- The Washington Times - Wednesday, July 15, 2009

The head of the Securities and Exchange Commission told a congressional panel Tuesday that her much-maligned agency is engineering a comprehensive overhaul intended to better protect investors and to assure market stability.

The SEC, the federal government’s regulatory arm of the securities industry, has been criticized for failing to prevent the near collapse of Wall Street last year. The agency also has been scorned for being caught off guard in the Bernard Madoff fraud scandal - believed to be the largest Ponzi scheme in history - despite years of red flags.

But SEC Chairman Mary Schapiro said that since taking over the agency in January, “we have been singularly focused on rebuilding investor confidence in the capital markets and in the SEC itself.”

“There is an invigorating sense of urgency among the staff of the agency to demonstrate that we are up to the job,” she said at a House Financial Services Committee hearing. “I understood when I arrived that we could not wait to begin making significant changes.”

Lawmakers and investors have clamored for limits on moves they say worsened the market’s downturn. So the agency is streamlining its enforcement procedures, such as allowing enforcement staff to issue subpoenas and negotiate corporate penalties without first getting full commission approval, Ms. Schapiro said.

Specialized units within the agency’s enforcement division are being created, including one that will focus on Ponzi schemes.

“The Madoff fraud is one that the agency tragically did not detect,” Ms. Schapiro said. “Not a day goes by that we do not regret that.”

And in order to make the best use of the SEC’s limited staff, Ms. Schapiro said its enforcement focus “has shifted to higher-impact cases brought in a timely way.”

The agency also has proposed rules to strengthen controls over the custody of client assets held by investment advisers or their affiliates. Such safeguards would encourage investment firms to place these assets in the care of “truly independent custodians.” Noncompliant firms would be required to obtain a special custody controls report from an independent audit firm.

Another key potential change is a plan to restrict short-selling, the controversial trading practice that involves borrowing a company’s shares, selling them, then buying them back when the stock falls and returning them to the lender. The short seller pockets the difference.

The Obama administration last week proposed legislation to increase oversight of the nation’s financial industries by consolidating regulatory duties that are spread out over several agencies. The proposals calls for a new regulatory agency that would have some interaction with the SEC and other financial oversight agencies.

The proposal was debated Tuesday during a Senate hearing, when Assistant Treasury Secretary Michael Barr testified that current federal oversight of the financial services industry is “a fractured system where everybody can point fingers and nothing gets done.”

Several Republicans said they fear the proposed new agency and its tighter rules would stifle innovation and add another layer of unnecessary government bureaucracy.

“What you’re really saying is you don’t trust consumers to make decisions for themselves,” said Alabama Sen. Richard C. Shelby, the top Republican on the Senate Banking, Housing and Urban Affairs Committee.

Sen. Bob Corker, Tennessee Republican, called the proposal “an example of this administration being big brother.”

But Sen. Charles E. Schumer, New York Democrat, pushed back, saying that the only innovation the new rules would stifle would be financial scams that dupe consumers.

“It’s amazing to me that people say they don’t want stronger protection,” said Mr. Schumer, vice chairman of Congress’ Joint Economic Committee.

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