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bers about the steadily increasing role of banks in the securities markets at a time when there are no legally mandated investor safeguards.
The fact is that the laws and regulations governing the activities of financial institutions simply have not kept pace with the dramatic changes in the market place. While there may have been many serious efforts over the years to rationalize the oversight of the new bank activities, we nonetheless are left today with a regulatory system that defies common sense. It is wholly inadequate, and potentially could result in a serious and devastating loss of consumer confidence.
There can be no doubt that the existing statutory framework is woefully outdated. It is not up to the demands of a rapidly changing marketplace.
Others who have testified before me today have provided you with an excellent overview of the shortcomings of our current laws. NASAA joined with the AARP and the Consumer Federation of America, CFA, to develop the following minimum standards for reform legislation in this area.
One, mandatory use of disclosure that is proven to work.
Two, a ban on naming or advertising uninsured bank products in any way that creates confusion with insured bank products' or the institution itself.
Three, no gap in the consumer protection available to bank customers buying investment products.
And, four, a mandatory physical separation of the sale of insured and uninsured products within banks.
NASAA is very pleased to lend its strong support for H.R. 3447, the Securities Regulatory Equality Act. This legislation would provide for the functional regulation of bank securities activities and thus close the consumer protection gap that now exists.
Our outmoded regulatory system has forced most securities regulators for definitional and jurisdictional reasons to watch from the sidelines as banks become more and more active in the securities marketplace. The continued exclusion of banks from the definitions of "broker," "dealer," and "investment adviser" serves no public interest. And, to the contrary, means that banks need not comply with the consumer protection, net capital, and books and records rules that were specifically designed to protect investors.
Mr. Chairman and members, NASAA respectfully urges Congress to move swiftly to adopt H.R. 3447 and to ensure that this Nation's financial system is one that inspires confidence on behalf of consumers and operates as efficiently and safely as possible.
[The prepared statement and attachment of Ms. Crawford follow:]
on behalf of the
Mr. Chairman and Members of the Subcommittee:
My name is Denise Voigt Crawford. I am Securities Commissioner for the state of Texas and chair of the Banks Securities Activities Committee of the North American Securities Administrators Association (NASAA), on behalf of which I appear here today. In the U.S., NASAA is the national voice of the 50 state securities agencies responsible for investor protection and the efficient functioning of the capital markets at the grassroots level.
| appreciate the opportunity to appear before the Subcommittee on Oversight and Investigations to comment on the very serious consumer protection issues that arise from the sale of uninsured investment products on bank premises'. As you are well aware Mr. Chairman, the primary function of state securities regulation is the protection of small investors from fraud and abuse in the capital markets. As a result, we see the day-to-day implications of what at times may be thought of on the national level only in theoretical terms, or worse yet, dismissed as mere "turf battles."
Today, state securities regulators across the country are reporting mounting evidence of consumer confusion about the lack of insurance coverage, and the risks and fees associated with the sale of uninsured products sold on bank premises.? An informal look by several states at what is actually going on in bank lobbies makes it very clear why consumers are so confused: the marketplace is sending them a bewildering variety of mixed, gobbled and misleading messages. Among the problems uncovered by states at the banks were: a blurring of the distinction between traditional bank activities and the sale of uninsured products; inadequate or misleading disclosure; and a serious gap in the consumer protection available to consumers who purchase securities on bank premises.
A more comprehensive look at the ramifications of this issue on the individual level may be found in the national opinion survey released in January by NASAA and the American Association of Retired Persons (AARP). What this survey revealed was that the vast majority of American bank consumers are unaware of the risks and fees involved in the uninsured investment products, such as mutual funds and annuities, that are now increasingly available at U.S. banks and other financial institutions. The survey data indicate that fewer than one in five bank customers knows that mutual funds (18 percent)
For purposes of simplification, the term "bank" is used throughout this testimony to refer to financial institutions generally, including thrifts, savings and loan associations and credit unions.
This is not to say that NASAA is opposed to the sale of uninsured products on bank premises. In fact, it is the Association's position that banks are now another option for consumers who have money to invest mutual funds, stocks and annuities and understand the risks in doing so. Our goal is to make sure that there is no "consumer protection gap" in relevant regulation.
and annuities (14 percent) are not insured by the Federal Deposit Insurance Corporation (FDIC). The survey also found that a substantial number of Americans are: unsure about the risks involved in such investments sold at banks; not questioned about the appropriateness of these investments for their needs; and unaware of where to turn for regulatory help in the event they have a problem with an uninsured investment purchased at a bank.
What state securities regulators see in these numbers is a distressing pattern of confusion and false comfort on the part of bank customers, a very substantial portion of whom do not seem to grasp the fact that banks have moved beyond its narrow and traditional business of selling only FDIC-insured products. When the next market correction takes place, millions of U.S. consumers may end up learning the hard way that there is no safety net for mutual funds and stocks sold at banks.
We know what happened with the outpouring of consumer panic and distrust in the wake of 1987's "Black Monday." At that time, most of the backlash was focused against brokerage firms and investment companies. Now banks have opened themselves up to the same reaction from the public. As a result, this is more than just a matter concern for consumers; this is something that has the potential to emerge down the road as a real test of the public's perception of the safety and soundness of banks.
It is NASAA's view that the time has come for federal legislation to comprehensively address the interrelated issues of securities activities conducted on bank premises and the safeguards needed to protect investors. It is abundantly clear that banks already are in the securities business in a major way. The proposed Mellon/Dreyfus merger serves to underscore and to bring into focus the concerns expressed by NASAA and its members about the steadily increasing role of banks in the securities markets and the lack of legally-mandated investor safeguards. This is a situation that simply cannot be allowed to go on in an "ad hoc“ fashion.
The simple fact is that the laws and regulations governing the activities of financial institutions have not kept pace with the dramatic changes in the marketplace. While there have been many serious efforts over the years to rationalize the oversight of the new bank activities, we nonetheless are left today with a regulatory system that defies common sense, is wholly inadequate, and potentially could result in a serious and devastating loss of consumer confidence. NASAA respectfully urges Congress to move swiftly to ensure that this nation's financial system is one that inspires confidence on behalf of consumers and operates as efficiently and safely as possible.
NASAA would like to take this opportunity to commend Chairman Dingell and other members of the Energy and Commerce Committee for the leadership role you have played over the years in focusing attention on the shortcomings of the current regulatory system and for your unflagging dedication to prudent regulation
NASAA supports the adoption of legislation, such as H.R. 3447, that recognizes the special circumstances that arise when uninsured products are sold at banks that have spent many decades persuading consumers to trust them because of the FDIC protection available for their traditional deposit products. At the same time, we would urge federal banking regulators to proceed cautiously and to exercise restraint with respect to allowing new investment-related activities on bank premises before the appropriate investor safeguards are put in place. The status quo of inconsistent and ad hoc application of investor protection standards simply is not acceptable.
THE EROSION OF GLASS-STEAGALL BARRIERS
The issue of whether commercial banks should be allowed to tap into new sources of business, including the sale of uninsured products on bank premises either directly or indirectly, is no longer an academic question. The fact is that many of the restrictions on the securities activities of banks erected by the Glass-Steagall Act have been eroded or removed through judicial and administrative decisions', thereby allowing banks and their non-bank affiliates to participate in a broad range of uninsured investment-related activities.
The regulatory and court decisions creating loopholes in the Depression-era law banning banks from the securities business have been in place for several years now. But it has only been recently that low interest rates have prompted the explosive growth in the sale through banks of uninsured products. As these low interest rates have propelled consumers to search beyond traditional bank savings products for better returns, more and more banks have moved to offer their clientele a wider range of financial products. Mutual funds, popular with consumers for a number of reasons, are one of the investment alternatives that many banks are providing in their bid to retain customer assets and generate new sources of revenue.
Banks are now major participants in the securities markets and it is likely that their involvement will continue to grow as bank customers move away from insured deposits into mutual funds and other uninsured products. Today, about one-third of all mutual
Banking Act of 1993, 48 Stat. 162-95 (codified as amended in various sections of 12 U.S.C.).
For example, the Office of the Comptroller of the Currency has used the "incidental powers" clause of the National Bank Act to allow national bankers to engage in certain activities once considered the exclusive territory of investment and insurance firms. The Federal Reserve has used the "closely related" language of the Bank Holding Company Act to expand the permissible product and service lines for bank holding companies.
funds are available through the bank channel. Why are banks expanding beyond their traditional base and moving into recommending or selling to retail customers non-deposit investment products, such as mutual funds and annuities? It may be because selling investment-related products can be a profitable business and, significantly, a growth business at a time when banks are suffering a steady erosion in their traditional product lines. Banks are not only anxious to retain customers in search of higher returns, but they also are eager to tap into the growing consumer demand for mutual funds and other investments.”
While mutual funds may be the investment product of choice today, we should not assume that banks will limit their activities to such a narrow range of new activities. The proposed Mellon-Dreytus merger is a recognition of the new levels to which banks may get involved in uninsured activities. Nor should we dismiss concerns about the potential for consumer harm based on the fact that banks are now involved in the sale of uninsured products due primarily to mutual fund activity. As one industry observer so aptly cautioned, " ... the 'rising tide' in mutual fund sales has masked the fact that the mutual fund business is not immune from downturns .... " I can't help but wonder what we would be facing today in terms of a banking crisis if banks had gotten into the securities business a decade ago when the "hot" investment product was limited partnerships, which at the time were thought of by investors as good, relatively safe, stable long-term investments and have since gone sour on a colossal scale.
," Mutual Fund Research in Brief, Research Department, Investment Company Institute, May 1993.
? For example, according to data gathered for Money magazine's "Small Investor Index," from January 1, 1993, to November 1, 1993, bank depositors reportedly withdrew about $77 billion from certificates of deposit and reinvested most of the proceeds in stock and bond mutual funds. (Jordon Goodman, *Depositors Switch Billions from CDs to Mutual Funds," Money, December 1993.) To be sure, not all of the money going into bank mutual funds is coming from maturing CDs. In fact, money from maturing CDs accounted for only about 5.5 percent of the individuals who invested in stock or bond mutual funds from July 1991 to July 1993. The bottomline is that the money flowing into mutual funds is coming from more sources than just maturing CDs. (Stan Hinden, "Some Wrongs That Have Become Rites," Washington Post, November 17, 1993, p. G3.)
Matthew Fink, Investment Company Institute, "Rough Weather Ahead for Banks in Mutual Funds," American Banker, February 17, 1994, p. 29.