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

The bill unveiled today is similar to one proposed by Sen. Dodd in December. It would also create a federal Office of National Insurance and includes provisions modernizing and streamlining regulation of the surplus lines and reinsurance industries under state regulation.

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

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

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

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

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

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

Over-the-counter derivatives would be regulated by the Securities and Exchange Commission and the Commodity Futures Trading Commission under the bill.

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

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

The bill would also establish what Sen. Dodd described as "tough new rules for transparency and accountability" for credit rating agencies to protect investors and businesses.

The bill would give the Federal Reserve the authority to impose restrictions on proprietary trading and hedge fund and private equity 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 and based on their recommendations."

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

The language dealing with creation of an Office of National Insurance would give it the authority to "monitor the insurance industry, coordinate international insurance issues, and requires a study on ways to modernize insurance regulation and provide Congress with recommendations."

Reacting to the bill, Leigh Ann Pusey, president and CEO of the American Insurance Association, criticized it saying, "Legislation that proposes to prevent future crises by forcing property-casualty insurers to pay into a prefunded resolution mechanism or arbitrarily including insurers in a systemic risk regulatory regime penalizes stability, leading those same consumers and investors to unfairly conclude that the property-casualty sector is unstable and unreliable."

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