SEC Functions Could be Divided under Obama Proposal

A regulatory reorganization could be unveiled as soon as next week, people familiar with the matter told Bloomberg.

According to the news report, the proposal, still being drafted, is likely to give the Federal Reserve more authority to supervise financial firms deemed too big to fail. The sources also said the Fed may inherit some SEC functions, with others going to other agencies.

Also on the table is a proposal to give oversight of mutual funds to a bank regulator or a new agency to police consumer-finance products, two people told the news agency.

However, SEC ex-chairman Arthur Levitt, in an interview with Bloomberg Television, said it’s unlikely the SEC will ultimately be stripped of its responsibilities. “I don’t think it’s a great idea nor do I necessarily think it’s going to happen,” Levitt said. The SEC “is a pretty powerful unit and to substitute that for a new bureaucracy is a mistake. I don’t think policymakers are likely to go down that path.’

The 75-year-old regulator has seen its reputation tarnished as some lawmakers blamed it for missing the oncoming financial crisis and failing to detect Bernard Madoff’s $65 billion Ponzi scheme.

SEC Chairman Mary Schapiro’s agency has been mostly absent from negotiations within the administration on the regulatory overhaul, and she has expressed frustration about not being consulted, according to sources who have spoken with her. She has pledged to fight any attempt to diminish the SEC.

“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 in Washington on Wednesday, according to Bloomberg. “I don’t think’ the Treasury Department has put together a “concrete proposal. I certainly hope they will be refining it.’

Schapiro has been outspoken about reforms she’d like to see under her leadership at the SEC (see “Schapiro Plans to Increase SEC Enforcement’). The SEC recently proposed tighter custody rules for investment advisers in order to prevent another Madoff scenario (see “SEC Proposes Tighter Adviser Custody Rules’).

Treasury spokesman Andrew Williams said in an email that “no decisions have been made’ on the proposals to change regulations, and the administration “is seeking views as it puts together its framework,’ according to Bloomberg.