some concern about a couple of provisions as they relate to functional regulation of products in the insurance industry issued by banks or securities firms. With the assurance that functional regulation is secured for all products, I think it would level the playing field.

As you well know, H.R. 10, as reported by the Banking Committee, while it provides for an affiliate structure or an operating subsidiary structure in underwriting securities, it does not provide for such an underwriting insurance, and we are satisfied with that and would strongly encourage the committee to certainly at least retain that feature of the Banking Committee report.

Mr. TOWNS. Thank you.

Mr. SINDER. In the insurance sales context, we would not believe it would create a level playing field, but an unlevel one. The primary reason is that State insurance regulators would be tremendously inhibited in their ability to regulate bank insurance sales activities where they have an unfettered right to regulate all insurance activities of other agents.

In our written testimony we have suggested three specific areas that we believe need to be addressed to help level this playing field. One is to treat the opinions of State insurance regulators equally with those of Federal banking regulators when an insurance sales requirement is challenged by a bank. The second is to alter, amend, the nondiscrimination provisions.

Right now, those provisions did not allow you to take into account in any way the special situation of a bank when it engages in sales activities, including inadvertent impact on a bank even when the legislation is not directed on a bank. We believe that the inadvertent impact section should be deleted and that the core nondiscrimination provisions should be modified to indicate that it is only when you treat a bank differently because of its insured financial status that the law is prohibited.

The last thing we have suggested is that six changes be made to improve the safe harbor provisions that protect State insurance laws that do specifically address bank sales of insurance activities, and those specific changes are outlined in our testimony.

Mr. TOWNS. Thank you.

Some of my colleagues are saying that we should expand the provisions of the CRA to cover industries other than the banking institutions. What do you say to that?

Mr. SCHULTZ. Sometimes as a community bank I wonder why we are subject to CRA, because if we don't invest

Mr. TOWNS. I didn't hear you.

Mr. SCHULTZ. I said sometimes we wonder as a community bank whether we should be subject to CRA, why we should be when maybe our credit union friends are not, you see. I am not sure that extending regulatory burden wider is really the solution in many cases, even though from a competitive standpoint it certainly raises some question. I make loans to customers and so on, and we also sell insurance. And getting back to the question you raised a little while ago, in my State, banks have been allowed to sell insurance for a long time. Our people are licensed agents, are subject to State insurance regulations and have had no problems. So I think the concern in the banking industry in some areas might be in the

States where this hasn't been the practice as to whether it will be easy enough for banks to enter the insurance business because of the safe harbors that are in the proposed legislation.

Again, getting back to the question about CRA and other types of regulation, you know, we are regulated as a bank and so on. As it relates to how we invest in our community and other consumer regulations, I am not sure who regulates Bob Spear, my American Family agent friend, when he makes a car loan, or makes a house loan, or the State Farm agent who is a friend of mine also who does the same thing.

Mr. Towns. My time has expired, so please respond briefly.

Mr. SUTTON. CRA is really not something I can comment on because it is not something we have been involved in.

Mr. ZIMPHER. I think you raise an interesting question. I don't believe the insurance industry should be subject to the CRA. I think the nature of investments, the nature of the use of capital within my industry as opposed to the banking industry, insuring properties and lending mortgage capital and lending practices are two very distinct business functions, and I think that I would seriously question whether CRA should be applied to the insurance industry. We make investments now, obviously, through our investment subsidiaries and any other urban projects or redevelopment projects. So there is money being used in an investment capacity, in a capital flow capacity and in hundreds of cities around this country.

Mr. SINDER. This is an issue on which the insurance agents have not focused and have no direct interest. We are comfortable with the provisions as they are in the bill, but we have no official position at all.

Mr. TOWNS. Thank you very much.

Mr. GILLMOR [presiding]. The gentleman from Illinois, Mr. Shimkus.

Mr. SHIMKUS. Thank you, Mr. Chairman. Two quick questions for you all. It is one that I asked Secretary Rubin and a lot of you were in the room.

The major players in the debate obviously is Chairman Greenspan and the administration, whether it be Levitt or Rubin or the chair of the FDIC. If safety, soundness and stability is a principle that our financial institutions need to be based on, which I believe, and the political winds blow in different directions at different times, for the sake of talking to the average investor, who do you feel best is the least political of the players? Let's just go from Mr. Schultz down.

Mr. SCHULTZ. Of those two players?

Mr. SHIMKUS. Of the two sides of this debate, Chairman Greenspan or really Secretary Rubin.

Mr. SCHULTZ. I think the public would probably feel that Chairman Greenspan would be the less political.

Mr. SHIMKUS. Who do you feel?

Mr. SCHULTZ. And I would too.

Mr. SHIMKUS. You would agree, okay. Mr. Sutton?

Mr. SUTTON. I am not so sure that I know all of the views that have been expressed by all of the parties that you just discussed.

I would say that I think from what I understand, the various issues surrounding regulatory

Mr. SHIMKUS. Well, the question is, to the consumer, if they want to make sure we are not playing politics and we want safety and soundness and really a nonpartisan overview of financial services, who would they trust?

Mr. SUTTON. I think they would trust safety and soundness to the bank regulators and investor interest to the SEC, which I think is what you have been hearing about probably all day long.

Mr. SHIMKUS. Well, I want to know what you would feel, but that is fine.

Mr. Zimpher.

Mr. ZIMPHER. Mr. Chairman and Mr. Shimkus, I have no idea who the public might-how they may perceive it. I have the utmost respect for both of those gentlemen. I think this country has been well-served by two very public-spirited gentlemen. I have read both of their testimony, studied their positions. I tend to support Mr. Greenspan. Whether the public would support that predominantly, I have no idea.

Mr. SHIMKUS. Well, I think the public understands that one is a politically appointed position and one is not.

Mr. SINDER. The insurance agents have the utmost respect for both Federal regulators, but the most important concern for us between the debate for subs and affiliates is not where insurance activities are performed, but it is who gets to regulate them. For us, we don't believe any Federal regulators should regulate them, because no Federal regulator has ever regulated insurance activities or other activities. Those should be left to be functionally regulated by the States.

Mr. SHIMKUS. Okay. The last question is: Is there a larger risk to the FDIC and the taxpayer if the operating subsidiary version of H.R. 10 becomes law over if the holding company version of H.R. 10; and I will just go down the line again. Mr. Schultz.

Mr. SCHULTZ. I think consistent with my testimony, it would be that there is less risk that is pushed out into a separate affiliate of the holding company, and after hearing this debate and reading the testimony, I do not know which one you are going to hear last. Both of them present very sound arguments, but I think the less risk is the holding company.

Mr. SHIMKUS. Mr. Sutton.

Mr. SUTTON. We are not currently involved in any banking activities

Mr. SHIMKUS. But you might be.

Mr. SUTTON. So if we were, I would assume that from the issue of risk, that the holding company would probably be less risk. Mr. SHIMKUS. Thank you.

Mr. ZIMPHER. I would probably agree with that, Mr. Shimkus, but that is an unfounded opinion. That is an uninformed

Mr. SHIMKUS. You could be a Member of Congress, then. I mean it would work out.

Mr. ZIMPHER. I have thought about it.

Mr. SINDER. I hate to sound like a broken record, but again, we believe the most important focus is on who regulates the activities,

not where the activities take place, and as long as whatever bill is enacted

Mr. SHIMKUS. Now, that is a cop-out, because the issue in this debate is the holding company versus the operating subsidiary, and if insurance sales goes under the operating subsidiary, people are going to make the claim that the insurance is subsidizing some of that risk.

Mr. SINDER. I don't think from a sales perspective you have the same subsidization concerns as you do from an underwriting perspective. If we had to choose, we would choose to put it in the affiliate, but like Chairman Levitt, we believe that the most important

Mr. SHIMKUS. We are the politicians here. We are asking for gut responses based upon your industry.

Thank you, Mr. Chairman. I yield back.

Mr. SUTTON. Mr. Gillmor, could I excuse myself?

Mr. GILLMOR. Mr. Sutton, yes, go ahead. Thank you for being here with us.

The gentleman from Michigan, the ranking member of the committee, Mr. Dingell.

Mr. DINGELL. Mr. Zimpher, you expressed concern that the Comptroller's op-sub rulemakes it clear that he is willing to allow the banks to do any nonbank activity, including underwriting. I share that concern. The Comptroller also told me that today, there are 19 national banks or subsidiaries of national banks underwriting insurance in the United States, and that there are 22 subsidiaries of banks engaged in reinsurance activities. Is there a risk to depositors when banks that don't have experience in the insurance industry get involved in such activities as underwriting and reinsurance?

Mr. ZIMPHER. I believe there very well potentially could be, sir; yes, sir.

Mr. DINGELL. As I note, the Comptroller indicates that 12 of the 22 banks that are engaged in reinsurance use managing general agents or independent contractors to perform at least part of these insurance activities. Doesn't that tell you that the banks who do this really don't know very much about the business, and are simply relying on others to do the job for them?

Mr. ZIMPHER. One could reach that conclusion, Mr. Dingell. I am not familiar with the specific examples you cite, but from your presentation, one could reach that conclusion, yes.

Mr. DINGELL. Now, doesn't it also make it clear that banks and its depositors are especially vulnerable to fraud and mismanagement by these contractors?

Mr. ZIMPHER. That is also a distinct possibility and potential, yes.

Mr. DINGELL. And that would be particularly true in view of the facts that banks would not be subject to State regulation and that there would be no substitute Federal regulation which would be put in place; isn't that right?

Mr. ZIMPHER. That follows along the reasoning of your earlier questioning of the prior panel, Mr. Dingell. Absent State regulation that particularly would relate to fraud or sales practices, there

would be a void, and policyholders, other investors could very seriously suffer.

Mr. DINGELL. Indeed, the insurance pools that protect people in the event of collapse of an insurance company would no longer be present; isn't that right?

Mr. ZIMPHER. That's right. If the banking laws don't apply, that's right. They are not going to be assessed; they will not participate in their guarantee funds, so the holders of those policies are again

Mr. DINGELL. The insurance commissioners have suggested amendments to this. Do you support the amendments that the insurance commissioners have suggested to protect against the abuses that you and I have been discussing?

Mr. ZIMPHER. Mr. Chairman and Mr. Dingell, we support any effort to strengthen and assure functional regulation.

Mr. DINGELL. It is my understanding-this one to Mr. Sinder, please. It is my understanding that 18 different states have laws that require separation of banks' loan making and insurance sales activity. If H.R. 10 in its present form were to become law, would the physical separation laws of these 18 states be preempted? Mr. SINDER. Possibly.

Mr. DINGELL. Can you say they would not?

Mr. SINDER. You could not say they would not.

Mr. DINGELL. As a matter of fact, it is almost certain they would, isn't it?

Mr. SINDER. I believe that they would.

Mr. DINGELL. Very well. The Michigan State house has passed a resolution calling on the Michigan State delegation, our two Senators, and the Congress at large to enact legislation that affirms, not preempts, State insurance laws including Michigan's physical separation law. This resolution was supported not only by the Michigan Association of Insurance Agents, but also by the Michigan Bankers' Association and the Michigan Credit Union League. Is it your view that H.R. 10 as reported by the banking committee fails to protect Michigan State insurance laws as this resolution suggests?

Mr. SINDER. Yes.

Mr. DINGELL. Now, why is it possible for the Michigan Bankers' Association to support Michigan's physical separation law, but the National Bankers' Association opposes the same law at the Federal level?

Mr. SINDER. I wish I knew the answer to the question.

Mr. DINGELL. It is a good question, isn't it? Now, your written statement says as follows: "Although the bill pays lip service to functional regulation in certain respects, it ultimately fails to protect it." That is a strong statement. Must the functional regulation provisions of the bill be strengthened if the insurance agents are to support financial services legislation?

Mr. SINDER. Yes.

Mr. DINGELL. Now, if the functional regulation provisions of the bill are not improved, would it be fair to say that the agents are no better off with the banking committee's bill than with the current law?

Mr. SINDER. That's essentially correct in my view.