Investors worry that Paulson plan curbs SEC power

By Rachelle Younglai

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission's role of policing the markets and monitoring investment banks would diminish under a Treasury Department proposal to overhaul the country's financial regulation, experts said on Monday.

Treasury Secretary Henry Paulson's plan would give the Federal Reserve more power to oversee market stability and monitor systemic risks from non-bank institutions like Wall Street investment banks and hedge funds.

The plan also proposes combining several bank regulators into a single prudential financial regulator to focus on safety and soundness of firms with federal guarantees such as commercial banks.

That would in essence strip the SEC's relatively new oversight of five investment banks, Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley.

"A number of responsibilities that are being turned over to the Federal Reserve Board and to a new regulator of consumers represents a taking away from the SEC," said Arthur Levitt, former SEC chairman under President Bill Clinton.

The SEC's duty is to monitor investment banks' capital and liquidity and respond quickly to any financial and operational weakness in the companies.

However, the agency's oversight has been criticized after Bear Stearns was forced to seek emergency funding from the Federal Reserve and JPMorgan Chase & Co when its liquidity deteriorated significantly.

The Fed, with the Treasury Department's approval, decided to guarantee $29 billion of illiquid Bear Stearns' assets and allowed JPMorgan to offer $10 a share for what was the fifth-largest U.S. investment bank.