DRAFT
February 16, 2006
The Honorable
Room Building
Washington, DC 20515
RE: H.R. 3505 – THE FINANCIAL SERVICES REGULATORY RELIEF ACT OF 2005
Dear Representative :
As the state securities regulator charged with protecting investors in [state], I would like to comment on Section 209, “Selling and Offering of Deposit Products” of H.R. 3505, the Financial Services Regulatory Relief Act of 2005. This provision affects my ability to license certain individuals in [state] who are selling non-traditional, riskier deposit products.
At one time, most CDs were fully FDIC insured and paid a fixed interest rate until they reached maturity. But, like many other products in today’s markets, CDs have become more complex. Investors may now choose among variable rate CDs, jumbo CDs, callable CDs and CDs with other special features. These CDs pose significantly greater risks to investors. Accordingly, the North American Securities Administrators Association (NASAA) suggests fine-tuning the Section 209 “Selling and Offering of Deposit Products” language that was reported by the House Financial Services Committee.
In order to protect investors, current federal and state laws allow states to regulate individuals who offer or sell securities, even if those securities are deposit products. At the same time, Congress and the states generally recognize that licensing exemptions are appropriate under certain circumstances – where for example, deposit products are sold by a bank through its employees.
My concern lies with non-bank-employees, often referred to as “independent agents” of the bank. These are individuals who do not have the employee affiliation with the thrift, do not necessarily have adequate training, and do not fall under the supervision of the thrift. The problem is exacerbated because many investors assume that a salesperson representing a financial institution is an employee, fully backed by the institution. Yet this is not the case, and these independent agents need oversight if they are going to offer the more complex and riskier deposit products. NASAA’s proposed amendment to Section 209 would help make that oversight available, without disturbing the licensing exemption for bank employees selling deposit products.
Licensing is an important aspect of investor protection, conferring many benefits. Licensing requirements enable states to insist upon a minimum level of education and expertise among
those who sell investment products. Those requirements also enable state securities regulators to verify that a salesperson does not have a disciplinary history of fraud or misconduct. And, a licensing framework provides for the supervision of agents, disclosure of commissions, suitability requirements, complaint reporting and other benefits. Any cost of licensing is certainly outweighed by the positive return to investors. In short, Section 209 undermines the need to monitor individuals who are taking people’s investment funds to the public.
The language proposed by NASAA is underlined in the Section 209 provision that follows this letter. It is a technical change, but one that I believe is important to ensure adequate oversight of these agents selling non-traditional deposit products to investors in my state.
Please contact me at [phone number] if I may provide additional information or answer any questions. I look forward to continuing to work with you as this bill moves through the legislative process to provide regulatory relief that is the appropriate balance between regulatory efficiency and protections for all investors.
Sincerely,
State Securities Administrator
SEC. 209. SELLING AND OFFERING OF DEPOSIT PRODUCTS.
Proposed Amendment is Underlined
Section 15(h) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(h)) is amended by adding at the end the following new paragraph:
`(4) SELLING AND OFFERING OF DEPOSIT PRODUCTS- No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall directly or indirectly require any individual who is an agent of 1 Federal savings association (as such term is defined in section 2(5) of the Home Owners' Loan Act (12 U.S.C. 1462(5)) in selling or offering fixed rate fully FDIC insured deposit (as such term is defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(l)) products issued by such association to qualify or register as a broker, dealer, associated person of a broker, or associated person of a dealer, or to qualify or register in any other similar status or capacity, if the individual does not—
`(A) accept deposits or make withdrawals on behalf of any customer of the association;
`(B) offer or sell a deposit product as an agent for another entity that is not subject to supervision and examination by a Federal banking agency (as defined in section 3(z) of the Federal Deposit Insurance Act (12 U.S.C. 1813(z)), the National Credit Union Administration, or any officer, agency, or other entity of any State which has primary regulatory authority over State banks, State savings associations, or State credit unions;
`(C) offer or sell a deposit product that is not a fixed rate fully FDIC insured deposit (as defined in section 3(m) of the Federal Deposit Insurance Act (12 U.S.C. 1813(m)));
`(D) offer or sell a deposit product which contains a feature that makes it callable at the option of such Federal savings association; or
`(E) create a secondary market with respect to a deposit product or otherwise add enhancements or features to such product independent of those offered by the association.'.
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