The Bliley-Dingell-Leach manager's amendment consists in the main of the investor and consumer protections originally contained in the Dingell amendment. It addresses concerns raised by the Federal and State regulators and consumer groups, and incorporates the historical positions of the Commerce Committee on matters within its securities and insurance jurisdiction under the rules of the House. This statement is offered as clarification of the meaning of those provisions and shall constitute the legislative history. I am pleased to have been able to contribute to this important effort.
1. Customer Fee Disclosure. Section 251 directs the Federal financial regulators to review the adequacy of existing disclosures of fees, commissions, markups, and other costs, and, using existing authorities, to consider improving their accuracy, simplicity, completeness, and consistency. It is the intent of this provision that the regulators, prior to adopting any new rules or rule amendments pursuant to section 251, would first consult with each other, and with the appropriate State financial regulators, in determining whether any new rules or rule amendments are appropriate, necessary, and in the public interest. It is the intent of Congress that the Securities and Exchange Commission (SEC) should take the lead in setting disclosure standards with respect to securities, and that the Federal bank regulators should apply the same standards as those adopted by the SEC with respect to securities sold by banks. It is the intent of Congress that disclosure for consumers and investors be improved so that they can make informed decisions. The Congress intends to give the financial regulators flexibility to achieve this goal through any effective means, including increasing the disclosure of prices for debt securities.
2. SEC Backup Authority. Section 231(a) adds a new subsection (j) to section 17 of the Securities Exchange Act to give the SEC explicit securities inspection backup authority over wholesale financial holding companies and other bank affiliates for the purpose of monitoring and enforcing compliance with the Federal securities laws. In the same manner as bank regulators are required to rely on the SEC's oversight before inspecting registered broker-dealer affiliates of banks, the SEC is required, to the fullest extent possible, to defer to the reports of examinations of banks made by bank regulators and of insurance companies made by insurance regulators and to provide notice to the appropriate regulatory agency. Reasonable limits are imposed on the scope of any inspection under this subsection. It is the intent of Congress that this Act maintain the SEC's ability to enforce the Federal securities laws vigorously for the protection of investors.
3. Saving Clause For CFTC: By letter dated March 19, 1998, the Commodity Futures Trading Commission (CFTC) complained that the bill designates many CFTC-regulated products as "traditional banking products," thereby creating a misconception that banks dealing in certain defined derivatives might need only comply with Federal banking laws and not the Commodity Exchange Act (CEA). This is not the intent of the Congress. This bill and this amendment do not address the scope of the CFTC's jurisdiction under the CEA. Accordingly, section 210 explicitly preserves the current extent of the authority of the CFTC under the CEA.
4. Consumer Protection. Section 308 of the bill adds a new section 45 to the Federal Deposit Insurance Act directing the Federal banking agencies to prescribe consumer protection regulations for insurance sales by insured depository institutions and wholesale financial institutions. The regulations cover retail sales practices, disclosures and advertising (especially with respect to uninsured status, investment risk, and coercion), prohibition on misrepresentations and domestic violence discrimination, separation of some activities, and the establishment of a consumer grievance mechanism. The amendment responds to concerns of consumer groups and banks with the effect of this provision on other laws. It provides that the regulations prescribed under section 45 will preempt State law only if the Federal Reserve, Comptroller of the Currency, and FDIC jointly determine that the joint Federal regulations provide consumers with greater protection. It is not the intention of Congress that this preemption provision shall override or be read in a manner inconsistent with section 104 of this Act.
5. Lifeline Banking. Section 103 of the bill adds new section 6 to the Bank Holding Company Act. Section 6(b) establishes eligibility criteria for forming a financial holding company and engaging in its expanded activities. One of the requirements is that the subsidiary insured depository institutions of such company offer and maintain low-cost basic banking accounts. The amendment provides for ongoing compliance as is the case with the other requirements. The provision does not affect banks who choose not to form financial holding companies.
6. State Securities and Insurance. Section 104 of the bill would preempt all State laws, including State securities laws and State insurance solvency laws, not specifically preserved with regard to affiliations and activities authorized by this Act or any other provision of Federal law. The amendment adds a new paragraph (4) to section 104(b) to preserve State regulation of securities. State regulation of insurance underwriting is preserved under a new paragraph (3) that sets forth five tests that must be met. The amendment makes clear that the U.S. Supreme Court Barnett Bank decision's "prevent or significantly interfere" standard will be applicable to both affiliations and activities with respect to allowable State regulation of bank insurance sales. Federal banking and State insurance regulators are directed to share information (consistent with applicable confidentiality and other privileges) regarding financial holding companies that own insurance companies, and Federal banking agencies shall consult with the appropriate State insurance regulator before making any determination regarding initial or continued affiliations with insurance companies. It is the intent of Congress that these regulators cooperate in order to enhance the safety and soundness of the financial system and the protection of consumers.
7. Brokerage Commissions. Title II of the bill requires the functional regulation of bank securities activities. Subtitle A amends the Securities Exchange Act of 1934 to eliminate the outdated blanket exceptions for banks from the definitions of "broker" and "dealer." The bill preserves specific exceptions for some existing bank securities activities based on the limited nature of those activities. In general, the fifteen exceptions reflect our intent to exclude certain existing banking activities while ensuring that activities that require securities regulation are subject to the securities laws. These exceptions are designed to assure that activities that most need to be subject to securities regulation in an era of financial modernization and increasing competition do not escape that regulation.
It is the intent of Congress that banks that act like brokerage firms must be regulated as brokerage firms unless these activities are limited in nature, narrowly constrained, and subject to limits to preclude the concerns that require broker-dealer oversight. To that end, the amendment makes clear that a bank will not be considered a "broker" only when it effects transactions in a trustee capacity, or in a fiduciary capacity in its trust department, subject to key limitations, or when, acting in its transfer agent capacity, it conducts brokerage transactions for: (1) employee benefit plans, (2) dividend reinvestment plans, and (3) open enrollment plans, as long as the bank does not solicit transactions, or provide investment advice concerning the purchase and sale of securities, or receive brokerage commissions exceeding the bank's execution costs. To take advantage of this exception, these excepted bank activities must be regularly examined by bank examiners for compliance with fiduciary principles and standards. It is the intent of Congress that such examinations be specifically focused on these activities and rigorous in nature. The amendment also spells out that banks that use these exceptions may be primarily compensated by an administration or annual fee, a percentage of assets under management, a flat or capped per order processing fee, or any combination of such fees. Such fees must not be structured in such a way that they give rise to the sales incentives inherent in brokerage commissions.
8. Antitrust. The bill substantially streamlines antitrust review of bank acquisitions and mergers under the Federal Reserve. The amendment strikes that language and replaces it with language preserving the authority of the appropriate antitrust regulators, the Attorney General and the Federal Trade Commission. It provides for interagency data sharing to facilitate antitrust reviews and requires a GAO report on market concentration in the financial services industry and its impact on consumers. It is the intent of Congress that the ongoing consolidation and merger activity in the financial services industry undergo complete and rigorous review in order to preserve competition and protect consumers.
9. Derivative Instruments. The bill preserves the ability of the SEC to determine what is a "security," and when new bank products are "securities," by providing a definition of "traditional banking product" as a stand-alone statute -- not in the Federal securities laws or in the banking laws. The definition includes such things as deposit accounts, letters of credit, credit card debit accounts, certain loan participations, and certain derivative instruments that traditionally have not been regulated as securities. If banks sell products within the scope of this definition, they are not required to register as a broker or a dealer.
Derivatives involving or relating to foreign currencies, interest rates, commodities, other rates, indices or other assets, except instruments that are (1) based on a security including a group or index of securities, (2) that provide for the delivery of one or more securities, or (3) that trade on a national securities exchange, are defined as traditional banking products. If a derivative other than an interest rate swap or a foreign currency swap is a security, it would not qualify as a traditional banking product unless it was based on a government security, commercial paper, banker's acceptance or commercial bill or a group or index of one of more of these products. The amendment makes technical and clarifying changes to this provision to ensure that the SEC maintains jurisdiction over derivatives that are securities.
The bill includes a new provision that establishes a process by which the SEC shall decide whether banks that sell "new banking products" that are securities must register with the SEC as brokers, dealers, or both. Specifically, the SEC must engage in a rulemaking proceeding and must determine (1) that the new product is a security and (2) that imposing a registration requirement on a bank to sell the new product is necessary or appropriate in the public interest and for the protection of investors. Under this provision, during the rulemaking process, the SEC is also required to consult with and consider the views of the appropriate banking agencies concerning the proposed rules and the impact of those rules on the banking industry.
10. Qualified Investors. The amendment expands the bill's definition of "qualified investor" to include the governments of foreign countries.
11. Community Needs. The amendment responds to the concerns of consumer and community groups about the impact of this bill and the recent megamergers on the cost and availability of financial services to communities and persons of modest means. The amendment requires the Treasury Department, in consultation with the Federal banking regulators and the SEC, to study the impact of the changes effected by this Act on Community Reinvestment Act obligations and performance, and to submit a report to Congress with any appropriate recommendations based on the results of that study.
12. Privacy Study. The amendment requires the Federal Trade Commission to submit to Congress an interim report on its ongoing study of consumer privacy issues together with recommendations for legislative and administrative action. This responds to growing concerns about the use and sharing of confidential customer information for cross-marketing and other purposes.
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