[Senate Report 106-44]
[From the U.S. Government Publishing Office]





                                                        Calendar No. 94

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106th Congress                                                   Report
 1st Session                     SENATE                          106-44

_______________________________________________________________________




                   FINANCIAL SERVICES MODERNIZATION


                              ACT OF 1999





                              R E P O R T

                                 OF THE

                     COMMITTEE ON BANKING, HOUSING,

                           AND URBAN AFFAIRS

                          UNITED STATES SENATE

                              to accompany

                                 S. 900

                             together with

                            ADDITIONAL VIEWS

                                     




                 April 28, 1999.--Ordered to be printed

                                -------                                

                    U.S. GOVERNMENT PRINTING OFFICE
69-010                     WASHINGTON : 1999       





            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama           PAUL S. SARBANES, Maryland
CONNIE MACK, Florida                 CHRISTOPHER J. DODD, Connecticut
ROBERT F. BENNETT, Utah              JOHN F. KERRY, Massachusetts
ROD GRAMS, Minnesota                 RICHARD H. BRYAN, Nevada
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska                CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania          EVAN BAYH, Indiana
JIM BUNNING, Kentucky                JOHN EDWARDS, North Carolina
MIKE CRAPO, Idaho

                   Wayne A. Abernathy, Staff Director
     Steven B. Harris, Democratic Staff Director and Chief Counsel
                      Linda L. Lord, Chief Counsel
           Geoffrey P. Gray, Senior Professional Staff Member
                Stephen S. McMillin, Financial Economist
                     Geoffrey C. Gradler, Economist
             Martin J. Gruenberg, Democratic Senior Counsel
                   Mitchell Feuer, Democratic Counsel

    Joseph R. Kolinski, Chief Clerk & Computer Systems Administrator
                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1
History of the Legislation.......................................     1
Background.......................................................     3
Need for Legislation.............................................     4
Purpose and Scope of the Legislation.............................     6
Section-by-Section Analysis......................................    20
Regulatory Impact Statement......................................    37
Cost Estimate....................................................    38
Changes in Existing Law (Cordon Rule)............................    50
Additional Views of:
    Senators Bennett and Shelby..................................    51
    Senator Santorum.............................................    52
    Senators Sarbanes, Dodd, Kerry, Bryan, Johnson, Reed, 
      Schumer, Bayh and Edwards..................................    54
    Senator Reed.................................................    77


                                 (iii)



                                                        Calendar No. 94

106th Congress                                                   Report
  1st Session                    SENATE                          106-44

=======================================================================




 
              FINANCIAL SERVICES MODERNIZATION ACT OF 1999

                                _______
                                

                 April 28, 1999.--Ordered to be printed

                                _______


 Mr. Gramm, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                         [To accompany S. 900]

    The Committee on Banking, Housing, and Urban Affairs, 
having considered the Financial Services Modernization Act of 
1999, reports favorably thereon as an original bill and 
recommends that the bill do pass.

                              Introduction

    On March 4, 1999, the Senate Committee on Banking, Housing, 
and Urban Affairs (the ``Committee'') marked up and ordered to 
be reported the ``Financial Services Modernization Act of 
1999,'' to enhance competition in the financial services 
industry by providing a prudential framework for the 
affiliation of banks, securities firms, insurance companies, 
and other financial service providers, and for other purposes.

                         HISTORY OF LEGISLATION

    The Committee held three days of hearings on this landmark 
legislation to modernize the financial system and the laws 
governing financial intermediaries. At the first hearing on 
Tuesday, February 23, Federal Reserve Board Chairman Alan 
Greenspan testified.
    On Wednesday, February 24, Secretary of the Treasury Robert 
E. Rubin testified, as did John D. Hawke, Jr., Comptroller of 
the Currency; James L. Pledger, Commissioner, Texas Savings and 
Loan Department, representing the American Council of State 
Savings Supervisors; Ellen S. Seidman, Director, Office of 
Thrift Supervision; George Nichols III, Commissioner of 
Insurance, State of Kentucky, representing the National 
Association of Insurance Commissioners; Arthur Levitt, Jr., 
Chairman, Securities and Exchange Commission; Thomas E. Geyer, 
Commissioner, Division of Securities, State of Ohio, 
representing the North American Securities Administrators 
Association; Donna A. Tanoue, Chairman, Federal Deposit 
Insurance Corporation; and Catherine Ghiglieri, Commissioner, 
Texas Department of Banking, representing the Council of State 
Bank Supervisors.
    On Thursday, February 25, the Committee received testimony 
from Michael Patterson, Vice President, J.P. Morgan and 
Company, representing the Financial Services Council; Ms. E. 
Lee Beard, President and CEO, First Federal Bank, Hazleton, 
Pennsylvania, representing America's Community Bankers; William 
L. McQuillan, President, City National Bank, Greeley, Nebraska, 
representing the Independent Bankers Association of America; 
James D. Ericson, President and CEO, Northwest Mutual Life 
Insurance Company, representing the American Council of Life 
Insurance, the American Insurance Association, the Alliance of 
American Insurers, the National Association of Independent 
Insurers, and the National Association of Mutual Insurance 
Companies; Jeff Tassey, Senior Vice President, American 
Financial Services Association; Robert W. Gillespie, Chairman 
and CEO, Key Corp, representing the Bankers Roundtable; Marc E. 
Lackritz, President, Securities Industry Association; Hjalma 
Johnson, Chairman and CEO, East Coast Bank Corporation, 
representing the American Bankers Association; Scott A. Sinder, 
Esq., representing the Independent Insurance Agents of America, 
the National Association of Life Underwriters, and the National 
Association of Professional Insurance Agents; John G. Finneran, 
Jr., Senior Vice President and General Counsel, Capitol One 
Financial Corporation, representing the Association of 
Financial Services Holding Companies; Mary Griffin, Insurance 
Counsel, representing the Consumers Union; Kathy Ozer, 
Executive Director, National Family Farm Coalition; F. Barton 
Harvey, Chairman and CEO, Enterprise Foundation; John Taylor, 
President and CEO, National Community Reinvestment Coalition; 
and Deborah Goldberg, Neighborhood Reinvestment Specialist, 
Center for Community Change.
    On March 4, the Committee met in Executive Session to mark-
up the Committee Print. During the mark-up, the Committee 
considered several amendments. Senator Shelby offered an 
amendment which was adopted by voicevote to allow officers and 
directors of public utilities to serve as officers or directors of 
banking and securities companies, subject to certain safeguards against 
conflicts of interests; Senator Shelby also offered an amendment 
adopted by voice vote to permit one or more thrift institutions to own 
bankers' banks. A third amendment offered by Senator Shelby (as amended 
by Chairman Gramm), adopted by a vote of 11-9 (Senators voting 
``Aye''--Gramm, Shelby, Mack, Bennett, Grams, Allard, Enzi, Hagel, 
Bunning, Crapo and Johnson. Senators voting ``No''--Sarbanes, Dodd, 
Kerry, Bryan, Reed, Schumer, Bayh, Edwards and Santorum) exempts from 
the requirements of the Community Reinvestment Act of 1977 those banks 
and savings and loan associations with total assets up to $100 million 
and that are located in non-metropolitan areas. Senator Grams offered 
an amendment which was adopted by a vote of 11-9 (Senators voting 
``Aye''--Gramm, Shelby, Mack, Bennett, Grams, Allard, Enzi, Hagel, 
Santorum, Bunning and Crapo. Senators voting ``No''--Sarbanes, Dodd, 
Kerry, Bryan, Johnson, Reed, Schumer, Bayh and Edwards) creating a 
presumption that general State insurance licensing statutes or 
regulations are not applicable to short-term motor vehicle rental 
companies (or their employees) unless a State's statute or regulations 
specifically provide for such licensing. Senator Grams also offered an 
amendment (as amended by Senator Dodd) adopted by voice vote expressing 
the sense of the Congress that State insurance regulators develop 
uniform insurance agent and broker licensing and qualification 
requirements. Senator Bryan offered an amendment (as amended by 
Chairman Gramm) which was adopted by voice vote to substitute certain 
provisions of section 104 of the Committee Print, dealing with 
insurance sales activities of banks. Chairman Gramm offered an 
amendment which was adopted by voice vote permitting certain 
institutions that become bank holding companies following the date of 
enactment of the Financial Services Modernization Act of 1999 to 
continue to engage in or control shares of a company engaged in 
commodities trading, sales, and investment activities under certain 
conditions. Senator Sarbanes offered an amendment in the nature of a 
substitute, which was defeated by a vote of 11-9 (Senators voting 
``No''--Gramm, Shelby, Mack, Bennett, Grams, Allard, Enzi, Hagel, 
Santorum, Bunning and Crapo. Senators voting ``Aye''--Sarbanes, Dodd, 
Kerry, Bryan, Johnson, Reed, Schumer, Bayh and Edwards).
    The Committee then voted 11-9 to report the amended 
Committee Print to the Senate for consideration. Senators 
Gramm, Shelby, Mack, Bennett, Grams, Allard, Enzi, Hagel, 
Santorum, Bunning and Crapo voted in favor of the motion to 
report the bill from the Committee. Senators Sarbanes, Dodd, 
Kerry, Bryan, Johnson, Reed, Schumer, Bayh and Edwards 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 the Financial 
Services Modernization Act of 1999 to the Senate, the Committee 
recommends a regulatory framework suitable for financial 
services as we move into the twenty-first century.
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    \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.
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                        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 
thefinancial services industry account for about 7.5 percent of our 
nation's gross domestic product and employ approximately 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 financial markets have changed dramatically since 
        the 1930s when many of our nation's laws governing the 
        financial system were written. Improvements in 
        information technology and innovations in financial 
        markets have rendered the current system increasingly 
        obsolete and unable to provide the full range of 
        financial services required by businesses and 
        individual consumers in today's global economy. 
        Modernization of the financial system is not only 
        desirable, but necessary, to enable the financial 
        services industry to meet the challenges that lie 
        ahead.\2\
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    \2\ Tanoue Testimony at 1.

    As the various sectors of financial services converge, 
providers of financial services are seeking to serve customers 
better by com- bining those sectors in one organization. 
Testifying for the American Bankers Association, Hjalma 
Johnson, Chairman and CEO of East Coast Bank Corp, Dade City, 
Florida, described the blurring of the divisions between the 
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financial services sectors:

          The virtually unanimous agreement among financial 
        service providers that the time has come to modernize 
        our financial structure is perhaps the most obvious 
        evidence of the need for reform. Revolutionary 
        improvements in technology and escalating competition 
        are redefining the financial services business. The 
        lines between different types of financial service 
        firms have been blurred beyond recognition.
          Today, my customers have the option to write a check 
        on a money-market mutual fund to pay their bills; they 
        can have a credit card issued by a phone company; and 
        they can get a home mortgage from an automobile 
        manufacturer. This list of non-traditional suppliers of 
        financial services competing for my customers gets 
        longer every day. Even defining the term ``financial 
        service'' is becoming difficult in today's market.\3\
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    \3\ Johnson Testimony at 2.

    In addition, as the number of nations participating in the 
global capital markets increases, providers of financial 
services face greater competition and seek greater economies of 
scale. Federal Reserve Board Chairman Greenspan describes the 
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pressure that U.S. firms are experiencing:

          In the United States, our financial institutions have 
        been required to take elaborate steps to develop and 
        deliver new financial products and services in a manner 
        that is consistent with our outdated laws. The costs of 
        these efforts are becoming increasingly burdensome and 
        serve no useful public purpose. Unless soon repealed, 
        the archaic statutory barriers to efficiency could 
        undermine the competitiveness of our financial 
        institutions, their ability to innovate and to provide 
        the best and broadest possible services to U.S. 
        consumers, and ultimately, the global dominance of 
        American finance.\4\
---------------------------------------------------------------------------
    \4\ Greenspan Testimony at 2.

    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 regulationdepending 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 Board Chairman Alan Greenspan 
testified:

          Without congressional action to update our laws, the 
        market will force ad hoc administrative responses that 
        lead to inefficiencies and inconsistencies, expansion 
        of the federal safety net, and potentially increased 
        risk exposure to the federal deposit insurance funds. 
        Such developments will undermine the competitiveness 
        and innovative edge of major segments of our financial 
        services industry. We believe that it is important that 
        the rules for our financial services industry be set by 
        the Congress rather than, as too often has been the 
        case, by banking regulators dealing with our outdated 
        laws. Only Congress has the ability to fashion rules 
        that are comprehensive and equitable to all 
        participants and that guard the public interest.\5\
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    \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

    The Financial Services Modernization Act of 1999, as 
reported by the Committee, 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 allows for 
a broader range of financial services to be affiliated, 
including commercial banking, insurance underwriting and 
merchant banking as defined in the legislation. It also 
contains provisions intended to provide appropriate regulation 
of bank sales of insurance. The bill also allows national banks 
with consolidated total assets not exceeding $1 billion, and 
not affiliated with a bank holding company, to engage in a 
broader range of financial services through subsidiaries. In 
order to engage in expanded activities in a principal capacity, 
the subsidiary must comply with certain safety and soundness 
requirements.

Permissible Affiliations

    Banks, securities firms, and insurance companies will be 
able to affiliate with one another through the bank holding 
company model. Bank holding companies will be allowed to engage 
in activities that are financial in nature or incidental 
thereto. This is a broader standard than the Aclosely related 
to banking'' standard that currently delineates the permissible 
activities of bank holding companies.
    The Committee believes that allowing broader affiliations 
within the bank 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.
    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 
establishes the Federal Reserve Board (the ``Board'') as the 
umbrella regulator of bank holding companies engaged in 
expanded financial activities. In order to engage in expanded 
financial activities, insured depository institution 
subsidiaries of a bank holding company must be well capitalized 
and well managed. The bill expressly provides that the 
provisions in Prompt Corrective Action (Section 38 of the 
Federal Deposit Insurance Act) will be used for purposes of 
determining whether an insured depository institution 
subsidiary of a bank holding company engaged in the new 
financial activities is well capitalized and whether an insured 
depository institution affiliate of a national bank with a 
financial subsidiary is well capitalized. Under Section 38(c) 
of Prompt Corrective Action, each Federal banking regulator has 
promulgated regulations specifying the levels at which an 
insured depository institution that is supervised by that 
regulator is well capitalized, adequately capitalized, 
undercapitalized, or significantly undercapitalized. To 
eliminate confusion and the potential for conflicting 
interpretations, the Committee intends that only the 
appropriate Federal banking agency for each insured depository 
institution subsidiary of a bank holding company or affiliate 
of a national bank shall determine the capital category for 
that institution in accordance with its regulations. In other 
words, the determination of whether an insured depository 
institution is well capitalized under this Act will be made by 
the OCC in the case of a national bank, the Board in the case 
of a state-member bank, the FDIC in the case of a state non-
member bank, and the OTS in the case of an insured savings 
association.

Organizational structure

            The bank holding company
    The Committee carefully analyzed whether the holding 
company or the operating subsidiary approach is the appropriate 
organizational structure for new activities 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. 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. 
The Committee took into consideration Federal Reserve Board 
Chairman Greenspan's views on this topic. Many distinguished 
former regulators share his views. In a recent editorial, 
former Federal Reserve Board Chairman Paul Volcker 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. The bill also 
adopts the holding company framework, but expands the range of 
permissible financial affiliations to include insurance 
underwriting, merchant banking, and activities complementary to 
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financial activities.

            National bank subsidiaries

    While the general approach to affiliations under the bill 
is through the bank holding company framework, limited 
authorization also is granted to smaller national banks (those 
with consolidated assets not exceeding $1 billion that are not 
part of a holding company structure) to affiliate with other 
financial service providers through subsidiaries meeting 
certain safety and soundness requirements. Such financial 
subsidiaries, as defined in the bill, are authorized to conduct 
financial activities in a principal capacity.
    The bill also expands the activities in which banks may 
engage. Section 121 of the bill authorizes national banks to 
underwrite municipal revenue bonds. Section 123 of the bill 
allows national bank subsidiaries to engage in any type of 
financial activity in an agency capacity. 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.
    For at least 30 years, national banks have been authorized 
to invest in operating subsidiaries that are engaged only in 
activities that national banks may engage in directly. For 
example, national banks are authorized directly to make 
mortgage loans and engage in related mortgage banking 
activities. Many banks choose to conduct these activities 
through subsidiary corporations. Nothing in this legislation is 
intended to affect the authority of national banks to engage in 
bank permissible activities through subsidiary corporations, or 
to invest in joint ventures to engage in bank permissible 
activities with other banks or nonbank companies.

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 bill creates 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 in nature if the Treasury Department believes that it 
is not financial or incidental to a financial activity. The 
TreasuryDepartment may also recommend that an activity be 
deemed to be financial in nature, and the Board must determine within 
thirty days whether to initiate a public rulemaking regarding the 
Treasury Department's proposal.
            Merchant banking
    The bill creates a new Section 4(k) of the Bank Holding 
Company Act (the ``BHCA''). Section 4(k)(4)(H) recognizes the 
essential role that principal investing, or merchant banking, 
plays in modern finance. A bank holding company or its non-bank 
affiliate (collectively, the ``BHC'') whether directly, 
indirectly, or through a fund, may make investments in any 
amount in, or otherwise acquire control of, a company, 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.
    The Committee believes that compliance with the 
requirements of Section 4(k)(4)(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 4(k)(4)(H) to 
permit investment banking firms to continue to conduct their 
principal investing in substantially the same manner as at 
present. A BHC 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 
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 a BHC is in violation 
of Section 4(k)(4)(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.
            Securities activities of banks
    The bill includes other provisions that 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. The legislative 
history of the 1934 Act indicates that banks were excluded from 
the definition of ``broker'' and ``dealer'' because Congress 
recognized at that time that these institutions were already 
subject to a comprehensive scheme of Federal regulation.\7\
---------------------------------------------------------------------------
    \7\ See, American Bankers Association v. SEC, 804 F.2d 739 (D.C. 
Cir. 1986), which includes a thorough and lengthy analysis of the 
legislative history behind the bank exemption from the 1934 Act.
---------------------------------------------------------------------------
    In recent years, however, the bank regulators have 
permitted banks and bank holding companies to expand their 
securities activities. The bill accommodates this trend within 
a functional regulatory framework. The repeal of Glass-
Steagall's anti-affiliation rules and the blanket exemption for 
banksfrom 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 does not believe that an extensive ``push-
out'' of or restrictions on the conduct of traditional banking 
services is warranted. Banks have historically provided 
securities services largely through their trust departments, or 
as an accommodation to certain customers. 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 a Commission registered broker-dealer.
    Banks also provide 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 bill does not prevent the offering of such services for 
transaction-based fees. Since transfer agent activities are 
regulated, and the transaction-based fees are for ministerial 
services which provide significant cost-savings for 
shareholders, the Committee finds no compelling reason to 
impose restrictions on transaction-based fees.
    With respect to private placements, the Committee believes 
that, to the extent that these transactions are conducted 
pursuant to applicable Federal law or the rules and regulations 
issued thereunder, there is no compelling reason to ``push-
out'' these activities (which have been supervised by banking 
regulators).
    The bill gives both the Board and the Commission a role in 
determining whether new 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.

Insurance activities

    As approved by the Committee, the bill creates a new 
Federal framework for insured depository institutions to 
affiliate with other financial firms and to engage, directly or 
indirectly, in a variety of financial activities. The Committee 
recognizes, however, that States have long had regulatory 
authority over certain financial activities, such as the 
business of insurance. Thus, it is the Committee's intent that 
the affiliations and activities authorized or permitted by 
Federal law be conducted in a manner that is consistent with 
applicable State regulation.
    On the other hand, the Committee is aware that some States 
have used their regulatory authority to discriminate against 
insured depository institutions, their subsidiaries and 
affiliates. The Committee has no desire to have State 
regulation prevent or otherwise frustrate the affiliations and 
activities authorized or permitted by the bill. Thus, Section 
104 clarifies the application of State law to the affiliations 
and activities authorized or permitted by the bill (or other 
Federal law), and ensures that applicable State law cannot 
prevent, discriminate against, or otherwise frustrate such 
affiliations or activities.
            Preemption of State anti-affiliation laws
    Subsection 104(c)(1) preempts State laws that prevent 
affiliations authorized or permitted by the bill. It provides 
that a State may not by statute, regulation, order, 
interpretation, or other action ``prevent or restrict'' the 
affiliations authorized by the bill. Currently, a number of 
States have such so-called ``anti-affiliation'' laws in effect. 
Without Section 104(c)(1), such laws would frustrate one of the 
principal purposes of the bill, which is to permit insured 
depository institutions to affiliate with other financial 
firms, including securities and insurance firms. An example of 
a State law that would be preempted under the ``prevent or 
restrict'' standard is the Florida law that prohibits a 
Florida-licensed insurance agent from being associated with, 
owned, or controlled by a financial institution.
    Subsections 104(g) (1) and (2) complement subsection 
104(c)(1). Those subsections prohibit States from preventing or 
placing certain limitations on affiliations between insurance 
underwriters and insured depository institutions. The Committee 
does not intend to imply, however, that the State actions 
described in subsections 104(g)(1) and (2) are not otherwise 
subject to preemption under the terms of subsection 104(c)(1).
            Exception for insurance affiliations
    In its effort to strike an appropriate balance between the 
preemption of State anti-affiliation laws and State regulation 
of the business of insurance, the Committee created a limited 
exception to Section 104(c)(1) for affiliations between insured 
depository institutions, their subsidiaries and affiliates, and 
insurance underwriters. Subsection 104(c)(2) provides that 
States may collect, review, and take actions on the 
acquisitions, changes, or continuations of control of an entity 
engaged in the business of insurance that is domiciled within 
the State.
    This exception is aimed at affiliations between an insured 
depository institution, or a subsidiary or affiliate thereof, 
and firms engaged in the business of insurance. It permits a 
State to review such applications in order to ensure that the 
affiliation does not jeopardize the solvency of the 
underwriter.
    Actions taken by a State pursuant to this exception cannot 
be inconsistent with the purpose of the bill to permit 
affiliations between insured depository institutions, their 
subsidiaries and affiliates, and the underwriters of insurance 
or annuities. Furthermore, State actions may not have the 
practical effect of discriminating, either intentionally or 
unintentionally, against an insured depository institution, 
subsidiary or affiliate thereof, or any other person or entity 
affiliated with an insured depository institution.
            General preemption standard for State laws related to 
                    authorized activities
    Subsection 104(d)(1) is a general preemption standard 
applicable to all State laws related to activities authorized 
or permitted by the bill. This general preemption standard 
provides that no State may take any action to ``prevent or 
restrict'' the ability of an insured depository institution, or 
subsidiary or affiliate thereof, from engaging directly or 
indirectly, either by itself or in conjunction with a 
subsidiary, affiliate, or any other entity or person, in an 
activity authorized by the bill. The Committee recognizes that 
this general preemption standard may not be appropriate for all 
types of State law. For example, the general ``prevent or 
restrict'' standard could, unintentionally, preempt capital and 
solvency requirements applicable to insurance underwriters. 
Thus, as explained below, the Committee established separate 
preemption standards for Stateinsurance laws and certain other 
categories of State law.
            Preemption standards for State insurance sales laws adopted 
                    prior to September 3, 1998
    States have long been the primary regulators of insurance. 
In recognition of this, the bill establishes separate 
preemption standards applicable to State insurance sales, 
solicitation, and cross-marketing laws. These preemption 
standards distinguish between State insurance sales, 
solicitation, and cross-marketing laws adopted prior to 
September 3, 1998, and such laws adopted after that date.
    The Committee believes that State insurance sales, 
solicitation, and cross-marketing laws adopted prior to 
September 3, 1998 should be subject to preemption under the 
preemption standards applicable when such laws were adopted. 
Thus, it is the Committee's intent that such laws may be 
subject to preemption under applicable case law, and the 
statutory preemption standard set forth in subsection 
104(d)(2)(A), which is patterned after such case law. There is 
an extensive body of case law related to the preemption of 
State law. For example, in Barnett Bank of Marion County, N.A. 
v. Nelson, 116 S.Ct. 1103 (1996), the U.S. Supreme Court noted 
that Federal courts have preempted State laws that ``prevent or 
significantly interfere'' with a national bank's exercise of 
its powers; that ``unlawfully encroach'' on the rights and 
privileges of national banks; that ``destroy or hamper'' 
national banks' functions; or that ``interfere with or impair'' 
national banks' efficiency in performing authorized functions.
    One example of a State law that would be preempted under 
the standard set forth in subsection 104(d)(2)(A) is a statute 
that requires all shareholders of an insurance agency to be 
licensed by the State. Such a requirement would prevent or 
significantly interfere with the ability of an insured 
depository institution, subsidiary, or affiliate to engage in 
insurance sales, since it is practically impossible for all 
shareholders of such entities to be licensed. Another example 
of a State law that would be preempted under the standard set 
forth in subsection 104(d)(2)(A) would be a statute that limits 
the volume or portion of insurance sales made by an insurance 
agent on the basis of whether such sales are made to customers 
of an insured depository institution or any affiliate of the 
agent. Such a statute would prevent or significantly interfere 
with the sale of insurance to an insured depository 
institution's customers.
            Preemption standards for insurance sales laws adopted after 
                    September 3, 1998
    For laws enacted after September 3, 1998, the Committee 
believes it is appropriate to apply not only traditional 
standards of preemption, but also a new, statutory 
nondiscrimination standard. The application of this additional 
test reflects the fact that versions of Section 104 have been 
pending in Congress since September 3, 1998. Therefore, State 
insurance sales, solicitation, and cross-marketing laws adopted 
after September 3, 1998, are subject to preemption not only 
under applicable case law and the statutory standard based upon 
that case law, which is set forth in subsection 104(d)(2)(A), 
but also to the nondiscrimination standard established in 
subsection 104(e).
    The nondiscrimination standard created in subsection 104(e) 
preempts any State statute, regulation, order, interpretation, 
or other action that--
          (1) distinguishes by its terms between insured 
        depository institutions, or subsidiaries or affiliates 
        thereof, and other persons or entities engaged in such 
        activities, in a manner that is in any way adverse to 
        any such insured depository institution, or subsidiary 
        or affiliate thereof;
          (2) as interpreted or applied, has or will have an 
        impact on depository institutions, or subsidiaries or 
        affiliates thereof, that is substantially more adverse 
        than its impact on other persons or entities providing 
        the same products or services or engaged in the same 
        activities that are not insured depository 
        institutions, or subsidiaries or affiliates thereof, or 
        persons or entities affiliated therewith;
          (3) effectively prevents a depository institution, or 
        subsidiary or affiliate thereof, from engaging in 
        insurance activities authorized or permitted by this 
        Act or any other provision of federal law; or
          (4) conflicts with the intent of this Act generally 
        to permit affiliations that are authorized or permitted 
        by federal law between insured depository institutions, 
        or subsidiaries or affiliates thereof, and persons and 
        entities engaged in the business of insurance.
    An example of a State law that would be preempted under 
this standard is a law that would prohibit the sale of 
insurance within 100 yards of a teller window. While such a law 
would apply equally to all parties, it would have an impact on 
an insured depository institution that is substantially more 
adverse than its impact on other persons engaged in insurance 
sales.
    Finally, it is the Committee's intent that courts apply the 
various preemption standards applicable to State insurance 
sales, solicitation, and cross-marketing laws so as to give 
effect to each of the standards. In other words, the standards 
are intended to be complementary alternatives. One standard is 
not intended to limit or reduce the scope of another.
            Safe harbors
    The Committee determined that certain categories of State 
insurance sales, solicitation, and cross-marketing laws that 
relate to insured depository institutions should not be subject 
to preemption under traditional case law, the preemption 
standard established in subsection 104(d)(2)(A), or the 
nondiscrimination standard established in subsection 104(e). 
The Committee recognizes that many of these categories of State 
insurance sales, solicitation, and cross-marketing laws, which 
appear in subsection 104(d)(2)(B), are already subject to 
Federal banking agency advisories and guidelines. Thus, 
subsection 104(d)(2)(B) lists various categories of State 
insurance sales, solicitation, and cross-marketing laws that 
are not subject to preemption under the terms of this bill. 
With respect to the enumerated safe harbors, however, it is the 
Committee's intent that any restrictions imposed by the States 
not be more burdensome or restrictive.
    Under the terms of subsection 104(d)(2)(B), a State may 
impose restrictions on the use of advertising or other 
promotional material by an insured depository institution to 
ensure that such advertisements or promotional materials do not 
cause a reasonable person to believe that a State or the 
Federal Government guarantees the insurance. This provision is 
necessary to avoid any potential for confusion by the 
purchasers of insurance products. On the other hand, it is not 
intended as a means for States to impose a complex regulatory 
structure related to the review and approval of advertisements 
that is not otherwise applicable to other providers of 
insurance.
    Similarly, subsection 104(d)(2)(B) permits a State to 
require that any person who receives a commission as an 
insurance agent hold a valid State license for the applicable 
class of insurance sold. Such a provision ensures that only 
qualified individuals act as agents and protects the purchasers 
of insurance from unprofessional, and potentially improper 
sales practices. On the other hand, such a provision is not 
intended to encourage States to impose different qualification 
standards for licenses held by agents that sell insurance by or 
on behalf of an insured depository institution than are 
applicable for other agents. Furthermore, this provision is not 
intended to suggest that an insured depository institution, 
itself, be licensed as an agent in order to either employ 
agents or contract with others to sell insurance.
    Also, subsection 104(d)(2)(B) permits a State to prohibit 
the payment of any compensation to an individual who is not 
licensed to sell insurance if the compensation is based on the 
purchase of insurance by the customer. This provision is 
intended to prevent employees of insured depository 
institutions from having inappropriate incentives to sell 
insurance to customers. It is not, however, intended to apply 
to the payment of compensation for referrals when such 
compensation is unrelated to the purchase of insurance by a 
customer.
    The Committee does not intend that State laws falling 
within any one of the safe harbor categories be identical to 
any one of those categories. However, the bill does provide 
that in order to fall within any one of these categories the 
State law must be substantially the same as the corresponding 
category in subsection 104(d)(2)(B), and no more burdensome 
than such category.
            Preemption standard for other State insurance laws
    The Committee recognizes that, as a general rule, State 
laws related to insurance underwriting activities have not been 
applied in a manner that is discriminatory to insured 
depository institutions, their subsidiaries, or affiliates. 
Thus, subsection 104(d)(3) provides that the general preemption 
standardapplicable to authorized activities (subsection 
104(d)(1)) does not apply to State statutes, regulations, 
interpretations, orders or other actions otherwise addressed in the 
subsection provided that such State actions do not contravene the 
nondiscrimination standard established in subsection 104(e).
            Exceptions for certain categories State law
    Subsection 104(d)(4) provides that the general preemption 
standard applicable to authorized activities (subsection 
104(d)(1)) does not apply to State statutes, regulations, 
interpretations, orders, or other actions that are not 
otherwise addressed in the subsection (such as zoning laws), 
provided such State actions do not discriminate against insured 
depository institutions, their subsidiaries, and affiliates, 
and others engaged in the same activity. In other words, the 
general preemption standard applicable to authorized activities 
would not reach State zoning or criminal laws that may apply to 
an insured depository institution, subsidiary or affiliate 
thereof, engaged in an authorized activity.
    Subsection 104(f) provides that neither the preemption of 
State anti-affiliation laws (subsection 104(c)) nor the various 
activity preemption standards in subsection 104(d) apply to 
State securities investigations and enforcement actions, or to 
State laws, regulations, orders, interpretations, or other 
actions related to corporate governance or antitrust, provided 
such corporate or antitrust laws, regulations, orders, 
interpretations, or other actions are of general applicability 
and are not inconsistent with the purposes of the Act to 
authorize affiliations and remove barriers to such 
affiliations.
            Holding company regulation
    The bill seeks to provide regulation of BHCs 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, ``the 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.'' \8\
---------------------------------------------------------------------------
    \8\ McQuillan Testimony at 10.
---------------------------------------------------------------------------
    Accordingly, the Board 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 Securities and Exchange 
Commission (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 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 depository 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.

Insurance customer protections

    The Committee recognizes the importance of protecting 
customers who will now be able to purchase a broader ranger 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 thenew 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, to the extent practicable, that sales 
take place in an area separate from the deposit-taking area, 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, as appropriate, 
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 1934 Act affecting the retail sales 
of securities through networking arrangements on or off bank 
premises.

Community Reinvestment Act (CRA)

    The bill does not expand the application of the Community 
Reinvestment Act (CRA). Thus, the criteria for engaging in 
expanded financial activities by a bank holding company, or by 
a qualifying national bank through a subsidiary, remain as in 
current law the fulfillment of capital and management 
requirements.
    In addition, the bill makes CRA examinations meaningful by 
deeming an insured depository institution in compliance with 
the CRA (i.e., that the institution has met the credit needs of 
its entire community) if it has achieved at least a 
``satisfactory'' rating in all of its CRA examination during 
the immediately preceding 36-month period. The presumption of 
an institution's CRA compliance may be rebutted or challenged 
by substantial verifiable evidence brought to the attention of 
the appropriate Federal bank regulatory agency. The objector 
will bear the burden of proving the substantial verifiable 
nature of the evidence.
    The cost of regulatory compliance on smaller institutions 
is a matter of concern to the Committee. To this end, the bill 
also exempts from the requirements of the CRA small banks and 
thrifts (those with total assets not exceeding $100 million) 
located in non-metropolitan areas. The exemption would, in 
effect, apply only to 38% of all banks and thrifts, which 
control less than 3% of banking assets nationally.

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 
requirement for a General Accounting Office (the ``GAO'') study 
of certain revisions to S corporation tax rules permitting 
greater access by community banks to S corporation treatment.

Federal Home Loan Banks

    The bill includes certain 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''). 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. Thesystem 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 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 management 
functions of the Federal Housing Finance Board (``FHFB''), which 
regulates the FHLB System, have been decentralized. 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 GAO, have suggested that the FHFB is too 
involved in day-to-day management decisions of the FHLBanks. The bill 
also requires a study by the GAO relating to the capital structure of 
the FHLB System.

Foreign banks

    The bill gives the Board explicit authority to apply 
comparable capital and management standards to foreign banks 
operating a branch or agency or owning or controlling a 
commercial lending company in the United States.
    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.

Unitary thrift holding companies

    Under the bill, new unitary savings and loan holding 
companies will not enjoy the benefits of unitary status and 
will be subject to the activity limitations of the Savings and 
Loan Holding Company Act. Existing unitary savings and loan 
holding companies (those meeting the grandfather date 
requirements of the bill) will not be subject to those 
limitations. Although some have advocated that the rights of 
those existing unitary companies should be extinguished upon 
sale, the bill reflects the Committee's judgment that the value 
of those companies, built up in justified reliance on a 
legitimate legal structure authorized by Congress, and often 
with the encouragement of Federal regulators, should not be 
subject to destruction or diminution resulting from the 
imposition of such restrictions. Instead, the bill preserves 
the existing transferability rights of such companies.

                      SECTION-BY-SECTION ANALYSIS

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


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. Financial activities
    Section 102 establishes the existing bank holding company 
(BHC) structure as that under which banks may affiliate with 
securities and insurance firms. A BHC may so affiliate and 
engage in a broad range of financial activities and activities 
incidental thereto if all of its insured depository 
subsidiaries are well capitalized and well managed.
    Activities that are ``financial in nature'' or ``incidental 
to financial activities,'' include:
          Lending and other traditional bank activities;
          Insurance underwriting and agency activities;
          Providing financial, investment, or economic advisory 
        services;
          Issuing or selling 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;
          Any other activity the Board may approve as 
        ``financial in nature'' or ``incidental'' to a 
        financial activity; and
          Activities that are complementary to financial 
        activities, or any service that the Board determines 
        not to pose a substantial risk to the safety or 
        soundness of depository institutions or the financial 
        system generally.
    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.
    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 Modernization Act of 1999 (the ``Act'') and the BHCA, 
changes that have occurred or are reasonably expected in the 
marketplace in which bank 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, subject to certain limits. 
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.
    This section also grandfathers commodity activities and 
affiliations of certain companies becoming bank holding 
companies after the date of enactment of the Act. Generally, 
these companies may continue to engage in or, directly or 
indirectly, own or control shares of a company engaged in 
activities related to the trading, sale or investment in 
commodities and underlying physical propertiesif the holding 
company or any subsidiary was lawfully engaged in such activities as of 
September 30, 1997 in the United States; and the holding company is 
predominantly engaged in activities financial in nature.

Section 103. Conforming amendments

    Section 103 amends the Home Owners' Loan Act of 1933 to 
permit multiple savings and loan holding companies to engage in 
activities permissible for bank holding companies.

Section 104. Operation of State law

    Section 104 establishes the core rules that will apply to 
state regulation of the affiliations and activities authorized 
under the Act.
    Section 104(a) simply restates that the McCarran-Ferguson 
Act, 15 U.S.C. Sec. Sec. 1011 et seq., remains the law of the 
United States.
    Section 104(b)(1) generally requires any person providing 
insurance in a State as principal or agent to be licensed as 
required by the appropriate insurance regulator of such State 
in accordance with the relevant State insurance law. This 
requirement is subject to the general preemption and 
nondiscrimination requirements set forth in Section 104 (c), 
(d) and (e).
    Section 104(c), in general, preempts a State's ability to 
prevent or restrict affiliations between insured depository 
institutions and financial entities, except that a State 
insurance regulator may collect, review and take actions on 
applications and documents or reports necessary or required in 
connection with proposed acquisitions, changes or continuations 
of control of entities domiciled within the State. The State 
actions must not have the practical effect of discriminating, 
intentionally or unintentionally, against an insured depository 
institution, subsidiary or affiliate thereof, or against any 
person or entity based upon affiliation with an insured 
depository institution.
    Section 104(d)(1), in general, preempts a State's ability 
to prevent or restrict the sales activities authorized under 
this Act of an insured depository institution or subsidiary or 
affiliate thereof with the exception of insurance sales and 
certain other insurance activities.
    Section 104(d)(2)(A) then establishes the general 
preemption rule that applies to state regulation of insurance 
sales, solicitation or cross-marketing activities. In 
accordance with the legal standards for preemption set forth in 
the decision of the Supreme Court of the United States in 
Barnett Bank of Marion Co., N.A. v. Nelson, 116 S. Ct. 1103 
(1996), no State may prevent or significantly interfere with 
the ability of an insured depository institution, or a 
subsidiary or affiliate thereof, to engage in insurance sales, 
solicitation and cross-marketing activities.
    Section 104(d)(2)(B) establishes 13 separate ``safe 
harbor'' provisions. These ``safe harbors'' permit a State to 
impose restrictions that are substantially the same as but no 
more burdensome or restrictive than the requirements included 
in each ``safe harbor'' provision. Any state law that falls 
within a safe harbor cannot be preempted under the provisions 
of Section 104(d)(2)(A). The ``safe harbors'' apply both to 
state laws and regulations already in place and to those that 
may be enacted in the future. They protect state restrictions--
          Prohibiting the rejection of an insurance policy 
        required in connection with a loan solely because it 
        was sold or underwritten by an unaffiliated agent.
          Prohibiting the imposition of extra charges on 
        insurance policies required in connection with a loan 
        that are purchased from unaffiliated agents.
          Prohibiting misrepresentations regarding the insured 
        or guaranteed status of any insurance product.
          Requiring that commissions can be paid only to 
        licensed insurance agents.
          Prohibiting any referral fees paid to non-licensed 
        individuals to be based on whether the referral results 
        in a transaction.
          Prohibiting the release of insurance information to 
        nonaffiliated third parties for the purpose of 
        soliciting or selling insurance without the express 
        written consent of the customer.
          Prohibiting the use of health information obtained 
        from insurance records without the express written 
        consent of the customer.
          Prohibiting tying arrangements.
          Requiring the written disclosure, prior to any 
        insurance sale, that the products is--(1) not a 
        deposit; (2) not insured by the FDIC; (3) not 
        guaranteed by the financial institution or its 
        subsidiaries or affiliates; and (4) where appropriate, 
        involves investment risk, including loss of 
principal.This disclosure may be required to be in writing where a 
writing is practicable.
          Requiring the disclosure, when insurance is required 
        in connection with a loan, that the purchase of 
        insurance from an unaffiliated agent will not affect 
        the loan decision or the credit terms in any way.
          Requiring the completion of credit and insurance 
        transactions through separate documents.
          Prohibiting the inclusion of the expense of insurance 
        premiums in a primary credit transaction without the 
        express consent of the customer.
          Requiring the maintenance of separate insurance books 
        and records that must be made available to state 
        insurance regulators for inspection.
    The Act provides special rules with respect to State laws, 
regulations, orders, interpretations and other actions enacted, 
issued or taken prior to September 3, 1998. Pursuant to Section 
104(d)(2)(C)(ii), these laws and other actions will not be 
subject to the Act's nondiscrimination provisions found at 
Section 104(e). In addition, pursuant to Section 
104(d)(2)(C)(i), when these laws and other actions are reviewed 
in the courts, traditional rules of judicial deference will be 
applied. These special rules do not apply to State laws and 
other actions that fall within the ``safe harbors'' found at 
Section 104(d)(2)(B).
    With respect to State laws, regulations, orders, 
interpretations and other actions enacted, issued or taken on 
or after September 3, 1998, the Act will apply a 
nondiscrimination standard found at Section 104(e), unless the 
laws or actions fall within the safe harbors found at Section 
104(d)(2)(B). Courts reviewing State laws enacted on or after 
September 3, 1998 will also apply new provisions relating to 
deference, found at Section 203(e).
    Whether or not a State law, regulation, order, 
interpretation or other action involving insurance sales, 
solicitation or cross-marketing activities was enacted, issued, 
or taken prior to or on or after September 3, 1998, the 
principles of the Barnett case will still apply, as well as the 
statutory preemption standard at Section 104(d)(2)(A), except 
to the extent that the State law or action falls within the 
safe harbor protections.
    Finally, Section 104(d)(2)(C)(iii) provides generally that 
Section 104(d)(2) should not be construed to limit the 
applicability of the Barnett decision or draw inferences 
regarding other State law not referenced by one of the 13 safe 
harbors.
    Sections 104(d) (3) and (4) clarify that no preemption 
under paragraph (d)(1) is intended with respect to certain 
State laws that do not violate the nondiscrimination standards 
established in Section 104(e).
    Section 104(e) establishes a second preemption standard 
that prohibits a State from regulating the activities 
authorized or permitted under this Act or any other provision 
of law in a manner that--(1) distinguishes by its terms between 
insured depository institutions and other persons engaged in 
similar activities that is in any way adverse to an insured 
depository institution; (2) as interpreted or applied, has or 
will have an impact on insured depository institutions that is 
substantially more adverse than its impact on other persons 
providing similar products and services; (3) effectively 
prevents an insured depository institution from exercising its 
powers under this Act or Federal law; or (4) conflicts with the 
intent of this Act.
    Section 104(f) makes clear that nothing included in Section 
104 is intended to affect the investigatory and enforcement 
powers of State securities regulators or the application of 
state laws, regulations, orders, interpretations or other 
actions of general applicability, including state antitrust 
laws that are not inconsistent with the purposes of this Act.
    Section 104(g) provides that, except as provided in Section 
104(d)(2), no State may prevent or restrict the ability of an 
insurer, or an affiliate of an insurer, to become a BHC. 
Section 104(g) further provides that no State may limit the 
amount of an insurer's assets that may be invested in the 
voting securities of an insured depository institution or a 
company that controls such an institution, except that the 
State of the insurer's domicile may limit the investment to 5 
percent of the insurer's admitted assets. Section 104(g) also 
provides that no State other than the State of the insurer's 
domicile may prevent, restrict, or have the authority to 
review, approve, or disapprove a plan of reorganization from 
mutual to stock form. The Committee notes that the State of 
domicile is not necessarily the State in which most of the 
insurer's policyholders reside. Therefore, in a proposed 
reorganization from mutual to stock form, the appropriate 
regulatory authority of the insurer's State of domicile is 
required toconsult with the appropriate regulatory authority in 
other States in which the insurer conducts business, regarding issues 
affecting the best interests of policyholders.
    Section 104(h) establishes a special rule that applies to 
the licensing of any person engaged in the sale of insurance 
products in conjunction with the short-term rental of motor 
vehicles. Unless a State statute, rule, or regulation expressly 
requires such persons to be licensed, then such persons need 
not be licensed pursuant to Section 104(b)(1). This provision 
is not intended to impede a State's ability to require rental 
car company employees to be licensed in any way. It is instead 
intended to foreclose third parties from seeking damages 
related to the sale of insurance products by unlicensed rental 
car agents unless and until a State has affirmatively concluded 
that such agents must be licensed.

Subtitle B--Streamlining Supervision of Bank Holding Companies

            Section 111. Streamlining bank 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 
functionally regulated 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 not authorized to prescribe capital 
requirements for any functionally regulated subsidiary of a 
holding company that is in compliance with applicable capital 
requirements of another Federal regulatory authority, a State 
insurance authority, or is a registered investment adviser. 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 111 makes clear that securities and insurance 
activities conducted in regulated entities are subject to 
functional regulation by relevant State securities authorities, 
the Securities and Exchange Commission (the ``Commission''), or 
relevant State insurance regulators.
            Section 112. Authority of State insurance regulator and 
                    Securities and Exchange Commission
    Section 112 amends Section 5 of the BHCA 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 113. Role of the Board of Governors of the Federal 
                    Reserve System
    Section 113 adds a new Section 10A to the BHCA. Section 10A 
is intended to protect functionally regulated subsidiaries from 
additional and duplicative regulation by the Board. Section 10A 
prohibits the Board generally from the entry of orders, 
imposition of restraints, restrictions, guidelines, or other 
requirements with respect to a functionally regulated 
subsidiary of a bank holding company unless the action is 
necessary to prevent or redress an unsafe or unsound practice 
or breach of fiduciary duty by that subsidiary that poses a 
``material risk'' to the safety and soundness of an affiliated 
insured depository institution or the domestic or international 
payment system and that the Board cannot protect against 
through action directed at or against the affiliated insured 
depository institution or insured depository institutions 
generally.
    The term ``material risk'' should be interpreted to mean 
that level of risk which, under the circumstances, poses a 
threat to the financial safety, soundness or stability of a 
particular insured depository institution, insured depository 
institutions generally, or to the domestic or international 
payment system. The Committee expects that the Board and other 
Federal banking agencies and functional regulators, as 
appropriate, to exercise their authority in order to protect 
against such feared risk, and to coordinate with and 
accommodate requests for action by the Board.
            Section 114. Examination of investment companies
    Federal banking agencies are prohibited from inspecting or 
examining registered investment companies unless the investment 
company is a bank holding company or savings and loan holding 
company. The Commission is directed to provide to any Federal 
banking agency, upon request, examination reports, records, or 
other relevant information. The section does not prohibit the 
FDIC from examining an investment company affiliate of an 
insured depository institution, pursuant to its authority under 
Section 10(b)(4) of the Federal Deposit Insurance Act, as 
necessary, to disclose fully the relationship between the 
insured depository institution and the affiliate, and the 
effect of such relationship on the insured depository 
institution.
            Section 115. Equivalent regulation and supervision
    Section 115 provides that the limitations imposed upon the 
Board pursuant to the provisions of Section 5(c), 5(g) and 10A 
of the BHCA also limit the authority of the other Federal 
banking agencies to require reports, make examinations, impose 
capital requirements, or take other actions with respect to 
holding companies and their functionally regulated 
nondepository institution subsidiaries. This section ensures 
that the OCC, the Office of Thrift Supervision (the ``OTS'') 
and the FDIC will not be able to assume and duplicate the 
function of being the general supervisor over functionally 
regulated subsidiaries. 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, functionally regulated 
subsidiaries should not be any greater than that of the Board 
under Sections 111 and 113.
            Section 116. Interagency consultation
    Section 116 states the Committee's intent that the Board as 
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 that 
upon the request of a State insurance regulator, the Board may 
provide any information regarding the financial condition, risk 
management policies, and operations of any bank 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 an insured depository institution or 
bank holding company with an insurance company.
            Section 117. Preserving the integrity of FDIC resources
    Section 117 amends Section 11(a)(4)(B) of the Federal 
Deposit InsuranceAct 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--Activities of National Banks

            Section 121. Authority of national banks to underwrite 
                    municipal revenue bonds
    Section 121 amends 12 U.S.C. 24(7) to expand the scope of 
securities activities permissible for a national bank to 
include the underwriting of 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.
            Section 122. Subsidiaries of national banks
    Section 122(a) adds a new Section 5136A to the Revised 
Statutes of the United States. Pursuant to and in accordance 
with Section 5136A(a), a national bank is permitted to control 
a ``financial subsidiary'' or to hold an interest in a 
financial subsidiary only if the bank has consolidated total 
assets not exceeding $1 billion, is not affiliated with a bank 
holding company, is well capitalized and well managed (along 
with its insured depository institution affiliates), and 
receives OCC approval to engage in the proposed activities. The 
OCC is authorized to prescribe regulations for the enforcement 
of these requirements. A financial subsidiary is defined to 
mean a company that is a subsidiary of a national bank that 
engages as principal in any activity that is permissible for a 
bank holding company under Section 4(k) of the BHCA but is not 
permissible for national banks to conduct directly.
    In order to conduct activities through a financial 
subsidiary, the national bank must comply with certain safety 
and soundness requirements: for purposes of determining 
regulatory capital, a deduction from assets and tangible equity 
is required for the aggregate amount of outstanding equity 
investments by the national bank in a financial subsidiary; 
also for determining regulatory capital, the assets and 
liabilities of the financial subsidiary may not be consolidated 
with those of the national bank; and the approval of the OCC is 
required prior to making any equity investment in the financial 
subsidiary if the investment, when made, would exceed the 
amount that the national bank could pay as a dividend without 
obtaining prior regulatory approval. The national bank also 
must maintain procedures, among others, for identifying and 
managing financial and operational risks within the bank and 
financial subsidiary.
    New Section 5136A is intended to allow small, independent 
national banks an opportunity to take advantage of financial 
modernization legislation without being required to incur the 
added costs and burdens of forming a bank holding company.
    Pursuant to Section 5136A(e), a national bank is authorized 
to retain control of a company or retain an interest in a 
company, and conduct through such company activities lawfully 
conducted therein as of the date of enactment of this Act. This 
subsection also clarifies that a national bank may conduct 
through a subsidiary any activity in which national banks may 
engage directly. The Committee does not intend that this 
provision be construed to authorize the retention by national 
banks of DPC assets beyond those periods permitted by the OCC 
under applicable regulations. Further, the Committee does not 
intend to limit the authority that national banks have under 
Federal statutes such as Section 25A of the Federal Reserve 
Act, the Bank Service Company Act or the Small Business Act 
that specifically authorize national banks to own an interest 
in specific types of companies. The enactment of new Section 
5136A does, however, make the OCC's Part 5 Rule inoperative.
    Section 122(b) amends Section 23A of the Federal Reserve 
Act to include a financial subsidiary of a national bank within 
the definition of ``affiliate.'' The purchase of or investment 
in equity securities issued by the financial subsidiary will 
not be deemed to be a covered transaction.
    Section 122(c) provides that a financial subsidiary of a 
national bank engaging in activities pursuant to Section 
5136A(a) of the Revised Statutes of the United States will be 
deemed to be a subsidiary of a bank holding company for 
purposes of the antitying provisions of the Bank Holding 
Company Act Amendments of 1970.
            Section 123. Agency activities
    Section 123 provides that national bank subsidiaries may 
engage in agency activities that have been determined by the 
OCC to be permissible for national banks or to be financial in 
nature or incidental to financial activities (pursuant to 
Section 4(k) of the BHCA) provided that the subsidiary engages 
in the activities solely as agent and not directly or 
indirectly as principal.
            Section 124. Misrepresentations regarding financial 
                    institution liability for obligations of affiliates
    Section 124 makes it a crime for bank or bank affiliate or 
bank subsidiary personnel to fraudulently represent that the 
bank will be liable for any obligation of a bank affiliate or 
subsidiary.
            Section 125. Insurance underwriting by national banks
    Section 125(a)(1) establishes the general rule that a 
national bank may only provide insurance as principal in 
accordance with Section 5136A(a) of the Revised Statutes of the 
United States, as added by this Act.
    Section 125(a)(2) provides for an exception to that general 
rule. Without regard to the requirements of Section 5136A(a), a 
national bank is permitted to offer any ``authorized insurance 
product'' in a principal capacity.
    Under Section 125(b), a product is ``authorized'' if, as of 
January 1, 1999, national banks were lawfully providing it as 
principal or the OCC 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 OCC that national banks may provide it as principal; and 
the product is not an annuity contract subject to tax treatment 
under Section 72 of the Internal Revenue Code. Under the 
Committee bill, the provision by national bank subsidiaries of 
title insurance in a principal capacity is not prohibited.
    Section 125(c) defines ``insurance'' for purposes of 
Section 125. Under Section 125(c)(1), ``insurance'' means any 
product regulated as insurance as of January 1, 1999 in the 
State in which the product is provided. Under Section 
125(c)(2), insurance means any product first offered after 
January 1, 1999 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. Insurance is 
defined to exclude those products which are a product or 
service of a bank, such as a deposit product, loan, discount, 
letter of credit, or other extension of credit; a trust or 
other fiduciary service; a qualified financial contract as 
defined in Section 11(e)(8)(D)(i) of the Federal Deposit 
Insurance Act; or a financial guaranty. 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 125(c)(2)(v) 
is not intended to exclude surety bonds from the definition of 
insurance. Under Section 125(c)(3), insurance means any annuity 
contract on which the income is subject to tax under Section 72 
of the Internal Revenue Code.

Subtitle D--National Treatment of Foreign Financial Institutions

            Section 151. National treatment of foreign financial 
                    institutions
    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 activities. The bill provides that 
foreign banks should no longer be entitled to financial 
grandfathered rights authorized under new Section 4(k) of the 
BHCA after the bank has filed a declaration under Section 4(l) 
of the BHCA.
            Section 152. Representative offices
    Section 152(a) removes the exemption for subsidiaries of 
foreign banks from the definition of a representative office. 
Thus, direct subsidiaries of foreign banks will need Board 
approval as ``representative offices'' of the foreign bank.
    Section 152(b) provides that the Board may examine any 
affiliate of a foreign bank in any State.

                Title II--Insurance Customer Protections


Section 201. Functional regulation

    Section 201 provides that, subject to Sections 104(c), (d) 
and (e), 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 preempted.

Section 202. Insurance customer protections

    Section 202 includes several consumer protection 
requirements that the Federal banking agencies will be required 
to implement within one year from the date of enactment of the 
Act. These requirements would establish federal minimum 
consumer protections. They require the promulgation of 
regulations--
          Prohibiting discrimination against non-affiliated 
        agents provisions by providing expedited or enhanced 
        treatment if insurance is purchased from affiliated 
        agents;
          Prohibiting tying and other coercive practices;
          Prohibiting misrepresentations regarding the 
        federally insured or guaranteed status of any insurance 
        product;
          Requiring, to the extent practicable, the separation 
        of insurance and deposit-taking activities;
          Limiting the payment of referral fees to bank tellers 
        to a nominal amount that may not be based on whether 
        the referral results in a transaction;
          Requiring the disclosure, prior to any insurance 
        sale, that the insurance is--(1) not a deposit; (2) not 
        insured by the FDIC; (3) not guaranteed by the 
        financial institution or its subsidiaries or 
        affiliates; and (4) where appropriate, involves 
        investment risk, including loss of principal;
          Requiring that an acknowledgment be obtained whenever 
        a disclosure is required from the customer verifying 
        receipt of the disclosure.
    In promulgating the requisite regulations, the Federal 
banking agencies must ensure that the regulations do not have 
the practical effect of discriminating, either intentionally or 
unintentional, against any person engaged in insurance sales or 
solicitations that is not affiliated with an insured depository 
institution. The Federal banking regulators are required to 
determine whether any parallel state customer protection 
requirement is more protective; if it is not, the Federal 
banking regulators must advise the State that the Federal 
requirement will apply. The State may then ``opt-out'' of this 
preemption if it enacts a statute within three years of the 
receipt of Federal notice.

Section 203. Federal and State dispute resolution

    Section 203(a) provides that in the event of a regulatory 
conflict between a State insurance regulator and a Federal 
regulator as to insurance issues, including 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 203(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 203(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 203(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 203(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 underFederal 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 must accord equal deference to the Federal regulator and the 
State insurance regulator.

                   Title III--Regulatory Improvements


Section 301. Elimination of SAIF and DIF special reserves

    Section 301 amends the Federal Deposit Insurance Act to 
eliminate the SAIF special reserve created by the Deposit 
Insurance Funds Act of 1996.

Section 302. Expanded small bank access to S corporation treatment

    Section 302 requires that the GAO conduct a study of 
possible revisions to the rules governing S corporations, 
including increasing the permissible number of shareholders in 
such corporations; permitting shares of such corporations to be 
held in individual retirement accounts; clarifying that 
interest on investments held for safety, soundness, and 
liquidity purposes should not be considered to be passive 
income; discontinuation of the treatment of stock held by bank 
directors as a disqualifying personal class of stock for such 
corporations; and improving Federal tax treatment of bad debt 
and interest deductions. The study is also to report on the 
impact that such revisions might have on community banks.

Section 303. Meaningful CRA examinations

    Section 303 provides that an insured depository institution 
rated as ``satisfactory'' or better in its most recent 
examination under the CRA, and in each such examination during 
the immediately preceding 36-month period shall be deemed to be 
in compliance with the requirements of the CRA (i.e., that the 
insured depository institution has met the credit needs of its 
entire community) until the completion of a subsequent 
regularly scheduled CRA examination, unless substantial 
verifiable information arising since the time of the most 
recent CRA examination demonstrating CRA noncompliance is filed 
with the appropriate Federal banking agency. The appropriate 
Federal banking agency must determine, on a timely basis, 
whether the information filed to challenge the insured 
depository institution's CRA compliance provides sufficient 
proof of the institution's CRA noncompliance. The person filing 
information with the appropriate Federal banking agency bears 
the burden of proving the substantial verifiable nature of that 
information.

Section 304. Temporary extension of bank insurance fund member FICO 
        assessment rates

    Section 304 extends for three years, until December 31, 
2002, the BIF-member FICO assessment rates.

Section 305. Cross-marketing restrictions; limited purpose bank relief; 
        divestiture

    Section 305(a) amends Section 4(f) of the BHCA by striking 
paragraph (3). This provision would repeal the current cross 
marketing restriction, allowing CEBA banks to cross market 
their products and services with the products and services of 
affiliates.
    Section 305(b) amends Section 4(f) of the BHCA by adding a 
new paragraph (3) to permit certain overdrafts. This provision 
would expand ``permissible overdrafts'' to include overdrafts 
incurred by affiliates that incidentally engage in financial 
services activities, if the overdraft is within the 
restrictions imposed by Section 23A and 23B of the Federal 
Reserve Act.
    Section 305(c) amends Section 2(c)(2)(H) of the BHCA. 
Section 2(c)(2)(H) exempts industrial loan companies from the 
definition of ``bank'' for purposes of the BHCA. 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 305(c) 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 BHCA (banks that, prior to the enactment of the 
Competitive Equality Banking Act of 1987 (``CEBA''), either 
made commercial loans or accepted insured deposits but did not 
do both).
    Section 305(d) amends Section 4(f) of the BHCA. This 
provision repeals therestriction which prohibited limited-
purpose banks from engaging in activities they were not engaged in 
prior to March 5, 1987. Limited-purpose banks would still be prohibited 
from both accepting demand deposits and engaging in the business of 
commercial lending (i.e. a limited-purpose bank can do one or the 
other, but not both). This section also clarifies that a limited 
purpose bank may acquire without limit the same type of consumer assets 
that it can originate.
    Section 305(e) amends Section 4(f)(4) of the BHCA. This 
section would modify the provision of CEBA which requires 
divestiture of a limited-purpose bank in the event the bank or 
its owner fails to remain qualified for the CEBA exception. The 
amendment allows limited-purpose bank owners to avoid 
divestiture by promptly correcting the violation (within 180 
days of receipt of notice from the Board) that would otherwise 
lead to divestiture and implementing procedures to prevent 
similar violations in the future.

Section 306. ``Plain language'' requirement for Federal banking agency 
        rules

    Section 306 directs the Federal banking agencies to use 
plain language in all proposed and final rulemakings published 
in the Federal Register after January 1, 2000. Not later than 
March 1, 2001, each Federal banking agency shall submit to the 
Congress a report describing how the agency has complied with 
that requirement.

Section 307. Retention of ``Federal'' in name of converted Federal 
        savings association

    Section 307 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.

Section 308. Community Reinvestment Act exemption

    Section 308 exempts from the requirements of the CRA FDIC-
insured banks and thrifts with total assets not exceeding $100 
million and that are located in non-metropolitan areas. A non-
metropolitan area is defined as any area, no part of which is 
within an area designated as a Metropolitan Statistical Area by 
the United States Office of Management and Budget. The $100 
million amount is to be adjusted annually by the annual 
percentage increase in the Consumer Price Index for Urban Wage 
Earners and Clerical Workers published by the Bureau of Labor 
Statistics.

Section 309. Bank officers and directors as officers and directors of 
        public utilities

    Section 309 amends Section 305(b) of the Federal Power Act 
to permit generally officers or directors of public utilities 
to serve as officers or directors of banks, trust companies, or 
securities firms if certain safeguards against conflicts of 
interest are complied with.

Section 310. Control of bankers' banks

    Section 310 amends Section 2(a)(5)(E)(i) of the BHCA to 
allow one or more thrift institutions to own a state-chartered 
bank or trust company, whose business is restricted to 
accepting deposits from thrift institutions or savings banks; 
deposits arising from the corporate business of the thrift 
institutions or savings banks that own the bank or trust 
company; or deposits of public funds.

Section 311. Multi-state licensing and interstate insurance sales 
        activities

    This section expresses the sense of the Congress that by 
the end of the 36-month period beginning on the date of 
enactment of the Act, the States should implement uniform 
insurance agent and broker licensing application and 
qualification requirements; eliminate pre- or post-licensure 
requirements having the practical effect of discriminating, 
directly or indirectly, against nonresident insurance agents or 
brokers; and if such actions are not taken, Congress should 
take steps to rectify the problems noted. Any entity 
established by the Congress should be under the supervision and 
oversight of the National Association of Insurance 
Commissioners.

         Title IV--Federal Home Loan Bank System Modernization


Section 401. Short title

    Section 401 designates this subtitle as the ``Federal Home 
Loan Bank System Modernization Act of 1999''.

Section 402. Definitions

    Section 402 provides technical changes to definitions 
within the Federal Home Loan Bank Act (``FHLBA''). It also 
creates a new class of ``community financial institutions'' 
with average total assets less than $500 million, based on an 
average of total assets over the preceding 3 years. Adjustments 
to the $500 million limit will be made annually based on the 
annual percentage increase, if any, in the Consumer Price Index 
for all urban consumers, as published by the Department of 
Labor.

Section 403. Savings association membership

    Section 403 makes Federal Home Loan Bank (``FHLBank'') 
membership voluntary, as of June 1, 2000, for savings and loan 
associations. Under current law, membership is mandatory.

Section 404. Advances to members; collateral

    Section 404 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 secured small business and agriculture loans as 
collateral (including securities representing a whole interest 
in such secured loans), and use the advances to fund small 
business, small farm and small agri-business 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 405. Eligibility criteria

    Section 405 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 406. Management of banks

    Section 406 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 407. Resolution Funding Corporation

    Section 407 changes the current annual $300 million funding 
formula for the Resolution Funding Corporation obligations of 
the FHLBanks to a percentage of annual net earnings. This 
change will become effective on June 1, 2000.

Section 408. GAO study on Federal Home Loan Bank System capital

    Section 408 directs the GAO to conduct a study of possible 
revisions to the capital structure of the FHLB System, 
including the need for more permanent capital; a statutory 
leverage ratio; a risk-based capital structure; and the impact 
such revisions might have on the operations of the FHLB System.

         Title V--Functional Regulation of Brokers and Dealers


Section 501. Definition of broker

    Section 501 amends the Securities and Exchange Act of 1934 
(the ``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 502. Definition of dealer

    Section 502 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; or 
transactions in ``traditional banking products.''

Section 503. Definition and treatment of banking products

    Section 503 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; debit accounts arising from a credit 
card or similar arrangement; loan participations sold to 
qualified investors; and swap agreements as defined in Section 
11(e)(8)(D)(vi) of the Federal Deposit Insurance Act.
    With respect to new products, the Commission may, with the 
concurrence of the Board, determine by regulation that a new 
product is a security, subject to registration with the 
Commission, as opposed to a banking product. The Commission may 
not require the registration of a new product as a security 
unless, with the concurrence of the Board, the SEC determines 
by regulation thatthe product is a new product; the product is 
a security; and that the imposition of registration requirements is 
necessary or appropriate in the public interest and for the protection 
of investors. The section makes clear that the rights or authority of 
the Board, any appropriate Federal banking agency, or any interested 
party under any other provision of law shall not be affected in any way 
to object to or seek judicial review as to whether a product or 
instrument is or is not appropriately classified as a traditional 
banking product.

Section 504. Qualified investor defined

    Section 504 defines ``qualified investor'' to include: any 
registered 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 505. Government securities defined

    Section 505 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 506. Effective date

    Section 506 provides that the subtitle shall take effect 
one year after enactment.

Section 507. Rule of construction

    Section 507 provides that the bill shall not be construed 
so as to limit the scope or applicability of the Commodity 
Exchange Act.

          Title VI--Unitary Savings and Loan Holding Companies


Section 601. Prevention of creation of new S&L holding companies with 
        commercial affiliates

    Section 601 amends Section 10(c) of the Home Owners' Loan 
Act to terminate expanded powers for new unitary savings and 
loan holding companies, excepting those that become a savings 
and loan holding company pursuant to an application filed with 
the OTS on or before February 28, 1999. 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 February 28, 1999, or that was formed pursuant to 
an application 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 February 28, 1999, or the successor to such a 
savings association (a ``grandfathered unitary savings and loan 
holding company'').

                      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. The Congressional Budget Office Cost Estimate 
and its Estimate of Costs of Private-Sector Mandates, both 
dated April 22, 1999, are hereby included in this report.

                       Congressional Budget Office,
                                             U.S. Congress,
                                    Washington, DC, April 22, 1999.
Hon. Phil Gramm,
Chairman, Committee on Banking, Housing, and Urban Affairs, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate and mandate statements for 
the Financial Services Modernization Act of 1999. One enclosure 
includes the estimate of federal costs and the estimate of the 
impact of the legislation on state, local, and tribal 
governments. The estimated impact of mandates on the private 
sector is discussed in a separate enclosure.
    If you wish further details on these estimates, we will be 
pleased to provide them. The CBO staff contacts are Robert S. 
Seiler (for costs to the Federal Home Loan Banks), Mary 
Maginniss (for other federal costs), Carolyn Lynch (for federal 
revenues), Marjorie Miller (for the state and local impact), 
and Patrice Gordon (for the private-sector impact).
            Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Enclosures.

Financial Services Modernization Act of 1999

            Summary
    The bill would eliminate certain barriers to ties between 
insured depository institutions and other financial services 
companies, including insurance and securities firms. While 
these changes could affect the government's spending for 
deposit insurance, CBO has no basis for predicting whether the 
long-run costs of deposit insurance would be higher or lower 
than under current law. Because insured depository institutions 
pay premiums to cover these costs, any such changes would have 
little or not net impact on the budget over the long term.
    CBO estimates that implementing this act would decrease 
other direct spending by $42 million in 2000 and $338 million 
over the 2000-2004 period, and would decrease revenues by $3 
million in 2000 and $15 million over the 2000-2004 period. 
Because the bill would affect direct spending and receipts, 
pay-as-you-go procedures would apply. Assuming appropriation of 
the necessary amount, CBO estimates that federal agencies would 
spend $3 million to $4 million annually from appropriated funds 
to carry out the provisions of the bill.
    The legislation contains several intergovernmental mandates 
as defined in the Unfunded Mandates Reform Act (UMRA), but CBO 
estimates that these mandates would not impose significant 
costs on state, local, or tribal governments. Any such costs 
would not exceed the threshold established by that act ($50 
million in 1996, adjusted annually for inflation). The bill 
also contains private-sector mandates as defined in UMRA. CBO's 
estimate of the cost of those private-sector mandates is 
detailed in a separate statement.
            Description of the bill's major provisions
    The Financial Services Modernization Act of 1999 would:
          Permit affiliations of banking, securities, and 
        insurance companies;
          Eliminate the requirement that the Federal Deposit 
        Insurance Corporation (FDIC) retain a ``special 
        reserve'' for the Savings Association Insurance Fund 
        (SAIF);
          Amend the Federal Deposit Insurance Act to prevent 
        the use of deposit insurance funds to assist affiliates 
        or subsidiaries of insured financial institutions;
          End the requirement that banks and thrifts located in 
        rural areas and having assets less than $100 million 
        comply with the provisions of the Community 
        Reinvestment Act (CRA);
          Reform the Federal Home Loan Bank (FHLB) System, 
        making membership voluntary and replacing the $300 
        million annual payment made by the FHLBs for interest 
        on bonds issued by the Resolution Funding Corporation 
        (REFCORP) with an assessment set at 20.75 percent of 
        the FHLBs' net income;
          Require the Federal Reserve, along with the Treasury, 
        to determine which activities bank holding companies 
        may engage in;
          Create a system of functional regulation, whereby 
        institutions that conduct banking, securities, or 
        insurance activities would be regulated by the agency 
        responsible for each such activity (regulatory 
        conflicts on insurance issues between federal and state 
        regulators would be resolved on an expedited basis by 
        the federal courts);
          Terminate the authority of the Office of Thrift 
        Supervision (OTS) to grant new thrift charters for 
        unitary savings and loan holding companies for all 
        applications other than those approved or pending as of 
        February 28, 1999;
          Extend for three more years the formula for 
        determinig how much BIF-insured and SAIF-insured 
        institutions will pay towards the interest payment on 
        bonds that the Financing Corporation (FICO) issued to 
        help pay for losses of failed savings institutions;
          Require federal banking agencies to develop 
        regulations governing sales or offers of insurance 
        products; and
          Require the General Accounting Office (GAO) to 
        prepare two reports.
            Estimated cost to the Federal Government
    The bill would make a number of changes affecting direct 
spending and revenues, which would result in net increases in 
spending by the banking regulatory agencies, decreased spending 
by the Treasury, and a decrease in the annual payment--recorded 
as revenues--that the Federal Reserve remits to the Treasury. 
Assuming enactment late in fiscal year 1999, CBO estimates that 
direct spending would decrease by about $338 million over the 
2000-2004 period and that revenues would decline by $15 million 
over the same period. The legislation also would lead to an 
increase in discretionary spending of an estimated $16 million 
over the 2000-2004 period, assuming appropriation of the 
necessary amounts. The estimated budgetary impact is shown in 
the following table. The outlay effects fall within budget 
functions 370 (commerce and housing credit) and 900 (interest).

----------------------------------------------------------------------------------------------------------------
                                                            By fiscal year, in millions of dollars--
                                               -----------------------------------------------------------------
                                                   1999       2000       2001       2002       2003       2004
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING

Spending Under Current Law: \1\
    Estimated Budget Authority................      3,830      3,830      3,830      3,830      3,830      3,830
    Estimated Outlays.........................     -1,503        473      1,438      2,074      2,564      2,967
Proposed Changes:
    Estimated Budget Authority................          0        -45        -63        -71        -80        -87
    Estimated Outlays.........................          0        -42        -61        -70        -79        -86
Spending Under the Bill:
    Estimated Budget Authority................      3,830      3,785      3,767      3,759      3,750      3,743
    Estimated Outlays.........................     -1,503        431      1,377      2,004      2,485      2,881

                                               CHANGES IN REVENUES

Estimated Revenues \2\........................          0         -3         -3         -3         -3         -3

                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Estimated Authorization Level.................          0          4          3          3          3          3
Estimated Outlays.............................          0          4          3          3          3          3
----------------------------------------------------------------------------------------------------------------
\1\ Includes spending for deposit insurance activities (subfunction 373) and Treasury payments for interest on
  REFCORP bonds.
\2\ Includes changes in the annual payment from the Federal Reserve to the Treasury. A negative sign indicates a
  decrease in revenues.

            Basis of estimate
    Direct Spending and Revenues: The Financial Services 
Modernization Act could affect direct spending for deposit 
insurance by increasing or decreasing amounts paid by the 
insurance funds to resolve insolvent institutions and to cover 
the administrative expenses necessary to implement its 
provisions. Changes in spending related to failed banks and 
thrifts could be volatile and vary in size from year to year, 
but any such costs would be offset by insurance premiums. Thus, 
their budgetary impact would be negligible over time. The major 
budgetary impact of the bill would stem from an increase in the 
annual payments by the FHLBs for interest on bonds issued by 
the REFCORP. As a result, Treasury outlays for such interest 
would decline. In addition, changes in regulatory activities 
would result in small outlay increases and revenue decreases.
    Deposit Insurance Funds.--Enacting the bill could affect 
the federal budget by causing changes in the government's 
spending for deposit insurance, but CBO has no clear basis for 
predicting the direction or the amount of such changes. Changes 
in spending for deposit insurance could be significant in some 
years, but would have little or no net impact on the budget 
over time.
    A number of provisions in the bill could affect spending by 
the deposit insurance funds. Some are likely to reduce the 
risks of future bank failures. For example, the bill would 
permit affiliations of banking, securities, and insurance 
companies, thereby giving such institutions the opportunity to 
diversify and to compete more effectively with other financial 
businesses. Changes in the marketplace, particularly the 
effects of technology, have already helped to blur the 
distinctions among financial service firms. Further, regulatory 
and judicial rulings continue to erode many of the barriers 
separating different segments of the financial services 
industry. For example, banks now sell mutual funds and 
insurance to their customers and, under limited circumstances, 
may underwrite securities. At the same time, some securities 
firms offer checking-like accounts linked to mutual funds and 
extend credit directly to businesses. Because the legislation 
would clarify the regulatory and legal structure that currently 
governs bank activities, CBO expects that its enactment would 
allow banks to compete more effectively and efficiently in the 
rapidly evolving financial services industry. Diversifying 
income sources also could result in lower overall risks for 
banks, assuming that the expansion of their activities is 
accompanied by adequate safeguards. The bill would specifically 
prohibit the FDIC from using the resources of the BIF to assist 
affiliates or subsidiaries of insured financial institutions.
    It is also possible, however, that losses to the deposit 
insurance fund could increase as a result of enacting the bill. 
The increase in scale and complexity of the new financial 
holding companies could challenge the ability of the regulators 
to manage any additional risk of losses to the deposit 
insurance funds. If additional losses were to occur, the BIF 
would increase premiums that banks pay for deposit insurance. 
Similarly, if losses were to decrease, banks might pay smaller 
premiums. As a result, the net budgetary impact over the long 
term is likely to be negligible in either case.
    Federal Home Loan Banks.--The bill would make a number of 
reforms to the FHLB system. Beginning in 2000, membership in 
the FHLB system would become voluntary. The bill also would 
require the FHLBs to replace the $300 million annual payment 
for the interest on bonds issued by the REFCORP with an 
assessment set at 20.75 percent of the FHLBs' net income. The 
Federal Housing Finance Board, which regulates the FHLBs, would 
be authorized to extend or shorten the period over which 
payments are made such that, over time, the average payment 
would equal $300 million a year, on a present-value basis.
    Based on CBO's analysis of the FHLB system's balance sheet 
and income statement, and using CBO's current economic 
assumptions, we estimate that the provisions affecting the 
FHLBs would increase their payments to REFCORP by $45 million 
in 2000 and a total of $346 million over the 2000-2004 period. 
CBO expects that the estimated increase in payments in the near 
term would be offset by a decrease in payments of an equal 
amount (on a present-value basis) in future years.
    The FHLB system is a government-sponsored enterprise and 
its activities are not included in the federal budget. But, 
because the Treasury pays the interest on REFCORP bonds not 
covered by the FHLBs, this change would reduce Treasury outlays 
by $346 million over the five-year period.
    Regulatory Costs.--The Federal Reserve, the Securities and 
Exchange Commission (SEC), the state banking regulators, and 
other federal banking regulators--the Office of the Comptroller 
of the Currency (OCC), the FDIC, and the OTS--would have 
primary responsibility for monitoring compliance with the 
statute. CBO expects that higher costs for regulatory 
activities would increase outlays by $9 million and would 
decrease revenues by $15 million over the 2000-2004 period.
    The banking agencies would be required to implement new 
regulations, policies, and training procedures related to 
securities, insurance, and other areas. The bill also would 
permit national banks with assets of $1 billion or less to 
conduct certain financial activities through operating 
subsidiaries. CBO expects that the FDIC would spend between $3 
million and $4 million annually for these new activities. The 
OCC and the OTS would also incur annualexpenses for these 
purposes--estimated to total between $1 million and $2 million for each 
agency, but those costs would be offset by increased fees, resulting in 
no net change in outlays for those agencies.
    Under this legislation, in insuring compliance with the CRA 
statutes, banking regulators would no longer have to examine 
institutions with assets less than $100 million (indexed for 
inflation) and located in a rural area--about 37 percent of all 
insured banks and thrifts. We estimate that the FDIC would 
realize savings of about $2 million annually from this change. 
CBO estimates that savings from fewer CRA exams for the OTS and 
for the OCC would total about $1 million annually for each 
agency. The OTS and the OCC would reduce fees to reflect these 
savings, resulting in no net budgetary effects.
    CBO estimates that, under this bill, the Federal Reserve 
would spend an additional $15 million over the 2000-2004 
period. This bill would require it to supervise the activities 
of new bank holding companies and, in conjunction with the 
Treasury Department, to define new financial activities. Based 
on information from the Board of Governors of the Federal 
Reserve System, CBO estimates that the Federal Reserve's new 
supervisory activities would result in added examination costs 
of about $4 million per year once the act's requirements were 
fully effective in 2000. That increase in examination costs 
would total an estimated $20 million over the 2000-2004 period. 
The Federal Reserve's cost of processing applications is not 
expected to be affected. Applications for the newly authorized 
activities of holding companies would increase, but the added 
workload would likely be offset by a decrease in applications 
for nonbanking activities, resulting in no significant net 
budgetary impact.
    The reduction in government receipts would be partially 
offset by a lowering of examination costs due to the amendment 
to CRA. The exemption from CRA of non-metropolitan financial 
institutions with assets of $100 million or less would result 
in less stringent examination, thereby decreasing the operating 
costs of the Federal Reserve System. Based on information 
provided by the Federal Reserve, we estimate that the CRA 
amendment would save the Federal Reserve $1 million annually 
beginning in 2000, for a total of $5 million over the 2000-2004 
period. Other provisions in the bill would not significantly 
affect spending by the Federal Reserve.
    The net effect of these provisions on the administrative 
costs of the Federal Reserve would be an increased in costs of 
$15 million over the 2000-2004 period. Because the Federal 
Reserve System remits its surplus to the Treasury, the 
increased costs would reduce governmental receipts, or 
revenues, by the same amount.
    SAIF Special Reserves.--The bill would repeal the 
requirement for the Savings Association Insurance Fund to 
retain a special reserve fund. CBO expects that the cost of 
that repeal would total less than $500,000 in any year. The 
Deposit Insurance Funds Act of 1996 required the Federal 
Deposit Insurance Corporation to set aside, on January 1, 1999, 
all balances in the SAIF in excess of the required reserve 
level of $1.25 per $100 of insured deposits. The funds in this 
special reserve become available to pay for losses in failed 
institutions only if the SAIF's balance (excluding the reserve) 
subsequently falls below 50 percent of the required reserve 
level, and the FDIC determines that it is expected to remain at 
that level for a year. In January 1999, the FDIC allocated $1 
billion of the SAIF's balances to the special reserve. CBO's 
baseline assumes administrative costs and thrift failures will 
remain sufficiently low to avoid raising assessment rates on 
SAIF-insured institutions through 2004. We expect that the 
SAIF's fund balances of about $10 billion will continue to earn 
interest, and that the fund's ratio of reserves to insured 
deposits will climb each year, reaching over 1.4 percent by 
2004.
    Although CBO's baseline estimates do not assume that the 
cost of thrift failures in any year would exceed the net 
interest earned by the SAIF, unanticipated thrift failures 
could result in a drop in the SAIF's reserve ratio below 1.25 
percent. The baseline reflects CBO's best judgment as to the 
expected value of possible losses during a given year, but 
annual losses will likely vary from the levels assumed in the 
CBO baseline. Thus, some small probability exists that thrift 
failures could increase sufficiently to drive the reserve ratio 
below the required level of 1.25 percent, but not so low as to 
trigger use of the special reserve.
    When the balance of an insurance fund dips below the 
required ratio, the FDIC is forced to increase assessments for 
deposit insurance to restore the fund balance to the required 
level. Thus, if thrift losses were to exceed baseline estimates 
by a significant amount, we would expect the FDIC to increase 
insurance premiums in order to maintain the SAIF's fund 
balance. Eliminating the special reserve would add to the fund 
balances and would make it less likely that the FDIC would have 
to raise insurance premiums. The probability that this change 
would affect premium rates is quite small, however, and 
therefore CBO expects that the loss of deposit insurance 
premiums that could result from eliminating the special reserve 
would total less than $500,000 in any year.
    Spending Subject to Appropriation: A number of federal 
agencies would be responsible for monitoring changes resulting 
from enactment of the legislation. CBO estimate that total 
costs, assuming appropriation of the necessary amounts, would 
be about $3 million annually beginning in 2000, primarily for 
expenses of the SEC, GAO, and the Treasury Department. The SEC 
would incur costs to monitor market conditions, to examine 
firms offering certain security products, and to investigate 
practice to ensure compliance with the statute. We expect these 
additional rulemaking, inspection, and administrative expenses 
of the SEC would total about $2 million annually.
    The bill would require several reports and would direct GAO 
to conduct two studies. CBO estimates that GAO would spend 
about $1 million in 2000 to prepare the reports.
            Pay-as-you-go considerations
    The Balanced Budget and Emergency Deficit Control Act sets 
up pay-as-you-go procedures for legislation affecting direct 
spending or receipts. Legislation providing funding necessary 
to meet the deposit insurance commitment is excluded from these 
procedures. Most of the FDIC's additional costs that would 
result from this bill ($3 million to $4 million a year) would 
be covered by this exemption. CBO believes that the various 
costs of the legislation related to consumer protection and 
eliminating SAIF's special reserve, along with the savings 
related to CRA compliance, would not qualify for the exemption 
that applies to the full funding of the deposit insurance 
commitment, and thus would count for pay-as-you go purposes. 
These changes would result in a net decrease in the FDIC's 
supervisory costs totaling about $2 million annually, for a 
total of $23 million over the 2000-2009 period. Net savings 
each year for similar activities of the OCC and the OTS, which 
are estimated to total about $1 million for each agency, would 
be offset by increases in fees of an equal amount, resulting in 
no significant net budgetary impact for those agencies.
    CBO estimates that provisions affecting the FHLBs would 
result in an increase in their payments for REFCORP interest, 
and a corresponding decrease in Treasury outlays, totaling $919 
million over the 2000-2009 period.
    CBO estimates that the exemption from the requirements of 
CRA for certain depository institutions would reduce the 
administrative costs of the Federal Reserve and thus increase 
Treasury receipts by $1 million per year beginning in 2000, 
increasing to $2 million by 2005, for a total of $15 million 
over the 2000-2009 period. CBO also expects that the Federal 
Reserve would incur additional expenses associated with 
consumer issues that are not directly related to protecting the 
deposit insurance commitment. We estimate that the resulting 
increase in regulatory and other costs would reduce the surplus 
payment that the Federal Reserve remits to the Treasury by less 
than $500,000 annually.
    The net changes in outlays and governmental receipts that 
are subject to pay-as-you-go procedures are shown in the 
following table. For the purposes of enforcing pay-as-you-go 
procedures, only the effects in the current year, the budget 
year, and the succeeding four years are counted.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       By fiscal year, in millions of dollars--
                                                             -------------------------------------------------------------------------------------------
                                                               1999    2000    2001    2002    2003    2004    2005     2006     2007     2008     2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays:
    DIC.....................................................       0      -2      -2      -2      -2      -2      -2       -2       -2       -2       -3
    REFCORP payment.........................................       0     -45     -63     -71     -80     -87     -94     -100     -109     -126     -144
                                                             -------------------------------------------------------------------------------------------
      Total.................................................       0     -47     -65     -73     -82     -89     -96     -102     -111     -128     -147
Changes in receipts.........................................       0       1       1       1       1       1       2        2        2        2        2
--------------------------------------------------------------------------------------------------------------------------------------------------------

            Estimated impact on State, local, and tribal governments
    This bill contains a number of intergovernmental mandates 
as defined in UMRA, but CBO estimates that these mandates would 
not impose significant costs on state, local, or tribal 
governments. Any such costs would not exceed the threshold 
established by that act ($50 million in 1996, adjusted annually 
for inflation). Other provisions in the bill, which are not 
mandates, would affect the budgets of state and local 
governments, and are discussed below.
    Mandates: A number of provisions in the bill would preempt 
state banking, insurance, and securities laws. States would not 
be allowed to prevent or restrict either the affiliations 
between banks, securities firms, and insurance companies 
authorized by the bill, or the expanded activities permitted 
banks by the bill. Further, while the bill would endorse 
states' primary role in licensing and regulating insurance 
operations, it would preempt their authority over these 
operations in a number of ways.
    Based on information provided by organizations representing 
state and local governments, CBO expects that enactment of 
these provisions would not result in significant costs for such 
governments. While they would be prevented from enforcing 
certain rules and regulations, they would not be required to 
undertake any new activities.
    Other impacts: State and local governments might benefit 
from a provision of this bill that would give national banks 
the authority to underwrite certain state and local 
obligations, including municipal revenue bonds. This provision 
would widen the market for these obligations and could reduce 
state and local borrowing costs.
    To the extent that enactment of this bill would facilitate 
the integration of different types of financial services, it 
may have a variety of impacts on state finances. It is possible 
that its enactment could affect states' administrative and 
legal costs, revenues from fees imposed on regulated 
businesses, and insurance guarantee funds. It would be 
difficult, however, to separate the impact of this legislation 
from ongoing changes to the structure and regulation of 
financial services occurring under current federal law.
            Estimated impact on the private sector
    The bill would impose several private-sector mandates as 
defined in UMRA. CBO's analysis of those mandates is contained 
in a separate statement on private-sector mandates.
    Estimate prepared by: Costs for FHLB's: Robert S. Seiler; 
Other Federal Costs: Mary Maginniss; Federal Revenues: Carolyn 
Lynch; Impact on State, Local, and Tribal Governments: Marjorie 
A. Miller.
    Estimate approved by: Robert A. Sunshine, Deputy Assistant 
Director for Budget Analysis.

    congressional budget office estimate of costs of private-sector 
                                mandates

Financial Services Modernization Act of 1999

            Summary
    Overall, the bill would reduce existing federal regulation 
of the financial services industry by relaxing certain 
restrictions on financial transactions throughout the economy. 
In particular, the bill would eliminate certain barriers to 
affiliations among banking organizations and other financial 
firms, including insurance firms and securities businesses. At 
the same time the bill would impose restrictions on newly 
authorized financial activities and prohibit associations 
between thrifts and commercial entities through new unitary 
thrift holding companies.
    The bill would impose several new private-sector mandates 
as defined by the Unfunded Mandates Reform Act of 1995 (UMRA). 
The mandates in the bill would affect the Federal Home Loan 
Banks, banking organizations, U.S. operations of foreign banks, 
and insured depository institutions that pay interest on bonds 
issued by the Financing Corporation. CBO estimates that the net 
direct costs of mandates in the bill would not exceed the 
statutory threshold for private-sector mandates ($100 million 
in 1996 dollars, adjusted annually for inflation) in any one 
year for the first five years that the mandates are effective.
            Private-sector mandates contained in bill
    The bill contains several new mandates on businesses in the 
financial services sector. If enacted, the principal mandates 
in the bill would:
          Replace the $300 million fixed annual payment for 
        interest on Resolution Funding Corporation (REFCORP) 
        bonds with a 20.75 percent annual assessment on the net 
        earnings of the Federal Home Loan Banks (FHLBs);
          Require banking organizations to adopt several 
        consumer protection measures affecting sales of 
        insurance products;
          End the blanket exemption provided banks from the 
        definition of ``broker,'' and ``dealer,'' making them 
        subject to regulation by the Securities and Exchange 
        Commission;
          Require that foreign banks seek approval from the 
        Federal Reserve before establishing separate 
        subsidiaries or using nonbank subsidiaries to act as 
        representative offices that handle primarily 
        administrative matters, and give the Federal Reserve 
        the authority to examine a U.S. affiliate of a foreign 
        bank with a representative office; and
          Extend the current two-tiered schedule of Financing 
        Corporation (FICO) assessment rates for an additional 
        three years which under current law, would be replaced 
        by a uniform rate for banks and thrifts starting on 
        January 1, 2000.
            Estimated direct cost to the private sector
    Most of the cost of the mandates in the bill would result 
from changes in payments from the Federal Home Loan Banks to 
REFCORP. CBO estimates the Federal Home Loan Banks would 
increase their payments to REFCORP by a total of $346 million 
over the 2000-2004 period as compared with current law. The 
short-term costs are somewhat misleading, however, because CBO 
expects that the estimated increase in payments in the near 
term would be offset by a decrease in payments of an equal 
amount (on a present-value basis) in future years.
    Mandates on banks, banking organizations, and foreign banks 
would impose some incremental costs of compliance on the 
industry. The additional costs to these institutions would 
depend on the actions of regulators and the degree to which new 
customer protection regulations would preempt state laws. The 
direct costs of mandates on banks and banking organizations 
could be at least partially offset by savings from changes the 
bill would make to expand the powers of banks and bank holding 
companies. Because of the multiple uncertainties involved and 
the complex interactions in the financial services sector, 
CBOcannot estimate the direct costs, net of savings, with any 
precision. However, based on discussions with federal banking agencies, 
securities regulators, and industry trade groups, CBO expects that the 
costs to banking organizations and domestic operations of foreign banks 
of complying with mandates in the bill are not likely to exceed the 
annual threshold established in UMRA.
    Insured depository institutions pay interest on FICO bonds 
based on their deposits in the Savings Association Insurance 
Fund (SAIF) and the Bank Insurance Fund (BIF). The increase in 
costs to institutions that would pay a high premium on SAIF-
assessable deposits (as compared with the expected premium rate 
under current law) would be completely offset by savings to 
institutions that would pay a lower premium on BIF-assessable 
deposits.
    Federal Home Loan Bank System: Section 407 would replace 
the current method of payment made by FHLBs for the interest on 
REFCORP bonds with a 20.75 percent assessment on the annual net 
earnings of each FHLB. That is, FHLBs would no longer have to 
pay a fixed amount regardless of annual earnings; under the 
bill they would have to pay a fixed percentage of net earnings. 
Based on projections of net earnings, CBO estimates that the 
new assessment rate would increase the payments made by FHLBs 
above the current payment of $300 million annually by $45 
million in fiscal year 2000 and a total of $346 million over 
the 2000-2004 period. However, CBO expects that the present 
value of the total amount paid by the FHLBs to the federal 
government would not change. The bill would authorize the 
Federal Housing Finance Board, which regulates the FHLBs, to 
extend or shorten the period over which payments are made such 
that, over time, the average payment would equal $300 million a 
year, on a present-value basis.
    Consumer Protection Regulations--Insurance Sales: Section 
202 would direct the federal banking regulators to issue, 
within one year of enactment, final consumer protection 
regulations that would govern the sale of insurance by any bank 
or by any person at or on behalf of a bank. According to the 
bill, the regulations should include requirements for: (1) 
anti-coercion rules (prohibiting banks from misleading 
consumers into believing that an extension of credit is 
conditional upon the purchase of insurance); (2) oral and 
written disclosures about whether a product is insured by the 
Federal Deposit Insurance Corporation (FDIC), about the risk 
associated with certain products, and about the prohibition 
against anti-tying and anti-coercion practices; (3) customer 
acknowledgment of disclosures; (4) an appropriate delineation 
of the settings and circumstances under which insurance sales 
should be physically segregated from bank loan and teller 
activities; and (5) rules against misleading advertising.
    Except for the anti-coercion provision, the provisions in 
section 202 are based on current industry guidelines issued in 
1994 by bank regulators in an Interagency Statement on Retail 
Sales of Nondeposit Investment Products. The anti-coercion 
provision is similar to the anti-tying provision in current 
law. Other new regulations would largely codify a modified 
version of existing guidelines drafted by the federal banking 
regulators and, therefore, would not likely impose large 
incremental costs on banks that currently engage in insurance 
activities. Moreover, in states where state insurance laws are 
inconsistent with the prescribed federal regulations but deemed 
to be at least as protective as those regulations, the new 
federal insurance customer protection regulations would not 
apply.
    Regulation of Securities Services: The Glass-Steagall Act 
generally prohibits banks from underwriting and dealing in 
securities, except for ``bank-eligible'' securities. Eligible 
securities are limited to those offered and backed by the 
federal government and federally-sponsored agencies, and 
certain state and local government securities. As banks have 
sought to expand their product lines, federal regulators have 
provided banks, through affiliated firms, limited authority to 
underwrite and deal in other types of securities. Generally, a 
firm that provides securities brokerage services (known as a 
broker-dealer) must register with and be regulated by the 
Securities and Exchange Commission (SEC) and at least one self-
regulatory organization such as the National Association of 
Securities Dealers, the New York Stock Exchange, or the 
American Stock Exchange. Banks, however, are currently exempted 
from those requirements.
    The bill would end the current blanket exemption for banks 
from being treated as brokers or dealers under the Securities 
Exchange Act of 1934. Securities activities of banks would, 
therefore, be subject to SEC regulations, with some exceptions. 
The bill would exempt from SEC regulation the securities 
activities of banks handling fewer then 500 transactions 
annually. Many of the roughly 300 small banks that currently 
provide brokerage services on bank premises would fall under 
this exemption. Sections 501 and 502 also would exempt several 
traditional securities activities of banks from the 
registration requirements and regulations that apply to brokers 
or dealers under SEC regulation. The exemptions would cover 
most products and services that banks currently offer as agents 
so that they would not trigger SEC regulation. However, for the 
products and services related to securities that would no 
longer be exempt under the bill, banks would most likely 
channel the non-exempt activities through their own securities 
affiliate or establish a relationship with a broker-dealer. A 
substantial number of banks that currently handle securities 
activities have a broker-dealer affiliate so that the 
incremental cost of complying with SEC regulation would involve moving 
non-exempt activities to such an affiliate and would not be 
significant.
    Foreign Banks: Section 152 would amend the International 
Banking Act of 1978 (IBA) to require that foreign banks seek 
prior approval from the Federal Reserve Board for establishing 
separate subsidiaries or using nonbank subsidiaries to act as 
representative offices. Under current law, a foreign bank must 
obtain the approval of the Federal Reserve Board (FRB) before 
establishing a representative office in the United States. A 
representative office handles administrative matters and some 
types of sales for the foreign bank owner, but it does not 
handle deposits. In some cases, foreign banks are establishing 
separate subsidiaries or using nonbank subsidiaries to act as 
representative offices and thereby escaping the requirement for 
approval by the FRB. The bill would strike the exclusion for 
subsidiaries from the IBA and close this loophole. The industry 
association estimates that there are fewer than 20 entities 
that would have to register their subsidiaries as a 
representative office. CBO expects that the cost to existing 
subsidiaries of filing with the FRB would be small.
    Section 152 also would require that U.S. affiliates of 
foreign banks with a representative office be subject to 
examination by the Federal Reserve Board. Under current law, if 
a foreign bank has only a representative office and no other 
banking office in the United States, the FRB may examine only 
the representative office. The FRB cannot examine or seek 
information from U.S. affiliates of such a foreign bank. The 
bill would give the FRB the authority to examine a foreign bank 
affiliate in this situation. CBO has no basis for estimating 
the potential costs to the industry of such examinations. 
According to one industry expert, it is likely that the FRB 
would only use this authority in a case where suspicious 
behavior warrants further examination. If the FRB would examine 
affiliates under such limited circumstances, the costs of the 
mandate to the industry would be very modest.
    Three-Year Extension of FICO Assessment Rates: The Deposit 
Insurance Funds Act of 1996 provided for the payment of 
interest on bonds issued by the Financing Corporation. Those 
payments which amount to approximately $780 million per year, 
are made by all institutions that are covered by FDIC 
insurance. Under the act, the FICO obligation was to be split 
between Bank Insurance Fund (BIF) deposits and Savings 
Association Insurance Fund (SAIF) deposits such that the rate 
on SAIF deposits was five times the rate on BIF deposits. Also, 
under current law, the rates are to be equalized no later than 
January 1, 2000. The annual FICO assessment rate is currently 
about 6.10 basis points for SAIF-assessable deposits and 1.22 
basis points for BIF-assessable deposits.
    Section 304 would freeze the current FICO contribution 
formula for 3 years. Without the freeze, on January 1, 2000, 
both BIF and SAIF members will pay a uniform rate of about 2.2 
basis points on insured deposits. Under the bill, for the next 
3 years, institutions with SAIF-assessable deposits would have 
to pay a higher amount than under current law. Institutions 
with BIF--assessable deposits would pay less than under current 
law. Some BIF and SAIF members hold assessable deposits in both 
funds--almost 40 percent of the SAIF-assessable base is held by 
BIF members and about 2 percent of the BIF-assessable base is 
held by SAIF members. Since the annual FICO payment would 
remain constant, the net cost of the freeze to BIF- and SAIF-
insured institutions would be zero.
    Estimate Prepared By: Patrice Gordon and Robin Seiler--
Federal Home Loan Banks.
    Estimate Approved By: Roger Hitchner, Acting Assistant 
Director for Natural Resources Commerce Division.

                        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 SENATORS BENNETT AND SHELBY

    We join the Chairman in voicing our strong support for the 
Financial Services Modernization Act of 1999. The banking laws 
in the United States are outdated and no longer provide a 
useful framework for the regulation of the many diverse 
activities our financial institutions are conducting or seeking 
to conduct to remain competitive in the global economy. Yet 
legislative reform of these laws has been elusive. Now, as we 
move toward the 21st century, it is important to reform these 
laws and to do it without imposing any unnecessary restrictions 
that will limit the competitiveness of our financial 
institutions.
    While we support this bill generally, we believe that the 
provisions governing operating subsidiaries unnecessarily limit 
the ability of financial institutions to structure their 
operations in the manner they deem most effective. The expert 
testimony presented to the Committee suggests that there is no 
reason to limit the use of the operating subsidiary structure 
to institutions with assets under $1 billion. Rather, there are 
important reasons why we support extending the use of that 
structure to all financial institutions.
    Foreign banks operating in the United States are permitted 
to use the operating subsidiary structure without regard to 
size, and failing to give U.S. institutions the same choice 
will create a competitive disadvantage. Furthermore, the 
Chairman of the Federal Deposit Insurance Corporation has 
testified that the operating subsidiary structure creates no 
safety and soundness risks and may provide more protection to 
the bank insurance fund in the event of a failure. If there is 
no safety and soundness problem associated with operating 
subsidiaries, then all financial institutions should be given 
as much choice as possible in structuring their business 
operations, certainly the same choice enjoyed by foreign 
financial institutions operating in the United States.
    We urge the Chairman to remove the arbitrary $1 billion 
asset limitation, and give American financial institutions 
choice in structuring their operations to maximize their 
competitiveness in the global economy.

                                   Robert F. Bennett.
                                   Richard C. Shelby.

                  ADDITIONAL VIEWS OF SENATOR SANTORUM

    As reported by the Senate Banking Committee, the Financial 
Services Modernization Act of 1999 includes a provision to 
extend for three years the existing premium disparity between 
Bank Insurance Fund (BIF)- and the Savings Association 
Insurance Fund (SAIF)-insured institutions. This provision is 
of particular interest and concern to me as I had hoped that it 
could have been fully debated and addressed before the 
committee reported the bill.
    In 1996, Congress enacted legislation, the Deposit 
Insurance Funds Act (``Funds Act''), to avert a potential 
crisis in the federal deposit insurance system. The legislation 
sought to capitalize the SAIF and ensure the health of the 
federal deposit insurance system.
    Prior to passage of that legislation, the SAIF did not meet 
statutory capitalization requirements. This situation arose, in 
part, from the fact that SAIF-insured institutions were 
required to pay annual FDIC insurance premiums of 23 basis 
points to capitalize the SAIF while banks paid an assessment 
rate of 4.6 basis points. Additionally, SAIF-insured 
institutions were solely responsible for paying the interest 
obligation on Financing Corporation (FICO) bonds used to 
resolve the Federal Savings and Loan Corporation. As a result, 
insured deposits were being shifted from the SAIF into the BIF, 
thereby shrinking the SAIF's assessment base, diminishing the 
BIF's reserve ratio and making capitalization of SAIF difficult 
to achieve. Realizing the gravity of this problem, Congress 
enacted the Funds Act at the urging of the FDIC, the Federal 
Reserve Board, the U.S. Department of Treasury, and the Office 
of Thrift Supervision.
    The Funds Act set out to capitalize the SAIF by requiring 
SAIF-insured institutions to make a one-time payment of $4.5 
billion while spreading the FICO interest obligation to all 
FDIC-insured institutions. Also spelled out under that Act was 
the scenario for the BIF and SAIF to be merged before 2000, but 
contingent upon convergence of the thrift and commercial bank 
charters. In the interim, BIF members were required to pay one-
fifth of the FICO assessment rate of SAIF members until ``the 
earlier of (a) December 31, 1999 or (b) the date as of which 
the last savings association ceases to exist,'' (Funds Act, 
Sec. 2703). After whichever date governed, BIF and SAIF member 
institutions were to pay the same assessment rate for FICO of 
2.2 basis points.
    Calculating that the merger of charters will not occur 
before December 31, 1999, the Senate Banking Committee included 
a three-year extension of the premium disparity in the 
committee print. In my view, changing the rules less than one 
year prior to when rate equalization was to occur is unwise. 
SAIF-insured institutions have made their legally required 
payments--nearly $6 billion--to capitalize SAIF and meet their 
FICO obligations. The Funds Act was successful in its goal, and 
resulting from its mandate is a healthy BIF and SAIF.
    As consideration of the Financial Services Modernization 
Act of 1999 moves forward, I encourage my colleagues to 
reconsider inclusion in the bill of any provision that extends 
the premium disparity.

                                                     Rick Santorum.

  ADDITIONAL VIEWS OF SENATORS SARBANES, DODD, KERRY, BRYAN, JOHNSON, 
                    REED, SCHUMER, BAYH, AND EDWARDS

                            1. introduction

    The Democratic Members of the Senate Committee on Banking, 
Housing, and Urban Affairs strongly support financial services 
modernization legislation. Last year, every Democratic Member 
of the Committee voted for financial services modernization in 
the form of H.R. 10, the Financial Services Act of 1998. That 
bill was reported by the Committee on a bipartisan vote of 16 
to 2. This year, every Democratic Member of the Committee voted 
for financial services modernization in the form of a 
Substitute Amendment offered by Senator Sarbanes. The 
Substitute Amendment contained the text of last year's bill, 
with the addition of a bank operating subsidiary provision 
supported by the Treasury Department. The Substitute Amendment 
was defeated at the Committee's markup on a party line vote of 
11 to 9. It has since been introduced by Senator Daschle and 
every Democratic Member of the Committee as S.753, the 
Financial Services Act of 1999.
    The Democratic Members supported these efforts, both last 
year and this year, because the legislation met certain basic 
goals. These include permitting affiliations between banks, 
securities firms and insurance companies; preserving the safety 
and soundness of the financial system; continuing access to 
credit for all communities in our country; and protecting 
consumers. Because the bill now reported to the Senate does not 
meet these goals, every Democratic Member of the Committee 
voted against it.
    The partisan divide that produced the reported bill is 
striking in view of the bipartisanship that has characterized 
the Committee's previous attempts to enact financial services 
modernization legislation. In 1988 and 1991, the Committee 
reported financial services modernization legislation to the 
full Senate with support from both sides of the aisle. Sixteen 
out of eighteen Committee Members voted for last year's bill. 
The broad, bipartisan margin of support enjoyed by last year's 
bill reflected the careful compromises struck during the course 
of its consideration. It was not opposed by a single major 
financial services industry association.
    We are disappointed that the Committee Majority has 
abandoned the consensus so carefully developed last year. The 
Substitute Amendment reflects compromises among Committee 
Members and among industry groups on a wide range of issues, 
including the Community Reinvestment Act, consumer protections, 
and the separation of banking and commerce. The decision by the 
Committee Majority to abandon these compromises has led some 
industry groups to oppose the reported bill or important 
provisions thereof. Civil rights groups, community groups, 
consumer organizations, and local government officials also 
strongly oppose the reported bill.
    We are disappointed as well that the Committee Majority has 
refused to recognize that enactment of financial services 
legislation entails accommodation of differing views. The 
Committee Majority's Report makes no mention of either the 
bipartisan bill reported last year or the Substitute Amendment 
offered at this year's markup, as if these events had never 
occurred. This is in keeping with their failure to consider the 
views of Democratic Members, a failure that led directly to the 
party-line vote on the reported bill.
    The views not only of Committee Members but also of the 
White House and the Treasury Department should have been 
considered. On March 2, 1999, before the Committee's markup, 
President Clinton wrote:

          This Administration has been a strong proponent of 
        financial legislation that would reduce costs and 
        increase access to financial services for consumers, 
        businesses, and communities. * * * I agree that reform 
        of the laws governing our nation's financial services 
        industry would promote the public interest. However, I 
        will veto the Financial Services Modernization Act if 
        it is presented to me in its current form.

The President warned that the bill ``would undermine the 
effectiveness of the Community Reinvestment Act,'' ``would deny 
financial services firms the freedom to organize themselves in 
the way that best serves their customers,'' ``would * * * 
provide inadequate consumer protections,'' and ``could expand 
the ability of depository institutions and nonfinancial firms 
to affiliate * * *.'' The Committee Majority did nothing at 
markup to resolve these concerns. Unless the concerns of the 
Administration are resolved, it is clear that the reported bill 
will be vetoed.

                     ii. community reinvestment act

    As noted above, all Democratic Members of the Committee 
support financial services modernization. Financial services 
modernization legislation, however, must ensure that financial 
services are available to all communities in our country. The 
Community Reinvestment Act (``CRA'') has played a critical role 
in expanding access to credit and investment in low- and 
moderate-income rural and urban communities. Accordingly, we 
cannot support legislation that would undermine the 
effectiveness of CRA.
    The bill reported by the Committee fails this standard in 
three ways. First, it fails to require that a bank have and 
maintain a ``satisfactory'' CRA rating to engage in the new 
affiliations permitted by the legislation. Second, it provides 
a safe harbor to banks with a ``satisfactory'' CRA rating, 
effectively eliminating public comment on the CRA performance 
of these banks when they submit applications to regulators. 
Finally, it exempts all small rural banks from CRA.
    President Clinton has stated that ill-conceived CRA 
provisions will result in a veto of this legislation. President 
Clinton's March 2, 1999 letter stated in part:

          [W]e cannot support the ``Financial Services 
        Modernization Act of 1999'' *  *  *. In its current 
        form, the bill would undermine the effectiveness of the 
        Community Reinvestment Act (CRA), a law that has helped 
        to build homes, create jobs, and restore hope in 
        communities across America. The CRA is working, and we 
        must preserve its vitality as we write the financial 
        constitution for the 21st Century.

Background on CRA

    CRA was enacted in 1977 to encourage banks and thrifts to 
serve the credit needs of their entire communities, including 
low- and moderate-income neighborhoods, consistent with safe 
and sound banking practices.\1\ CRA reflects the view that 
banks and thrifts, although privately owned, receive public 
benefits in the form of deposit insurance and access to the 
Federal Reserve's discount window and payments system. In 
return, they have charter obligations to serve the 
``convenience and needs'' of their local communities.\2\
---------------------------------------------------------------------------
    \1\ 12 U.S.C. Sec. 2903(a)(1).
    \2\ 12 U.S.C. Sec. 2901(a)(1).
---------------------------------------------------------------------------
    CRA requires the appropriate federal bank regulator to 
assess an institution's record of meeting the credit needs of 
its entire community. It does not place burdensomerequirements 
on banks. Compliance examinations typically occur 18 to 24 months 
apart. CRA performance evaluations are very flexible. Most banks and 
thrifts are assessed on three factors: lending, service, and investment 
performance. Small banks and limited purpose institutions have 
streamlined examinations. Based on their performance, institutions 
receive a rating of ``outstanding,'' ``satisfactory,'' ``needs to 
improve,'' or ``substantial non-compliance.'' These ratings are made 
available to the public.

Benefits of CRA

    CRA has significantly improved the availability of credit 
in historically underserved communities. CRA has been credited 
with a dramatic increase in home ownership by low- and 
moderate-income individuals. Between 1993 and 1997, private 
sector conventional home mortgage lending in low- and moderate-
income census tracts increased by 45%.\3\ CRA has also helped 
spur bank and thrift investment in multi-family rental housing 
development and rehabilitation and community economic 
development. In 1997, large banks and thrifts made 
approximately 525,000 small business loans totaling $34 billion 
to entrepreneurs located in low- and moderate-income areas.\4\ 
Commercial banks and thrifts also invest in community 
development projects--nearly $19 billion in 1997 alone.\5\ For 
example, according to the Office of the Comptroller of the 
Currency (``OCC''), CRA lending and investments have 
underwritten the expansion of African-American churches in 
Brooklyn, the renovation of a 100-unit apartment complex in a 
disadvantaged neighborhood in Washington, D.C., the provision 
of much needed retail services in the Roxbury section of 
Boston, and the strengthening of small business through the 
Enterprise Development Center in Louisville, Kentucky. Federal 
Reserve Chairman Alan Greenspan noted during his testimony 
before the House Banking Committee on February 11, 1999, that 
CRA has ``very significantly increased the amount of credit in 
communities'' and that the changes have been quite profound.''
---------------------------------------------------------------------------
    \3\ Attachment to FFIEC Press Release, August 6, 1998 (Table 7).
    \4\ Attachment to FFIEC Press Release, August 24, 1998 (Table 4.2).
    \5\ Attachment to FFIEC Press Release, August 24, 1998 (Table 5).
---------------------------------------------------------------------------
    The benefits of CRA extend beyond urban communities. CRA 
has also helped alleviate credit needs and improve services in 
rural areas. Banks and thrifts made $11 billion in small farm 
loans in 1997.\6\ Low- and moderate-income rural communities 
benefited from $2.8 billion in small business loans in 1997.\7\ 
Banks have entered into partnerships with community groups to 
provide affordable housing in many rural communities, such as 
in northeast Indiana and in Hillsborough, North Carolina.
---------------------------------------------------------------------------
    \6\ FFIEC Press Release, August 24, 1998.
    \7\ Id. at Table 4.2
---------------------------------------------------------------------------
    With encouragement from CRA, banks have also increased 
their services on Native American reservations. For instance, 
there were only three bank branches and two ATMs on Navajo 
reservations in 1994. At the end of last year, there were 12 
branches and 19 ATMs.\8\ The Navajo reservation branches are 
highly profitable for banks. Residents of the reservation have 
benefitted from an array of new mortgage and small business 
loans.
---------------------------------------------------------------------------
    \8\ Source: Department of the Treasury.
---------------------------------------------------------------------------
    There is a consensus among the regulatory agencies, 
community groups, local and state elected officials, and many 
bankers that CRA has been beneficial. President Clinton has 
repeatedly reaffirmed his support for CRA:

          [W]e should all be proud of what [CRA] has meant for 
        low and moderate-income Americans of all races. 
        Although we still have a long way to go in bringing all 
        Americans into the economic mainstream, under CRA the 
        private sector has pumped billions of dollars of credit 
        to build housing, create jobs and restore hope in 
        communities left behind.\9\
---------------------------------------------------------------------------
    \9\ President Clinton, Remarks at White House on 20th Anniversary 
of CRA, October 12, 1997.

    Chairman Greenspan has noted that ``CRA has helped 
financial institutions to discover new markets that may have 
been underserved before.'' \10\ The U.S. Conference of Mayors 
has promoted CRA as an essential tool in revitalizing cities, 
while the National League of Cities has listed CRA preservation 
as a major federal priority for 1999. Hugh McColl, Jr., 
chairman and CEO of BankAmerica Corp., stated earlier this 
year: ``My company supports the Community Reinvestment Act in 
spirit and in fact. To be candid, we have gone way beyond its 
requirements. * * * We're quite happy living with the existing 
rules.'' \11\
---------------------------------------------------------------------------
    \10\ Remarks, Social Compact Awards Luncheon, May 17, 1995.
    \11\ Bridge News, ``Bank America CEO Opposes Linking CRA Reform to 
Banking Reform,'' January 4, 1999.
---------------------------------------------------------------------------
    CRA has accomplished these goals by encouraging banks and 
thrifts to make profitable, market rate loans and investments. 
It does not jeopardize the safety and soundness of any 
depository institution. Chairman Greenspan noted last year that 
there is ``no evidence that banks' safety and soundness have 
been compromised by [low- and moderate-income] lendingand 
bankers often report sound business opportunities.'' \12\
---------------------------------------------------------------------------
    \12\ Remarks at Community Forum on Community Reinvestment and 
Access to Credit, January 12, 1998.
---------------------------------------------------------------------------
    Loans and banking services to low- and moderate-income 
communities have increased tremendously in recent years. 
Disparities still exist, however, in lending and banking 
services. CRA must remain a vital force in helping ensure that 
all creditworthy borrowers have access to essential capital and 
all communities have a chance to thrive.

CRA provisions of substitute amendment

    The Substitute Amendment would require that banks have at 
least a ``satisfactory'' CRA rating as a precondition for 
affiliation with securities and insurance firms. Banks in the 
financial holding company would be required to maintain the 
``satisfactory'' CRA rating in order to continue the new 
affiliations. As noted above, the Committee last year by a vote 
of sixteen to two approved financial services modernization 
legislation containing these provisions. Every financial 
services industry group accepted the bill with these 
provisions.
    Those provisions were viewed as necessary to maintain the 
effectiveness of CRA within the expanded holding company 
structure. Currently, the application process serves as the 
mechanism for regulatory review and assessment of a bank or 
thrift's performance in meeting the credit needs of the 
communities it serves as well as its capital and management 
performance. Capital, management, and CRA performance are at 
issue when an institution files an application for deposit 
insurance, a charter, a merger, an acquisition or other 
corporate reorganization, a branch, or the relocation of a home 
office or branch.
    The Substitute Amendment would permit holding companies to 
acquire insurance and securities firms without submitting 
applications for approval with the federal bank regulators. 
This is an important change from current law, which requires 
banks to submit applications before affiliating with non-banks. 
Accordingly, the CRA precondition requirement, like the 
preconditions regarding capital and management, would take the 
place of the review that now takes place in the application 
process. Without this requirement, an institution with an 
unsatisfactory CRA rating could nevertheless engage in the 
expanded affiliations permitted by the legislation.
    This requirement is supported by the Treasury, FDIC, Office 
of Thrift Supervision, and OCC. As FDIC Chairman Donna Tanoue 
has said:

          The bank and thrift regulatory agencies consistently 
        take into account an insured institution's record of 
        performance under CRA when considering an application 
        to open or relocate a branch, a main office, or acquire 
        or merge with another institution. As this legislation 
        would enable institutions to enter into additional 
        activities, it would seem consistent that CRA 
        compliance should continue to be a determining 
        factor.\13\
---------------------------------------------------------------------------
    \13\ Responses of FDIC Chairman Tanoue to Questions from Senator 
Paul S. Sarbanes, April 9, 1999 (``Tanoue Responses''), at A.1.
---------------------------------------------------------------------------

CRA Provisions of reported bill:

    On a party line vote, the Committee Majority this year 
rejected last year's bipartisan approach. The reported bill 
contains three CRA provisions that are unacceptable to 
Democratic Members of the Committee and the Administration.
            1. Eliminates ``satisfactory'' CRA rating as a precondition 
                    of expanded affiliations
    Unlike the Substitute Amendment, the reported bill does not 
require that all banks within a holding company have and 
maintain ``satisfactory'' CRA ratings in order to engage inand 
maintain expanded affiliations. The Committee Majority has asserted 
that an explicit requirement that banks have a ``satisfactory'' CRA 
rating to engage in these affiliations is not needed because, unlike 
last year's bill, the reported bill does not create a ``financial 
holding company.'' Instead, it expands the Bank Holding Company Act to 
permit broader financial activities. Since CRA applies to banking 
activities under the Bank Holding Company Act, it is argued that it 
would apply to the broader financial activities as well.
    In reality, CRA would not apply to these activities. 
Current law does not explicitly permit affiliations between 
banks and other financial services firms. Both the Substitute 
Amendment and the reported bill would change current law to 
permit these affiliations explicitly. Since these affiliations 
would be permitted pursuant to new statutory authority, new 
statutory authority is needed to condition these affiliations 
on compliance with bank regulatory standards. Both the 
Substitute Amendment and the reported bill make compliance with 
bank capital and management standards a statutory precondition 
for the new affiliations. Both do so because, the assertions of 
the Committee Majority's Report notwithstanding, compliance 
with capital and management standards are not currently a 
statutory requirement for banks' affiliations with nonbanks.
    However, the reported bill fails to make CRA compliance a 
precondition. By virtue of the failure to include CRA 
performance as a condition to affiliations, the reported bill 
cannot be described as ``neutral.'' In fact, enactment of the 
reported bill without the precondition of a ``satisfactory'' 
CRA rating would dramatically undermine CRA. Under the bill, 
bank holding company acquisitions of banks would remain subject 
to CRA. However, banking industry experts and regulators agree 
that most of the consolidations within the banking community 
have occurred. Mergers among banks, securities and insurance 
firms are likely to increase. As Treasury Secretary Robert 
Rubin testified to the House Banking Committee on February 12, 
1999,

          If we wish to preserve the relevance of CRA at a time 
        when the relative importance of bank mergers may 
        decline and the establishment of non-bank financial 
        services will become increasingly important, the 
        authority to engage in newly authorized activities 
        should be connected to a satisfactory CRA performance.
            2. Safe harbor for banks with a ``satisfactory'' CRA rating
    The Democratic Members strongly oppose the provision in the 
reported bill providing a safe harbor for banks with a 
``satisfactory'' or better CRA rating. This provision would 
effectively eliminate public comment on CRA performance at the 
time of bank applications. Under this provision, a bank that 
received a ``satisfactory'' or better CRA rating at its most 
recent examination and at each examination during the preceding 
three years would be deemed in compliance with CRA. It would be 
immune from public comments on CRA performance during pending 
bank applications. This immunity would remain unless 
individuals or groups presented ``substantial verifiable 
information to the contrary'' arising since the last 
examination. The provision imposes the burden of proof on those 
presenting the information.
    Federal bank regulatory agencies oppose this provision. 
They agree that a ``satisfactory'' CRA rating is not conclusive 
evidence that a bank is ``meeting the credit needs of all of 
its communities.'' On the contrary, they welcome comments from 
the public regarding the CRA performance of the institutions 
they supervise. Comptroller of the Currency John Hawke said:

          Public comment is extremely valuable in providing 
        relevant information to anagency in its evaluation of 
an application under the CRA, convenience and needs, and other 
applicable standards--even by an institution that has a 
``satisfactory'' CRA rating. This amendment would limit or reduce 
public comment that is useful in our application process.\14\
---------------------------------------------------------------------------
    \14\ Responses of Comptroller of the Currency Hawke to Questions 
from Senator Paul S. Sarbanes, March 23, 1999 (``Hawke Responses''), at 
A.2.

Ellen Seidman, Director of the Office of Thrift Supervision 
---------------------------------------------------------------------------
(``OTS''), testified before the Committee on February 24, 1999:

          [w]e generally find that the information received 
        from those few who do comment on applications is 
        relevant, constructive, and thoughtful, and frequently 
        raise issues that need to be considered. In order for 
        us to reach a supportable disposition on an 
        application, and satisfy our statutory 
        responsibilities, we need to have public input.

    Public comment is especially useful in the case of large 
banks serving multiple markets, because regulators sample only 
a portion of these markets to determine the institution's CRA 
rating. Performance in small communities is weighted less than 
performance in larger areas. Public comment provides an 
opportunity for community members to point out facts and data 
that may have been overlooked in a particular examination. 
Moreover, circumstances can change rapidly over the course of 
an examination cycle.
    The safe harbor provision of the reported bill would stifle 
public comment on banks' and thrifts' CRA performance, because 
nearly all banks and thrifts receive ``satisfactory'' or better 
CRA ratings. In fact, 97% of institutions examined in 1997 and 
1998 received CRA ratings of ``satisfactory'' or better.\15\ 
While the Committee Majority asserts that the public comment 
process has been routinely abused, that assertion is not 
supported by the record. The vast majority of applications 
reviewed on CRA grounds are approved expeditiously and do not 
receive any adverse comments. Data collected from the four 
regulatory agencies show that less than one percent of 
applications subject to CRA received adverse comments.\16\ Of 
those applications that received adverse comments, only one 
percent were denied. The data also show that few applications 
that receive adverse CRA comments are significantly delayed. 
According to the OCC, since 1995 ``the average time for 
processing protested applications is only 27 days beyond 
standard processing targets.'' \17\
---------------------------------------------------------------------------
    \15\ FFIEC Web Site, ``Interagency CRA Ratings,'' visited March 22, 
1999.
    \16\ See, e.g., Hawke Responses at A.5 (``In the past three years, 
less than one percent of the applications subject to CRA that were 
filed with the OCC were protested.'').
    \17\ Hawke Responses at A.5.
---------------------------------------------------------------------------
    The exception to the safe harbor provision for CRA comments 
based on ``substantial verifiable information'' is unworkable 
in practice. Under the bill's rebuttable presumption, 
information relevant to a bank's CRA performance could not be 
introduced if it relates to problems existing at the time of 
the last examination. The provision places an excessive burden 
on ordinary citizens and community organizations, which would 
need to provide comments on every bank examination. FDIC 
Chairman Tanoue stated, ``public comments relating to CRA 
should not bear a burden of proof that is not imposed on public 
comment related to any other aspect of a bank's performance.'' 
\18\ Comptroller Hawke warned ``the agencies will have to make 
the examination much more searching and time consuming than it 
is at present.'' \19\ It also unfairly singles out CRA comments 
for restrictive treatment. Individuals seeking to comment on 
other aspects of the bank's performance, such as financial and 
managerial resources or competitive implications, would not 
have their rights similarly curtailed.
---------------------------------------------------------------------------
    \18\ Tanoue Responses at A.2.
    \19\ Id. at A.2.
---------------------------------------------------------------------------
            3. Small bank exemption \20\
---------------------------------------------------------------------------
    \20\ Senator Johnson does not join in this portion of the 
Additional Views.
---------------------------------------------------------------------------
    Eight Democratic Members also oppose the provision which 
would exempt from CRA rural institutions with less than $100 
million in assets. If enacted, the provision will have 
devastating consequences for low- and moderate-income rural 
communities, which depend almost exclusively on small banks for 
their credit needs. Access to credit in rural areas is already 
scarce, due in part to the lack of competition in those 
markets.
    Over 76% of rural U.S. banks and thrifts have assets less 
than $100 million.\21\ It is asserted that these small rural 
banks by their nature serve the credit needs of their local 
communities. However, small banks have historically received 
the lowest CRA ratings. Institutions with less than $100 
million in assets accounted for 92% of institutions receiving 
``substantial noncompliance'' ratings in 1997-1998.\22\ Small 
banks are subject to CRA because they receive public benefits, 
namely deposit insurance and access to the Federal Reserve's 
discount window and payment system.
---------------------------------------------------------------------------
    \21\ Source: Federal Deposit Insurance Corporation.
    \22\ FFIEC Website, ``Interagency CRA Ratings,'' visited March 22, 
1999.
---------------------------------------------------------------------------
    Although many small banks do serve the needs of their 
communities, statistics from the Federal Deposit Insurance 
Corporation reveal that 57% of small banks and thrifts have a 
loan-to-deposit ratios below 70%, with 17% of these having 
levels less than 50%.\23\ Observers note that small banks often 
invest in government securities rather than in their own 
communities. A 1995 editorial in the Madison, Wisconsin Capital 
Times summed up the practice of many banks in rural 
communities:
---------------------------------------------------------------------------
    \23\ Source: Federal Deposit Insurance Corporation.

          [M]any rural banks, establish a very different 
        pattern [than reinvesting in their communities], where 
        local lending takes a lower priority than making more 
        assured investment, like federal government securities. 
        Thus, such banks drain local resources of the very 
        localities that support them, making it much harder for 
        local citizens to get credit.\24\
---------------------------------------------------------------------------
    \24\ ``Bank Measure Bad for Farms,'' July 20, 1995.

    An exemption for small banks is unnecessary to relieve 
regulatory burden. The Federal bank regulators revised their 
CRA regulations in 1995 to reduce small banks' cost of 
compliance. This action followed the review of thousands of 
public comments, submitted by financial institutions, 
organizations, and individuals. According to the American 
Bankers Association, ``[f]or the vast majority of banks it 
reduced record keeping, exams went quicker and banks now know 
what is required of them.'' \25\ The new CRA rules, which took 
effect January 1, 1996, provide a streamlined examination for 
banks with less than $250 million in assets. These institutions 
generally need not do paperwork or keep records beyond what 
they would do in the ordinary course of their business. The new 
rules exempt small banks from reporting requirements and 
emphasize institutions' actual performance rather than 
paperwork and process. CRA ratings for small banks focus 
exclusively on lending and lending-related activities: loan-to-
deposit ratio, percentage of loans in a given political 
subdivision, lending to borrowers of different income and 
different sizes, and geographic distribution of loans. 
Moreover, banks that find it difficult to meet the requirements 
outlined in the regulations have the option of developing a 
strategic plan by which they will be evaluated.
---------------------------------------------------------------------------
    \25\ American Banker, ``Ludwig Gets Bankers' Credit for Helping 
Modernize Industry,'' January 20, 1998.
---------------------------------------------------------------------------
    The FDIC, OTS, and OCC support the application of CRA to 
small banks. OTS Director Seidman has stated:

          Small banks should be subject to CRA. The simple 
        assumption that if an institution is small it must be 
        serving its community is not entirely correct. It is 
        the unfortunate fact that it is possible for an 
        institution to make money simply by arbitrating the 
        spread between insurance-backed deposits and other safe 
        investments, including Treasury bonds. Although the 
        overwhelming majority of small institutions have a 
        favorable CRA ratings history, during 1998 alone 18 of 
        the 24 (66%) thrifts that were rated Substantial 
        Noncompliance or Needs to Improve by OTS had assets 
        under $100 million. Overall, 40% of OTS-regulated 
        institutions have assets under $100 million.

FDIC Chairman Tanoue stated similarly:

          Although the vast majority of institutions 
        satisfactorily help to meet the credit needs of their 
        communities, not all institutions may do so over time, 
        including small institutions. Some institutions may 
        unreasonably lend outside of their communities, or 
        arbitrarily exclude low- and moderate-income areas or 
        individuals within their communities. We believe that 
        periodic CRA examinations for all insured depository 
        institutions, regardless of asset-size, are an 
        effective means to ensure that institutions help to 
        meet the credit needs of their entire communities, 
        including low- and moderate-income areas.\26\
---------------------------------------------------------------------------
    \26\ Tanoue Responses at A.4.
---------------------------------------------------------------------------

Conclusions regarding CRA

    Reinstating the ``satisfactory'' CRA rating as a 
precondition of expanded affiliations and deleting the safe 
harbor and small bank exemption would bring the reported bill 
in line with the approach taken by the House Banking Committee. 
The bill reported by the House Banking Committee on March 11, 
1999 by a vote of 51 to 8 (also known as H.R. 10) dealt with 
these three issues in the same way as the Substitute Amendment 
supported by the Democratic Members. This is the same approach 
to these three issues that passed the full House and the Senate 
Banking Committee last year. By including these onerous CRA 
provisions, the reported bill moves in a direction previously 
rejected in both Houses of Congress and makes passage of 
financial services modernization legislation significantly more 
difficult.

             III. OPERATING SUBSIDIARIES OF NATIONAL BANKS

    One of the difficult issues raised in the financial 
services modernization debate over the past two years has been 
what activities may take place in subsidiaries of banks, and 
under what conditions. The bill reported by the Committee last 
year contemplated that activities as principal, such as 
underwriting of securities and insurance, would take place in 
holding company subsidiaries rather than bank subsidiaries.\27\ 
Certain agency activities, such as sales of insurance, were 
permitted in bank subsidiaries. While this approach was 
supported by the Federal Reserve, it was opposed by the 
Treasury Department. The Federal Reserve argued that the 
holding company structure offered greater safety and soundness 
protection. The Treasury Department pointed out the bill would 
restrict banks' ability to organize their operations as they 
think best and that financial activities could be conducted as 
safely in a bank subsidiary as in a holding company subsidiary. 
The FDIC agreed with the Treasury that financial activities in 
bank subsidiaries can be consistent with safety and soundness 
and protection of the deposit insurance funds.
---------------------------------------------------------------------------
    \27\ Holding company subsidiaries are often referred to as ``bank 
affiliates.''
---------------------------------------------------------------------------
    As the legislative process has proceeded, the Treasury 
Department has agreed to significant additional safeguards 
regarding the scope and regulation of bank subsidiaries' 
activities, discussed in detail below. With these safeguards, 
the Democratic Members believe banks should be given the option 
of conducting financial activities in operating subsidiaries. 
Moreover, President Clinton has indicated that he will veto the 
reported bill, in part because it ``would deny financial 
services firms the freedom to organize themselves in a way that 
best serves their customers * * *.'' The Substitute Amendment 
supported at the Committee's markup by all Democratic Members 
therefore would allow certain financial activities to take 
place in bank subsidiaries, subject to those safeguards.

Safeguards on bank operating subsidiaries

            1. Insurance underwriting
    First, the Treasury has agreed that insurance underwriting 
may not take place in a bank subsidiary. In his February 24, 
1999 testimony, Secretary Rubin explained that the business 
nexus between commercial banking and insurance underwriting is 
not as great as that between commercial banking and investment 
banking. Therefore, the Treasury would support legislation 
containing a prohibition on insurance underwriting in bank 
subsidiaries. Banks also have less experience with insurance 
underwriting than with other financial activities, such as 
securities underwriting. This suggests that insurance 
underwriting in bank subsidiaries might pose greater risks than 
other activities. The prohibition on insurance underwriting 
would be in addition to an explicit prohibition on real estate 
development conducted by bank subsidiaries, to which the 
Treasury agreed last year.
            2. Merchant banking
    The Treasury has also agreed that the Federal Reserve shall 
have exclusive authority to define merchant banking activities 
in bank subsidiaries. Merchant banking refers to the practice 
whereby an investment bank takes a passive equity stake in a 
company in connection with the provision of financial services, 
such as underwriting the company's securities, with a view 
towards appreciation and eventual sale. In the context of an 
investment bank's affiliation with a commercial bank, merchant 
banking activities present a potential breach in the separation 
of banking and commerce. They raise the possibility of 
commercial bank lending decisions being influenced by the 
merchant banking investments of an affiliate, with accompanying 
risks to the Federal deposit insurance fund.
    The possible dangers would be increased if two different 
regulators, namely the OCC and the Federal Reserve, were to 
define the dimensions of merchant banking activities 
permissible in two different categories of bank affiliate, 
namely bank subsidiaries and bank holding company subsidiaries. 
Defining the scope of merchant banking will involve drawing 
fine lines. In response to this concern, the Treasury 
Department agrees that the Federal Reserve should have 
exclusive rulemaking authority over merchant banking 
activities. The Federal Reserve will define merchant banking 
both for the bank holding company subsidiaries it already 
regulates and for bank subsidiaries, over which the Federal 
Reserve otherwise has no authority. This meaningful step on the 
part of the Treasury will contribute to bank subsidiary 
activities being structured in a prudent fashion.
            3. Joint rulemaking
    The potential competition between bank regulators is 
present in other contexts aswell. Having the OCC define what 
activities are ``financial in nature'' when they take place in a bank 
subsidiary, while the Federal Reserve defines what is ``financial in 
nature'' for a holding company subsidiary, would be troubling. It could 
put pressure on each regulator to interpret its regulations broadly, so 
as not to lose regulatory jurisdiction to the other. The Treasury 
Department endorses a number of steps intended to eliminate this risk. 
The Treasury Department agrees that the Secretary and the Federal 
Reserve shall jointly determine which activities are ``financial in 
nature,'' both for a holding company subsidiary and for a bank 
subsidiary. The Secretary and the Federal Reserve shall also jointly 
issue regulations and interpretations under the ``financial in nature'' 
standard.
            4. Regulatory parity
    To further place activities on an equal footing, the same 
conditions would apply to a national bank seeking to exercise 
expanded powers through a subsidiary as to a holding company 
seeking to exercise those powers through a subsidiary. These 
conditions are that the banks be well capitalized, well 
managed, and in compliance with CRA. The same penalties would 
apply to an institution that falls out of compliance with those 
provisions. The Treasury also supports the application of 
functional regulation to securities and insurance activities 
taking place in bank subsidiaries just as it applies to holding 
company subsidiaries. The Securities and Exchange Commission 
thus would have the same authority over a broker-dealer 
subsidiary of a bank as over a broker-dealer subsidiary of a 
holding company. State insurance regulators would have the same 
authority over an insurance agency owned by a bank as over an 
insurance agency owned by a holding company. These provisions 
should ensure a level competitive playing field for financial 
firms and appropriate regulation for financial activities, 
wherever they take place.
    In addition, the Treasury supports a requirement that 
national banks with total assets of $10 billion or more retain 
a holding company, even if they choose to engage in expanded 
financial activities through subsidiaries. This is designed to 
preserve the oversight that the Federal Reserve now has over 
the nation's largest commercial banks via their holding 
companies. The Federal Reserve believes this oversight 
capability is crucial to the conduct of monetary policy and to 
identification of systemic risks to the financial system.
            5. Additional safeguards
    The Substitute Amendment supported by the Democratic 
Members contained certain additional safeguards that the 
Treasury Department has advocated for financial services 
modernization legislation. Every dollar of a bank's investment 
in a subsidiary would be deducted from the bank's capital for 
regulatory purposes. In this way, the bank would have to remain 
well-capitalized even after deducting the investment in the 
subsidiary and even should it lose its entire investment. 
Further, a bank could not invest in a subsidiary an amount 
exceeding the amount the bank could pay to its holding company 
as a dividend. This should place investments in bank 
subsidiaries and investments in holding company subsidiaries on 
a level regulatory footing. While a bank's investment in a 
subsidiary would still be counted as an asset for financial 
accounting purposes, these provisions should lead the financial 
markets to treat a bank subsidiary in the same manner as a bank 
affiliate.
    Finally, Sections 23A and 23B of the Federal Reserve Act 
would apply the same strict limits on transactions between 
banks and their subsidiaries as already apply to transactions 
between banks and their affiliates. These statutes restrict 
extensions of credit from banks to their affiliates, guarantees 
by banks for the benefit of their affiliates, and purchases of 
assets by banksfrom their affiliates. Sections 23A and 23B 
require that all such transactions be at arms' length and fully 
collateralized and limit the total amount of such transactions between 
a bank and all of its affiliates.
    In total, these safeguards pertaining to the regulation of 
bank subsidiaries should eliminate any economic benefit that 
may exist when activities are conducted in bank subsidiaries 
rather than holding company subsidiaries. The provisions 
regarding the scope of activities permissible for bank 
subsidiaries should remove any opportunity for regulators to 
compete with one another to the detriment of the safety and 
soundness of the banking system or the separation of banking 
and commerce. FDIC Chairman Tanoue testified to the Committee 
on February 24, 1999:

          From a safety-and-soundness perspective, both the 
        bank operating subsidiary and the holding company 
        affiliate structures can provide adequate protection to 
        the insured depository institution from the direct and 
        indirect effects of losses in nonbank subsidiaries or 
        affiliates. . . .[I]n practice, regulatory safeguards 
        for operating subsidiaries [discussed above] and 
        existing safeguards for affiliates, such as Sections 
        23A and 23B of the Federal Reserve Act, would inhibit a 
        bank from passing any net marginal subsidy either to a 
        direct subsidiary or to an affiliate of the holding 
        company.

Chairman Tanoue's position is echoed by three former Chairmen 
of the FDIC. In a September 2, 1998 American Banker editorial, 
former Chairmen Ricki Tigert Helfer, William M. Isaac, and L. 
William Seidman wrote,

          Whether financial activities . . . are in a bank 
        subsidiary or a holding company affiliate, it is 
        important that they be capitalized and funded 
        separately from the bank. If we require this 
        separation, the bank will be exposed to the identical 
        risk of loss whether the company is organized as a bank 
        subsidiary or a holding company affiliate.
          On the basis of the provisions agreed to by the 
        Treasury Department and the testimony given by the 
        FDIC, the Democratic Members believe that permitting 
        bank operating subsidiaries can be consistent with the 
        goals of preserving safety and soundness, protecting 
        consumers, and promoting comparable regulation. 
        Accordingly, the Substitute Amendment that was 
        supported by all Democratic Members included authority 
        for bank operating subsidiaries, subject to all the 
        restrictions discussed above.

    The reported bill authorizes operating subsidiaries only 
for certain small banks, namely those with less than $1 billion 
in assets. In his February 24, 1999 testimony, Secretary Rubin 
opposed putting a limit on the asset size of banks allowed to 
choose the operating subsidiary structure. Given the position 
of President Clinton as stated in his March 2, 1999 letter 
cited earlier, this provision of the reported bill would also 
result in a veto. The Democratic Members believe that adoption 
of the operating subsidiary provisions of the Substitute 
Amendment would be a meaningful step toward enactment of 
financial services modernization legislation into law.

                        IV. CONSUMER PROTECTION

    The Democratic Members believe that any financial services 
modernization bill must ensure adequate consumer protections. 
The blurring of lines between banking, securities and insurance 
products and the consolidation of these different financial 
services under one corporate roof increase the potential for 
confusion on the part of consumers. For example, the wider 
variety of financial products available through banks raises 
potential customer confusion about the insured status, risks, 
and the issuer and seller of those products. In the past, some 
depository institutions have sought to take advantage of this 
confusion. Appropriate measures addressing issues such as 
disclosure to customers and licensing of personnel can 
keepmisunderstandings to a minimum. Such provisions must be included in 
any financial services modernization bill. The reported bill, however, 
fails to include important consumer protection provisions that passed 
the Committee overwhelmingly last year.

Insurance sales

    Insurance sales have always been regulated at the State 
level. The State insurance commissioners have staff and 
expertise in this area. Roughly 30 States have enacted statutes 
specifically addressing sales of insurance by banks. Currently, 
under the Supreme Court's Barnett Bank decision,\28\ States may 
regulate sales of insurance by national banks so long as they 
do not ``prevent or significantly interfere'' with such sales.
---------------------------------------------------------------------------
    \28\ Barnett Bank v. Nelson, 517 U.S. 25 (1996).
---------------------------------------------------------------------------
    The Committee Print presented at the March 4, 1999 markup 
would have contained broad preemption provisions. It would have 
preempted State laws that differentiate in any way between 
sales of insurance by agents and sales of insurance by banks. 
Accordingly, regulations in those 30 States that differentiate 
between sales of insurance by banks and sales of insurance by 
brokers without ``significantly interfering'' with bank sales 
would nevertheless have been preempted as ``discriminatory.''
    At markup, the Committee adopted an amendment offered by 
Senator Bryan. The Bryan Amendment substituted the provisions 
from last year's bipartisan bill addressing the ability of 
States to regulate sales of insurance by banks. It deleted the 
overbroad preemption contained in the Committee Print. Instead, 
it codifies the Barnett Bank holding that States may not 
prevent or significantly interfere with a national bank's 
ability to sell insurance. It protects thirteen specific areas 
of State regulation from preemption. These include restrictions 
on the payment of commissions and referral fees to unlicensed 
bank personnel, restrictions on the release of customer 
insurance information, and requirements that banking and 
insurance transactions be documented separately.
    While substituting these provisions from last year's bill 
did much to improve the consumer protection provisions of the 
reported bill, more remains to be done. The Substitute 
Amendment required the Federal bank regulators to establish 
mechanisms for receiving and addressing consumer complaints. 
The reported bill contains no such requirement. In addition, 
the Substitute Amendment provided that Federal regulations 
would supersede State regulations when the Federal regulations 
afforded greater protection for consumers. The reported bill 
allows State regulations to trump Federal regulations, even 
when the State offers less protection to consumers. These 
deficiencies in the bill should be rectified.

Securities activities

    The reported bill reduces consumer protections not just in 
the conduct of insurance activities by banks but in the conduct 
of securities activities by banks as well. The Substitute 
Amendment ensured that the protections of the Federal 
securities laws were available to consumers in a wider range of 
circumstances than does the reported bill.
    Currently, banks enjoy a total exemption from the 
definitions of ``broker,'' ``dealer,'' and ``investment 
adviser'' under the Federal securities laws. Because of the 
blanket exemption, the Securities and Exchange Commission 
(``SEC'') cannot regulate securities activities taking place 
directly within banks. Banks are exempt from oversight by the 
securities self-regulatory organizations as well. This was 
appropriate in 1933 and for many yearsthereafter, when 
securities activities of banks were strictly limited.
    Beginning in the 1980's, bank regulators have allowed banks 
greater participation in securities activities. Banks may now 
offer brokerage services and conduct private placements. 
Because of the blanket exemption, consumers who purchase 
securities from banks do not receive any of the protections of 
the securities laws. These protections are in many ways 
superior to those offered by the banking laws. For example, 
broker-dealer personnel have an obligation to recommend to 
their clients only transactions that are suitable, based on 
their clients' tolerance for risk, overall portfolio and so on. 
Bank personnel have no such obligation. Broker-dealer personnel 
must pass licensing exams given by the National Association of 
Securities Dealers (``NASD'') and are subject to continuing 
education requirements. Bank personnel are exempt from these 
requirements. Disciplinary histories of broker-dealer personnel 
are made publicly available to investors by the NASD and State 
securities regulators. No such history is available regarding 
bank personnel. Broker-dealer managers have a duty to supervise 
their sales personnel that is enforceable under the Federal 
securities laws. Bank managers do not. Finally, customers' 
disputes with brokerage firms are subject to arbitration, which 
offers a specialized, quicker, and cheaper forum for settling 
disputes. No arbitration exists for customers' disputes with 
banks.
    Like the Substitute Amendment, the reported bill would 
repeal the total exemption banks enjoy from the definition of 
``broker'' and ``dealer.'' Also like the Substitute Amendment, 
it contains a number of exceptions that allow certain 
securities activities to continue to take place directly within 
banks. However, the exceptions in the reported bill are 
significantly wider than those in the Substitute Amendment.
    For example, the reported bill allows a bank trust 
department conducting securities transactions to be compensated 
on a transaction-by-transaction basis, just like a broker. It 
also allows a bank conducting transfer agent services for 
employee benefit plans and dividend reinvestment plans to be 
compensated on a transaction-by-transaction basis. This gives 
banks an opportunity to move brokerage activities directly into 
the banks, where customers receive less protection as detailed 
above. The Substitute Amendment would require the compensation 
to be a flat administrative fee in both cases. Where the 
Substitute Amendment would allow a bank to sell unregistered 
securities exclusively to sophisticated investors, the reported 
bill allows a bank to sell unregistered securities to all 
investors. Where the Substitute Amendent would prevent a bank 
from selling unregistered securities when the bank has a 
securities affiliate, the reported bill allows a bank that has 
securities affiliates to sell unregistered securities directly 
from the bank. Finally, the reported bill prohibits the SEC 
from determining that a new product is a security, and 
therefore must be sold by an SEC-registered broker-dealer, 
unless the Federal Reserve concurs. Over time, this will move 
even more securities activities directly into banks. The 
Substitute Amendment would afford the SEC the first opportunity 
to define new products as securities. In each of these 
circumstances, purchasers of securities will receive less 
protection under the reported bill than they would receive 
under the Substitute Amendment.
    The reported bill also provides less protection to mutual 
fund investors than would the Substitute Amendment. The SEC 
regulates mutual funds and their investment advisers. As noted 
above, banks are exempt from the definition of ``investment 
adviser.'' Therefore, when a bank serves as investment adviser 
to a mutual fund, the SEC can review only one side of the 
equation. The Substitute Amendment would remove the exemption 
from the definition of ``investment adviser'' when banks advise 
mutual funds. The reported bill does notinclude this provision. 
It leaves the SEC with less authority over bank-advised mutual funds 
and with less ability to protect investors in those funds.
    Finally, the Substitute Amendment would have required the 
Federal banking regulators to issue regulations regarding the 
sale of securities by banks and bank affiliates. The bank 
regulators would have established mechanisms to review and 
address consumer complaints. Currently, the Federal bank 
regulators have issued guidelines, which do not have the force 
of law, rather than regulations. The reported bill does not 
include this provision, leaving only the guidelines in force. 
The failure of the bank regulators to issue regulations 
underscores the importance of maintaining SEC oversight of 
securities activities.
    The Committee Majority's Report correctly notes that 
``sales of securities may be regulated differently depending on 
whether they take place through a bank or a securities 
broker.'' The reported bill, however, would actually make those 
regulatory discrepancies worse. The reported bill falls short 
in this area and thereby places investors at risk.

                        V. BANKING AND COMMERCE

    A final aspect of the reported bill that differs 
significantly from the Substitute Amendment is its approach to 
the separation of banking and commerce. U.S. law has long 
separated banking activities from commercial activities. 
Currently, a commercial firm such as General Motors or 
Microsoft may not own a bank or be owned by a bank.
    A number of commentators, including Chairman Greenspan, 
Secretary Rubin, former Federal Reserve Chairman Paul Volcker, 
banking industry associations and public interest groups, 
expressed caution regarding breaching the separation of banking 
and commerce. Chairman Greenspan testified to the Committee on 
February 23, 1999, ``[i]t seems to us wise to move first toward 
the integration of banking, insurance, and securities and 
employ the lessons we learn from that important step before we 
consider whether and under what conditions it would be 
desirable to move to the second stage of the full integration 
of commerce and banking.'' Secretary Rubin has stated, ``[w]e 
continue to oppose any efforts to expand the integration of 
banking and commerce.'' \29\
---------------------------------------------------------------------------
    \29\ Responses of Secretary of the Treasury Rubin to Questions from 
Senator Paul S. Sarbanes (``Rubin Responses''), at A.1.
---------------------------------------------------------------------------
    The Substitute Amendment reflects careful bipartisan 
compromises developed last year on the issue of banking and 
commerce. In general, it would have allowed affiliation between 
banking and commercial firms only in the context of merchant 
banking and insurance underwriting activities. The reported 
bill weakens the separation of banking and commerce by 
permitting broader combinations of banking and commerce than 
are allowed under current law. The Independent Bankers 
Association of American has expressed its ``strong opposition'' 
to the reported bill, terming it ``dangerous since it would 
permit the almost unbridled cross-ownership of banks and 
commercial firms.''30 In his March 2, 1999 letter stating he 
will veto the bill in its current form, President Clinton 
objected to the bill because it ``could expand the ability of 
depository institutions and nonfinancial firms to affiliate, at 
a time when experience around the world suggests the need for 
caution in this area.'' \30\
---------------------------------------------------------------------------
    \30\ News from IBAA, ``IBAA/IBAT Label Senate Banking Bill 
`Dangerous','' March 4, 1999.
---------------------------------------------------------------------------

Traditional separation of banking and commerce:

    The separation of banking and commerce has long been a 
feature of U.S. law. Itwas embodied in the national bank system 
established by the National Bank Act of 1864, which specifically 
forbids banks to engage or invest in commercial or industrial 
activities. Except in certain limited situations, a national bank may 
not own for its own account any shares of stock of any corporation.\31\
---------------------------------------------------------------------------
    \31\ 12 U.S.C. Sec. 24.
---------------------------------------------------------------------------
    When the rise of bank holding companies opened the 
possibility of the combination of banking and industrial firms 
through the holding company structure, Congress enacted the 
Bank Holding Company Act of 1956. This statute prohibited 
commercial firms from owning banks and prohibited holding 
companies owning two or more banks from owning commercial 
firms. This policy was strengthened by the Bank Holding Company 
Act Amendments of 1970, which extended the prohibition on 
owning commercial firms to holding companies owning just one 
bank. This policy was supported by both the Nixon 
Administration and the Democratic Congress. In submitting the 
1970 Amendments, President Nixon said, ``the strength of our 
banking system depends largely on its independence. Banking 
must not dominate commerce or be dominated by it.'' \32\
---------------------------------------------------------------------------
    \32\ Statement of President Richard M. Nixon of March 24, 1969, 
reprinted in H. Rep. No. 1747, 91st Cong., 2d Sess. 11 (1970).
---------------------------------------------------------------------------

Potential Risks of Mixing Banking and Commerce

    Allowing bank affiliations with commercial firms could 
raise numerous concerns relating to risk to the deposit 
insurance funds, the impartial granting of credit, unfair 
competition, and concentration of economic power. A bank that 
is affiliated with a commercial firm could have an incentive to 
make loans to that firm, even if the firm is less credit-worthy 
than other borrowers. The bank could have a similar incentive 
not to lend to the firm's competitors, even if they are credit-
worthy. If banks were to make lending decisions based on 
criteria other than creditworthiness, the taxpayer-backed 
deposit insurance fund ultimately would be put at risk.
    Some financial experts have pointed out these dangers. 
Secretary Rubin testified before the House Banking Committee on 
March 1, 1995 that mixing banking and commerce

          * * * might pose additional, unforeseen and undue 
        risk to the safety and soundness of the financial 
        system, potentially exposing the federal deposit 
        insurance funds and taxpayers to substantial losses. . 
        . . Equally uncertain is the effect such combinations 
        might have on the cost and availability of credit to 
        numerous, diverse borrowers and on the concentration of 
        economic resources.

Noted economist Henry Kaufman has warned that mixing banking 
and commerce would lead to conflicts of interest and unfair 
competition in the allocation of credit. In his view,

          A large corporation that controls a big bank would 
        use the bank for extending credit to those who can 
        benefit the whole organization. . . . The bank would be 
        inclined to withhold credit from those who are, or 
        could be, competitors to the parent corporation. Thus, 
        the cornerstone of effective banking, independent 
        credit decisions based on objective evaluation of 
        creditworthiness, would be undermined.\33\
---------------------------------------------------------------------------
    \33\ Talk Before UBS Securities Global Banking Conference, April 
29, 1997.

Some public interest groups have made the same points. 
Consumers Union testified before the Committee on February 25, 
1999 that it opposes ``permitting federally-insured 
institutions to combine with commercial interests because of 
the potential to skew the availability of credit, conflict of 
interest issues, and general safety and soundness concerns from 
expanding the safety net provided by the government.''
    Some believe that the difficulties experienced in Asia 
demonstrate the risks associated with mixing banking and 
commerce. Both Secretary Rubin and Chairman Greenspantestified 
that the financial crisis in Asia was made worse by imprudent lending 
by banks to affiliated commercial firms. Secretary Rubin said that his 
serious concerns about mixing banking and commerce ``are heightened as 
we reflect on the financial crisis that has affected so many countries 
around the world over the past two years.'' Chairman Greenspan 
testified ``the Asian crisis highlighted some of the risks that can 
arise if relationships between banks and commercial firms are too 
close, and makes caution at this stage prudent in our judgment.'' Other 
factors, including weak bank supervision and lack of transparency, 
contributed to the Asian financial crisis as well. Former Federal 
Reserve Chairman Volcker has written:

          Recent experience with the banking crises in 
        countries as different in their stages of development 
        as Japan, Indonesia and Russia demonstrates the folly 
        of permitting industrial-financial conglomerates to 
        dominate financial markets and potentially larger areas 
        of the economy. But we need look no further than our 
        own savings-and-loan crisis in the 1980s for the 
        lesson. Combinations of insured depository institutions 
        and speculative real estate developers cost American 
        taxpayers, who ultimately stood behind the thrift 
        insurance funds, tens of billions of dollars.\34\
---------------------------------------------------------------------------
    \34\ Washington Post, ``Boost for Banking,'' September 10, 1998.
---------------------------------------------------------------------------

Substitute Amendment Retained the Separation of Banking and Commerce

    Under the Substitute Amendment, agreed to as part of last 
year's bipartisan compromise, banks could be owned by bank 
holding companies and by new ``financial holding companies'' as 
well. While the financial holding companies could engage in a 
broader range of financial activities, they would not be 
allowed to own commercial firms.
    The Substitute Amendment would allow bank affiliates to 
engage in merchant banking activities, subject to certain 
specified conditions. As discussed above, merchant banking 
refers to the practice of taking a passive equity stake in a 
company in connection with the provision of financial services 
with a view towards resale. Under the Substitute Amendment, 
bank affiliates could invest in a ``bona fide'' merchant 
banking activity for the purpose of appreciation and ultimate 
resale. The investment could be held ``only for such a period 
of time as will permit the sale or disposition thereof on a 
reasonable basis,'' and the bank could not actively participate 
in the company's day to day management.
    The Substitute Amendment also would prohibit the formation 
of new unitary thrift holding companies by commercial firms. As 
noted above, a holding company that owns even one bank may not 
own a commercial firm, nor may a holding company that owns more 
than one thrift. However, a holding company that owns just one 
thrift (a ``unitary thrift holding company'') is not subject to 
the same prohibition. This provision of the law may take on 
greater importance than in prior years, as the statutory focus 
on residential mortgage lending for thrifts has been modified.
    The Substitute Amendment would prohibit any company that 
engages in commercial activities from acquiring control of a 
thrift. Under a ``grandfather'' provision, existing unitary 
thrift holding companies would be allowed to retain their 
commercial affiliations. The ``grandfather'' would also apply 
to any unitary thrift holding company formed pursuant to an 
application already pending before the Office of Thrift 
Supervision. The Substitute Amendment would continue to allow 
these thrifts to be acquired by financial companies, such as 
insurance companies and securities firms. However, it would 
prohibit the sale of these thrifts to commercial firms. There 
are currently over 500 thrifts owned by unitary holding 
companies. Allowing these thrifts to be transferred to 
commercial ownership would call the separation of banking and 
commerce into question. The Substitute Amendment would 
createparity of opportunity for banks and thrifts to be acquired by the 
same types of financial institutions.

Reported bill weakens separation of banking and commerce

    Unlike the Substitute Amendment, the reported bill 
significantly weakens the separation of banking and commerce. 
It goes beyond what is necessary to accomodate commercial bank 
affiliations with insurance companies and securities firms. 
First, it allows for unnecessarily open-ended Amerchant 
banking'' investments. Next, it continues to allow commercial 
firms to acquire thrifts through the unitary holding company 
provision. Finally, it permits holding companies to engage in 
any nonfinancial activities that regulators believe are 
Acomplementary'' to financial activities.
            1. Merchant banking
    Like the Substitute Amendment, the reported bill permits 
bank affiliates to acquire any type of company in connection 
with merchant banking activities, defined to include 
``investment activities engaged in for the purpose of 
appreciation and ultimate resale or disposition of the 
investment.'' However, the reported bill drops safeguards on 
merchant banking activities that were contained in last year's 
bipartisan bill. It would not prohibit a bank holding company 
from actively participating in the day-to-day management of the 
companies in which it invests. It also would not limit the 
duration of the investment to ``such a period of time as will 
permit the sale or disposition thereof on a reasonable basis.'' 
Thus, the reported bill would not place restrictions on a bank 
holding company's acquisition and operation of any company, 
including commercial companies of any size and in any industry. 
This could effectively break down the separation of banking and 
commerce. Over time, the lending decisions of the affiliated 
bank could be biased to benefit the commercial firm. The 
potential risks raised by mixing banking and commerce could 
then be squarely presented: the commercial firm may have a 
competitive advantage over its rivals and the deposit insurance 
fund might be exposed to unnecessary risk.
            2. Unitary thrift holding company provision
    The reported bill does not effectively close the unitary 
thrift holding company provision. While the bill would prevent 
a commercial company from acquiring a thrift after March 1, 
1999, it would allow a commercial company to acquire any of the 
existing unitary thrift holding companies. Unitary thrift 
holding companies currently own over 500 thrifts. Allowing 
these thrifts to be acquired by commercial firms would move far 
down the road toward a mixing of banking and commerce, with all 
its attendant dangers.
    Some financial leaders and banking industry groups advised 
the Committee to prohibit commercial firms from acquiring 
control of thrifts. Chairman Greenspan testified on February 
23, 1999, that ``the Board continues to support elimination of 
the unitary thrift loophole, which currently allows any type of 
commercial firm to control a federally insured depository 
institution.'' He recommended that financial services 
modernization legislation ``at least prohibit or significantly 
restrict the ability of grandfathered unitary thrift holding 
companies to transfer their legislatively created grandfather 
rights to another commercial organization through mergers or 
acquisitions.'' Secretary Rubin has stated,

          There are currently some 580 unitary thrift holding 
        companies. If financial modernization legislation were 
        enacted, insurance companies and securities firms would 
        be free to affiliate with banks, and the unitary thrift 
        holding company might be attractive primarily to 
        commercial firms seeking to avoid the general 
        prohibition against owning banks. For that reason, we 
        support the bill'sprohibition against forming 
additional unitary holding companies, and would further support an 
amendment terminating the grandfather rights of existing unitaries if 
they were transferred to commercial firms. Without such a limit on 
transferability, existing charters may tend to migrate to commercial 
firms and could become a significant exception to the general 
prohibition against commercial ownership of depository 
institutions.\35\
---------------------------------------------------------------------------
    \35\ Rubin Responses at A.1.

    The American Bankers Association and Independent Bankers 
Association of America both testified before the Committee on 
February 25, 1999 expressing their support for closing the 
unitary thrift holding company provision, including restricting 
transferability of existing unitaries. The American Bankers 
said, ``commerce and banking should not be allowed to mix in 
the wholesale fashion permitted under the unitary thrift 
concept.'' The Independent Bankers oppose the reported bill 
because it ``would perpetuate the unitary thrift loophole by 
permitting more than 500 existing unitaries to be sold to 
commercial firms.''
    OTS Director Seidman testified in favor of retaining the 
current features of the thrift charter, including the unitary 
holding company. She testified before the Committee on February 
24, 1999:

          In our experience, the modern thrift charter provides 
        business flexibility and choice coupled with sound 
        regulatory oversight. It permits affiliations of 
        insured depository institutions with insurance, 
        securities, and other firms, but with built-in 
        safeguards to avoid undue risks to the taxpayer and to 
        meet the needs of consumers and communities. Based on 
        our experience, there is no evidence that shows that 
        affiliations permitted in the unitary thrift holding 
        company structure are inherently risky and should be 
        constrained. In fact, there are numerous reasons to 
        retain the structure in its current form.

    Some have argued that limiting transferability of unitary 
thrift holding companies would be unfair because companies 
bought thrifts at a time when they could sell to any commercial 
company. In the past, however, Congress has changed statutes 
governing savings associations and required compliance. For 
example, in 1987 Congress imposed a ``qualified thrift lender 
test'' requiring thrifts to hold a percentage of their total 
assets as ``qualified thrift investments.'' A unitary thrift 
holding company owning a thrift that failed to comply with the 
new requirement was required to divest its commercial 
activities. Also in 1987, Congress limited the transferability 
of non-bank banks by requiring that upon transfer the new owner 
bank would be required to register as a bank holding company. 
Because the Congress broke no contracts in taking these 
actions, they created no liability for the Federal government. 
These prior Congressional actions provide a precedent for the 
position taken by the Substitute Amendment and are advocated by 
Chairman Greenspan, Secretary Rubin and others.
            3. ``Complementary'' activities
    Finally, as would the Substitute Amendment, the reported 
bill allows holding companies that own banks to engage in 
activities that are ``financial in nature or incidental to such 
financial activities.'' Both would also permit numerous 
specific non-banking activities. These include activities 
consistent with reasonably expected changes in technology or 
the financial marketplace and investments in commercial firms 
by insurance companies.
    The reported bill goes even further, by authorizing holding 
companies to engage in activities that are ``complementary'' 
activities that are financial in nature and incidental thereto. 
While subject to interpretation by regulators, the reported 
bill itself provides no definition of or limitations on these 
``complementary'' activities. Some ``complementary'' activities 
would very likely be commercial in nature, raising the 
potential dangers of biased lending decisions described above. 
This open-ended grant of authority seems unnecessary.

                             vi. conclusion

    The Democratic Members of the Committee support financial 
services modernization legislation. All Democratic Members of 
the Committee supported last year's bipartisan bill. All 
Democratic Members of the Committee this year supported the 
Substitute Amendment, which contained the text of last year's 
bipartisan bill with the addition of authority for bank 
operating subsidiaries and appropriate safeguards. These 
provisions achieve the primary objective of financial services 
modernization, namely allowing affiliation of banks, securities 
firms and insurance companies. The provisions do so while 
preserving safety and soundness, protecting consumers, 
providing for regulatory parity, and promoting the availability 
of financial services to all communities.
    The bill now reported by the Committee, however, falls 
short of these goals. It undermines the Community Reinvestment 
Act. It does not protect purchasers of securities and insurance 
products from banks. It does not provide bank operating 
subsidiaries with the scope sought by the Treasury Department. 
Finally, it breaches the separation of banking and commerce. 
For these reasons, President Clinton has declared he will veto 
it in its current form.
    If financial modernization legislation is to be enacted, 
the Senate must return to the bipartisanship that characterized 
legislative efforts in this area until this year. The 
Substitute Amendment offered at the Committee markup has been 
introduced by Senator Daschle and every Democratic Member of 
the Commitee as a stand-alone bill, S. 753. It is a balanced, 
prudent approach to financial services modernization. It 
reflects careful, bipartisan compromises struck last year. It 
is not opposed by any financial services industry association. 
It is similar to the bill passed with broad bipartisan support 
by the House Banking Committee earlier this year. It is clearly 
the approach most likely to achieve the enactment of financial 
services modernization legislation.
    Failure to proceed on a bipartisan basis will, at best, 
waste the Senate's time in fruitless effort. At worst, the 
reported bill would increase risks to the taxpayer-backed 
deposit insurance funds, reduce the availability of credit in 
underserved communities, and expose consumers to unnecessary 
confusion.

                                   Paul S. Sarbanes.
                                   John F. Kerry.
                                   Tim Johnson.
                                   Richard H. Bryan.
                                   Evan Bayh.
                                   John Edwards.
                                   Charles Schumer.
                                   Jack Reed.
                                   Christopher J. Dodd.

                    ADDITIONAL VIEWS OF SENATOR REED

    At the outset, I would like to indicate my desire to pass 
financial services modernization legislation. Indeed, I believe 
the existing legal framework governing the financial services 
industry is an anachronism that bears no relationship to the 
realities of today's financial markets. Moreover, the theories 
advanced at the time of Glass-Steagall's enactment which 
suggested the need to separate banking, securities, and 
insurance as a prudential measure, have long since been 
abandoned. In fact, today there is general consensus that these 
activities can safely be conducted in one firm if appropriate 
firewalls are in place.
    For these reasons, I am a proponent of financial 
modernization. More specifically, I support legislation that 
will allow financial institutions to affiliate, while 
preserving safety and soundness, and ensuring community access 
to credit. I believe last year's financial modernization bill, 
H.R. 10, which passed the House and overwhelmingly passed the 
Senate Banking Committee, adequately addressed these 
priorities. Unfortunately, that bill was prevented from coming 
to the Senate floor because of a desire by some to eliminate 
the Community Reinvestment Act (CRA) provisions included in the 
bill. As a result, the Senate missed an historic opportunity to 
enact fair and balanced financial modernization legislation.
    The bill now being considered substantially deviates from 
the bipartisan compromise passed by the Committee last year. To 
be sure, this legislation falls woefully short on a range of 
issues which, in my opinion, are essential components of 
financial services modernization.
    First, the current modernization bill includes several 
provisions that would significantly undermine CRA--legislation 
which has been responsible for $1 trillion in loans and loan 
commitments to low-income communities since its enactment in 
1977. For example, one provision of the bill would create an 
exemption to CRA for rural financial institutions with assets 
under $100 million. Although this exemption is limited to the 
smallest institutions, over 76 percent of rural banks would be 
covered. This is of great concern since small banks have 
historically received the lowest CRA ratings. In fact, 
institutions with less than $100 million in assets accounted 
for 92 percent of institutions receiving ``substantial non-
compliance'' CRA ratings in 1997-1998.
    I am also concerned about this exemption because banks are 
typically the primary sources of credit in rural communities. 
Hence, absent CRA, it is likely that many rural communities 
could become credit-starved.
    The bill also includes a provision that would provide a 
safe harbor for banks with a ``satisfactory'' or better CRA 
rating. Specifically, institutions receiving a satisfactory CRA 
rating at their most recent examination would be presumptively 
in compliance with CRA, unless ``substantial verifiable 
information'' to the contrary was presented.
    I am concerned about this provision because it establishes 
a very difficult-to-satisfy burden of proof for individuals or 
groups wishing to protest a bank merger on CRA grounds. Indeed, 
I fear this provision will greatly inhibit the ability of 
groups to get the necessary information from banks to protest a 
merger. Also, when considering the fact that 97 percent of 
institutions receive a satisfactory or better CRA rating, it is 
clear that this provision will effectively eliminate CRA 
comment on a bank merger.
    In addition to CRA, provisions in the bill establishing a 
$1 billion asset cap for banks engaging in securities 
underwriting and merchant banking in an operating subsidiary 
raiseconcerns. I believe that banks of any size should have the 
flexibility to engage in the designated principal activities in an 
operating subsidiary as long as the proper safeguards are in place such 
as capital deduction requirements and limitations on self-dealing. In 
accordance with my views on this issue, I offered an amendment to H.R. 
10 in the Banking Committee last year that would have allowed banks to 
engage in securities underwriting and merchant banking in an operating 
subsidiary. This amendment has been incorporated into an alternative 
Democratic financial services modernization bill, S. 753.
    The financial modernization bill is also problematic since 
it does not include provisions to require prior approval from 
the Federal Reserve Board (FRB) before allowing a bank to merge 
or engage in new activities. At a minimum, the FRB should be 
required to consider whether the merger or new activity will 
compromise safety and soundness, will adversely affect 
competition, and will serve the public interest. Such 
provisions were included in H.R. 10 and have been included in 
the Democratic alternative.
    I also have general concerns about the regulatory scheme 
established in the modernization bill. For example, the bill 
expands the powers of financial institutions, while 
simultaneously limiting the powers of federal regulators. This 
is evident in section 114, which prohibits the Office of the 
Comptroller of the Currency (OCC) and the Office of Thrift 
Supervision (OTS) from examining a mutual fund being operated 
by a bank or thrift. This provision curtails existing powers of 
the OCC and OTS, both of which currently have limited authority 
to examine a mutual fund operated by a bank or thrift. I 
believe it is important that this authority be maintained.
    Another similarly restrictive provision found in section 
111 would prohibit the FRB from examining a securities or 
insurance affiliate unless there is ``reasonable cause to 
believe'' the affiliate is engaging in a risky activity. Absent 
the ability to examine the affiliate, it is unclear how the FRB 
could determine whether the affiliate is engaging in a risky 
activity.
    Ultimately, I am concerned that this regulatory scheme, as 
illustrated by the foregoing provisions, is too porous. I fear 
that regulators may sometimes be unable to coordinate their 
responsibilities, which could result in situations in which 
detrimental practices may go unchecked.
    Finally, provisions of the bill that would limit the FRB's 
authority to require an insurance affiliate to recapitalize a 
failing bank raise concerns. These provisions undermine the 
``source of strength'' doctrine, and, in my opinion, could lead 
to a regulatory standoff between the FRB and state insurance 
commissioners. I could easily envision a situation in which a 
state insurance commissioner acts out of his/her political 
interest and prohibits a well-capitalized insurance affiliate 
from assisting a failing bank. In this case, the FRB's only 
recourse would be to require the bank holding company to sell 
off the bank. However, it is unlikely that there would be a 
buyer for an insolvent bank, in which case deposit insurance 
funds would have to cover losses.
    In view of my concerns with the Committee-passed bill, I 
joined my Democratic colleagues in introducing an alternative 
financial modernization bill, S. 753, which is substantially 
similar to the H.R. 10 bill that enjoyed broad industry support 
and which passed the House and Senate Banking Committee last 
year. In my opinion, S. 753 addresses the need to modernize our 
financial services system, while preserving safety and 
soundness, as well as protecting community access to credit. I 
hope my colleagues can support S. 753 if we have an opportunity 
to consider it on the Senate floor.

                                                         Jack Reed.

                                

