Now comes the hard part.

After a decade-long debate, widespread support exists for legislation allowing banking, securities, and insurance companies to own each other. Congress is tackling the next big question: how to regulate such a radically altered financial services industry.

Though most financial firms are eager to get into new businesses, they fear additional regulation will interfere with their operations and competitors will somehow come off with lighter supervision.

To ensure fairness, lawmakers and lobbyists repeatedly call for "functional regulation." It's a nebulous term implying that banks, securities firms, and insurance companies will follow the same laws when they enter each other's businesses.

Beyond that simple definition, however, few agree on how functional regulation should work.

"When you say functional regulation, it means different things to different people," said Julie Williams, chief counsel for the Office of the Comptroller of the Currency.

Those pushing to lift the barriers between commerce and banking say functional regulation would ensure that banking subsidiaries are well- supervised, reducing risks to the deposit insurance system.

Many supporters also hope to ward off holding company supervision by the Federal Reserve through functional regulation, which they say would make an "umbrella" regulator unnecessary.

Before functional regulation becomes viable, however, Congress must:

Decide whether financial institutions will be supervised by more than one regulator when offering products outside their traditional businesses.

Prevent regulators from discriminating against companies historically outside their jurisdiction.

Determine how to regulate new products that mix features of banking, securities, or insurance products.

These issues divide industry groups and repeatedly have helped to derail previous financial reform efforts.

"I think this is going to be one of the toughest issues to solve," said Edward L. Yingling, chief lobbyist for the American Bankers Association.

Disputes over bank securities sales are one example.

Though bank trade groups are willing to subject some new securities powers to Securities and Exchange Commission oversight, they are trying fiercely to stave off additional regulation for their existing operations, such as sales of U.S. government securities and municipal general obligation bonds.

Bills currently before Congress would exempt most existing bank securities sales from SEC oversight. Securities lobbyists and the SEC, however, are fighting back.

SEC Chairman Arthur Levitt complained lax supervision hurts investors who buy securities from banks. Any new laws, he said, should give his agency power to oversee all investment banking and brokerage businesses.

Because banks escape SEC oversight, they are exempt from SEC customer protection rules, continuing education requirements for brokers, and disciplinary proceedings, he complained in a Feb. 13 hearing before House Banking's financial institutions subcommittee.

"Investors who buy securities from these banks would continue to receive a different, and in our view lower, standard of protection than do investors who buy securities from broker-dealers," Mr. Levitt said. "Investors all deserve equally high protections regardless of the institutions through which they invest."

With the Treasury Department drafting a new regulatory proposal, bank supervisors would not comment on Mr. Levitt's remarks. Nor would Treasury Under Secretary John D. Hawke Jr. tip his hand, saying only that "harmonizing" current bank exemptions with additional SEC oversight is "something that needs to be worked out."

Bank lobbyists, however, argue that securities firms offer many banklike products such as money market checking accounts and brokered deposits and are not subject to banking regulations such as the Truth-in-Savings Act. So far, lawmakers haven't proposed to bring these activities under the domain of bank regulators, they say.

"They think it's O.K. to stick it to the banks, but in no way, shape or form would they let banklike activities offered by the firm down the road come under bank regulation," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America.

An equally contentious debate is being waged over regulation of bank insurance sales. Many bankers are wary that Congress will give state commissioners too much leeway, allowing states to bar banks from the business.

"There is not yet a consensus on the specifics of implementing functional regulation, particularly in the area of insurance," ABA president-elect William T. McConnell told the House Banking subcommittee.

Already, the ABA has asked Comptroller of the Currency Eugene A. Ludwig to preempt a Rhode Island law that bankers say blocks their entry into the insurance business. Bankers say the Rhode Island law, based on model legislation drafted by the Independent Insurance Agents of America, makes selling insurance too costly.

The law would bar most bank employees from selling insurance, requires insurance activities to be conducted in a "physically separate" part of the bank, and prohibits the use of nonpublic customer information in marketing the insurance products.

The insurance industry claims the restrictions are necessary to protect consumers from conflicts of interest. Mr. Yingling, however, called those arguments "a smoke screen to keep us out" of the insurance business.

With other states considering similar legislation, bank trade groups argue that federal regulators should have the power to override state rules governing bank insurance sales.

No way, said Roy C. Albertalli, vice president and general counsel for the Metropolitan Life Insurance Co. "If you wish to be in the business of selling insurance products, you should not object to playing by the same rules which govern all other sellers of insurance," he told lawmakers. "Certainly, we would not suggest that if an insurer acquires a bank or securities firm, those activities should be regulated by state insurance departments."

Mr. Hawke agreed. "We've been saying consistently, that bank insurance activity must be subject to state regulation on the same terms as others in the business," he said.

Bank regulators' say over insurance operations should be limited to bank safety and soundness, he said.

But even if the industry disputes can be solved, some observers say the hybrid nature of most new financial services products makes functional regulation impossible.

"Functional regulation sounds good in theory, but for it to work you have to be able to classify either the product being sold or the company doing the selling," said consultant Bert Ely, president of Ely & Co. in Alexandria, Va. Increasingly companies are creating products, such as variable annuities, that have characteristics of traditional banking, insurance, and securities.

"It's getting harder to make a nice, bright line distinction," he said.

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