SEC eyes longer-term funds for investment banks

WASHINGTON (Reuters) - The Securities and Exchange Commission may push for longer-term funding for the Wall Street investment banks it supervises, a senior agency official said on Thursday.

The SEC monitors investment banks Morgan Stanley (MS.N), Lehman Brothers Holdings Inc LEH.N, Merrill Lynch MER.N, Goldman Sachs (GS.N) and Bear Stearns BSC.N as part of an agency supervisory program intended to respond quickly to any financial or operational weakness in the companies.

After nearly collapsing from a sharp drop in its liquidity last month, Bear Stearns agreed to be acquired by JPMorgan Chase & Co (JPM.N), in a deal engineered by the Federal Reserve.

Erik Sirri, head of the SEC's division of trading and markets, said Bear Stearns' rapid loss of liquidity surprised regulators.

"Going forward, as we look at how we supervise these firms, I think we're going to push for more longer (term) funding. I think we're going to push for more diversified funding bases," Sirri told a meeting of the Council of Institutional Investors.

"So, rather than relying on particular short-term debt, where it might be overnight or measured in terms of weeks ... I think we could push longer term funding and some more equity capital -- those sorts of things," Sirri said.

Bear Stearns' swift decline was linked to its use of over-the-counter derivatives, a largely unregulated market, Sirri said.

"We have the ability to push harder at this, and you know I don't think it's necessarily an issue of (more) rules," he added.

"My expectation is what senior executives at the (Wall Street) firms learned ... and what we've learned will be reasonably consonant. I think you'll see a lot of convergence there," Sirri said.

Sirri also said the SEC is likely to propose rules in coming months to address conflicts of interest at credit rating companies.

Credit raters, which are typically hired by issuers of asset-backed securities, have been criticized by some lawmakers for being too eager to grant high ratings. The companies were also slow in responding to deteriorating conditions triggered by the subprime mortgage market, according to critics.

Sirri declined to be specific about what the SEC would propose for credit raters, saying only that the agency could broadly address questions about payment and "separating people from fee negotiations and ratings processors in general."

The ratings market is dominated by Standard & Poor's, a unit of McGraw-Hill Cos (MHP.N); Moody's; and Fitch Ratings, a unit of Fimalac SA (LBCP.PA).

(Reporting by Peter Kaplan; writing by Julie Vorman; Editing by Tim Dobbyn)