Our written testimony also identifies provisions which may be read to grant the banking agencies substantive regulatory authority over holding companies and non-bank subsidiaries. These provisions conflict with the bill's oversight model and conflict with functional regulation. In sum, H.R. 268 focuses on the key ingredients: tough functional regulation, effective risk assessment mechanisms, and close interagency coordination that are necessary to provide for effective oversight of the new financial services holding company. I appreciate the opportunity to appear before you today. I would be happy to answer any questions. Chairwoman ROUKEMA. Thank you, Mr. Fink. [The prepared statement of Mr. Matthew P. Fink can be found on page 308 in the appendix.] Chairwoman ROUKEMA. Mr. Baptista STATEMENT OF SAMUEL J. BAPTISTA, PRESIDENT, Mr. BAPTISTA. Thank you, Madam Chairwoman. I appreciate the opportunity to present the views of the Financial Services Council on the need for financial reform. We are encouraged by your recognition of the changing financial services marketplace and the corresponding need to modernize our Nation's financial system. I commend you and the Members of this subcommittee for your timely review of the crucial issues impacting today's financial environment. Ten years ago, when the council was formed, financial modernization was considered by many a radical concept, the creation of a "brave new world" for the financial services industry. Today modernization is simply a debate over how to conform the U.S. regulatory structure to the "brave new world" already well-entrenched in the marketplace. Over the intervening years this committee has amassed an extensive record on pros and cons of competing legal frameworks, a record clearly supporting the case for reform. The competing approaches to financial modernization introduced this year, H.R. 10 by the Chairman, your bill, H.R. 268, and the last session's D'Amato and Baker Bills, which we understand Mr. Baker and Mr. LaFalce will be reintroducing later today, are not that far apart. We can narrow the remaining issues down to a few, though significant ones. These are: One, the extent of affiliations permissible within a financial services holding company, most notably whether there will be affiliations between banks and commercial enterprises?; Two, if a line is drawn between banking and commerce, are the activities clearly delineated, as in H.R. 268, or are they left largely up to the discretion of the regulator, such as in H.R. 10?; and finally, the degree of oversight, if any, over the holding company? We are most pleased that all of the financial modernization bills proposed this year at a minimum permit affiliations between banking, securities and insurance firms. The question now at hand is the extent of commercial ownership. The banking and commerce issue is complex and involves more than a straightforward yes or no response. There are Members of this subcommittee who feel very strongly that such a mix is not healthy for the economy and, while disagreeing, I respect their opinions. However, I strongly believe that to define what is, or is not, a financial service is an artificial construct. The list is sure to change as the market changes, but as this decade-old debate clearly illustrates, the law is slow to adapt. I believe the financial system is better served by placing no restrictions on affiliations and addressing particular policy concerns, if substantiated, about commercial ownership by other means. As discussed in our written prepared statement, there are numerous alternative ways to address the concerns that have been raised without restricting the progression of the market by drawing a line between finance and commerce. House Resolution 268, however, does draw such a line by placing a broad, yet precise, definition of financial services into the law, then allowing in the corporate mix of a financial services firm a 25 percent basket of "non-financial" activities. Once the line is drawn, this basket is absolutely necessary to create a true two-way street for the securities and insurance sectors of the financial services industry, where commercial holdings are not uncommon. This model addresses the banking and commerce question from one of two perspectives. It allows financial firms a certain amount of commercial activity, but it does not afford commercial firms an opportunity to own an insured bank. Furthermore, the definition of "financial services" itself perpetuates an undue layer of regulatory burden, for whenever a new line in the sand is drawn, someone must be there to enforce it. Another central issue to this debate, and perhaps no less complex than the issue of banking and commerce, is the extent and manner of holding company oversight and regulation. House Resolution 268 includes oversight provisions modeled after the risk assessment provisions adopted in the Market Reform Act of 1990. These provisions would grant the appropriate banking agency the authority to require insured depository institutions to keep records and file reports regarding the operations of its affiliates. They are designed to give banking regulators sufficient information about the activities of bank affiliates to apprise them of potential threats to the safety and soundness of the bank itself or the banking system as a whole. Functional regulation of the affiliates, which we believe is appropriate, continues as it does under current law. Before adopting any specific model of holding company oversight, it would behoove this subcommittee to hold a full and open hearing on the policy issues involved. Is a degree of oversight necessary? If so, what form would it take and where should such oversight authority be vested? Does one type of holding company oversight fit all forms and sizes of financial services holding companies? The competing proposals before this subcommittee address the issue differently and other bills, expected to be introduced shortly, will no doubt contain other alternatives to the rigid Bank Holding Company Act regulations we have today. Each approach should be explored carefully before a specific model, if any, is adopted. I would now like to take a minute to talk about one very important consumer benefit of financial modernization. Allowing firms to offer a wide variety of products and services to their customers clearly enhances competition in the financial services market. Cross-marketing is the tool financial services providers use to inform their customers of the products available. There have been attempts at the State level to restrict the cross-marketing of financial products, most notably insurance and banking products. Such restrictions are anti-competitive and must be addressed in any serious reform effort. I applaud you, Madame Chairwoman, for including in your legislation a provision preempting discriminatory crossmarketing restrictions. In concluding, I repeat my call for the enactment of legislation to modernize our Nation's antiquated financial regulatory structure. The Financial Services Council and its members stand ready to work with the subcommittee to address all of the legitimate policy concerns within the debate and resolve them in a manner that will service the long-term interests of our Nation's economy. Thank you. Chairwoman ROUKEMA. Thank you. [The prepared statement of Mr. Samuel J. Baptista can be found on page 322 in the appendix.] Chairwoman ROUKEMA. Mr. Lackritz, please STATEMENT OF MARC E. LACKRITZ, PRESIDENT, Mr. LACKRITZ. Thank you, Madam Chairwoman. I appreciate the opportunity to participate in this hearing and to present SIA's views on H.R. 268. We commend you, Madam Chairwoman, for your introduction of this legislation and for making financial restructuring such a high priority for this subcommittee. When baseball great Yogi Berra said, "This is like deja vu all over again," he could easily have been talking about financial modernization legislation instead of baseball. But while baseball is fundamentally the same as when Ty Cobb and Babe Ruth played the game, the financial services industry today bears little resemblance to the industry that existed in 1933 when Congress enacted the Glass-Steagall Act. We would very much like this annual ritual to end with the long-awaited enactment of financial services modernization legislation. Chairwoman ROUKEMA. Hear! Hear! Mr. LACKRITZ. Technical innovations, new financial products, and globalization have put heavy pressure on the current outdated regulatory system. Bank regulatory actions have gradually eroded the distinctions between financial intermediaries. Now banks and securities firms compete directly against each other to sell securities, advise mutual funds, and underwrite and deal in securities. Both sectors offer sophisticated products, financial advice on corporate transactions, annuities, debt financing, and other products and services, but while commercial banks are engaged in the securities business, securities firms remain excluded from the business of banking. In the context of today's financial markets, this makes no sense. If banks can engage the full spectrum of securities activities, what possible policy object is achieved by prohibiting securities firms from affiliating with firms that accept insured deposits? Indeed, technology is now sweeping away the few remaining shards of the Glass-Steagall Act's prohibition against banks owning securities firms. Already consumers can use their home computers to dial into their banks to pay bills, send checks, or buy and sell securities with the mere click of a mouse. Computer companies are looking for ways to expand electronic banking services and broker-dealers and issuers are underwriting and selling securities over the Internet. Additional electronic marketplaces for securities are proliferating. The financial services industry is increasingly becoming an information business where consumers use computers, telephones, newspaper ads, and other media to determine which institution offers the best product at the best price. In this environment, arbitrary distinctions such as the Glass-Steagall Act's separation of commercial and investment banking are not effective. Electrons don't reach statutes. Comprehensive financial services modernization can only be achieved by Congress. Piecemeal, unilateral regulatory revision has produced a one-sided and confusing regulatory structure that permits banks to have securities operations, but prevents securities firms and insurance companies from affiliating with banks. This structure does not reflect a policy determination by Congress that commercial banks should have broader powers than securities firms and insurance companies; rather it reflects the fact that banking regulators are using great creativity and ingenuity to advance the interests of their constituent banks. The fact that banks now have opportunities that securities firms and insurance companies do not, hurts consumers by preventing fair and full competition in the financial services industry. Madam Chairwoman, SIA strongly supports your efforts to enact comprehensive financial services reform legislation. Although H.R. 268 largely incorporates our three principles for financial comprehensive financial restructuring, competition without subsidies, a two-way street, and functional regulation, several aspects of the legislation present some concerns. With respect to the competition without Federal subsidies, we believe there should be no government subsidies that benefit one type of financial services provider at the expense of another, which means that the low cost of funding that banks enjoy should not benefit any securities operation and the taxpayers should not bear the risk securities firms face every day. We strongly support the provision in H.R. 268 that permits securities firms and banks to meet the financial services needs of their customers by establishing wholesale financial institutions. With respect to functional regulation, H.R. 268 generally requires that the appropriate Federal banking regulator will oversee any bank subsidiaries of any financial holding company, and the SEC will oversee any securities firm subsidiaries of such a holding company. We strongly support this approach because it relies upon. the expertise and authority of the functional regulator to ensure that the activities of one affiliate do not threaten the financial stability of another affiliate. We also strongly support the aspect of H.R. 268 that would eliminate regulation at the holding company level. No apparent purpose is served, other than needless regulatory duplication, by having a banking regulator oversee a bank and having the same, or a dif ferent banking regulator, regulate the holding company. We believe that any legislation that modernizes the regulation of financial services must ensure functional regulation. Functional regulation is essential because it provides investors in the capital markets the same protections regardless of whether they transact business with a bank, a securities firm or an insurance company. United States capital markets are the strongest, most liquid and most vibrant in the world. There is simply no reason to reinvent the wheel and permit the development of a parallel system of regulation under which bank securities activities would be regulated by a different agency that would regulate similar activities undertaken by a registered broker-dealer. There are some aspects of H.R. 268 that do not conform with the goal of full functional regulation. We hope to work with Members of the subcommittee to modify this and other troublesome provisions. For example, the bill would permit banks to engage in a large number of securities activities inside the bank without being regulated as a broker-dealer. We believe this approach needs to be reexamined. And finally with respect to the two-way street, there are several elements of this legislation which fall a bit short of facilitating a true two-way street, that is to say, put securities firms entering the banking business on an equal footing with a banking organization entering the securities business. Of particular concern, Madam Chairwoman, is the 25 percent basket requirement whereby a financial services holding company could derive only 25 percent of its revenue from non-financial activities. Although the act's 25 percent basket provides some flexibility, we believe that a diversified securities firm should be allowed to become a financial services holding company without such a limitation on its non-financial business activities. Concerns about mixing banking and commerce can be resolved through strict enforcement of antitrust laws and affiliate transaction regulations. In conclusion, Madam Chairwoman, we commend you and the subcommittee for your efforts to comprehensively reform financial services regulation. We support those efforts and look forward to working with you, your subcommittee, and the full committee as the process moves forward. Thank you. Chairwoman ROUKEMA. Thank you, Mr. Lackritz. [The prepared statement of Mr. Marc E. Lackritz can be found. on page 347 in the appendix.] Chairwoman ROUKEMA. Mr. Albertalli for the American Council of Life Insurance STATEMENT OF ROY C. ALBERTALLI, VICE PRESIDENT AND ASSOCIATE GENERAL COUNSEL, METROPOLITAN LIFE INSURANCE COMPANY, ON BEHALF OF THE AMERICAN COUNCIL OF LIFE INSURANCE Mr. ALBERTALLI. Thank you, Madam Chairwoman, and Members of the subcommittee. On behalf of the American Council of Life Insurance and its member life insurance companies, I would like to |