The Internal Revenue Service may be the key to enacting financial modernization legislation. A small group of banks and insurance firms are working on a proposal that would rely on the U.S. tax code to determine which financial products will be regulated by state insurance commissioners and which will be overseen by federal banking regulators. This turf battle has been one of the major stumbling blocks to passage of a bill.

Under U.S. tax laws, the investment earnings of most insurance products are tax-exempt. Working with a few industry lobbyists, House Commerce Committee staff members are trying to draft a plan that would give state insurance officials authority over new products granted similar tax- deferred status by the IRS.

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