U.S. GOVERNMENT PRINTING OFFICE

70–889 PS WASHINGTON : 2001

PROTECTING CONSUMERS: WHAT CAN CONGRESS

DO TO HELP FINANCIAL REGULATORS

COORDINATE EFFORTS TO FIGHT FRAUD?

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

AND THE

SUBCOMMITTEE ON

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MARCH 6, 2001

Printed for the use of the Committee on Financial Services

Serial No. 107–2

(

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2550

Mail: Stop WWOP, Washington DC 20402–0001

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Texas

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, General Counsel and Staff Director

(III)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

SUE W. KELLY, New York, Chair

RON PAUL, Ohio, Vice Chairman

PETER T. KING, New York

ROBERT W. NEY, Texas

CHRISTOPHER COX, California

DAVE WELDON, Florida

WALTER B. JONES, North Carolina

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

ERIC CANTOR, Virginia

PATRICK J. TIBERI, Ohio

LUIS V. GUTIERREZ, Illinois

KEN BENTSEN, Texas

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

MICHAEL CAPUANO, Massachusetts

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

DAVE WELDON, Florida, Vice Chairman

MARGE ROUKEMA, New Jersey

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

MICHAEL N. CASTLE, Delaware

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

BOB BARR, Georgia

SUE W. KELLY, New York

PAUL E. GILLMOR, Ohio

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

JUDY BIGGERT, Illinois

PATRICK J. TOOMEY, Pennsylvania

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR, New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

LUIS V. GUTIERREZ, Illinois

FRANK MASCARA, Pennsylvania

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

PAUL E. KANJORSKI, Pennsylvania

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BARBARA LEE, California

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

(V)

C O N T E N T S

Page

Hearing held on:

March 6, 2001 ................................................................................................... 1

Appendix:

March 6, 2001 ................................................................................................... 47

WITNESSES

TUESDAY, MARCH 6, 2001

Albinson, Scott, Managing Director, Examinations and Supervision, Office

of Thrift Supervision ............................................................................................ 10

Bartlett, Hon. Steve, President, Financial Services Roundtable ......................... 32

Becker, David M., General Counsel, U.S. Securities and Exchange

Commission ........................................................................................................... 15

Hillman, Richard J., Director, Financial Markets and Community Investment,

U.S. General Accounting Office .......................................................................... 26

Lormel, Dennis M., Chief, Financial Crimes Section, Federal Bureau of Investigation .................................................................................................................. 14

Rodell, Thomas J., Executive Vice President and Chief Operating Officer,

Aon Risk Services, Inc., Chairman of the Council of Insurance Agents

and Brokers, on behalf of the Council ................................................................ 29

Smith, Ronald A., President, Smith, Sawyer & Smith, Inc., State Government

Affairs Chairman, Independent Insurance Agents of America, on behalf

of IIAA, National Association of Insurance and Financial Advisors and

the National Association of Professional Insurance Agents ............................. 31

Vaughan, Hon. Terri M., Iowa Commissioner of Insurance, Vice President

of the National Association of Insurance Commissioners, on behalf of NAIC 12

Williams, Hon. Julie L., First Senior Deputy Comptroller and Chief Counsel,

Office of the Comptroller of the Currency .......................................................... 8

Wuertz, Karen K., Senior Vice President, Strategic Planning and

Development, National Futures Association ...................................................... 28

APPENDIX

Prepared statements:

Kelly, Hon. Sue W. ........................................................................................... 197

Bachus, Hon. Spencer ...................................................................................... 198

Oxley, Hon. Michael G. .................................................................................... 199

Albinson, Scott .................................................................................................. 68

Bartlett, Hon. Steve ......................................................................................... 183

Becker, David M. .............................................................................................. 124

Hillman, Richard J. .......................................................................................... 139

Lormel, Dennis M. ............................................................................................ 113

Rodell, Thomas J. ............................................................................................. 166

Smith, Ronald A. .............................................................................................. 173

Vaughan, Hon. Terri M. ................................................................................... 96

Williams, Hon. Julie L. .................................................................................... 48

Wuertz, Karen K. .............................................................................................. 160

Page

VI

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Albinson, Scott:

Written resonse to questions from Hon. Sue Kelly and Hon. Spencer

Bachus ........................................................................................................... 93

Becker, David M.:

Written resonse to questions from Hon. Sue Kelly and Hon. Spencer

Bachus ........................................................................................................... 136

Hillman, Richard J.:

Written resonse to questions from Hon. Sue Kelly and Hon. Spencer

Bachus ........................................................................................................... 157

Vaughan, Hon. Terri M.:

Written resonse to questions from Hon. Sue Kelly and Hon. Spencer

Bachus ........................................................................................................... 109

Williams, Hon. Julie L.:

Written resonse to questions from Hon. Sue Kelly and Hon. Spencer

Bachus ........................................................................................................... 61

Wuertz, Karen K.:

Written resonse to questions from Hon. Sue Kelly and Hon. Spencer

Bachus ........................................................................................................... 164

National Association of Mutual Insurance Companies, prepared statement ..... 190

North American Securities Administrators Association, prepared statement .... 192

(1)

PROTECTING CONSUMERS: WHAT CAN

CONGRESS DO TO HELP FINANCIAL

REGULATORS COORDINATE EFFORTS TO

FIGHT FRAUD?

TUESDAY, MARCH 6, 2001

U.S. HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE OVERSIGHT AND INVESTIGATIONS, AND

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT,

COMMITTEE ON FINANCIAL SERVICES,

Washington, DC.

The joint subcommittees met, pursuant to call, at 2:00 p.m., in

room 2128, Rayburn House Office Building, Hon. Sue W. Kelly,

[chair of the Subcommittee on Oversight and Investigations],

presiding.

Present for the Subcommittee on Oversight and Investigations:

Chair Kelly; Representatives Cantor, Gutierrez, Bentsen, Inslee,

Capuano and Clay.

Present for the Subcommittee on Financial Institutions and

Consumer Credit: Representatives Bachus, Castle, Ryun, Biggert,

Toomey, Cantor, Grucci, Hart, Capito, Rogers, Tiberi, Waters,

Bentsen, Sherman, Gutierrez, Moore, Gonzalez, Hooley, Hinojosa

and Lucas of Kentucky.

Also Present: Representative Oxley.

Chairwoman KELLY. This joint hearing of the Subcommittee on

Oversight and Investigations and the Subcommittee on Financial

Institutions and Consumer Credit will come to order.

Without objection, all Members’ opening statements will be made

part of the record. Today we are here to hold the first of many subcommittee hearings on issues of importance to consumers, regulators and the financial services industries.

As this is a joint hearing of the Subcommittee on Oversight and

Investigations and my colleague from Birmingham, Mr. Bachus’, Subcommittee on Financial Institutions, I want to thank him for

allowing me to chair this hearing and for his invaluable thoughts

and observations on the issues before us.

In addition, I want to thank the Ranking Member of our

Subcommittee on Oversight and Investigations, the gentleman from

Chicago, Mr. Gutierrez, and the Ranking Member of the Subcommittee on Financial Institutions, the gentlewoman from Los

Angeles, Ms. Waters, for their work on this issue and for agreeing

to hold the hearing on this very important issue.

2

I look forward to continuing to work with you, along with all the

Members of our committee, as we consider potential legislation that

may result from the information that we gather at this hearing

today.

With the recent enactment of the Gramm-Leach-Bliley Act, Congress required ‘‘functional regulation’’ of our financial services industry. In order to make functional regulation work, Congress directed regulators to work together in the policing of their industries. Particularly in the insurance industry, since the enactment

of the 1994 Insurance Fraud Prevention Act, the insurance industry has been unable to access the necessary information to enforce

this law. This act prohibits anyone who has been convicted of a felony involving dishonesty or a breach of trust from engaging in the

business of insurance. However, the law did not provide any means

for potential employers or insurance regulators to check for criminal background.

Proper implementation of these acts clearly requires both increased coordination and communication among the regulators and

the highest of standards for those who work in the financial services industry. We must ensure that the regulators have all the tools

they need to meet these goals. To add to this problem, we have

clear cases where criminals, after being banned from one financial

industry, have gone to another financial industry to continue their

fraud. The best example of this is the case of Martin Frankel, who

was just reported to have been extradited back to the United

States to face charges for his crimes after his failed escape attempt

in Germany last week.

After being permanently banned from the securities industry in

August of 1992, Mr. Frankel migrated to the insurance industry,

where he is charged with perpetrating an investment scam which

stole more than $200 million from insurance companies. Representatives from the General Accounting Office are here with us today

who will provide some details of his alleged activities before he fled

the country in 1999. Mr. Frankel now faces a 36-count indictment,

with 20 counts of wire fraud, 13 counts of money laundering, and

one count each of securities fraud, racketeering, and conspiracy.

We have called this hearing to gain a better understanding of

these issues from the perspective of regulators and the industry. It

is our hope that this can lead to legislation to facilitate communication, which can prevent criminals from exploiting this perceived

weakness, as was perpetrated by Mr. Martin Frankel.

At issue before us is the impact these problems have upon consumers and what we can do to further protect consumers by better

regulatory oversight.

Before us today we are honored to have two distinguished panels

of witnesses to share their thoughts and observations about this

problem. I thank all of you for taking time out of your schedules

and fighting the snow to get down here to discuss the issues with

us.

At this point, I would like to let Members of the Committee and

their staff know that it is my intention to enforce the 5-minute

rule. I would appreciate their cooperation in this, and I would ask

staff to inform their Members of this, should their Member arrive

late for the hearing.

3

Now let me recognize Mr. Sherman, my colleague from California, for his opening statement.

[The prepared statement of Hon. Sue W. Kelly can be found on

page 197 in the appendix.]

Mr. SHERMAN. Thank you, Madam Chairwoman.

Consumer fraud is an important issue, and I am glad both subcommittees have come together to hold this hearing. We need better coordination, and the example you gave is a perfect one as to

how being banned from one industry should certainly be acknowledged by and usually lead to a ban from the other industries as

well. There is more that can be done to coordinate the financial

services regulatory scheme.

I think, though, if we are going to fight fraud, there are other

areas to look at as well as coordination. One of those is funding.

In the next day or two, the Capital Markets Subcommittee is

going to have a hearing on reducing the fees imposed on transactions, I believe with a focus of reducing the fee of 1/300 of 1 percent down to 1/500 of 1 percent.

It may very well be that is an appropriate reduction, but we

should not assume that we are doing all that we need to do and

accordingly can cut the fees to as low as they possibly could go to

keep that continuing effort alive.

I have been in public life for a while at the State and Federal

level. No one has ever come to me and complained about a 1/300

of 1 percent fee, or explained that their life would be better if it

was only 1/500 of 1 percent.

But not a year goes by when I do not hear several stories of people who are victimized by financial services fraud, usually securities fraud. We need to do more to protect investors from securities

fraud. We need to devote the adequate resources to this. We need

also to have the resources to increase our efforts. We have to devote the resources necessary to provide parity for those employed

by the SEC, and we need to look at new techniques for enforcement.

One thing that troubles me a bit, and I am not ready, without

hearing from other experts, to embrace the complete solution to

this, is that the SEC is prohibited by its own policies or perhaps

by statute from having its people pretend to be investors, which

would be the best way, it would seem, to find out what investors

are being told, what investments are being marketed. Yet I am

told, even if an SEC employee is called by one of these boiler room

operations, they have to say, ‘‘Oh, by the way, I am with the SEC.’’

Click.

What instead we ought to explore authorizing and directing the

SEC to do is to have its people pose as investors, get on the lists,

hear the telephone calls, and at least be allowed to search the web

the way investors or potential investors do to see what is being offered. That I think is an effective way to make sure that securities

that are being offered according to law and the claims being made

for them are at least within the realm of reason, and either those

claims are legal or at least close to being legal.

I have heard from so many people who have lost so much money

by the marketing of securities that are so far outside what is leVerDate 11-MAY-2000 10:32 Jul 20, 2001 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 70889.TXT HBANK1 PsN: HBANK1
4

gally allowed that I have to wonder whether we do not need more

effort in that area.

I would point out that most crimes take place in private or in the

dark. Securities fraud and other investment fraud has to take place

openly. The victim does not have a gun to their head, the victim

is there in the open, and certainly we should be able to spot crimes

that take place in the daylight even more easily than we are able

to prevent crimes that take place in the dark of night.

So, Madam Chairwoman, thank you for the hearing, and thanks

for the opportunity to make an opening statement.

Chairwoman KELLY. Thank you very much.

We have been joined by a number of other Members. I just simply would like to remind them, if their staff has not told them, that

I would like to enforce the 5-minute rule. I would really appreciate

their cooperation in this.

Next we turn to the Chairman of the Subcommittee on Financial

Institutions, Mr. Bachus.

Mr. BACHUS. Thank you, Madam Chairwoman.

I can think of no better topic which this committee can begin our

work with in this Congress than the one that brings us here together today, that is, protecting consumers by making sure our financial watchdog agencies have the necessary tools to combat

fraud and that they cooperate and coordinate their efforts in fighting fraud.

We have nearly 200 State and Federal regulators, so it is very

important. They each have separate filing systems. They maintain

separate records. It only makes good common sense that they

would coordinate and cooperate together.

I think, as Chairwoman Kelly has said, with Mr. Frankel being

extradited over the weekend back to the United States, he is certainly a high-profile poster boy for why cooperation between Federal and State financial regulators is so critical and what happens

when there is not that cooperation and coordination.

I want to thank Madam Chairwoman for convening this joint

hearing to consider the issue. This is, as I said, the first hearing

of the full committee. I am excited about the new Financial Services Committee. I am excited that Chairman Oxley will be our leader. He is a very exciting person to work with. As a former FBI

agent, I know he has a personal interest in this hearing. I know

he will be traveling back to Ohio tomorrow because of Governor

Rhodes’ death for that funeral, and I know we are all saddened by

that.

I want to thank my Ranking Member, Ms. Waters. She and I

have now been the Chairman and Ranking Member of three separate subcommittees on the Financial Services Committee. We have

always had a spirit of collegiality and candor. We work well together. I am sure that is going to continue.

So I look forward, Ms. Waters, to working with you in this Congress. She and I are both very concerned about consumer fraud.

Again, this is an appropriate place to start.

I also want to say, we have some staff changes on the Financial

Services Committee, and I want to just right up front thank Robert

Gordon and Charles Symington in the preparation for this hearing.

It was outstanding. If we come into something prepared and wellVerDate 11-MAY-2000 10:32 Jul 20, 2001 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 70889.TXT HBANK1 PsN: HBANK1
5

briefed, it can be so much more fruitful. I feel like you all have

done an excellent job preparing it. It tells me that you already have

an expertise in this area, so thank you for that.

The concept of linking together already existing databases maintained by various financial regulators and law enforcement agents

to combat fraud ought to be something that we just do, not something that we really have to work hard to do, because it does, as

I say, make good common sense. If implemented properly, such an

increase can serve as an effective early warning system when con

artists like Mr. Frankel attempt to expand the frontiers of their

criminal enterprises to new industries and new locations.

As with any effort to promote cooperation between regulators of

different industries across jurisdictional lines, achieving that objective is easier said than done. Anyone who has spent a significant

time inside the Beltway knows how difficult it is to get different

Government bureaucracies to coordinate their activities, each in an

area such as this where the benefits of such cooperation are so obvious, but, despite that, turf battles are one of Washington’s favorite pastimes. But for the sake of the consumer, we ought to put

those aside.

As I mentioned, there are logistical questions related to these different antifraud databases maintained by the agencies, and they

should be concerned about confidentiality. We should work very

hard to see that, while this kind of information is available, that

we protect it and make sure it does not get disseminated where it

should not be.

I will close again by just saying, Mrs. Kelly, I look forward to

working with you and the staff. We have some new freshman Members on the committee, and I can tell you that they are some of the

stars of the freshman class, so we are fortunate that we have got

some new Members of this committee that are very sharp. They

have come into this Congress with a lot of accomplishments. I

think they are going to be of great assistance to us right off the

bat.

Some of them are in attendance today. I am looking forward to

working with them and Chairman Oxley and the staff as we consider legislative proposals to advance the fight against financial

fraud. That fight begins by listening to those who are out there on

the front lines combatting it every day, our regulators. So we look

forward to this panel and the next panel sharing that information

with us and getting us informed enough to make the right decisions on what to do from this day forward.

Thank you, Madam Chairwoman.

[The prepared statement of Hon. Spencer Bachus can be found

on page 198 in the appendix.]

Chairwoman KELLY. Thank you very much, Mr. Bachus.

We will next go in order of appearance for the committee hearing

to Mr. Gonzalez.

Mr. GONZALEZ. I do not have an opening statement. Thank you

very much, Madam Chairwoman.

Chairwoman KELLY. Thank you very much, Mr. Gonzalez.

Next we will go to Mr. Rogers.

Mr. ROGERS. I will pass. Thank you, Madam Chairwoman.

6

Chairwoman KELLY. Next we will go to the Ranking Member of

the Subcommittee on Oversight and Investigations and someone I

look forward to working with, Mr. Gutierrez.

Mr. GUTIERREZ. Thank you very much, Chairwoman Kelly and

Ranking Member Waters and Chairman Bachus. I am pleased to

be here today. Addressing the importance of sharing information

between regulators at different financial services sectors is long

overdue, and I want to congratulate you, Chairwoman Kelly, for

calling this hearing.

The problem of financial fraud has tremendously affected not

only the financial services industry, but also the consumers. Consumers and taxpayers in States around the country ultimately pay

the consequences of lacking a centralized network to help prevent

fraud.

Clearly, the problem of financial fraud cannot be solved unilaterally by legislators, no more than it can be solved unilaterally by the

private sector. If we are to identify and respond to the problem, we

have to unite our efforts of industry and legislators at the national

level, on the national level, because I don’t think any State can do

this alone. This really requires the cooperation and, more importantly, the coordination of States alongside the Federal level.

I recognize the importance of providing all Federal and State financial services regulators with a single network where they can

obtain necessary disciplinary information regarding a financial

services company or individual. However, it is imperative that we

maintain and respect confidentiality and privacy of unrelated items

or information.

Regulators across America must be able to spot, investigate and

halt such actions as Martin Frankel’s. Congress must help by providing the necessary legal framework to help achieve this.

I hope with the information gathered here today Congress will be

able to take a firm step toward fighting financial fraud. In doing

so, we will not only be helping the industry and the public coffer

first, but also the consumers.

I look forward to hearing all of the testimony here this afternoon.

Thank you very much.

Chairwoman KELLY. Thank you, Mr. Gutierrez.

Next we are going to Ms. Hart.

Ms. HART. I will pass, Madam Chairwoman. Thank you.

Chairwoman KELLY. Next we will go to Mr. Grucci. Mr. Grucci,

have you an opening statement?

Mr. GRUCCI. Madam Chairwoman, I don’t have an opening statement, but I am interested in hearing what is going to be taking

place. I may have some questions. I reserve the ability to ask those

questions later.

Chairwoman KELLY. Thank you very much.

Ms. Hooley.

Ms. HOOLEY. I have no opening statement. Thank you.

Chairwoman KELLY. Ms. Waters.

Ms. WATERS. Thank you very much, Madam Chairwoman.

I don’t have an opening statement, but I would like to first congratulate you and Chairman Bachus on your new responsibilities

and to say to you that I think this is a good start, that we have

two subcommittees cooperating. Oftentimes, we kind of run off and

7

do duplicative work. This is a good sign that we will be able to

move forward together.

As you know, Mr. Bachus and I did work very well on the Domestic and International Monetary Policy Subcommittee, where we

had the honor of being in the forefront of the debt relief initiative

that has been supported by almost everybody in this House and

passed.

So I am looking forward to the opportunity not only to serve as

Ranking Member on the Subcommittee on Financial Institutions

and Consumer Credit with Mr. Bachus, but, again, on working

with you and the other chairs of committees.

I would also like to thank Mr. Gutierrez for accepting the responsibility to serve as the Ranking Member on the Subcommittee on

Oversight and Investigations.

Let me just say that even though we don’t have a detailed proposal before us, that this is an important subject matter. It appears

to me that some thought has gone into what we can do to begin

to collect information and data and compile it in ways where we

can have information on consumers in this country. That may be

a good thing, but, of course, you know, as a strong civil libertarian,

I have to always be concerned about whether or not we are invading privacy, whether or not we are literally eliminating the opportunity for someone to pursue careers and to pursue their goals in

these industries unfairly in ways that will harm them if the information is not correct and complete and well vetted.

So we must be careful when we begin to compile data and information that will eliminate one’s ability to work or to perform their

duties and their careers.

I also would like to hear as we go forward in this why the Treasury Department has not been included, and maybe this is just the

first draft or the first shot at how the Antifraud Subcommittee of

the Federal Financial Institutions Examination Council will be created.

So I look forward to hearing from our witnesses here today; and,

again, thank you for holding this hearing.

Chairwoman KELLY. Thank you very much, Ms. Waters.

Next we go to Mr. Cantor.

Mr. CANTOR. Madam Chairwoman, I have no opening statement.

Thank you.

Chairwoman KELLY. Thank you.

Mrs. Biggert.

Mrs. BIGGERT. Thank you, Madam Chairwoman. I have no opening statement.

Chairwoman KELLY. Thank you.

Mr. Capuano.

Mr. CAPUANO. No, thank you.

Chairwoman KELLY. Mr. Clay.

Mr. CLAY. Madam Chairwoman, I don’t have an opening statement. I am just looking forward to hearing the testimony of the two

panels. Thank you.

Chairwoman KELLY. Thank you, Mr. Clay.

Mr. Hinojosa.

8

Mr. HINOJOSA. Thank you, Madam Chairwoman. I have no opening statement, and I look forward to listening to the panelists and

asking questions at that time.

Chairwoman KELLY. Thank you.

Mr. Lucas.

Mr. LUCAS. I have no opening statement. Thank you.

Chairwoman KELLY. Mr. Bentsen.

Mr. BENTSEN. No, thank you.

Chairwoman KELLY. Thank you very much.

If there are no more opening statements, let us begin with our

first panel.

Before us today we have Julie Williams, First Senior Deputy

Controller and Chief Counsel for the Office of the Comptroller of

the Currency.

We have Mr. Scott Albinson, the Managing Director for Examination and Supervision in the Office of Thrift Supervision.

We have Terri Vaughan, the Iowa Commissioner of Insurance

and the Vice President of the National Association of Insurance

Commissioners, who is here on behalf of the National Association

of Insurance Commissioners.

We have Mr. Dennis Lormel, the Section Chief for the Financial

Crimes Section of the Federal Bureau of Investigation.

Finally, we have Mr. David M. Becker, the General Counsel for

the Securities and Exchange Commission.

We thank all of you for joining us here today to share your

thoughts on this issue.

Without objection, your written statements will be made part of

the record. You will each be recognized for a 5-minute summary of

your testimony.

Let us begin with Ms. Williams.

STATEMENT OF HON. JULIE L. WILLIAMS, FIRST SENIOR DEPUTY COMPTROLLER AND CHIEF COUNSEL, OFFICE OF THE

COMPTROLLER OF THE CURRENCY

Ms. WILLIAMS. Thank you.

Madam Chairwoman, Mr. Chairman, Ranking Members Gutierrez and Waters and Members of the subcommittees, thank you for

inviting the Office of the Comptroller of the Currency to participate

in this hearing.

In view of the integration of the financial services industries that

is permitted by the Gramm-Leach-Bliley Act and the resulting potential for individuals to move among the banking, securities and

insurance industries, it is particularly important for each functional regulator to know whether individuals or entities have been

subject to enforcement or disciplinary actions by another functional

regulator. On behalf of the Comptroller, I would like to thank you

for your efforts to further these objectives.

My written statement describes the most significant ways in

which the OCC currently shares information with other Federal

and State regulators. I will not repeat all that detail here, but I

will just note that we have various arrangements in place to share

different types of information with the other Federal banking agencies, with the SEC and with State insurance regulators.

9

I would also like to especially mention the progress that has occurred in just a few years in cooperative efforts between the banking agencies and the insurance regulatory community.

As you consider the design of a new system for enhanced enforcement-related information sharing among functional regulators,

there are two areas that I would like to highlight in my remarks

this afternoon.

First is the need to ensure that disclosure of the information is

not prohibited or restricted by Federal law; and, if disclosure is authorized, that applicable privileges are properly preserved.

Certain Federal laws, which are discussed in greater detail in my

written statement, prohibit or restrict some types of non-public information in the possession of one regulator from being shared with

other Federal and State regulators. Even if a statutory exception

permits the sharing of information, statutory and common law

privileges may still be waived or destroyed by the unprotected disclosure of privileged information. Thus, any new system for enhanced sharing of non-public information among Federal and State

regulators needs to take account of and preserve all these different

types of privileges.

Second, we need to recognize that expanded information sharing

can raise very sensitive issues regarding the nature and reliability

of the information collected and how that information is used when

it is shared. Disclosure to other regulators of preliminary suspicions, the reliability of which could vary widely, would raise significant privacy issues, including the possibility that dissemination

of potentially inaccurate accusations against individuals or institutions could cause unwarranted harm to the reputation of the individual or the entity.

Disclosure of preliminary information also could hamper ongoing

investigations by law enforcement agencies or Federal banking

agencies and might even expose agencies to some potential liability

for falsely accusing individuals.

We respectfully suggest that a balance between addressing these

concerns and promoting the benefits of interagency information

sharing could be achieved if new legislation first were to focus on

establishing a system for ready and convenient access by each functional regulator to information regarding final enforcement and disciplinary actions taken by all the functional regulators.

If Congress chose to include additional types of information in

such a system, we would urge that the additional information focus

on formally commenced enforcement and disciplinary actions by the

participating Federal and State agencies.

Congress could direct the relevant agencies to build on their existing systems to create an automated, linked system accessible to

functional regulators that contains public information on enforcement actions taken, potentially with the limited edition of non-public information concerning the initiation of formal actions and with

provision for the role of the NAIC on behalf of the State insurance

supervisor in that process.

This approach would make it unnecessary to create any new governmental agency to manage information sharing among functional

regulators.

10

In closing, let me again state our appreciation that the subcommittees are addressing these issues. Many of the issues in this

area can be quite complex, and we would be happy to work with

you and your staffs to provide technical assistance as you develop

specific legislative proposals.

Thank you, and I would be happy to try to answer any questions.

[The prepared statement of Hon. Julie L. Williams can be found

on page 48 in the appendix.]

Chairwoman KELLY. Thank you so much, Ms. Williams.

Next let us go to Mr. Albinson; and thank you, Mr. Albinson, for

being here.

STATEMENT OF SCOTT ALBINSON, MANAGING DIRECTOR,

EXAMINATIONS AND SUPERVISION, OFFICE OF THRIFT

SUPERVISION

Mr. ALBINSON. Thank you.

Good afternoon, Madam Chairwoman and Members of the subcommittees. Thank you for the opportunity to discuss the information-sharing systems we have in place at OTS.

We support efforts to improve information sharing among the

function regulators. Safeguarding thrifts from fraudulent activities

and from individuals and entities responsible for financial fraud is

of paramount concern to OTS.

We also appreciate the attention that has been directed at the

need to protect sensitive information in attempting to craft an

interagency database network.

Finally, we support efforts to include confidentiality and liability

protections for all shared information so that financial regulators

do not compromise existing legal privileges when sharing information with other financial regulators and law enforcement organizations.

Since 1997, 43 insurance groups and 15 securities firms have acquired or affiliated with OTS-regulated thrifts. In each instance,

OTS reviewed and evaluated the financial and managerial resources of the applicant in order to identify the extent to which the

acquisition or affiliation posed risks to the safety and soundness of

the thrift. This often required us to contact numerous State and

Federal regulators to obtain information on the applicant and its

affiliates.

For an insurance company, for example, that operates on a nationwide basis, this means that relevant information may be available from virtually every State insurance commissioner. Where an

applicant has both securities and insurance operations, the information trail extends to the SEC, NASD and State securities commissioners. Thus, our interest in efficiently obtaining access to

interagency regulatory information is compelling.

Because of these needs, OTS has been sharing information with

various State and Federal regulators for some years. Our cooperative arrangements are both formal and informal. We work closely

with our sister banking agencies and State bank regulators. We

have a long-standing working relationship with the SEC; and, in

1995, we executed a joint interagency information-sharing agreement with the NASD.

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Our most recent agreements were developed as a result of the influx of insurance company applicants for thrift charters during the

late 1990’s. This prompted us a few years ago to develop a close

working relationship with the NAIC, which has led to the development of a model agreement that is the basis for written information-sharing agreements with 41 State Insurance Commissioners.

These agreements extend significantly beyond the sharing of consumer complaint data and include the sharing of financial and enforcement information. We hope ultimately to have agreements in

place with every State insurance commissioner.

Notwithstanding the relationships we have developed with other

financial regulators, the information agreements we have in place

and the databases that we currently maintain and access, we share

the interests of our fellow regulators in improving our access to information that can help us do our jobs.

In my written statement, we discuss a number of approaches to

interagency information sharing. A practical first step is linking or

aggregating the existing public databases of financial regulators.

This could be accomplished in a variety of ways that would make

each regulator’s database information accessible simultaneously.

Each solution, of course, raises more difficult issues, both logistical

and substantive, including security, information integrity, confidentiality and liability protections.

For any type of database-sharing system to be useful in tracking

individuals involved in financial fraud, however, the quality and integrity of the information fed into the system must be consistent

and sustained.

Currently, the Federal banking agencies are only provided information regarding the addition of new senior officers and directors

if the depository institution is in a troubled or undercapitalized

condition. A streamlined after-the-fact notice regarding appointments from institutions not otherwise covered by this requirement

would address this information void.

OTS will soon issue a regulation that affords thrifts some degree

of corporate governance self-defense against perpetrators of financial fraud. This regulation will permit thrifts to adopt a

preapproved bylaw that would preclude persons under indictment

for or convicted of crimes or subject to a cease and desist order for

fiduciary violations from serving on the institution’s board of directors.

Financial regulators spend considerable resources tracking down

fraudulent activities and the perpetrators of financial fraud. To the

extent we can combine and leverage our collective experiences and

information, consumers will benefit through a more effective process. We support the committee’s efforts to achieve this objective.

Thank you. I will be happy to take any questions.

[The prepared statement of Scott Albinson can be found on page

68 in the appendix.]

Chairwoman KELLY. Thank you very much, Mr. Albinson.

Next we have Terri Vaughan. Thank you, Ms. Vaughan, for testifying.

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STATEMENT OF HON. TERRI M. VAUGHAN, IOWA COMMISSIONER OF INSURANCE, VICE PRESIDENT, NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, ON BEHALF OF

NAIC

Ms. VAUGHAN. Good afternoon. Thank you, Madam Chairwoman,

Mr. Chairman, and subcommittee Members. I am pleased to be

here on behalf of the NAIC and State insurance regulators to help

the Financial Services Committee as you work to establish an effective anti-fraud information network.

Today I would like to make three major points regarding regulatory information sharing.

First, the NAIC and State insurance regulators believe information sharing is the cornerstone for implementing functional regulation under the Gramm-Leach-Bliley Act. As regulators, we exist to

protect consumers. To do so, we must have access to criminal history information for routine background checks and to keep tabs on

the bad actors in all areas of the financial services industry.

We started the process of sharing information with Federal regulators well before the enactment of the Gramm-Leach-Bliley Act.

Our first priority has been to negotiate written cooperation agreements that can be used to open information channels between

State insurance departments and Federal banking and securities

regulators.

Scott touched on the agreements we have with the Office of

Thrift Supervision. In addition to the OTS agreements, we recently

completed negotiating agreements with the Federal Reserve Board,

the OCC and the FDIC. These agreements cover broad exchanges

of information, including information on financial solvency, enforcement matters, routine licensing and consumer complaints; and we

expect that most States will sign these agreements during this

year.

My second point: As a State-based system, we have considerable

experience in information sharing. The NAIC already has sophisticated online systems for sharing information among the States concerning licensing, financial condition, enforcement and consumer

complaints.

The NAIC annually spends about $20 million and dedicates

roughly 170 staff people to maintaining our databases at the NAIC.

As a result of this commitment, we currently have the technical infrastructure in place to share regulatory information with Federal

agencies.

As the central database manager and the link to individual State

insurance department computer systems, the NAIC is fully capable

of receiving and handling both public and confidential regulator information.

We believe effective information sharing must be structured on

the following principles:

First, we need to create a national information antifraud network

based on information-sharing agreements among functional regulators and law enforcement agencies.

We need to establish a central database authority that would set

the policy and technical standards for sharing this regulator and

law enforcement information.

13

We need to link databases, rather than create new ones. Each of

us has a significant investment in our current databases, including

training and integration. These should be preserved and enhanced

by permitting mutual access.

Finally, we need to provide all participants in an antifraud network with legal immunity for good-faith reporting and handling of

regulator information.

My third point: While the NAIC supports congressional efforts to

create a broad antifraud information-sharing network, we strongly

urge you to fix two glaring problems with the current system immediately.

The first relates to our ability to access the FBI’s fingerprint

identification record system. Madam Chairwoman, I appreciated

your opening comments regarding the need for insurance regulators to be able to access this database. As you know, State insurance regulators are the only functional regulators who do not currently have access to this system operated by the FBI.

Permitting States to run national fingerprint background checks

on insurance agents and company personnel is the best way to

weed out known wrongdoers before they get a chance to commit insurance fraud. It is also critical if Congress expects the States to

enforce the Federal insurance fraud laws and to establish a national agents licensing system, as envisioned by Gramm-Leach-Bliley.

Second, we need Congress to help us gain access to the national

securities enforcement database maintained by the National Association of Securities Dealers. We have been working with the

NASD to try to negotiate access for approximately two years, and

to date we have not been successful.

I understand there are potentially some legal issues that they

may have that you might be able to help us with. In return, we

are willing to share with the NASD the extensive database that the

NAIC maintains on insurance agents and companies.

In conclusion, the State insurance regulators and the NAIC fully

support a move to create a nationwide network of information sharing among regulators to fight financial fraud. We are ready and

able to share the information in our own regulatory databases in

exchange for receiving the information held by banking and securities regulators.

The most urgent need, in our opinion, is for Congress to open the

doors to the FBI fingerprint and the NASD enforcement databases.

These critical tools should not be left waiting while Congress determines how other elements of a national antifraud information program should be implemented.

We pledge our commitment and cooperation, and we appreciate

the opportunity to participate in this important initiative. I would

be pleased to answer any questions you may have.

[The prepared statement of Hon. Terri M. Vaughan can be found

on page 96 in the appendix.]

Chairwoman KELLY. Thank you very much, Ms. Vaughan.

Next we would like to hear from you, Mr. Lormel.

14

STATEMENT OF DENNIS M. LORMEL, CHIEF, FINANCIAL

CRIMES SECTION, FEDERAL BUREAU OF INVESTIGATION

Mr. LORMEL. Thank you, ma’am.

We have a bit of a different perspective. Ours, obviously, is lawenforcement-driven. Yet we are here in support of this initiative,

and we appreciate the opportunity to speak with you today and to

participate in the forum.

What I would like to do would be to defer most of my comments

to questions, but certainly my written statement speaks to two

things.

It is to, as my colleague to my right stated, to the information

that we have available through our record check capabilities,

through our CJIS—Criminal Justice Information Services Division—facility and in other means, and also to the importance of us

sharing information, as regulators, as an industry, as a law enforcement community in the opportunity to work together on the

crime problems.

The Department of Justice has not yet, with the new Administration, come out with a policy statement, so certainly I am not in a

position to talk to policy at this point. But we are here as a sign

of cooperation and are interested in working with everybody to further this initiative.

The insurance industry in particular is an industry that is—the

enormity of the industry in terms of size, in terms of opportunity

for exploitation and control weaknesses is certainly in need of a

uniform approach to looking at the crime problems. Lack of uniformity and systemic control weaknesses encourage individuals

such as Martin Frankel to enter and fraudulently exploit the insurance industry.

A few of you have spoken about the Frankel case. Unfortunately,

the Frankel case is one of a number of cases that speak to the

enormity of the crime problem.

We have over 500 investigations ongoing involving the insurance

industry. Unfortunately, there have been a few, like the Frankel

case, like the Shalom Weiss case out of Tampa, which has been,

again, a multi-million dollar case causing multi-million dollar

losses; and in that particular case the criminal—I think the convictions in those cases, the sentences were among the most significant

sentences given by a judge in financial crimes cases.

Just summing up my position, then, we are here, again, to support this initiative. We look to see that, from our standpoint, anything that the Bureau can support in working with our colleagues—and the essence of the comments that were made by

members of the panel and members down here in terms of the necessity for cooperation and coordination, I could not stress that

enough.

[The prepared statement of Dennis M. Lormel can be found on

page 113 in the appendix.]

Chairwoman KELLY. Thank you very much, Mr. Lormel.

Mr. Becker.

15

STATEMENT OF DAVID M. BECKER, GENERAL COUNSEL, U.S.

SECURITIES AND EXCHANGE COMMISSION

Mr. BECKER. Chairwoman Kelly, Chairman Bachus, Ranking

Members Waters and Gutierrez and Members of the subcommittee,

we at the Securities and Exchange Commission appreciate very

much your efforts in helping us and other regulators coordinate efforts to fight financial fraud. We all share the goal of staying a step

ahead of cynical scofflaws who, having been barred from one financial industry sector, move to a different sector in the hope that the

regulators there will not know of their taint, or if they do know

about it, they won’t have the authority to stop them from entering

a new industry.

In the securities industry, the Central Registration Depository

system supplies useful information on broker dealers and their registered employees. The CRD is maintained by the National Association of Securities Dealers, which is a private organization under

the SEC’s oversight.

The NASD is also implementing a similar system for investment

advisors, so we are familiar with these systems and their benefits

and costs.

The Commission also has a long-standing practice of sharing information with other Federal and State law enforcement agencies.

Particularly our Enforcement Division, I must say, has worked out

modes of rather effective cooperation with other law enforcement

agencies.

Of course, in light of the Gramm-Leach-Bliley Act, we are improving, along with banking regulators, our information-sharing arrangements. We are quite enthusiastic in supporting the goal of enhancing information sharing among regulators. We look forward to

working with you and your staff in developing an effective system.

We think that any such effort should follow a few general principles, which I will now discuss.

First, any system should provide information that is accurate.

We need to develop safeguards to ensure that not only the information that goes in is accurate, but that it stays accurate and does

not degrade over time.

Any system should also be secure, with access restricted only to

those who need the information to fight fraud. Any system that facilitates sharing among regulators of individuals’ personal and nonpublic information increases the risk that private information

somehow finds its way into the public.

We should think carefully about where to draw lines on access.

I think our view is that there should be multiple lines. That is reflected in the CRD system as now designed where different folks

at different levels of access can get different details of information.

Any system, of course, should be cost-efficient and should take

into account the extra burden on some entities, particularly nongovernmental entities like the NASD, who have a role in administering the system. These folks may face a liability risk that increases in proportion to the increased access to their system. They

also may face increased costs.

The CRD system costs about $50 million a year to maintain and

costs about another $50 million to establish. The cost of estabVerDate 11-MAY-2000 10:32 Jul 20, 2001 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 70889.TXT HBANK1 PsN: HBANK1
16

lishing and maintaining that system is borne by NASD members

who are private citizens who operate in the securities industry.

Any system should be nimble enough to respond to technological

changes. We see potential problems with creating a mega-system

which could well be obsolete before it is online.

At this point, we think the best approach is to maximize the ability of financial regulators to interact with each other’s systems,

rather than trying to develop a central omnibus system administered jointly or by some new entity created for that purpose.

Finally, any system of sharing information is only as useful as

an agency’s ability to make use of the information that it gets. As

things now stand, the SEC’s statutory authority does not allow it

to bar an individual from the securities industry on the basis of,

for example, a State insurance regulator’s finding of fraud.

We encourage you to consider these kinds of gaps in authority as

you address these issues. Let me repeat again that we are enthusiastic supporters of the goal of improving information flow among

regulators and that we appreciate the receptiveness of the subcommittees and your openness to our concerns.

Thank you very much.

[The prepared statement of David M. Becker can be found on

page 124 in the appendix.]

Chairwoman KELLY. Thank you, Mr. Becker.

The Chair notes that we have been joined by the Chairman of

the Committee on Financial Services, my colleague, Mr. Oxley from

Ohio.

Mr. Oxley, we would like now to have you make an opening

statement and ask any questions, if you would like.

Mr. OXLEY. Thank you very much.

Congratulations to you and your subcommittee on this hearing.

It is certainly timely and a good start on oversight.

As you know, Madam Chairwoman, the Frankel case has been

much discussed. I won’t go into details on that. But, obviously, if

we are not willing to invest now to coordinate the antifraud systems of our financial regulators, I guarantee that the next Frankel

is waiting to take advantage of us again certainly at a much higher

cost.

Overall, the regulators here today have done a good job in protecting consumers and should be commended for upgrading their

computer systems and beginning discussions of cross-industry coordination.

But their efforts are not enough, and they can never be enough

when done solely on an ad hoc basis. We need a coordinated antifraud computer system that establishes an automated information

connection among regulators.

Each regulator keeps a database of individuals and entities that

have been censured for wrongful acts. In most cases, these violations are already publicly accessible on each agency’s website.

There is no way for any regulator to look the information up without manually going to each website.

Yes, the State insurance regulators could have gone to the SEC

website and discovered Frankel had been barred from the securities industry, but with literally millions of agents and company licenses being processed each year, I think we can all understand

17

the difficulty of that endeavor. It is something that every business

and international organization is doing, but it is not happening in

the Government because there is no entity tasked with coordinating regulators across all financial industries; thus, the need for

this hearing.

An anti-fraud coordination mechanism can be put together without requiring any new collection of information, with no additional

bureaucracy or regulation, and with long-term cost savings for consumers. The network would only be accessible to regulators and

only include data on financial professionals, not individual consumers.

Even if this coordination effort only catches one future Martin

Frankel, it would pay for itself many times over.

Madam Chairwoman, two years ago the Members of this committee helped enact historic financial services modernization to integrate the cornerstones of our financial world. Today we are taking the next step forward.

Having begun integration of the industries, we must now turn to

integrating financial regulation to create a coordinated and seamless antifraud system to protect consumers.

I want to thank you, Madam Chairwoman, for braving the snowstorms in New York to come down and chair the hearing today,

and my friends, Chairman Bachus, Ranking Members Maxine Waters and Luis Gutierrez, for their leadership in putting this hearing

together.

I ask that my full statement be made part of the record, and I

yield back the balance of my time.

[The prepared statement of Hon. Michael G. Oxley can be found

on page 199 in the appendix.]

Chairwoman KELLY. Thank you very much, Chairman Oxley.

With that, I would like to open the questions. I would like to ask

the entire panel for a simple yes-or-no answer to a few questions

that we have put together here.

I just would like to ask you to hold off any further elaboration

until the committee submits written questions to you for further

analysis, so this is sort of just off the top of your head, a quick answer yes or no: Won’t consumers be better protected if the financial

regulators use an automated background check of all agency databases for all financial licenses and applications, as opposed to making specific occasional inquiries?

Let us start with you, Ms. Williams.

Ms. WILLIAMS. Yes.

Mr. ALBINSON. Yes.

Ms. VAUGHAN. Yes.

Mr. LORMEL. Yes.

Mr. BECKER. Yes.

Chairwoman KELLY. Thank you very much. It is unanimous.

Wouldn’t consumers be better protected if all background checks

for licenses and applications included a check of all financial regulators’ databases for comprehensive and seamless coverage and not

just those where individual information-sharing agreements exist?

Ms. Williams.

Ms. WILLIAMS. Yes.

Mr. ALBINSON. Yes.

18

Ms. VAUGHAN. Yes.

Mr. LORMEL. Yes.

Mr. BECKER. Yes.

Chairwoman KELLY. Isn’t it cheaper or more effective to create

one coordinated antifraud network to exchange information than to

rely on numerous individual agreements and computer connections?

Ms. WILLIAMS. Now, this is hard for a lawyer to do, just to answer with one word. Yes.

Chairwoman KELLY. You have done it before.

Mr. ALBINSON. Yes.

Ms. VAUGHAN. Fortunately, I am not a lawyer. Yes.

Mr. LORMEL. Yes.

Mr. BECKER. Yes.

Chairwoman KELLY. Wouldn’t regulators be better able to fight

fraud if they could share materials without risk of losing critical

confidentiality and liability protections?

Ms. Williams.

Ms. WILLIAMS. Yes.

Mr. ALBINSON. Yes.

Ms. VAUGHAN. Yes.

Mr. LORMEL. Yes.

Mr. BECKER. Yes.

Chairwoman KELLY. Thank you all for your cooperation.

I have a few more. Wouldn’t it be more efficient for financial institutions to allow the regulators to use a single coordinated entity

for sharing information to reduce duplicative examinations and reporting? This is dear to my heart, Ms. Williams. Caution on how

you respond.

Ms. WILLIAMS. Not necessarily.

Chairwoman KELLY. That doesn’t qualify. It has to be yes or no.

Ms. WILLIAMS. Then I am on the yes side.

Mr. ALBINSON. Yes.

Ms. VAUGHAN. Yes.

Mr. LORMEL. Yes.

Mr. BECKER. I am afraid I just don’t know.

Chairwoman KELLY. We will give you a pass on that, Mr. Becker,

but we will give you a written question to follow up. Could a coordinated network be used by the regulators as it evolved over time to

share other materials and financial data to reduce duplicative filings and examinations?

Ms. Williams.

Ms. WILLIAMS. Yes.

Mr. ALBINSON. Yes.

Ms. VAUGHAN. Yes.

Mr. LORMEL. Yes.

Mr. BECKER. Yes.

Chairwoman KELLY. Would it improve consumer protection in

the financial services industry if Congress created an anti-fraud

network coordinating limited information among regulators with

full confidentiality protections?

Ms. Williams.

Ms. WILLIAMS. Yes.

Mr. LORMEL. Yes.

19

Ms. VAUGHAN. Yes.

Mr. ALBISON. Yes.

Mr. BECKER. Yes.

Chairwoman KELLY. Thank you. I appreciate you responding to

my questions that way.

Let’s go to the committee Members and begin with Mr. Sherman.

Is he still here? All right.

Mr. Gonzalez, Mr. Gutierrez. No questions?

Ms. Hooley, is she still here?

Ms. Waters.

Ms. WATERS. Well, this agreement and cooperation is too much

for me. I have got to find out whether or not we have any concerns

whatsoever. We had a little bit of caution that was urged by Mr.

Becker, who said we must make sure that the systems are accurate

that they’re well maintained and that they are cost effective.

Mr. Becker, would you care to elaborate on any of your mild cautions on what the system must do to protect individuals or agencies

or companies. Why did you tell us that and what do you mean?

Mr. BECKER. Well, we certainly support the goals of sharing information, and we think it is possible to do that in a way that

meets the concerns that I have mentioned. But we do have to be

attentive to them and we do not think that the obstacles to doing

that are great, but we do need the help of this committee. There

are concerns. The NASD, for example, which maintains the securities database, is a private entity and there are concerns about liability. There are concerns about how the data are maintained over

time. We do want to make sure that the data are accurate. We

want to make sure that what is shared is what is most useful, and

at the same time, the least likely to intrude on people’s privacy.

I think you heard from Ms. Williams her support for sharing of

proceedings, of formal action. Those are the contexts in which people have procedural protections and have opportunities to contest

information. That is the type of thing that we are, I think, most

enthusiastic about sharing broadly.

Ms. WATERS. I suppose confidentiality is built into this proposed

system. Ms. Williams, how do you ensure confidentiality when so

many people will have access to this information?

Ms. WILLIAMS. Congresswoman, it obviously becomes more of an

issue the more dispersed the information is. There is a balancing

test here with the sensitivity of the information that might be included in an expanded database and the extent of access. There is

a spectrum of information. The more sensitive the information in

the system, the more sensitive we should be to the extent of access.

Ms. WATERS. Should there be penalties of violation of confidentiality?

Ms. WILLIAMS. I think so, yes.

Ms. WATERS. Is it proposed anywhere in the broad proposal that

we have here?

Ms. WILLIAMS. I think it is mentioned in the outline that I have

seen.

Ms. WATERS. Have any of you given input to what kind of penalties you think would be fair and effective to protect sensitive information?

20

Ms. WILLIAMS. Not yet specifically, but we’ve been asked to work

with committee staff.

Ms. WATERS. Thank you.

And finally, Mr. Lormel, do you support the performance regulators having access to fingerprint identification record system?

Mr. LORMEL. Yes, ma’am, I do.

Ms. WATERS. Why don’t they have it now? Somebody.

Mr. LORMEL. The—— Ms. WATERS. What has stopped them from having access in the

past? I guess the other regulators had it. Insurance never had it.

Why not?

Mr. LORMEL. I am not exactly sure, ma’am, of the insurance industry regulations.

Ms. VAUGHAN. I can take a stab at that. We do have laws in a

handful of States that would permit access to the first database.

We do not have laws in all the States. I think there are laws in

about 15 or 17 States. So we can get at this one of two ways: We

can try to go to all 50 States and enact laws that meet the Department of Justice requirements for protecting the confidentiality of

data and so forth, or we can try to do it in one fell swoop in this

forum. And we are hoping that we might be able to get it this

way—that it would be a more efficient way. We can get it done

more quickly than trying to go on a State-by-State basis.

Ms. WATERS. Thank you. I yield back the balance of my time.

Chairwoman KELLY. Thank you so much, Ms. Waters.

Mr. Bachus.

Mr. BACHUS. Thank you, Madam Chairwoman.

Madam Chairwoman, I am going to defer questions. I know it

was a pretty traumatic experience having to answer yes or no. In

fact, it made me uncomfortable up here. But I appreciate your testimony and your acknowledgment that we all agree that there is

an agreement for coordination and cooperation. I am going to defer

to Ms. Hart and Mr. Rogers, particularly Mr. Rogers, being a

former FBI agent. I think we are all going to look for him for his

experiences, but I will pass to him. The two of you are newer and

very capable Members.

Chairwoman KELLY. Thank you, Mr. Bachus. All right.

Mr. Rogers.

Mr. ROGERS. Thank you, Madam Chairwoman. We can only go

down the hill from him. Thank you, Mr. Chairman, I appreciate it.

Although I would encourage Madam Chairwoman that we bring

Mr. Greenspan back to the committee and ask the same yes or no

questions. And I, also as a former FBI agent, never pass up the opportunity to ask questions of an FBI agent, Mr. Lormel. Thank you

for being here. I have waited for this for a very long time.

Mr. LORMEL. I appreciate that, Mr. Rogers.

Mr. ROGERS. Thank you, sir. Do you think there is a need for insurance investigators to obtain any history record checks?

Mr. LORMEL. Yes, sir, I do. We believe that the more we can do

in terms of offering information, that will help give us accountable

measures in establishing preventative and deterrent type of situations is certainly warranted.

Mr. ROGERS. If the States decide to adopt the statute, who would

you recommend be fingerprinted in the industry?

21

Mr. LORMEL. Anybody in a fiduciary position, sir.

Mr. ROGERS. Is that consistent with the other financial industries?

Mr. LORMEL. Yes, it is.

Mr. ROGERS. Would the guidelines and could the guidelines be

the same for every industry?

Mr. LORMEL. I think they can be somewhat consistent. I think

we need to certainly look at all of the regulatory considerations

among the different industries.

Mr. ROGERS. Is it going to be a problem because we have industries that have different regulatory standards? Do you foresee a

problem here when we try to merge this?

Mr. LORMEL. In import sir, I think where at the outset, when I

mentioned the need for consistency. I think for instance, when you

bring the banking and insurance interests together, we need to

have better uniformity.

Mr. ROGERS. Are there any of those industries that do backgrounds checks that don’t request criminal history record from the

FBI right now?

Mr. LORMEL. Yes, sir. I think, for instance, the banking industry.

Banking is voluntary, sir.

Mr. ROGERS. Would you recommend any changes to that as

we——

Ms. WILLIAMS. If I could clarify on that, Congressman. We require background checks and fingerprinting in connection with certain situations where we are involved in clearing people for positions at banks. Senior executive officers of institutions that are in

troubled condition, for example, or when we charter a newly-established institution, a new bank, and we are looking at the proposed

new management and directors. But if a bank is healthy and well

managed and it is putting a new person on its board or retaining

a new vice president for something or other, there is not a requirement to go through that kind of background check in those situations. The detailed background check applies only in connection

with particular situations.

Mr. ROGERS. Given that we are broadening our scope ma’am,

would you consider that something we should deal with in this legislation?

Ms. WILLIAMS. I think I would want to have an opportunity to

think about it a little bit more. The current approach for us, with

the situations that I have described, seems to have worked well.

The most extensive clearance process focuses on those situations

that are the most sensitive in terms of entry into the banking system of particular individuals.

Mr. ROGERS. Thank you.

Mr. Albison, you talk that you have joint information sharing

agreements with 41 commissioners, and that has been in effect how

long, sir?

Mr. ALBISON. We began the process early last year. And we are

still in the midst of it. So the agreements are relatively new in nature.

Mr. ROGERS. Have you experienced any breach of confidentiality

problems in the process of obtaining that information?

22

Mr. ALBISON. Not to date, no. We have exchanged some information, not a whole lot, because the agreements are relatively new in

the preponderance of evidence of the States.

Mr. ROGERS. Thank you, Madam Chairwoman.

Chairwoman KELLY. Next we will go to Mr. Clay.

Mr. CLAY. Madam Chairwoman, I don’t have any questions at

this time. Thank you.

Chairwoman KELLY. Thank you, Mr. Clay.

Next we will go to Mr. Hinojosa.

Mr. HINOJOSA. Thank you, Madam Chairwoman. I would like to

get some clarification, because I have heard most of the presenters

say that you want to keep your current database systems and try

to share them more efficiently. Is this technologically possible without creating a new system? I will ask Terry if you could answer

that.

Ms. VAUGHAN. I am not a systems person. But we have talked

to our systems people at the NAIC and they believe very strongly

that it is. And I suspect that is true given our experience in the

State system. Because we are a State-based system, we have had

to network our systems already. And the NAIC serves as that capability for facilitating information sharing among the various States.

So we have an internet-based system now that allows us to communicate with the systems in the various States, and we think it is

not a big stretch to expand our communication capability to the

other Federal regulators.

Mr. HINOJOSA. Would the business computer systems languages

be able to speak to one another?

Ms. VAUGHAN. Again, I am not a systems person, but I am told

if you agree on the protocols, then you can do that kind of information sharing. That is why we have suggested we need some kind

of other coordinating body that would decide on a standard protocol

for communication.

Mr. HINOJOSA. How much time would it take to be able to determine that they could without changes of languages of business

computer systems?

Ms. VAUGHAN. We don’t have an answer for you, but we would

be happy to talk to our information people and get back to you

about that.

Mr. LORMEL. If I may follow up. We have a suspicious activities

reporting mechanism that FinCEN coordinates, and I think that

could kind of serve as a parallel model here.

Mr. HINOJOSA. Would you repeat the response for the FBI?

Mr. LORMEL. Yes. Through FinCEN, the Federal Reserve a few

years back in the banking industry, to better coordinate what we

are talking about doing here today, they established a reporting

mechanism known as the Suspicious Activity Reports, and it deals,

from the banking standpoint, with the different banking regulators,

and we came together in a bank fraud working group, and were

able to set up criteria to put in to a database, and it is all run

through FinCEN, which is kind of a repository under the direction

of the Treasury Department.

Mr. HINOJOSA. Very good. That is the only question I have,

Madam Chairwoman.

23

Chairwoman KELLY. Thank you very much. Next we will go to

Ms. Hart.

Ms. HART. I have no questions at this time.

Chairwoman KELLY. Thank you, Ms. Hart.

Mr. Grucci.

Mr. GRUCCI. Thank you, Madam Chairwoman. The question that

I have, and first let me thank this panel for being here today and

dealing with this critical issue. It is my understanding that we are

trying to come up with an anti-fraud network that permits the regulators of each industry to share information on those who have experienced disciplinary actions for misrepresentation, dishonesty,

fraudulent and suspicious activities. And I recognize that we have

an issue that we face that deals with privacy. But my question is

if the intent of this legislation is to inform like industries where

an individual with less than upstanding moral character may find

themselves, but yet did not commit any kind of act that would lend

itself to a criminal act, because then, quite frankly, they would be

plucked from the system by the current laws and rules and regulations that are out there.

My question is what happens in the instance when a company

would identify one of these individuals through this information

network and sharing of information, but it is not a more reputable

company. It is a company that may just be starting up, and the

earning potential that an individual may have that may be coming

to this company is a good one. They have the capabilities of bringing in a lot of money for either the insurance company or the securities or whoever they may be going to work for.

How does the consumer know this? How does the consumer get

that information? Is there a way that the consumer with all of the

safeguards for confidentiality in place be able to access this information so they can make the determination whether or not they

wish to deal with that corporation, that entity that may or may not

be hiring that individual? And I will open it up to anyone on the

panel that may want to take a stab at that answer.

Mr. BECKER. The NASD has what it refers to as the public disclosure program. And what one can get over the web is information

about your individual broker or about the firm, and you can get

fairly complete information about the existence, or most importantly, the nonexistence of any sort of disciplinary history. And it

is really quite useful and quite effective.

Mr. GRUCCI. Why then isn’t that sufficient? Why are we then embarking upon this piece of legislation to be able to share information? If that information is already readily available, it would—and

I am not suggesting we shouldn’t do this, I am just trying to understand where—we are trying to make sure we do not have dishonest

and unreputable people in places where they are going to be making decisions on or for the consumer when it deals with their

money. Our concern that the consumer may not know that they are

going to be dealing with unreputable or dishonest individuals if indeed their acts lended itself to a criminal act, but maybe one that

lends itself to a company of stature no longer wanting that individual in their employ, and they share that information with others. But that may not get that in the hands of a consumer and that

consumer may be subject to a dishonest or unreputable individual.

24

Ms. VAUGHAN. If I can respond from the insurance perspective.

I would like to make two points. First, we have public information

also available that consumers can access. In most States and perhaps all States, consumers can—certainly regulatory actions are

public, and in many cases on websites. But consumer complaints

are also public information. In Iowa, a consumer can contact us

and ask if any complaints have been filed against an agent and we

will give information on what kind of complaints have been seen

against that agent. Although we have good information in the insurance sector, we do not have ready access to information in the

other sectors.

So the problem we have, for example, when we are considering

licensing a new agent, and that agent fills out an application and

we ask whether disciplinary actions have ever been taken against

that individual in another sector or in another position and they

might answer no. Well, unfortunately they are not always answering those questions truthfully. And if we were to do a cross-check

against the securities, the NASD CRD we would find they did, in

fact, previously have a securities license and regulatory action was

taken against them. And that would then affect our decision on

whether or not to issue a license to that individual.

So we are looking for—we are trying to build an automated producer licensing system that would give us electronic efficient access

to the NASD CRD so we can do those kinds of cross-checks in a

very efficient manner recognizing that we have roughly over 3.2

million agents that are currently licensed in this country.

Mr. GRUCCI. Thank you. My last question, Madam Chairwoman.

Chairwoman KELLY. Mr. Grucci, you are over time. If you would

submit the question in writing, I would appreciate it. Thank you.

Now I will move on to Mr. Cantor.

Mr. CANTOR. Thank you, Madam Chairwoman. I thank the panelists for entertaining our questions. I think generally the way that

I read Graham-Leach-Bliley, and wherein, Congress instructed the

financial regulators across the country to coordinate their efforts,

I think this is a terrific place and I want to salute the two chairpersons here for starting our inquiry into how we were going to coordinate oversight in the area of anti-fraud activities. And I am

hearing a lot and reading in your testimony, a lot about information sharing agreements between regulators and just expanding it

across the country.

There seems to be a need, if we go that route, for an awful lot

of information sharing agreements, and my question, I guess to

you, is on the one hand, is it feasible how many information sharing agreements would be necessary, and if not, if you are looking

at one central anti-fraud network so to speak, Mr. Becker alluded

to the cost of NASD’s members, and they are having to support it,

and perhaps Ms. Vaughan, your licensees or the licensees in each

of the States are impacted with cost of creating this one network,

and I have, I guess, a lot of angles to this question. But one of you

had mentioned the needs for a central database authority, I think,

laying out some policy if we were going to have one network, and

how do we see that authority coming into being, empowering, I

think, itself?

25

And as far as requiring licensees to offer information up in a way

that would be uniform, so we do not go through duplicative information filing that we are trying to get away from as well. Probably

not a coherent question, but I will be glad to restate it if you did

not get it.

Ms. VAUGHAN. Well, since I was the one that mentioned the central database authority, I guess I will start. That really stemmed

from our recognition that we needed to have some set of technical

standards in order to share the information. I don’t have strong

feelings about how that authority is created. I know there has been

some discussion about it being part of the FFIEC. There needs to

be some way, however, for those regulators that are going to share

information, to agree on the technical specifications for the information sharing.

To answer your question about regulatory cooperation agreements, in the insurance sector, because we are a State-based system, if you say the 50 States plus the District of Columbia, we have

51 agreements that we need to sign with the OCC, the FDIC, the

OTS, the Federal Reserve. We have made great progress on the

OTS. We have three States that have problems with their State

laws that need to be fixed in order to get those information sharing

agreements in place. And I believe we have drafted some legislation that at some point proposed to deal with confidentiality issues

at the State level that we would be happy to share with you. Again,

that would allow us to shortcut that process.

Ms. WILLIAMS. Congressman, I think that regarding the mechanism for determining the protocols for data sharing, Mr. Lormel

was referring to the Bank Fraud Working Group, which is an interagency working group that did come up with the protocols for the

system that maintains the suspicious activity reports database.

That was not a new entity that was created. It was a working

group of the affected financial regulators that got together and

agreed on how to make the system come about.

Mr. CANTOR. If I could ask Mr. Becker, and I see him going for

the microphone. Could you comment on your suggestion that perhaps we benefit and build on the strength of the existing networks

among the agencies rather than, and I am just, there is a question

of approach rather than creating some new mega network that

could perhaps go into obsolescence before it even came online.

Mr. BECKER. On the licensing side, which is really what we are

talking about here, I think we are comfortable that it is possible

to sit folks down in a room without forming a new entity and arrive

at ways to share information. In terms of active investigations, I

think we have found that informal mechanisms work extremely

well. I know that I came to the SEC a little more than 21⁄2 years

ago after representing private clients in the enforcement world, and

every time I had a bank client, I think it is safe to say that folks

from the SEC and a banking agency showed up, so I think the cooperation has been very effective.

Chairwoman KELLY. Thank you very much, Mr. Cantor.

Mr. CANTOR. Thank you, Madam Chairwoman.

Chairwoman KELLY. Next we go to Mr. Tiberi.

Mr. TIBERI. No questions.

26

Chairwoman KELLY. No questions. All right then. I think that it

appears that some Members may have opening statements or have

additional questions for this panel and they may wish to submit

those in writing. So without objection, the hearing record will remain open for 30 days for Members to submit written questions to

this witness and place their responses in the question.

Oh, Mr. Lucas I am so sorry I didn’t see you come in. Do you

have any questions?

Mr. LUCAS. No.

Chairwoman KELLY. Thank you.

The first panel is excused. As the second panel will take their

seats at the witness table, I will begin the introductions of the second panel. Thank you very much.

For our second panel we are thankful that Richard J. Hillman

can join us. He is the Director of Financial Markets and Community Investments Division of the U.S. General Accounting Office.

Mr. Hillman, we welcome you today.

Then we have Karen Wuertz, the Senior Vice President of Strategic Planning and Development for the National Futures Association.

We have Thomas Rodell, Executive Vice President and Chief Operating Officer of Aon Risk Services, Incorporated, and the Chairman of the Council of Insurance Agents and Brokers testifying on

behalf of the council.

After which we will hear from Mr. Ronald Smith, the President

of Smith Sawyer and Smith, Incorporated, who also serves as the

State Government Affairs Chairman of the Independent Insurance

Agents of America who will be testifying on behalf of Point Association, the National Association of Insurance and Financial Advisors

and the National Association of Professional Insurance Agents. We

welcome you, Mr. Smith.

And finally, we will hear from Mr. Steve Bartlett, the President

of the Financial Services Roundtable. We welcome all of you and

thank you very much for joining us today to share your thoughts

on this issue.

So, without objection, your written statements will be made a

part of record. With one minor exception, you will each be recognized for a 5-minute summary of your testimony so let us begin

with you, Mr. Hillman.

STATEMENT OF RICHARD J. HILLMAN, DIRECTOR, FINANCIAL

MARKETS AND COMMUNITY INVESTMENT, U.S. GENERAL

ACCOUNTING OFFICE

Mr. HILLMAN. Thank you very much. I am pleased to be here

today to discuss GAO’s observations on the sharing of regulatory

and criminal history data among financial services regulators. GAO

has long held the view that financial regulators can benefit from

greater information sharing and with the passage of the GrahamLeach-Bliley Act, the need for information sharing capabilities

among financial services regulators becomes even more evident.

My prepared statement released today focuses on: One, an overview of the systems used by financial regulators for tracking regulatory history data; Two, the types of regulatory history data needs

of regulators to help them prevent rogue migration and limit fraud;

27

Three, criminal history data needs among financial regulators; and,

four, challenges and considerations for implementing an information sharing system among financial regulators.

Overall, we found substantial agreement among the regulators

about the potential benefits of improved information sharing, particularly related to licensing or registration data and adjudicated

regulatory actions. Most also concurred that it would be useful to

share regulatory and criminal history information in a more automated fashion. However, Congress will need to address concerns

raised by regulators related to confidentiality, liability, and privacy

issues for greater information sharing to occur.

Regarding the first topic, the systems used by financial regulators for tracking regulatory history data, we found that systems

are operated and maintained separately in each of the industries.

Systems and databases provide background information on some

individuals and entities, consumer complaints and disciplinary

records within that industry. Within the insurance, securities, and

futures industries, where there are registration and licensing requirements, this information is largely centrally maintained. In

contrast, such systems and databases are decentralized among

banking regulators. As a result, to find out about an enforcement

action in banking, you would have to query databases maintained

by each of the five banking regulators.

Regarding the second topic, in discussions with the financial regulators and committee staff, we have found that regulatory history

data useful to help prevent rogue migration and limit fraud include

information on completed disciplinary and enforcement actions, ongoing investigations, consumer complaints and reports of suspicious

activity. Most regulators are in agreement about the sharing of this

information, particularly information on registration and licensing

status, and closed or completed adjudicated regulatory actions.

Regarding criminal history data needs of regulators, our third

topic, we have found insurance regulators are not on equal par

with their counterparts in the banking, securities and futures industries, since many cannot obtain such data. As we noted in the

previous work, we believe insurance regulators need to have this

capability to help prevent criminals from entering the industry and

the representatives from NAIC and the FBI have been working on

solutions to facilitate insurance regulators’ ability to conduct routine criminal backgrounds checks.

Finally, regarding my last topic, we have found that information

sharing concerns are more legal than technical. As previously discussed, the financial regulators we contacted did not express concern about sharing basic regulatory history data on closed, disciplinary or enforcement actions. The majority of such information is already publicly available, although not necessarily easily accessible.

The threshold of the concern rises as the sensitivity of the regulatory data rises, particularly when unsubstantiated regulatory and

ongoing investigation data is involved.

While more work would need to be done to explore the most viable solutions, GAO believes that these issues are addressable.

Fraud prevention efforts among financial services regulators can be

enhanced, and the benefits are many. This past September, we reported on the activities of just one rogue who had been barred for

28

life from the securities industry and moved to the insurance industry where he allegedly stole about $200 million over an 8-year period. Our report noted that those losses may have been avoided had

more information been shared among regulators.

GAO also believes that the subcommittees’ continued endorsement and encouragement in developing and implementing improvements to facilitate the sharing of regulatory and criminal information will provide an important impetus for success.

Madam Chair, this completes my prepared remarks. I would be

pleased to respond to any questions you or other Members of the

subcommittees may have.

[The prepared statement of Richard J. Hillman can be found on

page 139 in the appendix.]

Chairwoman KELLY. Thank you very much, Mr. Hillman.

Next we go to Ms. Karen Wuertz. Ms. Wuertz, thank you very

much for being with us.

STATEMENT OF KAREN K. WUERTZ, SENIOR VICE PRESIDENT,

STRATEGIC PLANNING AND DEVELOPMENT, NATIONAL

FUTURES ASSOCIATION

Ms. WUERTZ. Thank you. NFA appreciates the opportunity to be

here today to present our views on increasing data sharing between

financial services industry regulators. NFA has a long history of cooperating with other regulators and welcomes the opportunity to

work with this committee to develop an efficient and effective

method of systematically sharing information. I would like to take

just a minute to describe NFA and its regulatory mission. For close

to 20 years, NFA has been the nationwide self-regulatory organization for the futures industry here in the U.S., and the only registered futures association under the Commodity Exchange Act.

NFA’s primary mission is to protect the public from unscrupulous, fraudulent, and unethical business practices through efficient

and effective regulations of its members. Our regulatory process begins by screening individuals and firms when they seek registration to conduct futures related business and continues with regular

examinations throughout their business lives. As a result of our activities, and because we are the sole nationwide SRO in the futures

industry, we have a large centralized and comprehensive database

containing disciplinary, registration, and background and financial

information about the firms and individuals operating in the futures industry. We are all too well aware of the damage that rogue

brokers can do when they use their unscrupulous practices to take

advantage of unsuspecting investors.

Since our inception, NFA has tracked their migration within the

futures industry. Because of our well-designed rules and our effective disciplinary process, the number of rogue brokers in our industry has decreased by over 75 percent. And the number of customer

complaints has also decreased by over 70 percent. NFA has always

provided futures industry disciplinary information to regulators

and to the public at large.

In 1999, NFA became the first financial services industry SRO

to make disciplinary information available to the public on the web

when it introduced its BASIC system. BASIC contains not only disciplinary information, but also registration status and history inforVerDate 11-MAY-2000 10:32 Jul 20, 2001 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 70889.TXT HBANK1 PsN: HBANK1
29

mation about all firms and individuals ever registered in the futures industry. Last month alone, there were over 35,000 BASIC

searches, and this trend continues to go upward. We expect that

through this year, we will have over 400,000 BASIC searches on

the system. We also maintain information in our databases that we

do not make public, but that we routinely share with regulators on

request. This includes information on customer complaints, open

investigations, arbitration matters and other information that individuals and firms have provided in their application forms.

The value of this information to other regulators would be significantly increased if there was an efficient and effective means

for sharing this information. NFA agrees with the committee’s concern that disreputable individuals could easily move from one financial services industry to another, and this problem will be

greater as the various sectors of the financial services industries

meld together.

I would like to close by saying that NFA is committed to exploring every avenue that will assist in maintaining the integrity of the

financial services industry. We have a strong background in developing our own tracking systems and information databases. We

have significant amounts of futures industry data in our databases,

and we are the front line regulator in the futures industry. We believe that we would be an extremely helpful participant in developing an anti-fraud network, and we would be willing to help in

any effort that is deemed appropriate. Thank you.

[The prepared statement of Karen K. Wuertz can be found on

page 160 in the appendix.]

Chairwoman KELLY. I thank you, Ms. Wuertz.

Next we are going to split the time between two witnesses. They

will each be recognized for 3 minutes each. That is Mr. Rodell and

Mr. Smith, and we are glad to have you have both testify and Mr.

Rodell will you please begin.

STATEMENT OF THOMAS J. RODELL, EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER, AON RISK SERVICES, INC., CHAIRMAN OF THE COUNCIL OF INSURANCE

AGENTS AND BROKERS, ON BEHALF OF THE COUNCIL

Mr. RODELL. Thank you, Madam Chairwoman. The firm that I

represent, Aon, is the second largest insurance broker, both globally and in the United States. I am testifying on behalf of the

Council of Insurance Agents and Brokers. Madam Chairwoman, on

behalf of my firm and the members of our association, I want to

express our gratitude to you for the essential role you played in the

enactment of NARAB provision of the Graham-Leach-Bliley Act.

After decades of effort to improve producer licensing burden, the

enactment of NARAB is a guarantee that at last these reforms will

occur. Tens of thousands of producers around the country will benefit from the legislation that the Members of this committee and

especially you, they have to thank.

Graham-Leach-Bliley tore down the firewalls separating the

banking, securities, and insurance industry, creating a brave new

world in which banking, securities, and insurance transactions

could occur in one place in a seamless manner. Instead of just selling or servicing insurance policies, we are now members of the fiVerDate 11-MAY-2000 10:32 Jul 20, 2001 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 70889.TXT HBANK1 PsN: HBANK1
30

nancial services industry, an industry that can provide both its

members and its customers with innovative new products and services. We believe the expanded ability to provide consumers with

these choices will lead to a more competitive market that can only

benefit consumers. However, the market freedom engendered by

these reforms comes with a price, the price of increased freedom to

offer financial services to consumers is the increased potential for

bad actors to move among the banking, securities and insurance

sectors without detection. The Council is extremely concerned

about this issue. As intermediaries between insurance companies

and consumers, our members must be concerned about bad actors

entering the market not only as intermediaries, but also as insurance company executives.

One only needs to listen to panel one for some examples of that

today. As we move toward a more integrated financial services industry, our paramount concern is for good regulation that will not

only provide necessary consumer protections, but also foster growth

and prosperity for our industry. In our view, the means of regulation in this case is subsidiary to the end goal of strong and efficient

regulation. The approach will assist financial service regulators in

detecting patterns of fraud and coordinating their anti-fraud efforts. It will also reduce duplicative requests for information among

regulators. In short, it will give Federal and State financial services regulators the tools they need to protect consumers and to preserve our newly found market.

Many State insurance regulators do not currently have the ability to directly access the Federal criminal history records maintained by the FBI. Also, there is no system to share criminal history records between insurance regulators and the National Association of Securities Dealers. Many of our insurance brokers are

both licensed insurance agents and licensed securities dealers.

There is an additional benefit to the proposal for consumers and financial services as a whole, but one not readily apparent on the

face of legislation.

The multiple add-ons to non-resident insurance licensing applications and the State laws that limit the activities on non-resident

producers have little to do with enforcing standards of professionalism, and much to do, in our view, with increasing the hassles

involved in obtaining non-resident licenses. We believe NARAB enactment, if NARAB does come into existence, will only serve to lift

the licensing burden, but also to raise the standards of professionalism involved in producer licensing. The proposal under the

committees consideration will contribute much to this goal and

strengthen our support. On behalf of Council, I would like to thank

you for providing me this opportunity to testify today.

[The prepared statement of Thomas J. Rodell can be found on

page 166 in the appendix.]

Chairwoman KELLY. I thank you, Mr. Rodell. Darn it, if I had

known you were going to talk about NARAB, I would have given

you a little more time.

Mr. Smith.

31

STATEMENT OF RONALD A. SMITH, PRESIDENT, SMITH,

SAWYER & SMITH, INC., STATE GOVERNMENT AFFAIRS

CHAIRMAN OF THE INDEPENDENT INSURANCE AGENTS OF

AMERICA, ON BEHALF OF IIAA, NATIONAL ASSOCIATION OF

INSURANCE AND FINANCIAL ADVISORS AND THE NATIONAL

ASSOCIATION OF PROFESSIONAL INSURANCE AGENTS

Mr. SMITH. We could both do that, talk about that a little bit.

Thank you, Madam Chairwoman, Chairman Bachus. We appreciate being here. We represent the three groups that I am speaking

for, represent approximately a million insurance agents and employees across the country. We would be remiss not to mention the

good work that we think Chairman Oxley has done on behalf of

this entire committee and all of us involved in financial services.

I will try and be very brief. Three minutes is moving by rather rapidly. Obviously, I think you have been hearing that we do believe

that access to Federal crime databases is an important thing for insurance licensing.

A couple of the areas of concern that we would have as an agents

group is number one, many times we have to do different things

for different States. So we should be compelled to act only one time

in supplying the data information that is needed for our background check. And number two, in conjunction with that and then

I will give you a few other specific concerns, but in conjunction

with that, you mentioned, Madam Chairwoman, the Violent Crime

Control Act of 1994 and the provisions in that, the 1033 provisions

have been a problem for insurance agents, and how in the world

we are supposed to conform to those. There are no rules, regulations for those.

So our concerns would magnify around these points, really on

those two various concerns. Any information that is made available

should be limited to information regarding crimes included within

the scope of section 1033, and that is part of the Crime Act. Insurance professionals should be required to have a criminal background check performed only once, not have to do it several times.

My agent friend here was saying the same thing essentially. The

administrative requirements for performing a check should be

minimized as much as possible. The determination of a State insurance regulator that an applicant satisfies the 1033 requirements

should be sufficient to satisfy any and all 1033 requirements. Once

satisfied, we think we should not have to do that again. I won’t

elaborate on two or three other points that we think that are important. They are in my formal written testimony to you.

We do think and are in favor, also, of the creation of a functional

regulator anti-fraud network. Again, we would want to be careful

that we would only supply that information that is needed and that

it would be, we think, shared from regulator to regulator, that we

could make the systems talk back and forth to each other as was

talked about on the first panel.

We do appreciate having this time today. We look forward to

working with you closer as we move forward in this project. We

think it is a good and worthwhile thing that we are trying to accomplish here. Thank you.

[The prepared statement of Ronald A. Smith can be found on

page 173 in the appendix.]

32

Chairwoman KELLY. I thank you, Mr. Smith, and we go to you

Mr. Bartlett.

STATEMENT OF HON. STEVE BARTLETT, PRESIDENT, THE

FINANCIAL SERVICES ROUNDTABLE

Mr. BARTLETT. Thank you, Madam Chairwoman. Thank you, Mr.

Chair and Ranking Member Waters. I thank you for the opportunity to testify. I commend the two subcommittees for their leadership early in the session on this important issue.

The Financial Services Roundtable membership consists of 100 of

the largest financial services companies across the breadth of the

industry, banking, insurance, securities, diversified. We are, in a

way, the poster child of Graham-Leach-Bliley. The Roundtable and

our member companies support the concept of this legislation as

you have outlined it. We believe it is important, critical indeed,

that there be a uniform standard for sharing of information relating to fraud by regulatory agencies. Legislation is needed to allow

that, and such legislation would help to prevent fraud. Fraud within our industry costs our industry and ultimately all consumers, by

our estimates anyway, about $100 billion a year.

As an industry we have taken several steps ourselves to identify

and prevent that fraud. I will cite two, but I note for the record

that both of these steps I will cite support that the appropriate use

of information sharing as a key component to combat fraud. One

is the Roundtable recently completed a study by Ernst and Young

entitled ‘‘The Customer Benefits Of Current Information Sharing

by Financial Services Companies,’’ and I submitted this, Madam

Chairwoman, as a part of my testimony for the record. One of the

principal benefits that we identified for appropriate information integration is the reduction of fraud. And in fact, it is that use of information that reduces a great deal of consumer fraud.

Second, our technology affiliate, known as BITS, has established

what is called a fraud reduction steering committee. That committee cuts across all sectors in the financial services industry. It

is based on the same concept as this legislation, that is, communicating known information about fraudulent activities from company to company and sector to sector will help to prevent fraud. It

has helped reduce the growth of check fraud from 17.5 percent a

year to 11.7 percent a year.

So in support of this legislation the key points of my written testimony, which I have submitted for the record, are as follows: One,

functional regulation as envisioned by Graham-Leach-Bliley is the

goal, but it is not yet working entirely smoothly. This legislation

would help with functional regulation, but we have a ways to go.

Madam Chairwoman, as it has been alluded to earlier, our industry has over 200 regulatory agencies, and my members tell me that

oftentimes each of the 200 chooses to show up at one location on

the same day.

Second, the enforcement information exchanged in this legislation should be limited to areas that relate to enforcement activities

with no information about customers exchanged per se.

Third, the terms and form of information exchanged should be

uniform across all 50 States and within all sectors, banking, securities and insurance.

33

Fourth, this legislation should establish no new collecting or reporting requirements, but rather should focus on sharing with appropriate agencies the information that is already collected. I will

repeat, this legislation should establish no new collecting or reporting requirements, but focus on disseminating or sharing the information that has already been collected.

Fifth, confidentiality and liability protections should migrate

with the information. For example, if information is protected

under Freedom of Information in its original location where it is

collected, that protection should hold to the next agency where it

is disseminated.

Sixth, the committee should consider reintroducing or incorporating into this legislation, legislation or proposed legislation

known as the Bank Examination Report Privilege Act introduced

last session by committee Vice Chair Marge Roukema. This bank

examination legislation would be a compelling companion piece to

the anti-fraud legislation that is under your consideration today.

The Roundtable supports this anti-fraud legislation based on the

concepts you have provided, and we look forward to working with

you to comment on the details as they develop. Thank you.

[The prepared statement of Hon. Steve Bartlett can be found on

page 183 in the appendix.]

Chairwoman KELLY. Thank you very much, Mr. Bartlett.

At this time, I would like to go to the panel with some questions,

and I am going to ask you the same set of questions that I asked

the first panel, because I would like to hear your answers. Just answer, please, if you were in the room before a simple yes or no.

Number one, wouldn’t consumers be better protected if the financial regulators use an automated background check of all agency

databases for all financial licenses and applications as opposed to

making specific occasional inquiries? Yes or no.

Mr. Hillman.

Mr. HILLMAN. Yes.

Ms. WUERTZ. Yes.

Mr. RODELL. Yes.

Mr. SMITH. Yes.

Mr. BARTLETT. Yes.

Chairwoman KELLY. Thank you.

Wouldn’t consumers be better protected if all background checks

for licenses and applications included a check of all financial regulators databases for comprehensive and seamless coverage, not just

those where individual information sharing agreements exist?

Mr. HILLMAN. Yes.

Ms. WUERTZ. Yes.

Mr. RODELL. Yes.

Mr. SMITH. Yes.

Mr. BARTLETT. Yes.

Chairwoman KELLY. Isn’t it cheaper and more effective to create

one coordinated anti-fraud network to exchange information then

to rely on numerous individual agreements and computer connections?

Mr. Hillman.

Mr. HILLMAN. Yes.

Ms. WUERTZ. Yes.

34

Mr. RODELL. Yes.

Mr. SMITH. Yes.

Mr. BARTLETT. Yes.

Chairwoman KELLY. Mr. Bartlett.

Mr. BARTLETT. Yes.

Chairwoman KELLY. Thank you.

Wouldn’t regulators be better able to fight fraud if they could

share materials without risk of losing critical confidentiality and liability protections?

Mr. HILLMAN. Absolutely, yes.

Ms. WUERTZ. Yes.

Mr. RODELL. Yes.

Mr. SMITH. Yes.

Mr. BARTLETT. Yes.

Chairwoman KELLY. Wouldn’t it be more efficient for financial

institutions to allow the regulators to use a single coordinated entity for sharing information to reduce duplicative examinations and

reporting?

Mr. HILLMAN. Yes.

Ms. WUERTZ. Yes.

Mr. RODELL. Yes.

Mr. SMITH. Yes.

Mr. BARTLETT. Yes.

Chairwoman KELLY. Thank you.

Could a coordinated network be used by the regulators as it

evolved over time to share other materials and financial data to reduce duplicative filings and examinations?

Mr. Hillman.

Mr. HILLMAN. Yes, that would be terrific.

Ms. WUERTZ. Yes.

Mr. RODELL. Yes.

Mr. SMITH. Yes.

Mr. BARTLETT. I want to think about that one, and I will submit

that one for the record.

Chairwoman KELLY. Well, do you think you want to say yes or

no, or do you want to say you don’t know? I am giving you three

choices. That is all we get on the floor of the House, so yes or no,

Mr. Bartlett.

Mr. BARTLETT. I don’t know.

Chairwoman KELLY. We will talk to you later.

Mr. BARTLETT. Perhaps, Madam Chairwoman, I didn’t understand the question.

Chairwoman KELLY. I will repeat it. Could a coordinated network

be used by the regulators as it evolved over time to share other materials and financial data to reduce duplicative filings and examinations?

Mr. BARTLETT. Madam Chairwoman, without straining the point,

my testimony was that this should be used only for dissemination

of regulatory information and not other data. So I am concerned

about the term ‘‘other data,’’ to use this system for other data.

Again, I would have to see what the other data is.

Chairwoman KELLY. Fair enough. I left you a lot of opening

there. Would it improve customer protection in the financial services industry if Congress created an anti-fraud network coordiVerDate 11-MAY-2000 10:32 Jul 20, 2001 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 70889.TXT HBANK1 PsN: HBANK1
35

nating limited information among regulators with full confidentiality protections?

Mr. HILLMAN. Yes.

Ms. WUERTZ. Yes.

Mr. RODELL. Yes.

Mr. SMITH. Yes, again, I would refer those 1033 pieces that I

mentioned in the Crime Act.

Chairwoman KELLY. Mr. Bartlett.

Mr. BARTLETT. Yes.

Chairwoman KELLY. You can answer that one?

Mr. BARTLETT. Yes.

Chairwoman KELLY. All right. That is good. I appreciate your

trying to answer it within the context of your testimony. I really

very much appreciate all of you for stepping up to the plate and

taking a choice here, because it is important for us to know how

you feel about these questions. So I have thank you very, very

much.

At this time, I would like to go now to the next Member, Ms. Waters.

Ms. WATERS. Well, you are such wonderful and cooperative, allagreeing witnesses. I don’t have a lot to ask, but I am curious

about something. In California, we had the unfortunate and regrettable experience of having an insurance company conspire with the

insurance commissioner to set up a fund, a 501C3, or a fund of

some kind where they would contribute to nonprofits. And this

fund substituted for the reconciling, I believe, of claims of consumers who were harmed during the Northridge earthquake, I believe. Now, would this whole company go into this database? Would

the CEO go in the database? How does that work? Did the State

regulatory agencies have to do something about them? I don’t know

exactly what happened, but it was a big scandal, terrible things.

Does this database encompass that kind of information?

Mr. SMITH. I will take a stab at it.

Ms. WATERS. Why do not we let Mr. Hillman take a stab at it

first.

Mr. HILLMAN. I am not familiar with that particular instance,

but the information housed in any system would depend upon who

the enforcement action was against. Systems maintain information

on both individuals and entities that were considered to be bad actors in an industry.

Ms. WATERS. So it could be a whole company? It could be a company that is on the databases having been fined or reprimanded or

something.

Mr. HILLMAN. It could be a company or one of the officers, depending on who the specific action was being taken against.

Ms. WATERS. Now who would make that decision about an insurance company? For example, in the State, would the State regulator make that decision? What if the company is a member of the,

what is it, the Roundtable?

Mr. BARTLETT. Financial Services Roundtable.

Ms. WATERS. Yeah, what if a company is a member of Financial

Services Roundtable?

Mr. BARTLETT. It would not make any difference, Congresswoman. As I understand the question and the answer, whatever

36

enforcement action is taken then in the State of California against

either individuals or the company would then be transmitted in

this database to regulatory agencies in other States or at the Federal level, so that a regulator in Alabama then, if one of the officers

that had an enforcement activity in California moves to Alabama

and applies to do the same kind of thing, then the regulatory agency, whether it is securities or insurance or banking in Alabama,

would know about it, would, in essence, have the same information,

no more, no less than the enforcement agent in the State of California had.

Ms. WATERS. How could a consumer in that State access that information?

Mr. BARTLETT. As I understand the legislation, I have testified

that the consumer would not be accessing the information unless

that information were available to consumers in California. So this

is for enforcement agencies or regulatory agencies, as I understand

the proposed legislation, and whatever rights the consumers of

California have would migrate to the consumers of Alabama, but

would not establish new types of information or new types of disclosure.

Ms. WATERS. I will have to take a look at this so that I can understand, because this is about trying to protect the consumer.

While the regulatory agencies would be able to make decisions

about everything from licensing to other kinds of things, if a consumer was suspicious of or had heard about or thought they knew

something about this company that had, in fact, reneged on its obligations to satisfy claims, they would have to try and get this information someplace else because it would not be available to them

from this source.

Mr. BARTLETT. It would be available, Congresswoman, in the

same way it would be available if they were a consumer of California, no more and no less. So this legislation, it seems to me, is

appropriate in that it creates a dissemination of information among

regulatory agencies, and then leaves for another day and another

forum if that dissemination should be expanded or contracted. This

simply allows the regulatory agencies that are regulating the right

to look at the legislation that other regulatory agencies have.

Ms. WATERS. My time is up. Thank you.

Chairwoman KELLY. Thank you, Ms. Waters.

Mr. Bachus.

Mr. BACHUS. Thank you.

As I understand it, what we are talking about here is presently

collected information, sharing that to enforce present requirements

and enforce present laws.

So, Mr. Bartlett, on the question that you were asked, I think

maybe we could change the question and it would be clear, and

that is, could a coordinated network be used by the regulators as

it evolved over time to share existing, as opposed to other—we will

just say existing material?

Mr. BARTLETT. I would answer yes to that. This legislation

should be used for dissemination of existing information, but not to

create new information that needs to be collected.

Our industry seems to have sufficient information collected about

us. We do not have a scarcity of that.

37

Mr. BACHUS. Right. I think the insurance commissioners were

saying no new requirements, no new fingerprints, just share what

you already have. I think that is what we are all talking about.

I am going to pass, with unanimous consent, to Ms. Hart, and

then at the end, with permission, I would like to ask maybe some

questions, if they have not been asked.

Chairwoman KELLY. Ms. Hart.

Ms. HART. Thank you, Madam Chairwoman.

Obviously, as a freshman, I am a little new to some of this stuff,

but on the State level, one of the things that I worked with quite

a bit was this vicious protection of States rights.

I know some of you addressed in your comments that you still

support State regulation, but you do also support this proposal for

some type of information sharing.

I guess the question I have for you is, and you can all answer

this, or a couple of you, if you choose, I don’t really have anybody

specific in mind, but do you envision this basically as a databank

that you would be able to access to determine if this company or

individual is clean? Or do you envision it as something beyond simply a databank, or just sort of a repository of information?

Mr. SMITH. I think from our standpoint, the independent insurance agents, professional insurance agents and life agents, we see

this as a means of sharing the data. It is a database.

I think the problem Mr. Bartlett had referred to, the problem is,

I am from Indiana. We could have an agent that is a rogue in Indiana that decides to move to Arizona, and Arizona does not have access or presently is not accessing Indiana’s information. This would

do it seamlessly. Indiana could pass that information, and they

would have certain guarantees that sharing that information would

not incur additional liabilities, things of that nature, so that we

could hopefully eliminate a rogue agent from going to 50 different

States and doing his damage in 50 different places.

Ms. HART. Just to get a little more specific, would you expect

that there would be a physical sharing from Indiana to Arizona, or

would you expect that the person in Arizona dealing with this individual would go back to this national bank to which Indiana would

be required to submit that information?

Mr. SMITH. I would anticipate that the information would be

given to the national database, and then that could be accessed by

any other State.

Ms. HART. Do you think it should be mandatory that every State

submit that information to the national—I am going to call it the

databank, just for my own term?

Mr. SMITH. We are big supporters of State regulation, functional

regulation. I always hate the word ‘‘mandatory,’’ but certainly we

are in favor of protecting consumers from anti-rogue agents. So if

we have to go to some extreme to make sure we get that accomplished, we need to do that.

Ms. WUERTZ. I would like to comment on that, as far as it being

a databank. One of the things we were envisioning, because I was

the one who developed the BASIC system for NFA, and it was a

difficult process because the CFTC contributes data, the various futures exchanges contribute data, we were envisioning that if an individual were applying to the futures industry, and we could go to

38

this network and put in some key information, that it would then

say there is a hit on the insurance industry, or there is a hit in

the securities industry, and then we could find the means to go get

that information.

I think it is just because of the level of information that each industry maintains, to contribute that to a massive database to me

seems a little overwhelming. But I think very efficiently, if you

would just get hits, and you could follow up on those, I think that

would work very efficiently.

Mr. BARTLETT. Congresswoman, if I might elaborate a bit, we

would see that the databank concept would be a rather old, antiquated and costly concept. It ought to be much more in the 21st

century; it is more a linkage or network in which access is provided.

The last thing we want to do, in my opinion, is to create some

new Federal agency to collect data. It ought to be linked, and access to it. Sort of think of it as a giant search engine, with protection so only the appropriate agencies can get to it, but not a place

where the data resides.

Ms. HART. One final question. This is also general.

If this is created—and I like Mr. Bartlett’s idea of having it be

more or less a linkage, since different States have different standards and have different requirements for participation in the agency, and also, I guess, baselines for problems within those industries—how would one who is accessing that information be able to

determine the rightness or wrongness of the person’s status?

Sometimes if you are going from one State to another, what is

a violation in one State would not appear to be a violation of the

other, and I appear to be out of time.

Mr. SMITH. Hopefully, the reciprocity that we are striving for

right now that the insurance commissioners are working on, if you

are licensed and in good standing in Indiana, can be licensed and

in good standing in any other State. So it goes back to the individual State to make sure that they keep their licenses straight

and up to date. Then they would have to share with the network

that information on bad agents.

Ms. HART. Thank you.

Chairwoman KELLY. Thank you very much, Ms. Hart.

Next we will go to Mr. Rogers.

Mr. ROGERS. Thank you, Madam Chairwoman.

You mentioned earlier that there were some 400,000 searches.

Ms. WUERTZ. On our BASIC system.

Mr. ROGERS. Was that by consumer or by regulatory searches?

Ms. WUERTZ. It is a combination of many things. We promoted

it very extensively to the consumers. We also promote it to other

firms that are thinking of hiring. It helps them determine the supervisory procedures they should be putting in place so they can

do their own background checks before making any types of hiring

decisions, as well as other regulators use it, but I don’t have the

breakdown of that.

Mr. ROGERS. I’m sure you are familiar with the 41 agreements

with NAIC for their information sharing and the things that were

listed by the panel previous to you.

39

Given those 400,000 searches that you have, and apparently you

anticipate that getting larger, and those information-sharing agreements, to any of your knowledge, has there been a breach of confidentiality that has posed a problem serious enough for your attention?

Ms. WUERTZ. First, I will have to say I am not that familiar with

the 41 agreements, but as far as we are concerned, the National

Futures Association, there have not been any breaches of confidentiality that have caused us any concerns.

Mr. ROGERS. Would that be consistent with the remainder of the

panel?

Mr. BARTLETT. Yes.

Mr. SMITH. Yes.

Mr. ROGERS. If you are not familiar with the agreement, that is

probably a good standard, because it does involve your industry,

and it means there is not a problem with those agreements. Am I

assuming that correctly?

Mr. BARTLETT. Congressman, as far as I know, there have been

no breaches. There could have been. The companies in this industry are quite sophisticated at building firewalls and developing

ways—technology is the answer. But the companies themselves figure out ways to provide this protection, as would these agencies.

So my experience in the industry would tell me that that is not

only not a problem, it has probably already been solved, and will

be solved on a daily basis as far as the potential breaches.

Mr. RODELL. I would also say that virtually all these disciplinary

actions are a matter of public record with the State insurance departments.

Mr. ROGERS. Who do you think should be fingerprinted now that

we are getting into the insurance industry? Consistent with the

same that is done in the other financial——

Mr. SMITH. I’m sorry, you are asking who should be?

Mr. ROGERS. Who do you think should be fingerprinted under

this?

Mr. SMITH. As of now, we think it is consistent with State law,

but our feeling would be—for instance, I am an agent in Indiana.

I do not have to be fingerprinted. I happen to have a license in the

great State of California. I had to be fingerprinted. I have done

that.

We believe that once you are fingerprinted, then that should suffice for any jurisdiction that has that requirement. We think that

that could stand outside of reciprocity and still not get into conflict

with the State regulation of insurance.

Mr. ROGERS. If I can follow up on that question, you mentioned

earlier in your testimony, Mr. Smith, that you didn’t want to have

repeated criminal checks, obviously repeated fingerprintings.

Is there an occasion that is occurring now, and obviously you just

mentioned one with fingerprints in California, but not in Indiana.

We don’t certainly want to impose more burdens on you.

Mr. SMITH. That has been, I think, the most common. I believe

there are about 11 or 12 jurisdictions that require fingerprints, and

if people operate in all of those States and have to provide those

independently, that is a burden.

40

Mr. ROGERS. Would that also be the same with the criminal history checks? We would have duplicative efforts.

Mr. SMITH. I can’t answer that specifically, but if you do the fingerprints, then the criminal background check would flow from

that. So, yes, I am sure that would be the case.

Mr. RODELL. Also, I would like to point out that our interest and

the Council’s interest is that we are working across the financial

services industry, so we are licensed as insurance brokers, as securities agents, and we are having to do this a multiple of times

across this industry. We feel we should only have to do it once.

Mr. ROGERS. Madam Chairwoman, I am very encouraged by the

testimony today. Very rarely will you have a panel of regulators

and a panel of those who are regulated in concurrence with something that we need to do in Congress.

I look forward to working with you all as we craft that legislation.

Thank you, and I yield back the remainder of my time.

Chairwoman KELLY. Thank you very much, Mr. Rogers.

Mr. Grucci.

Mr. GRUCCI. Thank you, Madam Chairwoman.

The question that I have really is in line with the question I had

asked earlier of the first panel.

The information and the words that I kept hearing, things like

unscrupulous individuals, disreputable individuals, rogue individuals, and the need to protect the vulnerable consumer or the vulnerable public, do you see any reason why the public should not

also have access to this information? Anyone who wishes to answer.

Mr. BARTLETT. Congressman, let me perhaps start. It depends on

which information.

There is a whole body of law and regulations by each of these

200 regulatory agencies I cited in each of the 50 States, and in

which there is a well-established pattern of what is available to the

public, what is not available to the public.

It is a little bit more complicated than making it all available to

the good consumers, because sometimes the good consumers are

also the bad competitors or the bad actors or other people who may

do harm. So the question is, what within a regulatory activity

should be public, and what should be limited to the regulatory

agencies.

My sense is that this legislation—there is not a problem there to

solve, in my sense. I have not heard of one.

This legislation should focus on a more orderly dissemination of

the information that is already being collected. Clearly just simply

opening all information that is ever collected for any reason, opening it up and putting it on the Web, is another way to approach

it. I don’t think that would be a productive way to approach it.

This legislation would say, let us make the information available

to one of the regulatory agencies available to the other regulatory

agencies, and I think that is the right step, the right approach.

Mr. GRUCCI. How would you then prevent a company that would

hire someone with the kind of attributes we have been hearing that

were not criminal, that they obviously did not conduct any criminal

activity to suffer any criminal punishment for, but yet are not the

type of people that some companies would want to represent them,

41

yet they are still out there, and some companies may hire these

types of people?

Why shouldn’t the public have that same kind of access so they

can make a decision on how to invest their money, whether it is

to buy a life insurance product or whether it is to buy an annuity

plan for their child’s education? Why wouldn’t you want them to

have that kind of information to determine whether or not the person they are dealing with is reputable?

Mr. BARTLETT. Congressman, I do want the public to have that

information. For that purpose we set up 200 regulatory agencies to

try to regulate the activities and regulate who can get a license and

who cannot. So I think that system, other than the dissemination

of the information, is pretty well in place.

The fact is, there is a competitive marketplace that helps to

make that decision, so individual consumers decide who they want

to do business with. That is sort of the basis of our industry, is to

promote the full competition within that industry.

But as far as the licensing of who is allowed to be hired in a particular license, that is pretty well established and we think is working pretty well.

Mr. GRUCCI. Thank you for your answer.

I yield back the remainder of my time.

Chairwoman KELLY. Mr. Hillman, did you want to make a comment?

Mr. HILLMAN. There was one point that I wanted to add. That

is that some of the most important information that the public

would need would be information on disciplinary actions or enforcement actions that were taken against an individual in any one of

these industries that we are talking about.

Right now today that information is currently available to the

public, but it is not readily accessible. One of the important things

that would be done through this provision would be to make that

information more easily available to others.

Mr. GRUCCI. Madam Chairwoman, if I could just follow up?

Chairwoman KELLY. Yes.

Mr. GRUCCI. I just wanted to ask the question, those examples

that you just pointed out would be for someone who committed

some sort of a criminal act, and there would be some sort of a trail

indicating that to the public. Is that my understanding of your answer?

Mr. HILLMAN. It would be a regulatory action that would have

been taken by a banking securities or insurance——

Mr. GRUCCI. Is this not designed to cover those people who have

yet to commit or are not committing a criminal act, but they are

not reputable, they are not acting with the utmost concern for the

general public?

Mr. HILLMAN. There is interest in sharing information in addition to enforcement actions and disciplinary actions, to include

things like consumer complaints, information on open investigations, and the like. That information also would be very useful to

regulators to help them ask more probing questions of applicants

in those industries to make sure that they are fit.

Chairwoman KELLY. Thank you very much, Mr. Grucci.

Mr. GRUCCI. Thank you, Madam Chairwoman.

42

Chairwoman KELLY. Mr. Cantor.

Mr. CANTOR. Thank you, Madam Chairwoman.

Just briefly, throughout the testimony of this panel, as well as

the prior panel, my concern has been the risk of duplicative reporting requirements and the creation of new bureaucracy. I am sensing that there really is not much concern for that among this panel.

Is it fair to say that the risk of duplicative reporting requirements

under the proposed legislation really has been obviated by the uniform licensing requirements inherent in the NARAB provisions of

the Gramm-Leach-Bliley bill?

Mr. BARTLETT. Congressman, the reason you do not hear a lot of

concern on this side is we have not seen the details of the legislation yet. So the risk is in the way the legislation is drafted.

We have full confidence in both the sponsors and leaders of this

committee and Members that that will not happen, but that is always the risk, because it is easy, and I was on your side of the

bench for a while, and it is easy to sit on your side of the bench

and sort of say, would it not be a neat idea if we just added a few

extra requirements here? Well, how about a few more and a few

more?

So the risk is the way it is drafted, not in the concepts.

Mr. CANTOR. If I could just follow that up, one of the discussions

I was having had to do with, you know, each State has different

requirements as far as applications for licensure, and so forth. My

question really is, does Gramm-Leach-Bliley speak to that specifically, and the sort of threat of the NARAB provisions hanging over

it, does that sort of take care of any duplicative requirement for information under a proposed bill here, because it has already been

required under Gramm-Leach-Bliley, and are we going to really be

entering an age where there is uniformity among specifically—let’s

say in the insurance area, is there going to be uniformity in licensing that would automatically be accessible, as Congresswoman

Hart said, be accessible through a network search?

Mr. SMITH. As far as the insurance industry is concerned,

Gramm-Leach-Bliley has moved the needle precipitously. The insurance commissioners are committed to trying to get to the reciprocity requirements.

I think there are a lot of things taking place as we speak in various State legislatures, and if we can indeed get to reciprocity—I

think if we get to 29, because that is the number in the bill, and

we stop there, that will not do us a whole lot of good. We are assuming once we get to 29, then we will get to 37, 38, then we will

get up to 50 or 51. Then we will make sure we are right where we

need to be.

Yes, that would take care of a lot of other requirements.

Mr. CANTOR. Because there are specific sort of offenses, if you

will, that an individual may have had on their record that will be

there in the databank at the State level that will then be retrieved

up to this sort of national linkage?

Mr. SMITH. Absolutely correct. They will be shared from State to

State in whatever fashion that would finally take.

Mr. RODELL. Again, I would just like to point out that part of

that act really is to look at this as one financial services industry.

43

So certainly NARAB helps insurance, but it does not help the duplicative issues across the entire sector.

Mr. CANTOR. Thank you. I yield back the balance of my time,

Madam Chairwoman.

Chairwoman KELLY. Thank you very much, Mr. Cantor.

Mr. Bachus, you have really not had a chance to ask your questions. Would you like to do that now?

Mr. BACHUS. Thank you. I did reserve my questions.

Mr. Bartlett, you talk about a superagency being created. I think

we created—in Gramm-Leach-Bliley we had the Federal Financial

Institution Examination Council, which was tasked with coordinating the information-gathering efforts within the financial industry, the banking industry.

It does make sense to have some mechanism for coordinating efforts between the industries. So do you think maybe it makes sense

to have that same examination council as the gathering body?

Mr. BARTLETT. Mr. Chairman, I do. I think that the Federal role

should be as limited as possible, sort of setting up the ground rules,

making sure the information is uniform, establishing uniform

standards, and making sure it is accessible.

My caution is to make sure that we don’t set up a place where

more information is gathered and sort of put into that place. There

are warehouses in Washington, as you know, that are the gathering places of all kinds of information that is not accessible. They

are just simply gathered.

I just would caution—and I know the committee, from the drafts

I have seen, the drafts of the concepts I have seen, is avoiding that.

I just want to be sure it is on the record to continue to resist that

temptation.

Mr. BACHUS. I think that is why the proposal is to use that examination council so you do not have to set up a new body.

Mr. BARTLETT. We think that is actually the appropriate body to

provide the supervision or the oversight on this function.

Mr. BACHUS. Thank you.

You mentioned $100 billion. If we can create an anti-fraud network with a cost of $5 million or $10 million that even eliminates

a fraction of this $100 billion price tag, plus—also it could have a

savings element there, or could save agencies and individuals

money by not having to respond to duplicative requests for information. It could actually be maybe—it could save the States

money, the agencies money, and individuals money and at the

same time prevent a lot of fraud. So I think it could be a very good

bargain for the citizens and the consumers.

I would also use an analogy. This may be a stretch, but we now

require repeat sex offenders and child molesters in certain States

to register when they go into a neighborhood. I see this as sort of

a way of registering some of these not only good agents, but bad

agents, and informing people when they do move around from industry to industry or from State to State.

Mr. Hillman, one thing that I have heard time and time again

is that in order to implement this information-sharing agreement,

these information-sharing agreements, that someone—and I think

only Congress would be the one—someone should supply some conVerDate 11-MAY-2000 10:32 Jul 20, 2001 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 70889.TXT HBANK1 PsN: HBANK1
44

fidentiality, liability, and corporation requirements; in other words,

legal immunity in certain cases.

Do you see any way of doing it without congressional involvement?

Mr. HILLMAN. I believe congressional involvement would be a

very critical component. Let me give you one example. Within the

securities industry they have this CRD system that maintains information on disciplinary actions, as well as information on open

complaints dealing with sales practices against brokers in that industry.

Open complaint information is sometimes unsubstantiated and

very sensitive. What they have done in the securities industry is

to give Federal immunity to the NASDR, that protects them from

any disclosures that have been made in good faith. That would be

somewhat of an appropriate model to consider for a system that we

are talking about today.

Mr. BACHUS. OK.

Ms. Wuertz, you mentioned that your association has decreased

the number of rogue agents by 75 percent by developing a coordinated tracking system. I think that model could be used throughout the industry.

Ms. WUERTZ. It was actually a combination of many things. The

rules we have put in place are sales practice rules.

If someone does have something in their history that they are

concerned about, we require the firms to have extra supervisory

procedures. So we do a lot if we have any information that someone

has a questionable background.

Mr. BACHUS. Thank you.

Chairwoman KELLY. Thank you very much, Mr. Bachus.

Ms. Waters, you have been very patient. I think you have a follow-up question, so I would like to call on you at this time.

Ms. WATERS. Thank you very much, Madam Chairwoman.

Instead of doing the follow-up question, I would like to kind of

wind it up.

There are a lot of questions that I still have about what it is, a

database or linkage, and what the technology is for the linkage, if

that is what it is; whether or not it is for regulatory agencies or

regulatory agencies and consumers; whether or not someone has

taken a look at the various States, and the fact that some States

are very, very consumer-oriented and you can have numerous violations, whereas in another State they may not be violations at all,

and what you do with that kind of reporting.

All, of course, we have not talked about costs. I don’t think it is

$5- to $10 million, as Mr. Bachus kind of alluded to. He is hoping,

but I think it is a lot more costly than that.

What I am hearing is this, that while we have a concept, it does

not appear that those of you in the industries with certain responsibilities, certainly regulatory responsibilities, and so forth, and

those of you who are in the industries where you try and form associations so that you can have standards, all of that, it does not appear to me that you have really been deeply involved in writing

this or helping to develop this.

So I guess what I want to leave with you and these subcommittees is this, that rather than go down the path of good ideas that

45

turn out to be nightmares later on, let’s make sure that there is

enough input and involvement and real critique of the concept so

that we can fix it.

Most people are concerned about fraud and rogues and all of

that, and others are concerned about fraud and rogues and privacy

and confidentiality and effectiveness. So let us make sure you are

involved, because you know what you are talking about. You know

what you are trying to get at, and know what we are trying to get

at and what the owners of the concept are trying to get at. Don’t

let it run away with the good ideas so that it will not work and

will not make good sense.

So I am just going to close by saying, Madam Chairwoman, I

think it is very important that we spend the time on this concept

to make sure we know what we are doing and how to best do it,

rather than move too quickly and create more problems than we

ever dreamed we could create.

Thank you. I yield back the balance of my time.

Chairwoman KELLY. Thank you very much for your comments,

Ms. Waters.

Mr. Bachus, did you have an additional question?

Mr. BACHUS. Just in closing, I would like to commend both panels. I thought their mood and their demeanor and testimony was

one of cooperation. We appreciate that.

What Representative Rogers said I think should encourage us

and give us optimism. That is that both panels, both the industry

and the regulators—there was agreement between them and a consensus on many things. That ought to assist us in the future.

Chairwoman KELLY. Thank you very much.

Yes, we do appreciate both panels and the fact that you spent as

much time as you did. It does give us a strong charge to get this

right, but it is good that we have a lot of agreement on where we

are going with this.

The Chair notes that some Members may have additional questions for the panel which they may wish to submit in writing, so

without objection, the hearing record is going to remain open for

30 days for Members to submit written questions for the witnesses,

and for the witnesses to place their responses in the record.

The second panel is excused, with the committee’s deep appreciation for your time.

I would like to ask unanimous consent for Members to have 1

week to submit opening statements or handwritten follow-up questions to our witnesses.

I would like to thank the staff, Mr. Robert Gordon, Charlie Symington, and especially my friends and colleagues, Mr. Bachus and

Ms. Waters for their work on this hearing.

Thank you very much. This hearing is adjourned.

[Whereupon, at 4:37 p.m., the hearing was adjourned.]

(47)

A P P E N D I X

March 6, 2001

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