WASHINGTON - The Treasury Department and the Federal Reserve Board outlined last week how they will decide whether financial institutions may engage in new activities not specified by the authors of financial modernization law.

Treasury Under Secretary for Domestic Finance Gary Gensler said the agreement, described in a memorandum of understanding between the agencies, will allow for smooth decision-making in future administrations - "even when Treasury and Fed are not getting along."

The Gramm-Leach-Bliley Act, which granted broad new powers to financial holding companies and the financial subsidiaries of national banks, lists numerous activities that are financial in nature and therefore permitted. It also outlined three broad categories of activities that are to be considered financial in nature, and told the Treasury and the Fed to consult with each other in determining what products fall into those categories. A process for making such decisions was issued as an interim rule on Dec. 21.

But lawmakers left open the possibility that activities that are not explicitly permissible under either of the first two provisions might nonetheless be financial in nature or incidental to financial activity. Congress directed the Treasury and the Fed to arrive at decisions on such activities jointly, giving each the power to veto an approval by the other.

The joint veto raised concerns among industry observers, who noted that the two agencies have not always agreed on policy matters, and worried that important decisions might get bogged down in interagency politics.

Mr. Gensler said the agencies had recognized that as a potential problem, and wanted to prevent it. "Before we left office we wanted to make sure there is a clear process in place," he said.

Under the agreement released Dec. 28, whichever agency receives a request that a new product or service be permitted must "promptly" supply a copy of the request to the other, and the staffs of each are directed to coordinate requests for additional information from the party that made the application.

The aim, the memorandum says, is to let the agencies "make simultaneous determinations applicable to financial holding companies and financial subsidiaries."

The agreement sets very specific limits on how the agencies can exercise their veto power. Each is obliged to solicit in writing the other agency's views on the requested activity 30 days before issuing a request for public comment or taking final action. Any decision to exercise the veto must include a written explanation for the decision.

The 30-day deadline can be extended if both agencies agree.

"If they disagree they are going to disagree agreeably," Mr. Gensler said. "If one agency is being recalcitrant, it will force them to fess up to the other in a very public way."

Karen Shaw Petrou, managing partner of the Washington consulting firm Federal Financial Analytics Inc., formerly ISD/Shaw, expressed cautious optimism at the announcement. "Like all of these processes, it will work if the people involved in it want it to work," she said.

She noted that the possibility of multiple 30-day extensions means that "things could drag on." But "at least it is a process with timelines, which helps to provide certainty that delays won't be just because of bureaucratic or administrative hang-ups."

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