As Congress grapples to define systemic risk regulator, the Investment Company Institute (ICI), the mutual fund trade group, has laid out what it thinks a systemic risk regulator’s role should be, and, more broadly, how financial services reform should take shape.

The House Financial Services Committee plans to hold its next hearing on financial services reform on March 26, with Treasury Secretary Timothy Geithner testifying.

The ICI notes in a March 3 paper detailing its recommendations on how lawmakers should proceed in revamping financial services, that as the current financial crisis has shown, “our system is vulnerable to risks that have the potential to spread rapidly throughout the system and cause significant damage.” Therefore, the ICI says that a systemic risk regulator should monitor the financial markets broadly; analyze changing conditions in domestic and overseas markets; evaluate the risks of practices as they evolve and identify those that are of such nature and extent that they implicate the health of the financial system at large; and act to mitigate such risks in coordination with other responsible regulators. At the same time, the ICI states, “very careful consideration should be given to the specifics of how the Systemic Risk Regulator will be authorized to perform its functions and how it will relate to other financial regulators.”

More broadly, the ICI suggests creating a “regulatory framework that enhances regulatory efficiency, limits duplication, closes regulatory gaps, and emphasizes the national character of the financial services industry.” The ICI is in favor of creating a new “Capital Markets Regulator” to “encompass the combined functions of the Securities and Exchange Commission and the Commodity Futures Trading Commission, thus creating a single independent federal regulator responsible for oversight of U.S. capital markets, market participants, and all financial investment products.” Also to achieve these goals, ICI recommends that “Congress consider consolidation of the regulatory structure for the banking sector and authorization of an optional federal charter for insurance companies. Such a regulatory framework–with one or more dedicated regulators to oversee each major financial services sector–would maintain specialized regulatory focus and expertise, as well as avoid the potential for one industry sector to take precedence over the others in terms of regulatory priorities or the allocation of resources.”