Key House Committee Green-Lights Final Regulatory Reform Measures

The House Financial Services Committee yesterday approved the final two pieces of a package of legislation to reshape the financial regulatory system, paving the way for the full House to debate and vote on the measures as one omnibus bill next week.

The committee voted along party lines, 31 to 27, to pass the Financial Stability Improvement Act, which would allow for the orderly winding down of large, financially troubled non-bank financial institutions as well as create a multi-agency council to identify and monitor risky activities that could undermine the nation’s financial stability.

Separately, the committee approved by voice vote the Federal Insurance Office Act, which would create a federal insurance office within the Treasury Department to monitor all aspects of the insurance industry, including bond insurers, and to report annually to Congress beginning in 2011.

The new federal office created by the insurance bill, which was sponsored by Rep. Paul Kanjorski, D-Pa., chairman of the committee’s capital markets panel, would serve as a single point of contact for the United States on domestic and international insurance matters and help coordinate with any new systemic risk-regulator.

Both bills are expected to be added to several pieces of legislation already voted out of the committee, including measures to regulate over-the-counter derivatives and to improve the accountability and transparency of rating agencies. The Rules Committee is expected Tuesday to set a procedural timetable for the full House to debate the omnibus bill, with a final vote scheduled for Thursday or Friday, according to committee chairman Barney Frank, D-Mass.

While debating the insurance measure yesterday, Ed Royce, R-Calif., and Melissa Bean, D-Ill., offered an amendment that would have given the federal insurance office regulatory authority over bond insurers. Specifically, it would have given bond insurers an optional federal charter rather than have to submit to the patchwork of 50 state insurance regulators.

Royce said that the amendment was intended to address the lack of uniformity in the current decentralized regulatory regime for monoline insurers, and stressed repeatedly that is was not a push for more or less regulation, but “smarter, more effective regulation.”

He also noted that even though the monoline bond insurers comprise a relatively small segment of the insurance market, they made headlines and had major market impacts last year when they were widely downgraded for their exposures to tainted mortgage-backed securities.

But Royce withdrew the amendment after several other lawmakers made it clear they would not support it, including Kanjorski, who said he had made “certain commitments” that the insurance bill would not create a new federal regulator, just a federal office with expertise on insurance.

Frank said it would be a mistake to provide optional federal charters “piecemeal” and told Royce that his measure would be “very much” on the table next spring, when the committee plans to hold hearings “on bills empowering even more federal authority than this.”

Separately, the full House yesterday passed by voice vote the Enhanced SEC Enforcement Authority Act, which gives the Securities and Exchange Commission the ability to serve subpoenas nationwide in its civil actions. Currently, the SEC only has limited authority to serve subpoenas in administrative proceedings.

The measure, introduced by John Campbell, D-Calif., is designed to help reduce SEC costs and improve its effectiveness. Currently, subpoenas may only be issued within the judicial district where a trial is taking place or within a “100-mile bulge” from the courthouse. Since witnesses in SEC cases are frequently located outside of this subpoena range, unless they voluntarily come to the trial, the SEC must depose them remotely and use their written or videotaped testimony during the trial. The SEC has long argued that deposition testimony is more expensive and less effective than live testimony.

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