The Dodd-Frank Wall Street Reform and Consumer Protection Act faces a “serious threat” and “potential undoing” ­under Republican-proposed spending cuts, House Democrats warned Tuesday.

If implemented, the cuts would “frustrate” the ability of both the Securities and Exchange Commission and the Commodity Futures Trading Commission to fulfill their expansive new mandates under the act, Rep. Barney Frank, D-Mass., one of the two principal authors of the law, told reporters.

The SEC has made clear it cannot proceed with several Dodd-Frank initiatives, including the establishment of a new office of municipal securities, without additional funding.

Frank, the top Democrat on the House Financial Services Committee, made the remarks after the House voted 256 to 165 for a resolution to cut non-security discretionary federal spending by about $60 ­billion to pre-stimulus, fiscal 2008 levels.

But in response to the Democrats’ concerns, House Republicans argued that they hope to make federal regulators more ­efficient.

Citing the failure of the SEC to uncover two enormous ponzi schemes as well as its inability to prevent Bear Stearns and Lehman Brothers from failing, Financial Services Committee chairman Spencer Bachus, R-Ala., said: “Past experience indicates that a few investigative reporters have been more effective than the many employees at the SEC in addressing and exposing financial wrongdoing. Chairman [Mary] Schapiro and I both agree the SEC could have done better, and I am committed to ensuring the agency works more effectively in the future.”

Separately on Tuesday, Frank and state officials said they would oppose any legislative proposals that would permit states to file for bankruptcy. Republicans in the House and Senate have been exploring the idea of such legislation. A bankruptcy filing would allow a federal judge to permit a state to alter its labor contracts, pension plans, outstanding debt levels and other obligations.

But the National Governors Association said its members “strongly oppose” the idea of state bankruptcy.

“The mere existence of a law allowing states to declare bankruptcy only serves to increase interest rates, raise the costs of state government, and create more volatility in financial markets,” Washington Gov. Chris Gregoire and Nebraska Gov. Dave Heineman, the NGA’s chair and vice chair, respectively, said in a statement. “Allowing states to declare bankruptcy is not an authority state leaders have asked for nor would they use.”

Jeffrey Esser, executive director of the Government Finance Officers Association, said calls for state bankruptcy were irresponsible and have unintentionally injected fear into the muni market, causing interest rates to rise rapidly. Those fears have been amplified by negative press about the possibility of municipal defaults despite the market’s historic safety, he noted.

“It is now clear that the nation’s governors don’t want, don’t need, and have no intention of declaring bankruptcy,” Esser said.

Asked by The Bond Buyer about the bankruptcy idea, Frank said he could not think of a more dramatic way to decrease investments in infrastructure. Frank lost his position as the powerful chairman of the committee when Republicans took over leadership of the House this month. 

Frank made the remark a day after House Majority Leader Eric Cantor from Virginia also said he does not support allowing states to declare bankruptcy, though he couched his argument around opposition to federal bailouts for states and localities.

“There will not be a federal bailout of the states,” he said during a press conference.

Without Cantor’s support, a bankruptcy bill would be unlikely to clear the GOP-controlled House.

Turning to the budget cuts, Frank said that Republicans “have made it clear that they don’t like the regulation of derivatives,” which are jointly regulated by the CFTC and SEC under Dodd-Frank.

“I had thought even among people in the Tea Party that credit-default swaps were not that popular,” said Frank, who spoke at a press conference alongside Reps. Carolyn Maloney of New York and Maxine Waters of California.

GOP House members have said they will propose a stopgap spending measure during the week of Feb. 14 for the remaining seven months of the fiscal year ending Sept. 30 that calls for these cuts. The current stopgap bill expires March 4. The Republican proposal would come the same week the Obama administration releases its budget for fiscal 2012, which begins Oct. 1.

Rep. Scott Garrett, R-N.J., the chair of the House Financial Services Committee’s capital markets panel, released a statement Tuesday saying the SEC and CFTC would have to learn to operate within their existing budgets.

“During our country’s current debt crisis, all branches of government — including Congress — have to tighten their belts and find ways to make their money go further,” Garrett said. “A dramatic spending increase to fund the SEC and CFTC, as envisioned by the authors of the Dodd-Frank legislation, would further the mindset that our nation’s problems can be solved with more spending, not more efficiency. Government agencies must learn to operate effectively within their budgets like American families and businesses do every day as we work to get our fiscal house in order.”

But Frank said the proposed fiscal 2011 funding for the two agencies would only have been about $260 million above their fiscal 2010 funding levels — a pittance in terms of overall federal spending.

President Obama’s request for fiscal 2011 calls for a nearly 70% increase in funding to $286 million for the CFTC, while the SEC request represented a 12.5% increase to $1.258 billion.

Frank said it is unfortunate that military spending cuts, but not cuts to financial regulators, are off the table to Republicans, because Americans were more directly harmed by the financial crisis than by any military issue.

Following the enactment of Dodd-Frank, the Obama administration and congressional Democrats sought significant budget increases for both the SEC and CFTC, which have each planned to hire hundreds of new employees. But lawmakers were unable to agree to an omnibus spending bill during the lame duck session late last year and instead passed a short-term stopgap measure.