Investors worry that Paulson plan curbs SEC power

Treasury Secretary Henry Paulson's plan would give the Federal Reserve more power to oversee market stability and monitor systemic risks from non-bank institutions like Wall Street investment banks and hedge funds.     Â

The plan also proposes combining several bank regulators into a single prudential financial regulator to focus on safety and soundness of firms with federal guarantees such as commercial banks.

That would in essence strip the SEC's relatively new oversight of five investment banks, Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley.

"A number of responsibilities that are being turned over to the Federal Reserve Board and to a new regulator of consumers represents a taking away from the SEC," said Arthur Levitt, former SEC chairman under President Bill Clinton.

The SEC's duty is to monitor investment banks' capital and liquidity and respond quickly to any financial and operational weakness in the companies.

However, the agency's oversight has been criticized after Bear Stearns was forced to seek emergency funding from the Federal Reserve and JPMorgan Chase & Co when its liquidity deteriorated significantly.

The Fed, with the Treasury Department's approval, decided to guarantee $29 billion of illiquid Bear Stearns' assets and allowed JPMorgan to offer $10 a share for what was the fifth-largest U.S. investment bank.

Paulson was quick to point out that the so-called blueprint for regulatory reform was not intended as a response to current market turmoil and should not be implemented until the difficulties are resolved.

 

INVESTOR ADVOCATES CONCERNED

Paulson's plan recommends that investment advisers be self-regulated, as are broker-dealers, which are overseen by the Financial Industry Regulatory Authority. Registered investment advisers are currently overseen by the SEC.

The proposal also recommends the merger of the SEC and the Commodity Futures Trading Commission, with an eye toward merging the regulators' philosophies.

"This, along with proposals to rely more on self-regulation and loosen regulatory oversight over self-regulatory bodies, does not bode well for retail investors," said Barbara Roper, director of investor protection of the Consumer Federation of America.

Rich Ferlauto, director of pension and benefit policy for the American Federation of State, County and Municipal Employees, said one of his main concern with the Treasury's plan was that it diminishes the power of the SEC.

"It will protect the integrity of large financial institutions, but it doesn't protect individuals from market risk or fraud," he said.

If Paulson's plan comes to fruition, the SEC would fall under the auspices of a regulator called the "Conduct of Business Regulator," which would have the responsibility of protecting consumers and investors, as well as achieving greater consistency across product lines.

A former Democratic SEC commissioner said adopting the CFTC's prudential approach to regulation would change the SEC entirely.

"Either you are an enforcement agency and you stress deterrence, or you are a prudential safety and soundness (regulator) and you essentially try to 'keep problems in the family,"' said Roel Campos, who left the agency last fall.

The SEC and the CFTC approach regulation quite differently. The SEC, which was established after the 1929 market crash to restore investor confidence in capital markets, is rules-based and relies heavily on enforcement to protect investors.

The CFTC was created in the 1970s to regulate futures and options. It takes a principles-based approach to regulation and supervises the markets prudentially.

The pro-business U.S. Chamber of Commerce said the Paulson plan would be good for the SEC and for investors.

"For the SEC, what this is going to provide is a more rational, nimble, simple and more-effective-for-everybody regulator," said David Hirschmann, president of the association's Center for Capital Markets Competitiveness.