ROCKLIN, Calif. — The backlash following the release of thecontroversial regulatory agency overhaul proposal from the TreasuryDepartment last week came on several fronts within the credit unionindustry.

Trade groups blasted the 218-page “Blueprint for a ModernizedFinancial Regulatory Structure,” which among other short- andlong-term goals, would establish a new federally insured depositoryinstitution charter that would consolidate national banks, federalsavings associations and federal credit union charters. Criticshave said that move alone could conceivably eradicate the creditunion nonprofit model.

Just as troublesome and murky, critics contend, is the impact aconsolidation of regulatory agencies would have on credit unioninvestment and insurance programs as well as their relationshipswith CUSOs.

“The reality is that this proposal takes a square peg and putsit in a round hole,” said Pete Snyder, president/CEO of SnyderConsulting Solutions, an investment and insurance serviceintegration firm. “The rippling effect and the complexity [ofimplementation] would have to be addressed if consolidation isgoing to occur.”

Under the Blueprint proposal, the Securities and ExchangeCommission's oversight of investment banks would significantlydwindle as would the agency's regulation of registered investmentadvisers, some fear.

The Federal Reserve could also have more authority to monitornonbank institutions like Wall Street investment banks.

For its part, the SEC said market shakeups and the lingeringsubprime crisis have provided more evidence that better integrationof financial service regulatory agencies may be long overdue.

“Recent events have provided further evidence, if more wereneeded, that financial services regulation in the United Statesneeds to be better integrated among fewer agencies, with clearerlines of responsibility,” said SEC Chairman Christopher Cox in aMarch 29 statement.

Cox said that proposed consolidation of responsibility forinvestor protection and the regulation of financial products“deserve[s] serious consideration as a way to better address therealities of today's markets.”

“Just as systemic risk cannot be neatly parceled along outdatedregulatory lines, the overarching objective of investor protectioncan't be fully achieved if it fails to encompass derivatives,insurance and new instruments that straddle today's regulatorydivides,” Cox said.

Meanwhile, Snyder pointed to the overlaps and gaps sure to comeshould the proposal become a reality, starting with NCUA's Letter150, which recognizes that CUSOs may participate with a creditunion and a broker under certain conditions without the financialinstitution having to register. That guidance came in 1993. TheFDIC did not issue any directions on these types of arrangementsbut chose to leave it up to the Office of the Comptroller of theCurrency, Snyder said. An interagency statement that touched on thematter but issued prior to 1993 was “materially different” fromLetter 150, he added.

The point? Count on regulatory murkiness to be one of theoutcomes of the Treasury's Blueprint.

“If the proposal on consolidation is chapter one, then therewould need to be at chapter two, three and four,” Snyder said.

NACUSO is concerned that the regulatory agency overhaul proposalwould not only do away with the credit union model but eliminatethe movement's “greatest hedge against unchecked greed.”

Guy Messick, general counsel for NACUSO, pointed out that theTreasury proposal summary states that its goal is to eliminate alldistinctions in structure and regulations among banks, thrifts andcredit unions to “create a level playing field among all types ofdepository institutions where competition can take place on aneconomic basis rather than on the basis of regulatorydifferences.”

“Unless banks are eager to become nonprofit entities, we can allguess that it will be the nonprofit cooperative credit unions thatwill cease to exist,” Messick said. “The nonprofit cooperativestructure permits a financial institution to serve members withoutthe constant quarterly earnings pressure that inhibits banks frominnovation and giving back value to the members.”

Bank executives “cannot take the long view,” Messick said,because if they do not meet the short-term profit goals, “they willbe fired.”

“This is the very pressure that compelled some banks to makemajor investments in the subprime market and entices them to takeother imprudent risks,” Messick said. “It is the credit unionnonprofit model and the conservative people running credit unionsthat is the greatest hedge against unchecked greed and Treasurywants to take that distinction away.”

Just as investment regulation could face an upheaval, insuranceprograms at credit unions are just as vulnerable, Snyder said.Regulation is simpler for credit unions, he said, because banks,with their different models, have a multitude of rules to follow.Consolidation would significantly complicate oversight forinsurance programs at credit unions.

While Treasury Department Secretary Henry Paulson disputescharges that the proposal is a knee-jerk response–the report hasbeen in the works since March 2007, he pointed out–to the presentcredit and housing crunch, he acknowledged that much more breathingroom is needed before the Blueprint moves forward.

“Our first and most urgent priority is working through thiscapital market turmoil and housing downturn, and that will be ourpriority until this situation is resolved,” Paulson said. “ThisBlueprint addresses complex, long-term issues that should not bedecided in the midst of stressful situations and should not beimplemented to add greater burden to a market already under strain.These long-term ideas require thoughtful discussion and will not beresolved this month or even this year.”

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