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lieve three core sets of changes supported by the NAIC would improve the proposed legislation: (1) clarify that state insurance regulators are entitled to receive consideration of their views in court when disputes arise between regulators; (2) amend the so-called “non-discrimination” provision to appropriately clarify the scope of the standard; and (3) strengthen and clarify the safe harbor consumer protection provisions. It is worth noting that all of these "improvements” that we are now seeking were included in the bill that you shepherded through the House last term, Mr. Chairman.

Clarify That The Opinions of State Insurance Regulators Are Entitled To Consid. eration In Court Reviews of State Insurance Laws. The viability of regulatory provisions already in force in many States would be put into jeopardy because of the implication created in the bill that the OCC is entitled to exclusive consideration when à court confronts the question whether a challenged provision should be preempted because it “significantly interferes” with a national bank's exercise of its insurance sales powers. Although Section 306 creates a special procedure for the challenge of state insurance regulations and dictates that the state insurance regulator and the OCC are entitled to equal consideration during that review, Section 104(b)2)(C) exempts laws in existence prior to September, 1998 from the “no unequal deference” standard. The OCC, however, simply has no expertise in the regulation of the business of insurance. Moreover, the OCC has repeatedly demonstrated that the expansion of national bank powers is at the forefront of its concerns. This preoccupation has led the OCC to interpret a small exception to the general prohibition on national bank sales of insurance that authorizes national banks located and doing business in places with populations not exceeding 5,000 inhabitants as allowing national bank agents to sell from anywhere so long as they are headquartered in a small-town bank office and to sell to customers located anywhere without any geographic restriction whatsoever. For these reasons, we believe that OCC interference with State regulation of the business of insurance and exclusive consideration of OCC opinions regarding, such regulation-is inappropriate. The Courts are well qualified to determine whether State regulations prevent or significantly interfere with a national bank's exercise of its insurance sales authority and requiring or implying that the OCC is entitled to special deference over and above that accorded state insurance regulators on such questions is therefore unacceptable.

Amend the Non-Discrimination" Provision. Section 104(c) completely prohibits States from distinguishing in any way between financial institutions and other entities—and from enacting provisions that may have a greater effect on financial institutions than on other entities (even if inadvertent)-in regulating the sale of insurance products. As over 25 States and the OCC itself have previously recognized, however, the sale of insurance products by financial institutions creates unique problems that require consumer protections tailored for the financial institution context. These laws are not “anti-competitive.” Indeed, they expressly recognize that banks are in the business to stay. But they attempt to create a level playing field between bank and non-bank insurance agents and brokers, and to protect consumers from potential abuse. Banks' access to cheap funds, FDIC-insured status, and control over credit, puts them in a position not held by others in the insurance industry. For this reason, many States believe provisions regulating bank sales of insurance are necessary to prevent coercion and confusion and to protect customer privacy.

Indeed, as the OCC itself recognized when it published an advisory letter to provide guidance to national banks on insurance and annuity sales activities, 14 there are many instances in which "discriminatory” regulation (in the sense of treating banks differently than non-banks) is appropriate and necessary. Consequently, there is no basis on which to argue that the type of "discrimination" present in consumer protection provisions such as those contained in the Rhode Island Act are per se illegitimate. 15

In working on these laws at the state level, agents have negotiated with all interested parties—banks, insurance companies, securities firms. Michigan's law, enacted almost six full years ago, is the product of negotiations between the banks and the agents. West Virginia's law, enacted two years ago, is the product of negotiations that included not just the banks and the agents, but insurance companies as well. The process has been no different in the other twenty-two States.

Although the safe harbor provisions are an effort to capture many of the substantive regulatory controls that currently are imposed, they are both under inclusive of the current universe of regulatory requirements designed to address bankspecific consumer protection issues and they cannot possibly take into consideration the wide array of issues that may in the future require bank-specific regulatory solutions.

14 See OCC Advisor Letter AL 96-8 (October 8, 1996).

15 Absolutely nothing in the Barnett decision, or its precedents, supports the argument that a State cannot regulate national banks in a manner that distinguishes them from non-banks.

We believe that, as long as the legislation makes clear that States may not prohibit the exercise of authorized insurance sales powers, there should be no need to bar state legislatures and governors from implementing bank-specific solutions designed to address consumer protection concerns that may arise when such powers are exercised. This would mandate the complete elimination of the “non-discrimination” provision. At a minimum, however, we believe that the standard must be clarified in two ways. First, the prohibition on the enactment of provisions that facially differentiate between insured depository institutions and other entities must be amended to clarify that such provisions are impermissible only if they treat insured depository institutions differently based on their federally-insured status because it is only regulation of that facet of their insurance-related activities that should be limited in any way to the regulatory requirements dictated by the legislation or protected by the safe harbor provisions. Second, the “indirect discrimination” provision—104(c)2)must be completely eliminated. It is unfair and unreasonable to prohibit the application of broad regulatory requirements simply because they may happen to have an indirect disparate impact on financial institutions.

Strengthening The Safe Harbor Provisions. Finally, we believe that the current list of safe harbors must be strengthened. Section 104(d)(2)(B) establishes 13 separate “safe harbor" provisions. These "safe harbors” essentially permit a State to promulgate consumer protection laws and regulations that are substantially the same as but no more burdensome or restrictive than the requirements included in each provision. Any state law that falls within a safe harbor cannot be preempted. The "safe harbors" apply to laws already in place as well as those that may be enacted in the future. The "safe harbor" provisions included in the bill, however, are inadequate.

Consumer protection provisions that are at the heart of the regulation of banks sales of insurance in many states requiring separation of banking and insurance activities within the bank, for example

have been excluded from the list of consumer protections that are automatically deemed to be permissible. That exclusion jeopardizes the application of many such provisions and may undermine the regulatory scheme of as many as 30 States that have been designed to address many of the unique issues that arise when banks in their unique position controlling federally insured credit capital-also engage in the business of insurance.

Specifically, we believe four of the current safe harbor provisions should be clarified and two provisions should be added: 1. Discrimination Against Non-Affiliated Agents (Safe Harbor ii) • The current version of the safe harbor permits a state to prohibit an insured de

pository institution from imposing a fee related to insurance required in connection with a loan when the insurance is purchased from an agent not affiliated with the bank that is not imposed if the insurance is purchased from an affili

ated agent. • This provision must be amended to clarify that an insured depository institution

cannot impose any other condition related to insurance required in connection with a loan that is purchased from an unaffiliated agent that is not imposed

when the insurance is purchased from an affiliated agent. 2. Referral Fees (Safe Harbor v) • The current version of this safe harbor permits a state to prohibit an insured de

pository institution from paying a referral fee to an unlicensed person if that

fee is based on the subsequent purchase of insurance. • The provision should be amended to also permit a state to require that any refer

ral fee paid to an unlicensed person can be no more than a nominal fee as many

states have implemented such a requirement. • The nominal fee requirement also is imposed through the federal consumer pro

tection requirements that would be promulgated by the federal banking agen

cies under Section 176 of the bill. 3. Anti-Tying (Safe Harbor viii) • The current version of this safe harbor creates an exception to the general rule

by allowing insured depository institutions to engage in any practice that the Fed has determined is permissible under the Bank Holding Company Act anit

tying rules. • This may allow insured depository institutions to offer product packages that

would violate state anti-rebating rules applicable to all other agents. • The provision should be amended to delete that exception.

4. Disclosures (Safe Harbor x) • The current version of this safe harbor permits states to require insured deposi

tory institutions to disclose that insurance products are not insured by the

FDIC or guaranteed by the state or federal government. • The wording of the safe harbor permits states to require such a “disclosure, in

writing, where practicable”. • That language creates an ambiguity regarding whether the disclosure need be in

writing only where practicable or whether the disclosure itself need be given

only where practicable. • The comma between the words writing and where should be deleted to clarify that

the disclosure need be in writing only where practicable. 5. Disclosure Acknowledgment • A new safe harbor should be included that would allow a state to require the col

lection of an acknowledgment whenever a required disclosure is given. Many

states currently require the collection of such an acknowledgment. • An acknowledgment requirement in connection with disclosures also is imposed

through the federal consumer protection requirements that would be promul

gated by the federal banking agencies under Section 176 of the bill. 6. Activities Separation • A second new safe harbor should be included that would permit a state to require

insured depository institutions to separate their insurance sales activities from their deposit-taking and lending activities within the bank. Many states cur

rently maintain such separation requirements. • A separation of insurance and deposit-taking activities also is imposed through

the federal consumer protection requirements that would be promulgated by the federal banking agencies under Section 176 of the bill.

CONCLUSION The financial services mechanism H.R. 10 seeks to establish must function in the real world. That can only be accomplished if there is true functional regulation. We believe that virtually everyone in Congress supports such functional regulation. The task is to implement it effectively. The affiliations contemplated by H.R. 10 are exciting and probably necessary. But there must be a level playing field for everyone in the industries involved. Small business concerns cannot be swept away by the resulting mergers of the bigger players. And, most importantly, the interests of consumers that state insurance regulators have been exclusively charged with protecting for decades must remain at the forefront.

It is clear that the absence of sufficient regulatory authority over national banks or any other entity—that is active in the insurance arena is a problem. Neither the Comptroller nor any other federal regulator possesses the necessary expertise to regulate the vast intricacies of the insurance business or of financial institutions' participation in that business. For this reason, and for the reasons delineated at length above, IIAA, NALU and PIA urge this Committee to recommend enactment of legislation that clarifies that all entities that engage in the business of insurance including national banks and any other entity in a new financial services holding company-are bound by state law regulating those activities and incorporating the suggestions we have offered in an effort to improve the ability of the states to satisfy this regulatory obligation. This would maintain the status quo by ensuring that the States remain the paramount regulatory authority for the insurance industry. Without enactment of such legislation, the emerging regulatory void in portions of this industry will continue to fester. The primary victims if such a bill is not enacted will inevitably be the consumers who are confronted by the unregulated participants in the essential but highly complicated business of insurance.

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

Mr. OXLEY. Thank you.
Let me begin with some questions.

Mr. Sinder, you referred to the court decision not by name I don't think, but the Independent Insurance Agents versus Hawke?

Mr. SINDER. Yes, sir.

Mr. OXLEY. Would you give the committee a little bit of background on that case and how that should, if indeed it should, affect our consideration of H.R. 10?

Mr. SINDER. Sure. That case was filed by the Independent Insurance Agents of America, NALU and PIA, the three clients who I am testifying on behalf of.

Mr. OXLEY. Did you litigate that case?

Mr. SINDER. Yes, sir. It has made it through the District of Columbia District Court. The case involves the OCC's grant of authority for national banks to sell crop insurance. They granted this authority under section 247 of the National Banking Act, which is the general powers provision of the National Banking Act. There is a separate provision, as you know, called section 92 which authorizes small-town national banks to engage in insurance sales activities.

The Comptroller argued that it was permissible for all banks to engage in crop insurance sales because it was credit-related insurance. There is a decision that was issued by the D.C. circuit several years ago that said that credit-related insurance products that are limited to the amount of the loan and for the terms of the loan are permissible for bank sales.

We argued that that is a very specific exemption and that crop insurance is a general insurance product, like any other PNC product, and that if you allow banks to sell crop insurance as a creditrelated activity, you completely eviscerate the very small exception that is left by the small-town sales provision. The court agreed with us. The court said that section 247 does not authorize general insurance sales like crop insurance because of the existence of section 92, which limits those activities to small towns.

Mr. OXLEY. Thank you. That appears to be, that one and a similar one appear to be a different outcome than had been the case over the last several years, was it not? In other words, there were a number of decisions based on OCC decisions that went pretty much with the OCC, and then these two appeared to be going in the opposite direction.

Mr. SINDER. We believe the tide is turning.

The other decision in some ways might be more important for this committee's deliberation. It is a case that was issued by the 11th circuit and it involves the ability of national banks to underwrite annuity-based products. The 11th circuit held that the Comptroller had authorized this activity of section 247 under the National Banking Act, again as a general banking power. It involves a unique product called a retirement CD that is an annuity with a deposit component. The 11th circuit said that there is no underwriting authority that exists under section 247. The Comptroller had issued various statements saying that he believed that there was such authority. This is the first time that a court has had the opportunity to review the underwriting issue and they went against the OCC.

Mr. OXLEY. Thank you. Mr. Zimpher, what effect on Nationwide, what would be the effect on Nationwide if you were unable to form a mutual holding company? How would it affect your ability to raise capital and indeed be competitive in the marketplace?

Mr. ZIMPHER. Well, fortunately, Mr. Chairman, fortunately right now I don't know that it is necessary for us to consider that for current purposes to capitalize ourselves. Our life company, Nationwide Financial Services, is a publicly traded company. Our mutual company owns 80 percent of that company.

If this bill were to be in effect, though, I think the net effect would be we would have to form a mutual holding company. I don't think we would have to demutualize necessarily, but we would have to form a mutual holding company in which to engage in other affiliated activities. Otherwise, simply to avoid dual regulation or double regulation of all of the various products.

Mr. OXLEY. Thank you.

Let me ask Mr. Schultz, why aren't the provisions that H.R. 10 has included to require for a deduction from regulatory capital of a bank's investment and its operating subsidiaries sufficient to address these concerns?

Mr. SCHULTZ. I think many reasonable people in the past have indicated that, and I think you are addressing firewalls, I assume.

Mr. OXLEY. Yes.

Mr. SCHULTZ. Firewalls can evaporate pretty quickly at times, and it appears to me that the op-sub is just closer to the core bank than if it were in a separate holding company structure.

Mr. OXLEY. Have you had discussions with other bankers from Iowa on this provision, and is there a consensus on this issue?

Mr. SCHULTZ. I haven't had that many discussions on this specific topic recently, but I think most community bankers would support the affiliate approach.

Mr. OXLEY. Thank you.
The Chair's time has expired.
The gentleman from New York, Mr. Towns.

Mr. TOWNS. Thank you very much, Mr. Chairman. If we simply pass the House banking version of H.R. 10 without any changes whatsoever, would your industry have a level playing field—I will sort of go down the line with this question competing against one another? The banking market, if we pass it as is, if the Commerce Committee says okay, we like it, we smile and we send it on its way without doing anything to it-let's start with you, Mr. Schultz and then go down.

Mr. SCHULTZ. Again, the question is, am I going to smile and like it?

Mr. TOWNS. No, no. I am saying if we smile and say we like the bill and we send it on, the question is if we do that, would your industries have a level playing field for competing against one another? That is the question.

Mr. SCHULTZ. Possibly leveler, but I am not so sure completely level.

Mr. TOWNS. What should we do then to make it level?
Mr. SCHULTZ. I would have to think about that for a moment.
Mr. TOWNS. All right. We will go to Mr. Sutton.

Mr. SUTTON. From the standpoint of the securities industry I think it would go a long way toward leveling the playing field, particularly toward the areas that I pointed out in my testimony, us competing against banks, and us being able to purchase banks, which today we can't purchase; on the other hand they can purchase us. So I think it would make substantial progress toward leveling the playing field for us.

Mr. ZIMPHER. Mr. Towns, that is a very good question. I would have to say from our perspective, it does level the playing field. You heard some earlier testimony from Mr. Nichols expressing

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