WASHINGTON - A proposed blueprint for modernizing regulation of the financial services industry released yesterday by the Treasury Department would boost the power of the Federal Reserve, change the structure of the Securities and Exchange Commission, and expand the oversight of self-regulatory organizations such as the Financial Industry Regulatory Authority.

But the 218-page proposal would probably have little direct impact on the municipal market because it does not call for any changes to the Municipal Securities Rulemaking Board, the primary regulation setter for the municipal market.

In fact, municipal regulation is not mentioned in the entire blueprint, which is nevertheless the most sweeping set of recommendations for updating the financial regulatory system since the Great Depression.

However, the document recommends establishing over several years an optional federal charter for the insurance industry, including muni bond insurers, that would replace the patchwork of state regulations. It also recommends, in the near term, enhancing the power of the Fed to monitor investment banking firms and to protect the stability of the entire financial system.

The proposal calls for merging the Commodity Futures Trade Commission with the SEC while placing oversight of both broker-dealers and investment advisers under the same SRO, possibly with FINRA.

"A strong financial system is vitally important, not for Wall Street, not for bankers, but for working Americans," Treasury Secretary Henry Paulson said yesterday in a speech unveiling the blueprint, which has been in the works since last June.

Reaction from federal lawmakers to the overall blueprint was mixed, however, suggesting the proposals would face a difficult time gaining approval from Congress.

House Financial Services Committee chairman Barney Frank, D-Mass., said that the blueprint was "a very constructive step forward" and urged lawmakers to focus on legislative solutions to the ongoing credit crunch, despite the distractions of election-year politics.

Senate Banking Committee chairman Christopher Dodd, D-Conn., praised aspects of the plan that would reduced "fragmentation and balkanization" among regulators, but said that overall it would "create weaker standards."

"That does not seem sensible in light of the beating investors and consumers are taking at the moment," Dodd said in a statement. "If the president and his advisers really want to help, they should work with those of us in Congress who are trying to reduce foreclosures and end the credit crunch."

Asked why a discussion of possible changes to municipal regulations were left out of the blueprint, a Treasury official told reporters yesterday during a background technical briefing: "Scoping this project was one of the hardest parts of it, and there wasn't a conscious effort to avoid that issue."

Still, the municipal securities market could be indirectly affected by, among other things, the recommendation that a single self-regulatory organization harmonize oversight over both broker-dealers and the investment advisers. The blueprint stated such a change is important because some firms already offer both services and investors "fail to understand the difference in the standards of care" between them. It also noted that the "rapid and continued convergence of the services provided by broker-dealers and investment advisers" has helped to fuel "resulting regulatory confusion."

"Treasury ... believes that self regulation of the investment advisory industry should enhance investor protection and be more cost effective than direct SEC regulation," the blueprint stated. "Thus, in effectuating this statutory harmonization, Treasury recommends that investment advisers be subject to a self-regulatory regime similar to that of broker-dealers."

FINRA chief executive officer Mary L. Schapiro said that the blueprint "marks an important beginning to a debate that is critical to the future of investors protection."

"Today's increasingly complex financial services landscape and fragmented regulatory environment has made it nearly impossible for the average investor to navigate the marketplace and fully understand the risks they may be exposed to and the protections they are entitled to," Schapiro said in a statement. A spokesman said that FINRA officials are still reading the proposal and cannot yet comment on any of its specifics.

The blueprint is unclear on what role, if any, the SEC would have going forward. It recommends expanded powers for the Fed in the short-, intermediate-, and long-term periods it outlines, and suggests that a "conduct of business" regulator and a "corporate finance" regulator eventually take over many existing SEC functions.

SEC chairman Christopher Cox said in a statement that "proposed consolidation of responsibility for investor protection and the regulation of financial products deserves serious consideration as a way to better address the realities of today's markets." He also said that financial services regulation needs to be integrated among few agencies, and that the "overarching objective" of investor protection "can't be fully achieved if it fails to encompass derivatives, insurance and new instruments that straddle today's regulatory divides."

Though Paulson described the existing state-based regulatory system for the insurance industry as "quite burdensome" because it "allows price controls to create market distortions," state regulators either reacted guardedly to, or opposed, the blueprint's call for an optional federal charter.

"We have an obvious concern with moving insurance and centralizing it into the federal government and how that would affect consumers," said Sean Dilweg, the commissioner of insurance for Wisconsin. "We look at the problems facing the market right now and they're due to what I would call lax oversight, on a lot of these instruments traded by the banks, and it's unclear to us why centralizing would be any better."

Maryland insurance commissioner Ralph S. Tyler said: "The question of the proper balance between federal and state regulation of insurance is an important one. Fundamental change of a system that has, overall, worked well should be approached with care. The states play a critical consumer protection role and that must be preserved. A huge Washington agency is likely to be less responsive to the complaints of Maryland consumers than the current state agency."

The National Association of Insurance Commissioners said that while the administration needs to "remodel the financial regulatory house," it should "leave the insurance 'room' alone."

But the American Bankers Insurance Association and the American Bankers Association hailed the call for an optional federal charter in a joint statement.

"This long overdue measure would create greater efficiency and modernization for the insurance regulatory system," said ABIA executive director Kevin McKechnie.

Dakin Campbell contributed to this story.

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