3. Section 104. Operation of State Law. (b) Activities. (2) Insurance Sales. Delete subsection 104(b)(2)(C)(i) OCC Deference in its entirety, page 53, lines 20-25 and page 54, lines 1-3. Renumber subparagraph (ii) on page 54, line 4, as subparagraph (i). Renumber subparagraph (iii) on page 54, line 13, as subparagraph (ii). Renumber subparagraph (iv) on page 54, line 21, as subparagraph (iii). Analysis: • This change is needed to ensure that equal deference is accorded to State insurance regulators regarding the interpretation of all State sales laws. 4. Section 104. Operation of State Law. (c) Nondiscrimination.— In subparagraph (c), on page 58, line 4, insert "affiliations or" after “insurance". In subparagraph (c)(1), on page 58, line 12, insert "based on their insured status" after "thereof". Delete subparagraph 104(c)(2), page 58, lines 17-25. Renumber subparagraph (3) on page 59, line 1, as subparagraph (2). Renumber subparagraph (4) on page 59, line 6, as subparagraph (3). Analysis: • The change to subparagraph (c) is necessary to clarify that affiliations of insured depository institutions authorized under the act are subject to the nondiscrimination requirements of this subsection. • The change to subparagraph (c)(1) is necessary to clarify that laws that differentiate by their terms between insured depository institutions and other entities are impermissible only if the differentiation is based upon the insured status of those institutions. • Deletion of subparagraph (c)(2) is necessary to remove the effects test, which would make it impossible to make or enforce insurance laws and regulations. A law or regulation will always impact entities differently for reasons that are wholly unrelated to whether the entities in question are banks. • These changes leave in the bill strong requirements ensuring that States cannot discriminate against banks. 5. Section 104. Operation of State Law. (d) Limitation.— On page 59, line 13, insert "(i)" after the word "affect" and before the word "the". On page 59, line 19, insert the following at the end of the paragraph: ; and (ii) State laws, regulations, orders, interpretations, or other actions of general applicability relating to the governance of corporations, partnerships, limited liability companies, or other business associations incorporated or formed under the laws of that State or domiciled in that State, or the applicability of the antitrust laws of any State or any State law that is similar to the antitrust laws if such laws, regulations, interpretations, orders, or other actions are not inconsistent with the purposes of this Act to authorize or permit certain affiliations and to remove barriers to such affiliations. Analysis: • This language was originally in subparagraph (a). This change is necessary so that this subparagraph, which preserves State corporate laws of general applicability and State antitrust laws, modifies both subsection (a) Affiliations and subsection (b) Activities. • The language has been changed slightly to conform to Senator Gramm's Financial Services Modernization Act. By these changes, the language of subsection (d) is made identical to Senator Gramm's Financial Services Modernization Act. 6. Section 111.-Streamlining Financial Holding Company Supervision. Page 76, line 11, delete "in compliance with applicable" and insert “subject to". Analysis: • This technical change is needed to ensure that the States retain authority to enforce their capital requirements. As the provision is currently written, the Federal Reserve would be able to step in as soon as a company falls out of compliance with applicable capital requirements, but before the State has had an opportunity to enforce its applicable laws and regulations with respect to such capital requirements. 7. Section 124.-Functional Regulation. Page 128, line 14, delete “Agency".Page 129, line 3, delete “Agency” from the heading of subparagraph (b). Page 129, lines 3-4, delete "insurance agency or brokerage that is a subsidiary of an insured depository institution" and insert "insured depository institution subsidiary that is engaged in insurance activities". Page 129, line 7, delete "insurance agency or brokerage” and insert “entity engaged in insurance activities". Analysis: • These changes are necessary to ensure that all insurance activities of bank operating subsidiaries are functionally regulated. • As the bill is currently written, this provision is limited to insurance agency and brokerage activities. These changes are necessary because HR 10 permits bank operating subsidiaries to engage in credit-related activities as well as agent/ broker activities. Such activities should be functionally regulated. • By this change, the provisions of HR 10 that apply to insurance affiliates of bank holding companies (including, for example, report, examination and capital requirements) also apply to bank operating subsidiaries that are engaged in insurance activities. 8. Section 303.—Functional Regulation of Insurance. Page 332, line 11, delete "sales". Analysis: • This technical change is needed to ensure that the bill clearly provides that all insurance activities are functionally regulated by the States. • This change makes this provision identical to the language in the Bryan amendment to Senator Gramm's Financial Services Modernization Act, which was adopted by the Senate Committee on Banking, Housing, and Urban Affairs on March 4, 1999. ATTACHMENT II HR 10 SUMMARY OF NAIC'S PROPOSED AMENDMENTS RELATED TO UNIFORM LICENSING AND ENFORCEMENT 1) Establish a streamlined and uniform non-resident agent licensing proc ess. The objective of this amendment is a uniform non-resident agent licensing process, but not a single licensing decision. States would use a common form, which could be submitted electronically and distributed to those states where the applicant wants to be licensed. However, each state would retain the ability and discretion to decide whether to license or not license an agent, based upon uniform procedures. Uniform procedures would be developed by the states collectively through the NAIC. Standards would focus on consumer protection. 2) Remove state law barriers to non-resident licensing, including countersignature requirements, by a specific date. Federal preemption of counter signature laws has been in and out of the HR 10 discussions. Many states have repealed these laws over the last few years. Only 8 or 9 states still retain these requirements. 3) Establish a streamlined, uniform, and expedited process for insurance company admissions. Similar to non-resident agent licensing, there would be a uniform process for insurance company admissions, but not a single licensing point. States would retain the ability and discretion to decide whether or not to admit a company, based upon uniform procedures. The states themselves would collectively establish uniform procedures through the NAIC. Applications could be submitted electronically to a single point for distribution to states where licensure is requested. 4) Authorize the use of social security numbers for licensing purposes, for the producer data base, and for use by IRIN. The use of social security numbers (SSN's) is restricted under the Federal Privacy Act of 1974. Most states have found ways to supply social security numbers for the producer data base, but a few states still have significant problems. Use of SSN's is the minimum element needed for properly identifying agents. A specific clarification in federal law would resolve any problems relating to use of SSN's for insurance regulatory purposes. 5) Exemptions from the Fair Credit Reporting Act for IRIN, the NAIC, and state insurance departments regarding regulatory licensing activities and related databases. Recent amendments to the Fair Credit Act extended its provisions to databases not typically a part of the credit rating process. These amendments apply to databases used for both credit rating and employment purposes. Expansive interpretations by the Fair Trade Commission have extended the Act even to situations involving administrative licensing. The Act, if it were determined to apply to IRIN, would impose extensive notice and appeal requirements, just as if IRIN were a credit bureau. The solution to these problems is simple-state insurance regulatory activities should be specifically exempted from the Act. 6) Nationwide access for insurance regulators to the national criminal history database (NCIC) for regulatory purposes; and use of IRIN/NAIC to access the database so that insurance companies can obtain criminal histories in order to meet their responsibilities under the Insurance Fraud Prevention Act. State licensing, fraud, and enforcement staff have long sought access to the criminal history databases maintained by the FBI (usually referred to as NCIC access). The Department of Justice supplies criminal history information to the American Bankers Association so banks can run checks on employees, and also supplies the information to the securities and commodities trading industries. However, the Justice Department has not been willing to extend such authority to state insurance regulators, despite years of discussions. Only a few states are currently able to access NCIC. In the remainder, enforcement personnel have no practical way to check the possible criminal background of an individual, even when they suspect a serious violation of law. Under the Federal Insurance Fraud Prevention Act (18 USC 1033), a person with a felony conviction involving dishonesty or breach of trust is barred from the business of insurance unless they have a specific exemption from a state insurance regulator. Insurance companies also have a duty not to employ convicted felons, but there is no reasonable means for them to check the criminal records of job applicants and employees. Statistics from the few states which are able to run criminal history checks show that between 10 and 15 percent of agent applicants conceal criminal convictions on their applications. Giving authority to the NAIC to obtain criminal records checks would provide a mechanism for regulators and insurance companies to comply with their legal obligations. The industry generally, as well as the IRIN Board, support this goal. 7) Immunity for IRIN/NAIC in database related activities. The major regulatory databases for insurance, including the financial solvency database, the disciplinary actions listings (RIRS), the Special Activities Database, and the Complaint Data System, are all maintained by the NAIC. Key licensing data is supplied by the states to the producer database, which is part of IRIN. Although NAIC and IRIN act on behalf of State governmental entities, they have no direct tort immunity from suit. This exposes IRIN and NAIC to potential legal actions. A number of states do grant immunity to the NAIC, but this does not cover all potential suits; a plaintiff could simply file in a different state. Federal immunity would help protect NAIC assets, and permit NAIC and IRIN funds to be spent for their intended purposes, not on lawsuits. Immunity would extend to the NAIC as an entity, as well as its members, officers, and employees. 8) Confidentiality protections for confidential regulatory communications with Federal agencies. Federal law should clearly state that confidential information can be exchanged between state insurance regulators and Federal agencies. Such protections may also extend to communications with international regulators. 9) Measures to facilitate regulatory database uses, including digital signature and acceptance of credit cards or other electronic funds transfers. Implementation of efficient electronic processing faces many hurdles, including various state requirements on how payments can be made, and what form of signatures will be accepted. Many of these requirements are in state laws or regulations outside the control of the insurance departments. In some states, for example, no payments via credit cards can be made. Some require payment with each transaction, even if there are multiple transactions per day with one entity. Other states will bill periodically. Technology exists to use both electronic funds transfers and digital signatures, which would make many transactions more feasible and cost-effective. 10) Immunity for insurance companies that report agent terminations for cause, to ensure that more complete data is reported. Insurers have long sought this immunity, and regulators support the idea because it means earlier identification of problem agents. Companies simply will not report terminations for cause without strong immunity, because an agent may sue them for defamation. There could be a process where agents reported by insurers are notified, so that they could contest a company's claim for database purposes. Consumer Complaints and Inquiries by State in the United States Consumer Complaints and Inquiries by State in the United States-Continued Mr. OXLEY. We now turn to our distinguished Chairman of the Securities and Exchange Commission, Arthur Levitt. Welcome. STATEMENT OF HON. ARTHUR LEVITT Mr. LEVITT. Chairman Oxley, Congressman Towns, members of the subcommittee, I appreciate the opportunity to testify today regarding H.R. 10. Let me begin, Mr. Chairman, by saying that I look forward to continuing to work closely with you and the rest of the subcommittee to ensure that any financial modernization bill is in the best interests of the Nation's investors and protects the integrity of our dynamic securities markets. The Commission has long supported the goal of modernizing the laws that govern our financial services industry. For this reason, the SEC worked closely during the last Congress with the committee to help craft legislation that would modernize the legal structure for financial services, while at the same time preserving principles that are fundamental to oversight-effective oversight of U.S. securities markets. After very difficult and trying negotiations, and compromise on all sides, the Commission was able to lend some support to the version of H.R. 10 that was passed by the full House in May 1998. Although the House-passed version was not perfect from our perspective, it did appear to recognize the fundamental importance of investor protection as banks and securities firms move toward greater closer affiliations. However, subsequent negotiations substantially diluted the securities provisions contained within H.R. 10 and eroded the basic principles that the Commission believes are absolutely critical to maintaining securities markets that are strong, vibrant, and healthy. Accordingly, the Commission strongly opposes the version of H.R. 10 that is now before you. I would note for the record that |