SEC, Fed near agreement to oversee financial system

By Rachelle Younglai

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission and the U.S. Federal Reserve have nearly completed a formal agreement to oversee the financial system, an SEC official told a Senate panel on Thursday.

The regulators are working on a memorandum of understanding to outline the scope and mechanism for sharing information related to the Fed's discount window and other areas, Erik Sirri, the SEC's director of trading and markets, said in prepared testimony.

The memo would provide a mechanism for regulators to gain a broader and continuous perspective on financial institutions and markets that could impact the stability of the financial system, Sirri said.

It will also help with "bridging the period of time until Congress can address through legislation" fundamental questions about investment bank supervision, he said.

Sirri testified at a risk management hearing held by a Senate banking subcommittee on securities and investments.

The SEC supervises the four largest investment banks, Goldman Sachs (GS.N), Lehman Brothers LEH.N, Merrill Lynch MER.N and Morgan Stanley (MS.N) for liquidity and capital levels.

But the supervisory program is voluntary.

SEC Chairman Christopher Cox has urged Congress to decide which regulator should have primary oversight over the investment banks and to make supervision mandatory.

U.S. Treasury Secretary Henry Paulson has also urged swift action. Paulson said the Fed's role in rescuing Bear Stearns meant lawmakers must examine whether the central bank has the authority and direction it needs to be a lender of last resort when the financial system is threatened.

In March, the Fed helped broker a takeover of Bear Stearns by JPMorgan Chase (JPM.N). The central bank guaranteed a $29 billion loan backed by taxpayers' money to facilitate the deal. He was concerned that a Bear Stearns bankruptcy could trigger a systemic financial failure.

At the same time, the Fed opened its discount window to make emergency loans to the investment banks in an effort to calm the markets. Previously, the investment banks never had access to the window and the access is a temporary measure that is expected to end in September.

(Reporting by Rachelle Younglai, editing by Leslie Gevirtz)