Obama's financial watchdog plan faces big hurdles

Last Updated: Sun, May 24, 2009 01:40 hrs

WASHINGTON (AP) — The head of the Securities and Exchange Commission is objecting to a plan being weighed by the Obama administration to create a new financial watchdog for consumers that would assume oversight of mutual funds.

The SEC chief's split with the administration shows how hard it may be for a broad overhaul of financial rules to overcome turf wars among various regulators and for a consensus to be reached on Capitol Hill.

SEC Chairman Mary Schapiro said Wednesday she opposed the plan discussed Tuesday night by Treasury Secretary Timothy Geithner and other administration officials that would chip away at the SEC's own powers. She said giving any new entity authority over mutual funds would lessen the government's protection of investors — her agency's core mission.

"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 at the agency's headquarters. "Investor protection is woven through everything that happens in this organization."

Many of the SEC's responsibilities — such as companies' financial disclosures, shareholder rights, stock trading, brokerage firm practices and mutual funds — involve investor protection, Schapiro said.

"So it's not a discrete thing that gets moved away without really damaging the fabric of the entire investor protection regime," she said.

But the SEC's effectiveness as protector has been called into question after revelations in December that the agency failed to detect the massive pyramid scheme run by money manager Bernard Madoff, despite red flags raised to its staff by outsiders over the course of a decade. Schapiro, an Obama appointee who became SEC chairman in January, has taken several actions intended to strengthen and speed the agency's enforcement efforts and tighten its internal processes.

The plan the administration is weighing would centralize the enforcement of laws that protect consumers of financial products, such as credit cards, mortgages and mutual funds. That mission is now spread across a patchwork of federal and state agencies, including the SEC, Federal Reserve and Federal Trade Commission.

Any changes to the nation's financial oversight would require congressional action. And it's unclear whether lawmakers will unite behind a single approach this year.

Rep. Barney Frank, D-Mass., who heads the House Financial Services Committee, favors in principle changes that would bolster consumer protection, but in this case "there's no proposal right now to endorse," said his spokesman, Steve Adamske.

Adamske declined to comment on the issue raised by Schapiro concerning mutual funds.

Schapiro's comments marked her first sharp public breach with the administration over an overhaul of rules designed to prevent another financial crisis. Schapiro in recent weeks has told Congress, which is debating the changes, that she thinks the SEC must play a key role as an independent watchdog protecting investors in any new regulatory system.

Schapiro also has said she favors an idea floated by Sheila Bair, head of the Federal Deposit Insurance Corp., for a new "systemic risk council" to monitor large institutions against financial threats. This council would include the Treasury Department, Federal Reserve, FDIC and SEC.

By contrast, the White House leans toward recommending that the Fed alone become a new supercop for "too-big-to-fail" financial companies that could set off another meltdown.

Schapiro says she's concerned about an "excessive concentration of power" over financial risk in any single agency.

Lawmakers are divided. The Fed has been widely criticized in Congress for failing to constrain aggressive mortgage lending that fueled the economic crisis. As a result, some have questioned whether the Fed should be entrusted with the responsibility of policing big financial institutions.

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, recently said he is "more attracted to the council idea" than having a single regulator play that role. But other key lawmakers, including Frank, lean toward giving the responsibility to the central bank.

Dodd couldn't immediately be reached for comment Wednesday on the new consumer regulator proposal.

Bair told Congress in March that "We could support the establishment of a new entity to (set) consistent consumer protection standards for banks and non-banks." However, she added, such an entity "should include the perspective of bank regulators as well as non-bank enforcement officials such as" the Federal Trade Commission. Bank regulators would include the FDIC, the Treasury and the Federal Reserve.

Officials said the administration has been exploring the new approach of a financial watchdog for consumers in meetings over the past few days with executives of the financial industry. Some industry groups already have expressed opposition to the plan. It was discussed at a dinner Tuesday at the Treasury Department attended by Geithner and Lawrence Summers, director of President Barack Obama's National Economic Council.

"I find it surprising that this is what the administration wants," said Chester Spatt, a former chief economist of the SEC. "If one is concerned about 'systemic crises,' why create a regulator with different goals?"

Schapiro, who didn't attend the dinner, said she has spoken with administration officials about her views on the issue and didn't view the proposal as being in its final form.

"I certainly hope they'll be refining it," she said. "And I will tell you that I very strongly represented the view ... that the SEC's sole responsibility is investor protection, and we will not flinch from that."

An administration official who confirmed that the dinner had taken place said no final decisions had been reached. Financial industry officials expect a finalized plan to be proposed within about two weeks.

Under one possible approach, some federal banking agencies might be combined and some powers over consumer products might be consolidated into a new body.

Geithner was asked about the proposal at the Senate hearing Wednesday and whether he was seeking to establish a "financial products safety commission."

"I believe that as part of regulatory reform we need to put in place stronger protections for consumers that are enforced more effectively and evenly across institutions that offer those products," Geithner said. "And as part of that, we are examining whether we should change the oversight structure so that we have better enforcement of stronger rules."

A leading advocate of the commission approach has been Elizabeth Warren, the Harvard law professor who heads the Congressional Oversight Panel for the government's $700 billion financial rescue effort.

Democratic Sens. Richard Durbin of Illinois, Charles Schumer of New York and Edward Kennedy of Massachusetts introduced legislation earlier this year that would create a commission like the one proposed by Warren.

The Financial Services Roundtable, which represents some of the biggest institutions, has argued against separating the regulation of financial products from the regulators who oversee the institutions selling the products. It wants the Fed and SEC to each maintain oversight of the products from companies they regulate.

It was unclear whether the administration will propose creating a new agency to house the commission or placing the commission under an existing agency.


Associated Press writers Martin Crutsinger and Jim Kuhnhenn contributed to this report.

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