do not believe banking entities merit any different treatment in this context. Moreover, if the proponents of this divergent regulatory scheme do in fact desire special treatment, their supporting rationale should be clearly stated so that members of the public can respond appropriately.

The situation is analagous to the involvement of life insurance companies, either directly or through subsidiaries, in the sale of investment company securities. Notwithstanding

the fact that life insurance companies and the agents that sell their products are extensively regulated by state insurance authorities, these same companies and individuals are subject to the full gamut of regulation under the federal securities laws, including regulation under the Exchange Act, for purposes of their investment company activities. Agents must be duly licensed with the SEC or the NASD and the insurance company itself or a subsidiary thereof must be registered with the SEC as a broker/ dealer. Similarly, once it was established that variable annuity contracts sold by life insurance companies constituted securities for purposes of the federal securities laws, variable annuity salesmen were required to comply with the provisions of the Exchange Act governing the sale of securities.

To permit banking institutions to be exempt from the broad regulatory provision of the Exchange Act would offend the principle of regulatory equality, and regulatory inequality portends unfair competition. It is unfair competition--and not additional competition--to which we object. The possibility of disparate

and possibly conflicting regulation, which we believe would inevitably result from empowering five federal bank regulatory bodies plus the SEC to regulate the same type of activity, should be avoided at all costs. Such a situation could foster serious competitive disadvantages between financial institutions that are not uniformly regulated. Indeed, the bill's objective of bolstering the banking industry by allowing entry into the securities business may, in the absence of equal regulation, jeopardize other competing segments of the financial industry, thereby causing a deterioration in the quality of the securities markets.

Conclusion

S. 1720 is a comprehensive bill proposing many significant changes to the existing banking system. These changes are of great consequence to the economy and to the competitive balance among financial institutions. There are many issues raised in the bill, such as the propriety of banking entities entering the investment company business, which warrant much more thoughtful analysis than they have presently been afforded. Until this analysis has been completed, we do not believe S. 1720 should be enacted.

We believe this type of further study would establish conclusively that, should banking institutions ultimately be permitted to sponsor investment companies and sell their shares, there is no demonstrable reason for their being afforded unique regulatory treatment under the federal securities laws. We therefore oppose in particular Section 302 of S. 1720.

The CHAIRMAN. Mr. Van Liew.

Mr. VAN LIEW. Mr. Chairman and member of the committee, I am Alfred Van Liew, executive vice president of the Rhode Island Hospital Trust National Bank. I am in charge of that bank's trust investment management division. We are a commercial bank with $1.2 billion in deposits. We have 36 branches throughout the State of Rhode Island. The vast majority of our deposits are raised in the Rhode Island marketplace and most of the lending activity relates to Rhode Island borrowers. In fact, roughly 80 percent of our stockholders are Rhode Island residents.

INVASION BY NONBANKING FINANCIAL INSTITUTIONS

In brief, we are owned by and serve Rhode Islanders. What we face today is an environment that is quickly being invaded by nonbanking financial institutions. Our bank is unable to compete adequately in this new environment under present laws and regulations.

I would like to expand on that statement by describing what has happened to the nature of competition for core deposits and local investable funds.

In the past, our competition for deposits has been other banks and thrift institutions within the Rhode Island marketplace. Today that competition remains, but it has expanded to include large national brokerage houses, insurance companies, retail businesses, and many other large financial institutions. Recent newspaper articles describing the financial services above to be offered by American Express, Prudential Insurance, and Sears, Roebuck clearly indicate the trend.

Intermediation has traditionally occurred within the framework of banks and thrifts.

Now, however, money market funds participate in this process by taking what used to be our deposit dollars directly from customers and then, to a large degree, returning only a portion of the dollars to the banking system through the purchase of large CD's at selected banks. Since the rates the funds may pay are not regulated, they can offer a higher rate of interest to the consumer than we can and, consequently, have been rapidly garnering our deposits. A conservative estimate of $100 million in Rhode Island money is invested in money market funds by brokerage firms in our immediate area.

Most of this money would otherwise have been in the Rhode Island banking system. However, if these funds do not buy CD's at local Rhode Island banks-and selections rarely include hospital trust or other Rhode Island banks-that money has left the community. There is no return on that money to the local banking community either as a deposit or in fees that would have been collected were we able to offer money market funds.

Due to this outflow, we find ourselves in a position where we are not only prohibited from using our expertise to generate additional business, but we also have to fight simply to retain our present customer base. The competition has an unfair advantage which has been successfully exploited because commonsense and increased sophistication has the consumer reaching for the highest rates available in the marketplace.

My purpose in mentioning all this is to make this point: other institutions that are not bound by the same laws which tie our hands can and do offer funds that attract the average investor and allow the firm to make a profit at the same time. These firms have no regulations that prohibit them from generating the volume necessary to make their required profit, and thus their funds are constantly growing. Many of the services these firms offer have been requested by our present customers but, by law, we cannot provide them. A nonbank financial services firm can virtually "capture the customer" by securing the core business-money market funds.

From this base the firm can then market a myriad of investment vehicles and financial services. Today's shopping list would include checkwriting, borrowing, and custodial as well as investment in equities, bonds, real estate, and other mutual fund products. Our offerings seem inadequate given the nature of the competition. To maintain our customer base, we are forced to find solutions under the present regulatory structure that offer minimal profitability, if at all. We call this in our organization, "shooting ourselves in the foot." An example is the banking industry's "stopgap" answer to the cash management account. At best, banks can offer an imitation product that will be some combination of checkwriting, credit extension, and money market fund participation.

A number of money market firsts have recently formed alliances with banks for this same purpose-Dreyfus and Fidelity are two that immediately come to mind. The banks must pass on this money to the money market funds. Those firms are able to change management and administrative fees that represent most of the compensation for the entire product. In such a situation, the money market fund will reap the profit; the bank will be fortunate to break even. However, the Glass-Steagall Act prevents the bank from sponsoring underwriting, or advising a mutual fund.

Add to all of this the fact that recent studies have shown that most individuals would prefer to conduct their financial transactions with the local institutions that have been serving them for years. They have more faith in their neighborhood bank due to a close relationship from past association.

Competition is something we welcome because we have the resources and capabilities to provide the necessary services. However, under present regulations, particularly those of Glass-Steagall, we face laws that prohibit us from offering, producing, marketing, and managing the type of services necessary to compete in our own market. The services provided by our trust division generally appeal to those Rhode Islanders who have a high net worth and/or annual income in excess of $100,000. Therefore, the management and investment expertise of our trust division is presently available only to a small percentage of our population. Over 46 percent of our local population-those with an annual income between $20,000 and $50,000-thus become prospects for money market funds and other services provided by nonbank, financial services organizations. These are services we are forbidden to offer under present law.

Our capabilities as qualified investment managers are severely diminished because we are unable to appeal to a sizable segment of

the population without a commingling of accounts and mass marketing of these services. This has proven unprofitable and unlawful in the past. Twice in our history we attempted to reach this market with products which had to be terminated because they were either thought to be in violation of Glass-Steagall or because of poor reception in the marketplace due to the necessity of extra consumer dollars being spent on legal fees for a trust agreement. The smaller investor does not want roadblocks.

If we were able to commingle our funds, we would have the ability to deliver the "economy of scale," and it would be possible for us to compete in a reasonable manner with other financial services institutions. Our expertise should then allow us to make our services available to a much broader base, and we could deliver vehicles such as money market funds to a greater number of Rhode Islanders.

In summary, Hospital Trust is a relatively small bank in a small State. Nevertheless, we are a well-managed financial services institution capable of providing services that are necessary and vital to our community. However, we want to do more but require a greater degree of regulatory freedom in order to do so. Our customers have expressed a desire for us to expand our services. They have stated that they would much prefer to deal with us through our extensive branch system than to go to an unknown, faraway firm that deals with them only by computer.

Therefore, we want to be deregulated on both price and product. We do not fear competing against large national organizations in Rhode Island, if we can do so on equal terms. Our capabilities in offering money market funds, equities, fixed income investments, real estate opportunities, gold investment, and others are sound and well-organized. Through the past 114 years we have successfully managed the dollars of thousands of Rhode Islanders. We have preserved and, where appropriate, built capital through sound investment for individuals and institutions in good times and in depressions and recessions.

We hope deregulation will allow us to offer these capabilities to the consumers of Rhode Island. Given deregulation, we feel confident that we can compete effectively for other types of financial services business within our own community. We fervently hope that through deregulation the antiquated laws that prohibit us from operating on terms that are feasible for fair competition will be amended.

If so, all organizations desiring to do business in the financial services field should be able to offer similar products, and the free enterprise system of competition will be restored to the financial services industry.

We applaud competition on equal terms. We urge the committee to focus on allowing the financial services industry to commingle their funds so that this equality will be achieved. Commingling would not only help restore our ability to compete but would allow us to better serve our Rhode Island community. At present, the scales are tipped in favor of the nonbanking sector of the industry. All we ask is that they be righted on a level plane so that true competition will once again exist.