State officials gird for fight against federal risk regulator

State securities officials are lining up against congressional proposals that would create a systemic risk regulator for the financial industry, fearing that it will pre-empt their power.

The risk regulator will have broad powers to oversee organizations that could cause instability in the financial markets if they fail.

One approach under consideration by congressional leaders is to assign the new responsibilities to the Federal Reserve, an idea supported by the Securities Industry and Financial Markets Association of New York and Washington.

But that approach concerns state regulators.

“To the extent the Federal Reserve were to take on this additional duty, it might conflict with its primary mission” of setting interest rates and keeping inflation in check, said Austin-based Texas securities commissioner Denise Voigt Crawford, president-elect of the North American Securities Administrators Association of Washington. “The Federal Reserve has a full plate.”

State officials will have an opportunity to make their case tomorrow, when state securities officials and members of Congress gather in Washington for the annual NASAA public policy conference.

TAKING THE LEAD

“The feds need to let the states take the lead and make sure they’re not taking away the states’ ability to regulate,” said Monica Lindeen, the Montana state auditor and commissioner of insurance and securities in Helena, who will speak at the NASAA conference.

She argues that the states have done a good job of regulating the industries they oversee, but “the feds have not proven they can do a good job.” Given the financial crisis, the idea of creating a single federal entity with power over systemic risk regulation “does make me nervous,” Ms. Lindeen said.

State regulators are lining up behind legislation introduced last month by Sen. Susan Collins, R-Maine, that would create a council to oversee systemic risk issues.

The Financial System Stabilization and Reform Act would create an independent Financial Stability Council composed of federal financial regulators who would oversee risk at Wall Street firms.

Rep. Michael Castle, R-Del., introduced legislation similar to Ms. Collins’ bill in the House.

State officials think it is the right approach, though they want state regulators included on the council.

Ms. Collins, a former financial regulator from Maine, wrote in an e-mail that she “will continue to reach out to stakeholders and will consider proposals advanced by state regulators.”

For their part, state insurance regulators, who opposed moves to give insurers the option of choosing a federal regulator, support her bill. The legislation “would allow integration of state insurance regulators in a financial stability council,” said Michael McRaith, director of the Illinois Division of Insurance in Springfield.

“We recognize that the country is at a point where a comprehensive understanding of our financial condition is critical,” he said.

State banking officials, who have chafed at federal pre-emption of state banking powers, also want a place at the systemic risk regulatory table.

“Many financial institutions are regulated primarily at the state level,” including state-chartered banks and insurance companies, said Sarah Bloom Raskin, who will speak at the conference on systemic risk regulation and is the Maryland commissioner of financial regulation, which oversees banks.

“The states have developed a highly coordinated system with other systems and with the federal government regarding supervision,” she said. Ms. Raskin’s office is in Baltimore.

To be sure, states will face financial industry officials who oppose their efforts at establishing a council and are lobbying for a single risk regulator.

“State regulators have a role to play in the regulatory universe,” said Travis Larson, a spokesman in the Washington office of SIFMA. “But at the systemic-risk level, there are perhaps others who bring skill sets more closely aligned to the goals of the financial market stability regulator.”

E-mail Sara Hansard at [email protected].