IT’S NOW OR NEVER (THIS YEAR) FOR FINANCIAL REFORM: LEGISLATORS JUST TALK AND TALK, SO INDUSTRY LEADERS SEEK OWN THREE-WAY COMPROMISE

With Congress fast approaching a drop-dead date for legislation allowing securities, banking and insurance companies to get into each others’ businesses, the head of the House Finance Subcommittee came forward last week with a new plan.

Rep. Michael Oxley (R-Ohio), chairman of the Commerce Committee’s Subcommittee on Finance and Hazardous Materials, has devised a compromise in a last-ditch attempt to energize the negotiations. He sent a proposal to the House Banking Committee that would be silent on the issue of whether banks could conduct new financial activities through operating subsidiaries, leaving conflicts to be duked out in the courts. But Mr. Oxley’s proposal does prevent banks from engaging in insurance underwriting, real estate development and merchant banking.

Meanwhile, frustrated financial industry executives are taking matters into their own hands. At presstime, bankers, brokerage and insurance execs were negotiating their own proposal. Leading the effort are Norwest Corp. chairman Richard Kovacevich, Dain Rauscher chairman Irving Weiser and ReliaStar Financial Corp. chairman John Turner. The proposal would merge elements of competing bills approved last year by the House’s Commerce and Banking committees.

House leaders have told lobbyists feverishly working the issue that a bill needs to be sent to the House floor by April 1 for it to have a chance at passage this year. Those chances grow slimmer by the day. The Senate has not acted on the legislation, and Sen. Banking Committee Chairman Alfonse D’Amato (R-N.Y.), whose support is critical, will be busy with his re-election battle. Mr. D’Amato, a major recipient of contributions to the financial services industry (InvestmentNews, Jan. 26), may be loathe to annoy any segment of the industry as he heads into what may be a tough – and expensive – campaign.

The battle lines are clear: insurance industry officials fear that, based on recent court rulings, banks will not be subject to state regulation, giving them an unfair advantage ove
r insurers, which are extensively regulated by states. Meanwhile, banks may have little to gain from a new law since they’ve been getting along just fine, engaging in a range of securities and insurance activities. And securities firms argue that if banks play their game, they should be subject to regulation by the Securities and Exchange Commission and the National Association of Securities Dealers.

Few details of the collaborative proposal by the industries are available, but an insurance industry lobbyist says it would require banks that engage in insurance activities to be subject to the same state regulation as insurance companies. It would let federal courts decide which regulator would have jurisdiction over new financial offerings.

An official with the Securities Industry Association would not comment on the talks, except to say that it is looking at what exemptions bankers should be granted from securities regulations when they engage in securities transactions. Trust activities of a bank are a common example of that.

“I think this is going to be the last gasp,” says a Democratic staffer on the House Banking Committee of the negotiations. “There’s a lot of smoke, but whether or not there’s really a fire that’s meaningful is a good question.”

differ over banking

The two newest proposals follow earlier financial modernization bills, one approved by Commerce and the other by Banking. The Banking Committee version would allow bankers to conduct new financial activities, like securities and insurance sales, through operating subsidiaries, rather than forcing them to set up more expensive separate affiliates as the Commerce Committee bill would do. In addition, the Banking bill leaves most activities under bank regulators, while the Commerce bill requires that each activity be regulated by agencies that normally cover the business, a concept called “functional regulation.”

Other issues remain on the table, most notably whether thrift institutions would retain their ch
arter. Both bills would phase out thrift institutions, forcing them to become banks or financial holding companies over a two-year period.

While securities companies would like to keep their thrifts, the head of government affairs for one large Wall Street brokerage says the industry would gladly give them up in exchange for the right to be able to buy banks. While the trend is toward megamergers with foreign banks, the securities industry “sits there being unable to do anything,” this official says. Recent bank mergers dwarf mergers between securities companies, he notes.

The banking industry has little incentive to agree on a bill. Banks are already winning the right to engage in securities and insurance transactions, both through court decisions and through regulatory decisions, and both bills in the House would add restrictions.

“We don’t like either the House Commerce or Banking Committee (bills),” says James McLaughlin, director of regulatory and trust affairs for the American Bankers Association in Washington. “They both represent steps back from where we are right now.”

David Winston, associate general counsel of the National Association of Life Underwriters, a Washington organization that represents 106,000 insurance agents, agrees. “Banks don’t see any need because they’re getting everything they want in the way of expanded powers from the Comptroller of the Currency.”

Still, legislation would offer them reduced regulation and powers to get into new fields without having to seek approval of each new venture.

big bond requirement

Even under regulations issued over the last year, 75% of the revenues brought in by banks’ securities subsidiaries must generally come from Treasury securities and municipal general obligation bonds. Only 25% can come from other types of investment business.

If a compromise can be forged in the House, a new battle looms in the Senate. Bills Sen. D’Amato has put forward would have allowed banks to engage in unlimited commer
cial activity, unlike the House bills.

“Sen. D’Amato has introduced the same legislation for a number of years,” says Richard Mills, spokes-man for the Senate Banking Committee. “He wanted the House to take the lead on it, especially in light of the fact that the Senate has passed the bill several times,” most recently in 1991.

Still, Mr. Oxley is optimistic about both the negotiations and the time left to act. “A lot of heavy lifting can be done in the House if we can compromise on key issues, and I think we can,” he said this month. “We hope to present the Senate with an attractive package.”