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House OKs Regulation of All Dealers in U.S. Government Securities

September 18, 1985|LEE MAY | Times Staff Writer

WASHINGTON — In an effort to prevent the kind of panic that disrupted savings institutions in Ohio and Maryland earlier this year, the House voted Tuesday to extend federal regulation to all government securities dealers.

The measure, passed on a voice vote, would create a new agency under the Federal Reserve Board--a nine-member Government Securities Rulemaking Board that would include investors and industry representatives. It would target an estimated 100 unregulated securities dealers, requiring them to register with the Securities and Exchange Commission and submit to certain record-keeping and inspection requirements as well as financial responsibility standards.

Similar legislation still must be considered in the Senate, and the Reagan Administration has opposed the House measure, preferring to give the Treasury Department the regulatory power. The Administration and some dealers have argued that the House legislation would over-regulate the industry.

About 100 Unregulated

Under current law, the Federal Reserve Bank of New York closely monitors the 36 primary dealers through which it directly buys and sells about $800 billion in Treasury securities each year to finance the national debt. But about 100 of the estimated 400 secondary dealers that purchase securities from primary dealers are not regulated.

The legislation was introduced in response to the failure of some secondary dealers, most notably ESM Government Securities. The collapse of the Fort Lauderdale, Fla.-based firm earlier this year caused losses of more than $300 million, started a run on an Ohio savings institution that had invested heavily in ESM and resulted in the temporary closing of 71 thrift institutions in the state.

Maryland institutions suffered similar problems when New Jersey-based Bevill, Bresler & Schulman Asset Management Corp. failed.

Some Unhappy With Bill

Rep. Timothy Wirth (D-Colo.), chief sponsor of the bill, said the ESM losses occurred because of a "serious gap in the supervision of our financial market." Wirth said ESM had "thwarted" government regulatory agencies for seven years before its collapse.

Some primary dealers are unhappy with the House bill because they fear that the self-governing body would create undesirable new regulations on their operations, according to a congressional aide familiar with the legislation.

"It's a matter of being happy with what you've got," the aide said.

However, an official representing Los Angeles-based First Interstate Bank of California, a primary dealer, said the bank is "not concerned" with the legislation. Dealers' associations have not opposed the bill in part because some new rules are expected, said Jerry Loeser, senior counsel for the bank's parent company, First Interstate Bancorp.

"They (primary dealers) know that some regulation is coming, but most expect it to be reasonable," Loeser said. He said the main effects of the bill will be felt by dealers not currently regulated or not affiliated with major institutions.

Many secondary dealers are wary of the proposed regulations partly because they may have to pay for some of the costs of enforcement and because some dealers might go out of business if they can't comply.

When the SEC made its recommendations to Congress on combating the problem, it did not recommend the new board, suggesting instead that new rule-making authority be given to the Treasury and the Fed, said Cecile Srodes, the SEC's director of legislative affairs. She declined to comment on whether the board would enhance efforts to better regulate the industry.

Opponents of the House measure are hoping that the Senate will pass a narrower version of the legislation specifically exempting primary dealers from any new regulation.

In setting up the board, the House legislation calls for three representatives from the public--at least two of them investors--while three members would represent primary dealers and three would represent secondary dealers. The Fed would appoint the initial nine members for two years and then adopt rules for future appointments.

The measure requires the Fed to issue rules governing the purchase of securities on credit and gives the SEC broad disciplinary powers over dealers, while the newly created board would only have rule-making authority.

The Congressional Budget Office has estimated that the new legislation would cost the SEC $600,000 in fiscal 1986 and $900,000 each year thereafter. The cost to the Fed would be $100,000 annually, the budget office said, adding that the new rule-making board would be financed from fees charged to the dealers.

Times staff writer John Broder, in Los Angeles, also contributed to this story.

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