no one to provide that protection for American insurance consumers; is that correct?

Mr. NICHOLS. That is correct, sir.

Mr. DINGELL. Now, Commissioner Nichols, some of these laws have been on the books for more than 40 years; is that correct? Mr. NICHOLS. That is correct.

Mr. DINGELL. Is there any authority or expertise at the Federal level-now, I said authority and expertise at the Federal level which is comparable to the body of insurance law and regulations that now exists at the State level?

Mr. NICHOLS. There is none.

Mr. DINGELL. Is there any expertise in the Fed to do this?
Mr. NICHOLS. No, sir.

Mr. DINGELL. Is there any expertise in the Office of the Comptroller of the Currency or elsewhere in the Treasury Department? Mr. NICHOLS. No, sir.

Mr. DINGELL. In a word, are you aware of any actions that have ever been taken by the Department of the Treasury or the Fed to regulate insurance matters?

Mr. NICHOLS. No, sir. But they have attempted to expand the ability of banks to do certain things in insurance.

Mr. DINGELL. In ways which would ofttimes deny you and the other State insurance commissioners the authority to regulate for the protection of consumers in your several States; is that right? Mr. NICHOLS. That is correct, sir.

Mr. DINGELL. Now it would seem that the Banking Committee's bill, therefore, lets the banks engage in insurance activities without regulations; is that correct?

Mr. NICHOLS. That is the way that we see it, sir.

Mr. DINGELL. And I would go on to note that while insurance companies are not bank related insurance agents would continue to be subject to Michigan's 33 insurance laws; is that right?

Mr. NICHOLS. That is correct, sir.

Mr. DINGELL. And to regulation by the insurance commissioner; is that right?

Mr. NICHOLS. That is correct.

Mr. DINGELL. That would leave the insurance consumer in the State of Michigan afflicted with something of a Hobson's choice between banks totally exempt from regulation and an insurance salesman who would be subject to State regulations; is that right? Mr. NICHOLS. That is correct, sir.

Mr. DINGELL. So the banks could promise any damn thing they liked and deliver as little as possible; is that right?

Mr. NICHOLS. That is right.

Mr. DINGELL. There would be no place that the insurance consumer could go for redress; is that correct?

Mr. NICHOLS. That is correct, sir.

Mr. DINGELL. Now, is there any reason in your mind why we ought to abate the historic protection afforded to consumers by State insurance laws when they buy insurance at their bank? Mr. NICHOLS. There is no reason, sir.

Mr. DINGELL. Banks are now subject to at least some of these insurance laws even while under the administration of the Comptroller of the Currency and the Federal Reserve Board; is that right?

Mr. NICHOLS. That is correct.

Mr. DINGELL. Is there any reason in your mind that would justify us coming to the conclusion that banks should be subject to less regulation than insurance companies and insurance agents?

Mr. NICHOLS. Not if you want to protect your consumers.

Mr. DINGELL. But if you want to scare them, letting the banks out from under regulation would be a fine way to begin, would it not?

Mr. NICHOLS. It would be an excellent way to do it, sir.

Mr. DINGELL. Thank you.

Mr. OXLEY. The gentleman's time has expired. The gentleman from Iowa, Dr. Ganske.

Mr. GANSKE. Thank you, Mr. Chairman. I must commend Mr. Dingell for his thoroughness. If there were more members of the committee here, they each would have obtained their own personal handout on their own State insurance laws.

I appreciate Commissioner Nichols being here and Chairman Levitt. I want to follow up on a question that I asked Secretary of the Treasury Rubin; and that has to do with the NationsBank case. And so, Chairman Levitt, I wonder-I understand that the NationsBank settled claims of $50 million for defrauding investors with securities sold by an op-sub. When I asked the Secretary Treasurer about this, he referred us to his assistant who then said rather blithely, said, Well, that was handled by the SEC, which actually I thought made my point in terms of functional regulation. But I wonder if you could share with us the facts of that case; and specifically I would like to know, in your opinion, were investors confused by the sales of securities by a bank operating subsidy?

Mr. LEVITT. Yes. They clearly were. I think that, as Mr. Dingell pointed out, time and time again some years ago when banks began the sale of mutual funds to customers

Mr. GANSKE. Mr. Chairman, can you pull the mike just a little closer.

Mr. LEVITT. That when banks began to sell mutual funds to individual customers, it became very easy to blur the lines between the banks, the insured deposits, the guarantees that went with so many banking activities, but clearly did not extend to money market funds or other funds that were being marketed to customers of banks.

And NationsBank was a clear case of blurring the lines, where investors were led to make purchases that they believed were totally secure. They thought that it was like a deposit; therefore, they couldn't lose any money. They were not told that the fund involved the purchase of very risky derivatives instruments. Furthermore, the sales of that fund-and I think this was the most repugnant part of all of it-were targeted toward elderly people, people who could ill afford to lose their funds, people who were really victimized by bank personnel using the prestige and power of the institution to imply a level of security that simply did not exist. It was fraud. It was misleading. It was a very bad performance.

Mr. GANSKE. Chairman Levitt, at the hearing before this committee on the last Congress, you stated, "It would be bad public policy to have the safety net extended over securities activities," that you

thought the use of an affiliate was far preferable to having a subsidiary's structure. You were referring to bank securities underwriting in an op-sub. Do you still maintain that view in light of this case that you just told me about?

Mr. LEVITT. You know, I have learned-maybe I learn slowly, but I have learned after many years of dealing with complicated issues before the Congress that focus is all important. Any participant in any piece of legislation tends to have different interests. But here my interest is almost obsessional in terms of protecting investors. This bill, as I see it, leaves investors naked, dangerously naked. If choosing an op-sub or choosing an affiliate were the central decision to be made, I don't think that bears as significantly on the well being of investors as other parts of the bill.

Yes, I believe that the affiliate structure certainly has administrative advantages. I am concerned about the fact that the op-subs are considered part of the bank for capital purposes and that the bank parent can suck out capital from the brokerage subs to help a weak bank. I think that, as I see it, is a shortcoming of the subsidiary structure. But overall, that is not our key issue.

Mr. GANSKE. Let me just follow up with one final question then because I want to get you on the record, the same as I did Secretary Rubin, on this issue of op-subs. And That is that you indicated that last year's committee print had your support to some degree.

The last the Commerce Committee print from the last Congress provided for limited operating op-subs and these op-subs were limited to agency activities, as I said, to address Chairman Greenspan's concern about government coverage of taxpayer money. Can you give us your opinion? Would you be willing to support agencyonly op-subs as a compromise?

Mr. LEVITT. I would have to think about that. My feeling is this: if this Congress is mindful of the importance to our markets of giving investors the basic protections that they have had for 65 years and extends to investors those same protections that they have had before and doesn't sweep them up in terms of calling something functional regulation which is not functional regulation, frankly, I would support any kind of structure that did that. I'm not going to get bogged down on one over the other.

We are most concerned with securities activities that remain in the bank. That is where our problem lies and our inability to get at that. That was one of the problems in NationsBank. It was one of the problems that we faced in terms of bank-marketed mutual funds. Clearly, I'm not going to be dogmatic about affiliates versus subsidiaries. I do feel that there are some administrative advantages to the affiliates, and it is for that reason that I gave support to that in the past.

Mr. GANSKE. Commissioner Nichols, would you concur with that? Mr. NICHOLS. I think for the most part. That is clearly where our concern is; we cannot get to the situation occurring within the bank.

Mr. GANSKE. I thank you.

Mr. OXLEY. The gentleman's time has expired. The gentleman from Wisconsin, Mr. Barrett.

Mr. BARRETT. Thank you, Mr. Chairman. Welcome, gentlemen. Prior to being on this committee I spent 6 years on the Banking Committee. One of the major reasons I left that committee was this legislation. So it is nice to see it again. I often described it as the legislative equivalent of the movie Groundhog Day. I don't know if you have seen that, a Bill Murray movie where every day was the same and the same thing would happen.

So now this is my fourth term in Congress and the fourth time I have seen this legislation, and I think your people have seen it for decades. Certainly careers are built around this legislation. But each time I go through it, I have to go back through a little primer and remind myself as to what we are doing.

I look at the various industries and those industries that may have the greatest incentives for this legislation and the ones that have the least incentive. In fact, I think of the securities and your office in particular as having one of the least incentives for this legislation. Maybe I'm wrong, but that is just my perception.

As I look through your testimony today, it is unclear to me as to whether your opposition is primarily that you don't think that the banks should be performing some of these functions or the fact, at least under your scenario, that they would be performing them without appropriate regulation. Can you help me with that?

Mr. LEVITT. Yes. I think the banking regulators of the United States do a superb job of protecting the safety and soundness of banks. I have sat on the boards of several banks. I have worked with banking regulators. I have listened to them make presentations to the boards. And the focus of their interests and their activity and their commitment has been the safety and the soundness of the bank.

Having been in the securities business for much of my life and now being a securities regulator, I understand what I have described as a cultural difference, where the interests of investment banks ad brokerage firms are entrepreneurial interests. The number of jobs that have been created in this economy and the strength of our economy are a function of a combination of risk-taking on the part of brokerage firms and capital extended by banks.

But they are two very different cultures. Now, the banking regulators for instance, just to give you an example of some of the differences-don't impose enforceable sales practice rules. They don't have a duty to supervise. They don't have a system of arbitration enabling individual investors to bring their cases to arbitrators to decide them. They don't subject their supervisory and their sales personnel to testing and mandatory continuing education, and they don't require the disclosure to investors of a disciplinary history of those people selling products. They don't insure securities as SIPC insures the securities of investors at brokerage firms.

So my reason for so passionately opposing this bill is this: if you have the growing securities activities of banks involving individual investors subject to the oversight of examiners who are concerned primarily for the banks' interests and for the safety and soundness of the banks rather than for the investors' interests, that is just wrong. It represents a threat not just to investors, but I believe a threat to our markets.

Mr. BARRETT. So it is not, per se, an opposition to banks performing these functions?

Mr. LEVITT. Absolutely not. I think banks should perform this and other functions. I have no problem with that any more than I have a problem with allowing brokerage firms to perform banking functions. But I think it would be as wrong to ask the SEC to supervise banking activities of brokerage firms, because of the cultural difference, as it would be to ask banks to supervise the securities activities within the banks.

Mr. BARRETT. One of the other concerns that we often hear, of course, is then it becomes a fight among the regulators. We have heard from Mr. Greenspan; we have heard from yourself, all people of good will, obviously people who are committed to this. And it concerns me that there doesn't seem to be an acknowledgement or a belief that another regulatory agency can perform some of the same regulatory functions, for example, that your commission does. Mr. LEVITT. Absolutely. And no doubt in time we could train the National Endowment of the Arts to supervise some of these activities. But why? To what end? We have contradictory objectives in some instances here. That is good; That is desirable to have that. But to suggest that you take a 65-year history that is committed to investor protection-no such agency any place in the world can replicate the protection to investors extended by the SEC-and in one fell swoop, for whatever reason, you want to wipe that out in favor of having banking regulators do this? To what end? What reason do you have not to ask that securities activities be supervised by those who have been trained for 65 years to do them and not change cultures in midstream?

Mr. BARRETT. You make a passionate case for your agency.

Mr. LEVITT. I make a passionate case for investors, not for our agency.

Mr. BARRETT. Let me continue because I think if you look at it, if one looks at it from a perspective of a regulator from the government, you make all the sense in the world. But if one were to look at it from the standpoint of the business to say, well, this week we have got SEC in here and this week we have got the comptroller, this week this agency in here.

I'm not one who is considered a big lover of business, but I am sensitive to their concern that they are just going to be regulated to death. I just want you to respond to that.

Mr. LEVITT. Yes. If you look at the system of regulation involving financial services in the country today and you examine, for instance, a large multifaceted brokerage firm, a firm that is subjected to the inspection of State regulators, the SEC, Federal regulators, and self-regulatory organizations such as the New York Stock Exchange, that system works pretty darn well.

If you took away any element of it, if you remove the States, if you remove the self-regulatory organization, or if you remove the SEC, you would severely cripple the ability to police those markets; and the safety of those markets and the efficiency and the trust in those markets would evaporate virtually overnight. The same holds true here.

If banks are going to get into brokerage services, there is no reason to suddenly substitute a bank regulatory culture which is so