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

express our appreciation for the opportunity to appear today and to discuss our views on financial services restructuring.

First, we want to thank you for taking the initiative in introducing H.R. 268. Your bill provides an excellent foundation for addressing the many important and complex issues associated with financial services restructuring. Moreover, it is a realistic approach, one that has encouraged all elements of the financial services community to work together to resolve open issues.

When ACLI members voted last September to endorse the concept of banking insurance affiliations, it meant that for the first time the three principal components of the financial services community: banking, securities and insurance, shared the same legislative objective. In our view, there has never been a better time for Congress to act.

AČLI and its members believe that legislation to restructure the financial services industry must include certain important concepts. I will briefly outline several of the concepts important to us. First, functional regulation: Functional regulation is essential if there is to be true equality in a restructured marketplace. Simply stated, all those engaged in a particular activity must be subject to the same rules and regulations. For example, those engaged in insurance activities should be regulated by State insurance regulators, while bank regulators should supervise those engaged in banking.

Second, while insurance sales may be permitted to occur within a bank, insurance underwriting activities, the risk-taking component, must be conducted in a separately organized and capitalized bank affiliate. This approach is needed not only to facilitate functional regulation, but also to insulate banks from insurance risks and insurance from banking risks.

Third, the approach to regulation at the holding company level once insurers and banks affiliate is very important to us. Frequently the starting point for discussion is the bank holding company model with its significant Federal Reserve oversight role. This may have been appropriate when bank holding companies only controlled banks; however, H.R. 268 would permit the combination of two businesses, banking and insurance, that are each separately regulated for solvency.

Some insurers can be expected to acquire banks as downstream subsidiaries. This would certainly be the case with mutual insurers, absent mutual holding company laws. Imposing Federal Reserve financial regulation on operating insurance companies would conflict directly with State solvency insurance regulation.

We believe that the preferable regulatory structure leaves solvency regulation exclusively at the institutional functional level as reflected in H.R. 268 with holding company regulation providing a means to monitor affiliate activities and coordinate efforts as appropriate.

Fourth, Federal legislation must place some limits on regulatory prerogatives. This means limiting State regulatory actions which would unreasonably interfere with the bank's insurance activities. Likewise, no bank regulator should be able to circumvent Congress or State insurance regulation, whether by redefining the businesses of banking and insurance, or otherwise.

Fifth, Federal legislation should permit commercial affiliations. Insurance companies have a long history of owning and being owned by commercial entities without adverse consequences. It is ACLI's view that adding a bank to the mix would not pose any additional difficulties that could not be addressed through a combination of firewalls and reporting requirements. We believe, therefore, that broader commercial affiliation must be permitted.

Lastly, mutual insurers constitute a significant portion of our business and must be fully able to participate in a restructured marketplace. Restructuring poses a unique challenge to mutuals because of limits on organizational structure and access to capital markets inherent in the traditional mutual form.

We are pleased that your bill includes provisions that will facilitate the formation of mutual holding companies, thus providing mutual insurers with a meaningful opportunity to participate. On behalf of MetLife and all the other mutual insurers, I want to thank for your foresight in this respect.

Again, Madam Chairwoman, thank you for the opportunity to express our views. We look forward to working with you and the subcommittee as the issue progresses, and we will be pleased to answer any questions you may have.

Chairwoman ROUKEMA. Thank you.

[The prepared statement of Mr. Roy C. Albertalli can be found on page 362 in the appendix.]

Chairwoman ROUKEMA. Mr. Klagholz of the Independent Insurance Agents.

C.N.

STATEMENT OF JAMES R. KLAGHOLZ, CO-OWNER, STERLING ASSOCIATES, INC., ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS OF AMERICA

Mr. KLAGHOLZ. Thank you, Madam Chairwoman. I don't know whether you think you saved the best for last orChairwoman ROUKEMA. Obviously.

Mr. KLAGHOLZ. It is a pleasure to be here. I represent over half a million insurance agents, members of the Independent Insurance Agents of America, National Association of Life Underwriters, and the American Land Title Association.

Throughout the history of our organizations, dating back to the early 1900's, we have always advocated the separation of banking and insurance for a variety of sound policy reasons. Banks have enjoyed special treatment in comparison to insurance agencies and insurers. For example, banks have FDIC coverage, access to the Federal discount window, the too-big-to-fail doctrine and the source of strength doctrine.

In addition to that, banks have the ability to leverage credit through credit ties, whether explicit, which is illegal but very difficult to enforce, or implicit. But all of this is now history, and we are looking toward the future.

Recently, the national boards of both IIAA and NALU adopted policy supporting affiliations within the financial services industry with two conditions.

First, there must be true, real functional regulation of insurance, which means States regulate the business of insurance, no matter who sells or underwrites the product.

Second, there must be consumer protections for insurance consumers in this "brave new world."

For our organizations to say this is truly a radical departure, but we didn't come to this point with any misconceptions. The world of affiliations is for big players; we know it, the banks know it, the securities firms know it, and Congress knows it. IIAA represents small businesses. We will not be acquiring banks; they will be acquiring us.

Affiliation in the context of a small business is a one-way street and one-way streets have warning signs to prevent accidents. But we can and will adapt, and consumers will benefit if Congress creates a true level playing field. The small businesses that I represent, as I said, seek two things in this "brave new world" of affiliations to keep some semblance of a level playing field.

Functional regulation: States have regulated the business of insurance for decades and should continue to do so. We oppose dual regulation where the OCC is a superregulator preempting State law whenever they creatively believe there is a so-called significant interference.

Consumer protections: This subcommittee should look consumer disclosure laws, the appropriate use of confidential customer information and credit tie-ins. Clearly, the States also have an important role to play in adopting consumer protections.

Recently, Chairman Leach was sent a letter by the Alliance and in that letter it states, and I quote, "Regulation of financial services should be focused on the specific function being performed and not on the corporate structure. Such regulations should be based on the principle of functional regulation."

Mr. LaFalce, I heard your question earlier in regard to this and the Alliance, and it was stated that we were not participants in this. Had we been asked to sign this letter, and we were not, we could have signed this letter.

We strongly believe that it doesn't matter who is selling the insurance product. They should be regulated by the State without preemption or a different set of standards by the OCC. Granted, States cannot prevent banks from selling insurance and some State anti-affiliation laws would have to be preempted to permit affiliations in States like Louisiana and Georgia and Pennsylvania and Florida. However, after that, States should have the right to regulate.

Quite interestingly, the OCC is currently taking comments on possible preemption of a new consumer protection law enacted in Rhode Island before the regulations in Rhode Island are even final. The law was passed by an overwhelmingly bipartisan margin in the State legislature, signed into law by the Governor, and yesterday in the week the OCC closes its comment period, the Rhode Island Department of Business Regulation is holding a hearing on the final implementing regulations.

The OCC should not be in the business of preempting State consumer protection laws. Prevention of any bank insurance activity is one thing, consumer protections is another.

House Resolution 268 does not contain an insurance functional regulation provision and therefore ambiguity, litigation and confusion could fill the vacuum. We have, however, discussed this issue

with the Chairwoman and look forward to working with you on this section.

The Leach Bill makes an attempt at implementing real functional regulation, but it needs to be modified, because it continues to permit the OCC to preempt State consumer laws under the significant interference standard. Without addressing this issue, you cannot have real functional regulation.

Thank you very much for the opportunity to be here.

Chairwoman ROUKEMA. Thank you. Thank you very much.

[The prepared statement of Mr. James R. Klagholz can be found on page 411 in the appendix.]

Chairwoman ROUKEMA. First, I believe I should say that it does my heart good and I am very pleased to see that everybody is at the table, everybody came around to the table, and particularly the two representatives of the insurance industry. I was particularly interested in what you said about the letter and that, had you known about it, you would have cosigned it.

Now there seems to be a remarkable degree of agreement here and unanimity of opinion, but I am not quite sure what that means when you get down to the details. The old saying is, "The devil is in the details," and I think that was said previously.

I don't quite know where to start with the questions here, but someone said, and I think it was Mr. Baptista, but I could be wrong about that, but when you draw the line in the sand, someone has to enforce it. But there seems to be a wide degree of opinion here as to how that enforcement comes about. Can each one of you, in one or two sentences, tell me what your position is on that?

I know you have talked about it in general, and some of you have been rather specific, but I think when you get down to the details of it, there is quite a bit of distinction between you as to how that is enforced. Or am I wrong?

Mr. BAPTISTA. Are you talking about the enforcement of the separation of banking and commerce, or regulation of the parent company?

Chairwoman ROUKEMA. Both. I am glad you asked that.

I am talking about both, separation of banking and commerce and the general regulatory structure.

Mr. BAPTISTA. We clearly think that there is no need for separation of banking and commerce. There are concerns

Chairwoman ROUKEMA. But there is going to be, all right. Go

ahead.

Mr. BAPTISTA. On that issue, the two concerns that are most often raised are the concentration of economic power and self-dealing.

Chairwoman ROUKEMA. Conflicts of interest, safety and soundness. Go ahead.

Mr. BAPTISTA. On the issue of concentration of economic power, Marc mentioned the antitrust laws. Certainly we can enforce them; we can also come back and put in additional safeguards if this subcommittee determines that from a public perspective that is necessary. And that is, you can prohibit commercial entities from acquiring the top 20, top 25, what have you, the largest institutions and prohibit mergers of the largest institutions.