Dealers in government securities have until now escaped federal regulation of the sort that covers the banking industry and private-securities traders. But as the scheduling of a House vote today indicates, Congress is moving to change that.
Spurred by the collapse of Florida-based E.S.M. Government Securities last March, as well as the failure and near-failure of other government-securities traders earlier, the House Energy and Commerce Committee in early August unanimously approved legislation that would impose registration, financial-reporting, inspection and capital-adequacy standards on government-securities dealers.
The bill is expected to be passed if it comes up before the full House under suspension of the rules today, as anticipated. A narrower proposal is before the Senate Banking Committee, which has taken no action.
Federal Reserve Chairman Paul A. Volcker has gradually eased his opposition to federal regulation. The Reagan administration opposes the House measure, but it is not clear how hard officials will lobby against it or what will be in the alternative legislation they have promised to propose. And the industry itself is divided over whether it should be regulated, or how.
The market they all are concerned about has mushroomed in recent years, as the burgeoning federal deficit has dramatically increased the amount the government must borrow to stay afloat. To sop up the roughly $200 billion in government securities sold by the Federal Reserve each year, 36 so-called primary dealers are authorized to buy them from the Fed and move them through the market to other purchasers.
Most of those firms are covered by federal securities laws, banking regulators or the supervision of the Fed. But many of the hundreds of secondary dealers -- E.S.M. was one -- that buy those securities from the primary dealers are not covered by federal regulation. They neither have to register with a government agency, provide details on their activities nor meet any federal operating standards.
"It is an anomaly in the securities industry in this country that such a loophole exists," said a representative of a primary dealer, who asked that his name not be used. "The primary dealers have recommended that there be regulation that would encapsule this group of dealers."
Some secondary dealers -- the industry appears to be somewhat fragmented and doesn't have a unified view -- have opposed the notion of regulation.
For example, Griffith X. Clarke, partner in G. X. Clarke & Co., told a congressional hearing last April that requiring government securities dealers to file information with the Securities and Exchange Commission "would be a costly and inefficient method." Instead, they should continue to submit such information voluntarily to the Federal Reserve, Clarke said.
At that same hearing, E. Gerald Corrigan, president of the New York Fed, said he worried that reporting and operating requirements might not have prevented the failure of E.S.M. -- which, in turn, led to the Ohio savings and loan crisis -- but could interfere with the functioning of what should be a very liquid market.
Since then, the Fed has become more enthusiastic about the idea. Volcker told a congressional hearing in June that "legislative authority providing for registration, appropriate record-keeping and inspection of those representing to deal in government and federally sponsored agency securities is desirable, and certain minimal regulatory authority should be provided with respect to trading practices."
There is disagreement about exactly what form regulation of dealers should take. The House bill involves a fairly elaborate regulatory structure that includes an industry self-governing body, the SEC, the Fed and bank regulators.
In the Senate, by contrast, legislation sponsored by Sen. Alfonse D'Amato (R-N.Y.) takes a narrower approach. It would exempt from regulation the 36 primary dealers that buy securities directly from the Fed, covering only other government securities dealers that are not currently regulated by the SEC or banking regulatory agencies. The primary dealer industry generally prefers it to the House bill.
Earlier this summer, the Reagan administration adamantly opposed the House bill, sponsored by committee Chairman John Dingell (D-Mich.), Rep. James T. Broyhill (R-N.C.), Rep. Timothy E. Wirth (D-Colo.) and a host of others.
Acting Assistant Treasury Secretary for Domestic Finance John J. Niehenke said in June that the government-securities market remained essentially sound, that self-correcting mechanisms would serve to prevent more E.S.M.-type failures and that the House bill would create an overlap of regulatory responsibility.
There are signs, however, that the administration is becoming more accustomed to the idea of regulation of government-securities dealers. In a July letter to Senate Banking Committee Chairman Jake Garn (R-Utah.), Treasury Secretary James A. Baker III opposed D'Amato's bill and said his department was "preparing a legislative proposal to provide the proper framework for registering and inspecting dealers in government securities."