The Federal Reserve Board is grabbing more power than it is entitled to under the Gramm-Leach-Bliley Act, according to comment letters on an interim final rule governing the formation of financial holding companies.

Industry leaders criticized the Fed's interpretation of its authority to "restrict or limit the commencement or conduct" of new activities by financial holding companies if, in the central bank's judgement, they lack the financial or managerial resources to engage in them.

The Fed is claiming regulatory jurisdiction over the nonbank subsidiaries of financial holding companies, they argued, but the new financial reform law did not permit the Fed to make judgements about the managerial staff of, for instance, insurance company affiliates.

"Our concern with [the rule] is that, as drafted, it exceeds the Federal Reserve Board's authority under the Gramm-Leach-Bliley Act," wrote Craig S. Tyle, general counsel of the Investment Company Institute.

Under the law, the Fed may take regulatory action against a financial holding company if any of its depository institutions are insufficiently capitalized, not well-managed, or receive an "unsatisfactory" Community Reinvestment Act rating. However, nonbank financial holding company subsidiaries, such as insurance underwriters and securities broker-dealers, are subject only to "functional regulation," or oversight by regulators with authority over a particular business.

Mr. Tyle recommended the rule be changed to state the Fed "may not … restrict or limit the activities or acquisitions of a functionally regulated subsidiary of a bank holding company in any manner."

Gary E. Hughes general counsel of the American Council of Life Insurers, said the rule "would significantly deter life insurance companies from affiliating with banks (and vice versa) and thus undermine one of the principle objectives of the Gramm-Leach-Bliley Act."

Few U.S.-based banks responded individually to the Fed's request for comment.

But Michael E. Bleier, general counsel for Mellon Financial Corp. in Pittsburgh asked the Fed to clarify banks' capital adequacy will be measured quarterly. "Temporary reductions in capital ratios occur for various reasons, many of which are fairly benign … and would generally be remedied before the end of the quarter in which they occur," he wrote.

James S. Keller, chief regulatory counsel for PNC Financial Services Group, also in Pittsburgh, requested that the Fed clarify when an institution that has fallen below required capital or management levels must inform the central bank. He recommended that the institution be given 15 days from the receipt of a final report of examination to deliver notice.

The rule, effective Jan. 19 but subject to change after industry comment, lays out the requirements for forming financial holding companies. The Gramm-Leach-Bliley Act of 1999 permitted banks, insurers, and brokers to affiliate and created the financial holding company to house the diversified businesses.

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