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Mr. Chairman, we look forward to working with you to pass a financial services reform bill.



Mr. Chairman, and members of the Committee, my name is Scott Sinder. I am a partner in the Washington, D.C. office of the Baker & Hostetler law firm. I appear today on behalf of the insurance agents of America, and their employees—nearly 1,000,000 men and women who work in every part of the United States. These people are represented by the Independent Insurance Agents of America, Inc. (IIAA), the National Association of Life Underwriters (NALU) and the National Association of Professional Insurance Agents (PIA), on whose behalf I testify today and for whom I serve as outside counsel. Their members sell and service all lines of insur


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INTRODUCTION First, Mr. Chairman, let me thank you for holding this hearing today. Throughout your career, you have been a friend to the insurance industry and you have been sensitive to the interests and concerns of insurance agents. It is those interests and concerns that I would like to focus your attention on today once again.

IIAA, NALU and PIA are appearing before you today to comment on the newest version of H.R. 10, the “Financial Services Act of 1999," that was reintroduced on the very first day of this new Congressional term. Before proceeding with my comments, I must commend you for the role you played last term in brokering, an historic agreement that resulted in a bill that was eventually passed by the House of Representatives by a razor-thin one vote margin. Without your commitment and heavy involvement, no bill would have proceeded to the floor and, in all likelihood, we would be no closer to the enactment of a financial services reform bill today than we were during the many past legislative terms in which such a bill was discussed and debated but was repeatedly unable to take flight.

One message that I have been asked to deliver to you today, Mr. Chairman, is that the insurance agents want you to know that they intend to do everything within their power to help you mold a bill that can take flight and become the law of the land.

As you know, Mr. Chairman, the insurance agents strongly supported the H.R. 10 bill that you brokered and shepherded through the House of Representatives last term. That bill included several provisions that the insurance agents believed to be essential to ensure adequate functional regulation of insurance sales activities. The bill, for example, included a provision that would ensure that the opinions of state insurance regulators were given equal consideration with those of federal banking regulators in any preemption challenges asserted against state insurance consumer protection provisions; established preemption "safe harbors” that would shield any provision similar to provisions included in the Illinois bank sales of insurance consumer protection provisions from preemption challenge; and did not impose a blanket prohibition on insurance sales provisions that addressed many of the unique consumer protection concerns that arise when insured depository institutions engage in insurance sales activities.

After that bill was passed by the House, however, the Senate Banking Bill drastically re-wrote and revised many of its most essential provisions, especially in the insurance sales context. That bill, for example, drastically limited the application of the “no unequal deference” provision; drastically reduced the scope of the preemption "safe harbors"; and imposed a blanket "nondiscrimination” requirement on state laws or regulations enacted in the future that would prohibit those provisions from specifically addressing bank insurance sales activities and from having a greater regulatory impact on those activities than on the insurance sales activities of other agents. The insurance agents actively opposed the bill that was passed out of that Committee.

After the Senate Banking Committee completed its work on the bill, Senator D'amato mediated a negotiation among selected banking and insurance industry representatives. The insurance agents participated in those negotiations but state insurance regulators were excluded. The exclusive focus of those negotiations in the insurance sales context was on the scope of the preemption safe harbors. The banking industry representatives made clear that the deference and “nondiscrimination” sections of the bill were not open for debate during those negotiations. During those

negotiations, the safe harbor provisions had been improved but they still did not provide the protection of the Illinois-based preemption safe harbor provisions that were included in the House bill.

At the conclusion of the negotiations, the insurance agents made clear that they still had serious concerns and problems with the Senate proposal, and they could not support the bill, although there would be no active opposition either.

As you know, the Senate proposal was never considered on the Senate floor. When this Congress convened in January, however, that proposal was re-introduced as the 1999 version of H.R. 10. The Senate package was largely untouched during its consideration by the House Banking Committee. We therefore sit before you today in virtually the same position we were in at the close of the Senate last year—the insurance agents do not support the current proposal and we urge this Committee to improve the proposal by adopting the amendments outlined below.

Banking industry representatives have been quite vocal in recent weeks regarding their belief that any changes that are made to the current proposal will eliminate any prospects for ultimate

passage. They argue that agreements were reached in the fall and that those agreements should be maintained. At the same time, however, many of these same representatives have themselves been requesting that some changes be made in the insurance sales provisions.

Many things have changed since last October. First and foremost, state insurance regulators, through the National Association of Insurance Commissioners, have taken a harder look at the compromise proposal and have concluded that it would dramatically undermine their ability to adequately regulate insurance activities if it is enacted. In addition, the issuance of two recent court decisions calls into question the ability of the Comptroller —that many had begun to take for granted—to unilaterally authorize national banks to engage in expanded insurance sales and underwriting activities absent Congressional action.'

It is against the backdrop of the tortured history of Congress' consideration of financial services reform proposals and the ever-evolving world in which those proposals are generated that this Committee must consider the latest iteration of H.R. 10. In undertaking that consideration, it should be clear that both the insurance industry and the banking industry believe that the current proposal can be improved. The insurance agents want a bill to be enacted and we have been falsely accused of trying to block passage of a viable proposal.

The remaining portions of this testimony will focus on the improvements the insurance agents seek to ensure that state authority and expertise in the regulation of the business of insurance is not overturned or undermined in any way as other industries become more heavily involved in providing insurance services. This statement is divided into four parts. Part I summarizes the basis of the insurance agents' historical support for the continued separation of the banking, insurance and securities industries and the reasons that we are now prepared to embrace reform provided that it ensures adequate regulation of all who seek to engage in the business of insurance. Part II explains why the regulation of insurance activities of everyone should be left to the States. Part III what is at stake if the bill fails to leave that regulation to the States. And Part IV explains the changes that we believe must be made to ensure the requisite functional regulation. 1. The Insurance Agents' Historical Support For Continued Separation

As you know, Mr. Chairman, we have in the past advocated that the traditional separation between the banking and insurance industries should be maintained. During your consideration of H.R. 10 last term, however, we for the first time came to you prepared to support financial modernization in the form of affiliations between banking, securities, and insurance entities. The market is evolving even in the absence of new legislation and today more than ever before agents are entering into an increasing number of relationships with members of the banking and securities communities. We can accept formal affiliation relationships, however, only if there is clear functional regulation of the insurance activities of every entity, and only if insurance consumer protections are addressed.

The monumental shift in our position has not come easily. As small business people, we are painfully aware that, as a practical matter, such affiliations will be a

See Independent Insurance Agents of America, Inc., et al. v. Hawke, Civil Action No. 98-cv0562 (U.S.D.C. D.C.) (slip op issued March 29, 1999) (granting the Plaintiffs' Motion for Summary Judgment and concluding that the OCC's ruling that national banks located outside of small towns were authorized to sell crop insurance products was precluded by the applicable provisions of the National Bank Act); Blackfeet Nat'l Bank v. Nelson, No. 96-3021 (iith Cir. April 4, 1999) (concluding in its primary holding that the OCC's ruling that national banks are authorized to underwrite an annuity product was precluded by the applicable provisions of the National Bank Act).

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one-way-street. That is, the average insurance agency is not going to be in the position to acquire a bank; the acquisition will run the other way. But we are convinced that we can not only survive, but thrive, in such a new world. True competition can work and consumers will benefit, however, only if the rules of the game establish a level playing field for all participants. It is only that which we seek.

The historic change in our position on affiliations has been prompted by marketplace and political reality. The Supreme Court's decision in Barnett Bank of Marion County, N.A. v. Nelson 2 holding that the Section 92 power' granted to town-of-5000 national banks to act as insurance agents preempts Štate laws that would otherwise prohibit such conduct, coupled with the Comptroller of the Currency's ever-broadening interpretations of Section 92, effectively vitiate the separation between the industries. And Congressional inaction to reign in the OCC's creation of new policy by administrative fiat has exacerbated the situation.

At the same time, the Barnett decision has created a great deal of uncertainty regarding who has regulatory authority over bank sales of insurance and what is the extent of any such authority. This uncertainty is undermining the efforts of all of the participants in the insurance sales arena-insurance companies, insurance agents, banks and State regulators—to move the insurance industry into the twenty-first century. The remaining portions of this statement will therefore focus not on whether financial institutions should be permitted to affiliate with insurance providers—we do not oppose such relationships—but on the need for the functional regulation of all members of the financial and insurance industries. Especially in the insurance context, we believe that it is essential that all insurance activities continue to be regulated at the State level—where they have been regulated for nearly two centuries. In championing this approach, we recognize the pressing need for eliminating the barriers that still exist between the banking, insurance and securities industries so that members with roots in all three sectors will better be able to serve the needs of their customers. We believe, however, that this concern also mandates ensuring that consumer choices are well-informed and freely made and, in the insurance context, state regulators have been the virtually exclusive protectors of such interests since the creation of an insurance industry in this country. This bill must ensure that their authority and expertise in the regulation of the business of insurance is not overturned or undermined in any way as other industries become more heavily involved in providing insurance services. II. Regulation of the Business of Insurance Should be Left to the States

Because no insurance licensing and regulatory scheme exists at the federal level, the only available regulators of the participants in the insurance industry are the States themselves. Some national banks, however, appear to believe that they are exempt from at least some of the governing insurance regulations in States in which they are currently engaging in the business of insurance. Although the OCC has recognized that State laws generally apply to national bank sales of insurance, it also has emphasized that national banks need not comply with State laws that interfere with their activities. Without the creation of a federal regulatory authority or a reaffirmation of the absolute right of States to regulate such insurance activity, the scope of this "exemption” will remain unsettled and national banks may be free to engage in the business of insurance without significant oversight.

Given the sophisticated insurance licensing and regulatory structure developed exclusively at the State level over the past 200 years and given the current climate disfavoring the creation of more federal regulatory authority (especially when it is duplicative of current State efforts), reaffirmation of the right of States to regulate the insurance business appears to be the only viable solution. Such reaffirmation is required to ensure that all entities involved in the insurance industry are on a level playing field; to ensure that they are all subject to effective consumer protection requirements; and to ensure that the insurance-buying public has consistent assurances of quality.

Any such reaffirmation would not be new or radical. To the contrary, it merely would build upon and clarify a federal policy that has been in place for over 200 years that States have virtually exclusive regulatory control over the insurance industry. Indeed, up until 1944, it was universally understood by everyone (including Congress) that Congress has no constitutional authority to regulate the business of insurance. This changed with a single Supreme Court decision issued that year. Congress responded immediately by enacting the McCarran-Ferguson Act, which “restore[d] the supremacy of the States in the realm of insurance regulation.”


2 116 S. Ct. 1103 (1996). 3 12 U.S.C. 892. 4 United States Dep't of Treasury v. Fabe, 113 S. Ct. 2202, 2207 (1993).

McCarran's statement of federal policy could not be more clear: “The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.”s Given the States' historical expertise in the realm of insurance regulation and the absence of any such expertise at the federal level, there does not appear to be any compelling reason for abandoning this traditional policy approach.

At a time when Congress is seriously considering empowering States in a myriad of areas, Congress should not strip the States of their authority to regulate in a business arena that has been within their virtually exclusive domain throughout this country's fruitful history.

The States are the only logical choice for comprehensive regulation of insurance. Although there are uniform national concerns in this industry as in many others, in uncountable ways, insurance involves concerns of an intensely local nature. The concerns in Ohio, for example, with its multiple urban centers, lakefront communities and manufacturing concerns, are quite different than the insurance issues raised in Iowa with its thousands of farmers and few large urban areas.

The public has a substantial interest in the continued functional regulation of insurance by the States, regardless of who is conducting the activities. Because of the social need for insurance and its importance to the public, the underwriting and sale of insurance has become one of the most highly regulated professions today. By their regulation, the States ensure that those who engage in the business of insurance are qualified to do so, remain appropriately qualified, offer sound insurance products, and comply with reasonable safeguards for the protection of consumers. This entire body of State insurance statutes and regulations is frequently revised and updated to address evolving regulatory issues and to ensure comprehensive consumer protection. Preservation of the applicability of these State regulations is essential because, at least at the current time, no comparable regulations exist at the federal level and no federal regulator has expertise in this arena. III. What Is At Stake

In March 1996, the Supreme Court issued its decision in Barnett. The Supreme Court's central holding was that Section 92 preempts State laws that prohibit national banks from selling insurance, pursuant to their Section 92 authority. In the course of rendering this decision, however, the Supreme Court also acknowledged that “[t]o say this" —to say that Section 92 preempts State laws that would otherwise prohibit small-town national banks from selling insurance—“is not to deprive States of their power to regulate national banks, where (unlike here) doing so does not prevent or significantly interfere with the national bank's exercise of its powers." 6 The OCC has ceased upon this standard as a potential mechanism for disrupting and potentially eliminating state efforts to regulate national bank sales of insurance products.

A request for comments issued by the OCC on January 14, 1997 dramatically illustrates this.? The question at the heart of the OCC's consideration is whether any provisions of the State of Rhode Island's "Financial Institution Insurance Sales Act” (“Rhode Island Act”) 8 which governs the insurance activities of financial institutions should be deemed preempted by Section 92. An anonymous Requestor that asked the OCC to consider this issue contends that five of the provisions included in the Rhode Island Act “discriminate” against national banks and significantly interfere with the exercise of their Section 92 powers.9

The Rhode Island Act was supported by a bipartisan group of state legislators. Indeed, it was agreed to by a significant portion of the State's banking industry. As reflected in the Rhode Island Governor's statement upon signing, the Act is designed to level the playing field. None of the provisions at issue actually or constructively preclude national banks from engaging in the business of insurance in any way, and none of the challenged provisions impose different requirements on national banks than those imposed on any other financial institution engaging in the sale of, or in the solicitation for the purchase of, insurance products. 10

5 15 U.S.C. $ 1012(a).
6 Barnett, 116 S. Ct. at 1109.
7 See 62 Fed. Reg. 1950 (Jan. 14, 1997).
8 See R.I. Gen. Laws 8827-58-1 et seq.
962 Fed. Reg. at 1951.

10 The challenged provisions generally prohibit the tying of banking and insurance; generally require that a financial institution's loan and insurance businesses be physically segregated; generally prohibit financial institution employees with loan or deposit-taking responsibilities from soliciting and selling insurance; require that loan and insurance transactions be completed


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The OCC, however, apparently believes that these provisions may “significantly interfere” with a national bank's exercise of its Section 92 powers, although the agency has not articulated the standard by which any such significant interference will be measured. 11 Indeed, based on the OCC's supplemental request for comments on the issue, it appears that the OCC is prepared to impose its own views of how best to legislate on the States. Not only is the OCC inquiring whether the Rhode Island provisions prevent or significantly interfere with national banks' insurance sales activities, the OCC is asking whether there are “better” means that the State might have chosen to effectuate its policy goals. This is clearly beyond the OCC's legitimate role as banking regulator. It is the role of legislators—and in this context, State legislators——to determine how best to effectuate public policy, not the OCC.

During the first round of comments, numerous members of Congress expressed their belief that it was inappropriate for the OCC to attempt to preempt any State insurance laws. No member voiced the opposite view. Nevertheless, the OCC labors on, possibly prepared to opine that these state law provisions-enacted on a bipartisan basis by state legislators with the agreement of significant representatives of the banking industry in the State-should not be applied to national banks. Interestingly, the Rhode Island law has been in force now for over two and a half years and all players seem to be functioning remarkably well.

The question whether any of the provisions of the Rhode Island Act may be preempted is not an isolated one. Sixteen other States have enacted laws that seek to regulate bank involvement in insurance sales activities, 12 another seven have acted by regulation,13 and at least six other States are now considering legislation to regulate bank sales of insurance. And, in the meantime, the OCC is meeting with State insurance regulators intimating that it is prepared to preempt any laws or regulations that it views as going too far. There is thus an intense need to clarify the States' regulatory supremacy in this area. The financial services proposal currently before you, however, fails to adequately ensure that state regulators will remain empowered to insurance activities in general and, more specifically, the unique consumer protection concerns that arise when federally insured depository institutions engage in insurance sales. IV. Ensuring That The Bill Does Not Undermine Functional Regulation

Put simply, enactment of the current H.R. 10 draft would dramatically undermine the ability of state insurance regulators to regulate and it would jeopardize many of the consumer protections already in place in many states that are designed to ensure that consumers are well-informed and free to choose to purchase insurance products adequate to address their insurance needs. Although the bill pays lip service to functional regulation in certain respects, it ultimately fails to adequately protect it. It is for this reason that we support the amendments sought by the NAIC to improve the bill's preemption provisions. In the insurance sales context, we be

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independently and through separate documents; and prohibit usage of nonpublic customer information without the written consent of the customer. See id.

11 Remarkably, the OCC first sought comments on the preemption of the Rhode Island Act before the State Insurance Department had finalized regulations that would implement the statute. We, among others, pointed out the prematurity of the OCC's request. Apparently recognizing its error, the OCC recently reopened the comment period to permit consideration of the finalized regulations. It is only in light of those regulations that the meaning of the statute can be ascertained.

12 Arkansas (House Bill 2070 (1997)); Colorado (House Bill 97-1175 (Colorado Rev. Stat. $$ 102-601 et seq.)); Connecticut (Public Act No. 97-317 (Connecticut Gen. Stat. $ 36a-775)); Illinois (House Bill 586 (1997) (The Illinois Insurance Code Article XLIV)); Indiana (House Enrolled Act No. 1241 (1997) (Indiana Code $$ 27-1-15.5-8 et seq.)); Kentucky (Kentucky Laws Ch. 312 (H.B. 429) (1998) (Ky. Rev. Stat. $304)); Louisiana (House Bill No. 2509 (1997) (La. Rev. Stat. 22:3051-3065)); Maine (S.P. 439-L.D. 1385 ((9-A Maine Rev. Stat. Ann. $$ 4-401 et seq.)); Massachusetts (Senate 1948, Bill No. MA97RSB (May 15, 1998)); Michigan (House Bill No. 5281 (1993) (Mich. Compiled Laws $ 500.1243)); New Hampshire (House Bill 799 (1997) (N.H. Rev. Stat. Ann. $$ 406-C et seq.)); New Mexico (House Bill 238 (43rd Legislature, 1st Sess.) (New Mexico Stat. Ann. 88 59A-12-10 et seq.)); New York (Bill No. 5717-B (July 18, 1997) (New York Banking Law § 14-g; New York Insurance Law 882123 and 2502) (sunsets July 18, 2000)); Pennsylvania (House Bill 1055 amending the Act of May 17, 1921 (P.L. 789, No. 285), Printer's No. 1985 (June 9, 1997), 40 Penn. Stat.); Texas (House Bill No. 3391 (1997) (Texas Insurance Code Article 21)); and West Virginia (H.B. 2198 (March 14, 1997) (W.V. Code Chapter 33)).

13 Florida (Dept. of Insurance Rules 4-224.001-4-224.014); Georgia (Rules and Regulations of the Office of the Commissioner of Insurance Chapter 120-2-76 (adopted February 17, 1997)); Maryland (Advisory Letter Issued by the Insurance Commissioner and the Commissioner of Financial Regulation on October 31, 1996); Mississippi (Executive Memorandum issued by the Commissioner of Banking and Consumer Finance on May 13, 1997); Ohio (Department of Insurance Rule 3901-5-08); Vermont (Insurance Division Bulletin 117 (June 13, 1997)); and Wyoming (Chapter 16 of the Rules of the Division of Banking).

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