Securities and Exchange Commission Chairman Arthur Levitt on Thursday panned the functional regulation proposal in pending financial modernization bills.

The measure introduced by House Banking Committee Chairman Jim Leach, R- Iowa, exempts 16 types of securities activities from SEC oversight, Mr. Levitt said.

The SEC "has serious concerns regarding the creation of a separate but unequal regulatory scheme for banks," Mr. Levitt testified before the House banking panel.

Under Rep. Leach's vision of functional regulation, bank sales of asset- backed and privately placed securities no longer would be subject to SEC supervision, Mr. Levitt complained. This would allow banks to "operate a public securities business largely outside the framework of the federal securities laws," he said.

Consequently, consumers would be put at risk because bank regulators' primary concern has been the safety and soundness of banks, Mr. Levitt said. The SEC, on the other hand, focuses on investor protection.

Mr. Levitt also slammed a provision in Rep. Marge Roukema's financial modernization bill that would create a council of regulators to supervise diversified holding companies. The council would slow down the regulatory process and blur the lines between different regulators' jurisdictions, Mr. Levitt said.

"It is contrary to functional regulation because it removes decision- making from the hands of the expert regulator," Mr. Levitt said. "A substantive regulator does its job best with clear responsibilities and clear lines of authority."

Indeed, when questioned by Rep. Roukema, R-N.J., about the council, Mr. Levitt responded: "I hate it. I hate it."

If true functional regulation were in place, he argued, no "umbrella" regulator would be necessary to regulate the financial services holding companies that would be created by the pending bills.

Federal Reserve Board Chairman Alan Greenspan disagreed.

"With the complex types of products and organizations that have evolved ... you do need some form of regulatory entity which has consolidated oversight," Mr. Greenspan said. Under the Leach bill, the Fed would regulate financial services holding companies.

"We do not want a situation where everybody is looking at ... the individual parts, but not looking at the sum of the parts," added Rep. Ken Bentsen, D-Tex.

The hearing focused on the three bills introduced by House members. The Clinton administration's long-awaited reform plan, unveiled Wednesday, was not discussed in detail.

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