SEC Regulatory Overhaul Bid by Bush Condemned by SEC Chairmen
By Jesse Westbrook
April 8 (Bloomberg) -- Three former leaders of the U.S. Securities and Exchange Commission say the Bush administration's proposed overhaul of financial regulation threatens to weaken the agency, a process that may already be under way with help from the SEC itself.
David Ruder, Arthur Levitt and William Donaldson, all former SEC chairmen, said a Treasury Department push for the agency to adopt the regulatory approach of the much smaller Commodity Futures Trading Commission would be a mistake.
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,'' Ruder, a Republican SEC chairman under President Ronald Reagan, said in an interview. ``We have to have an enforcement approach.''
Levitt, who led the SEC from 1993 to 2001 under President Bill Clinton and who supports an SEC and CFTC merger, says the terms proposed by Treasury are ``wrongheaded'' because they would give the trading commission ``primacy.''
SEC Chairman Christopher Cox, 55, hasn't endorsed a merger between the two agencies, said SEC spokesman John Nester. ``He would insist on a system of oversight that best protects investors, promotes fair markets and facilitates capital formation.''
Treasury's proposal, issued in a March 31 report, comes as lawmakers question whether the SEC has already eased up in fighting fraud. The Federal Reserve now shares oversight of investment banks, and the SEC is moving to transfer some responsibilities for monitoring accounting rules and securities sales to overseas regulators.
Policy Change
Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Jack Reed, a Rhode Island Democrat, have asked government watchdogs to investigate why SEC sanctions against companies and individuals plunged 51 percent, to $1.6 billion, in the regulator's most recent fiscal year. The agency also opened 15 percent fewer probes over the same period, according to its annual reports.
The drop in fines, Dodd and Reed said in a March 20 letter to the Government Accountability Office, ``raises questions about whether changes have taken place in enforcement philosophy or scope of activity.'' The two senators asked the GAO to review a policy change implemented last year by Cox that requires agency attorneys to get approval from commissioners before negotiating corporate fines.
Milken, Enron
Cox, in an April 1 letter to Dodd, said the SEC has demonstrated ``vigorous enforcement of the securities laws.'' He noted that the agency brought 655 cases in the fiscal year ended in September, the second-most in its history. The number of inquiries that resulted in enforcement actions within two years, however, fell to 54 percent last year, down from 64 percent in 2006, according to the agency's annual reports.
The SEC was created by President Franklin Roosevelt to restore investor confidence after the 1929 stock market crash. It regulates brokers, stock exchanges, money managers and public companies, and sues them for violating securities laws.
The agency gained notoriety in 1990 for its successful insider-trading probe of former Drexel Burnham Lambert Inc. bond trader Michael Milken and its collaboration with the Justice Department earlier this decade in investigating Enron Corp., the defunct energy trader accused of accounting fraud.
Oversight of Wall Street investment banks was primarily the SEC's responsibility until rumors of a liquidity shortage at Bear Stearns Cos. triggered the firm's near collapse and forced a sale to JPMorgan Chase & Co. on March 16. Cash and easy-to- sell assets plunged to $2 billion at New York-based Bear Stearns on March 13 from $12.4 billion a day earlier, according to the SEC.
Fed Power
The Fed, which orchestrated Bear Stearns's takeover to prevent a market panic, is now lending money to securities firms for the first time since the Great Depression. The central bank also has examiners onsite at such companies as Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc. to help the SEC scrutinize capital and liquidity.
Treasury Secretary Henry Paulson, who was previously Goldman's chairman, wants to increase the Fed's power further by giving the central bank a hand in writing rules for securities firms and making it responsible for monitoring risks that Wall Street poses to the U.S. economy.
His 218-page report, which was in the works before the credit crisis, also says the SEC should rely more on the $11.7 trillion mutual-fund industry to police itself. Most of the recommendations would require changes in legislation.
`More Violence'
Donaldson, who stepped down as SEC chairman in June 2005, was also critical of Paulson's approach. ``Before you start rearranging the organization of the financial-regulatory agencies,'' he said in an interview, ``you must examine how all of this happened.'' Congress needs to determine ``whether new powers are needed or whether there were powers there that were not used.''
Even without legislation, the SEC is changing. Last year the agency dropped a requirement that overseas companies align their financial statements with U.S. accounting rules. It's now considering letting American companies use international rules as part of a plan to move to global standards for accounting provisions. In doing so, said Levitt, the SEC risks relinquishing its oversight of how companies report profit and revenue under rules drafted by the Norwalk, Connecticut-based Financial Accounting Standards Board.
``That proposal does more violence to protecting America's investors from the standpoint of transparency as anything in the Paulson proposal,'' said Levitt, who is now a senior adviser at Carlyle Group Inc. and a board member of Bloomberg L.P., the parent of Bloomberg News.
Overseas Regulators
Cox, in a January speech, said the SEC is doing ``everything within our power to ensure that financial-reporting information from different countries is comparable and reliable.'' He said the SEC and overseas regulators have to ``harmonize our differing sets of rulebooks'' to respond to growing public demand for cross-border investing.
Separately, the SEC is also considering easing its rules to allow foreign stock exchanges and brokerages to sell securities directly to U.S. investors. The plan would permit transactions under the watch of overseas regulators who have rules that are similar to those in the U.S.
Reed, who heads the Senate Subcommittee on Securities, Insurance and Investment, said he will hold hearings on the proposal. ``No other regulator,'' he said in an April 1 speech, ``no matter how conscientious, is likely to share our same commitment to protecting U.S. investors.''
To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.
Last Updated: April 8, 2008 00:01 EDT |
