Congress made a mistake when it stripped away most of the Securities and Exchange Commission's authority to police the holding companies of broker-dealers for risks, according to the SEC's newest commissioner.

In his first formal interview with Reuters since joining the SEC late last year, Commissioner Daniel Gallagher defended the purpose behind the now-defunct oversight regime, which gave the SEC a direct window into the holding company operations of major investment banks like Bear Stearns, Lehman Brothers and Goldman Sachs.

That program, known as the Consolidated Supervised Entities (CSE) program, allowed the SEC to voluntarily monitor five major investment banks for capital and liquidity levels.

It was shut down by the SEC in 2008, however, amid criticism that it failed to properly oversee Bear Stearns.

Congress later stripped the SEC of that authority to oversee holding companies in the 2010 Dodd-Frank law and gave the power instead to the Federal Reserve.

Now, the SEC only has some outdated rules on the books that give it an opaque window into the holding companies of broker-dealers.

As we see it now, ... we are out of the holding company oversight regime. The CSE program was the end of it, Gallagher said last week in the interview.

He said Congress should have actually expanded the SEC's authority in this space.

Where we might have netted better tools out of Dodd-Frank, they actually eliminated that program and ceded all of that power to the Fed ... I think that was a mistake, he said

Gallagher, a Republican who was nominated to the SEC by President Barack Obama last year, has insight into the CSE program and broker-dealer oversight in general.

Prior to becoming a commissioner at the SEC, he worked in management positions within the SEC's Trading and Markets Division during the height of the financial crisis and helped oversee the CSE program.

Most recently, he worked as a partner at the law firm Wilmer Cutler Pickering Hale.

Although the CSE program is gone, Gallagher said there is still at least one remaining tool that the SEC can use to police the holding companies of broker-dealers: a series of antiquated risk assessment rules on the books known as 17h.

Those rules, which are still only temporary despite becoming effective in 1992, require broker-dealers that are part of a holding company with at least $20 million in capital to file certain information about the holding company and its other various subsidiaries.

A 2008 audit by the SEC's then-inspector general, David Kotz, was critical of the agency for failing to update and finalize the 17h risk assessment rules. The report also found that the SEC was not diligent in enforcing the rules' document retention and filing requirements.

As a new commissioner, Gallagher said one of his priorities will be to encourage the commission to better utilize these rules to help improve the SEC's core mission of overseeing broker-dealers, especially when there are no other regulators minding the shop.

It is very narrowly prescribed, but it is a useful tool and it helps us to understand these entities better, said Gallagher of the risk assessment rules.

The largest investment bank will have multiple layers of regulators at this point, but if you get into a pure broker-dealer holding company ... and you don't have a bank involved, ... we might be it.

(Reporting By Sarah N. Lynch; Editing by Steve Orlofsky)