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Mr. DINGELL. Now, there have been some recent court rulings that have called into question the decisions of the Comptroller to permit banks to engage in insurance activities.

Are these rulings evidence that the courts thinks that the Comptroller has gone too far in improving insurance powers

for banks? Is it possible that with the tide turning against the Comptroller that the courts' agents might be better off with the current law and fighting it out in the courts, rather than with the enactment into law of the banking committee's bill?

Mr. SINDER. Possibly. We are very much in favor of the decisions. They do point to specific areas where the Comptroller has overstepped his bounds, but there are certain advantages to the current bill if it is enacted.

Mr. DINGELL. Thank you. Thank you, Mr. Chairman.

Mr. GILLMOR. Thank you, Mr. Dingell. A question for Mr. Sinder and also if the other members would like to jump in, on the issue of title insurance. The banking version generally permits national banks to sell insurance with the exception of title insurance.

From your experience, is there any justification for treating title insurance different, or do you think they should be all forms of insurance?

Mr. SINDER. There is some justification for treating title insurance differently. It is a product that is a one-time sale. It primarily protects the bank's interests and not the consumer's interests in the underlying loan and protecting the underlying loan. There is some conflict of interest in a bank that is seeking to get the loan and will too readily approve a title insurance sale in order to secure the loan.

Mr. GILLMOR. Why wouldn't the same arguments apply to any other type of insurance that the bank was selling to a borrower?

Mr. SINDER. We believe there are issues involved in other sales to borrowers. But those products do not protect the interests of the bank. They do protect the first beneficiary of such products.

Mr. GILLMOR. How about credit life?
Mr. SINDER. Credit life has a long and tortured history.
Mr. GILLMOR. The fact is it protects the bank.

Mr. SINDER. If we had our druthers, the banks would not be permitted to sell credit life directly, but we have lost that fight.

Mr. GILLMOR. Basically, you would prefer that the bank not sell insurance, credit life, title, whatever?

Mr. SINDER. Under the bill, the bank can sell title insurance through an affiliate, it just cannot do it through a subsidiary. The title insurance product is very complicated because the agent takes on some of the underwriting risk.

When you sell any other type of insurance product, the underwriting and the sale are completely separate. So if the bank acts as the agent, or if the bank subsidiary acts as the agent in the sale of the product, a different company, which under the bill would have to be an affiliate, assumes all of the underwriting risk.

When you sell a title product, the agent him or herself also assumes some of the underwriting risk. So in effect if you don't treat title differently, you are allowing the bank to engage in some underwriting activities, whereas it can't for any other insurance product.

Mr. GILLMOR. Any other comments on that issue, Mr. Schultz?. Mr. Zimpher?

Mr. ZIMPHER. I would not, no.

Mr. GILLMOR. Mr. Zimpher, is the banking committee bill's provisions regarding the separation of financial and commercial activities creating problems for insurance companies since insurance companies take money from policyholders and invest for those policyholders?

Mr. ZIMPHER. Mr. Chairman, you are right that insurance companies must invest the funds that they receive from policyholders. Those investments are strictly limited and regulated by State investment statutes and laws across the country.

Section 6 of H.R. 10, as it is reported by the banking committee, would permit insurance companies to retain some shares of interest in investment operations on behalf of policyholders. We happen to believe that that perhaps should be expanded, particularly on behalf of our policyholders whose funds it is we are investing; that insurance companies should continue to have some management supervisory role and responsibility in those operations.

Mr. GILLMOR. If I may go back to you, Mr. Sinder, we were told earlier by the Treasury Secretary that financial activities and operating subs would be regulated in the same manner as affiliates.

My question is what has been the real-life experience of insurance agents in respect to insurance sales through banks and bank operating subsidiaries? Is there a feeling on the part of an agent that there has been any loss of consumer protection?

Mr. SINDER. This is an area that the Comptroller of the Currency has tread somewhat lightly because of the pendency of the H.R. 10 bills. The history of this is that there was a real question about whether section 92, the small town sales authorization, overrode State laws that prohibited bank sales of insurance. That issue was not resolved until 1996.

In March 1996, the Supreme Court issued a decision. They said section 92 preempts. In the wake of that, 25 States enacted bank sale of insurance consumer protection provisions to regulate the manner in which small town banks sell insurance.

The first State to do so after the Barnett decision was Rhode Island. Within 6 months before the Department of Insurance could even issue its implementing regulations, the Comptroller of the Currency issued a request for comments in the Federal register asking whether certain provisions included in the Rhode Island bill should be preempted. That was in February 1997. It has been over 2 years.

The Comptroller has not issued any opinion on this. We believe that it is because the office fears congressional response if it oversteps its bounds in doing so. As soon as this issue is resolved, we also fear that the Comptroller will then step up and give his view on whether these laws should be allowed to exist. In the past, the Comptroller has made statements that licensing provisions shouldn't apply to national banks, and anything else that interferes in a way that the Comptroller feels is bad with the banks' insurance sales function should not be allowed to exist.

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So today, is the real practical experience that banks are complying with these provisions? Yes. Do they want to challenge them? Yes.

Mr. GILLMOR. Mr. Schultz, are you a national bank or a Statechartered?

Mr. SCHULTZ. National bank. We have a holding company that also owns a State-chartered bank.

Mr. GILLMOR. You have been selling insurance for how long?
Mr. SCHULTZ. Many, many years, 30 years.
Mr. GILLMOR. Including title insurance?

Mr. SCHULTZ. No. I don't pretend to know much about title insurance. Iowa was one of the few States that doesn't allow, maybe the only State that doesn't allow title insurance.

Mr. GILLMOR. Doesn't allow title insurance? I used to practice real estate law. I'm glad I was in Ohio.

In any event, Mr. Towns, do you have any further questions? If not, I want to thank the panelists for being here. We appreciate it very much. Stand adjourned.

[Whereupon, at 3:10 p.m., the subcommittee was adjourned.) [Additional material submitted for the record follows:) PREPARED STATEMENT OF HON. KENNETH E. BENTSEN, JR., A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS Mr. Chairman, I appreciate the opportunity to provide my views on financial modernization legislation before the House Commerce Committee. I would like to focus on one aspect of this legislation that directly relates to the safety and soundness of our financial system and competitive equity between foreign and national banks. This issue is about the corporate structure that this legislation will provide for our nation's banks.

I am a strong proponent of providing more than one option of operational structure to our nation's banks. I believe that decisions about corporate governance should be made by the bank's officers, not the federal government. Later this month, your Committee will be voting on H.R. 10, financial modernization legislation. Í would urge you to keep those provisions included in the House Banking Committee version of this bill that would preserve flexibility for our nation's banks and would permit them to create operating subsidiaries or bank holding company affiliates to offer new services to their customers.

I believe that there is no safety and soundness associated with the inclusion of the operating subsidiary structure in financial modernization legislation. During testimony presented to the House Banking Committee in May 1997, I asked Federal Reserve Chairman Alan Greenspan whether there was any safety and soundness concern or risk with an operating subsidiary structure. Let me quote his response:

“My concerns are not safety and soundness. It is an issue of creating subsidies for individual institutions which their competitors do not have. It is a level playing field issue. Non-bank holding companies and other institutions do not have access to that subsidy, and it creates an unlevel playing field. It is not a safety

and soundness issue.” His response clearly indicates that safety and soundness is not a concern, assuming appropriate firewalls are in place, just as they are with a holding company-affiliate model and as provided by the House Banking Committee's legislation. In fact, Chairman Greenspan argued that a bank receives a subsidy form its parent bank, not its operating subsidiary. Further, Chairman Greenspan acknowledged that banks can also receive a subsidy through its holding company affiliate as well.

I believe that our capital markets today are very efficient and transparent and would be able to discount such subsidies if they do exist. In recent hearings, I asked several federal bank regulators about this issue and they all agree that there is no difference in capital costs for banks who wish to set up either an operating subsidiary or bank holding company affiliate. In addition, the House Banking Committee approved bill imposes strict firewalls and a requirement for the bank to be well-capitalized before it can opt to set up an operating subsidiary. Banks will benefit from this added flexibility by choosing whichever structure is better for their individual company. Finally, I would argue that the operating subsidiary structure will ensure that all assets of banks, including its operating subsidiary, are subject to Community Reinvestment Act (CRA) regulations.

As you may know, the current and three previous Chairs of the Federal Deposit Insurance Corporation (FDIC) have emphatically stated that restricting the organizational flexibility of banking organization will have a negative impact on the safety and soundness of our financial system. If banks are required to provide new activities through holding company affiliates, but not in operating subsidiaries, the revenues earned by these new activities will flow directly to the holding company shareholders, and not to the bank. If the bank runs into trouble, the FDIC will not be able to reach these holding company assets, which rightly should be used to protect the bank and the FDIC funds.

Further, I do not believe that there is any compelling, evidence that the federal government should be interfering with private business decisions regarding organizational structure. Each business in this country should be free to organize its activities in the most efficient manner for that organization. For some banks, an operating subsidiary may be more cost-effective, while other banks may choose to use holding company affiliates to offer new services to their customers. For instance, it might be cheaper to organize an operating subsidiary because they do not require a multiple set of books and board of directors or legal requirements. Other banks, however, may elect to create a holding company structure because of tax consequences, compensation schemes, multibranding, risk management, and geographic location. Banks should be free to make business decision for themselves without unnecessary government mandates.

I would also encourage you to consider how these options will affect our nation's smaller, community banks. Because smaller institutions have a smaller revenue base, they may not be able to afford to absorb increase organizational and regulatory costs of operating a holding company. For these smaller banks, the operating subsidiary option may be the best and most economically feasible option for these banks to offer their customers a full range of financial products in the most costefficient manner.

We need to enact legislation that provides for adequate supervision to ensure that expanded financial activities are conducted safely and soundly in a subsidiary or an affiliate. The solution is not to favor one structure over another but rather to pass legislation that provides that the regulators can adequately supervise the effect on the bank of the expanded activities and bank's relationship with its subsidiaries or affiliates. This supervision along with adequate internal controls by the banks. is the critical element to conducting in activities in a safe and sound manner rather than a mandated corporate structure.

Another argument that has been made in opposition to operating subsidiaries is that the banks are more protected from corporate veil piercing under a holding com

a pany structure. This is wrong. Bank subsidiaries, in the same manner as bank affiliates, are legally separate from the insured bank. In those extremely rare instances when a court ignores this legal separation and permits the corporate veil to be pierced, an exhaustive empirical study conducted by Cornell Law Review shows that affiliates, not arent organizations, have been found financially liable in the greater number of instances. Piercing the corporate veil depends on how entities conduct their operations and not on how the operations are structured within an organizational chart.

Opponents to the subsidiary option also assert that banks have a subsidy from the Federal safety net through the deposit insurance program, the access to the discount window and the payments system. These opponents argue that banks funding operations through subsidiaries have an unfair competitive advantage over nonbank owned competitors. I would disagree with this argument, because I believe banks are among the most heavily regulated private institutions in American society. After factoring in the costs of regulations and what banks' pay for the services in the federal safety net, I believe it is difficult to argue that any net subsidy exists. Even assuming for argument's sake that a net subsidy exits, there is no evidence that a holding company affiliate structure would be more effective than the operating subsidiary in containing the net subsidy because equivalent safeguard may be put in place. The subsidy could be passed through in the form of dividends to the holding company. And, in repeated questioning neither Chairman Greenspan nor the Federal Reserve has provided any quantitative evidence of such a subsidy nor any quantitative analysis determining a differential in such subsidy between an operating subsidiary and a holding company affiliate.

I would also like to point out that the Federal Reserve has not expressed the same concerns about transfer of the subsidy in connection with foreign bank operations in the United States. In this decade alone, the Federal Reserve Board has issued approvals for almost 20 foreign banks to own directly so-called Section 20 subsidiaries that engage in securities underwriting activities in the United States. While foreign banks are not supported by the United States federal safety net, they do have full access similar safety net benefits in their home country. Yet, these foreign banks are permitted to conduct non-banking activities directly through a subsidiary structure in the United States. In its first order permitting foreign banks to conduct securities underwriting through a Section 20 subsidiary, the Board states that any potential advantages of allowing foreign banks to operate through the subsidiary structure rather than the bank holding company structure is not significant in light of the firewalls imposed. These firewalls are similar to those including in H.R. 10 as reported by the House Banking Committee.

It simply does not make sense to permit foreign banks to enjoy the benefits of organization freedoms when acting in the United States but to deny these same benefits to United States banks. I believe in the principle of national treatment, which means foreign banks are treated in the same way as national banks. However, I do not believe that we should be providing flexibility to foreign banks that are denied to domestic institutions.

Further, I would like to inform the Committee that I believe that these operating subsidiaries would ensure functional regulation for products sold from them. This would ensure that the Securities and Exchange Commission and states' securities regulators would have primary regulatory jurisdiction of operations. I believe that functional regulation is the most appropriate manner to ensure that consumers will understand what they are buying.

Therefore, I urge this Committee to follow the approach of the Banking Committee by giving our banks the organizational choice that will be available to foreign banks under this legislation.

PREPARED STATEMENT OF THE NATIONAL ASSOCIATION OF INDEPENDENT INSURERS

The National Association of Independent Insurers ( NAII) is the nation's largest full service property-casualty trade association with 619 members in the United States. NAJI members include insurance companies of every size and type-stock, mutual, reciprocal and Lloyds. NAII members write almost $81.3 billion in annual premiums representing every type of property-casualty coverage, including automobile, homeowners, business insurance, workers' compensation and surplus lines.

NAII and its members applaud the work of this committee and Congress in moving the Financial Services Act of 1999 toward finalization. The current version represents long hours of work at modernizing the financial services sector of the United States economy, while attempting to retain the best of existing regulatory structure in each of the respective areas of financial services. In addition to the public policy discussion at the congressional level, interested parties have worked behind the scenes to voice their concerns. A variety of regulators at the federal level—including the Chairman of the Federal Reserve, the Secretary of the Treasury, and the heads of the Office of Thrift Supervision and the Securities and Exchange Commissionhave given their input. Likewise, state insurance regulators, through their organization, the National Association of Insurance Commissioners (“NĂIC”), have commented on H.R. 10. In addition, trade associations comprised of insurers, insurance agents, thrifts, and banks, to name a few, have suggested language in an attempt to draft a bill which recognizes the needs of all the interested parties under such a unified financial services package.

The authors of H.R. 10 have made great strides toward this objective by seeking to establish clear delineation of regulatory authority based on functional regulation. NAII and others believe that with modification, H.R. 10 can set out a bright line of functional regulation which will minimize needless costs of regulatory overlap and regulatory challenges, not only between the regulator and the regulated, but between the different kinds of regulators. NAII supports H.R. 10 and the concepts behind it. However, NAII believes that in order to achieve true functional regulation and a smooth running financial services sector of the economy, H.R. 10 must be modified to clearly delineate functional regulation and thus ensure that no element of the financial services sector receives an unfair advantage. Section 104(c)(2)

Of paramount concern to NAII members is the language in Section 104(c)(2). Summarizing Section 104(c)(2), no state may pass a law or regulate insurance activities where such law or regulation, as interpreted or applied, will have an impact on a bank that is substantially more adverse than on non-bank entities. On its face, this sounds rather innocuous, indeed laudable, as no law or regulation should be permissible if that law or regulation is intended to be more adverse to a bank than

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