try, is a one-way street. Banks will remain protected with an exclusive franchise in the banking business. If I thought we were in the banking business and my industry thought we were in the banking business, we would not be here today asking for bank charters as fair reciprocity for bank entry into the securities business. We want to compete on the same terms, as Mr. Van Liew puts it, with banks. We cannot compete in Rhode Island when he is in the banking business and in the mutual fund business, and we are only in the mutual fund business.

The CHAIRMAN. Your statement indicates that S. 1720 would afford certain large banks, as you just said, a one-way competitive advantage, not only enabling those banks to compete for securities business but also insulating the same banks from meaningful competition in the banking business from the securities industry. Does Shearson operate mutual funds in addition to the brokerage business?

Mr. SILVER. Yes, sir.

The CHAIRMAN. Do they also own a bank?

Mr. SILVER. They own a trust company, I believe, in Boston. The CHAIRMAN. Is Fidelity Management one of the largest mutual fund companies? Does it own a bank?

Mr. SILVER. They own a noncommercial bank that does not make commercial loans.

The CHAIRMAN. They do own a bank. Does Sears, which takes deposits through an S. & L. subsidiary and operates a full brokerage business, undermine the principles of Glass-Steagall?

Mr. SILVER. I believe that you are referring to the holding company complex, an S. & L. in California. I'm not acquainted with it. The CHAIRMAN. Yes, they do. Does the Glass-Steagall Act prohibit such combinations?

Mr. SILVER. As I suggested in my testimony, Senator, we recognize that the Glass-Steagall Act should be revisited. I think that the three instances you have mentioned are examples of reasons for revisiting the Glass-Steagall Act. I would suggest that entry is not open to the banking business generally. These are very specific and unique examples you have given us. I do not think that either the securities industry generally or the mutual fund industry in particular believes that they have free access to the banking busi

ness.

If, by your question, you are suggesting that perhaps access to banking should be opened up so that there was a true two-way street rather than these odd examples which are really historical accidents; if there is a true two-way street, then I think we would have come a long way toward achieving a playing field which is level on both sides of the 50-yard line.

The CHAIRMAN. I'm only using a few examples, as you did, on the other side. I could produce documents this thick, all sorts of examples like that. They are not isolated. They are not historical accidents. I think everybody is aware that the marketplace is dramatically changing, and I do not know where that balance is. Certainly you are right in some of your comments. Certainly there are some inequities on the other side, no doubt about it. But this $150 or $160 billion and where it is coming from is a result of high-interest rates, and we simply have to look at those laws and try to decide

where the new balance point is. I have no preconceived ideas, other than the fact that it is tremendously unbalanced in favor of your industry because of a number of factors.

I could go on. You've used three or four examples. I have used three or four examples the other way. Securities people being involved in the banking business. We just let the thrifts have checking account authority the 1st of January this year. Merrill, Lynch can say, hey, no problem, we're not in the banking business. because we write checks on CMA's. We do not have them written under $500. But I have seen $2 and $3 and $7 checks, the gas bill paid with it. Well, we can't control it, our rules are such.

I think it is time we all quit kidding each other. The ABA testimony was not scintillating on Tuesday. The game goes on. Everybody comes in here holier than thou, and pure, and we are the nice guys and somebody else is the bad guy. When are we going to get realistic and get up on top of the table and try to come to a solution? That's all I'm trying to do. I'm trying to find where that middle ground is. I realize it will never be found. There is always going to be some inequities. But you have got to try and balance it as carefully as you can.

I am not going to sit back and let the little institutions of my State be absorbed, unless they are absorbed and go out of business in fair competition. We see money being taken out of rural States like mine, so don't bring up the specter of the big boys. They will take care of themselves, whether they are in the securities business or the banking business, regardless of what you and I do. I'm worried more about the mass of small institutions that have served this country so well and so long, and who will continue to do so if they have a fair, competitive playing field to work on.

NEW YORK CITY FUNDING CRISIS

Mr. Silver, I note with interest your use of the 1974-75 New York City funding crisis as a reason to keep banks out of securities activities. The final report of the Securities and Exchange Commission regarding the issuance and sale of New York City securities, the SEC indicated, and I quote,

After thorough consideration of various alternatives which might be taken, including the possibility of enforcement actions, the staff recommended and the commission has concluded that the public interest will best be served by commission efforts in support of legislative solutions to the complex problems existing in the mutual securities field.

The commission went on to say in its final report that the Federal loan legislation in 1978 went a long way in opposing appropriate financial controls over the city, including financial statements. With regard to the principal underwriters of the city's securities in 1974-75, you are correct that the banks were significant participants in that. But do not forget that Merrill, Lynch was also a principal underwriter.

1974-75, New York City's situation was not the work of bankers alone. The city fathers were severely criticized by the SEC and Congress for slipshod and inefficient, inadequate financial disclosure and financial management. I sat through all of those hearings as a member of this committee. I think it is unfair to try and indicate in your testimony that it was primarily the responsibility

of the banks. We can get back to John Lindsay's term and all sorts of things on the city's side, but they also criticized the bond council, the bond rating agencies.

So if you are suggesting that the banks alone were primarily to blame for New York City's problems, I think Merrill, Lynch has to share in that. I think the city has to share. I think the bond underwriters have to share. I think the bond rating agencies have to share as well. I do not think that we can keep the California, Utah, or Wisconsin banks or any other State from expanded security activities on the basis of the conduct of banks in New York City in 1975. We have to restrict Merrill, Lynch from cash management and other bank-like activities. What about Standard & Poor's and Moody's, the venerable rating agencies and their participation? Would you like to reply?

Mr. ŠILVER. Yes, I would, sir. First, I was not referring to this example as a reason for keeping the banks out of the securities business. The example, as I stated, was for the purpose of showing the kind of rules that should be applied to prevent abuses. And I suggested that there were problems unique to the banks on the sales end which were not shared by other participants in the distribution of New York City securities.

Now, I fully agree with you that there is enough blame for all concerned, but I was focusing on the sales abuses, the emptying out of such inventories to the general public and into trust accounts that did not occur with respect to any brokers, as far as I understand. And the specific example was directed at the need to extend the Securities Exchange Act controls, the broker dealer controls that Mr. Cantor was talking about, over bank securities activities. That was the purpose of the example and that is what was intended to be illustrated.

The CHAIRMAN. I cannot be convinced that anybody involved in the 1974-75 New York situation deserves any more or less blame than some of the other participants. I am certainly not advocating that we restrict the activities of Standard & Poor's because of their investment grade ratings for New York City securities, either. Even if your statement is correct, I do not think that we can apply to the whole banking industry nationwide, because of what a few banks did in New York City in 1974 and 1975 in concert with a lot of other people who blew it at that time, as well.

Mr. Cantor, you mentioned that providing banks with additional securities activities under this bill will clearly contradict the legislative intent of the Glass-Steagall Act and would conflict directly with those provisions of the act which sought to limit the securities activities of commercial banks. Isn't the legislative intent of GlassSteagall under attack from many sides?

Mr. CANTOR. Yes, Senator. I would point out that we have clearly indicated that we are not prepared to take a position on whether Glass-Steagall should ultimately be modified in this respect. All we are saying is that before a fundamental public policy position taken by the Congress in 1933 is abrogated, it ought to be studied in depth. Our position fundamentally is, though-and I really suppose that, in view of your statement that you agreed with me, if I had any common sense I would keep quiet-that even if GlassSteagall is to be abrogated in this sense, our main concern is

achieving regulatory equality with the banks. We are not concerned about their competing with us in the securities business. All we ask is that they be required to compete with us on the same basis as we are required to compete from a regulatory standpoint. That means the full jurisdiction of the SEC, including the broker/ dealer requirements of the 1934 act.

We, ourselves, are at a stage where we, too, need to diversify the kinds of things that we do because of the impact of the economy on us. Our problems in these respects, by reason of the McCarranFerguson Act and State regulation, are with the State regulators who determine what we can and cannot do, as a matter of business activity. Should we get the kinds of powers to do the kinds of things that would put us in competition with the banks, we are perfectly willing to do so under the same regulations to which they are subject.

We think the so-called level playing field that everybody wants to play on does suggest that if they are going to compete with us in these fields, they be subject to the same rules. That is fundamentally what we are saying.

The CHAIRMAN. I do not disagree in principal. But then I will repeat the question which I asked earlier. Isn't it fair, with CMA's and checking and so on, to make the same claim that they ought to be regulated as well, and have reserve requirements like checking accounts do in commercial banks and in S. & L.'s?

Mr. CANTOR. Yes, assuming this activity is ultimately determined to be the business of banking. I see no problem, no reason to feel that, if someone else wants to compete with banking entities in the things that they do, they be regulated in the same way.

The CHAIRMAN. The securities industry will not admit that.
Mr. CANTOR. I speak for the life insurance business.

The CHAIRMAN. I made my living in the life insurance business for 15 years, and I was silly enough to leave it for this body. It shows my level of intelligence. [Laughter.]

Mr. CANTOR. I think we have many problems now that you would not have recognized back then in the life insurance business.

The CHAIRMAN. I talk to my former partner a great deal about it, and I think it illustrates the point very well. It has changed very dramatically. After 9 years away I would have to go back and start from scratch to learn the business over again. That is why I do not think it is particularly relevant to talk about the 1920's and the 1930's and not recognize that there have been dramatic changes in the banking business, the securities business; electronic funds transfers, all sorts of things that are so dramatically different. And again, I do not know how Glass-Steagall ought to be changed. When we get into the full ramifications of it next year, and McFadden. I have no particular preconceived ideas about it. But I certainly think it is an incredibly different market, not only from 50 years ago but just over the last 5 or 6 or 10. We have got to take a look at it.

Mr. CANTOR. May I suggest, as I am sure you know, that if you were to go back into the life insurance business, you would have to be appropriately licensed and regulated and qualified. And probably today you would probably also have to be appropriately registered and licensed under SEC regulations. And all we are saying is

that anybody else that wants to come into the business that we engage in ought to play on the same playing field.

The CHAIRMAN. I don't disagree in principal. The securities people are going to have to learn that they cannot go North across the Yalu without the banks being able to come south. It reminds me of the Korean war. Our pilots could not go North. Their's could come South and raid all they wanted, but we could not go the other way. The securities people are saying keep the banks all tied up, don't let them out. But let us raid all we want.

BANK ADS HAVE BEEN MISLEADING

Mr. Silver, your statement alleges that bank ads for retail repurchase agreements have been misleading. Probably it's true. Isn't it a fact that many ads for money market mutual funds have been highly criticized for using terms designed to make the accounts appear to be analagous to insured deposits? I have certainly seen some that would give me a very definite impression that these were just like insured accounts.

Mr. SILVER. With respect to any misleading impression you have received from specific ads the SEC ought to take those up-but the differences, of course, that with the retail repo ads is that you read an ad and you buy the certificate. There is nothing in between. You do not receive any disclosure whatsoever with respect to these short-term notes. These are just run of the mill short-term notes, which, if issued by an industrial issuer, would have to be preceded or accompanied with a document which described the true financial condition of the issuer.

No such protection is being afforded here, and these are not insured investments. If in the comparison between a securities firm and a bank, certainly the impression among investors would be that something purchased from a bank is subject to FDIC. These are not. Certainly, special care should be taken, when the security is being issued by an institution whose financial condition was such that if that institution were subject to normal SEC requirements, total and complete disclosure would have to be made about its financial condition.

The CHAIRMAN. My point is simply there have been misleading ads on both sides. With the great SEC, in all of its detailed disclosure, do you believe that all of your money market fund shareholders understand the terms of their investments?

Mr. SILVER. Certainly, Senator, I cannot represent that 11 million shareholders all understand everything about their investment. What I can say is the documents which enable them to understand their investments are provided to them.

With respect to retail repos, there is no disclosure at all. There is no legal requirement whatsoever that the investor be told anything about the financial condition of the institution issuing this security.

The CHAIRMAN. Would you feel that the level of understanding as a result of that being filed someplace is much higher among shareholders than those who bought repos?

Mr. SILVER. I think under our system, Senator, those of us-you and I-who want to buy a money market fund share or buy a retail