[House Report 107-192]
[From the U.S. Government Publishing Office]




107th Congress                                            Rept. 107-192
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     Part 2

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



 
            FINANCIAL SERVICES ANTIFRAUD NETWORK ACT OF 2001

                                _______
                                

October 16, 2001.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

 Mr. Sensenbrenner, from the Committee on the Judiciary, submitted the 
                               following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 1408]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 1408) to safeguard the public from fraud in the 
financial services industry, to streamline and facilitate the 
antifraud information-sharing efforts of Federal and State 
regulators, and for other purposes, having considered the same, 
reports favorably thereon with an amendment and recommends that 
the bill as amended do pass.

                                CONTENTS

                                                                   Page
The Amendment....................................................     2
Purpose and Summary..............................................     2
Background and Need for the Legislation..........................     2
 A.  Background.......................................................2
 B.  The Coble Amendment..............................................3
 C.  The Rep. Smith and Rep. Bachus Agreement.........................3
Hearings.........................................................     4
Committee Consideration..........................................     4
Vote of the Committee............................................     4
Committee Oversight Findings.....................................     4
Performance Goals and Objectives.................................     4
New Budget Authority and Tax Expenditures........................     4
Congressional Budget Office Cost Estimate........................     4
Constitutional Authority Statement...............................     8
Section-by-Section Analysis and Discussion.......................     8
Changes in Existing Law Made by the Bill, as Reported............    11
Markup Transcript................................................    11
Additional Views.................................................   107

    The amendment (stated in terms of a provision in the 
reported bill filed by the Committee on Financial Services) is 
as follows:

    In section 111(e)(2), strike subparagraph (A) and insert 
the following:

                    (A) Declaratory judgment.--If a party seeks 
                in any action or proceeding to compel 
                disclosure of confidential supervisory 
                information, a financial regulator may in a 
                civil action for a declaratory judgment seek to 
                prevent such disclosure.

                          Purpose and Summary

    H.R. 1408, as reported by the Committee on the Judiciary, 
establishes a seamless national network for the sharing of 
critical and confidential antifraud information among American 
financial services industries. This network is intended to 
preserve the careful balance of privacy and confidentiality 
concerns with the need of our financial services industries' 
regulators and law enforcement agencies to access critical 
information.

                Background and Need for the Legislation

                             A. BACKGROUND

    In recent weeks, threats of potential terrorist activity 
within the United States have raised grave concern over 
America's Homeland Security. The need to better secure our 
financial services industries is emphasized by the possibility 
that perpetrators of terrorist acts on September 11, 2001, may 
have utilized American financial markets to hedge enormous 
profits from their horrific acts.\1\ Furthermore, a financial 
investigation is reportedly a key element of the ongoing 
investigation into the September 11, 2001 attacks.\2\ Enhancing 
the ability of financial services industries' regulators to 
better evaluate those to be licensed to serve in our financial 
services industries will help America fortify its first line of 
defense and prevent abuses of our financial services 
industries.
---------------------------------------------------------------------------
    \1\ Jerry Seper, Patrice Hill, FBI Expands Terrorist Hunt Into U.S. 
Banks, Wash. Times, Sept. 19, 2001, at A18.
    \2\ Id.
---------------------------------------------------------------------------
    Currently, there are over 250 Federal and State financial 
regulators and self-regulating financial organizations, each 
using different systems without a coordinated interface to 
share information and keep track of each other's antifraud 
efforts. Most regulators have already computerized their 
records and have been working on efforts to coordinate their 
databases internally. Recently, some of the larger regulators 
have begun developing individual information-sharing agreements 
with other regulators across the financial industry. There are, 
however, no comprehensive cross-industry coordination efforts 
underway, and there are no comprehensive guidelines for 
safeguards to protect the confidentiality, privacy, and 
security of shared information. Effectuating individual 
coordination among all of the more than 250 financial 
regulators would require tens of thousands of separate 
agreements--something that would be neither efficient nor 
effective for protecting consumers.

                         B. THE COBLE AMENDMENT

    At the markup, Mr. Coble, Chairman of the Committee on the 
Judiciary Subcommittee on Courts, the Internet, and 
Intellectual Property, offered an amendment to subsection 
111(e)(2)(A) of H.R. 1408. In general, section 111 clarifies 
that ``confidential supervisory information'' (CSI) prepared by 
financial regulators is privileged from disclosure. As a 
result, the regulator collecting the CSI is its owner and its 
contents may not be disclosed by a third party absent the 
regulator's consent. While H.R. 1408 provides rules for the 
appropriate disclosure of CSI, section 111(e)(2)(A) permits 
regulators to remove any dispute over the disclosure of CSI to 
Federal District Court.
    Although Mr. Coble explained that he was not opposed to the 
Federal Courts reviewing disputes over CSI disclosure, Mr. 
Coble explained two primary objections to the drafting of 
section 111(e)(2)(A):

        1. LAs drafted, section 111(e)(2)(A) would apply to a 
        wide variety of proceedings in state court, including 
        criminal prosecutions, civil fraud suits, and 
        proceedings instituted by state regulators. In such 
        proceedings, a third party might well assert that the 
        CSI in question was relevant to a claim, even a 
        constitutional defense.

        2. LThe language of section 111(e)(2)(A) would 
        encourage unnecessary satellite litigation over what 
        part of a given case would be brought into Federal 
        court and what part would remain in a state tribunal.

    The Coble amendment substitutes new language in 
subparagraph 111(e)(2)(A), authorizing an action for 
declaratory judgement. The action for declaratory judgement 
creates a means by which rights and obligations may be 
adjudicated in cases involving an actual controversy that has 
not reached the stage at which either party may seek a coercive 
remedy, or in which the party entitled to such a remedy fails 
to pursue. The classic example is a Federal declaratory 
judgement action to resolve coverage issues in an automobile 
accident while the state court resolves questions of liability.
    Under the Coble amendment, a regulator in a state action 
may request that a Federal District Court issue a declaratory 
judgement as to whether the regulator must surrender its CSI to 
a third party. It is simply a cleaner way to accomplish the 
same purpose of section 111(e)(2).

                    C. THE REPRESENTATIVE SMITH AND

                    REPRESENTATIVE BACHUS AGREEMENT

    During the markup, Mr. Smith, Chairman of the Committee on 
the Judiciary Subcommittee on Crime, voiced opposition to H.R. 
1408. Mr. Smith noted that while H.R. 1408 would enhance 
information sharing between financial regulators, other 
provisions in H.R. 1408 would limit the ability of law 
enforcement to receive and share the same information. In 
addition, Mr. Smith pointed out that section 111(b) of H.R. 
1408 created an exception for duly authorized Committees of the 
Congress, the Government Accounting Office, and financial 
regulators to access privileged information under section 
111(b) but provided no exception for law enforcement. During 
markup, Mr. Smith pointed out that information currently 
accessible to law enforcement would become privileged and 
unaccessible under H.R. 1408. Mr. Smith explained that his 
concerns are shared by the United States Department of Justice.
    Mr. Smith engaged Mr. Bachus in a colloquy to discuss the 
possibility of drafting an amendment for the floor that would 
address Mr. Smith's concerns. Mr. Bachus agreed to work with 
Mr. Smith, Members on both sides of the aisle, so that an 
amendment may be offered on the House floor.

                                Hearings

    No hearings were held on H.R. 1408.

                        Committee Consideration

    On Wednesday, October 10, 2001, the Committee met in open 
session and ordered favorably reported the bill H.R. 1408, with 
amendment, by voice vote, a quorum being present.

                         Vote of the Committee

    During the Committee's consideration of H.R. 1408, it took 
no rollcall votes. The Coble amendment passed by a voice vote 
and the Chairman Sensenbrenner motion to order the bill 
reported favorably with an amendment passed by a voice vote.

                      Committee Oversight Findings

    In compliance with clause 3(c)(1) of rule XIII of the Rules 
of the House of Representatives, the Committee reports that the 
findings and recommendations of the Committee, based on 
oversight activities under clause 2(b)(1) of rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

                    Performance Goals and Objectives

    H.R. 1408 does not authorize funding. Therefore, clause 
3(c) of rule XIII of the Rules of the House of Representatives 
is inapplicable.

               New Budget Authority and Tax Expenditures

    Clause 3(c)(2) of House rule XIII is inapplicable because 
this legislation does not provide new budgetary authority or 
increased tax expenditures.

               Congressional Budget Office Cost Estimate

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, the Committee sets forth, with 
respect to the bill, H.R. 1408, the following estimate and 
comparison prepared by the Director of the Congressional Budget 
Office under section 402 of the Congressional Budget Act of 
1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, October 12, 2001.
Hon. F. James Sensenbrenner, Jr., Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1408, the 
Financial Services Antifraud Network Act of 2001.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Mark Hadley 
and Ken Johnson (for Federal costs), who can be reached at 226-
2860, Susan Sieg Tompkins (for the State and local impact), who 
can be reached at 225-3220, and Paige Piper/Bach (for the 
private-sector impact), who can be reached at 226-2940.
            Sincerely,
                                  Dan L. Crippen, Director.

Enclosure

cc:
        Honorable John Conyers, Jr.
        Ranking Member
H.R. 1408--Financial Services Antifraud Network Act of 2001.

                                SUMMARY

    CBO estimates that enacting H.R. 1408 would have no 
significant impact on the budget. Enacting the legislation 
could affect direct spending and receipts, so pay-as-go 
procedures would apply; however, we estimate that any such 
impacts would not be significant. H.R. 1408 contains 
intergovernmental and private-sector mandates as defined in the 
Unfunded Mandates Reform Act (UMRA), but CBO estimates that the 
costs would not be significant and would not exceed the 
thresholds established in that act ($56 million for 
intergovernmental mandates and $113 million for private-sector 
mandates in 2001, adjusted annually for inflation).
    H.R. 1408 would require financial regulators to coordinate 
their computer systems to share information about fraud. The 
affected regulators would include private regulatory 
organizations, the Board of Governors of the Federal Reserve 
System, the Federal Deposit Insurance Corporation (FDIC), the 
National Credit Union Administration (NCUA), the Office of the 
Comptroller of the Currency (OCC), the Office of Thrift 
Supervision (OTS), the Securities and Exchange Commission 
(SEC), and State regulators of the banking, insurance, and 
securities industries.
    The bill also would establish criminal penalties for 
regulators who intentionally disclose confidential or 
privileged information to the public. Finally, the bill would 
authorize these regulators to request the Federal Bureau of 
Investigation (FBI) to conduct criminal background checks on 
individuals in the financial services industry, and it would 
impose criminal penalties for the improper use of such 
information.

                ESTIMATED COST TO THE FEDERAL GOVERNMENT

    CBO estimates that coordinating computer systems among the 
affected regulatory organizations would cost about $2 million 
over the 2002-2003 period and insignificant amounts in 
subsequent years. We estimate, however, that these costs would 
be largely offset by fees, and that the net effect on the 
budget would be negligible.
    Those prosecuted and convicted under H.R. 1408 could be 
subject to criminal fines; therefore, the Federal Government 
might collect additional fines if the bill is enacted. 
Collections of such fines are recorded in the budget as 
governmental receipts (revenues), which are deposited in the 
Crime Victims Fund and spent in subsequent years. CBO estimates 
that any impact of this legislation on collections of fines 
(and subsequent spending) would not be significant.

                           BASIS OF ESTIMATE

    Federal financial regulators currently provide information 
about enforcement and disciplinary actions via the Internet. 
Under the bill, CBO expects that the financial regulators would 
create a search engine to share information about fraud, and 
that the FDIC, the NCUA, the OCC, or the OTS would bear the 
costs of this new system. The NCUA, the OCC, and the OTS charge 
fees to cover all their administrative costs; therefore, 
additional spending by those agencies would have no significant 
net budgetary effect. That is not the case with the FDIC, 
however. Because the balances in the deposit insurance funds 
exceed the levels required under current law, deposit insurance 
premiums would not be affected by a small amount of additional 
spending. Therefore, CBO expects that costs incurred by the 
FDIC would not be recovered by raising insurance premiums.
    The Federal Reserve remits its profits to the Treasury, and 
those payments are classified as governmental receipts in the 
Federal budget. To the extent that the Federal Reserve bears 
the costs of sharing information, H.R. 1408 would reduce 
receipts, but CBO estimates that any such impact would be 
negligible. If Federal financial regulators that receive annual 
appropriations, such as the SEC, bear the costs of sharing 
information, H.R. 1408 could increase discretionary spending, 
subject to the availability of appropriated funds.

                      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. Under the Balanced Budget and Emergency 
Deficit Control Act, legislation to provide funding necessary 
to meet the government's deposit insurance commitment is 
excluded from pay-as-you-go procedures. CBO expects that the 
cost to the FDIC and other financial regulators to establish a 
system to share information on fraud would be related to the 
safety and soundness of the banking system, and thus would be 
excluded. Although H.R. 1408 would establish new criminal 
penalties, CBO estimates that any impact of this legislation on 
the collection of criminal fines and subsequent spending would 
not be significant.

              INTERGOVERNMENTAL AND PRIVATE-SECTOR IMPACT

    The bill would require State and private financial 
regulators to:

         LParticipate in a network that links databases 
        containing information on final enforcement and 
        disciplinary actions they take. The bill does not 
        require regulators to create new databases; rather, if 
        such databases of public information exist, those 
        regulators must make the contents available to the 
        network.

         LProvide notice to persons against whom 
        enforcement or disciplinary action is taken based on 
        information from the network. Such notice would include 
        the identity of the network participant who provided 
        the information, a description of the information 
        received, and an opportunity to respond to the 
        information.

    The requirement to make information available to the 
network and to meet certain notice requirements would 
constitute both private-sector and intergovernmental mandates.
    The bill also would preempt certain State disclosure laws 
that would apply to the regulatory information released to the 
network, to the extent that State laws provide less 
confidentiality or a weaker privilege than the bill provides. 
The bill also would require State insurance regulators, when 
being audited by the General Accounting Office (GAO), to make 
all records available to GAO as part of the audit. The 
preemption and new requirement would be intergovernmental 
mandates.
    Based on information from governmental and industry 
sources, CBO estimates that the costs of these mandates would 
not be significant, and would not exceed the thresholds 
established in UMRA. Because the regulators would be required 
to provide information from databases that already exist, the 
costs to regulators would be incurred only to bring those 
databases into compliance with the network design. The notice 
requirements would expand the procedures States already follow 
in their regulatory process and would impose minimal costs.
    The bill would place certain eligibility requirements on 
State insurance commissioners and State securities 
administrators in order to access information from the network. 
These eligibility provisions affect voluntary access to network 
information and therefore are not mandates.

                         PREVIOUS CBO ESTIMATE

    On July 17, 2001, CBO transmitted a cost estimate for H.R. 
1408, as ordered reported by the House Committee on Financial 
Services on June 27, 2001. The two versions of the bill are 
nearly identical, and their budgetary effects are the same.

                         ESTIMATE PREPARED BY:

Federal Costs: Mark Hadley and Ken Johnson (226-2860)
Impact on State, Local, and Tribal Governments: Susan Sieg 
    Tompkins (225-3220)
Impact on the Private Sector: Paige Piper/Bach (226-2940)

                         ESTIMATE APPROVED BY:

Robert A. Sunshine
Assistant Director for Budget Analysis

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
Constitutional Authority for this legislation in article 1, 
section 8, clause 1 (relating to the general welfare of the 
United States); article 1, section 8, clause 3 (relating to the 
power to regulate interstate commerce); article 1, section 8, 
clause 5 (relating to the power to coin money and regulate the 
value thereof); and article I, section 8, clause 18 (relating 
to making all laws necessary and proper for carrying into 
execution powers vested by the Constitution in the government 
of the United States).

               Section-by-Section Analysis and Discussion

    The following section by section analysis describes H.R. 
1408 as reported by the Committee on the Judiciary.

                       Title I--Antifraud Network

             Subtitle A--Direction to Financial Regulators

    Section 100. Creation and Operation of the Network. 
Provisions contained in Section 100 were not referred to the 
Committee on the Judiciary, see H. Rept. 107-192 for analysis.

     Subtitle B--Potential Establishment of Antifraud Subcommittee

    Section 101. Establishment. This section authorizes the 
establishment of an ``Antifraud Subcommittee'' (the 
Subcommittee) within the President's Working Group on Financial 
Markets, which operates pursuant to Executive Order 12631. In 
addition, this section establishes liaisons between the 
Subcommittee, representatives from the financial services 
industries, and representatives from law enforcement agencies. 
Liaison representatives from law enforcement agencies include: 
a representative of the Department of Justice, appointed by the 
Attorney General; a representative of the Federal Bureau of 
Investigation (FBI), appointed by the Director of the FBI; a 
representative of the United States Secret Service, appointed 
by the Director of the Secret Service; and a representative of 
the Financial Crimes Enforcement Network, appointed by the 
Secretary of Treasury.
    Section 102. Purposes of the Subcommittee. This section 
authorizes the Subcommittee to coordinate various local, State, 
and Federal antifraud databases through a network, providing 
information to financial services industries' regulators. 
Subparagraph, 102(a)(3) states that ``where appropriate'' law 
enforcement agencies are authorized to participate in this 
network. The committee intends that ``where appropriate'' does 
not limit law enforcement agencies ability to participate in 
the network and that it provides discretion to law enforcement 
agencies to determine which databases are appropriate to 
coordinate on this network. For instance, a law enforcement 
agency would have the discretion to determine whether law 
enforcement sensitive or confidential database are appropriate 
to be coordinated on this network. Therefore, the Subcommittee 
does not have authority to compel a law enforcement agency or 
it's liaison to provide access or to share any confidential or 
law enforcement sensitive information. In addition, this 
section provides requirements for participation on the 
antifraud network, due process considerations, privacy 
protections, and performance reporting requirements. Finally, 
this section does not affect existing information sharing 
agreements already in place and does not provide authority for 
the Subcommittee to mandate the creation of new databases or 
require costly modifications to existing databases.
    Section 103. Chairperson; term of Chairperson; Meetings; 
Officers and Staff. Provisions contained in Section 103 were 
not referred to the Committee on the Judiciary, see H. Rept. 
107-192 for analysis.
    Section 104. Nonagency Status. The provision contained in 
Section 104 was not referred to the Committee on the Judiciary, 
see H. Rept. 107-192 for analysis.
    Section 105. Powers of the Subcommittee. This section 
authorizes the Subcommittee to collect information through its 
liaisons describing existing antifraud databases, limits 
additional compensation for members and liaisons to the 
Subcommittee, and authorizes the Subcommittee to request 
additional administrative, technical, or other support service 
to carry out the purposes of section 102(a).
    With respect to collecting information describing existing 
antifraud databases, this authority is limited in section 
105(b) ``to the extent permitted by law.'' Therefore, the 
Subcommittee is authorized only to collect antifraud 
information already available under existing law. While this 
provision requires liaisons to furnish information about 
existing databases, any such database deemed ``law enforcement 
sensitive'' or confidential by a law enforcement agency or it's 
liaison would be excluded from this requirement. Furthermore, 
nothing in 105(b) provides the Subcommittee with the authority 
to compel the liaison to produce information. In addition, 
while paragraph 105(d) authorizes the Subcommittee to request 
additional support service to carry out the purposes of section 
102(a), this request is not mandatory. Creating this 
information sharing network will require technical support, 
this section authorizes the Antifraud Subcommittee to request 
and accept support services that it may find necessary.
    Section 106. Agreement on Cost Structure. The provision 
contained in Section 106 was not referred to the Committee on 
the Judiciary, see H. Rept. 107-192 for analysis.

                   Subtitle C--Regulatory Provisions

    Section 111. Agency Supervisory Privilege. This section 
defines Confidential Supervisory Information (CSI), creates a 
special privileged status for CSI, and establishes rules for 
disclosing CSI and resolving disputes over disclosing CSI. It 
is the intent of the committee that this privileged status for 
CSI does not confer any new right or privilege to obstruct, 
delay, or interfere with the ability of any law enforcement 
agency to access CSI under existing authorityerefore, any 
privileged established pursuant to this section shall not be 
asserted in response to a request from law enforcement, the 
United States Department of Justice, and criminal law 
enforcement agencies with relevant jurisdiction. The status of 
CSI does not create a new privilege from law enforcement 
investigations. While section 111(b)(2)(A) establishes specific 
exceptions to the CSI privilege status for the Government 
Accounting Office, duly authorized Committees of Congress, and 
Federal agencies with oversight authority, these entities 
cannot access this information because it is compiled on an ad-
hoc basis. Law enforcement investigations on the other hand, 
routinely access this information following various rules of 
criminal procedure and protections of the Constitution. 
Therefore, it is the Committee's intent that section 111(b)(2) 
create no new limitation on law enforcement agencies ability to 
access this information. It is inherent in establishing any 
national antifraud database network that law enforcement 
agencies ability to access information not only be preserved by 
the network, it is expected to be enhanced provided that 
constitutional and procedural laws do not prohibit this access. 
Finally, sections 111(e)(2), and 111(k)(3) provides an action 
for declaratory judgment in Federal District Court over 
disputes concerning disclosure of CSI or CSI related 
information. This declaratory judgement is intended to offer 
efficient and effective resolution of these disputes.
    Section 112. Confidentiality of Information. Provisions 
contained in Section 112 were not referred to the Committee on 
the Judiciary, see H. Rept. 107-192 for analysis.
    Section 113. Liability Provisions. This section establishes 
civil liability and criminalizes and penalizes the unlawful 
disclosure of information that is confidential or privileged 
pursuant to the Financial Services Antifraud Network Act of 
2001. It is the Committee's intent that section 113 does not 
create any new potential criminal or civil liability for law 
enforcement individuals that disclose confidential or 
privileged information pursuant to the Financial Services 
Antifraud Network Act of 2001.
    Section 114. Authorization for Identification and Criminal 
Background Check. This section authorizes a procedure for 
financial services industry regulators to request criminal 
background checks from the United States Department of Justice 
and provide this information to an authorized agent. This 
section restricts access to this information by carefully 
defining an authorized agent, which is limited to only highly 
accountable individuals already in law enforcement or closely 
associated to law enforcement. Also, the provision delineates 
permissible uses of background information, establishes a 
criminal and civil penalties for improper use of background 
information, and provides a good faith exception for use of 
background information. This section clarifies section 
1033(e)(1)(B) of Tilte 18, United States Codes, by limiting 
criminal liability for a financial services industry employer 
for the illegal conduct of an employee under section 
1033(e)(1)(A), so long as the employee is authorized to be in 
the business of insurance, is licensed to be in the insurance 
business by a state insurance regulator that performs criminal 
background checks pursuant to this section of the Financial 
Services Antifraud Network Act of 2001, and the employer does 
not know the employee is in violation of section 1033(e)(1)(A). 
Also, the section provides authority for the Attorney General 
to collect reasonable fees for fulfilling information requests 
under this section, that the Attorney General is not precluded 
from issuing regulations to carry out this section, and that 
existing authorities allowing access to criminal background 
records are not limited or superceded by this section.
    It is the Committee's intent that subparagraph 
114(a)(1)(B)(ii) serve only as an option under the discretion 
of the Attorney General should the Department of Justice 
develop the technology to limit background information.
    Also, it is the Committee's intent that paragraph 
114(a)(4)(A) does not limit the Attorney General's ability to 
share or receive critical information with any law enforcement 
agency or financial services industry regulator. This 
subsection provides that the Attorney General may elect to 
withhold background information from State financial regulators 
that are not in compliance with section 321 of P.L. 106-102. In 
turn, this subsection does not preclude the Attorney General 
from sharing any information from any state financial services 
regulator.
    Section 115. Definitions. Provisions contained in Section 
100 were not referred to the Committee on the Judiciary, see H. 
Rept. 107-192 for analysis.
    Section 116. Technical and conforming amendments to other 
acts. Provisions contained in Section 100 were not referred to 
the Committee on the Judiciary, see H. Rept. 107-192 for 
analysis.
    Section 117. Audit of State Insurance Regulators. 
Provisions contained in Section 100 were not referred to the 
Committee on the Judiciary, see H. Rept. 107-192 for analysis.

               Title II--Securities Industry Coordination

                  Subtitle A--Disciplinary Information

    Section 201. Investment Advisers Act of 1940. Provisions 
contained in Section 100 were not referred to the Committee on 
the Judiciary, see H. Rept. 107-192 for analysis.
    Section 202. Securities Exchange Act of 1934. Provisions 
contained in Section 100 were not referred to the Committee on 
the Judiciary, see H. Rept. 107-192 for analysis.

 Subtitle B--Preventing Migration of Rogue Financial Professionals to 
                        the Securities Industry

    Section 211. Securities Exchange Act of 1934. Provisions 
contained in Section 100 were not referred to the Committee on 
the Judiciary, see H. Rept. 107-192 for analysis.
    Section 212. Investment Advisers Act of 1940. Provisions 
contained in Section 100 were not referred to the Committee on 
the Judiciary, see H. Rept. 107-192 for analysis.

         Changes in Existing Law Made by the Bill, as Reported

    The bill, as reported by this committee, does not make any 
changes to existing law. The bill, as reported by the Committee 
on Financial Services, does make changes to existing law, which 
are shown in the report filed on the bill by that committee 
(Rept. 107-192, Part 1).

                           Markup Transcript



                            BUSINESS MEETING

                      WEDNESDAY, OCTOBER 10, 2001

                  House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 2:35 p.m., in Room 
2141 Rayburn House Office Building, Hon. F. James 
Sensenbrenner, Jr. (Chairman of the Committee) presiding.
    Chairman Sensenbrenner. The Committee will be in order. A 
working quorum of 13 is present, and pursuant to notice, I now 
call up the bill H.R. 1408, the Financial Services Antifraud 
Network Act of 2001, for purposes of markup, and move its 
favorable recommendation to the House.
    [The bill, H.R. 1408, follows:]
      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


    Chairman Sensenbrenner. Without objection, the bill will be 
considered as read and open for amendment at any point. I 
recognize myself for 5 minutes.
    The version of H.R. 1408 before you was adopted by the 
Committee on Financial Services by voice vote on June 27th of 
this year, and the Committee on the Judiciary has received a 
sequential referral of sections 100, 101, 102, 105, 111, 113, 
and 114, which will expire this Friday. In general, this 
referral contains sections of H.R. 1408 that deal with the 
Federal courts or law enforcement agencies.
    The bill requires financial regulators to formulate and 
implement an information sharing network. If the regulators 
fail to do so, a subcommittee will be formed by representatives 
of each financial services industry to formulate and implement 
a similar network.
    When Congress recently adopted the Gramm-Leach-Bliley bill 
requiring regulators to modernize the regulation of the 
financial service industry, H.R. 1408 will give financial 
regulators the tools to complete the task. Currently our 
country loses in excess of $100 billion each year from 
financial services fraud. H.R. 1408 will help regulators 
prevent these losses, which will ultimately benefit American 
consumers and businesses.
    Also, the bill creates a national standard for confidential 
information sharing among financial services industries. This 
will help Federal, State, and local law enforcement networks 
track or even root out the bad actors that burrow into our 
financial institutions. Currently regulators share all sorts of 
information on an ad hoc basis, with varying safeguards. While 
many in the industry already maintain industry-specific 
databases, it only makes sense to coordinate this information 
and create a seamless regulatory system, which is what the bill 
does.
    I would at this time ask unanimous consent that all Members 
may include opening statements at this point in the record, and 
will specifically recognize Messrs. Conyers and Bachus, who is 
the Chairman of the Subcommittee on Financial Services that put 
this bill together in the other Committee, when they come in.
    [The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative 
                 in Congress From the State of Michigan
    First, I would like to thank Chairman Sensenbrenner for taking up 
this legislation, thereby preserving the Committee's jurisdiction on 
this issue.
    H.R. 1408, the ``Financial Services Antifraud Network Act of 2001'' 
is the result of a bipartisan effort on the Financial Services 
Committee, led by our colleagues, Representatives Waters and Bachus. I 
support its passage in this Committee.
    The bill directs financial regulators to coordinate their computer 
systems to facilitate the sharing of appropriate antifraud information. 
The purpose of this is to help enable the regulators to prevent fraud 
artists from moving from one sector of the financial services industry 
to another, detect fraud patterns early on, and to streamline their 
antifraud efforts.
    H.R. 1408 does not require the creation of any new databases. 
Rather, it helps to network existing systems so they can easily 
communicate with each other.
    Importantly, the direction to coordinate information is limited to 
data on financial companies and professionals--not consumers.
    The bill involves the Attorney General and the Department of 
Justice in the antifraud effort. Under the bill, DOJ provides relevant 
criminal background records to the regulators, and this information 
must be maintained according to a strict confidentiality protocol.
    I understand that there will be an amendment offered to modify the 
removal provisions of the bill and provide for a declaratory judgment 
to resolve questions involving confidential supervisory information. I 
support this common-sense change.
    I encourage a ``yes'' vote on H.R. 1408.

    [The prepared statement of Ms. Jackson Lee follows:]
       Prepared Statement of the Honorable Sheila Jackson Lee, a 
           Representative in Congress From the State of Texas
    Thank you Chairman Sensenbrenner and Ranking Member Conyers for 
holding this Judiciary Committee markup today.
    The bill before us today, HR 1408, represents a delicate bi-
partisan compromise between members of the House Financial Services 
Committee. The bill would effectively direct financial regulators to 
coordinate their computer systems to facilitate the sharing of 
appropriate antifraud information. Currently, Federal and State 
financial regulators and self-regulating financial organizations each 
use a different system, thus complicating the sharing of information to 
keep track of each other's antifraud efforts. HR 1408 would coordinate 
regulators' computer protocols so that their systems can communicate 
and share critical antifraud information on a comprehensive basis. 
Importantly, HR 1408 would not create any new database or collecting 
mechanism, but would instead utilize existing systems to better 
facilitate the responsible sharing of vital information.
    Despite the delicate compromise, the Department of Justice has 
indicated several concerns that may be raised today. First, section 
111(b) of HR 1408, could be clarified to reflect that law enforcement 
is not precluded from accessing confidential supervisory information. 
This can be done by adding a new subparagraph 111(b)(2)(A)(iii), which 
would state that ``No provision of paragraph (1) shall be construed as 
preventing access to confidential supervisory information by law 
enforcement agencies.''
    Next, section 114(f), could be stricken because the term ``knows'', 
which may be inconsistent with the term ``willfully'' in 18 USC 
1033(e)(1)(B), could create confusion in prosecutions concerning the 
burden of proof to be put forth by the government.
    Finally, subparagraph 114(g)(2)(C) might be stricken because the 
database that the National Association of Insurance Commissioners is 
asked to maintain would not be subject to accuracy and updating 
requirements, perhaps leading to inaccurate and outdated information.
    The concerns of the Department of Justice are well taken, 
particularly in light of the recent need for information sharing among 
our law enforcement and investigative agencies. The recent spirit of 
bi-partisanship that has been fostered in this Committee by Chairman 
Sensenbrenner and ranking Member Conyers with respect to the recent 
Anti-Terrorism legislation has addressed many of these concerns and 
continues to drive us forward in answering the call of our law 
enforcement and security needs.
    As we all know, this greatly needed anti-terrorism legislation was 
favorably reported out of this Committee last week in an historic 36-0 
vote which truly transcended party lines at a time when we as a Nation 
most needed to come together. I truly hope that this Committee can 
continue to foster that same spirit of bi-partisanship. So while we 
must strongly consider the Justice Department's unanswered provisions 
in the bill before us today, we must take care to avoid tipping the 
delicate balance which has been struck on this important legislation.
    Mr. Chairman, I offer these concerns and hope that my colleagues 
will contemplate their importance during today's markup. Thank you.

    At this point in time, are there any amendments? The 
gentleman from North Carolina.
    Mr. Coble. Thank you, Mr. Chairman. You pretty well stated 
it. I will make a brief clarifying statement.
    As you point out, I think you implied the Financial 
Services Committee has approved or indicated approval of this 
amendment, and I am told that the Democrats have also approved 
as well. The Subcommittee on Courts, Internet, and Intellectual 
Property is primarily concerned with the operation of a removal 
provision set forth in section 111 of the bill.
    In general, section 111 clarifies that confidential 
supervisory information or CSI prepared or collected by banks, 
securities, insurance and other financial regulators as part of 
their supervisory responsibilities is privileged from 
unauthorized disclosure under H.R. 1408. As a practical matter, 
this means that the regulator who establishes or creates a 
given database is its owner, and its contents for the most part 
may not be disclosed by a third party absent the regulator's 
consent. The section therefore contemplates the need to provide 
security and confidentiality in the sharing of such 
information.
    Notwithstanding the privileged status of CSI under the 
bill, one provision in section 111 would allow a third party 
the opportunity to obtain disclosure through subpoena or 
discovery procedures. The jurisdictional counterpart to this 
option would entitle the regulator, upon motion, to remove the 
action to Federal court for adjudication under section 
111(e)(2)(a). The removal item, Mr. Chairman, is what troubles 
me.
    Specifically, we have identified two primary objections to 
section 111 in its present form. First, as drafted, section 
111(e)(2)(a) would apply to a wide variety of proceedings in 
State court, including criminal prosecutions, civil fraud 
suits, and proceedings instituted by State regulators. In such 
proceedings, a third party might well assert that the CSI in 
question was relevant to a claim, even a constitutional 
defense. And, second, the language of section 111(e)(2)(a) 
would encourage unnecessary satellite litigation over what part 
of a given case would be brought into Federal court and what 
part would be allowed to remain in the State tribunal.
    Mr. Chairman and fellow Members, the basic goal of section 
111(e)(2)(a) is to assure that controversies over attempts to 
disclose CSI will be heard by a Federal court, at least when 
the regulator prefers the Federal forum. Another way to 
accomplish this objective is to authorize a declaratory 
judgment action in Federal court by the regulator. In fact, 
another provision in the legislation, section 111(k)(3), 
authorizes an originating financial regulator to bring a 
declaratory judgment action in the United States District Court 
for the District of Columbia to resolve disputes with a 
requesting financial regulator over disclosure of CSI.
    As a result, the amendment simply allows a financial 
regulator to bring a declaratory judgment action to prevent 
disclosure of CSI to a third party seeking its disclosure. Mr. 
Chairman, this is simply a cleaner way to achieve the same 
purpose served by the removal provision in section 111, and I 
urge Members to support this, what amounts to a technical 
amendment.
    Chairman Sensenbrenner. Does the gentleman have an 
amendment at the desk?
    Mr. Coble. There is an amendment at the desk.
    Chairman Sensenbrenner. The clerk will report the 
amendment.
    The Clerk. Amendment to H.R. 1408 offered by Mr. Coble.
    [The amendment follows:]
    
    
    Mr. Coble. Unanimous consent to have the amendment declared 
as read, Mr. Chairman.
    Chairman Sensenbrenner. Without objection, so ordered. The 
gentleman is recognized for 5 minutes, which he has already 
used.
    Mr. Coble. And I used it prematurely, and I apologize to 
the Chair for that.
    Chairman Sensenbrenner. Further debate on the amendment? 
Does the gentleman from Alabama want to strike the last word at 
this point?
    Mr. Bachus. I move to strike the last word.
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes. Let the Chair----
    Mr. Bachus. To address the amendment, not the bill.
    Chairman Sensenbrenner. Well, can we do it all at once, 
because we are----
    Mr. Bachus. I will do it all at once.
    Chairman Sensenbrenner. Let me say that the timer once 
again has broken down, so I would ask the indulgence of all 
Members not to abuse the fact that there isn't a red light 
shining in your face, and the gentleman from Alabama is 
recognized for 5 minutes.
    Mr. Bachus. Thank you, Mr. Chairman. Mr. Chairman, I will 
be brief. H.R. 1408 is legislation which will allow the over 
250 various State financial regulators and self-regulating 
financial organizations to exchange information about 
fraudulent acts. The Marvin Frankel case alone cost consumers 
over $200 million, and it is estimated that the cost of this 
interchange system would be about $2 million initially and then 
about a half million dollars a year, so the cost is a very good 
bargain for the American people. And I can go into the details 
of the legislation. I think most of you, the Judiciary 
Committee did a very good job on drawing up the issues.
    This amendment replaces a removal provision which was 
poorly written, and this is, as Mr. Coble said--I was listening 
to it--a cleaner way of doing it.
    Chairman Sensenbrenner. Does the gentleman yield back his 
time?
    Mr. Bachus. Yes.
    Chairman Sensenbrenner. Let the Chair make another public 
service announcement. Chris at the clerk's desk has a 
stopwatch, and he will time the 5 minutes. When his hand goes 
up, that means time is up.
    The question is on----
    Mr. Watt. Mr. Chairman?
    Chairman Sensenbrenner. The gentleman from North Carolina.
    Mr. Watt. Mr. Chairman, I am having a little
    trouble--I move to strike the last word----
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes.
    Mr. Watt [continuing]. For the purpose of asking Mr. Coble 
a question. This doesn't seem to me to fit where the language 
says that it fits. If it is 111(e)(2), it is 111(e)(3) that is 
about declaratory judgments, I thought. Maybe I am missing 
something. What page is this amendment on, Mr. Coble?
    Mr. Coble. If the gentleman would yield, Mr. Watt, I am 
told that it is properly codified, that it bars from 111(k)(3), 
the staffer advises me, and furthermore says that it is drafted 
correctly. As to what page, Mr. Watt, hang on a minute and let 
me see if I can dig that up.
    Mr. Bachus. It amends section 111 of the bill.
    Mr. Watt. Yes, but it seems like section 111, the 
declaratory judgment is in 111(e)(3) on page 48 of the bill.
    Mr. Coble. Mr. Watt, I think we are striking the removal 
provision, if the staffer could take that to Mr. Watt and show 
that to him.
    Mr. Watt. On page 43 of the bill? Okay, let me ask the 
gentleman another question, and maybe I should address this to 
the Chair. I had understood that another amendment was going to 
be offered that did something to a section that I had raised a 
question about in the Banking Committee. Is there another 
amendment coming forward, or did I miss something?
    Chairman Sensenbrenner. If the gentleman would yield, the 
Chair is not aware of another amendment besides this one.
    Mr. Coble. And if the gentleman would yield, nor am I. I am 
not aware of another amendment either.
    Mr. Watt. All right. Thank you.
    Mr. Bachus. If I could clarify, are you talking about the 
fingerprint provision?
    Mr. Watt. No, it didn't have anything to do with 
fingerprints. But that is all right.
    Chairman Sensenbrenner. Does the gentleman from North 
Carolina yield back?
    Mr. Watt. I yield back the balance of my time.
    Chairman Sensenbrenner. The question is on agreeing to the 
amendment by the other gentleman from North Carolina, Mr. 
Coble. Those in favor will signify by saying aye.
    Opposed, no.
    The ayes appear to have it. The ayes have it.
    Mr. Smith. Mr. Chairman?
    Chairman Sensenbrenner. For what purpose does the gentleman 
from Texas seek recognition?
    Mr. Smith. Mr. Chairman, I move to strike the last word.
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes.
    Mr. Smith. Thank you, Mr. Chairman. Mr. Chairman, in a 
minute I would like to ask the gentleman from Alabama a 
question. I want to give him advance notice of my intent to do 
so.
    Mr. Chairman, the intent of H.R. 1408, as I understand it, 
is to promote information sharing to fight financial fraud, but 
I must voice my opposition to the bill because, while it 
enhances information sharing within the financial community of 
regulators, it would actually restrict information sharing with 
law enforcement agencies.
    We have just reported the Patriot Act out of this Committee 
with full support. That bill removes obstacles to law 
enforcement's receiving and sharing information. In my 
judgment, now is not the time to create new obstacles 
restricting law enforcement officials from getting information 
they currently may obtain.
    In particular, I am concerned about section 111(b) that 
prohibits the disclosure to any person with three exceptions, 
Congress, General Accounting Office, and financial regulators, 
of all supervisory information. Supervisory information 
includes, among other things, any file, work paper, or similar 
information collected by the financial regulators.
    We have heard from the Department of Justice, and know that 
they have also met with the Financial Services Committee to 
express their concern about this provision. And so what I would 
do is to hope that my friend from Alabama would consider 
language for a floor manager's amendment that would read, in 
substance, that no provision of paragraph 1 shall be construed 
as preventing access to supervisory information by law 
enforcement agencies, and this simply would make it clear that 
we do not intend to deny law enforcement the information they 
can currently obtain.
    And I would like now to yield to my friend from Alabama.
    Mr. Bachus. Thank you. First of all, confidential 
supervisory information can be disclosed with either the 
permission of the relevant financial regulator, number one; or 
number two, if other than that information is not granted, you 
can subpoena the information or discover it in a court case. 
And those are the two ways you can do it.
    Mr. Smith. Let me reclaim my time and say if that currently 
can be done, I assume that there would be no objection to 
language that would clarify that is the intent of the 
legislation.
    Mr. Bachus. Well, it already, actually what this bill does 
is, it charges the financial regulators to just work together 
to develop a network to coordinate antifraud information, and 
that network is not a database. It simply allows computer 
connections, allowing the regulators to swap information on 
existing databases.
    Mr. Smith. Let me reclaim my time quickly----
    Mr. Bachus. It would be wise for that information to be 
swapped, unless both regulators agree to it. If a regulator 
actually said, ``We are opposed to this information being 
disclosed,'' then because of adequacy or confidentiality 
concerns, there is a mechanism in here----
    Mr. Smith. Let me reclaim my time. While I don't want to 
quibble over the technicalities, I do want to make the very 
important point, and that is that the Department of Justice 
believes as the language now stands they will not be able to 
access the information that they can now access. I think that 
is a legitimate concern, a legitimate consideration, and I 
would hope that we could clarify the language to alleviate 
their, in my opinion, just considerations.
    Mr. Bachus. Yes, and I would say to the gentleman that 
there is an expression in one of the last sections of the bill 
that expresses a sense of Congress that regulators should 
consider sharing additional information.
    Mr. Smith. Would you be willing to have additional language 
to clarify that the Department of Justice can access the 
information they can currently access?
    Mr. Bachus. Actually, we had two competing interests in 
there, and that was, many Members of the Financial Services 
Committee felt like there was certain information which 
shouldn't be shared. I can't speak for the whole Committee.
    I can say that what they are going to do is, they are going 
to sit down over the next 6 months, they are going to develop a 
proposal. They have 2 years to implement it. Once they have 
developed a proposal in 6 months, then I would say that if any 
of the law enforcement agencies or regulators----
    Mr. Smith. Well, let me reclaim my time. I honestly don't 
think we can wait 6 months to correct a problem that the 
Department of Justice feels that it has. And, Mr. Chairman----
    Chairman Sensenbrenner. The gentleman's time has expired.
    Mr. Smith [continuing]. Mr. Chairman, I would simply urge 
you to exercise whatever persuasion you can to correct this 
before we got to the House floor with that bill.
    Mr. Bachus. If I could ask one more minute----
    Chairman Sensenbrenner. Without objection.
    Mr. Bachus [continuing]. You know, the basic thing it 
doesn't allow is personally identifiable information consumers, 
and that we have chosen not to share.
    Chairman Sensenbrenner. For what purpose does the gentleman 
from Wisconsin seek recognition?
    Mr. Green. Mr. Chairman, I move to strike the last word.
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman. Very briefly, I support 
1408, H.R. 1408. I do, however, have one serious concern with 
the bill.
    As Members of the Committee know, each State has its own 
regulatory authority for the insurance industry. These offices 
are established and funded entirely under State laws and State 
constitutions. In short, they are purely an agency of State 
government.
    Section 117 of H.R. 1408 would give the GAO, a Federal 
agency, complete authority to audit State insurance records. I 
think all Members would agree that giving a Federal agency such 
direct power over a State government agency raises some serious 
States' rights and sovereignty issues. While I understand the 
need for cooperation between the GAO and State insurance 
regulators, I don't believe this justifies giving the GAO the 
unfettered ability to subpoena or otherwise compel a State 
government agency to cooperate with an audit.
    Unfortunately, this issue was not raised until after the 
Financial Services Committee completed consideration of this 
bill. I understand that Chairman Sensenbrenner has examined 
this issue and determined it to be outside the jurisdiction of 
the Judiciary Committee, so we cannot reexamine the issue 
today. I just hope that as the bill moves to the floor, we can 
revisit section 117 and make appropriate changes.
    As a Member of both the Financial Services and Judiciary 
Committees, I would be happy to work with the Chairman and his 
staff to accomplish this. With that----
    Chairman Sensenbrenner. Will the gentleman yield?
    Mr. Green. I yield.
    Chairman Sensenbrenner. The gentleman is correct on both 
points, first on the merits, and secondly, section 117 is 
specifically outside the sequential referral that the Judiciary 
Committee received, and thus any amendments to section 117 the 
Chair would feel constrained to rule out of order.
    Mr. Green. That is right, and so I won't be offering an 
amendment. I would just seek to work with the Chairman as we 
move to the floor.
    With that, I yield my time back.
    Chairman Sensenbrenner. The gentleman's time has expired. 
Are there further amendments?
    Mr. Smith. Mr. Chairman?
    Chairman Sensenbrenner. Are there further amendments? The 
gentleman from Texas, do you have an amendment?
    Mr. Smith. Mr. Chairman, I would like to engage the 
gentleman from Alabama in a colloquy, very briefly.
    Chairman Sensenbrenner. You already have been recognized 
once, and so has the gentleman from Alabama.
    Mr. Gekas. I seek recognition and would yield.
    Chairman Sensenbrenner. The gentleman from Pennsylvania 
moves to strike the last word, and yields to the gentleman from 
Texas.
    Mr. Smith. I thank the gentleman from Pennsylvania for 
yielding. Let me yield to the gentleman from Alabama, and see 
if the amendment that I just showed him would be acceptable to 
him, and if so, I would like to offer it.
    Mr. Bachus. Mr. Chairman, it seems innocuous enough, but 
let me say this. Without passing it by staff, I am not in a 
position to accept it.
    I am in a position to do this. I am in a position to 
consult Members on both sides of the aisle and, as this goes to 
the floor, to offer it on the floor.
    Mr. Smith. I thank the gentleman for mentioning that, and I 
will look forward to working with him, and hopefully we can 
offer that together on the House floor. And I thank the 
gentleman from Pennsylvania for yielding.
    Mr. Gekas. I yield back the balance of my time.
    Chairman Sensenbrenner. Does the gentleman from Texas wish 
to offer the amendment?
    Mr. Smith. Mr. Chairman, I am not going to offer the 
amendment now, in the expectation that Mr. Bachus and I will 
offer the amendment on the House floor.
    Chairman Sensenbrenner. The time of the gentleman from 
Pennsylvania is yielded back. Are there further amendments? For 
what purpose does the gentlewoman from Texas seek recognition?
    Ms. Jackson Lee. I would like to strike the last word.
    Chairman Sensenbrenner. The gentlewoman is recognized for 5 
minutes.
    Ms. Jackson Lee. Thank you very much, Mr. Chairman.
    In light of the events of past weeks and other issues, this 
bill obviously is a very important bill that adds to the 
sharing of information and also the elimination, or at least 
the working toward the elimination of fraud in the financial 
services industry.
    I would like to yield to Mr. Bachus, I guess our resident 
expert on this, for a question as it relates to any privacy 
elements in this bill that do not conflict or would not 
conflict with the intent of the bill to eliminate fraud. Are 
there any provisions that give us comfort that the respective 
agencies cannot go too far with the information? I yield to the 
gentleman from Alabama.
    Mr. Bachus. In fact, a great deal of the bill has 
confidentiality and privacy protections and safeguards in the 
bill, and I would say the bulk of the bill actually has these 
safeguards in sharing of information.
    Ms. Jackson Lee. We can be sure, then, with the ultimate 
and potential passage of this bill that we have not 
eliminated--and I reclaim my time--have not eliminated those 
concerns regarding policy, which of course in this Committee 
and I know in the Financial Services Committee the privacy 
issues have been vigorously discussed and debated. Is that 
correct? I yield to the gentleman.
    Mr. Bachus. Yes, and the information that is shared is 
final disciplinary actions or formal adjudications by the 
bodies, not rumors or simply statements as to what somebody 
said during an investigation. These are actually formal 
findings of the different regulatory bodies.
    Ms. Jackson Lee. Reclaiming my time, let me thank the 
gentleman for that. Being a member of the bar, there are 
procedures where information regarding disciplinary actions on 
lawyers are shared. Knowing the impact that fraudulent 
securities professionals can have on the elderly and the less 
informed, I think it is important to have the privacy 
protections but also to have this reporting feature to 
eliminate such, if you will, bad practices in the industry.
    And I thank the gentleman. I yield back my time, Mr. 
Chairman.
    Chairman Sensenbrenner. Are there further amendments?
    Hearing none, the Chair notes the presence of a reporting 
quorum. The question occurs on the motion to report the bill, 
H.R. 1408, favorably, as amended. All in favor, say aye.
    Opposed, no.
    The ayes appear to have it. The ayes have it, and the 
motion to report favorably is adopted. Without objection, the 
bill will be reported favorably to the House in form of a 
single amendment in the nature of a substitute, incorporating 
the amendment adopted here today.
    Without objection, the Chairman is authorized to move to go 
to conference pursuant to House rules. Without objection, the 
staff is directed to make any technical and conforming changes, 
and all Members will be given 2 days, as provided by the House 
rules, in which to submit additional dissenting, supplemental, 
or minority views.
    [Intervening business.]
    And the Committee stands adjourned.
    [Whereupon, at 5:12 p.m., the Committee was adjourned.]
                            Additional Views

    We support the bill as passed by the Committee on the 
Judiciary and would oppose an attempt to carve out of the 
financial regulator supervisory privilege an exemption for law 
enforcement, as was proposed at the markup by Representative 
Smith. Such an exemption is both unnecessary and unwise.
    A law enforcement exemption is unnecessary because H.R. 
1408 does not in any way restrict the ability of law 
enforcement agencies to obtain the books and records of a 
financial institution, such as a bank, broker-dealer, or 
insurance company. Under the bill, law enforcement agencies 
could still obtain--directly from a financial institution--
customer account and other records of an institution to the 
extent provided by existing law. Nothing in H.R. 1408 impairs 
that process.
    It would also be unwise to grant a law enforcement 
exemption to the financial regulator supervisory privilege 
because it would undermine the privacy of individuals' 
financial records. The bill clarifies that law enforcement 
agencies should work directly with the appropriate financial 
regulator--primarily the Federal banking agencies and 
Securities and Exchange Commission--if law enforcement seeks to 
obtain the confidential reports of examination prepared by the 
financial regulator. This process encourages cooperation 
between law enforcement and the financial regulators.
    Equally important, such a process ensures that law 
enforcement officials obtain information that is relevant to 
their inquiry, but not extraneous information about persons or 
entities that are not the target of the law enforcement 
investigation. If law enforcement agencies are exempted from 
the financial regulator supervisory privilege, it could 
potentially result in confidential information unrelated to the 
investigation becoming public. The current practice, whereby 
law enforcement agencies obtain financial regulatory reports 
from the regulatory body (as opposed to the regulated entity), 
is the best way to provide law enforcement with relevant 
information without compromising the privacy of those who are 
not the focus of the investigation.
    For these reasons, we would oppose any attempt to create a 
law enforcement exemption to the financial regulator 
supervisory privilege.

                                   John Conyers, Jr.
                                   Maxine Waters.

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