III. OTHER SUGGESTED AMENDMENTS

The Institute recommends that a number of additional revisions be made to the

bill.

Bank Mutual Fund Powers. H.R. 268's partial repeal of Glass-Steagall Section 32 should be broadened to permit personnel interlocks between a registered investment company or registered investment adviser and any bank. Limiting permitted interlocks to investment companies and advisers affiliated with a bank through the financial services holding company is not necessary to protect mutual fund investors or banks and allowing a broader range of interlocks would further the public interest by broadening the supply of qualified personnel available to serve the banking and mutual fund industries.

Modernization of Federal Securities Laws. The provisions of Title III of H.R. 268 modernizing the federal securities laws relating to investment companies should be broadened so as to apply to all depository institutions and not just to depository institutions owned by financial services holding companies. Each of the investor protection and functional regulation policies underlying each of these amendments applies equally in the context of a bank that is not affiliated with a financial services holding company as it does in the context of a bank affiliated with a financial services holding company.

Measurement of Predominance In The Investment Advisory Context.
H.R. 268 should be amended to make clear that a company is
"predominantly a financial company" and therefore eligible to become a
financial services holding company if 75% of the company's business is
devoted to investment advisory activities. Because investment advisory
activities are clearly financial in nature, as H.R. 268 itself recognizes, see
§§ 102(n)(5), (19), a company that devotes 75% of its business to
investment advisory activities is and should be eligible to become a
financial services holding company under the bill. Clarification is
necessary to ensure that any formula that is used to measure the
percentage of a company's business that is devoted to financial activities
does not underestimate the relative importance of a company's investment
advisory activities. In particular, if an asset test is used to determine

whether or not a company is predominantly a financial company, full credit should be given to assets under management.

IV. CONCLUSION

H.R. 268 contains important provisions that provide a firm foundation for Congress as it proceeds to craft and enact financial services reform legislation. We applaud your efforts to open the debate on financial services reform in a constructive and forward looking manner as we move into the 21st century. We thank you for the opportunity to present our views and look forward to working with the Committee as H.R. 268 moves forward.

APPENDIX

THE CONSOLIDATED BANK HOLDING COMPANY

MODEL OF OVERSIGHT AND SUPERVISION

From time to time, consolidated bank holding company supervision has been recommended as the appropriate model for financial services holding company oversight. This model seeks to protect banks owned in a holding company complex by appointing the Federal Reserve Board (or some other banking agency) to act as superregulator of the holding company and its component firms pursuant to a statutory scheme addressing, and often granting the superregulator broad discretion over, a host of matters ranging from capital standards and activity restrictions to prior notice and approval obligations to direct reporting and examination requirements. Both the existing Bank Holding Company Act as well as the proposed Financial Services Competitiveness Act of 1997 (H.R. 10) are based upon this model. For several reasons, however, the model is inappropriate in the context of a financial services holding company owning both bank and a wide range of non-bank subsidiaries.

Non-Bank Safety and Soundness Regulation. The consolidated bank holding company supervision model should be avoided in the diversified financial services arena because the model almost certainly would lead to efforts to protect banks through imposition of safety and soundness regulation on affiliated securities firms. These efforts necessarily would temper the risk taking upon which the securities markets are based and would interfere with the vibrancy of the securities markets.

Philosophies espoused by potential financial service holding company umbrella regulators leave little doubt that adoption of the model ultimately could lead to imposition of direct safety and soundness regulation on securities firms affiliated with banks. For example, just last year Federal Reserve Board Chairman Greenspan identified the core function of an umbrella supervisor as monitoring and assessing the risks that the nonbank portions of the financial services complex have on the bank subsidiary and generally on the safety net. He also expressed the view that the umbrella supervisor must be able to take actions designed and intended to reduce the perceived risks to acceptable levels.'

History provides confirmation, since it records that when bank regulators have exercised authority over bank securities activities, they have imposed safety and

1 Remarks by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the 31st Annual Conference on Bank Structure and Competition (May 11, 1995).

soundness requirements inconsistent with fundamental tenets of securities regulation. For example, the FDIC adopted a rule in 1984 that limited certain insured nonmember bank subsidiaries to underwriting investments quality securities.2 The Release accompanying the rule stated that the FDIC's purpose in adopting the rule was to address the risk associated with bank subsidiaries underwriting securities. The Release also stated the FDIC's view that it had the authority to oversee the direct and indirect securities activities of insured nonmember banks and that it had the authority to address on a case-by-case basis practices, acts or conduct it found to constitute unsafe and unsound practices not specifically addressed by the rule.

Duplicative Regulation. The consolidated bank holding company supervision model places unnecessary burdens on regulated entities. For example, securities firms in general and participants in the investment company marketplace in particular already are subject to extensive regulation and supervision by the Securities and Exchange Commission ("SEC") under the federal securities laws. Indeed, Congress only recently examined the statutory and regulatory scheme governing the investment company industry and concluded that the regulatory system was functioning well in satisfying the underlying Congressional objectives.' Subjecting securities firms affiliated with banks to the various regulatory and supervisory mechanisms through which consolidated holding company supervision must be implemented, however, needlessly overlays an additional level of often duplicative and potentially inconsistent oversight by the banking regulator administering the model.

Rigidity. The consolidated bank holding company supervision model creates substantial inefficiencies in the financial services holding company context because the activity restrictions and new activity prior notice and approval requirements underlying the model constrain the ability of regulated entities to respond quickly to developments

2

3

Rule 337.4 under the Federal Deposit Insurance Corporation Act (12 C.F.R. 337.4).

See, e.g., H.R. Conf. Rpt. No. 864, 104th Cong., 2d Sess. 2-3 (September 28,

1996); H.R. Rep. No. 622, 104th Cong., 2d Sess. 16-17 (June 17, 1996).

in the marketplace with new products. As SEC Chairman Levitt has pointed out, the consolidated bank holding company supervision model "is not well-suited for companies that seek to compete vigorously in new lines of business and fast-moving markets. ""

Innovation. Adoption of the consolidated bank holding company supervision model is unwarranted because of the danger that a single bank-oriented umbrella supervisor would be tempted to stifle innovation and preclude new product developments by a securities affiliate on the grounds that they might compromise the competitive standing of banks. For example, Professor John C. Coffee, Jr. observed in a recent article that a single financial services regulator might have barred or restricted the growth of money market funds in the 1970's because of the competition these funds posed to bank accounts. Such an outcome would have been not only anticompetitive but also a notable disservice to consumers and to the capital marketplace, as reflected by the more than $760 billion in assets held by money market funds today.

Safety Net. Adoption of the consolidated bank holding company supervision model is unwarranted because its existence may lead the market to believe that non-bank holding company subsidiaries will be protected by the federal safety net."

Conclusion. As recent scholarship has noted, "the case for consolidated supervision is far from obvious." Experienced regulators have been more direct. In the words of the Treasury Department:

4 Hearings before the House Committee on Banking and Financial Services on H.R. 1062, The Financial Services Competitiveness Act of 1995, Glass-Steagall Reform, and Related Issues (Revised H.R. 18), Part 2, 104th Cong., 1st Sess. 273 (Mar. 7, 1995) ("March 1995 Hearings") (Statement of SEC Chairman Levitt).

' See, e.g., Coffee, Competition Versus Consolidation: The Significance of Organizational Structure in Financial and Securities Regulation, 50 The Business Lawyer 447, 456 (1995).

6

See Hearings on H.R. 1062 before the House Comm. on Banking and Financial Services, 104th Cong. 1st Sess. 138-39 (February 28, 1995) (Statement of Alan Greenspan, Chairman of Board of Governors of the Federal Reserve System); Remarks by Alan Greenspan, supra, at note 1.

7

Franklin R. Edwards, The New Finance 162 (AEI Press 1996).