SEC Finds Voice with Investment Bank Plan

WASHINGTON(Reuters) – The top U.S. securities regulator is reasserting hisauthority in the final months of his tenure, after weathering criticismthat his agency stood by while Bear Stearns collapsed in March.

U.S. Securities and Exchange Commission Chairman Christopher Coxurged Congress last week to give the SEC the authority to superviseinvestment banks and take action if a firm is in danger of collapsing.

While it’s unclear if he’ll win that argument — and any decisionson revamping financial regulation look set to be made next year by anew Congress and new administration — Cox’s stance has drawn attention.

"Perhaps belatedly, Chairman Cox has drawn a line in the sand anddelivered to Congress a persuasive and cogent argument as to why theSEC should permanently remain the main supervisor of investment banks,"said former SEC commissioner Roel Campos, now a partner at CooleyGodward Kronish.

The country’s four largest investment banks — Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz), Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz), Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) — have elected to be supervised by the SEC. But that supervision is currently voluntary.

The SEC says Bear Stearns, that was also under voluntarysupervision, was well capitalized before a crisis of confidence causedthe bank’s clients to flee.

But the perception that the agency was on the sidelines washeightened by the prominent role of the U.S. Treasury and FederalReserve in organizing an emergency sale of Bear Stearns to JPMorganChase & Co (JPM.N: Quote, Profile, Research, Stock Buzz).

Cox, a congressman for 17 years and known for seeking middle groundamong his commissioners, faces competition from other regulators forthe supervision of investment banks.

Fed officials have argued that they need more oversight of thebroker-dealer firms now they are allowing them to borrow money from thecentral bank.

And Federal Deposit Insurance Corp Chairman Sheila Bair has said heragency, which oversees the resolution of failed banks, might play thatrole of liquidating investment banks.

Cox says investment banks need a different regulatory structure fromcommercial banks, whose primary regulator is the Fed. He wants the SECto have the authority to regulate the investment banks’ capital levels,liquidity, risk management and internal control standards.

U.S. policymakers are grappling with how to reform the country’sfinancial regulation regime that has its foundation in the 1930s.

Treasury Secretary Henry Paulson began a review of the country’sfinancial regulatory system last year before the housing market startedto crumble and bring pieces of the financial industry down with it.

Paulson’s blueprint, unveiled in March, proposed to give new powersto the Federal Reserve and streamline regulators, including merging theSEC with the Commodity Futures Trading Commission.

The SEC and the Federal Reserve recently formalized an agreement toshare information about the investment and commercial banks, a stepseen as a way to plug regulatory gaps while Congress figures out how toreform financial regulation.

The Fed has a substantial advantage over other regulators as it has the ability to lend money to financial institutions.

Since March, Cox has urged Congress to give it, or another agency,legal authority to oversee the investment banks, but until last week henever explicitly told Congress it should be the SEC.

"He is partly defending his turf and responding to people within theagency saying that he’s been too passive," said James Fanto, aprofessor at Brooklyn Law School who specializes in banking andsecurities law.

"The SEC is saying, ‘no, keep us involved in it, we should still be the main regulator’," Fanto said.

Besides seeking authority over the investment banks, Cox has flexedthe SEC’s muscles in other areas this month, announcing a crackdown onmarket manipulation through false information and abusive short-selling– both activities fingered for the Bear crisis.

And Cox has remained firm in telling the markets he intends tobroaden an emergency short sale rule for the whole market despiteopposition from the hedge fund industry and grumbling from theexchanges.

The emergency short selling rule, which went into effect July 21, isdesigned to curb abusive short selling in 17 Wall Street firms andmortgage finance giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz).

"He’s playing catch-up," said James Cox, a securities and corporateprofessor at Duke law School and no relation to SEC Chairman Cox.

"I have heard grumblings about the noticeable absence of the SECbeing a participant in the major discussions, whether it be BearStearns, or the design proposed by Paulson (to reform financialregulation)."

(Reporting by Rachelle Younglai; Editing by Tim Dobbyn)