SEC Chief Backs ‘Systemic Risk Council’ Idea

By | May 11, 2009

The head of the Securities and Exchange Commission said Friday she favors a new proposal for federal regulators sharing oversight of companies that pose financial risks to the U.S. economy.

SEC Chairman Mary Schapiro said she’s “inclined toward” the idea floated this week by the head of the Federal Deposit Insurance Corp. for a new “systemic risk council” to monitor large institutions against financial threats. The council would include the Treasury Department, Federal Reserve, FDIC and SEC, according to the proposal by FDIC Chairman Sheila Bair.

Congress and the Obama administration are working to craft an overhaul of U.S. financial rules to prevent a repeat of the crisis that plunged markets worldwide into distress.

Speaking to the Investment Company Institute, the mutual fund industry’s biggest trade group, Schapiro said she is concerned about an “excessive concentration of power” over financial risk in a single agency.

Some key lawmakers have proposed that the Fed alone assume the role of systemic regulator.

But Sen. Christopher Dodd, chairman of the Senate Banking Committee, said last week he is “more attracted to the council idea” than having a single regulator play that role.

Policymakers want to replace the “too big to fail” model used by the government as it rushed in to rescue huge financial institutions caught up in the global crisis last fall.

Regulators are calling for a new system of supervision that prevents institutions from taking on excessive risk and becoming so large their failure would threaten the financial system.

At the same time, Schapiro on Friday reaffirmed her position that the SEC must play a key role as an independent watchdog protecting investors in the new system of financial regulation.

“There is a need for a regulator entrusted with responsibility for our capital markets,” she said. For the SEC, “independence is indispensable.”

Staking out the SEC’s position in the sweeping overhaul of the financial rule book that Congress and the administration have begun, Schapiro said it “would be a disaster” for that supervision over the markets to be split among various agencies.

Schapiro, an Obama appointee who became head of the SEC in January, stressed to the audience of mutual fund executives how hard Americans have been hit by the worst economic crisis in 70 years.

Around 92 million Americans entrust $9 trillion of their savings to mutual funds, and retirement savings plans were devastated by the stock market slide beginning last fall. The market has been on an upward swing since early March, rising more than 25 percent from 12-year lows, but the climb back remains steep and investors are rattled.

“The SEC is acting aggressively” to become a stronger and more agile regulator to help restore investor confidence, Schapiro said. The agency is revamping and strengthening its enforcement program, she said, and already this year has stepped up the number of actions taken against investment fund managers and others alleged to have violated securities laws.

Last Tuesday, the SEC filed civil fraud charges against Reserve Management Co. Inc. and its two top executives, alleging they withheld key facts from investors when its $60 billion money-market fund “broke the buck” last fall after Lehman Brothers filed for bankruptcy protection. The Primary Fund, which had invested $785 million in Lehman’s debt, saw the value of its assets fall to 97 cents per investor dollar put in _ below the dollar-for-dollar level needed to fully repay investors.

New York-based Reserve Management said it “intends to defend itself vigorously” against the SEC’s allegations.

About $46 billion, or about 90 percent of fund assets, have been returned to investors, the company has said. Schapiro said Friday the SEC is working to recover more money for them.

In the wake of the episode, the SEC is considering how regulation of money-market mutual funds could be tightened to better protect investors, she said.

The Investment Company Institute has proposed its own tightened rules for money funds. They include toughened requirements to screen money fund investments for safety, and to ensure that fund companies can return cash on demand to investors _ even if redemption orders come in a panic-induced rush. The industry is rejecting private insurance to protect investors against losses, and opposes easing current requirements that money funds hold at least $1 in assets for each investor dollar put in.

Schapiro called the trade group’s proposals “helpful,” but has said the SEC’s eventual rule changes are likely to go further.

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