Wednesday, April 9, 2008

SEC Chairman Condemns Overhaul Bid by Bush

David Ruder, Arthur Levitt and William Donaldson, former leaders of the SEC, say the Bush administration’s proposed overhaul of financial regulation threatens to weaken the SEC, and it is a mistake for the Treasury Department to push the SEC into adopting the regulatory approach of the much smaller Commodity Futures Trading Commission (CFTC).

Ruder, said it’s not useful for the SEC to have “a prudential-based attitude in which regulators solve problems by discussing them informally with market participants and ask them to change;” instead, the SEC needs “to have an enforcement approach.” Levitt supports an SEC and CFTC merger but says the terms proposed by Treasury are “wrongheaded'” because they would give the CFTC “primacy.”

Current SEC Chairman Christopher Cox hasn’t endorsed a merger between the two agencies, but he promises a system of oversight that best protects investors, promotes fair markets and facilitates capital formation.

The Treasury’s proposal comes as lawmakers question whether the SEC has been lax in fighting fraud. Currently, the Federal Reserve shares oversight of investment banks, and the SEC is transferring some duties for monitoring accounting rules and securities sales to overseas regulators.

Government watchdogs have been asked by Senators Christopher Dodd and Jack Reed to look into why SEC sanctions against companies and individuals dropped 51 percent, to $1.6 billion, in the most recent fiscal year. According to the SEC’s own reports, it also opened 15 percent fewer investigations over the same period. Dodd and Reed said this drop “raises questions about whether changes have taken place in enforcement philosophy or scope of activity.”

Cox’s response to Dodd is that the SEC has been vigorous in enforcing securities law and the agency brought in 655 cases in the fiscal year that ended in September, the second-most in its history. But the number of probes that resulted in enforcement actions within two years dropped to 54 percent last year, compared to 64 percent in 2006.

The SEC was primarily responsible for regulating Wall Street investment banks until the Feds stepped in last month to orchestrate the Bear Stearns and JP Morgan marriage to save Bear Stearns from bankruptcy and prevent widespread market panic. The Feds is now lending money to securities firms for the first time since the Great Depression and having examiners onsite at these firms to help the SEC inspect capital and liquidity.

Treasury Secretary Henry Paulson wants to increase the Fed's power by giving it a role in writing rules for securities firms and making it responsible for monitoring risks that Wall Street poses to the U.S. economy. Paulson also suggests the SEC should rely more on the $11.7 trillion mutual-fund industry to police itself. Most of Paulson’s recommendations would require changes in legislation in order to take effect though.

Donaldson, who stepped down as SEC chairman in June 2005, didn’t agree with Paulson’s recommendations. “Before you start rearranging the organization of the financial-regulatory agencies,” Donaldson said, “you must examine how all of this happened” and determine what powers are needed or weren’t used.

The SEC is also evolving on its own. In 2007, the agency dropped a rule that required overseas companies match their financial statements with U.S. accounting rules. The SEC is now considering allowing American companies to use international accounting rules to adjust to cross-border investing. With these moves, the SEC risks losing control of how companies report profit and revenue under rules drafted by the Financial Accounting Standards Board. Cox assures that the SEC is doing everything to make sure financial reporting from different countries is comparable and reliable but Levitt charges that from a transparency standpoint, these changes hurt American investors.

In addition, the SEC is thinking of easing rules to allow foreign stock exchanges and brokerages to sell securities directly to U.S. investors. Transactions would be carried out under the watch of overseas regulators who have rules that are similar to the U.S. Doubtful that overseas regulators share the same commitment in protecting U.S. investors, Senator Reed plans to hold hearings on this proposal.

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