May 3, 1990
TO: BOARD OF GOVERNORS NO. 35-90
RE: INSTITUTE TESTIMONY ON BANK SECURITIES AFFILIATES
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On May 1, the Institute testified at a hearing before the
Subcommittee on General Oversight and Investigations of the House
Banking Committee. The subject of the hearing was the recent
report of the General Accounting Office on activities of
securities subsidiaries of bank holding companies that have been
authorized by the Federal Reserve Board.
The Institute's testimony stated that the orders of the
Federal Reserve Board permitting subsidiaries to engage in
certain securities activities (the "Section 20 orders") contained
worthwhile elements, which should be utilized by Congress in the
development of comprehensive legislation to restructure the
financial services industry. Specifically, the Institute
endorsed requiring securities activities to be conducted in a
separate subsidiary of a bank holding company, rather than in the
bank itself or a subsidiary of the bank. The Institute also
supported the imposition of "firewalls" between the bank and the
securities subsidiary. The Institute cautioned, however, that
the power to relax firewalls should be reserved generally to
Congress. The Institute also pointed out that any administrative
deregulatory steps suffered from inherent limitations, which
demonstrates the need for comprehensive legislation. The
Institute's testimony also stressed the need for special
firewalls if bank affiliates are permitted to sponsor and
underwrite mutual funds.
The testimony also criticized the Comptroller's recent
proposal to deregulate and allow the mass-merchandising of bank
common trust funds, contrasting it with the more limited approach
being taken by the Federal Reserve Board. The Institute pointed
out that the Comptroller's proposal contained none of the
safeguards of the Section 20 orders. At the hearing,
Representative Parris, the ranking minority member of the
Subcommittee, expressed concern over the Comptroller's proposal
and stated that he had sent to the Comptroller a list of
questions on it.
Copies of the Institute's written and oral statements are
attached.
Craig S. Tyle
Associate General Counsel
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