Recent Developments in Financial Services Modernization, February 1999

Washington, DC, February 18, 1999 - On February 10, the House Banking and Financial Services Committee held a hearing on H.R. 10, the "Financial Services Act of 1999." (The Institute's testimony is available elsewhere on this site.) In an unexpected development shortly before the hearing, SEC Chairman Arthur Levitt informed Committee Chairman James Leach (R-IA) that the SEC cannot support H.R. 10 as currently drafted. Chairman Levitt's objectives for financial modernization are summarized below.

SEC Opposes Current H.R. 10
In a departure from last year's support, SEC Chairman Levitt, in a February 4 letter to Banking Committee Chairman Leach, said that the Commission cannot support H.R. 10 as currently drafted. These concerns were reflected in the SEC's testimony before the House Banking Committee on February 12. Chairman Levitt provided an outline of the SEC's objectives for financial modernization, which include:

maintaining aggressive SEC policing and oversight of all securities activities;
protecting mutual fund investors with uniform adviser regulations and conflict-of-interest rules;
safeguarding customers by enabling the SEC to set net capital rules for all securities businesses;
protecting investors by applying the SEC sales practice rules to all securities activities; and
enhancing global competitiveness through voluntary broker-dealer holding companies.

Chairman Leach has announced that the House Banking Committee markup on H.R. 10 will take place on March 4. Meanwhile, Senate Banking Committee Chairman Phil Gramm (R-TX) has scheduled hearings for February 23, 24, and 25, with Federal Reserve Board Chairman Alan Greenspan testifying on February 23. Chairman Gramm has rescheduled markup on the legislation for March 3.

H.R. 665, "Financial Services Modernization Act"
On the same day as the hearing, Representative John LaFalce (D-NY), the ranking Democrat of the House Banking Committee, introduced H.R. 665, the "Financial Services Modernization Act of 1999." While there are several differences between this bill and H.R. 10, one important similarity is that in all key aspects the functional regulation provisions are the same. The most significant difference between the two bills for the investment company industry is the creation of a commercial basket. H.R. 665 would allow the creation of a 15 percent commercial basket. Specifically, this would allow qualified bank holding companies to own an interest in a commercial, nonfinancial firm, so long as that firm generates less than 15 percent of the holding company's gross domestic revenues. A cutoff level would prohibit a qualified bank holding company from acquiring any commercial firm with consolidated assets exceeding $750 million, effectively precluding acquisition of the top 1,000 commercial firms.

The Administration generally supports the LaFalce approach; the only exception is the Administration's continued opposition to the commercial basket. In particular, the Treasury supports the bill's compromise on the activities of national bank operating subsidiaries that will include all new financial activities except insurance underwriting and real estate development. Inability to resolve this issue was the source of the Treasury Department's veto recommendation last Congress.