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and capacity of any national brokerage firm, it also is the "only firm" to offer the "service, convenience and unique insight of the region's premier banking organization." Readers are encouraged to find out "how a regional bank can meet your investment needs on a national scale."

ACTUAL BANK SALES PRACTICES: WHAT SURVEYS SHOW

While many states have visited bank lobbies over the last several weeks to gain a better understanding of how it is that banks are promoting their brokerage activities, the Texas State Securities Commission and the New Jersey Bureau of Securities each conducted very similar informal surveys during February 1994." It is instructive to look at the results of the surveys conducted in these two states and to compare those findings with what was uncovered in a Consumer Reports1 investigation of 40 banks in five states. (See the next page for side-by-side comparison of survey results.)

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Examiners from the Texas State Securities Board targeted three general geographic regions and, posing as potential customers, requested information on uninsured bank products. The geographic regions were Houston/La Grange, Austin/Georgetown/San Antonio, and Dallas/Irving. In total, 30 banks were visited. The New Jersey Securities Bureau visited a total of 18 banks in Bergen, Middlesex, and Morris counties.

18 "Should You Buy Mutual Funds From Your Bank?" Consumer Reports, March 1994, pp 148-150.

The nearly identical results of these three independent surveys go a long way in explaining why it is that consumers are confused about the uninsured nature of investment products and the risks and fees associated with them.

80-222 0-94-7

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CLOSING THE CONSUMER PROTECTION GAP:

CURRENT AND NEEDED REMEDIES

Mr. Chairman and Members of the Subcommittee, there can be no doubt that the existing statutory framework is woefully outdated and not up to the demands of a rapidly changing marketplace. Others who have testified before me have provided an excellent overview of the shortcomings of our current laws. I will not repeat those points, but rather will discuss pending measures and other steps NASAA believes should be taken to address the serious consumer protection problems arising from the ever-widening sale at banks of uninsured investment products.

As you may know, NASAA, AARP and the Consumer Federation of America (CFA) developed the following minimum standards for evaluating Congressional reform legislation in this area:

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Mandatory use of disclosure that is proven to work. It is clear that what is being done now in terms of disclosure is not working. Disclosure about the risks of uninsured bank products should be in the form of a concise and "simple English" document and related lobby posters. No sale of an uninsured product should be permitted to take place before the disclosure document is provided and the consumer signs a statement indicating an understanding that mutual funds, stocks and annuities sold at banks are not FDIC insured. In view of the apparent ineffectiveness of current disclosures, AARP, CFA and NASAA are prepared to assist in the development and testing of model disclosure documents and other materials that can be proven to be effective at eliminating the current consumer confusion about the extent of FDIC insurance coverage.

A ban on naming or advertising uninsured bank products in any way that creates confusion with insured bank products or the institution itself. Many consumers mistakenly believe that uninsured bank products are FDIC insured in the same manner as traditional bank products. As a result, every precaution must be taken to avoid undue confusion in the consumer's mind about the "dividing line" between uninsured products on the one hand and the safety and soundness of the bank and its traditional insured products on the other. The use of the same or similar names and logos of banks and their affiliates or subsidiaries should be prohibited. Additionally, some mutual funds and other uninsured investment products sold at banks should be renamed in order to bring an end to existing instances of the blurring of the line between uninsured and insured bank products.

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o No "gap" in the consumer protection available to bank customers buying investment products. Consumers who invest in mutual funds and stocks through brokerage firms or investment companies are provided a comprehensive framework of consumer protections, including suitability requirements, fair dealing and disclosure of risks and costs. Though much of the activity in investments sold through banks is conducted by subsidiaries registered as broker dealers, there is the potential for banks to deal directly with individuals and firms who would not be subject to brokerdealer regulation. This disturbing possibility has already become reality in some instances. At the same time, a serious effort must be undertaken to review the extent and effectiveness of current state and federal regulatory oversight. All investors in mutual funds, stocks and annuities should be accorded the same level of consumer protection.

A mandatory physical separation of the sale of insured and uninsured products within banks. The commingling of insured and uninsured activities in bank lobbies greatly increases the potential for consumer confusion. Because of this, no bank should be able to sell insured and uninsured products from the same desk, window or lobby area. A clear, physical separation should exist (along with appropriate lobby posters) in order to distinguish the areas within banks where the two types of products are sold.

NASAA is pleased to lend its strong support for H.R. 3447, the "Securities Regulatory Equality Act," legislation which would provide for the functional regulation of bank securities activities and thus close the "consumer protection gap" that now exists. The current mismatched 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 and the banking regulators grapple with a previously unknown world. The continued exclusion of banks from the definitions of "broker" and "dealer" serves no public interest, and to the contrary, means that banks need not comply with the customer protection, net capital, and books and records rules specifically designed to protect investors. What purpose is served in allowing for expansive securities powers for depository institutions and yet not subjecting those activities to legally-enforceable and appropriate oversight? It certainly is not investor interests that are served by such a gaping hole in the regulatory structure. Banks that act as broker-dealers, are, of course, subject to federal banking laws. However, those Jaws are designed to protect the banks and their depositors, not investors.

In addition, banks may serve as investment advisers to certain mutual funds without registering under the Investment Advisers Act of 1940. As a result of this loophole, shareholders in mutual funds advised by banks, unlike their counterparts in other mutual

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funds, do not receive the protections of that Act's provisions, including those related to the recordkeeping and inspections conducted by the Securities and Exchange Commission (SEC) and those restricting performance-based fees and agency crosstransactions. H.R. 3447 would remove the exclusion for banks from the definition of "investment adviser" under Section 202(a)(3) of the Investment Advisers Act if the bank or bank holding company acts as an investment adviser to a registered investment company. NASAA strongly supports this provision.

H.R. 3447 not only addresses the consumer protection gap by significantly narrowing the exclusions from the various securities laws for banks, the legislation also addresses the issue of similar or common names. Section 116 of the bill would prohibit any registered investment company that has as an investment adviser or distributor a bank or its affiliate from adopting any word or design that is the same as, similar to, or a variation of the name, title or logo of the bank. NASAA's view is that such a requirement will greatly assist in reducing consumer confusion concerning the uninsured status of investmentrelated products. NASAA further believes that such requirement should be applied retroactively.

As Congress considers this issue, NASAA respectfully encourages you also to incorporate measures requiring plain-English disclosure so that consumers are provided with meaningful and understandable information on which to base their financial decisions and that you consider the issue of physical separation of the banking and brokerage activities in bank lobbies. Both issues have emerged as particularly troubling to consumers and should be corrected.

STATE EFFORTS

It also is recognized that a serious effort must be undertaken to review the extent and effectiveness of current state securities regulatory oversight. The first order of business for state securities regulators was to gather information about what is going on in the marketplace and to get a better sense of how it is that banks are entering the securities business. The NASAA committee which I have been asked to chair, the Banks Securities Committee, was established last September and we have been charged with reviewing state securities laws and regulations to determine what changes we may need to make to take into account the expanding role banks are playing the securities marketplace. In addition, NASAA is taking a hard look at our current authority to see what changes may be necessary in our oversight of registered broker/dealers who operate on bank premises. In addition, a number of individual states also are moving to put in place new rules governing the bank activities of broker/dealers.