SEC, Fed push for authority over investment banks

WASHINGTON (Reuters) - The head of the U.S. Securities and Exchange Commission on Thursday urged Congress to give his agency authority to oversee investment banks, even as a top Federal Reserve official said the central bank needed similar powers to do its job.

At a congressional hearing on how to modernize financial regulation, the SEC and the Fed laid out similar, if somewhat competing, visions for a new regime capable of monitoring commercial and investment banks to ensure they remain financially sound in order to prevent another credit crisis.

Both SEC Chairman Christopher Cox and New York Federal Reserve Bank President Timothy Geithner said that the current patchwork of regulatory agencies, much of which dates back to the Great Depression of the 1930s, deserved part of the blame for the year-long financial market turmoil.

But Cox said his agency should oversee investment banks, while Geithner said the Fed must have a direct supervisory role over any firms that borrow from the U.S. central bank.

"It's very important that we have a role in consolidated supervision of these institutions because you will not have good judgments made by this central bank, this Federal Reserve, in the future unless we have the direct knowledge that comes with supervision," Geithner told the U.S. House of Representatives Financial Services Committee.

The rise of broad financial services companies, some of which are involved with both commercial and investment banking, has blurred the regulatory lines and reform must establish clear responsibility and authority for overseeing the various types of financial firms, he said.

Where that power will rest is still unclear. The U.S. Treasury on March 31 proposed a framework that would merge the SEC and the Commodity Futures Trading Commission, and also broaden the Fed's supervisory scope.

In his initial response to that plan, Cox had said clearer lines of regulatory authority were needed, but it was not until Thursday that he explicitly called for the SEC to have the primary authority over investment banks.

"We don't need to start from scratch," he told the committee. "Instead we can build on what has worked, take lessons from what hasn't worked, and modernize the current system to reflect developments in the markets."

POST-BEAR STEARNS ERA

Regulatory reform had been in the works even before the current crisis exploded last summer, but it has taken on greater urgency since the March collapse of investment banks Bear Stearns. It will likely be next year before any major changes are implemented.

Currently the SEC is the primary supervisor of the country's four largest investment banks -- Goldman Sachs (GS.N), Lehman Brothers LEH.N, Merrill Lynch MER.N and Morgan Stanley (MS.N). But that supervision is voluntary and Cox has been urging Congress to give it or another agency legal authority to oversee the banks.

The Fed currently supervises commercial banks, and because the central bank serves as lender of last resort when banks run into trouble, it has the authority to examine bank records and set capital standards to ensure that they are sound.

However, during the current crisis, the Fed extended its lending operations to investment banks as well in an effort to keep the financial system from crumbling, and has sought congressional authority to supervise those firms more closely.

"Our ability to directly oversee the risk profile of these institutions is essential to our capacity to make the judgments necessary for using our lender of last resort tools," Geithner said.

Cox said Congress needed to recognize that the two types of banks operate differently and therefore need differing regulatory structures, a point the Fed has also stressed.

"The SEC, as the supervisory authority focused on the securities business and markets, should be vested with the responsibility for implementing this modified framework ... for closely coordinating with other relevant supervisory agencies," he said.

Separately, Cox said the SEC was looking at more ways to prevent speculators from distorting financial markets by selling shares in companies that they don't actually own. Last week, the SEC issued an emergency order restricting the practice, known as "naked short-selling."

"We have immediately pivoted to a broader rule making ... to extend this kind of procedural protection to the entire market place. I think that very soon we will be in a position to issue a proposal on that," he said.

(Additional reporting by David Lawder, Mark Felsenthal, Joanne Morrison, Alister Bull and Karey Wutkowski; Writing by Emily Kaiser; Editing by James Dalgleish)