Leaders Introduce Financial Services Modernization Bill

N/Anths after the 105th Congress ended just short of enacting historic financial services reform legislation, a key House committee chairman has introduced a bill that reflects broad industry consensus.

"This legislation will be a top priority of the House Banking Committee," said House Banking Chairman Jim Leach (R-IA). "I'm hopeful that we can build on the efforts of the last Congress and enact reform legislation with broad bi-partisan support.

"We are very excited that Chairman Leach is getting the ball rolling by introducing this bill on the first day of the 106th Congress," said David Pratt, <%=company%> senior vice president, federal affairs.

Co-sponsors of the bill include: 105th Congress Committee Vice Chairman Bill McCollum; Subcommittee Chairs Marge Roukema, Richard H. Baker, Rick Lazio, Spencer Bachus, III and Michael N. Castle; and Committee Members Peter King, Robert Ney, Merrill Cook and Steven LaTourette.

"The rationale for enactment of financial services modernization legislation relates to three goals: to level the competitive playing field within the financial services industry, to increase competition so that costs of services will go down for customers and to boost the international competitive position of American firms," Leach said.

Leach's measure is very similar to one that the Senate failed to enact before time ran out on the 105th Congress last October. The bill was supported by major segments of the financial services industry—banks, insurance companies and securities firms. Along with other insurance groups, AIA supported the financial services reform measure throughout the debate in the last Congress and is urging Congress to take up the measure early this year.

Provisions of the bill being introduced are in keeping with H.R. 4870, which Leach and other Committee leaders introduced at the end of the last session, and closely parallel Senate Banking Committee compromises reached last fall. Leaders say The Financial Services Act of 1999 creates a framework that will permit the banking, securities, and insurance industries to compete more efficiently and effectively while improving consumer access to financial services, protecting investors, and ensuring a safe and sound banking system.

Bill Highlights

Title I, Facilitating Affiliation among Securities Firms, Insurance Companies, and Depository Institutions:

• Repeals Glass-Steagall Act prohibitions on banks affiliating with securities firms, permitting holding companies to engage in securities underwriting and dealing without limitation, as well as sponsoring and distributing mutual funds.
• Repeals Bank Holding Company Act prohibitions on insurance underwriting, allowing holding companies to underwrite and broker any type of insurance product.
• Expands permissible non-banking activities for holding companies from those "closely related to banking" to those that are "financial in nature."
• Permits holding companies to offer new services and products that have not been found to be financial through a "developing basket", provided the holding company reasonably believes that such activities are financial and the activities do not exceed 5% of the holding company's gross revenues, total assets, and total capital.
• Grandfathers non-financial activities for companies that are predominantly financial (85% of revenues) for a 10-year period subject to certain conditions. The FRB can extend the period for an additional 5 years.
• Preempts State anti-affiliation laws that prevent banks from affiliating with financial companies as provided for under this Act or in Federal law.
• Requires holding companies that want to engage in financial activities to have their subsidiary depository institutions well capitalized and well managed and have a satisfactory CRA rating as of the time the holding company first seeks to engage in financial activities.
• Eliminates application process for companies to engage in financial activities that are listed in the statute or that have been approved by the FRB.
• Requires that companies file an eligibility notice with the FRB on the company's intent to become a financial holding company. Requires an application for mega-mergers involving companies with total assets in excess of $40 billion.
• Streamlines holding company supervision and regulation.
• Authorizes the FRB to impose prudential safeguards on transactions/relationships between a depository institution and an affiliate to avoid safety and soundness risks, avoid conflicts of interest, and protect the privacy of customers.
• Incorporates functional regulation into holding company supervision by requiring the FRB to defer to the SEC and state securities regulators on interpretations of federal and state securities law and to state insurance regulators on interpretations of state insurance law.
• Authorizes national banks to underwrite municipal revenue bonds.
• Authorizes national bank operating subsidiaries to engage as agent in financial activities. Such activities include acting as a travel agent and insurance agent (without the place of 5,000 restrictions). Operating subsidiaries may also engage in any activity permissible for a national bank including underwriting municipal revenue bonds.
• Creates a new type of uninsured bank charter known as a wholesale financial institution ("WFIs") which can be either a national or state bank. WFIs may not receive initial deposits of $100,000 or less (except on an incidental basis). WFIs will be subject to CRA.
• Reforms the Federal Home Loan Bank System (FHLBS) by changing membership rules and corporate governance of the FHLBS and by increasing small bank access to funds for making agricultural and community development loans.
• Repeals SAIF special reserve provisions.

Title II, Functional Regulation (Securities Activities):

• Replaces the broad bank exemption from regulation as a broker-dealer under the Securities Exchange Act with more limited exemptions.
• Contains a list of banking products that banks can continue to offer even if the SEC determines that such products are securities.
• Adopts a new procedure for determining whether a product is a banking product or a security that must be forced out of the bank. The SEC, after consultation with the FRB, may determine by regulation that a new product a bank offers is a security and as a result should be pushed out of the bank. The FRB or an aggrieved party would then be able to initiate an expedited judicial appeals process to challenge the SEC's rulemaking. During the proceeding, the SEC would be prohibited from bringing an enforcement action.
• Requires federal banking agencies to adopt regulations regarding retail sales of securities by banks.

Title III, Insurance:

• Ensures state functional regulation of insurance.
• Clarifies that national banks cannot underwrite insurance within the bank, except for those products which national banks were authorized to engage in as of January 1, 1997. Prohibits national banks from underwriting title insurance unless the national bank or its subsidiary were actively and lawfully engaged in doing so before the date of enactment of this Act.
• Provides for an expedited and equalized court proceeding ("without unequal deference") for disputes between state insurance and Federal regulators on whether a product is insurance for purposes of the ban on insurance underwriting within a national bank and whether state laws regulating bank insurance agency activities should be preempted under section 104.
• Requires the Federal banking agencies to adopt jointly consumer protection regulations regarding retail sales of insurance products by depository institutions.
• Creates the National Association of Registered Agents and Brokers for the purpose of establishing uniform standards for qualification, training, and education of insurance agents. Meeting these standards would permit an agent to sell in any state.
• Incorporates a redomestication provision allowing mutual insurance companies to move their state of incorporation for the purpose of facilitating a reorganization to a stock company.
• Requires the OTS to publish in the Federal Register notices of intent when preempting state laws regarding consumer protection to provide interested parties at least 30 days to submit written comments. Current law requires this notification and publication for the OCC.

Title IV, Unitary Savings and Loan Holding Companies:

• Provides that no company that becomes a unitary holding company after 10/7/98 may engage in commercial activities.
• Grandfathers existing unitary holding companies and those companies that had filed an application to become a unitary holding company as of 10/7/98. Existing unitary holding companies may not be sold to new commercial firms.