U.S. May Strip SEC of Powers in Regulatory Overhaul (Update4)

By Robert Schmidt and Jesse Westbrook
May 20 (Bloomberg) -- The Obama administration may call for stripping the Securities and Exchange Commission of some of its powers under a regulatory reorganization that could be unveiled as soon as next week, people familiar with the matter said.
The proposal, still being drafted, is likely to give the Federal Reserve more authority to supervise financial firms deemed too big to fail. The Fed may inherit some SEC functions, with others going to other agencies, the people said. On the table: giving oversight of mutual funds to a bank regulator or a new agency to police consumer-finance products, two people said.
The 75-year-old SEC, chartered to oversee Wall Street and safeguard investors, has seen its reputation tarnished as some lawmakers blamed it for missing the incipient financial crisis and failing to detect Bernard Madoff’s $65 billion Ponzi scheme. Any move to rein in the agency is likely to provoke a battle in Congress, which would need to approve the changes, and draw the ire of union pension funds and other advocates for shareholders.
“It would be a terrible mistake,” said Stanley Sporkin, a former federal judge and SEC enforcement chief. “Whatever the SEC has done or didn’t do, it is still the premier investor protection agency around.”
Schapiro Determination
SEC Chairman Mary Schapiro’s agency has been mostly absent from negotiations within the administration on the regulatory overhaul, and she has expressed frustration about not being consulted, according to people who have spoken with her. She has pledged to fight any attempt to diminish the SEC, they said.
“I would question pretty profoundly any model that would try to move investor-protection functions out of the Securities and Exchange Commission,” Schapiro told reporters in Washington today. “I don’t think” the Treasury Department has put together a “concrete proposal. I certainly hope they will be refining it.”
Treasury Secretary Timothy Geithner was set to discuss proposals to change financial regulations last night at a dinner with National Economic Council Director Lawrence Summers, former Fed Chairman Paul Volcker, ex-SEC Chairman Arthur Levitt and Elizabeth Warren, the Harvard University law professor who heads the congressional watchdog group for the $700 billion Troubled Asset Relief Program.
Levitt, in an interview today with Bloomberg Television, said it’s unlikely the SEC will ultimately be stripped of its responsibilities.
‘Powerful Unit’
“I don’t think it’s a great idea nor do I necessarily think it’s going to happen,” Levitt said. The SEC “is a pretty powerful unit and to substitute that for a new bureaucracy is a mistake. I don’t think policy makers are likely to go down that path.”
Levitt added that the SEC needs stronger resources to make up for “nearly 15 years of deregulatory efforts.”
Geithner and Summers are leading the administration’s effort to redraw the lines of authority for policing the financial system.
“We’re going to have to bring about a lot of changes to the basic framework of oversight, so there’s better enforcement,” Geithner said May 18 at the National Press Club in Washington. “That’s going to require simplifying, consolidating this enormously complicated, segmented structure.”
Geithner today told the Senate Banking Committee at a hearing in Washington that financial “rules of the road” are needed to ensure against “manipulation, deception and abuse.”
Treasury spokesman Andrew Williams said “no decisions have been made” on the proposals to change regulations. President Barack Obama’s administration “is seeking views as it puts together its framework,” he also said in an e-mail.
‘Engaged’ in Discussions
Schapiro today said the SEC has been “engaged” in discussions with the Treasury and other agencies “about what sort of regulatory overhaul might be necessary.”
Since taking over at the SEC in January, Schapiro has tried to restore investor confidence by speeding fraud investigations and hiring Robert Khuzami, a former federal prosecutor and Deutsche Bank AG attorney, to lead the enforcement unit.
She’s hired an outside consultant to examine how the agency handles tips after a former money manager said he tried to convince the SEC for nine years that Madoff was a fraud. In an effort to safeguard client holdings, the agency last week proposed new rules that would subject most investment advisers to surprise examinations.
Obama has said he wants to sign legislation on regulatory changes by year-end. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, is planning hearings with the aim of drafting a bill by the end of June.
SEC Makeup
The SEC’s job is to regulate stock markets, police securities sales and make sure public companies make adequate disclosures to investors about their finances. The commission has five members, with the chairman and two commissioners typically from the president’s political party and the other two from the party not in the White House.
Schapiro was appointed by Obama to replace Christopher Cox, who was named by President George W. Bush.
Under Cox, the SEC ceded some of its authority to the Fed after the central bank responded to Bear Stearns Cos.’ near collapse last year by inserting its own examiners into Wall Street securities firms.
Paulson Plan
Former Treasury Secretary Henry Paulson, Geithner’s predecessor, urged Congress in a March 2008 “blueprint” for overhauling financial rules to give the Fed broader powers to oversee risk in the system.
Opponents of giving the Fed more authority, such as former SEC chief Levitt, have said the central bank’s focus on keeping the financial system solvent may trump efforts to punish companies for violating securities laws. Levitt is a board member of Bloomberg LP, the parent company of Bloomberg News.
The SEC’s reputation took a hit last week when U.S. Senator Charles Grassley, an Iowa Republican, released a report saying two of its enforcement attorneys face an insider-trading investigation by the Federal Bureau of Investigation.
The report, written by the SEC inspector general’s office, faulted the SEC for inadequately monitoring trades by the employees and said one of them sold shares in companies after co-workers opened probes into the firms. Both employees, who are enforcement attorneys in the SEC division that investigates securities fraud, denied any wrongdoing.
While the agency has been battered recently, it still has powerful supporters, including a number of Democrats on the Senate Banking Committee who aren’t likely to support having an agency they oversee cut back.
Pension Funds
In addition, public pension funds that hold $872 billion of assets urged lawmakers this month to protect the SEC’s turf in any legislation overhauling financial regulation.
The California Public Employees’ Retirement System, the New York retirement fund and 12 other pension funds wrote letters to Frank and Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, arguing that the SEC “must maintain robust regulatory and enforcement authority” over securities trading, brokers, money managers, corporate disclosures and accounting rules.