Mr. Chairman and members of the Committee, I am Jim Higgins, President and COO of Morgan
Stanley, Dean Witter & Co., Individual Securities Division, and I am testifying on behalf of the
Securities Industry Association ("SIA").(1) I appreciate the opportunity to present SIA'S views on H.R. IO, the Financial Services Act of 1998. SIA commends you, Mr. Chairman, for your leadership in scheduling hearings so quickly after House passage of H.R. IO. We look forward to working with you and members of the Committee to enact this important legislation.
Mr. Chairman, my message today is simple. The securities industry strongly supports
H.R. 10 and urges this Committee and the Senate to pass it promptly. As the members of this
Committee know, the House took an historic step last month when it passed H.R. 10. In passing
H.R. IO, the House faced and resolved most of the contentious issues in this legislation and
created an unprecedented opportunity for Congress to enact desperately-needed legislation to
modernize the regulation of our financial services industry. SIA urges the Senate to act swiftly
to capitalize on this opportunity.
SIA supports H.R. 10 because it updates the outdated Depression-era laws governing the
financial services industry. H.R. 10 creates a new regulatory structure that enhances the
competitiveness of financial services firms and is flexible enough to accommodate the constantly
evolving financial marketplace. Increased competition between financial services firms will
reduce costs and give consumers more choices. In permitting securities firms, insurance
companies, and banks to freely affiliate in a holding company structure, H.R. IO gives financial
services providers the flexibility they need while providing a sound, workable regulatory
structure. The holding company would be regulated by the Federal Reserve Board, and each of
the subsidiary financial institutions would be functionally regulated, thereby ensuring investor
protection and fair competition. SIA believes this financial services regulatory structure is far
superior to today's archaic system.
The financial services industry is highly competitive and every segment of the industry has a
stake in this legislation. It would be nearly impossible to pass legislation that fully satisfies all
parties. The critical point is that H.R. IO is a vast improvement over our often counterproductive
regulatory system. For this reason, H.R. IO enjoys the unified support of the securities and
insurance industries and a large segment of the commercial banking industry.
Today, financial institutions are affiliating with one another at a dizzying speed under a
regulatory system that was intended to ban such affiliations. These affiliations are the result of
piecemeal decisions by banking regulators that have permitted banking organizations to acquire
securities firms while securities firms generally remain prohibited from acquiring commercial
banks. Moreover, even if a securities firm were to acquire a bank, the combined entity would
become subject to the Bank Holding Company Act even though the law was not designed to
accommodate many of the ordinary and customary activities of securities firms (such as
securities underwriting and dealing, merchant banking, venture capital, commodities, and various
other activities). Many of these restrictions were imposed prior to the invention of computers,
fax machines, ATMs, the Internet, and various other technological innovations that have
transformed the financial services industry. Such impediments certainly make little sense in
today's financial world.
Yet financial services providers continue to affiliate un er the current regulatory framework
despite outdated restrictions that drive up the cost of affiliations and limit the competitiveness of
the combined firms. They do so in response to their customers' and clients' demands and to
remain competitive in the financial marketplace. The financial services industry will continue to
evolve regardless of whether H.R. IO is enacted. The option of maintaining the status quo is
simply not a viable one. The fundamental policy question for Congress is not whether these
affiliations should occur, but what regulatory system should govern the combined entities.
Surely, it should not be the current patchwork regulatory scheme that gives some financial
institutions unfair and irrational competitive advantages over other financial institutions and that
permits many financial activities to be conducted outside of the supervision of the
appropriate functional regulator. SIA believes these combined entities should be regulated
under a system such as that proposed in H.R. 10 which would establish a structure that enhances
the competitiveness of all financial services firms and functionally regulates their financial
The U.S. securities industry is perhaps as competitive as any industry in the world. It is in part a
result of that competition - including the ability to affiliate - that the U.S. capital markets are the
world's largest and most liquid. In the securities markets, one need only look at the vast choices
in products, services, providers, and methods of compensation to see how competition has
greatly benefitted investors. They can invest in stocks, bonds, and thousands of mutual funds.
They can choose a full-service provider or a financial planner to receive advice on managing
their assets. More independent and knowledgeable investors can use a discount firm to execute
their transactions. Or they can make their trades electronically for a fraction of the cost of just a
few years ago. Investors can choose to compensate their broker in a traditional commission
arrangement, a flat-fee basis, or a percentage of assets under management. These changes
greatly benefit investors and are the direct result of a highly diverse, competitive industry that is
willing and able to invest the capital needed to meet the demands of its customers. Passage of
H.R. 10 would bring the benefits of competition, including cost savings estimated at $15 billion
over three years, to the financial services marketplace.
H.R. 10 would also give customers more choices. Individuals and corporate customers
worldwide are demanding to have all their financial needs met by a single firm. The ability of
securities firms, insurance companies, and banks to affiliate would allow a single financial
services firm to meet those needs. Individuals may choose a full-service provider because they
value something as simple as a single monthly statement showing their checking account
balances, securities holdings, retirement account investments, and insurance policy values.
Corporate customers might take advantage of banking, securities and insurance services from one
provider without having to reveal confidential information to several different entities. Many of
the cross-industry acquisitions of securities firms by banks allow one institution to provide a
broader range of products and services to its customers.
For many years, SIA has supported financial modernization legislation that embodies the
principles of competition without federal subsidies, functional regulation, and a two-way street.
We believe that H.R. 10 satisfies those three principles.
First, the legislation should not pen-nit securities, insurance, and other non-banking activities to
be covered by, and potentially to jeopardize, the deposit insurance system. H.R. 10 protects the
deposit insurance system from the risks imposed by securities and insurance I activities. With
certain carefully defined and limited exceptions, H.R. IO provides that all securities and
insurance activities must be conducted in separately-capitalized affiliates of a bank, rather than in
the bank itself. As a result, these activities would not pose a risk to the deposit insurance system
and taxpayers would not be forced to indirectly subsidize banks that engage in those activities.
Second, the legislation would require each financial institution to be functionally regulated. One
regulatory agency should apply the same set of rules to the same activity engaged in by any
financial institution, regardless of the type of institution it may be. SIA strongly believes that the
Securities and Exchange Commission (SEC), the self regulatory organizations (SR0s) and the state securities administrators should regulate securities activities regardless of what entity performs those activities. Similarly, the appropriate federal or state banking regulator should regulate banking activities, and the appropriate state insurance regulator should regulate insurance activities. Functional regulation assures that the most knowledgeable regulator is supervising a financial institution's activities. In the securities markets, all participants would be equally subject to the principle of complete and full disclosure and regulation by the SEC and SROs. The guiding principle of disclosure protects investors, encourages innovation, and ensures fair markets. Indeed, under this regulatory structure, the U.S. capital markets have set the global standard for integrity, liquidity, and fairness. Investors
understand the protections they are afforded and market participants understand their obligations.
Moreover, functional regulation eliminates regulatory discrepancies and the resulting competitive
advantages between financial services firms engaging in the same activities. Under H.R. IO, all
securities activities would be performed outside of a bank, except for a small number of
carefully-defined securities activities that traditionally have been conducted in banks.
Third, the legislation provides for a two-way street by permitting securities firms, insurance companies, and banks to freely affiliate with one another, on the same terms and conditions, and to engage in any activity that is financial in nature. SIA believes the definition of "financial in nature" must be broad enough to permit securities firms to affiliate with any type of financial services firm, and to engage in any type of financial services activity, including those in which they have always engaged. H. R. 10 contains a definition of financial in nature that, for the most part, is sufficiently broad.
SIA supports several other critical provisions in H.R. 10. For example, H.R. 10 adequately
balances the need for appropriate regulation of financial services firms with the need of financial
services firms to operate without unnecessary government regulation. H.R. 10 grants the Federal
Reserve Board oversight and regulatory authority over holding companies and their subsidiaries.
However, the bill appropriately limits the Board's authority over regulated entities (such as
securities firms) to situations such as those when the Board is not able to obtain necessary
information from the regulated entity's primary regulator (such as the SEC), or when necessary to
protect an affiliated bank or the financial system.
H.R. 10 also creates wholesale financial institutions (WFIs), which are banks that do not accept
insured deposits - that is, they generally do not accept deposits under $1 00,000 - and whose
deposits are not insured by the federal government. WFIs would provide commercial banking
services to institutional customers without imposing any risk to the bank insurance fund or U.S.
SIA has concerns with some of the provisions in H.R. 10. We believe H.R. 10 inappropriately expands bank powers in some cases, most notably by permitting banks to directly underwrite and deal in municipal revenue bonds. We have also long-supported the concept of a commercial basket, which would permit securities firms to invest in, and maintain their longstanding investments in, commercial businesses that do not engage in financial activities. Although H.R. 10 does not include a commercial basket - which we think would assure a true two-way street - it does provide for broad affiliations in the financial area to warrant its support. We also urge the Senate to reexamine a provision that was added at the last minute to the House bill. The House approved an amendment to require disclosure of fees, mark-ups, and other transaction costs without holding hearings on the provision or providing the opportunity for thoughtful consideration. SIA believes that should the need arise, regulators have sufficient authority to address the issues throough their existing regulatory powers.
Although the securities industry would prefer that these provisions be modified, we know that time is short and it may not be possible to reassess these concerns. H.R. 10 is the culmination of years of work and compromise by every segment of the financial services industry. In the process of reaching this compromise and passing the House, a number of difficult decisions have already been made. This Committee, and the Senate, will undoubtedly face other divisive issues, but many of the traditional impediments to enactment of financial modernization legislation have been removed. You have the opportunity to resolve the remaining concerns in a way that improves the bill and increases support among the financial services participants.
In conclusion, H.R. 10 strikes a fair and equitable balance between various financial
services sectors and we believe the legislation deserves your support. Although the regulatory
framework governing the U.S. financial services industry met its original objectives, its
effectiveness has been eroded by changes unimaginable to its creators. Laws developed to
restore public confidence in our nation's financial institutions now hinder the competitiveness of
financial services firms, drive up costs, and inhibit the growth of our dynamic industry.
Congress has the opportunity to enact much-needed reformsthat reflect today's new financial
marketplace and give consumers more and better choices. SIA looks forward to working with
this Committee and your colleagues to enact H.R. 10 this session.
1. The Securities Industry Association brings together the shared interest of nearly 800 securities
firms, employing more than 380,000 individuals, to accomplish common goals. SIA members -
including investment banks, broker-dealers, and mutual fund companies - are active in all
markets and in all phases of corporate and public finance. The U.S. securities industry manages
the accounts of more than 50million investors directly and tens of millions of investors indirectly
through corporate, thrift, and pension plans and account for $270 billion of revenues in the U.S.
economy. (More information about SIA is available on its home page: http://www.sia.com.)
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