriate functional regulator of a bank's (for the purposes 
of discussing Section 104, the term ``bank'' shall mean ``an 
insured depository institution or a wholesale financial 
institution or any subsidiary or affiliate thereof'') sales of 
insurance products, provided that such regulation meets certain 
criteria.
    The bill holds, as a general rule, that States may not 
``prevent or significantly interfere'' with the insurance 
sales, solicitations, or cross-marketing of ``an insured 
depository institution or a wholesale financial institution or 
any subsidiary or affiliate thereof''. However, the Committee 
recognizes that a bank's sales of products that are not insured 
by the FDIC or that may be required to be obtained in 
connection with a loan or other traditional bank product 
present certain circumstances under which it may be necessary 
for the protection of consumers for a State to treat a bank's 
sale of insurance differently than insurance sales by entities 
unaffiliated with a bank. To address this important distinction 
and to protect consumers, the Committee established a safe 
harbor of thirteen different areas in which a State can treat a 
bank's sales of insurance differently than the sales by 
unaffiliated entities. State laws which fall under the safe 
harbor are exempt from challenge under the various remedies 
provided elsewhere in this section.
    As noted above, the Committee is also mindful of the 
history of State insurance statutes, regulations, orders, and 
other actions which have made it virtually impossible for a 
bank to sell insurance. As a result, the Committee has made 
remedies available to protect banks from prohibitive, 
discriminatory, or interfering regulation. First, as a general 
rule, States may not ``prevent or significantly interfere'' 
with a bank's insurance sales activities. Second, for State 
laws that are enacted prior to September 3, 1998, and which 
fall outside the bill's safe harbor, the bill does not limit in 
any way the application of the Supreme Court's decision in 
Barnett Bank v. Nelson.\8\ State laws outside the safe harbor 
could be challenged under that decision. Moreover, the Office 
of Comptroller of the Currency (OCC) would retain all deference 
currently accorded it in applying Barnett to the laws enacted 
prior to September 3, 1998. Third, State laws enacted on or 
after September 3, 1998, which do not fall into the bill's safe 
harbor would be subject to a non-discrimination test made up of 
four distinct criteria. This test would prevent States from 
enacting laws that are discriminatory on their face, which 
create a significant disparate impact on banks as compared to 
other entities selling insurance, which effectively prevent a 
bank's sale of insurance, or which generally conflict with the 
intent of this bill. Furthermore, the bill does not limit in 
any way the application of the Supreme Court's decision in 
Barnett and those laws outside the safe harbor could be 
challenged under that decision. However, for laws which are 
subject to the non-discrimination test (e.g., which are enacted 
on or after September 3, 1998), the OCC would be accorded no 
unequal deference, as spelled out in Section 307(e) of the 
bill.
---------------------------------------------------------------------------
    \8\ 116 S. Ct. 1103 (1996).
---------------------------------------------------------------------------
            Securities activities
    H.R. 10 expands bank activities in the securities area as 
well. National banks are given authority to underwrite 
municipal revenue bonds, in addition to their existing 
authority to underwrite general obligation bonds.
    The Committee made a number of changes to Subtitle A of 
Title II, relating to the functional regulation of broker-
dealers. First, the Committee adopted several revisions that 
the North American Securities Administrators Association 
suggested. These changes reflect the new division between the 
Commission and the States of regulatory responsibility for 
investment advisors that was adopted as part of the National 
Securities Markets Improvement Act of 1996.\9\
---------------------------------------------------------------------------
    \9\ P.L. 104-290 (approved October 11, 1996).
---------------------------------------------------------------------------
    The other changes that were adopted pertain to the 
treatment of: banking products that are also ``securities'' for 
the purposes of the Federal securities laws and certain 
traditional banking activities that involve securities 
transactions. Currently, banks are exempted from the definition 
of ``broker'' and ``dealer'' in the Securities and Exchange Act 
of 1934 (the ``1934 Act''), and are therefore not required to 
register as broker-dealers with the Commission. Registration as 
a broker-dealer was deemed unnecessary when the 1934 Act was 
enacted because of the Glass-Steagall Act. As a general rule, 
banks were prohibited from ``securities'' activities; in light 
of this general prohibition, and the existing bank regulatory 
framework, there was no need to regulate banks as broker-
dealers.\10\
---------------------------------------------------------------------------
    \10\ See, e.g., Hearings on H.R. 10 Before the Senate Committee on 
Banking, Housing and Urban Affairs, June 25, 1998 (Testimony of Arthur 
Levitt, Chairman of Securities and Exchange Commission, Concerning H.R. 
10, note 5 and accompanying text).
---------------------------------------------------------------------------
    In recent years, the bank regulators have permitted banks 
and bank holding companies to expand their securities 
activities. H.R. 10 accommodates this trend within a functional 
regulatory framework. The repeal of Glass-Steagall's anti-
affiliation rules and the blanket exemption for banks from 
broker-dealer registration raises the issue whether, and under 
what circumstances, such products and activities should be 
``pushed out'' of (i.e., moved out of) a bank and into a 
registered broker-dealer affiliate.
    The Committee believes that the House-passed version of 
H.R. 10 required too many activities to be ``pushed-out'' of 
the bank and placed too many restrictions on the conduct of 
traditional banking services. Clearly, to the extent that banks 
want to engage in full-service brokerage activities, such 
activities should be ``pushed-out'' to an SEC-registered 
affiliate or subsidiary. Nevertheless, banks have historically 
provided largely ministerial securities services, frequently 
through their trust departments. Banks are uniquely qualified 
to provide these services and have done so without any problems 
for years. Banks provided trust services under the strict 
mandates of State trust and fiduciary law without problems long 
before Glass-Steagall was enacted; there is no compelling 
policy reason for changing Federal regulation of bank trust 
departments, solely because Glass-Steagall is being modified. 
Under IRS regulations, banks must offer self-directed 
Individual Retirement Accounts (``IRAs'') in either a trustee 
or custodial capacity. Services rendered as a trustee do not 
require registration as a broker-dealer to the extent that 
these services fall within the trust exemption. The Committee 
believes that bank custodial, safekeeping, and clearing 
activities with respect to IRAs do not need to be pushed-out 
into an SEC-registered broker-dealer.
    The Committee also revised the bank transfer agent 
provisions. The House-passed provisions would have disrupted 
services for employee benefit plans, dividend reinvestment 
plans, and issuer plans. Currently, such service plans can 
offer direct execution services to participants through 
transfer agents. By removing the intermediaries from the 
execution process, these plans provide cost-savings for their 
participants. The transfer agents receive a payment which is 
calculated based on transaction volume (typically, a set number 
of basis points of the volume).
    The House-passed version of H.R. 10 would have precluded 
the offering of such services for transaction-based fees. This 
would have made such services prohibitively expensive. Since 
transfer agent activities are regulated, and the transaction-
based fees are for ministerial services which provide 
significant cost-savings for shareholders, the Committee 
decided to eliminate this restriction.\11\
---------------------------------------------------------------------------
    \11\ Hearings on H.R. 10 Before the Senate Committee on Banking, 
Housing and Urban Affairs, June 25, 1998 (Submission prepared by ABA 
Securities Association, p.12 (referred to in testimony of William T. 
McConnell, on behalf of the American Bankers Association)).
---------------------------------------------------------------------------
    The Committee also amended the provisions of the House bill 
that set limitations on other traditional bank activities that 
may or do involve transactions in products that qualify as 
securities: private placements and derivative transactions. The 
Committee believes that, to the extent that these transactions 
are conducted with sophisticated and experienced investors, 
there is no compelling reason to ``push-out'' these activities 
(which have been supervised by banking regulators). This 
approach is consistent with the treatment of such transactions 
under Federal securities laws.
    The Committee believes that the House-passed version of 
H.R. 10 established a one-sided process for determining how to 
regulate future ``hybrid'' products (i.e., products that have 
both banking and securities characteristics). Section 206 of 
the bill was amended to give both the Board and the Securities 
and Exchange Commission a role in determining whether such 
hybrid products must be pushed-out to a registered broker-
dealer. The Committee believes these changes will allow banks 
to develop new products cheaply and efficiently, while giving 
due consideration to the dual goals of safety-and-soundness and 
investor protection. The Committee also removed Section 251 of 
the bill. This section contained unnecessary and redundant 
disclosure requirements.
    The bill creates a new Section 6 of the Bank Holding 
Company Act. Section 6(H) recognizes the essential role that 
principal investing, or merchant banking, plays in modern 
finance. A financial holding company or its non-bank affiliate 
(collectively, the ``FHC'') whether directly, indirectly, or 
through a fund, may make investments in any amount in, or 
otherwise acquire control of, a portfolio company, or its board 
of directors, subject to conditions designed to maintain the 
separation between banking and commerce. The ownership 
interests must be acquired for appreciation and ultimate resale 
or other disposition. Such disposition can be subject to a 
variety of factors, including overall market conditions, the 
condition and results of operation of the portfolio company's 
business, and its duties to co-investors and advisory clients. 
The Committee recognizes that certain investments may be held 
for a period of time in order to realize their potential value. 
Another condition imposed by Section 6(H) is that the FHC may 
not actively manage or operate the portfolio company, except 
insofar as necessary to achieve the investment objectives. The 
Committee recognizes that employees of the FHC may have 
dealings with the management of a portfolio company. The word 
``actively'' was used to distinguish occasional participation 
in management from continuous participation; the reference to 
``day to day management'' was used to suggest that 
participation is not limited to the company's board of 
directors. The language makes clear that it may be necessary 
for the investor to intervene indaily management in order to 
protect its investment.
    The Committee believes that compliance with the 
requirements of Section 6(H) can be ascertained either by 
periodic reports from, or by examination of, the holding 
company or affiliate making the investment. No examination of 
the portfolio company is necessary other than in the case in 
which reports or examinations are necessary to assure 
compliance with restrictions governing transactions involving 
depository institutions and portfolios companies.
    Furthermore, the Committee intends Section 6(H) to permit 
investment banking firms to continue to conduct their principal 
investing in substantially the same manner as at present. An 
FHC should not be placed at a competitive disadvantage with 
firms unaffiliated with any depository institution. The Board 
shall not require, even informally, any pre-clearance of 
principal investments and not impose arbitrary or unduly 
restrictive limitations on the holding period for such 
investments. Moreover, the Board should challenge the 
management or operation of the portfolio company or the 
exercise of discretion regarding the duration of an investment 
only if clearly inconsistent with the purposes of this section. 
Finally, the Committee intends that the Board be the sole 
entity with legal standing to allege that an FHC is in 
violation of Section 6(H) with respect to a particular 
investment.

Functional regulation

    The bill generally adheres to the principle of functional 
regulation, which holds that similar activities should be 
regulated by the same regulator. Different regulators have 
expertise at supervising different activities. It is 
inefficient and impractical to expect a regulator to have or to 
develop expertise in regulating all aspects of financial 
services. Accordingly, the bill is intended to ensure that 
banking activities are regulated by bank regulators, securities 
activities are regulated by securities regulators, and 
insurance activities are regulated by insurance regulators. The 
bill establishes procedures for determining whether future 
products should be underwritten within a bank, subject to 
banking regulation, or by an insurance company subject to 
insurance regulation. Similarly, the bill contains procedures 
for determining whether new products should be subject to 
banking regulation or securities regulation.
    The bill repeals the blanket exemption banks currently 
enjoy from the definitions of ``broker'' and ``dealer'' under 
the Federal securities laws. Instead, the bill delineates 
specific securities activities that banks may conduct without 
registering with the Commission. These provisions are intended 
to allow banks to continue to engage in securities activities 
that have already been permitted by, and are subject to, 
regulation by bank regulators. Trust activities, custody, 
safekeeping, derivatives dealing, private placement of 
securities, and underwriting of asset-backed securities that 
fall within the bill's provisions may remain in banks. 
Securities activities that do not fall within the bill's 
provisions must take place in broker-dealers regulated by the 
Commission.

Treasury role in determining ``financial in nature''

    The Committee believes that the Treasury Department's views 
regarding what activities are ``financial in nature'' are 
highly relevant. Accordingly, the Committee has revised the 
bill to create an explicit role for the Treasury Department in 
the Board's review process.
    The Board must coordinate and consult with the Treasury 
Department in making its determinations regarding financial 
activities. The Board may not determine that an activity is 
financial if the Treasury believes that it is not financial or 
incidental to a financial activity. The Treasury may also 
recommend that an activity be deemed to be financial, and the 
Board must determine within thirty days whether to initiate a 
public rulemaking regarding the proposal.

Holding company regulation

    The bill seeks to provide regulation of FHCs that is 
sufficient to protect the safety and soundness of the financial 
system and the integrity of the Federal deposit insurance funds 
without imposing unnecessary regulatory burdens. While 
functional regulators are supervising various holding company 
subsidiaries, the Committee believes there is a need for 
oversight of the organization as a whole as well as 
subsidiaries not subject to functional regulation. The need for 
holding company regulation was stressed by witnesses before the 
Committee as well. For example, William McQuillan, President of 
City National Bank of Greeley, N.E., testified, ``[t]he IBAA 
strongly supports the establishment of an umbrella regulator 
for diversified financial services firms and feels the only 
Federal regulator equipped for this job is the Federal 
Reserve.''\12\
---------------------------------------------------------------------------
     \12\ McQuillan Testimony at 2.
---------------------------------------------------------------------------
    Accordingly, the bill gives the Board authority to adopt 
consolidated capital requirements for financial holding 
companies. The Board also has authority to examine the holding 
company and, under certain circumstances,any holding company 
subsidiary that poses a material risk to an affiliated bank.
    The Committee does not intend for holding company 
regulation to override functional regulation of holding company 
subsidiaries. For functionally regulated subsidiaries, the 
Board is required, to the greatest extent possible, to rely on 
reports required by and examinations conducted by the 
functional regulator. Thus, the Board must generally defer to 
regulation by the State insurance commissioners, the State and 
Federal banking agencies, the Commission, the State securities 
commissioners, and appropriate self regulatory organizations. 
The Board may not require that an insurance company or 
securities firm provide financial support to a troubled bank 
affiliate if the functional regulator determines this would 
have a materially adverse effect on the financial condition of 
the insurance company or securities firm.

Too-big-to-fail

    The Committee felt strongly that language should be added 
to the House-passed bill to address the ``too-big-to-fail'' 
concerns. Accordingly, the bill amends the Federal Deposit 
Insurance Act to prevent the use of Federal deposit insurance 
funds to assist affiliates or subsidiaries of insured financial 
institutions. The intent of this provision is to ensure that 
the FDIC's deposit insurance funds not be used to protect 
uninsured affiliates of financial conglomerates.

Prior notice for large non-banking acquisitions

    The Committee believes that the Board should have prior 
notice of and authority to disapprove of a large financial 
merger because of its potential impact on the financial system. 
The bill requires FHCs and wholesale financial holding 
companies seeking to acquire companies with assets in excess of 
$40 billion (or companies that would become FHCs as a result of 
such acquisition), to give 60 days prior notice to the Board. 
The Board is given the authority to disapprove the proposed 
acquisitions. The bill enumerates the factors that the Board 
shall consider in making this determination, and the agencies 
with which the Board shall confer with as a part of this 
process.

Community Reinvestment Act (CRA)

    The Committee preserved the provisions of H.R. 10 with 
respect to the Community Reinvestment Act (CRA) with the 
following exceptions:
    The bill eliminates the specific remedy of divestiture, 
where the Board would have been authorized to require financial 
holding companies whose bank subsidiaries do not maintain a 
satisfactory CRA rating to divest control of any depository 
institution subsidiary. In addition, National banks that do not 
maintain a satisfactory CRA rating would not be required to 
divest subsidiaries.
    The bill applies CRA only to Wholesale Financial 
Institutions (WFI's) that are affiliated with insured banks. 
The bill also deletes the application of CRA to foreign banks, 
as well as the CRA study by Treasury.

Unitary thrift holding companies

    The Committee adopted changes to Title IV of the House-
passed version of H.R. 10. These changes reflect a careful 
balancing of the diverse views held by Committee members.
    Some Committee members strongly hold the view that mixing 
banking and commerce poses serious risks to the safety and 
soundness of the financial system, distorts credit decisions by 
banks, and leads to undue concentrations of economic power. 
Since H.R. 10 generally maintains the separation of banking and 
commerce, they felt strongly that the unitary holding company 
loophole to the separation of banking and commerce should be 
closed.
    However, other Committee members feel strongly that the 
unitary thrift structure has posed no undue supervisory risk 
and, in fact, represents a model for financial reform. These 
members point to the long history of the unitary structure and 
the lack of evidence that the structure has presented any 
safety and soundness threat. In fact, these members believe 
that commercial affiliations authority enhances the pool of 
capital and managerial talent available to unitary thrifts, as 
evidenced by the acquisition of some thrifts during the savings 
and loan crisis.
    To balance these concerns, the Committee modified the 
provisions in the House bill concerning unitary thrift holding 
companies, as recommended by the Board's Chairman Alan 
Greenspan. Section 401 of H.R. 10 as reported by the Committee 
prohibits any company that engages, directly or through a 
subsidiary, in commercial activities from directly or 
indirectly acquiring control of a savings association after 
September 3, 1998. It also prohibits any savings and loan 
holding company from engaging, directly or through a 
subsidiary, in commercial activities.
    Existing unitary savings and loan holding companies are 
exempted from these restrictions. These prohibitions do not 
apply to a unitary savings and loan holding company in 
existence on September 3, 1998, or that was formedpursuant to 
an application pending before the Office of Thrift Supervision (OTS) on 
or before that date, provided that the company continues to meet the 
requirements to be a unitary savings and loan holding company under 12 
U.S.C. 1467(a)(c)(3) and to control at least one of the savings 
associations that the company controlled (or had applied to control) as 
of September 3, 1998, or the successor to such a savings association (a 
``grandfathered unitary savings and loan holding company'').
    The purpose of this provision of the bill is to prohibit 
any company directly or indirectly engaged in commercial 
activities (other than a grandfathered unitary savings and loan 
holding company) from acquiring control of a savings 
association after September 3, 1998, by or through any means 
including through any forward or reverse merger, consolidation, 
or other type of business combination. Section 401 authorizes 
the OTS to issue such regulations, interpretations, and orders 
as may be necessary to prevent evasions of this prohibition, 
and the Committee expects the OTS to take all actions necessary 
to carry out the purpose of this section, which is to prohibit 
firms engaged in commercial activities from acquiring control 
of any savings association. In particular, the Committee 
expects that the OTS will use this authority to prohibit 
transactions that, although structured to appear as the 
acquisition of a commercial firm by a grandfathered savings and 
loan holding company, would in substance result in a commercial 
company or its shareholders acquiring control of a savings and 
loan holding company or any of its savings association 
subsidiaries.
    In making such determinations or taking other actions under 
Section 401, the OTS should use the definition of ``control'' 
set forth in section 10 of the Home Owners Loan Act.

Consumer protections

    The Committee recognizes the importance of protecting 
consumers who will now be able to purchase a broader range of 
financial products from affiliated providers of financial 
services on the premises of or through banks. The wider variety 
of financial products available at a bank raises potential 
customer confusion about the insured status, risks, the issuer 
and the seller of the new products. The Committee is concerned 
about past instances in which depositors have purchased 
unsuitable investment products without understanding their 
nature, and wants to take reasonable steps to prevent 
misunderstanding and confusion when bank customers receive 
unsolicited sales presentations or see advertisements for 
securities and insurance products for purchase through the 
bank.
    The bill requires sales to take place in an area separate 
from the deposit-taking that is clearly marked, so that retail 
customers can distinguish whether a bank, a securities broker 
or insurance agent is offering the product. Salespersons would 
be required to inform potential customers about whether the 
products are insured or carry risks with conspicuous and 
readily understandable disclosures before sales occur, and 
would be prohibited from misrepresenting the products' 
uninsured nature. The bill requires sales personnel to be 
appropriately licensed. Unlicensed employees, such as tellers, 
would be allowed to receive a nominal, one-time, fixed-dollar 
fee for referring a customer to the stock or insurance broker, 
provided such fee's payment is not conditioned on whether the 
customer executes a transaction.
    The bill requires the Federal bank regulators, in 
consultation with State insurance authorities, to issue 
regulations that are consistent with the requirements of the 
Act that apply to the retail sale of insurance products by or 
through banks. The Commission would administer the amended 
provisions of the Securities Exchange Act of 1934 affecting the 
retail sales of securities through networking arrangements on 
or off bank premises.

Federal home loan banks

    The Committee adopted a substitute for the House-passed 
provisions addressing the Federal Home Loan Bank (FHLB) System. 
The last major reform of the FHLB system took place in the 
Financial Institutions Reform, Recovery and Enforcement Act of 
1989 (FIRREA). Prior to FIRREA, only thrifts could be members 
of the FHLB system and access the system's advances. In 1989, 
Congress permitted commercial banks to gain access to the 
system. The provisions in the bill addressing the FHLB system 
are intended to recognize the changes in membership and 
regulatory structure put in place by FIRREA.
    There are four major provisions in the bill affecting the 
FHLB system. The first changes the membership of thrifts from 
mandatory to voluntary. The system provides enough benefits to 
its members to ensure that it can sustain itself on the 
membership of those who wish to join. Second, the bill gives 
small banks greater access to advances by expanding the types 
of assets they may pledge as collateral. Third, the Resolution 
Funding Corporation (REFCorp) obligation was changed from a 
fixed dollar figure to a percentage of the system's current net 
earnings. Lastly, many of the day-to-day managementfunctions of 
the individual banks were taken away from the Federal Housing Finance 
Board (FHFB), the system's safety and soundness regulator. Many of the 
day-to-day functions of the FHLBanks currently require approval from 
the FHFB. These approval requirements largely date to an earlier period 
when the FHLBanks were regulated by the Federal Home Loan Bank Board. 
Several studies, including one by the General Accounting Office (GAO), 
have suggested that the FHFB is too involved in day-to-day management 
decisions of the FHLBanks.

Foreign banks

    At the recommendation of the Board, the Committee adopted 
several provisions to provide parity between foreign banks and 
their domestic counterparts.
            Capital standards for foreign banks
    The House bill required the Board to establish and apply 
comparable capital standards for foreign banks that wish to be 
treated as financial holding companies. The Committee added a 
provision to clarify the Board's current authority to require 
foreign banks to meet other requirements for FHCs. For example, 
the ``well managed'' criteria literally applies only to insured 
depository institutions, e.g., the U.S. bank and thrift 
subsidiaries. Accordingly, the Committee adopted an amendment 
to give the Board explicit authority with regard to other 
operating standards applicable to FHCs.
            Restriction on transactions with affiliates
    The House bill authorizes the Board to impose additional 
restrictions on transactions or relationships only between U.S. 
banks and thrifts and their nonbank affiliates. The Committee 
amended these provisions to include authority to impose 
restrictions on transactions and relationships between the 
foreign bank and its U.S. nonbank affiliates.
            Amendments to international banking act
    Congress amended the International Bank Act (IBA) in 1991, 
after the Bank of Credit and Commerce International (BCCI) 
affair, to require that a foreign bank could not establish a 
representative office without obtaining the prior approval of 
the Board. In keeping with the common understanding of 
representative offices, a subsidiary of a foreign bank was 
excluded from the IBA definition of a representative office. 
The Committee has become aware that some foreign banks are 
seeking to avoid the prior approval requirement of the IBA by 
establishing separate subsidiaries or using existing nonbank 
subsidiaries to act as representative offices. Although the 
subsidiary is separately incorporated, it carries out the same 
representative function as if it were a traditional 
representative office of the foreign bank. A number of States 
do not distinguish between representative offices that are 
direct offices of the foreign bank and those that are 
subsidiaries. Accordingly, the bill would eliminate this 
loophole by striking the subsidiary exclusion from the 
definition of representative offices.
    In addition, the bill clarifies the Board's authority to 
examine a U.S. affiliate of a foreign bank with a 
representative office in order to determine the compliance of 
the representative office with requirements of U.S. law. 
Presently, if a foreign bank has only a representative office 
and no other banking office in the United States, the Board may 
examine only the representative office. The Board cannot 
currently examine or seek information from U.S. affiliates of 
such foreign bank. This limitation could become a problem if 
there were serious questions raised about the nature or 
legality of relationships or transactions between the 
representative office and its U.S. affiliates. To illustrate 
such a problem, it must be recalled that BCCI illegally used 
its representative offices to engage in deposit-taking and 
money laundering in the United States.
    In addition, the bill permits U.S. Attorney's Offices to 
seek a court order to provide financial institution regulatory 
agencies with access to grand jury material, thereby giving 
State regulatory agencies parity with Federal regulatory 
agencies.

Privacy

    The Committee adopted the ``Financial Information Privacy 
Act'' to address the significant threat to financial privacy 
posed by an emerging industry of so-called ``information 
brokers,'' some of whom use deception and false pretenses to 
collect personal financial information for their clients. The 
legislation authorizes civil and criminal penalties for a 
person who uses fraud or deception to obtain, or attempt to 
obtain, customer information from a financial institution. This 
legislation amends the Consumer Credit Protection Act by adding 
a new title consisting of eight sections.

Community Banks

    Small independent banks are confronting unprecedented 
challenges as a result of growing competition from all 
financial service providers, the accelerating pace of 
technological change and the innovation it promotes, changing 
demographic patterns, and shifting consumer attitudes towards managing 
their personal finances. The Committee has attempted in this and other 
legislation within its jurisdiction to recognize the importance of 
community-oriented banks to our economy and the local markets they 
serve.
    Because the Committee wants to make every effort to 
preserve the role of community banks, this bill includes a 
Sense of the Committee Resolution underscoring the importance 
of changes to the Internal Revenue Code to reduce the tax 
burden on community banks and recommending to the Senate that 
such changes should be adopted by Congress in conjunction with 
financial modernization legislation. This Committee Resolution 
is not intended to intrude on the responsibilities of the 
Senate or any of its committees; only to underscore this 
Committee's ongoing effort to strengthen community banks.

Technical corrections and miscellaneous provisions

    The Committee also adopted the following technical changes 
to the H.R.10.
    The bill repeals section 3(f) of the Bank Holding Company 
Act to conform the regulation of savings bank life insurance 
with the regulations governing all other financial institutions 
in a bank holding company structure.
    The bill amends the Federal Deposit Insurance Act to allow 
a holding corporation (formerly a GSE) that was privatized by 
Federal legislation to enter into an affiliation arrangement 
with an insured depository institution provided that the 
Secretary of the Treasury approves the affiliation and 
determines that the successful wind-down of the GSE will not be 
affected and that the GSE will otherwise be separate from the 
arrangement. The Secretary of the Treasury is authorized to 
impose any conditions on the affiliation that the Secretary 
deems appropriate.
    The bill deletes provisions concerning the redomestication 
of mutual insurers.
    The bill deletes erroneous references and provide other 
technical corrections.

                      SECTION-BY-SECTION ANALYSIS

  Title I--Facilitating Affiliation Among Securities Firms, Insurance 
                 Companies, and Depository Institutions

                        Subtitle A--Affiliations

Section 101. Glass-Steagall reformed

    Section 101 repeals Sections 20 and 32 of the Glass-
Steagall Act, allowing affiliations and interlocking employment 
among banks and securities firms.

Section 102. Activity restrictions applicable to bank holding companies 
        which are not financial holding companies

    Section 102 applies activity restrictions to bank holding 
companies that are not financial holding companies, and makes 
conforming changes to the Bank Holding Company Act Amendments 
of 1970 and the Bank Service Company Act.

Section 103. Financial holding companies

    Section 103 defines a new structure, called a ``financial 
holding company'' (FHC), under which banks may affiliate with 
securities and insurance firms. A holding company qualifies as 
a FHC if all of its insured depository subsidiaries are well 
capitalized and well managed, and maintain Community 
Reinvestment Act (CRA) ratings of at least ``satisfactory.''
    Certain FHCs may engage in a broad range of activities that 
are ``financial in nature'' or ``incidental to financial 
activities,'' including:
          Lending and other traditional bank activities;
          Insurance underwriting and agency activities;
          Providing financial, investment, or economic advisory 
        services;
          Issuing instruments representing interests in pools 
        of assets that a bank may own directly;
          Securities underwriting and dealing, and mutual fund 
        distribution;
          Merchant banking;
          Any activity that the Federal Reserve Board (the 
        ``Board'') has deemed ``closely related to banking'' 
        under the Bank Holding Company Act;
          Any activity that the Board has already approved for 
        U.S. banks operating abroad; and
          Any other activity the Board may approve as 
        ``financial'' or ``incidental'' to a financial 
        activity.
    The Board will determine by regulation or order which 
activities are financial in nature or incidental to financial 
activities. In determining whether activities are financial in 
nature or incidental to financial activities, the Board must 
take into account expected changes in markets or technology, 
and international competition.
    The Board must coordinate and consult with the Treasury 
Department in making its determinations regarding financial 
activities. The Board may not determine that an activity is 
financial if the Treasury believes that it is not financial or 
incidental to a financial activity. The Treasury may also 
recommend that an activity be deemed financial, and the Board 
must determine within 30 days whether to initiate a public 
rulemaking regarding the proposal.
    FHCs and wholesale financial holding companies (WHFCs) may 
merge with other financial companies without prior notice to or 
approval from the Board, unless the acquired company has assets 
exceeding $40 billion. If the acquired company's assets exceed 
$40 billion, the FHC proposing the acquisition must provide the 
Board with notice at least 60 days prior to the proposed 
acquisition. The Board may disapprove the acquisition within 
that time period, which the Board may extend by an additional 
60 days. The section details factors which the Board must 
consider in making a determination about a proposed 
acquisition.
    Section 103 permits financial holding companies to engage 
in a broad range of financial activities and activities that 
are incidental to financial activities, and grants the Board 
new authority to define those activities. In determining 
whether an activity is financial in nature or incidental to one 
or more financial activities, the Committee intends that the 
Board take into account a number of factors. Those factors 
include the purposes of the Financial Services Act and the Bank 
Holding Company Act, changes that have occurred or are 
reasonably expected in the marketplace in which financial 
holding companies compete or in the technology for delivering 
financial services, whether the activity in necessary and 
appropriate to allow a financial holding company and its 
affiliates to compete effectively with any company seeking to 
provide financial services in the United States, and any 
available or emerging technological means for providing 
financial services to customers or allowing customers to use 
financial services.
    This authority includes authority to allow activities that 
are reasonably connected to one or more financial activities. 
For example, the Board has, under the existing closely related 
to banking test, permitted bank holding companies to engage in 
activities, such as processing any type of data or providing 
general management consulting services, that are incidental to 
permissible nonbanking activities and are relatively small in 
scale. The Board has also allowed bank holding companies to 
market excess capacities that have been developed or acquired 
in the course of conducting permissible activities, in order 
that bank holding companies may make and plan for the most cost 
effective acquisition of technological and other facilities. 
This authority provides the Board with some flexibility to 
accommodate the affiliation of depository institutions with 
insurance companies, securities firms, and other financial 
services providers while continuing to be attentive not to 
allow the general mixing of banking and commerce in 
contravention of the purposes of this Act.

Section 104. Operation of State law

    Section 104(a), in general, pre-empts a state's ability to 
prevent or restrict affiliations between financial entities, 
except that a State insurance regulator may continue to require 
notice and specified information about potential purchasers of 
insurance companies in order to ensure that all mandated 
capital requirements are met and maintained, and to place an 
insurance company into receivership or conservatorship.
    Section 104(b)(1), in general, pre-empts a State's ability 
to prevent or restrict the sales activities authorized under 
this Act of an insured depository institution with the 
exception of insurance sales and other insurance activities.
    Section 104(b)(2) governs State regulation of insurance 
sales so that States may not prevent or significantly interfere 
with the insurance sales of an insured depository institution, 
except that a State may enact restrictions contained in the 
thirteen points of the safe harbor listed in section 
104(b)(2)(B).
    With respect to State laws on insurance sales enacted prior 
to September 3, 1998, but which fall outside the provisions of 
104(b)(2)(B), those laws are subject to the Supreme Court's 
Barnett decision and, in connection with those laws, the 
Comptroller of the Currency retains deference.
    With respect to State laws on insurance sales enacted on or 
after September 3, 1998, but which fall outside the provisions 
of 104(b)(2)(B), those laws are subject to the anti-
discrimination test of contained in section 104(c) and can also 
be subject to the Supreme Court's Barnett decision. However, 
the provisions of Section 307(e) will apply, under which the 
Comptroller of the Currency will not enjoy unequal deference.
    Section 104(b)(3) ensures that insurance companies 
affiliated with insured depository institutions continue to be 
governed by the domiciliary State as envisioned under the 
McCarran-Ferguson Act, provided that the laws are consistent 
with the provisions of Section 104(c).
    Section 104(c) creates a standard for State regulation of 
insurance that prevents a State, on or after September 3, 1998, 
from discriminating againstinsurance sales or activities by 
insured depository institutions.

Section 105. Mutual bank holding companies authorized

    Section 105 authorizes mutual bank holding companies, which 
are to be regulated in a manner comparable to other bank 
holding companies.

Section 106. Prohibition on deposit production offices

    Section 106 places references to the Financial Services Act 
of 1998 in the Riegle-Neal Interstate Banking and Branching 
Efficiency Act of 1994.

Section 107. Clarification of branch closure requirements

    Section 107 clarifies bank branch closure requirements 
under Section 42 of the Federal Deposit Insurance Act.

Section 108. Amendments relating to limited purpose banks

    Section 108(a) amends Section 4(f) of the Bank Holding 
Company Act. Section 4(f) provides that certain companies that 
control banks are not treated as bank holding companies. These 
are companies that control banks that, prior to the Competitive 
Equality Banking Act of 1987, either made commercial loans or 
accepted insured deposits but did not do both. Under Section 
4(f)(2)(A)(ii), such companies may not acquire control of more 
than 5 percent of the shares or assets of an additional bank or 
savings association, other than certain enumerated exceptions. 
Section 108(a) amends Section 4(f)(2)(A)(ii) to allow these 
companies to acquire consumer loan assets derived from or 
incidental to activities in which credit card banks and 
industrial loan companies are permitted to engage, without 
losing their exemption from treatment as bank holding companies 
under the Bank Holding Company Act.
    Section 108(b) amends Section 2(c)(2)(H) of the Bank 
Holding Company Act. Section 2(c)(2)(H) exempts industrial loan 
companies from the definition of ``bank'' for purposes of the 
Bank Holding Company Act. Under Section 2(c)(2)(H), the 
exemption is conditioned on an industrial loan company's not 
permitting an overdraft on behalf of an affiliate, or incurring 
an overdraft on behalf of an affiliate at its account at a 
Federal Reserve bank, unless such overdraft is the result of an 
inadvertent computer or accounting error. Section 108(b) amends 
Section 2(c)(2)(H) to allow industrial loan companies to incur 
the same overdrafts on behalf of affiliates as are permitted 
for banks described in Section 4(f)(1) of the Bank Holding 
Company Act (banks that, prior to the enactment of the 
Competitive Equality Banking Act of 1987, either made 
commercial loans or accepted insured deposits but did not do 
both).

Section 109. Reports on ongoing FTC study of consumer privacy issues

    Section 109 requires the FTC to submit interim reports on 
its study of consumer privacy issues.

Section 110. General Accounting Office study of economic impact on 
        community banks and other small financial institutions

    Section 110 requires the General Accounting Office (GAO) to 
study the projected impact of this Act on financial 
institutions with assets of $100 million or less.

  Subtitle B--Streamlining Supervision of Financial Holding Companies

Section 111. Streamlining financial holding company supervision

    Section 111 provides that the Board may require any bank 
holding company or subsidiary thereof to submit reports 
informing the Board of its financial condition, financial 
systems and statutory compliance. The Board is directed to use 
existing examination reports prepared by other regulators, 
publicly reported information and reports filed with other 
agencies to the fullest extent possible.
    The Board is authorized to examine each bank holding 
company and its subsidiaries. However, it may examine 
nondepository institution holding company subsidiaries only if 
the Board has reasonable cause to believe that the subsidiary 
is engaged in activities that pose a material risk to the 
depository institution or is not in compliance with certain 
statutory and regulatory restrictions. The Board is directed to 
use to the fullest extent possible examinations made by 
appropriate Federal and State regulators.
    If a bank holding company is not ``significantly engaged'' 
in non-banking activities (e.g., a shell holding company), the 
bill would authorize the Board to designate the appropriate 
bank regulatory agency of the lead depository institution 
subsidiary as the appropriate Federal banking agency for the 
bank holding company.
    The Board is required to defer:
          To the Securities and Exchange Commission (the 
        ``Commission'') to interpret all Federal securities 
        laws applicable to the activities, conduct, and 
        operations of registered brokers, dealers, investment 
        advisers, and investment companies;
          To the relevant State securities authorities to 
        interpret State securities laws relating to the 
        activities, conduct and operations of registered 
        brokers, dealers, and investment advisers; and
          To the relevant State insurance regulators to 
        interpret insurance laws relating to the activities, 
        conduct and operations of insurance companies and 
        insurance agents.
    The Board is not authorized to prescribe capital 
requirements for any nondepository subsidiary of a financial 
holding company. In developing, establishing, and assessing 
holding company capital or capital adequacy rules, guidelines, 
standards, or requirements, the Board also has been prohibited 
from taking into account the activities, operations, or 
investments of an affiliated investment company, unless the 
investment company is a bank holding company or a bank holding 
company owns more than 25 percent of the shares of the 
investment company (other than certain small investment 
companies). The Committee adopted this measure because 
investment companies are specially regulated entities that must 
meet diversification, liquidity, and other requirements 
specifically suited to their role as investment vehicles. 
Consequently, the Committee believed that it was important to 
ensure that the Board not indirectly regulate these entities 
through the imposition of capital requirements at the holding 
company level, except in the very limited circumstances noted 
above.

Section 112. Elimination of application requirement for financial 
        holding companies

    Section 112 amends Section 5(a) of the Bank Holding Company 
Act of1956 to provide that a declaration filed in accordance 
with Section 6(b)(1)(E) will satisfy the requirements of Section 5(a) 
with regard to the registration of a bank holding company, but not a 
requirement to file an application pursuant to Section 3. This 
eliminates duplicative filing requirements.

Section 113. Authority of State Insurance Regulator and Securities and 
        Exchange Commission

    Section 113 amends Section 5 of the Bank Holding Company 
Act of 1956 to prohibit the Board from requiring a broker-
dealer or insurance company that is a bank holding company to 
infuse funds into an insured depository subsidiary if the 
holding company's functional regulator, the Commission or State 
insurance regulator, determines in writing that ``such action 
would have a material adverse effect on the financial condition 
of the insurance company or the broker or dealer, as the case 
may be.'' If the Commission or State insurance regulator makes 
such a determination, the Board can order the holding company 
to divest the insured depository institution.

Section 114. Prudential safeguards

    Section 114 authorizes the Board to adopt rules governing 
the relationships between bank holding companies' depository 
institution subsidiaries and other subsidiaries if the Board 
finds that such rules:
          Are consistent with the public interest and Federal 
        law, and would avoid significant risks to the safety 
        and soundness of depository institutions;
          Enhance the financial stability of bank holding 
        companies;
          Avoid conflicts of interests or other abuses;
          Enhance the privacy of customers of depository 
        institutions; or
          Promote the principles of national treatment and 
        equality of competitive opportunity for nonbank 
        affiliates of domestic bank holding companies and 
        nonbank affiliates owned or controlled by foreign banks 
        operating in the U.S.

Section 115. Examination of investment companies

    Section 115 authorizes the Commission to be the sole 
Federal agency with authority to inspect and examine any 
registered investment company that is not a bank holding 
company.

Section 116. Limitation on rulemaking, prudential, supervisory and 
        enforcement authority of the Board

    Section 116 adds a new Section 10A to the Bank Holding 
Company Act. Section 10A is intended to protect regulated 
subsidiaries, which already are subject to extensive regulation 
at the hands of their functional regulators, from additional 
and duplicative regulation by the Board. Section 10A prohibits 
the Board from becoming involved in or interfering with the 
regular, day-to-day business and operations of regulated 
subsidiaries. Section 10A also prohibits the Board from taking 
any action under 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 service 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, soundness or stability of an affiliated 
depository institution or to the domestic or international 
payment system.
    The Committee intends the term ``material risk'' to mean a 
risk of serious harm to the financial safety, soundness or 
stability of the particular depository institution at issue or 
to the payment system. In considering whether it is not 
reasonably possible to effectively protect against risk through 
action directed at an affiliated depository institution or 
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, 
the Committee expects 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 the 
Committee expects the other agencies to coordinate with and 
accommodate requests for action by the Board.

Section 117. Interagency consultation

    Section 117 states the Committee's intent that the Board as 
the umbrella regulator, the appropriate Federal banking 
regulator, and the State insurance regulator as the functional 
regulator of insurance activities, should consult with each 
other and share examination reports and other information. It 
provides thatupon the request of a State insurance regulator, 
the Board may provide any information regarding the financial 
condition, risk management policies, and operations of any financial 
holding company that controls an insurance company regulated by that 
State insurance regulator, and vice versa. It further provides that 
upon the request of a State insurance regulator, the appropriate 
Federal banking agency may provide information about any transaction or 
relationship between a depository institution and affiliated insurance 
company regulated by that State insurance regulator, and vice versa. In 
addition, the appropriate Federal banking regulator is required to 
consult with the appropriate State insurance regulator before making 
determinations between a depository institution, wholesale financial 
institution, or financial holding company with an insurance company.

Section 118. Equivalent regulation and supervision

    Section 118 provides that the provisions of both Section 
5(c) of the Bank Holding Company Act of 1956 and Section 10A of 
the Bank Holding Company Act of 1956 also limit any authority 
that the Director of the Office of Thrift Supervision (OTS) and 
Comptroller of the Currency (OCC) have under any statute to 
require reports, make examinations, impose capital 
requirements, or take any other action with respect to bank 
holding companies and their nonbank subsidiaries. Section 5(c) 
of the Bank Holding Company Act of 1956 limits the authority of 
the Board to require reports of, make examinations of, and to 
impose capital requirements on bank holding companies and their 
nonbank subsidiaries. Section 10A of the Bank Holding Company 
Act of 1956 which limits any Board authority to take action 
with respect to bank holding companies and their nonbank 
subsidiaries. The OTS and the OCC are subject to the same 
standards and requirements as are applicable to the Board under 
these provisions.
    This section ensures that these agencies will not be able 
to assume and duplicate the function of being the general 
supervisor over regulated subsidiaries which has been 
appropriately left to their functional regulators. The 
Committee recognizes that, under the concept of functional 
regulation, the extent of the authority of these agencies to 
take actions under any statute against, or with respect to, 
regulated subsidiaries should not be any greater than that of 
the Board under Sections 111 and 116.

Section 119. Prohibition on FDIC assistance to affiliates and 
        subsidiaries

    Section 119 amends Section 11(a)(4)(B) of the Federal 
Deposit Insurance Act generally to prohibit the use of the Bank 
Insurance Fund and the Savings Association Insurance Fund to 
benefit any shareholder, subsidiary or nondepository affiliate.

               Subtitle C--Subsidiaries of National Banks

Section 121. Permissible activities for subsidiaries of National banks

    Section 121 provides that National bank subsidiaries can 
engage only in those activities permissible for National banks 
to engage in directly, those otherwise expressly authorized by 
statute, when or acting as an agent in activities that are 
financial in nature or incidental to financial activities under 
the Bank Holding Company Act; provided that the bank is well-
capitalized, well-managed, rated ``satisfactory'' for CRA, and 
approved for the activity by the OCC. Non-bank activities, such 
as underwriting insurance, must be conducted in holding company 
affiliates, and not through subsidiaries of the bank. There is 
a limited exclusion from the community needs requirements for 
newly acquired depository institutions.

Section 122. Misrepresentations regarding depository institution 
        liability for obligations of affiliates

    Section 122 makes it a crime for bank personnel to 
fraudulently represent that the bank will be liable for any 
obligation of a bank affiliate or subsidiary.

Section 123. Repeal of stock loan limit in Federal Reserve Act

    Section 123 repeals Section 11(m) of the Federal Reserve 
Act, relating to the Board's ability to fix the percentage of 
individual bank capital and surplus which may be represented by 
loans secured by stock or bond collateral made by member banks.

Subtitle D--Wholesale Financial Holding Companies; Wholesale Financial 
                              Institutions

Section 131. Wholesale financial holding companies established

    Section 131 establishes Wholesale Financial Holding 
Companies (WFHC), defining a WFHC as a FHC that is 
predominantly financial, controls one or more Wholesale 
Financial Institutions (WFIs), and is not affiliated with an 
insured bank or savings association. WFHCs are subject to 
supervision by the Board, which may adopt capital adequacy 
rules for them. Commercial activities of WFHCs are 
grandfathered, but may not be expanded throughmerger or 
consolidation.

Section 132. Authorization to release reports

    Section 132 authorizes the release of certain reports under 
the Federal Reserve Act, and includes the Commodity Futures 
Trading Commission under the definitions of the Right to 
Financial Privacy Act.

Section 133. Conforming amendments

    Section 133 makes conforming amendments to the Bank Holding 
Company Act and the Federal Deposit Insurance Act.

Section 136. Wholesale financial institutions

    Section 136 establishes National Wholesale Financial 
Institutions, which are chartered and regulated by the 
Comptroller of the Currency, and State Wholesale Financial 
Institutions which are chartered and regulated by the States. 
Wholesale Financial Institutions (WFIs) generally may not 
accept deposits of less than $100,000. Neither National nor 
State WFIs may have deposit insurance. This section also 
provides for the termination of deposit insurance under the 
Federal Deposit Insurance Act so that institutions may become 
WFIs.
    Capital requirements for all WFIs must be established by 
the Board, which may also impose limitations on transactions 
with affiliates, set special clearing balance requirements, and 
take other actions to protect the payments system and the 
discount window. The Board may also exempt WFIs from 
regulations applying to member banks in order to enhance safety 
and soundness.
    State WFIs have all of the powers and privileges of 
National banks, and thus of National WFIs. This includes 
branching rights and the preemption of State laws.
    WFIs are subject to prompt corrective action by the Board. 
All WFIs must be well capitalized and managed, and those 
failing these standards must take corrective action within 
prescribed time periods, or face divestiture.
    Subsection 136(a) subjects WFIs which are affiliated with 
insured depository institutions or own insured branches to CRA. 
This provision was included to ensure that insured financial 
institutions could not circumvent compliance with the H.R. 10 
by transferring assets and/or deposits to affiliated WFIs.
    Section 136(e) is intended to parallel the National Bank 
Receivership Act, which provides that the FDIC shall be 
appointed receiver only for insured depository institutions.

               Subtitle E--Preservation of FTC Authority

Section 141. Amendment to the Bank Holding Company Act of 1956 to 
        modify notification and post-approval waiting period for 
        Section 3 transactions

    Section 141 sets forth a statutory requirement that the 
Board immediately notify the Federal Trade Commission (FTC) 
about transactions by a bank holding company to merge with or 
acquire another bank holding company if the transaction 
involves the acquisition of nonbank assets.

Section 142. Interagency data sharing

    Section 142 provides that Federal banking regulators share 
with the Attorney General and the FTC any information that the 
antitrust agencies deem necessary for antitrust review of 
appropriate transactions.

Section 143. Clarification of status of subsidiaries and affiliates

    Section 143 provides that financial holding companies 
proposing to acquire a nonbank company engaged in financial 
activities must provide the antitrust agencies with prior 
notice of the transaction under the Hart-Scott-Rodino Act. It 
also clarifies that any person affiliated with a depository 
institution that is not itself a depository institution shall 
not be deemed a ``bank'' or ``savings association'' for 
purposes of the Federal Trade Commission Act or other law 
enforced by the FTC. The jurisdiction of the FTC over 
transactions involving the non-bank affiliates and subsidiaries 
of banks and savings associations under the FTC Act is affirmed 
by stating that such entities will not be treated as banks or 
savings associations.

Section 144. Annual GAO report

    Section 144 requires the Comptroller General of the U.S. to 
annually report to Congress on market concentration in the 
financial services industry and its impact on consumers. The 
annual report is to focus on affiliations and acquisitions 
involving depository institutions, depository institution 
holding companies, securities firms, and insurance companies.

Subtitle F--Applying the Principles of National Treatment and Equality 
   of Competitive Opportunity to Foreign Banks and Foreign Financial 
                              Institutions

Section 151. Applying the principles of national treatment and equality 
        of competitive opportunity to foreign banks that are financial 
        holding companies

    Section 151 amends Section 8(c) of the International 
Banking Act of 1978 (IBA) by adding a new paragraph (3) to 
permit termination of the financial grandfathering authority 
granted by the IBA and other statutes to foreign banks to 
engage in certain financial companies. The bill provides that 
foreign banks should no longer be entitled to grandfathered 
rights after the bank has filed a declaration under section 
6(b)(1)(E) of the BHCA or receives a Board determination under 
Section 10(d)(1) of the BHCA.

Section 152. Applying the principles of national treatment and equality 
        of competitive opportunity to foreign banks and foreign 
        financial institutions that are wholesale financial 
        institutions

    Section 152 amends Section 8A of the Federal Deposit 
Insurance Act by adding a new subsection (i) which allows an 
insured branch of a foreign bank to terminate voluntarily its 
deposit insurance under the same conditions and extent as 
insured State and National banks.

Section 153. Representative offices

    Section 153 would require prior approval by the Board for 
the establishment of representative offices by a foreign bank.

        Subtitle G--Federal Home Loan Bank System Modernization

Section 161. Short title

    Section 161 designates this subtitle as the ``Federal Home 
Loan Bank System Modernization Act of 1998''.

Section 162. Definitions

    Section 162 provides technical changes to definitions 
within the Federal Home Loan Bank Act (``FHLBA''). It also 
creates a new class of ``community financial institutions'' 
with assets less than $500 million.

Section 163. Savings association membership

    Section 163 makes Federal Home Loan Bank (``FHLBank'') 
membership voluntary for savings and loan associations. Under 
current law, membership is mandatory.

Section 164. Advances to members; collateral

    Section 164 expands the types of assets which can be 
pledged as collateral for advances for certain institutions. 
Currently, only mortgage loans, mortgage-backed securities, 
FHLBank deposits, and certain other real estate assets may be 
used as collateral for advances. Many smaller banks are unable 
to hold sufficient mortgage loans to pledge as collateral. The 
bill would permit banks with assets of $500 million or less, to 
pledge small business, agriculture, rural development, and 
community development loans as collateral, and use the advances 
to fund these four types of loans. The Federal Housing Finance 
Board (FHFB) would also be allowed to review, and if necessary 
for safety and soundness, increase certain collateral 
standards.

Section 165. Eligibility criteria

    Section 165 waives the ten percent residential mortgage 
asset test for FDIC-insured institutions with assets of $500 
million dollars or less. All institutions are currently 
required to have ten percent of their total assets in 
residential mortgage loans in order to become members of the 
system.

Section 166. Management of banks

    Section 166 transfers from the FHFB to the individual 
FHLBanks authority over a number of operational areas, 
including director and employee compensation, terms and 
conditions for advances, interest rates on advances, dividends, 
and forms for advance applications. The section also clarifies 
other powers and duties of the FHFB with regard to enforcement.

Section 167. Resolution Funding Corporation

    Section 167 changes the current annual $300 million funding 
formula for the Resolution Funding Corporation obligations of 
the FHLBanks to an percentage of annual net earnings.

                 Subtitle H--Direct Activities of Banks

Section 181. Authority of national banks to underwrite certain 
        municipal bonds

    Section 181 amends 12 U.S.C. 24(7) to expand the scope of 
securities activities permissible for a national bank to 
include municipal revenue bonds, limited obligation bonds, and 
other obligations that satisfy the requirements of Section 
142(b)(1) of the Internal Revenue Code issued by a State or 
political subdivision thereof.

                  Subtitle I--Deposit Insurance Funds

Section 186. Study of safety and soundness of funds

    Section 186 directs the Federal Deposit Insurance 
Corporation to study the following aspects of the Savings 
Association Insurance Fund and Bank Insurance Fund: their 
safety and soundness and adequacy of reserves, in light of the 
size of newly merged institutions and affiliations with other 
financial institutions; their geographic concentration levels; 
and their required plans for possible merger of the funds.

                  Subtitle J--Effective Date of Title

Section 191. Effective date

    Section 191 provides that Title I becomes effective 270 
days after enactment of the Act.

                    Title II--Functional Regulation

                    Subtitle A--Brokers and Dealers

Section 201. Definition of broker

    Section 201 amends the Securities and Exchange Act of 1934 
(1934 Act) definition of ``broker'' to narrow the blanket 
exemption for banks. A ``broker'' is defined as ``any person 
engaged in the business of effecting transactions in securities 
for the account of others''. The bill exempts a bank from 
classification as a ``broker'' only to the extent that the bank 
engages in activities that are enumerated in this section.

Section 202. Definition of dealer

    Section 202 amends the 1934 Act's blanket exemption for 
banks from the definition of ``dealer''. A ``dealer'' is 
defined as ``any person engaged in the business of buying or 
selling securities for such person's own account through a 
broker or otherwise''. The bill exempts a bank from 
classification as a ``dealer'' only to the extent that the bank 
engages in: transactions for investment purposes for accounts 
where the bank acts as a trustee or fiduciary; transactions in 
commercial paper, bank acceptances, commercial bills, qualified 
Canadian government obligations, and Brady bonds; the issuance 
or sale of asset backed securities to qualified investors; 
transactions in ``traditional banking products''; or buying or 
selling derivative instruments to qualified investors.

Section 203. Registration for sales of private securities offerings

    Section 203 creates a new limited qualification category of 
National Association of Securities Dealers, Inc. (NASD) 
registration for bank employees engaged in private securities 
offerings.

Section 204. Sales practices and complaint procedures

    Section 204 directs Federal banking agencies to establish, 
within six months of the bill's enactment, joint regulations, 
similar to the NASD Rules of Fair Practice, governing the 
securities sales practices of insured depository institutions 
and their affiliates. The appropriate Federal banking agencies 
are directed to develop joint procedures and facilities for 
handling customer complaints, and for making referrals to the 
Commission. These required rules must be developed in 
consultation with the Commission.

Section 205. Information sharing

    Section 205 requires Federal banking agencies, in 
consultation with the Commission, to establish record-keeping 
requirements for banks relying on the bank exceptions to 
``broker'' or ``dealer'' classification. These records must be 
made available to the Commission upon request.

Section 206. Definition and treatment of banking products

    Section 206 defines ``traditional banking product,'' for 
the purposes of the bank broker-dealer exemptions. The 
definition includes: deposit accounts; deposit instruments 
issued by a bank; bankers acceptances; letters of credit or 
loans issued by a bank; credit card debt accounts; loan 
participations sold to qualified investors; certain non-
security derivative instruments; and any new product not 
currently regulated as a security that the Board, after 
consultation with the Commission, determines to be a new 
banking product.
    With respect to new products, the Commission may object to 
the Board's determination, and may, within sixty days, appeal 
to the United States Court of Appeals for the District of 
Columbia Circuit. The court's consideration must affirm and 
enforce, or set aside, the regulation based upon whether the 
subject product or instrument is best regulated under Federal 
banking laws or Federal securities laws.

Section 207. Derivative instrument and qualified investor defined

    Section 207 defines ``derivative instrument''. This 
definition excludes any derivatives that are included within 
the definition of ``traditional banking product''. Section 207 
also defines ``qualified investor'' to include: anyregistered 
investment company; bank; savings and loan association; broker; dealer; 
insurance company; business development company; licensed small 
business investment company; State sponsored employee benefit plan or 
employee benefit plan under ERISA (other than an IRA); certain trusts; 
any market intermediary; any foreign bank or any foreign government; 
any corporation, company or individual who owns and invests at least 
$10 million; any government or political subdivision who owns and 
invests at least $50 million; and any multinational or supra-national 
entity; or any other person that the Commission determines to be a 
qualified investor.

Section 208. Government securities defined

    Section 208 amends the 1934 Act definition of ``government 
securities'' to include qualified Canadian government 
obligations for the purposes of Section 15C (which governs 
government securities brokers) as applied to a bank.

Section 209. Effective date

    Section 209 provides that the subtitle shall take effect 
270 days after enactment.

Section 210. Rule of construction

    Section 210 provides that the bill shall not be construed 
so as to limit the scope or applicability of the Commodity 
Exchange Act.

             Subtitle B--Bank Investment Company Activities

Section 211. Custody of investment company assets by affiliated banks

    Section 211(a) reorganizes Section 17(f) of the Investment 
Company Act of 1940 and adds a new paragraph 17(f)(6). New 
paragraph 17(f)(6) authorizes the Commission to adopt rules 
prescribing the conditions under which a bank or an affiliate 
of a bank, when either of them is affiliated with an investment 
company, may serve as custodian of that investment company.
    Section 211(b) similarly amends Section 26 of the 
Investment Company Act to add a new subsection 26(b). New 
subsection 26(b) authorizes the Commission to adopt rules 
prescribing the conditions under which a bank or an affiliate 
of a bank, when either of them is affiliated with a unit 
investment trust, may serve as custodian of that unit 
investment trust.
    Section 211(c) amends Section 36(a) of the Investment 
Company Act to add a new paragraph 36(a)(3). Section 36(a) 
currently authorizes the Commission to bring actions for breach 
of fiduciary duty against the officers, directors, investment 
advisers, and principal underwriters of an investment company. 
New paragraph 36(a)(3) provides the Commission with the 
authority to bring an action for breach of fiduciary duty 
against a custodian of an investment company as well.

Section 212. Lending to an affiliated investment company

    Section 212 amends Section 17(a) of the Investment Company 
Act to add a new paragraph 17(a)(4). Section 17(a) currently 
makes it unlawful for any affiliated person, promoter, or 
principal underwriter of an investment company to sell any 
security or other property to the investment company (subject 
to certain exceptions), to purchase any security or other 
property from the investment company (except securities of the 
investment company), or to borrow money or other property from 
the investment company (except as permitted by Section 21(b)). 
New paragraph 17(a)(4) makes it unlawful for any affiliated 
person, promoter, or principal underwriter of an investment 
company to lend money or other property to the investment 
company in contravention of such rules as the Commission may 
promulgate.

Section 213. Independent directors

    Section 213(a) amends Section 2(a)(19)(A) of the Investment 
Company Act. Section 2(a)(19)(A)(v) defines an ``interested 
person'' of an investment company to include any broker or 
dealer registered under the Securities Exchange Act and any 
affiliated person of such a broker or dealer. Section 213(a) 
replaces Section 2(a)(19)(A)(v) with new Section 2(a)(19)(A)(v) 
and (vi). New Section 2(a)(19)(A)(v) defines an ``interested 
person'' of an investment company as any person or affiliate of 
a person who during the preceding six-month period has executed 
any portfolio transactions for the investment company or any 
related investment company. New Section 2(a)(19)(A)(vi) defines 
an ``interested person'' of an investment company as any person 
or affiliate of a person who during the preceding six-month 
period has loaned money or other property to the investment 
company or any related investment company. Section 213(b) makes 
a conforming change to Section 2(a)(19)(B) of the Investment 
Company Act, which defines an ``interested person'' of an 
investment adviser or principal underwriter of an investment 
company.
    Section 213(c) amends Section 10(c) of the Investment 
Company Act. Section 10(c) generally provides that no 
investment company may have a majority of its board of 
directors consisting of officers, directors, or employees of 
any one bank. Section 213(c) extends this prohibition to the officers, 
directors, or employees of any one bank or bank holding company, 
together with the bank or bank holding company's affiliates and 
subsidiaries.
    Section 213(d) provides that the amendments made by Section 
213 shall take effect one year after the date of enactment.

Section 214. Additional SEC disclosure authority

    Section 214 amends Section 35(a) of the Investment Company 
Act. Section 35(a) currently makes it unlawful for any person 
issuing or selling any security of an investment company to 
represent or imply in any manner that such security or company 
is guaranteed, sponsored, recommended, or approved by the 
United States or any agency, instrumentality or officer 
thereof. New Section 35(a) further makes it unlawful for any 
person issuing or selling any security of an investment company 
to represent or imply in any manner that such security or 
company is insured by the FDIC or is guaranteed by or is an 
obligation of any bank.
    New Section 35(a) further requires any person issuing or 
selling the securities of an investment company that is advised 
by, or sold through, a bank to disclose prominently that an 
investment in the company is not insured by the FDIC or any 
other government agency. The Commission is given authority to 
issue rules prescribing the manner in which this disclosure 
will be provided.

Section 215. Definition of broker under the Investment Company Act of 
        1940

    Section 215 amends Section 2(a)(6) of the Investment 
Company Act. Section 2(a)(6) defines ``broker'' for purposes of 
the Investment Company Act and currently contains an exemption 
for banks. New Section 2(a)(6) defines ``broker'' as having the 
same meaning as in the Securities Exchange Act, except that for 
purposes of the Investment Company Act it does not include any 
person solely by reason of the fact that such person is an 
underwriter for one or more investment companies. The exemption 
for banks is deleted.

Section 216. Definition of dealer under the Investment Company Act of 
        1940

    Section 216 amends Section 2(a)(11) of the Investment 
Company Act. Section 2(a)(11) defines ``dealer'' for purposes 
of the Investment Company Act and currently contains an 
exemption for banks. New Section 2(a)(11) defines ``dealer'' as 
having the same meaning as in the Securities Exchange Act, 
except that for purposes of the Investment Company Act it does 
not include any insurance company or investment company. The 
exemption for banks is deleted.

Section 217. Removal of the exclusion from the definition of investment 
        adviser for banks that advise investment companies

    Section 217(a) amends Section 202(a)(11) of the Investment 
Advisers Act of 1940. Section 202(a)(11) defines ``investment 
adviser'' and currently exempts any bank or bank holding 
company that is not an investment company. New Section 
202(a)(11) removes this exemption for any bank or bank holding 
company to the extent it serves or acts as an investment 
adviser to an investment company. If such services or actions 
performed through a separately identifiable department or 
division of a bank, the department or division and not the bank 
itself shall be deemed to be the investment adviser.
    Section 217(b) adds a new Section 202(a)(26) to the 
Investment Advisers Act. New Section 202(a)(26) defines 
``separately identifiable department or division'' of a bank as 
a unit under the direct supervision of an officer or officers 
designated by the bank's directors as responsible for the day-
to-day conduct of the bank's investment adviser activities for 
one or more investment companies, including the supervision of 
all bank employees engaged in the performance of such 
activities. All records relating to investment adviser 
activities must be separately maintained in or extractable from 
the unit's own facilities or the facilities of the bank so as 
to permit examination and enforcement by the Commission.

Section 218. Definition of broker under the Investment Advisers Act of 
        1940

    Section 218 amends Section 202(a)(3) of the Investment 
Advisers Act. Section 202(a)(3) defines ``broker'' for purposes 
of the Investment Advisers Act and currently contains a blanket 
exemption for banks. New Section 202(a)(3) defines ``broker'' 
as having the same meaning as in the Securities Exchange Act. 
The blanket exemption for banks is deleted.

Section 219. Definition of dealer under the Investment Advisers Act of 
        1940

    Section 219 amends Section 202(a)(7) of the Investment 
Advisers Act. Section 202(a)(7) defines ``dealer'' for purposes 
of the Investment Advisers Act and currently contains a blanket 
exemption for banks. New Section 202(a)(7) defines ``dealer'' 
as having the same meaning as in the Securities Exchange Act, 
except that for purposes of the Investment Advisers Act it does 
not include any insurance company or investment company. The 
blanket exemption for banks is deleted.

Section 220. Interagency consultation

    Section 220 amends the Investment Advisers Act to add a new 
Section 210A. New Section 210A authorizes the Commission to 
receive from a Federal banking agency the results of any 
examination, reports, records, or other information to which 
such agency may have access regarding the investment advisory 
activities of any bank holding company, bank, or separately 
identifiable department or division of a bank, that is 
registered as an investment adviser or that has a subsidiary or 
separately identifiable department or division registered as an 
investment adviser. New Section 210A similarly authorizes the 
Federal banking agencies to receive from the Commission the 
results of any examination, reports, records, or other 
information regarding the investment advisory activities of any 
bank holding company, bank, or separately identifiable 
department or division of a bank, that is registered as an 
investment adviser. Section 210A does not limit the authority 
of any Federal banking agency with respect to such bank holding 
company, bank, or separately identifiable department or 
division under any provision of law.

Section 221. Treatment of bank common trust funds

    Section 221(a) amends Section 3(a)(2) of the Securities Act 
of 1933. Section 3(a)(2) currently exempts from the application 
of the Securities Act any interest or participation in any 
common trust fund or similar fund maintained by a bank 
exclusively for the collective investment and reinvestment of 
assets contributed by the bank in its capacity as trustee, 
executor, administrator, or guardian. As amended, Section 
3(a)(2) exempts any interest or participation in any common 
trust fund or similar fund that is excluded from the definition 
of ``investment company'' under new Section 3(c)(3) of the 
Investment Company Act.
    Section 221(b) similarly amends Section 3(a)(12)(A)(iii) of 
the Securities Exchange Act of 1934. Section 3(a)(12)(A)(iii) 
currently exempts from the application of the Securities 
Exchange Act any interest or participation in any common trust 
fund or similar fund maintained by a bank exclusively for the 
collective investment and reinvestment of assets contributed by 
the bank in its capacity as trustee, executor, administrator, 
or guardian. As amended, Section 3(a)(12)(A)(iii) exempts any 
interest or participation in any common trust fund or similar 
fund that is excluded from the definition of ``investment 
company'' under new Section 3(c)(3) of the Investment Company 
Act.
    Section 221(c) amends Section 3(c)(3) of the Investment 
Company Act. Section 3(c)(3) currently exempts from the 
definition of ``investment company'' any interest or 
participation in any common trust fund or similar fund 
maintained by a bank exclusively for the collective investment 
and reinvestment of assets contributed by the bank in its 
capacity as trustee, executor, administrator, or guardian. As 
amended, Section 3(c)(3) exempts such a bank common trust fund 
only if (i) the fund is employed by the bank solely as an aid 
to the administration of trusts, estates, or other fiduciary 
accounts; (ii) interests in the fund are not advertised or 
offered for sale to the general public, except in connection 
with the ordinary advertising of the bank's fiduciary services; 
and (iii) fees and expenses charged by the fund are in keeping 
with fiduciary principles established under applicable Federal 
or State law.

Section 222. Investment advisers prohibited from having controlling 
        interest in registered investment company

    Section 222 amends Section 15 of the Investment Company Act 
to add a new subsection 15(g). Section 15 regulates advisory 
contracts between investment companies and their investment 
advisers. New subsection 15(g) requires that if an investment 
adviser, or an affiliated person of that adviser, holds a 
controlling interest in an investment company in a trustee or 
fiduciary capacity, he or she must transfer the power to vote 
the shares of the investment company. If the adviser or an 
affiliate holds the shares in a trustee or fiduciary capacity 
under an employee benefit plan subject to the Employee 
Retirement Income Security Act of 1974, he or she must transfer 
the power to vote the shares of the investment company to 
another plan fiduciary who is not affiliated with the adviser 
or an affiliate. If the adviser or an affiliate holds the 
shares in a trustee or fiduciary capacity under any other 
circumstance, he or she must either (i) transfer the power to 
vote the shares of the investment company to the beneficial 
owners, to another fiduciary who is not affiliated with the 
adviser or an affiliate, or to any person authorized to receive 
statements and information with respect to the trust who is not 
affiliated with the adviser or an affiliate; (ii) vote the 
shares of the investment company in the same proportion as 
shares held by all other shareholders of the investment 
company; or (iii) vote the shares of the investment company as 
otherwise permitted by such rules as the Commission may 
prescribe. Acting in accordance with these provisions is deemed 
not to breach a fiduciary duty under State or Federal law. 
These provisions do not apply if the investment company 
consists solely of assets held in a trustee or fiduciary 
capacity.

Section 223. Conforming change in definition

    Section 223 amends Section 2(a)(5) of the Investment 
Company Act. Section 2(a)(5) defines ``bank'' for purposes of 
the Investment Company Act to include any banking institution 
organized under the laws of the United States. As amended, 
Section 2(a)(5) defines ``bank'' to include any depository 
institution as defined in Section 3 of the Federal Deposit 
Insurance Act and any branch or agency of a foreign bank as 
defined in Section 1(b) of the International Banking Act of 
1978.

Section 224. Conforming amendment

    Section 224 amends Section 202 of the Investment Advisers 
Act to add a new subsection 202(c). New subsection 202(c) 
requires the Commission, whenever it is engaged in rulemaking 
or is required to consider or determine whether an action is 
necessary or appropriate in the public interest, under the 
Investment Advisers Act, to consider the promotion of 
efficiency, competition, and capital formation as well as the 
protection of investors. Similar changes were made to the 
Securities Act, the Securities Exchange Act, and the Investment 
Company Act by the National Securities Markets Improvement Act 
of 1996.

Section 225. Effective date

    Section 225 provides that this subtitle shall take effect 
90 days after the date of enactment.

     Subtitle C--Securities and Exchange Commission Supervision of 
                   Investment Bank Holding Companies

Section 231. Supervision of investment bank holding companies by the 
        Securities and Exchange Commission

    Section 231 establishes a supervised investment bank 
holding company (``IBHC'), as an alternative to a financial 
holding company. An IBHC must register with, and is supervised 
by, the Commission. This alternative is made available to any 
company that controls two or more broker-dealers and is not 
affiliated with a WFI, an insured bank or savings association, 
or certain foreign banks and companies. An IBHC may affiliate 
with uninsured trust companies, credit card banks, Edge Act 
companies, CEBA institutions, and foreign branches of National 
banks. This section outlines registration, discontinuation, and 
record keeping requirements for IBHCs. This section provides 
the Commission with examination authority and the power to 
regulate the IBHC's capital if deemed necessary. The Commission 
is required to defer to the appropriate regulator regarding the 
interpretation of banking or insurance law with respect to the 
banking and insurance activities of the IBHC. Finally, the 
Commission is granted ``backup'' supervisory authority over 
certain WFHCs to ensure that the WFHC and its affiliates comply 
with Federal securities law.

                           Subtitle D--Study

Section 241. Study of methods to inform investors and consumers of 
        uninsured products

    Section 241 mandates a GAO study of the efficacy, costs, 
and benefits of requiring insured depository institutions to 
inform consumers through the use of a logo or seal that a 
securities or insurance product is not FDIC-insured.

Section 242. Study of limitation on fees associated with acquiring 
        financial products

    Section 242 requires the GAO to undertake a study of the 
efficacy and benefits of uniformly limiting costs associated 
with the purchase of a financial product.

                          Title III--Insurance

               Subtitle A--State Regulation of Insurance

Section 301. State regulation of the business of insurance

    Section 301 states that the McCarran-Ferguson Act (15 
U.S.C. Sec. 1011 et seq.) remains the law of the United States.

Section 302. Mandatory insurance licensing requirements

    Section 302 provides that, subject to Section 104, any 
person providing insurance in a State as principal or agent 
must be licensed as required by the appropriate insurance 
regulator of such State.

Section 303. Functional regulation of insurance

    Section 303 provides that, subject to Section 104, the 
insurance sales activities of any person or entity shall be 
functionally regulated by the States. Section 104 establishes a 
safe harbor for State regulation of insurance sales, as well as 
a method for determining whether State regulation falling 
outside the safe harbor would be pre-empted.

Section 304. Insurance underwriting in National banks

    Section 304(a) prohibits National banks and their 
subsidiaries from providing insurance in a State as principal. 
This prohibition does not apply to ``authorized products.'' 
Under Section 304(b), a product is ``authorized'' if, as of 
January 1, 1997, National banks were lawfully providing it as 
principal or the Comptroller of the Currency had determined in 
writing that National banks may provide it as principal; no 
court of relevant jurisdiction had, by final judgment, 
overturned a determination by the Comptroller that National 
banks may provide it as principal; and the product is not title 
insurance or an annuity contract subject to tax treatment under 
Section 72 of the Internal Revenue Code.
    Section 304(c) defines ``insurance'' for purposes of 
Section 304. Under Section 304(c)(1), ``insurance'' means any 
product regulated as insurance as of January 1, 1997 in the 
State in which the product is provided. Under Section 
304(c)(2), insurance means any product first offered after 
January 1, 1997 which a State insurance regulator determines 
shall be regulated as insurance in the State in which the 
product is provided because the product insures, guarantees, or 
indemnifies against loss of life, loss of health, or loss 
through damage to or destruction of property. Products which 
may not be a product or service of a bank that is a deposit 
product are (i) a loan, discount, letter of credit, or other 
extension of credit; (ii) a trust or other fiduciary service; 
(iii) a qualified financial contract as defined in Section 
11(e)(8)(D)(I) of the Federal Deposit Insurance Act; or (iv) a 
financial guaranty; except a bank product does not include a 
product that has an insurance component such that if offered by 
a bank as principal the product would be treated as a life 
insurance contract under Section 7702 of the Internal Revenue 
Code or losses incurred with respect to the product would 
qualify for treatment under Section 832(b)(5) of the Internal 
Revenue Code if the bank were subject to tax as an insurance 
company under Section 832 of the Internal Revenue Code. The 
term ``financial guaranty'' in Section 304(c)(2)(B)(v) is not 
intended to exclude surety bonds from the definition of 
insurance. Under Section 304(c)(3), insurance means any annuity 
contract on which the income is subject to tax under Section 72 
of the Internal Revenue Code.

Section 305. Title insurance activities of National banks and their 
        affiliates

    Section 305(a) prohibits National banks and their 
subsidiaries from engaging in any activity involving the 
underwriting of title insurance, other than title insurance 
underwriting activities in which they were lawfully engaged 
before the date of enactment. Section 305(b) provides that, in 
the case of a National bank that has an affiliate which 
provides insurance as principal, neither the bank nor a 
subsidiary of the bank may engage in any activity involving the 
underwriting of title insurance. Section 305(c) provides that, 
in the case of a National bank that has a subsidiary that 
provides insurance as principal and no affiliate that provides 
insurance as principal, the bank may not engage in any activity 
involving the underwriting of title insurance.

Section 306. Expedited and equalized dispute resolution for financial 
        regulators

    Section 306(a) provides that in the event of a regulatory 
conflict between a State insurance regulator and a Federal 
regulator as to whether a product is insurance as defined in 
Section 304(c), or as to whether a State statute, regulation, 
order, or interpretation regarding insurance sales or 
solicitation activity is preempted under Federal law, either 
regulator may seek expedited judicial review. Either regulator 
may file a petition for review in the U.S. Court of Appeals for 
the District of Columbia Circuit or in the U.S. Court of 
Appeals for the circuit in which the State is located.
    Under Section 306(b), the relevant U.S. Court of Appeals 
must complete all action on the petition, including rendering a 
judgment, within 60 days from the filing of the petition unless 
all parties agree to an extension. Under Section 306(c), any 
request for certiorari to the U.S. Supreme Court must be filed 
as soon as practicable after the judgment of the U.S. Court of 
Appeals is issued. Section 306(d) provides that no action 
challenging an order, ruling, determination, or other action of 
a Federal or State regulator may be brought under these 
procedures after the later of (i) 12-months after the first 
public notice of the order, ruling, or determination in its 
final form, or (ii) 6-months period after the order, ruling, or 
determination takes effect.
    Section 306(e) requires the court to base its decision on 
an action filed under this section upon its review on the 
merits of all questions presented under Federal and State law. 
The court must review the nature of the product or activity and 
the history and purpose of its regulation under Federal and 
State law. The court may not accord unequal deference to either 
regulator.

Section 307. Consumer protection regulations

    Section 307 adds a new Section 45 to the Federal Deposit 
Insurance Act. New Section 45(a) directs the Federal banking 
regulators, within one year ofthe date of enactment of this 
Act, to prescribe consumer protection regulations that the regulators 
jointly determine to be appropriate. The regulations will apply to 
retail sales practices, solicitations, advertising, or offers of any 
insurance product by any insured depository institution or wholesale 
financial institution or any person engaged in such activities at an 
office of, or on behalf of, such an institution. The regulations must 
be consistent with the requirements of this Act and provide such 
additional consumer protections as the regulators determine to be 
appropriate. The regulations must apply to subsidiaries of insured 
depository institutions as deemed appropriate by the regulators to 
protect consumers. In prescribing the regulations, the Federal banking 
regulators must consult with the State insurance regulators, as 
appropriate.
    New Section 45(b) requires the regulations prescribed 
pursuant to new Section 45(a) to include anti-coercion rules 
applicable to the sale of insurance products. The anti-coercion 
rules must prohibit an insured depository institution from 
engaging in any practice that would lead a consumer to believe 
that an extension of credit, in violation of Section 106(b) of 
the Bank Holding Company Act Amendments of 1970, is conditional 
upon (i) the purchase of an insurance product from the 
institution, its affiliates or subsidiaries; or (ii) an 
agreement by the consumer not to obtain, or a prohibition on 
the consumer from obtaining, an insurance product from an 
unaffiliated entity.
    New Section 45(c) requires the regulations to include 
certain provisions relating to disclosures and advertising in 
connection with the initial purchase of an insurance product. 
The regulations must require oral and written disclosure, 
before completion of the initial sale, that the product is not 
insured by the FDIC, the U.S. government, nor the insured 
depository institution; and in the case of an insurance product 
such as a variable annuity that involves an investment risk, 
that there is an investment risk associated with the product, 
including possible loss of value. Oral and written disclosure 
must be made before completion of the initial sale and at the 
time of application for an extension of credit that approval of 
an extension of credit may not be conditioned on the purchase 
of an insurance product from the lending institution or its 
affiliates or subsidiaries; nor on an agreement by the consumer 
not to obtain, or a prohibition on the consumer from obtaining, 
an insurance product from an unaffiliated entity.
    The regulations must encourage the use of conspicuous, 
simple, direct, and readily understandable disclosure. Examples 
of such disclosure include: NOT FDIC-INSURED; NOT GUARANTEED BY 
THE BANK; MAY GO DOWN IN VALUE. The regulations must require an 
insured depository institution to obtain an acknowledgment by 
the consumer of the receipt of the required disclosure at the 
time the consumer receives the disclosure or at the time of the 
consumer's initial purchase of the product. The regulations 
shall make necessary adjustments for purchases in person, by 
telephone, or by electronic media to provide for appropriate 
and complete disclosure and acknowledgment.
    The regulations must prohibit any practice or advertising 
at any office of, or on behalf of, an insured depository 
institution or its subsidiary which could mislead any person or 
otherwise cause a reasonable person to reach an erroneous 
belief with respect to the uninsured nature of any insurance 
product sold or offered for sale, or, in the case of an 
insurance product such as a variable annuity which involves an 
investment risk, the investment risk associated with such 
product.
    New Section 45(d) provides that the regulations must 
include such provisions as the Federal banking regulators deem 
appropriate to ensure that the routine acceptance of deposits 
is, to the extent practicable, kept physically segregated from 
insurance product activity. The regulations must clearly 
delineate the setting in which, and the circumstances under 
which, transactions involving insurance products should be 
conducted in a location physically segregated from an area 
where retail deposits are routinely accepted. The regulations 
must include standards that permit a person accepting deposits 
from the public in an area where such transactions are 
routinely conducted to receive a one-time nominal fee of a 
fixed dollar amount for each referral of a customer seeking to 
purchase an insurance product to a qualified person who sells 
such product. The fee may not depend on whether the referral 
results in a transaction. The regulations also must prohibit 
any person from selling or offering for sale an insurance 
product in any part of any office of an insured depository 
institution, or on the institution's behalf, unless the person 
is appropriately qualified and licensed.
    New Section 45(e) prohibits discrimination against victims 
of domestic violence and providers of services to victims of 
domestic violence as applicants for, or as insureds under, any 
insurance product sold or offered for sale, as principal, 
agent, or broker, by, at, or on behalf of, an insured 
depository institution. ``Domestic violence'' is defined as 
certain actions by a current or former family member, household 
member, intimate partner, or caretaker. The actions are: (i) 
attempting to cause, causing or threatening physical 
harm,severe emotional distress, psychological trauma, rape or sexual 
assault; (ii) engaging in a course of conduct or repeatedly committing 
acts, including following a person without proper authority, under 
circumstances that place the person in reasonable fear of bodily injury 
or physical harm; (iii) subjecting a person to false imprisonment; and 
(iv) attempting to cause, or causing damage to, property so as to 
intimidate or attempt to control the behavior of another person. New 
Section 45(e) expresses the sense of the Congress that, within 30 
months after the date of enactment, States should enact prohibitions 
against discrimination against victims of domestic violence and 
providers of services to victims of domestic violence as applicants 
for, or as insureds under, any insurance product.
    New Section 45(f) requires the Federal banking agencies to 
jointly establish a consumer complaint mechanism for receiving 
and expeditiously addressing consumer complaints alleging 
violations of the regulations issued under this section. The 
Federal banking agencies must establish a group within each 
agency to receive such complaints; develop investigative 
procedures; develop procedures for informing consumers of their 
rights; and develop procedures for addressing complaints and 
recovering losses.
    New Section 45(g) provides that no provision of new Section 
45 shall be construed as affecting (i) any authority of the 
Commission, any self-regulatory organization, the Municipal 
Securities Rulemaking Board, or the Secretary of the Treasury 
under any Federal securities law; or (ii) any authority of any 
State insurance commissioner or other State authority under any 
State law. New Section 45(g) further provides that regulations 
promulgated under this section will not apply in a State which 
has in effect statutes, regulations, orders, or interpretations 
that are inconsistent with or contrary to the regulations. 
However, a provision of the regulations prescribed under this 
section shall supersede the comparable provision of State law 
if the Federal banking agencies jointly determine that the 
protection afforded to consumers by such provision is greater 
than that provided by the State law.
    New Section 45(h) provides that, for purposes of this 
section, the term ``insurance product'' includes an annuity 
contract subject to tax treatment under Section 72 of the 
Internal Revenue Code.

Section 308. Certain State affiliation laws preempted for insurance 
        companies and affiliates

    Section 308 provides that, except as provided in Section 
104(a)(2), no State may prevent or significantly interfere with 
the ability of an insurer, or any affiliate of an insurer, to 
become a financial holding company or to acquire control of an 
insured depository institution. Section 308 further provides 
that no State may limit the amount of an insurer's assets that 
may be invested in the voting securities of insured depository 
institution or a company that controls such an institution, 
except the State of the insurer's domicile may limit the 
investment to 5 percent of the insurers assets. Section 308 
further provides that no State other than the State of the 
insurer's domicile may prevent, significantly interfere with, 
review, approve, or disapprove of an insurer's plan of 
reorganization from mutual form to stock form.

   Subtitle B--National Association of Registered Agents and Brokers

Section 321. State flexibility in multistate licensing reforms

    Section 321 provides that Subtitle B will take effect 
unless three years after the date of enactment of the Act a 
majority of the States have enacted uniform laws and 
regulations governing licensing insurance agent and agencies, 
or have enacted reciprocity laws and regulations governing the 
licensing of nonresident agents and agencies.

Section 322. National Association of Registered Agents and Brokers

    Section 322 establishes the National Association of 
Registered Agents and Brokers (NARAB), a nonprofit corporation 
that is not an agency of the United States.

Section 323. Purpose

    Section 323 states that NARAB's purpose is to provide a 
mechanism through which uniform licensing, appointment, 
continuing education, and other qualifications and conditions 
can be adopted and applied on a multistate basis. NARAB must 
preserve the rights of States to license, supervise, and 
discipline insurance producers and to prescribe and enforce 
laws and regulations relating to insurance-related consumer 
protection and unfair trade practices.

Section 324. Relationship to the Federal Government

    Section 324 states that NARAB will be subject to the 
supervision and oversight of the National Association of 
Insurance Commissioners and is not an agency or instrumentality 
of the United States Government.

Section 325. Membership

    Section 325 provides that any State-licensed insurance 
producer is eligible to be a member of NARAB.

Section 326. Board of directors

    Section 326 states that NARAB will have a board of 
directors composed of 7 members serving three-year terms 
appointed by the National Association of Insurance 
Commissioners. At least four of the board members must have 
significant experience with the regulation of commercial lines 
of insurance in at least one of the 20 States with the greatest 
total dollar amount of commercial-lines insurance in the United 
States.

Section 327. Officers

    Section 327 establishes the officers of NARAB: Board 
Chairperson (who must be a member of the National Association 
of Insurance Commissioners), Board Vice Chairperson, President, 
Secretary, and Treasurer. It requires each officer of the Board 
and NARAB to be elected for a three-year term.

Section 328. Bylaws, rules and disciplinary actions

    Section 328 describes the procedure for adoption and 
amendment of the bylaws and rules and details determinations as 
to whether any membership should be denied, suspended, revoked, 
or not renewed.

Section 329. Assessments

    Section 329 authorizes NARAB to assess application and 
membership fees necessary to cover the costs of its operations 
provided that it does not discriminate against smaller 
insurance producers. Section 329 also authorizes the National 
Association of Insurance Commissioners (NAIC) to assess the 
NARAB for any costs it incurs under Subtitle B.

Section 330. Functions of the NAIC

    Section 330 authorizes the National Association of 
Insurance Commissioners to examine and inspect NARAB and 
require NARAB to file reports appropriate to the public 
interest. It requires NARAB to annually report to the NAIC 
about its business, financial condition, and related matters. 
NAIC will transmit the report to Congress and the President. It 
further provides that rulemaking determinations made by NAIC 
pursuant to Section 328 must be made after offering a notice 
and comment period and an opportunity for a hearing.

Section 331. Liability of the association and the directors, officers, 
        and employees of the association

    Section 331 states that NARAB is not to be deemed an 
insurer or insurance producer under State law. It provides that 
NARAB and its officers, directors, and employees are immune 
from liability for any action taken or omitted in good faith 
under or in connection with any matter in Subtitle B.

Section 332. Elimination of NAIC oversight

    Section 332 contains provisions for establishing NARAB 
without National Association of Insurance Commissioners 
oversight under certain circumstances.

Section 333. Relationship to State law

    Section 333 describes circumstances under which State laws 
and actions purporting to regulate insurance producers will be 
preempted.

Section 334. Coordination with other regulators

    Section 334 authorizes NARAB to issue uniform insurance 
producer applications and renewal applications; establish a 
central clearinghouse through which NARAB members may apply for 
new or renewal of licenses; and establish a national database 
of regulatory information on insurance producers.

Section 335. Judicial review

    Section 335 sets standards of review, requires an aggrieved 
individual to exhaust all available administrative remedies 
before NARAB and the NAIC before seeking judicial review of a 
NARAB decision, and identifies the courts with appropriate 
jurisdiction over litigation involving NARAB.

Section 336. Definitions

    Section 336 defines ``insurance,'' ``insurance producer,'' 
``State law,'' ``State'' and ``home state.''

          Title IV--Unitary Savings and Loan Holding Companies

Section 401. Prevention of creation of new S&L holding companies with 
        commercial affiliates

    Section 401 prohibits any company that engages, directly or 
through a subsidiary, in commercial activities from directly, 
or indirectly, acquiringcontrol of a savings association after 
September 3, 1998. Section 401 also prohibits any savings and loan 
holding company from engaging directly, or through a subsidiary, in 
commercial activities. Certain existing unitary savings and loan 
holding companies are exempted from these restrictions. In particular, 
these prohibitions do not apply to a unitary savings and loan holding 
company in existence on September 3, 1998, or that was formed pursuant 
to applications pending before the OTS on or before that date, provided 
that the company continues to meet the requirements to be a unitary 
savings and loan holding company under 12 U.S.C. 1467a(c)(3) and 
controls at least one of the savings associations that the company 
controlled (or had applied to control) as of September 3, 1998, or the 
successor to such a savings association (a ``grandfathered unitary 
savings and loan holding company'').
    The purpose of Section 401 is to prohibit any company 
directly or indirectly engaged in commercial activities (other 
than a grandfathered unitary savings and loan holding company) 
from acquiring control of a savings association after September 
3, 1998, by or through any means including through any forward 
or reverse merger, consolidation, or other type of business 
combination. Section 401 authorizes the OTS to issue such 
regulations, interpretations, and orders as may be necessary to 
prevent evasions of this prohibition, and the Committee expects 
the OTS to take all actions necessary to carry out the purpose 
of this section, which is to prohibit firms engaged in 
commercial activities from acquiring control of any savings 
associations.
    In making such determinations or taking other actions under 
Section 401, the OTS should use the definition of ``control'' 
set forth in Section 10 of the Home Owners' Loan Act.

Section 402. Optional conversion of Federal savings associations to 
        National banks

    Section 402 permits Federal savings associations, or 
branches thereof in any State, to convert to National banks 
with the approval of the Comptroller of the Currency provided 
that they meet all of the requirements for a National bank. The 
new banks would have to apply to the FDIC for deposit 
insurance. Statutory requirements for any payment of exit fees 
by any insured depository institution leaving a deposit 
insurance fund would not be affected by this section.

Section 403. Retention of ``Federal'' in name of converted Federal 
        savings association

    Section 403 would permit Federal savings associations that 
convert to National or State bank charters to keep the word 
``Federal'' in their names. For example, if First Federal 
Savings Bank converts from a Federal savings association to a 
State bank charter, it may retain its former name.

                 Title V--Financial Information Privacy

Section 501. Financial information privacy

    Section 501 makes it unlawful to obtain or attempt to 
obtain, or cause to be disclosed, or attempt to cause to be 
disclosed, customer information of a financial institution 
through fraudulent or deceptive means; such as by 
misrepresenting the identity of the person requesting the 
information or otherwise tricking an institution or customer 
into making unwitting disclosures of such information. This 
section also makes it unlawful to request that customer 
financial information be obtained knowing, or consciously 
avoiding knowing, that the information will be collected in a 
fraudulent or deceptive manner. This section exempts from 
coverage law enforcement agencies that acquire customer 
information from a financial institution in carrying out their 
official duties and financial institutions engaged in efforts 
to combat fraud such as tests of security systems for 
maintaining the confidentiality of customer information and 
investigations of allegations of employee misconduct.

Section 502. Report to Congress on financial privacy

    Section 502 requires the GAO to report to Congress within 
eighteen months of enactment on the efficacy and adequacy of 
this provision and recommend whether additional legislation or 
regulations are needed.

                        Title VI--Miscellaneous

Section 601. Grand jury proceedings

    Section 601 permits U.S. Attorneys offices to seek a court 
order to provide financial institution regulatory agencies with 
access to grand jury material giving State regulatory agencies 
parity with Federal regulatory agencies.

Section 602. Sense of the Committee on Banking, Housing, and Urban 
        Affairs of the Senate

    Section 602 expresses the Sense of the Committee that 
legislation should be enacted to reduce the tax burden on 
community banks by expanding the availability of the Subchapter 
S tax election.

Section 603. Investments in government sponsored enterprises

    Section 603 amends the Federal Deposit Insurance Act to 
allow a holding corporation (formerly a government sponsored 
enterprise, ``GSE'') that was privatized by Federal legislation 
to enter into an affiliation arrangement with an insured 
depository institution provided that the Secretary of the 
Treasury approves the affiliation and determines that the 
successful wind-down of the GSE will not be affected and that 
the GSE will otherwise be separate from the arrangement. The 
Secretary of the Treasury is authorized to impose any 
conditions on the affiliation that the Secretary deems 
appropriate.

Section 604. Repeal of savings bank provisions in the Bank Holding 
        Company Act of 1956

    Section 604 repeals section 3(f) of the Bank Holding 
Company Act to conform the regulation of savings bank life 
insurance with the regulations governing all other financial 
institutions in a bank holding company structure.

                      REGULATORY IMPACT STATEMENT

    In accordance with paragraph 11(g), rule XXVI of the 
Standing Rules of the Senate, the Committee makes the following 
statement regarding the regulatory impact of the bill.
    The bill establishes a comprehensive framework to permit 
affiliations between banks, securities firms and insurance 
companies. It would modernize and reform outdated laws 
governing the financial system. The new framework promotes 
competition, enhances consumer choice, safeguards the Federal 
deposit insurance system, and protects the safety and soundness 
of insured depository institutions and the stability of the 
payment system.
    The bill reduces substantially the current regulatory 
burdens placed on financial intermediaries--banks, broker-
dealers, insurance and securities firms--in several ways. 
First, the bill incorporates the principle of functional 
regulation. By clearly allocating regulatory responsibility to 
Federal and State financial regulators, the proposed system of 
functional regulation promotes efficiency, eliminates 
regulatory overlap and duplication, and promotes increased 
investor, depositor and taxpayer protections.
    Second, the bill streamlines the regulatory process by 
requiring coordination and information-sharing between the 
various Federal and State regulators. The bill seeks to provide 
regulation of financial holding companies that is sufficient to 
protect the safety and soundness of the financial system and 
the integrity of the Federal Deposit insurance funds without 
imposing unnecessary regulatory burdens.
    Third, the bill eliminates many notification and approval 
procedures mandated under current law. Because the bill seeks 
to streamline and update the financial regulatory framework, 
the Committee believes that this legislation will have a 
favorable regulatory impact.

               CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

    Senate rule XXVI, section 11(b) of the Standing Rules of 
the Senate, and Section 403 of the Congressional Budget 
Impoundment and Control Act, require that each committee report 
on a bill containing a statement estimating the cost of the 
proposed legislation, which was prepared by the Congressional 
Budget Office. This statement has been requested from the 
Congressional Budget Office, but it was not available at the 
date of filing this report. When the information is made 
available to the Committee, it will be placed in the 
Congressional Record.

                        CHANGES IN EXISTING LAW

    In the opinion of the Committee, it is necessary to 
dispense with the requirement of section 12 of rule XXVI of the 
Standing Rules of the Senate in order to expedite the business 
of the Senate.

                ADDITIONAL VIEWS OF SENATOR CONNIE MACK

    I am committed to moving this bill forward, however, I 
still have concerns about the language which was included in 
the managers' amendment regarding the application of the 
Community Reinvestment Act (CRA) to Wholesale Financial 
Institutions (referred to as ``woofies'') and the ability of 
the Federal Reserve to impose limitations on new activities of 
financial services holding companies. I view these provisions 
as expanding CRA.
    I do not support the Community Reinvestment Act as it has 
evolved, and I oppose subjecting any industry to these 
requirements. In fact, I would prefer to see the entire 
Community Reinvestment Act repealed. Because of CRA, banks are 
now often forced to make unsound and risky loans in 
economically disadvantaged areas. If they do not make these 
high risk investments, they are accused of discrimination. I 
strongly believe that most of these allegations are false.
    In contrast to banks, WFIs will not be permitted to accept 
retail deposits under $100,000, and will not have federal 
deposit insurance. When the Community Reinvestment Act was 
enacted, CRA was the price banks were to pay for federal 
deposit insurance. Why should this price be imposed on an 
entity which can not qualify for deposit insurance?
    In this legislation, the CRA provision is one of the most 
difficult things to accept. I was once in the banking business, 
and had to deal with the burdens of CRA. Philosophically, I 
agree with Senators Gramm and Shelby that this bill's expansion 
of CRA, regardless of how harmless it may appear, is wrong. 
Senator Gramm proposed two amendments that I would have liked 
to support, but I know if his amendments were incorporated into 
the bill, the likelihood of this becoming law would be greatly 
diminished. For that reason, and because of the efforts that 
have been made to find compromise, I found myself in a position 
that, frankly, I didn't like. I believe, for the sake of 
compromise, and the need to have this bill go forward, I would 
have had to vote against Senator Gramm's amendments which would 
have lessened the burdens of CRA.
    H.R. 10, as it came over from the House, contained six 
provisions referring to or expanding the Community Reinvestment 
Act. At this time, in the name of compromise, I am willing to 
withhold my objections to the CRA provisions in the bill. I am 
pleased that the CRA compromise in the managers' amendment 
deletes many of the provisions which I found offensive. These 
provisions required divestiture due to unsatisfactory CRA 
ratings, applied CRA to foreign banks, and directed the 
Treasury to conduct a study on CRA. I believe the included 
compromise on CRA has moved in the right direction, but we 
still have some work to ensure that H.R. 10 is ``CRA-neutral.''
    As this bill moves through the legislative process, I will 
continue to work with my colleagues on additional compromises 
to move this bill towards CRA neutrality. My support of this 
bill is due to the compromises incorporated in the manager's 
amendment. I would like to thank my colleagues for their 
willingness to work out a compromise on so many complicated 
issues. I hope we will be able to continue discussing the CRA 
issue prior to floor consideration.

                                                       Connie Mack.

                    ADDITIONAL VIEWS OF WAYNE ALLARD

    I support this financial modernization legislation. The 
legislation is not perfect, but the Committee has worked hard 
to reach a consensus on important issues. Financial 
modernization will increase competition and benefit the 
economy.
    I am always concerned with the impact of banking 
legislation on community bankers. Financial modernization 
should benefit small financial institutions as well as large 
financial institutions. I am therefore pleased that the 
Committee has included language supporting the small bank tax 
relief legislation that I have proposed. This legislation would 
expand the Subchapter S tax election available to financial 
institutions.
    Subchapter S of the Internal Revenue Code was first enacted 
in 1958 to reduce the tax burden on small business 
corporations. The Subchapter S provisions have been liberalized 
a number of times over the last two decades, most significantly 
in 1982, and again in 1996. This liberalization reflects a 
desire on the part of Congress to relieve the tax burden on 
small business. S corporations do not pay corporate level 
income taxes, earnings are passed through to the shareholder 
level where income taxes are paid, thus eliminating the double 
taxation of corporations. By contrast, Subchapter C 
corporations pay corporate level income taxes on earnings, and 
shareholders pay income taxes again on those same earnings when 
they are passed through as dividends.
    Congress made the S corporation option available to small 
banks for the first time in the 1996 ``Small Business Job 
Protection Act.'' Since then, ten percent of FDIC insured 
financial institutions have converted to Subchapter S 
corporations, and eighty percent of these have assets under 
$100 million. Unfortunately, many small banks which would like 
to convert to Subchapter S are having trouble qualifying under 
the current rules. The Sense of the Committee language 
therefore recommends enactment of legislation to increase the 
allowed number of S corporation shareholders; permit S 
corporation stock to be held in individual retirement accounts; 
clarify that interest on investments held by banks for safety, 
soundness, and liquidity purposes should not be considered to 
be passive income; provide that bank director stock is not 
treated as a disqualifying second class of stock; and improve 
the tax treatment of bad debt and interest deductions for 
financial institutions.

                                                      Wayne Allard.

                 ADDITIONAL VIEWS OF SENATOR ROD GRAMS

    Notwithstanding my opposition to certain provisions in H.R. 
10, I want to reiterate my enthusiastic support for financial 
modernization. As one of the Senate's strongest and most 
consistent supporters of financial modernization, I believe 
that Congress, not the regulators, should lead in modernizing 
the nation's financial laws because modernization via 
regulatory fiat results in convoluted rules which are open to 
perpetual interpretation and continual litigation. However, as 
has been the case on so many instances, Congress is showing up 
to the dance after the music has ended.
    I am pleased that H.R. 10 provides core financial 
modernization provisions--such as repealing the Glass-Steagall 
Act and allowing banks and insurance companies to affiliate. By 
repealing the Glass-Steagall Act, Congress deletes an obsolete 
statute which was arguably misguided when it was originally 
enacted. Also, by removing the Bank Holding Company Act 
prohibition on common ownership of banks and insurance 
companies, the bill allows true one-stop shopping for 
individuals financial needs. Also, although not perfect, the 
bill includes a good insurance regulation framework from which 
to work.
    However, there are a number of flaws in H.R. 10 which may 
well result in its demise. The first fatal flaw in this 
legislation is the broad expansion of the Community 
Reinvestment Act (CRA). A statement in the Congressional Record 
by the bill's author, Senator William Proxmire, when he 
introduced the CRA argued that one of the assumptions--or 
justifications--for the CRA is that a bank or thrift charter 
conveys ``economic benefit.'' Of those listed in the Senator's 
statement, one of the only remaining economic benefits is 
government provided deposit insurance. Although the reach of 
the CRA has always been limited to insured depository 
institutions, H.R. 10, for the first time, extends the CRA to 
uninsured wholesale financial institutions (WFI).
    Another flaw of H.R. 10 is the treatment of the unitary 
thrift holding company. There is a broad disagreement over how 
and if the affiliation right of unitary thrift holding 
companies should be limited. Under current law, unitary thrift 
holding companies are able to affiliate with any company--
financial or commercial. This narrow and well regulated 
universe does not pose the risks opponents to banking and 
commerce fear. A number of commercially-owned unitaries were 
formed in the late 1980s at the request of the Federal 
government as a small contribution to cleaning up the savings 
and loan crisis. Due to the massive failures in the savings and 
loan, the cost of the cleanup outpaced the government's ability 
to cover the insured deposits held by these failing 
institutions. Therefore, the government appropriately sought 
buyers, rather than absorb the cost of resolution. Many 
commercial firms acquired these thrifts and saved the Federal 
government untold billions. Now, Congress, without significant 
debate on the merits of this action, is reversing the rules 
these institutions operate under and is deleting a large 
segment of acquirers these institutions assumed when they 
purchased these institutions.
    I feel that this action is wrong for two main reasons. The 
first is that the Federal government cannot continue to break 
its promises. All Americans should be concerned that if we 
break our promises to these ``big bad businesses,'' who is 
next--veterans, seniors, the poor? Also, I fear that if we take 
this action, we are reducing our credibility the next time we 
have a crisis and ask the private sector to step in and assist. 
Although it seems easy to take this action today, I hope we do 
not regret it the next time we face a crisis.

                                                         Rod Grams.

   ADDITIONAL VIEWS OF SENATORS SARBANES, DODD, KERRY, BRYAN, BOXER, 
                    MOSELEY-BRAUN, JOHNSON, AND REED

          privacy for citizens' personal financial information

    Although we are all supporters of H.R. 10, there is a 
significant issue that is not adequately addressed by this 
legislation: the protection of a customer's personal, 
confidential, financial information by a bank, securities 
broker-dealer, or insurance company.
    Few Americans understand that, under current Federal law, a 
financial institution can sell, share, or publish customer 
transaction and experience data. Such data includes savings 
account balances, certificate of deposit maturity dates and 
balances, stock and mutual fund purchases and sales, life 
insurance payouts, and health insurance claims.
    H.R. 10 would dramatically alter the U.S. financial 
landscape by allowing mergers that put under the roof of one 
holding company banks, securities firms, and insurance 
companies. Each affiliated institution will be able to offer 
its customers new products through ``cross-marketing,'' or 
selling new products of affiliates to existing customers. 
Cross-marketing can entail sharing large amounts of highly 
sensitive, confidential customer information. Today's 
technology makes it easier, quicker, and less costly than ever 
before to have immediate access to large amounts of consumer 
information; to analyze data, to identify someone who, for 
example, is elderly or has a maturing CD; and to immediately 
send that data to others. Furthermore, this confidential 
information can easily be sold, shared or made public without 
the customer's consent or knowledge.
    Both these new business affiliations and technology 
advances are fueling consumer concerns about the mishandling of 
personal information, and they have also highlighted the 
difficulties individuals face in trying to prevent 
inappropriate use. Selling and sharing this information will 
likely lead to increased telephone calls and mail 
solicitations.
    A June 8, 1998 Business Week commentary entitled ``Big 
Banker May Be Watching You'' underscored the potential abuses:

          Suppose that when you retired, your bank started 
        deluging you with mailings for senior services--each 
        tailored to your exact income, health needs, and 
        spending habits. Or your lender slashed your credit-
        card limit from $20,000 to $500 after you were 
        diagnosed with a serious disease.
          Those two Orwellian scenarios may sound far-fetched, 
        but they might not be for long. In the wake of the * * 
        * mad rush by large insurers to acquire thrift 
        charters, consumer advocates are raising valid 
        questions about whether the insurance arms of these new 
        conglomerates will share sensitive medical records with 
        their lending and marketing divisions.

    Abuses arising from sharing information without a 
customer's knowledge or permission have already taken place. 
For example, the Securities and Exchange Commission (SEC) 
recently took enforcement action against a large national bank 
that had been giving sensitive customer financial information 
to an affiliated securities broker. The SEC found the bank 
employees and the securities affiliate employees ``blurred the 
distinction between the bank and the broker dealer'' and the 
affiliated broker's sales ``representatives used materially 
false and misleading sales practices'' which ``culminated in 
unsuitable purchases by investors.'' The SEC also found many of 
the targeted bank customers were elderly and had never 
previously invested in securities: 65% were over 60 years old, 
36% were over 70 years old; and 11% were over 80 years old. 
Many had low annual incomes: 47% were under $25,000 and 19% 
were $15,000 or less.
    Other major corporations have bumped against privacy 
concerns while expanding their marketing services. In almost 
every case, the companies backed down only after the practices 
became publicly known and outraged consumers complained.
    Additional abuses are easy to imagine:
          --A bank could send names and account balances of 
        elderly customers with maturing certificates of deposit 
        that have large balances to an affiliated stockbroker 
        who, in turn, could market riskier products to those 
        customers.
          --An insurer could send an affiliated stockbroker the 
        names and the amount of payouts received by 
        beneficiaries on the policies of recently deceased life 
        insurance policyholders.
          --A health insurer could send information on 
        policyholders with claims for serious or terminal 
        health conditions to an affiliated bank loan 
        department.
          --An entrepreneur could legally obtain this 
        confidential information about a private citizen from a 
        financial company and then set up a website that 
        provides all of the financial and transactional 
        information outlined above to anyone who wants to 
        examine it.
    The Committee has heard from many groups voicing support 
for consumer financial privacy protections. The American 
Association of Retired Persons (AARP) advocated that, 
``Consumers should be given the choice as to whether banks can 
share information about their accounts with any other entity.'' 
AARP is especially concerned about older Americans' vulnerability: 
``elderly Americans are among those most vulnerable to the complex and 
fundamental changes already occurring in this period of financial 
transformation--and they will be put at further risk by the financial 
mergers permitted by this proposed legislation if the issue of 
information privacy is not addressed.''
    Consumers Union has said, ``As financial services firms 
diversify and `cross market' an array of financial products, 
their interests in obtaining information about consumers is on 
a collision course with consumers' interest in protecting their 
privacy. * * * We believe legislation should prohibit 
depository institutions and their affiliates from sharing or 
disclosing information among affiliates or to third parties 
without first obtaining the customer's written consent.''
    The Free Congress Research and Education Foundation, 
Consumers Federation of America, Consumers Union, Electronic 
Privacy Information Center, Privacy International, Privacy 
Times, and U.S. Public Interest Research Group wrote on August 
26, 1998 to all Senate Banking Committee Members to ``sound an 
urgent alarm about the lack of protections for consumers' 
financial privacy.'' They complained, ``Financial modernization 
will become a code phrase for `privacy violation' unless 
changes are made to help ensure that consumer financial privacy 
is protected and that consumers have control over with whom 
information about them is shared or sold.''
    The letter elaborated on the problems we face:

          Current law would allow these companies to create a 
        virtually unregulated centralized data base combining, 
        for example, the health insurance, mortgage, stock 
        brokerage and credit card data of their estimated 100 
        million customers, along with information from numerous 
        outside data sources, ranging from credit reports and 
        credit and insurance applications to public records and 
        other information obtained from ``data-mining'' firms, 
        without the informed knowledge or consent of their 
        customers. * * * [H.R. 10] will create a whole new 
        financial services landscape, putting consumers' 
        personal, medical and financial information into a 
        brave new world with greater privacy risks than ever 
        before.

    On September 9, 1998, The Washington Post published an 
editorial, ``* * * And a Matter of Privacy,'' arguing,

          Along with medical records, financial and credit 
        records probably rank among the kinds of personal data 
        Americans most expect will be kept from prying eyes. As 
        with medical data, though, the privacy of even highly 
        sensitive financial data has been increasingly 
        compromised by mergers, electronic data-swapping and 
        the move to an economy in which the selling of other 
        people's personal information is highly profitable--and 
        legal.

    The Post editorial concluded that the privacy amendment to 
H.R. 10, which was supported by all of the Democrats on the 
Committee, is ``a protection well worth considering, especially 
in the banking context. As the pace of the much-touted 
`information economy' quickens, safeguards against these 
previous unimagined forms of commerce become ever more 
important.''
    We firmly believe that a citizen should have the 
fundamental right to prevent his or her personal financial 
transaction or experience information from being sold or shared 
by a financial institution unless he or she has been given 
notice, has a chance to verify the accuracy of the information, 
and has agreed to disclosure.
    During consideration of H.R. 10, we offered an amendment 
that would have protected the privacy of customers' financial 
information by directing the Federal Reserve Board, Office of 
Thrift Supervision, Federal Deposit Insurance Corporation, 
Office of the Comptroller of the Currency, and SEC to jointly 
promulgate rules requiring the institutions they regulate to: 
(1) inform their customers what information is to be disclosed, 
and when, to whom and for what purposes the information is to 
be disclosed; (2) allow customers to review the information for 
accuracy; and (3) for new customers, obtain the customers' 
consent to disclosure, and for existing customers, give the 
customers a reasonable opportunity to object to disclosure. 
These institutions could use confidential customer information 
from other entities only if the entities had given their 
customers similar protections.
    Unfortunately, the Committee defeated this amendment by a 
vote of 8-10.
    The majority argued simply that the issue was ``too 
complex'' to be dealt with in H.R. 10. At the same time, they 
admitted, ``It is absolutely a problem that must be 
addressed.'' Also, it was acknowledged, ``the industry should 
understand that this issue is not going to go away, and if they 
think they're just going to relax on it and nothing's going to 
happen, they're going to be making a big mistake.''
    We agree that the issue of protecting an individual's 
financial privacy is ``complex.'' That is the very reason we 
proposed that the Federal financial regulators jointly 
promulgate rules on the subject and gave them 270 days to do 
so.
    We also agree that the issue is ``too important'' and ``is 
not going to go away.''
    The Financial Services Act of 1998 will provide unique and 
historic opportunities for banks, securities firms, and 
insurance companies. But bestowing these benefits upon these 
industries and allowing them to join together in a single 
holding company does not mean that consumers must surrender the 
confidentiality of their financial information.
    In fact, the United States already faces pressure from the 
European Union as a result ofour inadequate privacy 
protections. The European Union Data Protection Directive, which goes 
into effect October 25, 1998, goes much further than any privacy 
protections in place in the U.S. or even contemplated by the 
Administration. The Directive mandates that member states protect 
privacy rights in the data collection by both the public and private 
sectors. It prohibits the transfer of data without first obtaining the 
individual's unambiguous consent regarding the transfer and use of his 
or her personal financial data. The Directive provides ``that the 
transfer to a third country of personal data * * * may take place only 
if * * * the third country in question ensures an adequate level of 
protection.'' Since indications are that the European Union views 
current U.S. privacy policy as inadequate, U.S. businesses are likely 
to have difficulties marketing to European consumers.
    Moreover, it is our view that industry self-regulation, 
which has been tried during the past few decades, is not 
working. The Privacy Protection Study Commission, established 
by the Privacy Act of 1974, recommended privacy legislation in 
a number of fields, including banking, credit, and insurance. 
The recommendations applied the key privacy principles of 
notice, consent, and verification of information. In 1996, 
after two decades of surveys and academic studies which showed 
little progress implementing privacy rights, the former 
Chairman of the Privacy Commission wrote: ``The [1977] 
commission, at the behest of industry, recommended that 
companies be allowed to follow its guidelines voluntarily. But 
19 years later, it is clear that Congress should turn the 
commission's suggestions into law.''
    Recent studies by the FTC and the FDIC have also found 
self-regulation to be ineffective. The FTC June 1998 report, 
Privacy Online: A Report to Congress, observed: ``To date, the 
Commission has not seen an effective self-regulatory system 
emerge.'' The FDIC August 1998 Financial Institution Letter, 
Online Privacy of Consumer Personal Information, reported: 
``The FDIC conducted its own informal survey of Web sites of 
FDIC-supervised banks. The FDIC's survey findings were 
comparable to the FTC's.''
    We believe that the protection of the privacy of customers' 
personal financial information is much too important to ignore 
any longer. It should be addressed in H.R. 10.

                             BASIC BANKING

    We regret that the Committee failed to retain the important 
lifeline basic banking provision included in the House-passed 
version of H.R. 10. The provision was designed to ensure that 
low-income individuals will have access to basic banking 
services within the new financial holding company structure. 
The provision would have required that as a condition of a bank 
holding company becoming a financial holding company, all 
subsidiary insured depository institutions of the bank holding 
company must offer and maintain low-cost basic banking 
accounts.
    The provision addressed a significant problem: banking 
services are beyond the reach of millions of Americans. 
According to a recent study by the U.S. Public Interest 
Research Group, the average cost of a checking account is $264 
per year. The cost represents a major obstacle to establishing 
a relationship with a bank for families at or near the poverty 
line. Conservative estimates by the Comptroller of the Currency 
place the number of households without a basic banking account 
at 12 million.
    Because they cannot afford banking services, many Americans 
are shut out of the economic mainstream. This lack of access 
compels many low-income individuals to become customers of 
fringe bankers and pay high costs to access the payment system. 
For instance, they utilize the services of high priced check-
cashing businesses and money order services. In addition, some 
individuals are forced to operate on a cash-only basis which 
places them at risk for their personal safety. Further, many 
individuals find it difficult to establish traditional credit 
without a banking account.
    We also agree with the rationale of the House-passed 
provision, that it is imperative that low-income individuals 
have access to basic banking services in light of passage of 
the welfare reform law and the Electronic Benefits Transfer 
Act. These laws mandate that all Federal government transfer 
payments be made electronically.
    The Committee heard from many consumer groups, including 
the Consumer Federation of America, Center for Community 
Change, and the National Community Reinvestment Coalition, that 
supported the inclusion of this provision in H.R. 10. During 
House Banking Committee hearings, NationsBank and BancOne 
expressed support for the basic banking provision.
    We disagree with arguments that a basic banking requirement 
would be burdensome and unworkable. Many large banks currently 
offer basic banking accounts on a voluntary basis. Moreover, 
seven states currently have statutes requiring some form of 
lifeline banking. The experiences of these states indicate that 
a meaningful and useful basic banking requirement is possible 
on the Federal level.
    In our view, the requirement that a bank offer low-cost 
basic banking accounts if it wants to exercise the expanded 
powers permitted by H.R. 10 is a very modest one with large 
public benefits. We hope that it can be restored during the 
course of the legislative process.
                                   Paul Sarbanes.
                                   Christopher Dodd.
                                   John Kerry.
                                   Richard Bryan.
                                   Barbara Boxer.
                                   Carol Moseley-Braun.
                                   Tim Johnson.
                                   Jack Reed.

                    ADDITIONAL VIEWS OF SENATOR REED

    The Senate Banking Committee's passage of H.R. 10 
represents a significant step forward in Congress' efforts to 
modernize the Depression-era laws governing our financial 
services industry. I voted in favor of the bill because I 
believe that institutional and technological changes which have 
taken place in the financial services industry have cast doubt 
on the need to maintain the existing separation between 
banking, securities, and insurance activities. Indeed, these 
barriers between financial activities have made it increasingly 
difficult for U.S. financial firms to realize economies of 
scale and compete with their international counterparts. 
Notwithstanding my support for the bill, however, there are 
several issues that I believe should be addressed as the Senate 
contemplates further action on the bill.
    At the behest of the Federal Reserve, H.R. 10 would require 
financial services companies to conduct activities through 
affiliates that are subject to Federal Reserve regulation. 
Historically, national banks have been able to conduct many of 
these activities through an operating subsidiary of the bank. 
As a result, H.R. 10 limits the flexibility of financial 
services firms in conducting activities. This limitation, I 
believe, runs counter to the goals of modernization embodied in 
H.R. 10.
    The effect of the organizational structure established in 
H.R. 10 is to give the Federal Reserve, an independent and 
politically unaccountable agency, the unbridled discretion to 
regulate financial services firms. In so doing, the bill limits 
the authority of the Treasury Department and the Office of the 
Comptroller of the Currency to regulate the activities of 
national banks, a function in which these agencies have been 
engaged since 1864. As a result, I am concerned that the 
Federal Reserve, whose primary occupation is monetary policy, 
will be less responsive to public concerns and may not 
vigorously exercise its regulatory authority over financial 
institutions.
    Inherent in H.R. 10 is the consolidation of banking, 
securities, and insurance activities in one business 
enterprise. To regulate these activities, H.R. 10 has adopted a 
functional approach which places banking regulation under the 
appropriate bank regulator, securities regulation under the 
Securities and Exchange Commission and insurance regulation 
under the relevant state. The Federal Reserve acts as the 
``umbrella'' regulator over these functional regulators. This 
new structure has not been effectively tested in practice, 
particularly under the excruciating pressure of the failure of 
a large financial institution. Because of this dispersion of 
regulatory authority, a significant financial failure could 
produce regulatory stalemate rather than an effectively 
coordinated response.
    Central to Congressional consideration of financial 
modernization legislation must be the protection of the 
taxpayer-backed deposit insurance funds. Following the savings 
and loan crisis of the 1980s, in which taxpayers paid $60 
billion to cover depositor losses from failed thrifts, Congress 
must be careful not to create opportunities for abuse that 
could lead to a future crisis.
    While there are a number of prudent safeguards included in 
H.R. 10, the bill, by its very nature, will allow the creation 
of financial behemoths, which, in a time of crisis, could 
bankrupt deposit insurance funds and require a taxpayer 
bailout. Conventional wisdom is that because of the size and 
importance of such institutions to the economy, they would be 
too-big-to-fail, and the government--i.e. taxpayers--would be 
obligated to bail out the institutions.
    Unfortunately, H.R. 10 does not address the potential 
inadequacy of deposit insurance funds to recapitalize a 
troubled mega-bank. Moreover, H.R. 10 does not address the 
``too-big-to-fail'' problem. As we go forward, I believe these 
issues should be considered and addressed.
    Finally, I am concerned that H.R. 10 does not do enough to 
promote affordability and access to retail banking services 
such as checking accounts. Provisions in the House-passed bill 
requiring banks to provide low-cost, basic banking accounts 
were, unfortunately, stripped out in the Senate Banking 
Committee. This is of great concern in light of recent evidence 
suggesting that large institutions, of the type that will be 
created under H.R. 10, generally charge higher fees for retail 
banking services. As a result, I fear that the cost of banking 
services for many Americans may increase.
    Moreover, by failing to include low-cost banking provisions 
in H.R. 10, Congress is foregoing a tremendous opportunity to 
provide access to the banking system for the 10 million 
Americans who are currently ``unbanked''. In my view, financial 
modernization by its very terms must provide the broadest 
possible access to the banking system, thereby promoting 
savings and investment activity, which stimulates economic 
growth. H.R. 10 ought to help the unbanked become banked.
    I voted to favorably report H.R. 10 out of the Senate 
Banking Committee. I did so because I believe the bill goes a 
long way in eliminating unnecessary and outdated laws which 
have hampered the competitiveness of the U.S. financial 
services industry. Nevertheless, I believe the concerns that I 
have raised should be addressed if we are to produce balanced 
legislation that will provide a sturdy regulatory framework 
that will encourage economic expansion and ensure the safety 
and soundness of our financial industry.

                                                         Jack Reed.

                                
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