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SEC Seeks Carve Out From Industrial Bank Holding Company Act

Robert Colby, the deputy director of the Division of Market Regulation, urged the House Financial Services Committee to amend H.R. 698, the Industrial Bank Holding Company Act of 2007, to recognize the SEC's consolidated supervised entities ("CSE") program. Otherwise, the bill would subject firms that are already highly regulated under the program to an additional layer of duplicative and burdensome holding company oversight, he explained. In his April 25 testimony, Colby said the SEC's CSE program should be carved out of the legislation just as bank holding companies that are under the supervision of the Federal Reserve and the Office of Thrift Supervision have been. Colby's prepared statement is posted on the SEC's Web site.

The legislation is similar to H.R. 5646, which Barney Frank (D-MA), chairman of the House Financial Services Committee, and Paul Gillmor (R-OH), the ranking member, introduced in the 109th Congress. A loophole in the Bank Holding Company Act makes industrial loan companies eligible for federal deposit insurance, but they can be owned by commercial firms. H.R. 698 is intended to restore the traditional separation between banking and commerce. It would prohibit the FDIC from granting new charters to commercial companies seeking to start or acquire industrial loan companies.

Colby described the SEC's CSE program in which it supervises five of the major securities firms on a consolidated basis: Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley. Under the CSE program, the SEC oversees not only the U.S.-registered broker-dealer, but also the holding company and all affiliates. The affiliates may include other regulated entities, such as foreign-registered broker-dealers, banks and derivatives dealers. This prudential regime allows the SEC to monitor for and quickly respond to any operational weaknesses in a holding company or any of its unregulated affiliates that might put regulated entities or the broader financial system at risk.

The program is similar to other consolidated supervision regimes, according to Colby, such as the Federal Reserve's oversight of bank holding companies. The CSE regime reflects securities firms' reliance on mark-to-market accounting as a critical risk and governance control, along with the requirement to maintain adequate internal liquidity sources to withstand market stress. Colby added that the CSE program is recognized internationally as one that provides consolidated supervisory oversight of the largest U.S. securities firms in a manner equivalent to that of the well-recognized federal banking regulators.

Accordingly, while the SEC generally supports the goals of H.R. 698, Colby recommended that the bill be amended to recognize the unique ability of the SEC to comprehensively supervise the consolidated groups that are overwhelmingly in the securities business. This is particularly important in an era of increased global competitiveness, he said.