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to the Senate again, I would urge my colleagues to keep faith that this can be done, but only if we do it the right way. Passing no bill is better than passing a bad bill.

I just would like to hold up for everybody to look at, there is an article in the Wednesday, today, April 28, 1999, Wall Street Journal. “Sitting pretty,” it says. It's on the left-hand side of the page, "Strong banking system helps Australia prosper as neighbors struggle." Neighbors disregarded the lessons that the Australians have observed. Bankers have complained to me for years about the fact that the Japanese and other banks in that area were large, and that ours were smaller. I observed that it is better to have smaller, better, stronger banks than large, weak banks which impose danger on the American people. The warnings are there before all. I hope they will see them, and I look forward to the testimony of my good friend.

[The prepared statement of Hon. John D. Dingell follows:) PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN Mr. Chairman, I commend you for holding this hearing on H.R. 10, the Financial Services Act of 1999, legislation reported by the House Banking Committee to modernize the U.S. financial regulatory system, to enhance competition in the financial services industry, to provide protections for investors and consumers, to increase the availability of financial services to citizens of all economic circumstances, and for other purposes.

Mr. Chairman, the Banking Committee's mark falls short of many of these goals and I must inform you that, in its current form, I would be compelled to oppose it vigorously

Key consumer protection provisions that the chairman of this committee and the chairman and ranking member of the House Banking Committee joined me in adding to last year's bill are not in H.R. 10 this year. The SEC opposes the bill because it eviscerates investor protection. Yesterday, the North American Securities Administrators Association submitted a 10-page memorandum outlining their concerns with this bill. Last week the National Association of Insurance Commissioners sent us a letter stating that the state insurance regulators oppose H.R. 10 as passed by House Banking because the bill is hostile to consumers and the States. I ask unanimous consent to include these documents in the hearing record with my statement.

At the same time, we have received letters from the American Bankers Association Securities Association and the ABA Insurance Association telling us not to change a word in the securities and insurance language of the Banking Committee bill. In response, it should come as no surprise that I have instructed the staff to go over every word with a magnifying glass. The last time I checked, the rules of the House vest the Commerce Committee with jurisdiction over securities and the business of insurance and the responsibility for reviewing and addressing these matters. No matter how difficult, we must do so, and do so in the public interest.

I warmly welcome my good friend Chairman Greenspan and thank him for his years of excellent public service and for appearing before us today to share with us his wisdom on matters in which he is most expert.

I may be the only man in this room old enough to remember the aftermath of the banking crisis of the early 1930s. I remember what it did to the economy and people of this country and what was necessary to restore the American public's confidence in the Nation's banking system and the securities markets. Moreover, surely the thrift debacle of the 1980s should still be fresh in our minds.

My colleagues, I will not support a regulatory structure that exposes the American public to a repetition of those terrible events and a similar raid on the U.S. Treasury. Congress should be anxious to prevent the loss of public confidence and to prevent large losses to the public treasury. I am hopeful that Chairman Greenspan can share with us some of the relevant lessons of the recent Asian financial crisis, and the decision of the Japanese to adopt a holding-company format for their financial structure on a going-forward basis.

Absent significant changes to H.R. 10—and that is one of the responsibilities of this government, to protect consumers, to protect depositors and to protect, of course, the taxpayers to whom we have a paramount responsibility—I will be compelled to oppose this bill with every bit of strength I have. Like the President, I also will be compelled to oppose any legislation that weakens our commitment to the Community Reinvestment Act.

In Greco-Roman mythology, Sisyphus was the cruel king of Corinth whose punishment in Hades was to roll up a hill a heavy stone that constantly rolled down again. As we enter banking Hades. this year and attempt to roll H.R. 10 up the legislative hill to the Senate again, I urge my colleagues to keep faith that this can be done, but only if we do it the right way. Passing no bill is better than a bad bill.

Mr. Chairman, I thank you.


February 4, 1999 The Honorable THOMAS J. BLILEY Chairman Committee on Commerce U.S. House of Representatives 2125 Rayburn House Office Building Washington, DC 20515 The Honorable JOHN D. DINGELL Ranking Member Committee on Commerce U.S. House of Representatives 2322 Rayburn House Office Building Washington, DC 20515

DEAR CHAIRMAN BLILEY AND CONGRESSMAN DINGELL: I am writing to share the Commission's views on financial services modernization as the Congress begins to considers pending legislation.

Last year, Commission staff worked with Congress in an effort to develop legislation that would preserve principles that are fundamental to effective oversight of the securities markets. Unfortunately, the extended negotiations so eroded these basic principles that the Commission cannot support the latest version of H.R. 10, as introduced in the 106th Congress.

Rather than attempt to address all the specific provisions in this particular bill, I believe it would be more useful, at this time, to step back and outline the broader concepts we feel should be incorporated in any financial modernization bill. I have attached a brief discussion of the Commission's overall objectives for financial services reform. My staff and I are readily available to discuss these objectives further with you or your staff.

I applaud the Congress' efforts to advance financial services modernization and look forward to working with you and the Committee on this important legislation. Sincerely,


Chairman Enclosure cc: The Honorable Michael G. Oxley

Chairman, Subcommittee on Finance and Hazardous Materials The Honorable Edolphus Towns

Ranking Member, Subcommittee on Finance and Hazardous Materials

SEC OBJECTIVES FOR FINANCIAL MODERNIZATION The SEC's mandate is to protect investors and ensure the integrity of the U.S. securities markets. In order to keep our markets the fairest, safest, most transparent and most liquid in the world, the SEC must oversee all U.S. securities activities, irrespective of location, and continue to determine how they are defined.

Focusing on market integrity and investor protection, the SEC will work with the Congress to include the following key safeguards in any financial modernization legislation: • Maintain aggressive SEC policing and oversight of all securities activities. Public

confidence in our securities markets hinges on their integrity. The SEC has an active enforcement program committed to fighting securities fraud. Banking regulators have a different mandate protecting the safety and soundness of institutions and their deposits—which does not consider the interests of defrauded investors. To continue its effective policing of the markets, the SEC must be able to monitor securities activities through regular examinations and inspec

tions, including access to books and records of all activities. Safeguard customers by enabling the SEC to set net capital rules for all securities

businesses. Securities positions are generally more volatile than banking activities. The SEC's capital and segregation requirements recognize this fact and are more rigorous in addressing market risk than those imposed by bank regulators. During recent turmoil in the financial markets, SĒC-regulated entities were well-collateralized and none was ever at risk of failure. We must continue to protect our markets from systemic risk by ensuring that there is enough cap

ital backing securities transactions to protect customers. • Protect investors by applying the SEC sales practice rules to all securities activi

ties. All investors deserve the same protections when buying securities, regardless of where they choose to do so, but gaps in the current scheme leave investors at risk. For example, banks are not required to recommend only suitable investments or provide a system for arbitrating customer disputes. The high, uniform standard of the Federal securities laws should apply to all sales of se

curities. • Protect mutual fund investors with uniform adviser regulations and conflict-of-in

terest rules. Mutual fired investors should always receive the protections of the federal securities laws. Accordingly, all parties that provide investment advice to mutual funds should be subject to the same oversight, including SEC inspections and examinations. In addition, any type of entity that has a relationship

with a mutual fund should be subject to the SEC conflict-of-interest rules. Enhance global competitiveness through voluntary broker-dealer holding compa

nies. U.S. broker-dealers are at a competitive disadvantage overseas because they lack the global, consolidated supervision that foreign regulators often require. To address this concern, a U.S. broker-dealer predominantly in the securities business should have the option of SEC holding company supervision. This structure would impose risk-based supervision, consistent with the firm's principal business, and would help protect market integrity by. overseeing the entire corporate entity, not just an isolated domestic unit.


10 G Street N.E., Suite 710 Washington, DC 20002

202.737-0900 Telecopier: 202/783-3571

E-mail: Web Address:






Thomas E. Geyer, Ohio Securities Commissioner
Chair, NASAA Financial Services Modernization Project Group
Deborah A. Fischione
NASAA Director of Policy and Office Management

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NASAA has had the privilege of testifying before the House and Senate regarding financial services modernization legislation pending in the 106 session of Congress. The issues discussed below are among the more important issues for NASAA. This list does not purport to be exhaustive and NASAA reserves the right to add to or amend this list as the legislative process continues. NASAA is basing these comments on H.R. 10 as it was reported from the House Banking and Financial Services Committee on March 23, 1999. We look forward to working with the House Commerce Committee as you begin deliberations on the bill.


Full Preservation of State Securities Enforcement Authority.

NASAA appreciates the preservation of State securities enforcement authority established by Section 104(d) of H.R. 10. NASAA believes such preservation is essential in order for States


to provide meaningful investor protection and effectively police the securities marketplace. This express preservation is consistent with the similar preservations set out in the National Securities Markets Improvement Act of 1996 and the Securities Litigation Uniform Standards Act of 1998. However, NASAA respectfully suggests three minor changes in order to give full effect to the express preservation clearly articulated in Section 104(d).

Delete Section 104(b)(4)(C). Section 104(b)(4) generally seeks to preserve certain State laws from preemption. However, because of the use of a double negative, Section 104(b)(4XC) appears to have the actual effect of preempting State securities enforcement. Such preemption seems inconsistent with the careful and express preservation of State securities enforcement authority contained in Section 104(d). NASAA believes that the most efficient solution to this oversight is to simply strike Section 104(bX4)(C).

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Section 307 generally preempts State law that would "prevent or significantly interfere with the ability of any insurer, or any affiliate of an insurer ... to become a financial holding company or to acquire control of an insured depository institution." NASAA's concern is with the affiliates of insurers. Such affiliates could be broker-dealers or investment advisers under the jurisdiction of the State securities authorities, and the broad preemption of Section 307 could conflict with the State securities enforcement preservation language carefully and expressly preserved by Section 104(d). To remedy this confusion, NASAA suggests that preservation language identical to that appearing in Section 104(d) be added to Section 307. This new language could appear as follows:


subsections (1), (2) and (3) shall not be construed as
affecting the jurisdiction of the securities commission (or
any agency or office performing like functions) of any
State, under the laws of such State, to investigate and bring
enforcement actions, consistent with section 19(c) of the
Securities Act of 1933, with respect to fraud or deceit or
unlawful conduct by any person, in connection with
securities or securities transactions.

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Change "and" to "or" in Section 104(b)(4)(D)(iii). As previously mentioned, Section 104(b)(4) generally seeks to preserve certain State laws from preemption. Section 104(b)(4)(D) in effect provides that a State law will not be preempted if it satisfies all parts of a four-part test. Part three of the test (Section 104(b)(4)(D)(iii)) provides that a State law will not be preempted if it "does not effectively prevent a depository institution, wholesale financial institution, or subsidiary or affiliate thereof from engaging in activities authorized or permitted by this Act or any other provision of federal law." This provision is inconsistent with the express preservation of State securities law set out in section 104(d) because State securities enforcement action may properly and intentionally have the effect of preventing such activities. Consequently, NASAA believes it is inappropriate and inconsistent with Section 104(d) to provide that such an effect is fatal to State law. To remedy this, NASAA suggests that the "and" at the end of Section 104(b)(4)(D)(iii) be changed to "or." This would have the effect of changing the four-part preemption test into a preemption test with four alternative standards. In other words, a State law would avoid preemption if it met any one of the four standards set out in Section 104(b)(4)(D), rather meeting all four parts as is currently the case. NASAA believes that such an alternative standard is consistent with, and gives full effect to, the preservation of State securities enforcement authority set out in Section 104(d).

2. Full Regulatory Deference and Functional Regulation.

NASAA also appreciates the regulatory deference contained in Section 111, which would amend Section 5(c) of the Bank Holding Company Act of 1956 to require banking regulators to defer to the Securities and Exchange Commission, State insurance authorities and State securities authorities under certain circumstances. To accomplish full functional regulation, NASAA suggests one minor change to proposed Section 5(c)(5) of the Bank Holding Company Act, which deals with the functional regulation of securities and insurance activities. Specifically, NASAA recommends that Section 5(c)(5)(B) be amended to apply to brokers, dealers and investment advisers required to be registered with State authorities, in addition to applying to brokers, dealers and investment advisers actually registered under State laws. New Section 5(c)(5)(B) could read as follows:


the relevant State securities authorities with regard to all
interpretations of, and the enforcement of, applicable State
securities laws (and rules, regulations, orders and other
directives issued thereunder) relating to the activities,
conduct, and operations of brokers, dealers and investment
advisers registered or required to be registered under
applicable State securities laws (or rules, regulations and
other directives issued thereunder).

Many State securities enforcement actions are directed against persons who are unregistered. This proposed amendment would include such actions within the scope of required deference. This amendment would also make Section 5(c)(5)(B) more consistent with the express preservation of State securities enforcement authority set out in Section 104(d) of H.R. 10.


Full Functional Regulation of Securities Subsidiaries.

NASAA appreciates that H.R. 10 moves towards unctional regulation of securities activities. However, NASAA believes that Section 124 of H.R. 10 contains a minor oversight, the correction of which will result in true functional regulation in this section. NASAA respectfully suggests a minor amendment to Section 124 of H.R. 10. Section 124 would add to the Federal Deposit Insurance Act new Section 46 regarding the functional regulation of securities and insurance subsidiaries of insured depository institutions. Currently, proposed new Section 46(a) provides in pertinent part that a broker or dealer that is a subsidiary of an insured depository institution shall be subject to regulation under the Securities Exchange Act of 1934. In order to accomplish full functional regulation, NASAA recommends that a reference to State securities law be added to this provision. A revised Section 46(a) could read as follows:


Broker or Dealer Subsidiary.

A broker or dealer that is a subsidiary to an insured
depository institution shall be subject to regulation under
the Securities Exchange Act of 1934 and State securities
laws in the same manner and to the same extent as a broker
or dealer that

This amendment accomplishes full functional regulation and also serves to establish a level-playing field by ensuring that subsidiary and non-subsidiary broker-dealers are subject to the same set of complementary State and federal securities laws.

In, addition, in order to provide for complete functional regulation of securities subsidiaries, NASAA suggests that a provision regarding investment adviser subsidiaries be added. Such a provision could be added as new section 46(b) and read as follows:

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An investment adviser that is a subsidiary of an insured depository institution shall be subject to regulation of the Investment Advisers Act of 1940 and State securities laws in the same manner and to the same extent as an investment adviser that


is controlled by the same bank holding company as controls the insured depository institution; and

(2) is not an insured depository institution or a subsidiary of an

insured depository institution. It is important to note that the failure to add this suggested provision regarding investment advisers would result in significant ambiguity as to the appreciable regulation of investment adviser subsidiaries. If this suggested provision is added, current subsection “(b)”, regarding insurance subsidiaries, should be redenomiated as subsection "(c)”. And current subsection “(c)”, definitions should be changed as follows:

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