ORANGE COUNTY IN BANKRUPTCY : Congress to Ponder Stricter Regulations : Government: Three committees plan hearings next month on the Orange County fiscal fiasco. One possible outcome would place municipal securities under the same stringent rules as corporate issues.

Three congressional committees intend to conduct hearings on the Orange County financial debacle or related issues next month to explore whether steps should be taken to strengthen the oversight of municipal securities.

In the Senate, the Banking, Housing and Urban Affairs Committee will focus attention on risky derivative securities involving municipal, corporate and individual investors as well as highly leveraged investment strategies--two key elements of the Orange County crisis. Incoming Chairman Alfonse M. D’Amato (R-N.Y.) said Wednesday that the hearings will take place Jan. 5 and 6.

“This is probably the No. 1 issue in the financial community,” said a D’Amato spokesman, noting that it will be the first subject that the panel tackles. “It takes on added significance in light of what’s happened in Orange County.”

In the House, the Commerce subcommittee on telecommunications and finance plans a Jan. 10 hearing on the adequacy of the federal law on municipal security disclosure that exempts municipal securities from the same stringent reporting requirements that corporate securities face. Orange County is expected to be cited “as another example of the need to update and improve disclosure in the municipal securities markets,” a committee aide said.

Rep. Jim Leach (R-Iowa), incoming House Banking chairman, also expects to schedule a hearing in January on various aspects of Orange County’s financial plight, in which the county is estimated to have lost more than $2 billion in public funds.

Leach has included proposals for consideration in a preliminary Banking Committee agenda to provide a new regulatory framework for the sale of derivatives as well as to repeal a 1975 law that granted municipal securities an exemption from provisions of federal law that applies to corporate securities.

Leach introduced a measure last year intended to constrain risk in the marketing of derivatives--which are complex, high-risk financial products whose value is linked to, or “derived” from, another asset. The bill passed the House but not the Senate.

Leach’s legislation would have, among other things, set up an interagency commission to establish rules on capital, accounting, disclosure and suitability for dealers and end-users of over-the-counter derivatives products, and admonish banking regulators to discourage financial institutions from actively trading in the derivatives market unless they can demonstrate adequate capitalization and sophistication.

The proposal to require public entities that issue municipal bonds to provide regular certified financial statements to the Securities and Exchange Commission is controversial. State and local governments and some Republican lawmakers have said that this would represent unnecessary government intrusion and another costly unfunded federal mandate.

Also Wednesday, California Rep. C. Christopher Cox (R-Newport Beach) met with Securities and Exchange Commission Chairman Arthur Levitt Jr. to discuss a proposal that would raise the standard of proof in fraud cases to require plaintiffs to prove that defendants knowingly engaged in securities fraud.

Cox and other proponents of the measure, which is in the House Republican “contract with America,” say it is intended to end frivolous lawsuits. Critics counter that it would make it difficult for investors such as those in the Orange County investment fund to sue successfully if they believe they are victims of fraud.

“The commission is philosophically supportive of the need to reform securities litigation, and (the members) are going to continue to work with us,” Cox said after the session. “They shared their expertise without lobbying very strongly for one or another position.”

Times staff writer Gebe Martinez contributed to this story.