together and by limiting the activities of both the bank and bank holding company affiliates. Permitting only nonbank affiliates of bank holding companies to offer new activities will not keep the benefits of any subsidiary from spreading beyond the bank. Limiting the activities of bank subsidiaries would yield a destabilized hollow bank with a very limited base of income-producing products and services. Such a bank would be teetering on the whims of the business cycle without the benefits of diversification or counter-cyclical fee income available from new activities. The safety and soundness of our banking system would deteriorate, and public policy would not be served. Financial modernization must allow banks flexibility in determining their corporate structure, so long as they adhere to principles of safety and soundness. Choice, when consistent with safety and soundness, makes sense. The strength of our economy is built on the individual decisions made by thousands upon thousands of independent entrepreneurs and small businesses, each with different visions of the future. Permitting choice, in and of itself, adds value. Businesses have different strengths, weaknesses, strategies, and cultures. Those who operate these businesses day-to-day know better than the Government which structure will allow them to operate most efficiently and effectively. Absent a convincing public policy reason, it is not Government's role to tell financial services firms how to structure their business. To implement legislative prescriptions based on this mistaken claim not only would provide a flawed basis for public policy but also would lead to undesirable 1840 1850 1960 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1989 Year *Ratio of aggregate dollar value of bank book equity to aggregate dollar value of bank book assets. SOURCE: Statistical abstract through 1970. Report of condition thereafter. 1 Graph in U.S. Department of the Treasury, "Modernizing the Financial System: Recommendations for Safer More Competitive Banks," February 1991. RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM COMPTROLLER EUGENE LUDWIG Q.1. You have established a "National Access Committee" to address access to financial services. What is the purpose of this Committee and what do you think it can achieve? A.1. The National Access Committee (NAC) will support OCC's efforts related to the OCC's fourth pillar, which I described in my written testimony-to assure fair access to financial services for all Americans. The NAC is the focal point for our efforts to improve access to the financial services, particularly to the underserved, women, minorities, low- and moderate-income households, and small business owners. The NAC will assure that the OCC's access objective is integrated into the work of the agency, and it serves as a focal point for the ideas and initiatives of OCC's employees. The NAC plays a central role in developing policy by sponsoring and coordinating research and analysis on access issues at the OCC. It is also responsible for organizing the dissemination of access-related materials and presentations inside and outside the agency. Specifically, the Committee will: • Conduct research on access to financial services using data from OCC's compliance examinations and other sources; • Oversee an initiative to extend the frontiers of banking to households who are not now bank customers through educational forums, dialogue, and policy research, including coordinating the OCC's support of the Treasury Department's efforts to increase access to financial services, particularly EFT 99; • Conduct research on the impact of credit scoring on consumer access to banking services; and • Conduct an analysis of how on-line banking may be used to facilitate access to financial services. The Committee's diverse membership, which includes the OCC's safety-and-soundness examiners, compliance examiners, attorneys, economists, district community reinvestment/development specialists, and the Director of Community Relations, brings a wide range of skills and experience to this effort. Q.2. If a national bank takes advantage of Part 5 and moves its securities brokerage activities to an operating subsidiary, is the subsidiary a "bank" and thus exempt from the definition of brokerdealer? A.2. No. Bank operating subsidiaries engaged in securities brokerage activities are not "banks" and are subject to the broker-dealer registration requirements and regulation under the Federal securities laws to the same extent as any other nonbank entity. While the definitions of both "broker" and "dealer" in the Securities Exchange Act expressly exclude banks, bank affiliates, including subsidiaries, are not excluded. 15 U.S.C. §§ 78c(a) (4) and (5). Therefore, bank subsidiaries acting as brokers or dealers must register with the SEC, must become members of the National Association of Securities Dealers, Inc., and are subject to the same laws, regulations, and rules as any other broker-dealer. The OCC has routinely acknowledged the Exchange Act's registration requirements when authorizing brokerage activities involving bank operating subsidiaries. See e.g., OCC Conditional Approval No. 139 (Mellon/Dreyfus Acquisition) [1994 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,557 (May 4, 1994); Decision of the OCC Establishing an Operating Subsidiary to be Known as Security Pacific Discount Brokerage Services, Inc. [1982 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 99,284 (August 26, 1982). Q.3 Is it legally certain that all future comptrollers after you will share your interpretation? A.3. Current law is very specific that only banks are exempted from the definitions of "broker” and “dealer” under the Securities Exchange Act. Bank affiliates and bank subsidiaries are not included in the exemption, and the exemption could not be interpreted to include them unless current law is changed. Q.4. If a bank subsidiary engages in underwriting activities and the parent bank is the seller of the securities, is the bank subject to the investor protections imposed by the SEC? A.4. Bank subsidiaries engaged in underwriting activities are subject to applicable Federal securities laws, including all the market conduct and investor protection standards that the securities laws and regulations apply to entities engaged in underwriting securities. A bank acting as a broker selling securities is subject to the anti-fraud provisions of the Federal securities laws and regulations. While the detailed requirements applicable to brokers do not apply to banks because of the exemption of banks from the definition of a "broker" under the Securities Exchange Act, the OCC applies standards to bank brokerage operations that are substantially equivalent to the investor protections imposed by the SEC. These provisions include the following investor protections: • Retail bank brokerage activities are covered by the investor protection provisions of the Interagency Statement on Retail Sales of Nondeposit Investment Products, issued February 15, 1994 (Interagency Statement). For example, the Interagency Statement provides that "if depository institution personnel recommend nondeposit investment products to customers, they should have reasonable grounds for believing that the specific product recommended is suitable for the particular customer on the basis of information disclosed by the customer." The Interagency Statement also directs banks to ensure their sales personnel receive comparable training to their counterparts in the securities industry. In addition, the Interagency Statement directs, among other things, that banks: disclose the risks associated with the investment products and the nature of those products; disclose the lack of FDIC coverage; and take steps to minimize the risk of investor • In addition, the OCC's Recordkeeping and Confirmation Requirements for Securities Transactions Regulation (12 C.F.R. Part 12) imposes detailed recordkeeping, customer notification, and other requirements upon national banks acting in a brokerage capacity. These Part 12 requirements are consistent with the comparable requirements imposed upon registered broker-dealers by the securities laws. confusion. • Bank brokerage activities conducted for national banks' trust accounts are covered by 12 C.F.R. Part 9 and include a series of investor protection provisions. For example, 12 C.F.R. §9.12 restricts self-dealing and conflicts of interest by a national bank acting as a fiduciary. Q.5. How do you think that you can keep Part 5 from setting off a "competition in laxity" that occurs when the other bank regulators perceive that you have enhanced the national bank to the disadvantage of the holding company, or the State, or nonmember bank? A.5. The availability of chartering choices and the potential for new approaches to the banking business is at the heart of our dual banking system. As a result, regulators have healthy incentives to promote high quality and efficient supervision. These incentives have yielded bank innovations in products and services over the years, including products we now take for granted such as adjustable rate mortgages and interest-bearing transaction accounts. This healthy competition is not, and should not become, a "competition in laxity" of regulation or supervision. History shows that bank regulators must revise their regulations periodically to recognize changes in the financial services marketplace. These revisions occur incrementally as regulators acquire new knowledge about rises facing the banking system and can make informed determinations about the most effective ways to supervise that risk. This dynamic is an important part of the ongoing nature of our Nation's regulatory system. The OCC's recently revised Part 5 regulation established a process for national banks to seek approval to engage in activities that are part of or incidental to the business of banking but that are different from those the bank may engage in directly. Many States already authorize their banks to engage in a variety of activities not permissible for national banks, either directly or through a bank subsidiary. Part 5 lays out the specific safety and soundness safeguards that apply to all operating subsidiaries engaging in activities not permissible for the bank, and the OCC will impose additional safeguards as needed. Part 5 protects the interests of America's taxpayers by establishing a prudent process through which banks can respond to new marketplace demands for financial products and services and better position themselves to weather economic cycles. Part 5 will not trigger a "competition in laxity" or disadvantage the bank holding company and State charter. An incremental expansion in the potentially permissible activities of national bank subsidiaries is simply a response to the realities of a modern financial marketplace that helps banks to choose the organizational form most suitable to meet their business needs. As is the case today for activities that are permissible for the bank, some banking firms will conduct activities through affiliates of the holding company and others will use operating subsidiaries. Q.6. Is there a way that regulators can be urged to heed public policy concerns even if it means a loss to them of regulatory turf? A.6. Congress expresses its public policy goals for the banking agencies through legislation. The banking regulators cannot com promise these public policy goals-such as safety and soundness, access to credit, and fair lending-without compromising the heart of their supervisory responsibility. Actions by a regulator that seeks to preserve the regulatory turf at the cost of ignoring public policy concerns would be self-defeating in the long run. The subsequent damage to the banking industry, as evidenced by bank failures, discriminatory lending practices, or other signs of an industry that was not fulfilling public policy goals, would only lead to criticism of the regulator that would offset any short-term gain. Q.7. How do you propose training your bank examiners to understand the new activities engaged in by banks through the bank subsidiaries? A.7. Bank supervision must evolve as the banking industry evolves to meet the changing needs of the Nation's economy and American consumers. In my term as Comptroller the OCC has taken many steps to do just that, including internal reorganizations to make effective use of our resources and provision of specific training for examiners. For instance, we have undertaken numerous organizational changes to improve our ability to monitor and effectively supervise emerging risks, in new and existing activities. Three years ago, we created the Risk Analysis Division in our Economics Department. Economists from that division assist our examiners in evaluating banks' use of quantitative models to measure, monitor, and control market risk, interest-rate risk, and credit risk. Last year, we created a new position, the Deputy Comptroller for Risk Evaluation, to serve as our national risk expert and as my principal advisor on risks facing the National Banking System. The new Deputy Comptroller helps the OCC identify risks, assists in developing timely supervisory responses, and monitors those responses to ensure that they are effective. Early this year, we established a Bank Technology Unit to focus on the impact of the changing technology on national bank activities. This group is responsible for determining how the use of technology can best be supervised, and providing training and support to OCC's examiners who specialize in bank use of technology to ensure that national banks are managing this risk appropriately. Currently, we are undergoing a realignment of our operational and policy units. On the operations side, we are restructuring our supervision units to recognize the differing risks and supervisory challenges posed by large, mid-size, and small banks. We believe these changes will create a more flexible and more efficient organizational structure and allow the OCC to respond better to an industry that has and will continue to change. On the policy side, we created risk speciality units for asset management, banking technology, capital markets, and community and consumer policy. These units are charged with ensuring that we keep abreast of emerging risks, and that we have appropriate policies and examination expertise in these key areas. We are also developing and implementing training programs to cover new activities in order to ensure effective supervision. For example, in recent years, we have developed significant training programs in a number of technical product areas, such as capital |