WASHINGTON (MNI) - The following is the second and final part of excerpts from testimony by Securities and Exchange Commissioner Elisse B. Walter, Commissioner before the Committee on Agriculture Tuesday:

3. Ensure that Existing Clearing Agency Requirements are Not Eliminated.

A new systemic risk regulator should act as a second set of eyes over all systemically important entities (such as systemically important securities clearing agencies and other clearinghouses for financial products), participate in examinations, review risk management practices, and evaluate whether the existing functional regulation is sufficiently protective. However, Subtitle E of the Discussion Draft as currently formulated could fundamentally undermine the existing regulation and oversight of clearing agencies that are crucial to the overall competitiveness of U.S. securities markets. As currently drafted, Subtitle E would provide the Federal Reserve Board with the authority "by regulation or order" to "prescribe or issue risk management standards governing the operations of identified financial market utilities and the conduct of identified activities by financial institutions." This language would include clearing agencies and a host of other entities that might be subject to other regulatory requirements, and could be exercised subject only to "consultation" with the Council and existing supervisory entities.

In addition to potentially being a wholesale change in the way such institutions are regulated and supervised, it is unclear how these new standards would interact with existing risk management requirements or other important policy goals. For example, under existing laws, securities clearing agencies must provide fair access to and cannot discriminate among market participants seeking to become members of the clearinghouse. This requirement fosters competition and addresses potential conflicts of interest, but is not clearly protected under the language in Subtitle E. Although there may be a benefit to Congress empowering a regulator to act as a second set of eyes to reduce risks over certain institutions, this authority should not automatically override other important policy goals like transparency and fair competition that promote investor protection and the competitiveness of U.S. securities markets.

To ensure that the supervision of these entities and concerns about systemic risk are appropriately balanced, these standards (as with others) could be established by the Council, implemented by the functional regulator, and designed to supplement but not supersede existing regulation and protections. The Council should coordinate with the Federal Reserve Board and functional regulators to eliminate regulatory gaps in a manner that reduces duplicative requirements. To the extent a conflict exists between the Federal Reserve and the functional regulator regarding the standards to be applied, the Council should resolve the conflict so that all regulatory goals are achieved, including safety and soundness.

4. Ensure that Existing Capital Requirements are Not Lowered.

Although the Discussion Draft calls for heightened prudential standards for identified financial holding companies, the language should be clarified to ensure that these standards are heightened in a meaningful sense to reduce the risk to the system appropriately and ensure that counterparties do not favor large institutions because they are "too big to fail" -- fueling greater size and risk at the expense of smaller more nimble competitors. The Discussion Draft currently defines heightened prudential standards as higher than for a normal financial holding company. It is not clear that this standard is higher than would apply today for a particular regulated entity. Accordingly, the Discussion Draft should be clarified to ensure that these new authorities cannot lower any standard that would otherwise apply to a company, including standards set by functional regulators.

For example, the Discussion Draft could permit the Federal Reserve Board to impose bank-like capital requirements on a broker-dealer subsidiary of a Bank Holding Company (BHC). Such a requirement could (1) lower capital requirements for a broker-dealer in a BHC -- potentially putting customer accounts at risk in the case of failure; and (2) provide a competitive advantage for broker-dealers within a BHC relative to broker-dealers outside a BHC. This could have the effect of increasing systemic risk by permitting the big to get bigger.

Therefore, the Discussion Draft should be clarified that Federal Reserve Board (or any other entity) cannot lower or reduce capital and other requirements for a regulated entity. This will better protect customers and investors and ensure that broker-dealers and other companies that are within large institutions do not receive an additional competitive advantage relative to smaller, less systemically risky, entities.

5. Revise Approach for Identifying and Regulating Systemic "Activities".

The Discussion Draft permits the regulation of systemically important "activities" and establishes multiple mechanisms for doing so (see subtitles B and E). This language is very broad and could apply to many small institutions that do not themselves pose any systemic risk. To minimize confusion, reduce the potentially unlimited reach of this grant of authority, and give affected parties due process, Congress should:

* Ensure that the Council identifies systemically important "activities" and develops policies to address them. Where the affected entities are already subject to a regulatory regime, the Council could direct the functional regulators to implement these policies, with the Federal Reserve Board as a "second set of eyes" over already regulated entities. This will ensure that the regulation of activities is not unchecked, and that transparent, traditional rulemaking requirements (including public notice and comment) are followed; and

* Consider defining what the term "activities" means in this context to provide more guidance to regulators and reduce the likelihood that this authority will expand over time.

6. Protect Independent Accounting Standards.

I am pleased that the Discussion Draft does not alter existing protections that ensure the independence of accounting standard setting, but would like to raise the issue in anticipation of possible amendments on the topic. Investors must have transparent, unbiased and comparable information about the companies in which they choose to invest. Providing investors with this information, to assist them in allocating capital to its most efficient use, is essential to the health of our capital markets. High quality, consistent accounting standards provide the framework for investors to make the comparisons of investment opportunities and perform the analysis necessary to make informed investment decisions.

Some have argued that prudential regulators should have a greater role in the setting of accounting standards or that accounting standards should be tied to "systemic risk." This would be a grave mistake.

Accounting standards are measurement and disclosure tools that convey information about financial performance and condition, tools for investors and investor protection -- not for institution protection. To continue to be useful, accounting standards should endeavor be the same across the markets and market participants, just as they should be consistently applied over time. As noted above, one key anchor in this process to guard against systemic risk must be a requirement that standards be raised, not lowered. Establishing a new process that would permit regulators to weaken accounting standards, reduce disclosure or allow the basis by which economic performance is measured to fluctuate with the economic environment, could provide a new avenue for particular institutions to lobby for -- and potentially receive -- special treatment.

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