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sought in the first instance at the state level.

Only if

those problems cannot be solved there would it be appropriate

to consider action at the Federal level, and even then that

action should be far less ambitious than is contemplated by

the Act.

Thank you for providing us this opportunity to

express the views of the Independent Insurance Agents of


The CHAIRMAN. Thank you very much, Mr. Kremer.
Mr. Douds.



Mr. Douds. Thank you, Mr. Chairman, NALU is made up of 135,000 life insurance agents doing business in this country.

I think it might be of interest to this committee to know that these members of NALU represent 971 of the life insurance companies in America that would be directly affected by S. 1710.

Overall, I should say that, as an overall comment on the bill, we look upon this as an attempt at the Federal level to solve what we consider to be a State problem. But we do appreciate the opportunity to be heard and we want to be as constructive and helpful as we can, given the circumstances.

Therefore we would like to enumerate some of the objections we have to the bill for whatever value this might have when the bill is further considered, so that there might be some possibility that support from organizations such as ours might be garnered in the future.

We are just saying we do not believe in its present terms that S. 1710 is adequately designed to meet the problem.

First, the argument we have already alluded to, and that is that insurance as an industry, and one of the last, we might say, which has heretofore, indeed with the blessing of the Congress, been regulated at the State level. It is a major industry, Mr. Chairman, and as you said on Monday, it has in fact done a good job. And we would add, that it has done this good job under State regulation, and therefore we would think if guarantees against insolvency are to be provided, they should be provided at the hand of the State governments, and not the Federal Government.

As Senator Brooke himself said in introducing the bill, the financial solvency picture had improved significantly from the time of the GEICO crisis of a year before. I don't think we should fail to keep in mind that the GEICO crisis was averted, not by any Federal device or mechanism, but that crisis was averted by the ingenuity of the very State regulation that S. 1710 would seek to supplant.

Senator BROOKE. If you would yield there, there is some dispute about that. The private companies actually were the ones, I think, that averted the crisis for GEICO. But I certainly don't want to take anything away from the State regulators in their assistance in that. I quite agree it was not done with any Federal assistance.

Mr. Douds. I was referring to Superintendent of Insurance Wallach of the District of Columbia, who acted as a quarterback, as it were, in trying to rehabilitate the company.

Second, and more important from the NALU point of view, we understand that nothing in S. 1710 is intended to affect the general qualifications of licensing and day-to-day activities of insurance a gents.

But at the same time, section 101(b)(7) of the bill would give the Federal Insurance Commission the power to examine and require reports and records of federally guaranteed insurers or applicants for

such status, or their "managers and agents," and I am quoting from the bill.

In the lexicon of the life insurance business, managers and agents are the very field people we represent, whereas in a more legal sense of the term, it might refer to corporate representatives generally. Perhaps it would be appropriate to include clarifying language, maybe in the definitions section of the bill, if in fact the bill is not intended to directly affect the day-to-day activities of insurance agents.

I think a similar clarification would be in order in section 108, which gives the Commission supervisory authority over “agents."

Third, and even more disturbing to us, is the power the Commission would have to promulgate regulations such as it might deem necessary to carry out the purposes of the act.

This is a power which we would almost be willing to bet would be the subject of bitter dispute as time went on. Because under the dual regulatory system that the bill is designed to set up, the Federal Insurance Commission really couldn't do its job properly, unless it stepped into the territory of many areas of State regulation. This would be true not only with respect to federally chartered insurers, but it would be true with respect to federally guaranteed insurers, and with respect to applicants for one or the other status as well.

As Mr. Hunter so well said the other day, it does seem to us with this new Federal regulatory power, insurance regulation stands a good chance of being sliced into 100 rather than 50 pieces.

Fourth, the bill gives the Commission the power to allow insurance companies to get into businesses that are complementary or incidental to insurance. No one knows better than the members of your committee, Mr. Chairman, the trouble that can be caused by legislative language that is as broad and vague as this.

We have only to look at the Bank Holding Company Act amendments of 1970, and the disputes and the problems that have been caused by them in trying to decide what is closely related to banking and what is an incident to banking and what is not.

If I might, I would like to submit for the record an excerpt from an article in Economic Perspective, a publication of the Federal Reserve Board, which chronicles 39 nonbanking activities that have either been approved by the Fed, are pending, or have been disapproved.

The CHAIRMAN. We are glad to have that for the record. It will be printed in full.

[The information follows:]

"INCIDENTAL" ACTIVITIES OF BANK HOLDING COMPANIES The March-April 1977 issue of Economic Perspective, a publiction of the Federal Reserve Board, reviews the nonbanking activities of bank holding companies which have been approved by the Board; those that have been denied, and those that are pending. The list is a good chronicle of 39 nonbanking activities which banks feel are “incidental”, some of which insurance companies might well also consider to be such if S. 1710 were to be enacted :


1. Armored car services.'
2. Underwriting mortgage guarantee insurance.

1 Added to list since January 1, 1975.

99-073 0 - 78 - 36


3. Underwriting and dealing in U.S. Government and certain municipal securities. 23

4. Underwriting the deductible part of bankers blanket bond insurance (withdrawn).

5. Management, consulting to nonaffiliated, depository type, financial institutions.1 2

ACTIVITIES APPROVED BY THE BOARD 1. Dealer in bankers' acceptances.' 2. Mortgage banking. 3. Finance companies.?

a. consumer. b. sales.

C. commercial. 4. Credit car issuance.2 5. Factoring company.? 6. Industrial banking. 7. Servicing loans. 8. Trust company." 9. Investment advising.' 10. General economic information.” 11. Portfolio investment advice.? 12. Full payout leasing.'

a. personal property.

b. real property. 13. Community welfare investments. 14. Bookkeeping and data processing services.' 15. Insurance agent or broker-credit extensions." 1. Equity funding (combined) sale of mutual funds and insurance. 17. Courier service. 18. Management consulting to nonaffiliate banks." 19. Issuance of travelers checks. 20. Bullion broker.? 21. Land escrow services.1 ? 22. Issuing money orders and variable denominated payment instruments."



1. Equity funding (combined) sale of mutual funds and insurance.
2. Underwriting general life insurance.
3. Real estate brokerage.
4. Land development.
5. Real estate syndication.
6. General management consulting.
7. Property management.
8. Nonfull-payout leasing.'
9. Commodity trading.'
10. Issuance and sale of short-term debt obligations ("thrift notes").'
11. Travel agency.13
12. Savings and loan associations."

Mr. Douds. It is a good chronicle of the kind of activities that insuranco companies, given the same entrepreneurial latitude, would be just as innovative as the banks have been in getting into businesses perhaps where they have no business being.

So we would say with respect to this bill, as we did in 1970 when the Bank Holding Company Act amendments were pending, if this is to be a power of insurance companies, there ought to be a so-called laundry list in the bill, spelling out what it is they can get into and what they cannot get into, to prevent the kind of trouble we have had with the banks.

1 Added to list since January 1, 1975.
? Activities permissible to national banks.

3 These were found to be "closely related to banking" but the proposed acquisitions were denied hy the Board of Governors as part of its “go slow" policy.

• To be decided on a case-by-case basis,

Fifth, we would say the concept of a guaranty fund is laudable, but as you have heard many times, it would be set up in direct competition with State funds, and competition for laxity, or what has more salaciously been called a "perverse competition” would be generated.

The Federal Government might initially, by attractive devices, seek to lure insurers into it's fund. This could be very damaging to the State funds.

Another section would deal an even more powerful blow to State regulation and that is the section that says that once the Federal charter is issued, the insurance company can do business in any State.

It is very difficult to conjure up any more serious usurpation of State regulatory power than that one, considering that licensing of companies is a mainstay of State regulation.

Our sixth point of concern is with the tax section of the bill. It is a very hard section to understand. But as we do understand it, the State of Wyoming, for example, could not tax a federally chartered insurance company from Maine any more than the least taxed foreign company is taxed in any State. That is what the language seems to say. If that is the case, it would seem the bill would ask Wyoming to adopt as a standard the lowest tax of any State in the Nation.

In any event, we would urge clarification of that language. And we would say this: unless some argument can be advanced to support a thesis that State premium taxes have somehow been the cause of insolvency, we wonder why this is in the bill. We would have thought the ability to pay taxes to be a sign of solvency, not insolvency.

Finally, with respect to Federal charters in general, these charters have always had about them an aura of the prestige of the United States. We would wonder whether the Congress would be willing to authorize their issuance on a wholesale basis to the 1,800 or so life insurance companies in America, many of whom may want the charter to avoid burdensome or onerous State taxation, many of whom might want the charter to get into other States, where they have not before been allowed to do business.

As we indicated earlier, in conclusion, we endorse the major goal of S. 1710, which is to guard against insurance company insolvencies, but we do have certain reservations about it.

We appreciate Senator Brooke's remarks that proposals like this take many years sometimes to gain acceptance, and we hope that with the passage of time, as State regulation is improved, maybe enactment of S. 1710 might even be rendered unnecessary.

Thank you.
[The complete statement of Mr. Douds follows:]

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