- The Washington Times - Thursday, March 26, 2009

WASHINGTON (AP) - The head of the Securities and Exchange Commission said Thursday the agency must play a key role as an independent watchdog protecting investors in the new system of financial regulation that is being crafted.

SEC Chairman Mary Schapiro said the agency’s independence is essential to ensuring investor protection in a revamped regulatory structure.

Testifying at a Senate hearing, Schapiro said “Congress created only one agency with the mandate to be the investors’ advocate.”

A leading idea in the discussions of financial overhaul is the creation of a so-called systemic regulator to monitor against the risks that plunged markets worldwide into distress last year. Under a “twin peaks” model, the Federal Reserve would act as systemic risk regulator while the SEC would oversee consumer protection and transparency.

Schapiro appeared at a Senate Banking Committee hearing as the Obama administration was presenting to Congress an extensive overhaul of financial regulation meant to prevent a repeat of the banking crisis that toppled once-mighty institutions and wiped out trillions of dollars in investor wealth.

Committee Chairman Christopher Dodd, D-Conn., said he welcomed the administration plan being outlined by Treasury Secretary Timothy Geithner before a House panel as a basis for discussion.

“The time has come for a new era of responsibility in financial services,” Dodd said. “That begins with rebuilding our 21st century financial architecture from the bottom up.”

Schapiro said the SEC, as a regulator with market expertise, “can perform its critical capital-markets and investor protection functions without compromising the oversight of systemic risk.” It is the only government agency that has been responsible both for protecting investors and promoting the formation of capital since its creation during the Great Depression, she said.

As Congress prepares to undertake a sweeping overhaul that will change the face of financial regulation in the U.S., the Senate panel also was hearing from groups representing state and industry securities regulators, hedge funds, investment advisers and consumers.

Schapiro has suggested the SEC needs to explore ways to diminish the market’s dependence on ratings by the big rating agencies, Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings. They have been widely blamed for contributing to the subprime mortgage debacle that touched off the financial crisis by failing to give investors adequate warning of the risk of mortgage securities tied to the high-risk home loans.

Schapiro also has said that complex financial instruments that are growing explosively and mostly unregulated _ notably hedge funds and credit default swaps _ need to come under regulatory reins.

Credit default swaps, a form of insurance against loan defaults, are traded in a secretive market valued at around $60 trillion. They figured prominently in the credit crisis that brought the downfall of Lehman Brothers Holdings Inc., a government rescue plan for insurer American International Group Inc., and the sale of brokerage Merrill Lynch & Co. to Bank of America Corp.

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