While the industry lauded Congress for passing the Gramm-Leach-Bliley Act, the new law also gave the Federal Reserve an entree into the SEC's turf.
The law sweeps away the last remnants of Depression-era legislation that prohibited one company from engaging in banking, securities and insurance simultaneously. Under the act's regulatory scheme, the Fed was given broad oversight authority of new financial services companies. The SEC, in contrast, was directed to consult and work closely with the Fed in some cases.
Since the new law allows banks to coexist with other business units, the Fed was given the power to intervene with these subsidiaries--including securities firms--to maintain the soundness of a bank or to protect the international payments system.
Turf battles over hybrid products caused Congress to direct the SEC to "consult with and seek the concurrence" of the Fed in regulating hybrids. The Fed was given explicit authority to challenge SEC regulation over these new products.
The SEC had no comment on the new law.
Marc Lackritz, president of the SIA, downplays the changes, saying the SEC still has "full regulatory authority over broker/dealers, which the Fed can supercede only after proving need."
But the Fed now has new powers courtesy of a Congress that was critical of the SEC. A bipartisan statement by the deregulation bill's managers faulted the SEC for failing to promote more efficient regulation. "The Conferees expect that the SEC will improve in this area," they wrote.
Christi Harlan, spokesperson for the Senate Banking Committee, says the SEC is required to perform an economic analysis of all proposed new rules. "They don't even have a chief economist over there," Harlan complains.
The bill's managers also faulted the SEC for not adequately consulting the Fed regarding an accounting issue that affected banks' loan loss reserves.
The report's criticism didn't end with the SEC. It warns the entire investment industry that it is "the sense of the Congress that individuals offering financial advice and products should do so in a nondiscriminatory, nongender-specific manner."