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nannyisms will work a prompt and significant alteration on the culture of Wall Street.” Do you agree with that?
Mr. LEVITT. My predecessor, whom I respect and admire a great deal, was much more confrontational than I am. Again, it is not my primary issue. My issue is again consistent regulation, and I have expressed, for administrative purposes, some preference for the affiliate structure. Will western civilization rise or fall on that decision? I don't know. Again, I don't want to divert from something that I consider to be of much greater importance.
Mr. SHIMKUS. I think why members of the committee may be focusing on this is because there seems to be an impression that last year it was an issue which you were concerned about, and if the answer is no to this question, or to the view that they may be different than the position taken last year
Mr. LEVITT. I think the difference is simply that the threat that I see to our markets and to investors in a bill which so blurs the line between banking and securities regulation is of such compelling and immediate importance that it overrides my concern for the structural issue. Again, I have some preference for the affiliate structure, but that is of a much lower level of concern than the other, and I am going to stick with that.
Mr. SHIMKUS. That answers my question. Or it doesn't-it addresses my question, so I will yield back my time, Mr. Chairman.
Mr. OXLEY. The gentleman's time has expired.
Mr. ĐINGELL. I thank you for that courtesy and I thank you for your patience.
Under the exemptions, Mr. Chairman, I note that private placements would be one of the exemptions. The Fed would be required to come up with certain rules, and the Fed, the OCC and the Treasury would be required to come up with certain rules with regard to these matters. Now, private placements are kind of peculiar. First of all, the number of people who can participate in them are very small, they have to be highly sophisticated, they have to have a lot of money, which makes them presume to be very sophisticated and smart. But there is much less in the way of protection for the rights of the investor in that situation.
In instances where there are private placements, the rules that are now in place under the SEC would not necessarily be in place under the new regime under the legislation. The practical result of that would be that every one of the placements could essentially become private placements playing under the rules which afford vastly less protection for the investor. Indeed, zero protection for the investor on the assumption that anybody who is silly enough to go into one of these private placements would be smart enough to protect himself and have enough money even if he missed it, isn't that right?
Mr. LEVITT. Absolutely.
Mr. DINGELL. Now, just one other thing. Your current authority over private placements regarding suitability, disclosure, failure to supervise, and the requirements with regard to keeping books and records would be significantly modified as to activities within the banks and also as to activities within the wholly owned op-subs, isn't that so?
Mr. LEVITT. That is correct, and I might say that a majority of the corporate debt you spoke of before is placed privately. A majority of corporate debt is privately placed.
Mr. DINGELL. Not subject to disclosure and not subject to other rules to protect the investor; isn't that right?
Mr. LEVITT. Not under this configuration.
Mr. OXLEY. The committee wishes to thank both of you for, once again, excellent testimony. As I indicated when you first arrived, we hope this is the last time that you will be here testifying on this particular issue, although we welcome you on many issues in the future other than financial services modernization. Thank you very much.
Mr. NICHOLS. Can I make a comment, sir, before we go?
Mr. NICHOLS. I hope that as you all move forward on this, that you recognize that as we have addressed the issue of banking, we have talked about the business of banking, but on this panel you have heard from Arthur Levitt whose focus has been on the end result, the investor, and my focus has been on the insurance consumer. As we go through financial modernization, we should allow them to commingle, but let us keep that in perspective: that two of the pieces of the three-legged stool are very, very critical to the ones that are actually investing the money.
Mr. OXLEY. And two of those legs are under the jurisdiction of this committee, so I appreciate your remarks. Again, I thank you so much for your testimony.
The subcommittee will stand in recess for 5 minutes so that we can have the other panel come up to the witness table.
Mr. OXLEY. The subcommittee will reconvene. I know that we have our final panel here, because they have been waiting patiently all day, since 10 o'clock this morning. So we are pleased to have you here. Let me introduce the panel. Mr. Arnold Schultz, Board Chairman for the Grundy National Bank from Grundy Center, Iowa; Mr. Mark Sutton, President of the Private Client Group from Paine Webber, from Weehawkin, New Jersey; and formerly mentioned and introduced by my colleague, Paul Gillmor, Mr. Craig Zimpher, Vice President of Government Regulations, Nationwide Insurance Corporation. I agree with most of the things that Congressman Gillmor said about you. Mr. Scott A. Sinder, partner of Baker and Hostetler, a good Cleveland-based firm located here in Washington, on behalf of the Independent Insurance Agents, the National Association of Life Underwriters, and the National Association of Professional Insurance Agents of America.
So gentlemen, thank you all for your patience. It is always difficult to be on the last panel, but we thank you for your patience and your understanding.
Mr. Sutton, I am going to begin with you, as I understand you might have a plane to catch. So let me begin with your testimony. After your testimony, again, feel free to stay as long as you can, but I understand your commitment as well.
STATEMENTS OF MARK B. SUTTON, PRESIDENT, PRIVATE CLI-
Chairman Oxley and members of the subcommittee, I am Mark Sutton, Executive Vice President of Paine Webber Group and President of PaineWebber's Private Client Group. I am also a member of the Board of Directors of the Securities Industry Association.
First of all, let me say I appreciate the opportunity to present Paine Webber's views on H.R. 10 and the Financial Services Act of 1999. Paine Webber commends you for your efforts and those of this subcommittee to enact desperately needed legislation to modernize the regulation of the United States financial services industry.
I manage PaineWebber's retail brokerage business. We have over 18,000 employees in 300 offices around the United States. Passage of H.R. 10 is essential to providing PaineWebber and the entire securities industry, fair access to compete globally and nationally. This is a dynamic time in the financial services industry with the demographic shifts in the aging baby boomers and the increasing numbers of companies changing their pension plans from defined benefit to defined contribution. Each of these actions contribute to the creation of 50 million individual pension plan managers. These significant domestic shifts, along with global competitive challenges, present the platform for my appearance today, urging you to pass H.R. 10 this year.
Mr. Chairman, my message is simple. The securities industry strongly supports financial services modernization and urges this subcommittee, the Commerce Committee, the House, and the Senate to pass it promptly.
Last year, the House capitalized on a unique opportunity for the passage of financial services modernization legislation when large segments of the banking, securities and insurance industries were able to reach a series of compromise positions on issues that had previously divided them and that had previously prevented legislation from being enacted. We believe the opportunity created last year for passage of financial services legislation still exists, and we urge the House to act swiftly to pass this legislation.
Paine Webber believes that there is more than one approach to modernize the regulatory framework for the financial services industry. For the securities industry to support the legislation, it should satisfy three fundamental principles: first, maintaining functional regulation; second, providing a two-way street; and finally, fostering competition without Federal subsidies. For the legislation to be successful, it should incorporate the compromise provisions agreed to by industry and also by Members of Congress.
These provisions, particularly the functional regulation of bank securities activities are not only good public policy, but they also
remove the disagreements that have derailed this legislation many times in the past. Today, financial institutions are affiliating with one another at an accelerating speed under a regulatory system that was intended to ban such affiliations. In the last 2 years, banks have acquired more than 50 securities firms. Mergers and acquisitions are occurring in spite of significant and anticompetitive regulatory obstacles.
For example, currently, banks can acquire securities firms while securities firms generally cannot acquire commercial banks. The financial services industry will continue to evolve in response to customers' demands, but it is simply not desirable, nor possible, to maintain the status quo. The fundamental policy question for Congress is not whether these affiliations should occur, but what regulatory systems should govern the combined entities. Surely it should not be the current patchwork regulatory structure that gives some financial institutions unfair and irrational competitive advantage over others.
PaineWebber supports key provisions of H.R. 10 because they go a long way toward meeting the three principles upon which any new financial legislation should be built. The first principle, functional regulation, would require one regulatory agency to apply the same set of rules to the same activity engaged in by any financial institution regardless of the type of financial institution it may be. Under H.R. 10, most securities activities would be performed outside of a bank, except for a small number of carefully defined securities activities that traditionally have been conducted in banks with the benefit of SEC, SRO, and State securities regulation.
After years of negotiation, the securities and banking industries developed a set of functional regulation provisions that permitted banks to continue to engage in certain securities activities that banks had traditionally provided to their customers as an adjunct to their banking services, but that required full-scale brokerage operations be conducted outside of the bank in an SEC- and NASDregulated brokerage affiliate. Notably, Paine Webber is not aware of any significant opposition in either the banking or the securities industries to these functional regulation provisions. Paine Webber supports the strong regulation provisions in H.R. 10. Second, the legislation generally provides for a two-way street by
, permitting securities firms, insurance firms and banks to freely affiliate with one another on the same terms and conditions and to engage in any activity that is financial in nature.
Third, PaineWebber supports the holding company affiliate structure. But importantly, H.R. 10 allows for the SEC to regulate securities activities whether they are conducted in an affiliate under a holding company structure or in an operating subsidiary of a bank. Paine Webber believes that this would, at a minimum, ensure that securities activities are regulated by the appropriate experienced authority.
Mr. Chairman, in the last session, PaineWebber supported H.R. 10 and worked actively to pass it. The bill presented a series of compromises by every sector of the financial services industry. We supported the bill because we were, and we are, committed to maintaining the delicate consensus compromise that emerged among all of the participants. PaineWebber has worked with you,
Chairman Oxley, members of this subcommittee, others in Congress and many in the financial services community to reach a number of the compromise positions that are reflected in H.R. 10. The progress we have made cannot be overstated. Passage of the financial services modernization legislation is vital to maintaining the global competitiveness as well as the financial products and services for our individual customers.
Mr. Chairman, we look forward to working with you, members of your subcommittee, as well as the House, Senate and administration to enact financial services legislation reform this year.
[The prepared statement of Mark B. Sutton follows:]
PREPARED STATEMENT OF MARK B. SUTTON, PRESIDENT, PRIVATE CLIENT GROUP,
PAINEWEBBER GROUP, INC. Chairman Oxley and members of the Subcommittee, I am Mark B. Sutton, President Private Client Group, Paine Webber Group, Inc. I am also a member of the Board of Directors of the Securities Industry Association. I appreciate the opportunity to present the views of Paine Webber on H.R. 10, the Financial Services Act of 1999. Paine Webber commends you for your efforts Mr. Chairman, and those of this Subcommittee, to enact desperately needed legislation to modernize the regulation of the United States financial services industry. PaineWebber is optimistic that this year Congress will pass, and the President will sign into law, widely supported financial services modernization legislation. We look forward to working with you and members of this Subcommittee to achieve this result.
I manage PaineWebber's entire retail brokerage business. We have over 7000 financial advisors and over 300 offices around the United States. Passage of H.R. 10 is essential to pro ling Paine Webber and the entire securities industry fair access to compete globally and nationally. This is a dynamic time in the financial services industry with the demographic shifts in the aging baby boomers and the increasing shifts in companies' pension plans from defined benefit to defined contribution in effect, contributing to the creation of 50 million individual pension planners. These significant domestic shifts, along with global competitive challenges, present the platform for my appearance today in urging you to pass H.R. 10 this year.
My message today is simple. The securities industry strongly supports financial services modernization legislation and urges this Subcommittee, the Commerce Committee, the House, and the Senate to pass it promptly. Last year, the House capitalized on a unique opportunity for the passage of financial services modernization legislation when large segments of the banking, securities and insurance industries were able to reach a series of compromise positions on issues that previously had divided them. We believe the opportunity created last year for passage of financial services modernization legislation still exists, and we urge the House to act swiftly to pass legislation this session.
PaineWebber shares the concerns of certain members of this Subcommittee that H.R. 10 has flaws. But reform of existing financial services regulations must be viewed in a realistic context. After more than 60 years of operating under the current regulatory structure, banks, thrifts, insurance companies and agents, securities firms, consumer groups, financial services regulators, executive agencies and others have legitimate, competing and often conflicting views of how the financial services industry should be regulated. Due in part to the large number of competing interests, financial services modernization legislation has stalled in every congressional session in recent memory. In this environment, no bill can be “perfect,” because each bill will represent a compromise in which each industry may get some, but not all, of its favored solutions. It, therefore, is left to Congress to resolve these competing interests and develop legislation that is in the national interest.
Under the current regulatory system, banks are rapidly acquiring securities firms and banking regulators are being forced to devise new ways to regulate and supervise their bank securities affiliates--a role previously the exclusive domain of the Securities and Exchange Commission (SEC). Neither securities customers nor the financial services industry benefits from the ad hoc and duplicative regulatory scheme that has developed. And the longer regulators debate ever finer points of jurisdiction and competing regulatory schemes, the more deeply and permanently entrenched the banking industry and regulators become in the securities industry.