WASHINGTON--Legislation proposed by Sen. Chris Dodd, D-Conn.,would give specific authority to federal banking regulators tooversee insurance companies, especially if they pose a potentialthreat to the financial system.

The bill unveiled today is similar to one proposed by Sen. Doddin December. It would also create a federal Office of NationalInsurance and includes provisions modernizing and streamliningregulation of the surplus lines and reinsurance industries understate regulation.

Sen. Dodd said he hopes to start committee action on the billnext week.

At the same time, to the chagrin of insurers with assets of morethan $50 billion, the measure would require them to pay into a fundthat will be used to resolve troubled financial companies thatregulators believe pose a risk to the financial system.

This system, however, contains safeguards. Specifically,two-thirds of a "Financial Stability Oversight Council" would needto approve a decision by the Federal Reserve Board to require alarge, complex company to divest some of its holdings if it poses agrave threat to the financial stability of the United States, "butonly as a last resort," according to a summary of the bill releasedby Sen. Dodd.

This council will consist of nine members, all federal financialregulators, and an independent member. It will be chaired by theTreasury Secretary and made up of regulators including the FederalReserve Board, SEC, the Commodity Futures Trading Commission, theFederal Deposit Insurance Corporation, the Federal Housing FinanceAgency and a new Consumer Financial Protection Bureau.

"The council will have the sole job to identify and respond toemerging risks throughout the financial system," a summary of theDodd bill says.

The legislation would also strengthen regulation of executivecompensation and governance of public companies by providingshareholders with a say on such pay and corporate affairs with anonbinding vote on executive compensation.

Over-the-counter derivatives would be regulated by theSecurities and Exchange Commission and the Commodity FuturesTrading Commission under the bill.

The section in the bill dealing with this issue is the same asin the original Dodd bill.

But, Sen. Dodd said that this provision will be changed toreflect language now being drafted by Sen. Jack Reed, D-R.I., andSen. Judd Gregg, R-N.H.

The bill would also establish what Sen. Dodd described as "toughnew rules for transparency and accountability" for credit ratingagencies to protect investors and businesses.

The bill would give the Federal Reserve the authority to imposerestrictions on proprietary trading and hedge fund and privateequity investments by insurance companies and other nonbanks.

The bill would require federal regulators to develop regulations"after a study by the Financial Stability Oversight Council andbased on their recommendations."

In another break with current law, the new council will have theability to require nonbank financial companies that pose a risk tothe financial stability of the United States to submit tosupervision by the Federal Reserve.

The language dealing with creation of an Office of NationalInsurance would give it the authority to "monitor the insuranceindustry, coordinate international insurance issues, and requires astudy on ways to modernize insurance regulation and provideCongress with recommendations."

Reacting to the bill, Leigh Ann Pusey, president and CEO of theAmerican Insurance Association, criticized it saying, "Legislationthat proposes to prevent future crises by forcing property-casualtyinsurers to pay into a prefunded resolution mechanism orarbitrarily including insurers in a systemic risk regulatory regimepenalizes stability, leading those same consumers and investors tounfairly conclude that the property-casualty sector is unstable andunreliable."

The National Association of Professional Surplus Lines Officeslauded the decision to include provisions modernizing and reformingthe regulation of the surplus lines and reinsurance industries.