1 See Memorandum to Board of Governors No. 3-97, Federal Legislation Committee No. 1-97, and Public Information Committee No. 2-97, dated January 13, 1997.
June 24, 1997
TO: BOARD OF GOVERNORS No. 39-97
FEDERAL LEGISLATION MEMBERS No. 10-97
PRIMARY CONTACTS - MEMBER COMPLEX No. 41-97
PUBLIC INFORMATION COMMITTEE No. 21-97
RE: HOUSE BANKING COMMITTEE REPORTS FINANCIAL SERVICES
MODERNIZATION BILL
______________________________________________________________________________
On June 20, the House Banking and Financial Services Committee approved H.R. 10, the
"Financial Services Competitiveness Act of 1997," by a margin of 28-26. As reported, the
legislation differs significantly from the bill originally introduced by Banking Committee
Chairman James Leach (R-IA) in January.1 The bill will now be referred to the House
Commerce Committee for its consideration before proceeding to the House floor.
Permissible Financial and Commercial Activities
Provisions in the bill allow for the creation of qualified bank holding companies, and a
two-way street that allows a limited mix of banking and commercial activities. In sum, the bill
provides that:
Banking, insurance, and securities firms may affiliate under a "qualified bank
holding company," subject to umbrella regulation by the Federal Reserve Board. Qualifi
ed
bank
holdin
g
compa
nies
would
be
allowe
d to
own
an
interes
t in a
comme
rcial,
nonfin
ancial
firm,
so long
as that
firm
genera
tes less
than 15
percen
t of the
holdin
g
compa
ny’s
gross
domest
ic
revenu
es. A
cutoff
level
would
prohibi
t a
qualifi
ed
bank
holdin
g
compa
ny
from
acquiri
ng any
comme
rcial
firm
with
consoli
dated
assets
exceed
ing
$750
million
,
effectiv
ely
preclu
ding
acquisi
tion of
the top
1,000
comme
rcial
firms.
Nonfinancial, commercial firms would be permitted to acquire, within a holding
company, one bank, provided the bank’s gross revenues do not exceed 15 percent of the
commercial firms’ consolidated U.S. gross revenues and the bank’s total consolidated
assets do not exceed $500 million (effectively prohibiting acquisition of the top 1,500
banks). No umbrella regulator would govern these commercial entities.
Federal thrift charters would be converted to national bank charters over a five-year
period; grandfathering provisions cover existing unitary thrift holding companies.
Regulation of Holding Companies
H.R. 10 would create a National Financial Services Council (NFSC) to oversee the
regulation of new qualified bank holding companies. The NFSC would work in conjunction
with the Federal Reserve Board to determine whether a new product is a banking or insurance
product; the Federal Reserve Board would conduct the initial product review to screen out
"frivolous" applications. The NFSC would be comprised of the heads of the Federal Reserve
Board, the Treasury Department, the Office of the Comptroller of the Currency, the FDIC, the
SEC, and others, including a state securities regulator and a state banking regulator.
Furthermore, the NFSC would designate the primary functional regulator by industry
(i.e., the SEC would regulate securities affiliates). However, all qualified bank holding
companies created under this legislation would ultimately be subject to Federal Reserve Board
oversight, which could potentially extend to holding company capital requirements,
examination, and enforcement. The NFSC, in conjunction with the Federal Reserve Board,
would also have restricted authority to designate financial and nonfinancial activities, which
could impact the size and nature of the commercial baskets. However, it is the committee’s
intent that the Federal Reserve Board regulation would not extend to the day-to-day operations
of affiliates regulated by other federal or state agencies.
Regulation of Securities Transactions
As amended, H.R. 10 would require all persons involved in retail sales of securities to be
covered under the same securities laws and regulations. It is expected that this provision will
allow the SEC to issue rules governing previously-exempted bank securities employees.
Enforcement of this provision among bank employees, however, would remain with bank
regulators.
Disclosure Requirements and Other Consumer Issues
The bill includes several consumer-focused provisions that would, among other things,
require disclosure of whether a product is FDIC-insured, establish suitability requirements,
limit cross-marketing, and call for the physical segregation of banking and non-banking
activities. These provisions would apply to all non-deposit retail products sold by or within a
depository institution. In addition, the bill stipulates that qualified bank holding companies
may only acquire depository institutions with a "satisfactory" record in providing so-called
"lifeline" depository accounts to low-income consumers.
H.R. 10 would also create an Advisory Council on Community Revitalization that
would make non-binding recommendations to the NFSC and Congress for enhancing access to
capital, credit, and insurance for citizens in communities of diverse economic composition.
As noted above, H.R. 10 will now be referred to the House Commerce Committee,
which shares jurisdiction over the issue. We will keep you informed as developments occur.
Matthew P. Fink
President